Economics of International Finance Econ 315 Chapter 2

Economics of International Finance Econ. 315 Chapter 2: International Monetary Fund (IMF)

What is the IMF? • An international organization of 189 member countries. • The IMF is located in Washington DC. • It was established to promote international monetary cooperation, exchange rates stability.

History of IMF Creation • As the consequence of the World War Two, three international institutions were established.

Ø Debt

Ø Inflation Ø Unemployment

• The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton Woods, New Hampshire, in the north-eastern United States,

Objectives of IMF • Fostering economic growth, • Promoting high levels of employment, • Securing financial stability, • Facilitating international trade,

Who controls the IMF ? § The Fulfillment of daily IMF's work is done by the Executive Board, composed of 24 directors, headed by the Director General. § In separate seats in the Executive Board, the big five countries (United States, Japan, Germany, France, the United Kingdom) as well as China, Russia and Saudi Arabia. § However, the other directors (16 directors) are elected every two years.

Sources of the IMF • Upon joining, each member of the IMF is assigned a quota, based broadly on the country’s relative size in the world economy. • The IMF can be thought of as a global credit union in which countries’ shares are determined by their quotas. • Quotas determine both the amount members can borrow from the IMF and their voting power within the IMF

Sources of the IMF • A 25% of a member’s quota is held in a reserve currency: US dollar, British pound, euro, yen or IMF special drawing right (SDR) • A 75% of the quota is held in a members own currency.

Special Drawing Rights (SDR) • The SDR is an international reserve currency, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is calculated through a basket of currencies.

• Last September 2016, IMF added Chinese Renminbi to Special Drawing Rights Basket.

The Role of IMF 1) Surveillance • Policy advice to members (governments & central banks) based on economic trends. • Proving research, statistics, forecasts, and analysis to members. • Focusing on assessing whether countries' policies promote external stability. • IMF has provided 130 consultations in 2013 and 132 in 2014, and 124 in 2015

2) Lending • IMF lending enables countries to rebuild their international reserves; stabilize their currencies; continue paying for imports; & restore conditions for strong economic growth (no lend for specific projects). • It eases the adjustment policies and reforms that a country must make to correct its balance of payments problem and restore conditions for strong economic growth. • Biggest borrowers (as of August 2016): Portugal, Greece, Ukraine, Pakistan

3) Technical assistance • It supports the development of the productive resources of member countries by helping them to effectively manage their economic policy and financial affairs. • About 90 percent of IMF technical assistance goes to low and lower-middle income countries, particularly in sub-Saharan Africa and Asia.