global finance lesson 4

The International Monetary Fund

• conceived in July 1944 at the United Nations Bretton Woods Conference in New Hampshire, United States

• 44 countries sought to build a framework for intl economic cooperation and avoid competitive currency devaluation due to the Great Depression

• ensure stability of the international monetary system

international monetary system

system of exchange rates and international payments that enable countries and their citizens to transact with each other

surveillance

• IMF monitors member country policies, national, regional, and global economic and financial developments

• provides advice to member countries and promotes policies to foster economic stability, reduce vulnerability to economic and financial crises, and raise living standards

financial assistance

• provide loans to member countries experiencing actual or potential balance-of-payments problems (may exchange rate issues ba)

• individual country adjustment programs are designed in close cooperation with the IMF and supported by IMF financing, and ongoing financial support is dependent on effective implementation of these adjustments (pag may intervention si IMF, required kang sumunod)

• bcs of Covid 19, the IMF temporarily increases the access limits under emergency financing instruments and the annual limit on overall access under non-concessional resources

• IMF also established Short-term Liquidity Line (SLL) to provide a backstop to members with very strong policies and fundamentals (kahit maayos patakbo, pwede ka pa ring umutang)

capacity development

• provides technical assistance and training to help member countries build better economic institutions and strengthen related human capacities

• includes designing and implementing more effective policies for taxation and administration, expenditure management, monetary and exchange rate policies, banking and financial system supervision and regulation, legislative frameworks, and economic statistics

public finances

• helping govts better mobilize revenues and effectively manage expenditure, via tax and customs policies, budget formulation, public financial management, and debt management

• enables govt to maintain fiscal sustainability, improve infrastructure, and develop fiscal policies to mitigate and build resilience to climate change and other exogenous shocks

monetary and financial policies

working with central banks to modernize their monetary and exchange rate frameworks and policies, and collaborating with financial sector regulators and supervisors to strengthen financial systems and banking supervision. the IMF has also been providing CD in fintech and cyber-risk, which helps improve macroeconomic and financial stability, fostering inclusive growth and intl trade

macroeconomic frameworks and tools

Building government’s capacity in macroeconomic analysis, diagnostic and modeling tools, and policy formulation and implementation, with a focus on country-specific institutional contexts.

legal frameworks

Aligning legal and governance frameworks to international standards to support fiscal and financial reforms, fight corruption, and combat money laundering and terrorism financing.

statistics

Helping countries compile, manage, and disseminate macroeconomic and financial data. Improving these processes provides a more accurate understanding of their own economy and helps governments formulate economic policies, improves the investment climate, and fosters transparency and accountability.

fostering inclusion and reducing inequality

• The IMF trains policymakers to implement inclusive policies such as expenditure and subsidy reforms, progressive taxation, and financial inclusion. It also provides the analytical, operational, and monitoring tools countries need to tackle inequality.

gender equality

The IMF compiles gender-specific data on financial access to enable countries to better understand the impact of their economic policies on women. It is also boosting female labor market participation, providing training on gender budgeting, publicizing best practices, and empowering female government officials through training. 

climate action

The IMF works with countries on environmental tax reforms, and efficient carbon and energy pricing. It also helps create robust frameworks and public financial management plans so countries can build resilience to natural disasters. It assists in monitoring systemic risks to financial stability from climate change shocks, supervises credit risks related to vulnerability, and assesses the resilience of financial institutions.

Special Drawing Rights (SDRs)

• an international reserve asset that can supplement the official reserves of member countries participating in the SDR Department (currently all members of the IMF). 

• A general allocation of SDRs must be consistent with the objective of meeting the long-term global need for reserve assets and requires Board of Governors approval by an 85 percent majority of the total voting power. 

• Once agreed, the allocation is distributed to member countries in proportion to their quota shares at the Fund. Total global allocations are currently about SDR 204.2 billion (some $293 billion). IMF members can voluntarily exchange SDRs for currencies among themselves.

primary source of IMF financial resources

member quotas

New Arrangements to Borrow (NAB)

• main backstop to quotas

• credit arrangements between the IMF and a group of members and institutions provide supplementary resources.

Bilateteral borrowing agreements (BBAs)

a third line of defense, member countries have also committed resources to the IMF

• On March 30, 2020, the Executive Board approved a borrowing framework for a new round of BBAs. Of these, agreements for about SDR 128 ($183) have become effective as of February 5, 2021.

IMF’s Board of Governors

• consisting of one governor and one alternate governor from each member country, usually the top officials from the central bank or finance ministry. The Board of Governors meets at the IMF–World Bank Annual Meetings. 

• Twenty-four of the governors serve on the International Monetary and Financial Committee, or IMFC, which advises the IMF's Executive Board on the supervision and management of the international monetary and financial system.

•  The day-to-day work of the IMF is overseen by its 24-member Executive Board, which represents the entire membership and supported by IMF staff. The Managing Director is the head of the IMF staff and Chair of the Executive Board and is assisted by four Deputy Managing Directors

how IMF lending helps

• aims to give countries breathing room to implement adjustment policies in an orderly manner, which will restore conditions for a stable economy and sustainable growth. 

• These policies will vary depending upon the country’s circumstances. For instance, a country facing a sudden drop in the prices of key exports may need financial assistance while implementing measures to strengthen the economy and widen its export base. 

• A country suffering from severe capital outflows may need to address the problems that led to the loss of investor confidence—perhaps interest rates are too low; the budget deficit and debt stock are growing too fast; or the banking system is inefficient or poorly regulated.

Lending Facilities of IMF

• tailored to different types of balance of payments need as well as the specific circumstances of its diverse membership.

• General Resources Account (GRA)

• Poverty Reduction and Growth Trust (PRGT)

• Stand-by Arrangements (SBAs)

• Standby Credit Facility (SCF)

• Extended Fund Facility (EFF) and Extended Credit Facility (ECF)

General Resources Account (GRA)

all IMF members are eligible to access the fund’s resources here

Poverty Reduction and Growth Trust (PRGT)

financial support for diversity and needs of low-income countries, zero interest rates

Stand-By Arrangements

for emerging and advance market economies in crises

address short-term or potential balance of payments problems

Standby Credit Facility (SCF)

serves a similar purpose for low-income countries

Extended Fund Facility (EFF) and Extended Credit Facility (ECF)

fund’s main tools for medium-term support to countries facing protracted balance of payments problems. their use has increased greatly since the global financial crisis, reflecting the structural nature of some members’ balance of payments problems

Flexible Credit Line (FCL) or the Precautionary and Liquidity Line (PLL)

To help prevent or mitigate crises and boost market confidence during periods of heightened risks, members with already strong policies can use this

Rapid Financing Instrument (RFI) and the corresponding Rapid Credit Facility (RCF)

for low-income countries provide rapid assistance to countries with urgent balance of payments need, including from commodity price shocks, natural disasters, and domestic fragilities.

Policy Conditionality

A country’s commitments to undertake certain policy actions are in most cases an integral part of IMF lending. This policy program underlying an arrangement is in most cases presented to the Fund’s Executive Board in a “Letter of Intent” and further detailed in a “Memorandum of Understanding”.

World Bank

• an international organization dedicated to providing financing, advice, and research to developing nations to aid their economic advancement. The bank predominantly acts as an organization that attempts to fight poverty by offering developmental assistance to middle- and low-income countries.

• has two stated goals that it aims to achieve by 2030. The first is to end extreme poverty by decreasing the number of people living on less than $1.90 a day to below 3% of the world population. The second is to increase overall prosperity by increasing income growth in the bottom 40% of every country in the world.

Understanding the World Bank

• provider of financial and technical assistance to individual countries around the globe. The bank considers itself a unique financial institution that sets up partnerships to reduce poverty and support economic development.

• The World Bank supplies qualifying governments with low-interest loans, zero-interest credits, and grants, all to support the development of individual economies. 

• Debt borrowings and cash infusions help with global education, healthcare, public administration, infrastructure, and private-sector development. The World Bank also shares information with various entities through policy advice, research and analysis, and technical assistance. It offers advice and training for both the public and private sectors.

World Bank as an organization

• like a cooperative, made up of 189 member countries. These member countries, or shareholders, are represented by a Board of Governors, who are the ultimate policymakers at the World Bank. Generally, the governors are member countries' ministers of finance or ministers of development. They meet once a year at the Annual Meetings of the Boards of Governors of the World Bank Group and the International Monetary Fund.

• The governors delegate specific duties to 25 Executive Directors, who work on-site at the Bank. The five largest shareholders appoint an executive director, while other member countries are represented by elected executive directors.

• The World Bank Group President chairs meetings of the Boards of Directors and is responsible for overall management of the Bank. The President is selected by the Board of Executive Directors for a five-year, renewable term.

• The Executive Directors make up the Boards of Directors of the World Bank. They normally meet at least twice a week to oversee the Bank's business, including approval of loans and guarantees, new policies, the administrative budget, country assistance strategies and borrowing and financial decisions.

• The World Bank operates day-to-day under the leadership and direction of the president, management and senior staff, and the vice presidents in charge of Global Practices, Cross-Cutting Solutions Areas, regions, and functions.

World Bank Financials

• Within the organization operates different sectors: the International Bank of Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). They comprise what is called the World Bank Organization or the World Banks.

• The IBRD, the original World Bank, loans money to creditworthy low-income or middle-income countries.

International Development Assocation

issues credits, or interest-free loans, to the poorest nations.

International Financial Corporation

provides funds and guidance to the private sector for the purpose of helping developing nations stay on a growth trajectory.

Multilateral Investment Guarantee Agency

directs investments to the poorest countries to help reduce poverty and improve the welfare of a nation's citizens.

World Trade Organization

• the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to ensure that trade flows as smoothly, predictably and freely as possible.

• aim to help its members use trade as a means to raise living standards, create jobs and improve people’s lives. The WTO operates the global system of trade rules and helps developing countries build their trade capacity. It also provides a forum for its members to negotiate trade agreements and to resolve the trade problems they face with each other.

Overview of WTO

• the international organization whose primary purpose is to open trade for the benefit of all.

• provides a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development. 

• also provides a legal and institutional framework for the implementation and monitoring of these agreements, as well as for settling disputes arising from their interpretation and application. 

• The current body of trade agreements comprising the org consists of 16 different multilateral agreements (to which all WTO members are parties) and two different plurilateral agreements (to which only some WTO members are parties).

The Secretariat

supports the WTO activities, led by the WTO Director-General

located in Geneva, Switzerland and has an annural budget of approx. CHF 20 million

Ministerial Conference

highest institutional body in WTO, which meets roughly every 2 years. during the interval, nagkakaron sila ng General Council

Main Activities of WTO

• negotiate reduction/elimination of obstacles to trade

• administer and monitor the application of WTO’s agreed rules for trading

• monitor and review trade policies of members, ensure transparency regarding regional and bilateral agreements

• settle disputes among members

• build capacity of developing country govt officials in intl trade mattwrs

• assist process of accession of countries not yet members of the org

Guiding Principles of WTO

• pursuit of open borders, the guarantee of most favoured national principle and non discriminatory treatment by and among members, commitment to transparency in the conduct of its activities

• fundamental goals is to improve the welfare of people around the world