IMF (International Monetary Fund):- Role of IMF during the crisis?

1. Introduction IMF is an international organisation that controls the global financial system by macroeconomic policies with the main objectives stabilizing exchange rates and the balance of payments of the member countries. It formally came into existence on the 27th December 1945 but was created in July 1944 during the United Nation Monetary and Financial Conference. It helps countries to stabilise the world economies and also provides loans to the poorest counties. The root cause of the financial crisis stretch from the preceding six years of low interest rates and high world growth. In the essay I will be talking about the different aspects of the IMF which has helped the world to come out of the current crisis and preventing from becoming a disaster. The main body of the assignment will be divided into 1.The immediate role of the IMF (Immediate Crisis Management), 2. The ways IMF help the different counties in the crisis which is further sub-divided into A. Lending, B. Policy framework (ecomonic&financial policies), C. Resolve Balance of Payments, and D. Surveillance, 3. The mistakes of the IMF & the renewed role of the IMF after the crisis and finally 4.The conclusion overview of the topic in brief.

2. The ICM (Immediate Crisis Management) of the IMF

The beginning of the crisis had triggered the world with falling world economies . this also lead to a current across the members of the IMF. At IMF meeting on October 2008 managing director Strauss-Kahn Firstly declared that the IMF has started its Emergency Financing

Mechanism (EFM) to speed the normal process for loans to crisisafflictedcountries. The emergency mechanism enables rapid approval (usually within 48-72hours) of IMF lending once an agreement has been reached between the IMF and the national government,- Martin A. Weiss (2008). Secondly provided financial assistance in its Exogenous Shock Facility (ESF) The ESF provides policy support and financial assistance to low-income countries facing exogenous shocks, events that are completely out of the national governments control. These could include commodity price changes (including oil and food), natural disasters, and conflicts and crises in neighbouring countries that disrupt trade,- Martin A. Weiss (2008). These were the immediate response of the IMF to the crisis which helped many low income countries.

3. The different ways IMF help in the crisis A. Lending policies and increasing liquidity by the IMF during the crisis

Lending to its member countries and providing them with liquidity is one of the most important way in which IMP helps in the crisis. A member of the IMF can request financial advice as well as the financial help from the IMF when ever needed. Even the best countries in the world cant avoid crisis or instability. The reason of lending during this world crisis was to provide sufficient amount so that the countries who are borrowing can pursue the macroeconomic policies which the HIC (high income counties) are capable of, which may result in minimizing the loss of output as well as the employment, and the unending damage that occurs in most endangered countries .-Mark Weisbrot, Rebecca Ray, Jake Johnston, Jose
Antonio Cordero and Juan Antonio Montecino (October 2009 )

(http://www.cepr.net/documents/publications/imf-2009-10.pdf) The IMF has provided financial assistance to these countries by support policy programs which helped solve macroeconomic problems and limit

disruption to the domestic and global economies, and help restore confidence, stability, and growth. Thus the IMF helps in this way during the crisis and in the same way has helped many countries during this current credit crunch. IMF tripled its support in the year 2008 and ready to double it again to $4 billion in 2009 -2010.IMF is trying to increase its capacity of its lending to around $17 billionby2014, -(http://www.imf.org /external /np/speeches/2009/091109.htm).And I think they have been very successful in doing so because after seeing such figures of the IMF they clearly show that its being helping the world to come out of this current credit crunch very successfully.

Table 2a. Current Financial Arrangements (GRA) as of November 12, 2009 (In millions of SDRs)1 (For definitions see Attachment)

Member

Effective Expiration Amount Undrawn

Total GRA Credit

Date

Date

Agreed Balance Outstanding As percent of Quota

Stand-by Arrangements

Armenia

3/6/09

7/5/11

534

232

302

328

Belarus Bosnia Costa Rica Dominicam Republic El Salvador Gabon Georgia Guatemala Hungary Iceland Latvia Mongolia Pakistan Romania Serbia, Republic of Seychelles Sri Lanka Ukraine

1/12/09 7/8/09 4/11/09 11/9/09 1/16/09 5/7/07 9/15/08 4/22/09 11/6/08 11/19/08 12/23/08 4/1/09 11/24/08 5/4/09 1/16/09 11/14/08 7/24/09 11/5/08

4/11/10 6/30/12 7/10/10 3/8/12 3/31/10 5/6/10 6/14/11 10/21/10

2,270 1,015 492 1,095 514 77 747 631

876 832 492 895 514 77 365 631 2,901 735 808 61 3,833 5,355 1,918 10 1,240 4,000

1,394 183 -489 --383 -7,637 665 714 92 3,403 6,088 702 8 446 7,000

361 108 -223 --254 -735 565 563 180 329 591 150 90 108 510

10/5/10 10,538 5/31/11 3/22/11 10/1/10 12/30/10 1,400 1,522 153 7,236

5/3/11 11,443 4/15/11 11/13/10 3/23/11 2,619 18 1,654

11/4/10 11,000

19 Arrangements

54,955

25,773

29,504

Flexible Credit Line

Colombia Mexico Poland

5/11/09 4/17/09 5/6/09

5/10/10

6,966

6,966 31,528 13,690

----

----

4/16/10 31,528 5/5/10 13,690

3 Arrangements

52,184

52,184

--

--

0 Extended Arrangements

Total 22 STBY, EFF, and FCL

107,139

77,957

29,504

-- indicates zero value. Totals may not add due to rounding.

3

Indicates undrawn and scheduled purchases.

Source: - IMF Financial Activities -- Update November 12, 2009

http://www.imf.org/external/np/tre/activity/2009/111209.htm

B. Policy framework specially the economic and financial policies by the IMF during the crisis

The IMF advices the different members specially the developing nations about the policies to achieve economic and financial stabilization and to continue to gain access to the worlds financial market.IMF in this current credit crisis has strongly supported Pro-cyclical policies or Contractionary monetary policy which seeks to reduce the size of the money supply- Mark
Weisbrot, Rebecca Ray, Jake Johnston, Jose Antonio Cordero and Juan Antonio Montecino (2009). This is a type of policies which lowers spending and

increases the taxes, that decreases inflation but also declines economic growth. Like as you can see in the table 1 below which all countries have adopted Contractionary monetary policy. In its crisis loan to Serbia in January, the IMF advised ...there is no scope now for countercyclical fiscal loosening. Anything less than a tight fiscal stance could also jeopardize the credibility of the program in the eyes of foreign investors and the Serbian public. Fiscal policy will in addition need to put a tight constraint on wage growth in government sectors and public enterprises. -Neil Watkins1 (Mar, 2009). The main task of the makers of the policy is that they have to make the policies in such a way that it increases stability without decreasing the ability of the system to increase the standard of living from rising productivity and employment. Stanley Fischer said "...Macroeconomic stability is essential if growth is to be sustained and permanent progress

made in the attack on poverty -Patrick Conway and Stanley Fischer

(Mar.2006).

Source :-

Essays from a Time of Crisis: The International Financial System, Stabilization, and Development Author(s): Patrick Conway and Stanley Fischer Source: Journal of Economic Literature, Vol. 44, No. 1 (Mar., 2006), pp. 115-144 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/30032299

C. The IMF Helps to Resolve Balance of Payments Difficulties by the IMF during the crisis Balance of Payments is a statistical statement that summarizes transactions between residents and non-residents during a period Bad luck or the improper policies are the only two reasons which lead to imbalance of payment. This may lead to rapid depreciation in the currency and if not controlled this may lead to a crisis. IMF has helped many countries during this current credit crunch in which there were many imbalances of payments which was like adding insult to injury. And thus preventing many countries from many huge problems like the depreciation in the exchange rate. (http://www.imf.org/external /np/exr/facts/crises.htm) D. Surveillance by the IMF during the crisis Ongoing monitoring using methods distinguished by their practicability, uniformity, and rapidity, rather than by complete accuracy. The purpose of surveillance is to detect changes in trend or distribution to initiate investigative or control measures (http://www .jointcommission.org/
sentinelevents/se_glossary.htm)

IMF surveillance is one of the most important issues in this present credit crunch. The main reason for the present credit crunch started with the breakdown of macroeconomic Policies, in micro prudential policies, and in what are called macro prudential policies Prudential policies that have macroeconomic implications and vice versa,- Edwin M. Truman(2009). The dispute for the policymakers for both the national as well as the international level was that there was no proper structure to direct international cooperation. SO as IMF is an international organisation which considerably it played a very important role in helping the members in implementing the policies and to avoid the chances of potential crisis. The IMFs surveillance is extra essential during the exchange rate policies as the global crisis has lead many counties depreciate its currency, but

there is a problem that all counties cant depreciate its currencies together. Which lead to the inflow of funds from abroad and thus decreasing the loss on unemployment and growth eventually. Originally Member countries have to give the IMF the required information and also consult the IMF when requested. The IMF normally meets every member country every year regarding the countrys present financial situation and its economic policies, its situation on exchange rate, its economical policies and other important concerns. All these concerns fall under the article, Article IV consultations-Martin A. Weiss(2008). The IMF executive board is presented with the annual IMFs report on its Article IV consultations by each country. The staffs observations and their recommendations for all the improvements those are possible for the countrys economic policies and its practices, are also presented to the IMFs executive board. The IMF has conducted multilateral surveillance beyond two bi-annual reports it produces, because the global financial system has become increasingly interconnected. Economic Outlook and the Global Financial Stability Report, four regional reports have the IMFs contribution to inter governmental environment and knowing the interconnection between the economies. Under the Article IV the member counties work together to encourage steadiness of the world exchange rates. But with the updates in June 2007 it was decided to adopt the Decision on Bilateral Surveillance over Members Policies,( http://www.imf.org/external/np/exr/facts/surv.htm) which means to assess whether counties policies promote external stability. Ever since then it continues to develop. In October 2008 the IMF adopted a "Statement of Surveillance Priorities (SSP), -( http://www.imf.org/external /np/exr/facts/surv.htm) which advices the IMF its economic and operational priorities until 2011. SSPs major role to provide the IMF with the proper guideline showing the IMF the direction in which in show work to get out of this current economic crisis. The IMF also looked at the modified SSP which showed the important changes in the global economics over the past year. IMF plays a very IMF role in this present credit crunch

http://digital.library.unt.edu/govdocs/crs/permalink/meta-crs-10813:1 http://digital.library.unt.edu/govdocs/crs/permalink/meta-crs10813:1 http://www.imf.org/external/np/exr/facts/surv.htm http://www.imf.org/external/np/exr/facts/surv.htm

4. Some of the lessons learned from the present credit crunch by the IMF and its future role. British PM Gordon Brown said that the IMF should reshape itself in order to regulate the world financial system and avoid the repeat of such financial crisis. Thus IMF should take new roles, it has to transform itself to have much wider perspective than it has had in the past .IMF has to get back to centre stage and should see that their voice is been heard. What we are missing in these moments is the absence of a strong international, independent voice which stands for the world economy and fights for the world economy," Rajan said.-(http://www.imf.org/external/pubs/ft/survey/so/2008/new101608a.htm).The IMF has learnt that the world be closer and cooperative in order to maintain the stability in the world. The greatest question which was asked by the the Peterson Institute for International Economics that whether the crisis was due to failure of the world economies or the massive bubble in the housing market in US. The other most important thing is to look for new ways for funding the IMF and reinvest in the IMF.

5. Conclusion First, financial crises result in part from a specific market failure: financial markets at least occasionally-and sometimes spectacularly-initially misjudge and eventually aggravate bad news. In the twentieth century, when economic activity was affected gradually by financial disruptions, allowing financial markets time to correct their own course was often feasible. In the twenty-first century, that luxury will no longer be affordable. Second, safeguarding the real economy requires conditionality. The bad news that financial markets might misjudge results either from policy errors or from exogenous shocks that require policy adjustments. To shift policies requires credibility, and credibility often cannot quickly be restored unilaterally. Accepting external conditionality benefits the country if it strengthens credibility. Third, conditionality also reduces moral hazard to the indebted country (though not to creditors): financial assistance, instead of bailing out a government, forces it to accept the short-term costs of shifting to a more sustainable course. Fourth, as Miller and Zhang (1997) argue, reliance on a market solution requires a 'bankruptcy' procedure to avoid prisoners' dilemmas and creditors' races for the exits. Crisis management provides a viable alternative to a potentially much more costly international bankruptcy procedure. If the institution succeeds in resolving crises (or, a fortiori, in avoiding them through effective surveillance), it provides a public good. International Monetary Fund

Source: The Economic Journal, Vol. 110, No. 460 (Jan., 2000), pp. 273-291 Published by: Blackwell Publishing for the Royal Economic Society Stable URL: http://www.jstor.org/stable/2565658 Accessed: 19/11/2009 09:04

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THE LONDON G-20 SUMMIT:

The Global New Deal We Need

2.

by Neil Watkins1
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American Economic Association

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The Global Financial Crisis: The Role of the International Monetary Fund (IMF)
Martin A. Weiss Specialist in International Trade and Finance 11. Foreign Affairs, Defense, and Trade Division(October 30, 2008) CRS Report Of Congress http://digital.library.unt.edu/govdocs/crs/permalink/meta-crs-10813:1

9.

IMFSupported Macroeconomic Look at FortyOne Borrowing Countries

Policies and the World Recession: A

Mark Weisbrot, Rebecca Ray, Jake Johnston, Jose Antonio Cordero and Juan Antonio Montecino
(October 2009)
Center for Economic and Policy Research
http://www.cepr.net/documents/publications/imf-2009-10.pdf 10.

The IMF and the Global Crisis: Role and Reform

Edwin M. Truman Senior Fellow, Peterson Institute for International Economics Remarks delivered to the Tulsa Committee on Foreign Relations on January 22, 2009 and to the Dallas Committee on Foreign Relations on January 23, 2009.
Peterson Institute for International Economics

http://www.iie.com/publications/papers/truman0109.pdf

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Source: The Economic Journal, Vol. 110, No. 460 (Jan., 2000), pp. 273-291 Published by: Blackwell Publishing for the Royal Economic Society Stable URL: http://www.jstor.org/stable/2565658