Changing Role of IMF

1. Changing Role of IMF

2. If the Fund did not exist, country’s access to external finance would depend on international capital market’s perceptions of their creditworthiness and proclivities of aid donours.

3. If international capital markets were efficient enough there were no problem. • Efficiency: Allocated to where the real rate of return is the highest • Are they? • International Capital Flows are rather short-term and speculative => Contagious

4. BrettonWoodsSystemCollapsed in 1973: • BoP problems faced by developing countries • Developing countries => New Clients • After 1970s, industrial countries ceased drawing loans from IMF.

5. IMF Critics • Political Arguments: “IMF became a development agency” • NGOs Arguments: “an inadequate development agency” =>”Fifty years is Enough”

6. Bretton Woods Commission • Set up by G-7 and recommended reshaping of the IMF. • IMF has excessively focused on development and lost its track on international monetary issues.

7. IMF-supported policies did more harm than good to developing countries.

8. 1970s & 1980s • World recession • Oil prices skyrocketed • Petroleum Exporting Countries, through international banks, lended their money to Latin American countries • Interest rates in U.S. & Europe inreased • Tequila effect

9. Beginning of 1980s • African and Asian low income countries were the users of IMF loans. • However, by the end of 1980s, Debt crises in L.America radically changed the picture => L. America became the major user of IMF loans

10. Mexican Crisis (1994) • High budget deficit left over from previous gov’t. • 7% of GDP current account deficit • Tesobonos: debt instrument in pesos but indexed to dollars • Corruption • Devaluation

11. Sturcture of IMF Loans • Intheearly 1980s: Stand-byand EFF to L. America • By 1987: StructuralAdjustmentFacilityandEnhancedStructuralAdjustmentFacilitystartedtoLowincomecountries • SAF &ESAF accountedonly a smallfraction on the total fundlending • SAF & ESAF had widerinfluence on monetarypolicy

12. IMF Conditionality • When a countryborrowsfrom IMF, itsgovernmentmakescommittments on economicandfinancialpolicies- a requirementknown as conditionality. • Conditionality is a way for the IMF to monitor that its loan is being used effectively in resolving the borrower's economic difficulties, so that the country will be able to repay promptly, and make the funds available to other members in need.

13. IMF Influence on Design of Economic Policy • IMF has a high influence on the design of economic policy in countries that turn to it for financial assistance • Powerful say on: Exchange rates Domestic Credit Creation Interest rates Fiscal Imbalances

14. ESAF • Structuralconditionality • Coveringpolicyareas of: PricingPolicy TradeLiberalisation Privatisation Structure of Taxes Gov’t. Expenditure Reform of FinancialSector

15. IMF Borrowers • Heavy use of IMF credit by developing countries coincide with: (1) deteriorating BoP performance (2) falling creditworthiness • IMF borrowers are developing countries trapped in BoP difficulties, either due to (1) excessive credit creation, or (2) deteriorating t.0.t

16. General Characteristics of Borrowers: • They turn to IMF when all other financing resources are exhausted. • High levels of external debt. • Severe BoP imbalances. • Depleted international reserves. • Low investment • Slow growth

17. Recidivist Tendency of Borrowers • Developing countries often have had credit from the Fund for as many as 15 consecutive years, in some cases, for almost 30 years =>How about “temporary and revolving” character of IMF lending envisaged in Articles of Agreement? Temporary =? Non-permanant? Or short-term?

18. Countries that have borrowed form the Fund in the recent past are likely to borrow from it in the near future.