International Monetary Fund, IMF

1
International Monetary Fund, IMF

• Lecture at the University of Helsinki, April 1,
  2008
• by Kaija-Leena Rikkonen, M. Phil. Economics,
  Boston University
• Senior Economist, Bank of Finland

2
Outline

• The IMF in brief
• The importance of the IMF today
• Future challenges

3
The Bretton Woods Institutions

• The International Monetary Fund
• The Bank for Reconstruction and Development, IBRD
  or in the World Bank
• established at the Bretton Woods Conference in
  New Hampshire in 1944
• The IMF and the World Group complement each
  other IMF focuses on macroeconomic and financial
  sector issue and the World Bank deals with
  longer-term development issues, economic effects
  of climate change and poverty reduction.

4
The IMF was established

• To promote international monetary cooperation
• To facilitate the expansion and balanced growth
  of international trade
• To promote exchange rate stability
• To assist in the establishment of a multilateral
  system of payments
• To make its resources available (under adequate
  safeguards) to members experiencing balance of
  payments difficulties

5
Executive Board and Management

• IMF is accountable to its 185 member countries
• Executive Board is responsible for day-to-day
  business
• Managing Director chairs the Board meetings and
  runs the IMF, assisted by First Deputy Managing
  Director and two Deputy Managing Directors
• Board of Governors is the highest authority
  governing the IMF
• International Monetary and Financial Committee
  (IMFC) is an advisory committee consisting of 24
  members

6
Executive Board

• The Executive Board consists of 24 Executive
  Directors
• The following countries have single country
  seats US, Japan, Germany, France, UK, China,
  Russia, and Saudi Arabia
• The other 16 Executive Directors represent groups
  of countries, chairs known as multi-country
  constituencies
• The Executive Board aims at consensus in its
  decision- making

7
Finland and the IMF

• The Bank of Finland is responsible for day-to-day
  work on IMF issues, together with the Ministry of
  Finance
• Finland is a member of the Nordic-Baltic
  constituency
• Finland held the Executive Directors position of
  the constituency in 2006 2007, Sweden in
  2007-2008
• Swedens Minister of Finance is a member of the
  IMFC
• Nordic-Baltic Monetary and Financial Committee is
  the highest decision-making body in the
  constituency
• Report on positions of the Nordic-Baltic
  constituency is published twice a year
  http//www.suomenpankki.fi/en/suomen_pankki/kv_yht
  eistyo/imf.htm

8
How is the IMF funded ?

• the IMF gets its financial resources from member
  countries who make payments determined by their
  quota
• Current quota is based on 5 formulas that contain
  (decision to l be revised at the Annual Meeting
  2008)
• GDP, reserves, current payments, currenty
  receipts, and variability of current receipts
• quota determines also a members voting power,
  adjusted with basic votes
• each member is allotted 250 basic votes plus one
  vote per SDR 100,000 of its quota

9
Core functions of the IMF

• Surveillance bilateral, regional and
  multilateral
• The IMF has a mandate to assess the exchange
  rate policies of member countries in order to
  ensure effective and stable operation of the
  international monetary system (Article IV
  consultations)
• Multilateral surveillance World Economic
  Outlook
• Crisis prevention management
• Standards and codes, financial sector stability
  assessments
• Technical assistance for capacity building
• Limited but focused role in low-income countries

10
IMF lending

• IMF provides short term loans to member countries
  experiencing balance-of-payments difficulties
• IMF lending enables countries to rebuild their
  foreign exchange reserves, stabilize their
  currencies,finance imports, and restore
  conditions for sustainable economic growth
• Principal facility is called Stand-By Arrangement
  
• Supplemental Reserve Facility (SRF) for
  exceptional balance-of-payments difficulties
  resulting from a sudden loss of market confidence
  (since 1979)
• PRGF (poverty reduction growth facility) for
  low-income countries
• also available Compensatory Financing Facility
  (raw materials exports and imports) and Emergency
  Assistance (natural disasters)

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IMF lending cont.

• the amount of lending is specified in relation to
  a members quota
• the interest on lending is SDR- interest rate
  plus a mark-up, that varies between loans
• Major borrowers in the 1990s were Indonesia,
  Korea, Thailand,Philippines, Russia, Brazil.
  After 2000 Argentina, Uruguay, and now only
  Turkey
• Many large borrowers have repaid ahead of
  schedule
• Demand for IMF loans has declined drastically

12
IMF lending cont.

• Stand-by Arrangements outstanding SDR 5899
  million
• Concessional lending SDR 3800 million (data Feb
  2008)
• Reasons behind the decline for IMF loans ?
• Stable international capital market, ample
  liquidity, and market interest rates on emerging
  market borrowing have declined making IMF loans
  expensive and unattractive because of the
  conditions attached to them
• Asian countries have accumulated large foreign
  exchange reserves and would be reluctant to
  borrow from the IMF

13
IMF lending to poor countries

• concessional lending to poor countries since 1976
  
• concessional lending is long-term and at interest
  rate 0.5 percent
• so called structural adjustment lending, ESAF
  (1987) for strengthening the structures of the
  economy necessary for economic growth, renamed
  PRGF since 1999
• there are 78 PRGF eligible countries at the
  moment, cut off determined by 2005 per capita
  gross national income of USD 1025 about 30 of
  them have loans currently

14
Debt Relief (HIPC)

• HIPC Initiative, debt relief for heavily indebted
  poor countries (1996) and enhanced HIPC (1999)
• Poverty Reduction and Growth Facility, PRGF for
  generation of economic growth with a focus on
  reduction of poverty (1999)
• Multilateral Debt Relief Initiative in 2005

15
The IMFs Reform Agenda

• The IMF needs to reform itself in order to better
  respond to the challenges of the future in the
  globalized world
• Medium-Term Strategy adopted in 2006 and centers
  on
• More effective and focused Surveillance
• Quota and Voice Reform that reflects the member
  countries relative position in the world economy
  (2008)
• Reforming the Funds income mechanism ensuring
  sound finances in the future as income from
  lending has declined
• the Funds role in low-income countries must
  remain focused on macroeconomic and financial
  stability

16
Quota and Voting system reform

• the current quota and voting system is
  unsatisfactory
• the current quotas outdated and not reflecting
  relative economic strengths of members
• EU countries overrepresented (claim by others) 7
  Executive Directors from EU countries and 3 EU
  countries in non-EU constituencies
• emerging market economies quotas too small,
  China and India
• poor African countries underrepresented in the
  Board (2 chairs for 24 and 19 countries,
  respectively)

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Quota and Voting system reform cont.

• Quota shares in , old and changes after reform
  (/-)
• USA 17.1 -
• EU 32.4
• Other advanced economies 15.5 -
• Emerging market economies 15.3 /-
• Rest of the world 19.7
• China 3.7
• Step 1. Ad hoc quota increase by for China,
  Korea, Mexico, and Turkey. September 2006 in
  Singapore Annual Meetings
• Step 2. at the latest by Annual Meetings in 2008
• IMF Board approved the reform proposal on March
  28, 2008 gt
• Shift of 4.91 percent in quotas and 5.42 in
  votes, for 54 and 135 members, respectively

18
The Funds role in the low-income countries

• the IMFs lending not intended for long-term
  development finance
• main activity through the PRGF and technical
  assistance
• the IMFs Independent Evaluation Office has
  evaluated IMF programs in low-income countries
• recommendations
• need to clarify the role of the IMF in poor
  countries in order to avoid undue expectations
• more contacts between the local civil society,
  NGOs and the Fund representatives in countries

19
The Funds role in the low-income countries cont.

• The IMF-World Bank Collaboration must be improved
  and better coordinated, also with donors
• Cooperation with the UN, the World Bank, and the
  IMF for advancement of the 8 Millennium
  Development Goals (MDGs) set for 2015
• Most important is to halve poverty by 2015 with
  the help of
• 1. More development aid 2. Debt Relief 3. Trade
  4. Innovative financing sources.

20
The Importance of the IMF today more relevant
than ever

• Future challenges
• How to remain relevant for all member countries
• More effective surveillance focus on
  multilateral perspective and linkages between the
  real economy and the financial sector
• Lessons from Subprime crisis
• Better risk analysis, supervision and regulation
• Crisis prevention
• Setting the Fund on a sustainable financial
  footing