ECON3315 International Economic Issues Instructor: Patrick M. Crowley Issue 18: The IMF

Overview What the IMF does – it’s purposes What the IMF does – it’s purposes What are the circumstances for the IMF to become involved in a country’s finances? What are the circumstances for the IMF to become involved in a country’s finances? What kind of resources does the IMF have? What kind of resources does the IMF have? What are the economic effects of IMF lending? What are the economic effects of IMF lending?

What the IMF does The IMF goes into countries and analyses their macroeconomic policies, suggesting changes that could be made to improve economic growth The IMF also makes it’s funds temporarily available to members to give them opportunities to correct maladjustments in their balance of payments

The purposes of the IMF i.To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. ii.To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. iii.To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. iv.To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. v.To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. vi.In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

What are the circumstances for the IMF to become involved in a country’s finances? When a member nation requests to borrow from the IMF, the member country borrows against it’s quota. Quotas determined by size of the economy and the variability of trade The IMF can also borrow from its financially strongest countries Loans under the “Poverty Reduction and Growth facility” and the “Exogenous Shocks Facility” do not come out of quotas. The situation in a country has to warrant a loan, and when IMF staffers agree there is a problem a presentation is made to the Executive Board by the country and the IMF staffers in the form of a “letter of intent”. What are the circumstances for a loan though? When the country concerned has a “balance of payments” problem – that is, they cannot afford to pay for their necessary imports or make payments on existing loans.

What kind of resources does the IMF have?

What are the economic effects of IMF lending? Moral hazard = ? If a distressed country gets funds from the IMF, this usually has the effect of allaying fears of other investors, who will then lend to the country (“bail in”). Once the country has the loan, moral hazard can take place (e.g. Indonesia in 1997), allowing an unsustainable situation to persist, leading to the country seeking a further loan to pay off creditors. Pressure on IMF from private lenders to continue to support government so that they get their payments….

Recent developments At April 2009 G20 meeting in London, agreement on tripling of IMF resources to $750bn, and an additional $250bn in extra SDRs At April 2009 G20 meeting in London, agreement on tripling of IMF resources to $750bn, and an additional $250bn in extra SDRs Double amount of concessional loans available for poor countries (to $6bn) Double amount of concessional loans available for poor countries (to $6bn) NAB (New agreement to borrow) accounts for most of the increase – up until now these monies were made available on a bilateral basis NAB (New agreement to borrow) accounts for most of the increase – up until now these monies were made available on a bilateral basis G20 hopes that IMF will now be the central institution in any coordinated efforts to combat the financial crisis G20 hopes that IMF will now be the central institution in any coordinated efforts to combat the financial crisis