IBO-6 UNIT-1 INTERNATIONAL MONETARY SYSTEM AND INSTITUTIONS

1. What do you mean by international monetary systems and why there is a need for international monetary system? ANS: International monetary system is "a set of arrangements, rules, practices and institutions under which payments are made and received for international transactions across national boundaries". They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected. International monetary system is concerned not with the supply of international money but with the relationships among a hundred or so currencies of individual countries and with the pattern of balance of payments relationships and the manner in which they are adjusted and settled. In broad terms, the international monetary system involves the management of three processes (I) the adjustment of balance of payments positions, including the establishment and alteration of exchange rates; (2) the financing of payments imbalances among countries by the use of credit or reserves; and (3) the provision of international money (reserves).

NEED FOR INTERNATIONAL MONETARY SYSTEM

An monetary system requires a set of rules of behaviour. The goldstandard system, involved very little management at the international level. But the individual countries had to abide by a code of conduct. In the system of freely floating exchange rates, there is no provision for settling imbalances or providing reserves. This, however, requires a rule prohibiting official intervention in the foreign exchange markets. However in the present or in the future system, there would be a need for the day-to-day management at the international level. This is because of the fact of international interdependence. Today we live in a global economy. A global economy is characterised not only by the free movement of goods and services, but also by the free movement of ideas and of capital. The movements in exchange rates, interest rates and stock prices in various countries are intimately interconnected. There are certain benefits of the global economy, namely the international division of labour, economies of scale and the rapid spread

IBO-6 UNIT-1 INTERNATIONAL MONETARY SYSTEM AND INSTITUTIONS

of innovations from one country to another, non-economic benefits as the freedom of choice associated with the international movement of goods, capital and people, and the freedom of thought associated with the international movement of ideas. However, global capitalism is not without its problems. These can be grouped under five main headings; the uneven distribution of benefits, the instability of the financial system, the incipient threat of global monopolies and oligopolies, the ambiguous role of the state, and the question of values and cohesion. These problems provide sufficient reason for international monetary system. 2. Discuss international monetary systems before the First World War. Or Discuss the evolution of international monetary systems ANS: The idea of creating an international economic and monetary union has a long history.

Under a gold standard, paper notes are convertible into pre-set, fixed quantities of gold. The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. Three distinct kinds of gold standard can be identified. The gold specie standard is a system in which the monetary unit is associated with circulating gold coins, or with the unit of value defined in terms of one particular circulating gold coin in conjunction with subsidiary coinage made from a lesser valuable metal. The gold exchange standard may involve only the circulation of silver coins, or coins made of other metals, but the authorities will have guaranteed a fixed exchange rate with another country that is on the gold standard, hence creating a de facto gold standard, in that the value of the silver coins has a fixed external value in terms of gold that is independent of the inherent silver value. The gold bullion standard is a system in which gold coins do not actually circulate as such, but in which the authorities have agreed to sell gold bullion on demand at a fixed price in exchange for the circulating currency.

IBO-6 UNIT-1 INTERNATIONAL MONETARY SYSTEM AND INSTITUTIONS

A country is said to be on the gold standard when its central bank is obliged to give gold in exchange far its currency when presented to it. The gold standard was the foundation of the international trading system. The currency of a country was freely convertible into gold at a fixed exchange rate. International debt settlemen was in gold. When a country had a surplus in its balance of Payment, gold flowed into its central bank. Thus the country with a balance of payment surplus could expand its domestic money supply without having the fear of insufficient gold to meet its Liabilities. When the money supply increased, prices increased hence the demand for export fell, the BOP surplus will be reduced. On the other hands when a country had a deficit in its balance of payments, gold flowed outside the country. Thus the deficit country had to contract the money supply with the reduction in gold prices. The prices of commodities decreased. The Export will become more competitive.

IBO-6 UNIT-1 INTERNATIONAL MONETARY SYSTEM AND INSTITUTIONS

Summary ADVANCE LICENSE An Advance Licence is issued to allow duty free import of inputs, which are physically incorporated in the export product (making normal allowance for wastage). In addition, fuel, oil, energy, catalysts etc. which are consumed in the course of their use to obtain the export product, may also be allowed under the scheme. Duty free import of mandatory spares upto 10% of the CIF value of the licence which are required to be exported/ supplied with the resultant product may also be allowed under Advance Licence. Advance Licences are issued on the basis of the inputs and export items given under SION. However, they can also be issued on the basis of Adhoc norms or self declared norms as per para 4.7 of Handbook. Duty free import of mandatory spares upto 10% of the CIF value of the licence which are required to be exported/ supplied with the resultant product may also be allowed under Advance Licence. Advance Licence can be issued for:a) Physical exports:- Advance Licence may be issued for physical exports including exports to SEZ to a manufacturer exporter or merchant exporter tied to supporting manufacturer(s) for import of inputs required for the export product. b) Intermediate supplies:- Advance Licence may be issued for intermediate supply to a manufacturer-exporter for the import

IBO-6 UNIT-1 INTERNATIONAL MONETARY SYSTEM AND INSTITUTIONS

of inputs required in the manufacture of goods to be supplied to the ultimate exporter/deemed exporter holding another Advance Licence c) Deemed exports:- Advance Licence can be issued for deemed export to the main contractor for import of inputs required in the manufacture of goods to be supplied to the categories mentioned in paragraph 8.2 (b), (c), (d) (e) (f),(g) (i) and (j) of the Policy. In addition, in respect of supply of goods to specified projects mentioned in paragraph 8.2 (d) (e) (f), (g) and (j) of the Policy, an Advance Licence for deemed export can also be availed by the sub-contractor of the main contractor to such project provided the name of the sub contractor(s) appears in the main contract. Such licence for deemed export can also be issued for supplies made to United Nations Organisations or under the Aid Programme of the United Nations or other multilateral agencies and paid for in foreign exchange. Advance Licence is issued for licences (other than Advance exempted from payment of customs duty, education cess, duty, if any. duty free import of inputs. Such Licence for deemed exports) are basic customs duty, additional anti dumping duty and safeguard

Advance Licence for deemed export shall be exempted from basic customs duty ,additional customs duty and education cess only. However in case of supplies to EOU/SEZ/ EHTP/STP/ BTP under such licences, anti-dumping duty and safeguard duty shall also be exempted. Advance Licence and/or materials imported there under shall not be transferable even after completion of export obligation. Advance Licences (including Advance Licence for deemed exports and intermediate supply) shall be issued with a positive value addition. However, for exports for which payments are not received in freely convertible currency, the same shall be subject to value addition as specified in Appendix-32 of Handbook (Vol.1). Advance Licence shall be issued in accordance with the Policy and procedure in force on the date of issue of licence and shall be

IBO-6 UNIT-1 INTERNATIONAL MONETARY SYSTEM AND INSTITUTIONS

subject to the fulfilment of a time bound export obligation as may be specified. The facility of Advance Licence shall also be available where some or all of the inputs are supplied free of cost to the exporter. Applicability Normally, the exports made under the DEPB Scheme of Drawback" shall not be entitled for drawback. However, the additional customs duty/excise duty paid in cash or through debit under DEPB shall be adjusted as CENVAT Credit or Duty Drawback as per rules framed by the Department of Revenue. DUTY ENTITLEMENT PASSBOOK SCHEME The objective of DEPB is to neutralise the incidence of Customs duty on the import content of the export product. The neutralisation shall be provided by way of grant of duty credit against the export product. The DEPB scheme will continue to be operative until it is replaced by a new scheme which will be drawn up in consultation with exporters. Under the DEPB, an exporter may apply for credit, as a specified percentage of FOB value of exports, made in freely convertible currency. The credit shall be available against such export products and at such rates as may be specified by the Director General of Foreign Trade by way of public notice issued in this behalf, for import of raw materials, intermediates, components, parts, packaging material etc. The holder of DEPB shall have the option to pay additional customs duty, if any, in cash as well. The DEPB shall be valid for a period of 24 months from the date of issue. The DEPB and/or the items imported against it are freely transferable. The transfer of DEPB shall however be for import at the port specified in the DEPB, which shall be the port from where exports have been made. Imports from a port other than the port of export shall be allowed under TRA facility as per the terms and conditions of the notification issued by Department of Revenue. Normally, the exports made under the DEPB Scheme shall not be entitled for drawback. However, the additional customs duty/excise duty paid in cash or through debit under DEPB shall be adjusted as CENVAT

IBO-6 UNIT-1 INTERNATIONAL MONETARY SYSTEM AND INSTITUTIONS

Credit or Duty Drawback as per rules framed by the Department of Revenue.