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IMF LENDING AND

GEOPOLITICS

All About the


International
Monetary
Fund

The Beginnings: Establishment of


the IMF in Bretton Woods
(Reason for the formation of IMF)

During the Great Depression of the 1930s,


countries attempted to shore up their failing
economies by sharply raising barriers to
foreign trade
Devaluing their currencies to compete against
each other for export markets

Effects of Devaluation of currency


Cheaper Exports
A devaluation of the exchange rate will make exports more competitive
and appear cheaper to foreigners. This will increase demand for exports.
For example, after a devaluation, PH assets become more attractive; for
example a devaluation in the Peso can make Ph property appear cheaper
to foreigners.
More expensive Imports
A devaluation means imports, such as petrol, food and raw materials will become
more expensive. This will reduce demand for imports.
Wages
A devaluation in the currency makes a country less attractive for foreign workers.
For example in UK, with fall in the value of the Pound, migrant workers from Eastern
Europe may prefer to work in Germany than the UK.

The Beginnings: Establishment of


the IMF in Bretton Woods
(Reason for the formation of IMF)

This breakdown in international monetary


cooperation led the IMF's founders to plan an
institution charged with overseeing the international
monetary systemthe system of exchange rates and
international payments that enables countries and
their citizens to buy goods and services from each
other.
The new global entity would ensure exchange rate
stability and encourage its member countries to
eliminate exchange restrictions that hindered trade.

The Beginnings: Establishment of


the IMF in Bretton Woods
(The Bretton Woods agreement)

The IMF was conceived in July 1944, when


representatives of 45 countries meeting in the town of
Bretton Woods, New Hampshire, in the northeastern
United States, agreed on a framework for international
economic cooperation, to be established after the
Second World War. They believed that such a
framework was necessary to avoid a repetition of the
disastrous economic policies that had contributed to
the Great Depression.

The Beginnings: Establishment of


the IMF in Bretton Woods
(The Bretton Woods agreement)

The IMF came into formal existence in December


1945, when its first 29 member countries signed its
Articles of Agreement. It began operations on March
1, 1947. Later that year, France became the first
country to borrow from the IMF.
Currently have 189 member countries

Membership of the IMF


(Date of entry into force: December 27, 1945)
Chronological List
Member
Belgium
Bolivia
Canada
China
Colombia
(Czechoslovakia)
Egypt
Ethiopia
France
Greece
Honduras
Iceland
India

Effective Date of
Membership
December 27, 1945
December 27, 1945
December 27, 1945
December 27, 1945
December 27, 1945
(December 27, 1945)
December 27, 1945
December 27, 1945
December 27, 1945
December 27, 1945
December 27, 1945
December 27, 1945
December 27, 1945

Iraq

December 27, 1945

Luxembourg

December 27, 1945

Netherlands

December 27, 1945

Norway

December 27, 1945

Philippines

December 27, 1945

South Africa

December 27, 1945

United Kingdom

December 27, 1945

United States

December 27, 1945

(Yugoslavia)

(December 27, 1945)

Dominican Republic

December 28, 1945

Ecuador

December 28, 1945

Guatemala

December 28, 1945

Paraguay

December 28, 1945

Iran, Islamic
Republic of (Iran)
Chile

December 29, 1945

Mexico

December 31, 1945

Peru

December 31, 1945

December 31, 1945

Functions and Purpose of IMF


The IMF is responsible for the creation and
maintenance of the international monetary system,
the system by which international payments among
countries take place. It thus strives to provide a
systematic mechanism for foreign exchange
transactions in order to foster investment and
promote balanced global economic trade.

Functions and Purpose of IMF


Offer financial assistance to nations in need of correcting
balance of payments discrepancies.
The IMF advises on the macroeconomic policies of a
country, which affect its exchange rate and its
government's budget, money and credit management.
The IMF will also appraise a country's financial sector and
its regulatory policies, as well as structural policies within
the macroeconomy that relate to the labor market and
employment.

Functions and Purpose of IMF


(Funds)

The IMF gets its money from quota subscriptions paid


by member states. The size of each quota is
determined by how much each government can pay
according to the size of its economy. The quota in
turn determines the weight each country has within
the IMF, hence its voting rights as well as how much
financing it can receive from the IMF.

Quota
Quota subscriptions are a central component of the
IMFs financial resources.
Each member country of the IMF is assigned a quota,
based broadly on its relative position in the world
economy.
A member countrys quota determines its maximum
financial commitment to the IMF, its voting power, and
has a bearing on its access to IMF financing. (Access
Limits)

IMF Executive Directors and Voting


Power
The Executive Board (the Board) is responsible for
conducting the day-to-day business of the IMF. It is
composed of 24 Directors, who are appointed or
elected by member countries or by groups of
countries, and the Managing Director, who serves as
its Chairman. The Board usually meets several times
each week. It carries out its work largely on the basis
of papers prepared by IMF management and staff.

Director
Alternate

Vacant
Sunil Sabharwal

Casting Votes of

Votes by Country Total Votes

Percent
of Fund
Total2

United States
831,405

831,405

16.54

Masaaki Kaizuka Japan


Tetsuya Hiroshima

309,668

309,668

6.16

Jin Zhongxia
Ping Sun

China
306,292

306,292

6.09

Menno Snel
Willy Kiekens
Oleksandr Petryk

Armenia
Belgium
Bosnia and
Herzegovina
Bulgaria
Croatia
Cyprus
Georgia
Israel
Luxembourg
Macedonia, former
Yugoslav Republic
of
Moldova

2,751
65,570
4,115
10,426
8,637
4,501
3,567
20,672
14,681
2,866

QUOTA
Member
Pakistan3

VOTES

Millions Percent Governor


of SDRs of Total1 Alternate
2,031.0

0.43 Ashraf Mahmood Wathra

Number2

Percent
of Total1

21,773

0.43

1,494

0.03

Waqar Masood Khan

Palau3

3.1

0.001 Elbuchel Sadang


Ruth Wong

Panama3

376.8

0.08 Dulcidio De La Guardia


Rolando de Leon de Alba

5,231

0.10

Paraguay3

201.4

0.04 Carlos Fernandez Valdovinos

3,477

0.07

14,808

0.29

21,892

0.44

Santiago Pea Palacios

Peru3

1,334.5

0.28 Julio Velarde


Alfredo Eduardo Thorne Vetter

Philippines3

2,042.9

0.43 Amando M. Tetangco, Jr.

Process of Lending
Upon request by a member country, IMF resources are usually made
available under a lending arrangement, which may, depending on the
lending instrument used, specify the economic policies and measures a
country has agreed to implement to resolve its balance of payments
problem.
The economic policy program underlying an arrangement is formulated
by the country in consultation with the IMF and is in most cases
presented to the Funds Executive Board in a Letter of Intent and is
further detailed in the annexed Memorandum of Understanding.
Once an arrangement is approved by the Board, IMF resources are
usually released in phased installments as the program is implemented.

Conditionality
When a country borrows from the IMF, its
government agrees to adjust its economic policies to
overcome the problems that led it to seek financial
aid from the international community. These loan
conditions also serve to ensure that the country will
be able to repay the Fund so that the resources can
be made available to other members in need.

When can a country borrow from the


IMF?
A member country may request IMF financial
assistance if it has an actual or potential balance of
payments need.
IMF resources provide a cushion that eases the
adjustment policies and reforms that a country must
make to correct its balance of payments problem and
help restore conditions for strong economic growth.

Non-Concessional Lending
All non-concessional facilities are subject to the IMFs marketrelated interest rate, known as the rate of charge, and large
loans carry a surcharge. The maximum amount that a country
can borrow from the IMF, known as its access limit, varies
depending on the type of loan, but is typically a multiple of the
countrys IMF quota.
The IMFs instruments for non-concessional loans are Stand-By
Arrangements (SBA); the Flexible Credit Line (FCL); the
Precautionary and Liquidity Line (PLL); for medium-term needs,
the Extended Fund Facility (EFF); and for emergency assistance
to members facing urgent balance of payments needs, the
Rapid Financing Instrument (RFI).

Non-Concessional Lending
[Stand-by Arrangements (SBA)]

The SBA is designed to help countries address shortterm balance of payments problems. SBAs may be
provided on a precautionary basis where countries
choose not to draw upon approved amounts but
retain the option to do so if conditions deteriorate.
The length of a SBA is typically 1224 months, and
repayment is due within 3-5 years of disbursement

Non-Concessional Lending
[Flexible Credit Line (FCL)]

The FCL is for countries with very strong fundamentals, policies,


and track records of policy implementation. The length of the
FCL is either one year or two years with an interim review of
continued qualification after one year.
Access is determined on a case-by-case basis, is not subject to
access limits, and is available in a single up-front disbursement
rather than phased. Disbursements under the FCL are not
conditional on implementation of specific policy understandings
as is the case under the SBA because FCL-qualifying countries
have a demonstrated track record of implementing appropriate
macroeconomic policies.
repayment is due within 3-5 years of disbursement

Non-Concessional Lending

[Precautionary and Liquidity Line (PLL)]


The PLL is for countries with sound fundamentals and
policies, and a track record of implementing such
policies. PLL-qualifying countries may face moderate
vulnerabilities and may not meet the FCL qualification
standards, but they do not require the substantial
policy adjustments normally associated with SBAs. The
PLL combines qualification (similar to the FCL but with
a lower bar) with focused conditions that aim at
addressing the identified remaining vulnerabilities.

Non-Concessional Lending

[Extended Fund Facility (EFF)]


This facility helps countries address medium- and longer-term
balance of payments problems reflecting extensive distortions
that require fundamental economic reforms. Its use has
increased substantially in the recent crisis period, reflecting the
structural nature of some members balance of payments
problems.
The prolonged nature of the adjustment required to restore
macroeconomic stability, and the presence of adequate
assurances about the members ability and willingness to
implement deep and sustained structural reforms

Non-Concessional Lending

[Rapid Financing Instrument (RFI)]


The RFI was introduced to replace and broaden the
scope of the earlier emergency assistance policies.
The RFI provides rapid financial assistance with
limited conditionality to all members facing an urgent
balance of payments need.

Concessional Lending
These loans are allocated for Low income countries (LIC)
under the Poverty Reduction and growth trust (PRGT). These
are loans that are extended on terms substantially more
generous than market loans. The concessionality is achieved
either through interest rates below those available on the
market or by grace periods, or a combination of these.
Concessional loans typically have long grace periods.
Financing terms have been made more concessional, and
the interest rate is reviewed every two years

Concessional Lending

[The Extended Credit Facility (ECF)]


It is the Funds main tool for medium-term support to
LICs facing protracted balance of payments
problems. Financing under the ECF currently carries a
zero interest rate, a grace period of 5 years, and a
final maturity of 10 years.

Concessional Lending

[The Standby Credit Facility (SCF)]


Provides financial assistance to LICs with short-term
or potential balance of payments needs. The SCF can
be used in a wide range of circumstances, including
on a precautionary basis. Financing under the SCF
currently carries a zero interest rate, with a grace
period of 4 years, and a final maturity of 8 years.

Concessional Lending

[The Rapid Credit Facility (RCF)]


Provides rapid financial assistance with limited
conditionality to LICs facing an urgent balance of
payments need. The RCF streamlines the Funds
emergency assistance for LICs, and can be used
flexibly in a wide range of circumstances. Financing
under the RCF currently carries a zero interest rate,
has a grace period of 5 years, and a final maturity
of 10 years.

Issues
Governance
Highly advanced economy countries dominate decision-making in the IMF
Uneven voting power
Voting power is determined by the amount of money that each country pays into
the IMF's quota system. The disproportionate amount of power held by wealthy
countries means that the interests of bankers, investors and corporations from
industrialized countries are put above the needs of the world's poor majority.
Conditions inclined to capitalist and hurt workers
The conditions in the arrangements when borrowing loans from IMF may weaken
the labor laws to attract investors which in turn will inject money in that country,
contribute to its economic growth but at the expense of the workers.

The Role of
Geopolitics in
IMF

What is Geopolitics?
The study of the effects of geography on international politics and
international relations. Geopolitics is a method of studying foreign policy to
understand, explain and predict international political behavior through
geographical variables.
Geopolitics traditionally indicates the links and causal relationships
between political power and geographic space; in concrete terms it is often
seen as a body of thought assaying specific strategic prescriptions based on
the relative importance of land power (Osterud, 1988).
In the working paper, the authors use four areas or geopolitical determinants
which significantly affects and relevant to the lending decision of the IMF;
Energetic area, Nuclear area, Military area and Geographic area.

Relevance of Geopolitics to IMF


The fundamental principles of IMF in its lending are being overturned
and influenced by different geopolitical interest. Almost most of the
time, It is inclined to favor borrowing countries who have a significant
geopolitical importance or potential.
A countries geopolitical determinants can give them more or less
consideration when asking to borrow funds depending if the outcome
may be positive or negative effect in the international economy or
rather, effects to the economy of the dominating country.
IMF favored geopolitically important countries when lending nonconcessional facilities while concessional ones tend to be attributed to
non-geopolitically important countries

Variables that embodies the


geopolitical importance of
countries
Energetic area
Nuclear area
Military area
Geographic Area
These four variables were singled out through Common
Factor Analysis
(interacting determinants)

Energetic area
There are many resources that might be a significant
geopolitical factor but a source of energy is what
makes an industry function, hence its the oil that
fuels the machine (industry). Oil and Gas reserves of
a country, with or without the capability to utilize the
resource, is considered as a geopolitical importance
or potential - (if incapable to utilize the resource).

Nuclear area
This area is in a cross-section of an energetic area
and military area because a country can derive
energy from it or can be used to develop military
grade nuclear weapon. That is why the approval of
loan for these countries is very meticulous. The nonallocation of an IMF loan may be seen by dominant
countries willing to retain their position as a tool to
counteract the rising power of nuclear powers.
On the other hand, the international community may
be interested in ensuring the economic stability of
nuclear powers in order to reduce the risk that they

Military area
To explain this clearly, the author used US involvement
as an example. US dominates the Funds decision
making process. Its deployment of troops and
establishment of bases throughout the regions of the
world becomes a factor in the lending decision of IMF.
The US and its military allies influence loan decisions in
order to favor countries where their troops are present.
Another example is treaties towards peace like Nonproliferation treaties signals cooperative behavior of a
country which may impact positively on the odds of
obtaining an IMF loan, thus lessening their threat to the

Geographic Area
This is purely about geographic characteristic of a country that
affect the lending decision of IMF. (i.e desert, mountains)
All geographical factors that are expected to influence positively
will contribute on the probability to receive IMF loans.
The transport of resources also serves as a factor to determine
the geopolitical importance of a country. This means, even if you
do not have the resources but these resources needs to transit
via your country (i.e Pipelines or road routes) to be able to enter
the market, you possess a geopolitical importance.

Findings

Method Used By The Authors:


Geopolitical Importance
Step 1: Geopolitical Factor
Identify geopolitical determinants that may influence the
distribution of IMF loans.
Extract the underlying factor
*FACTOR ANALYSIS looks for factors which underlie the variables
*How?

Method Used By The Authors:


Geopolitical Geographical Situation
Step 2: Geopolitical Potential
*POTENTIAL NALYSIS like Harris Market-Potential Analysis
*How?
Taking the countrys geopolitical factor and sum of other
countries geopolitical factors over their geographical distances

Method Used By The Authors:


Geopolitical Geographical Situation
Step 3: Pure Geopolitical Potential
Taking into account only the geopolitical geographic situation of
the country
(i.e. without taking into account its own geopolitical factor but only
that of its neighbors over their distance)

Results: Geopolitical Importance and


Geopolitical Geographic Situation

Robustness
Checks

Robustness Checks
Importance of Political Factors
Voting in line with the US and the UN General Assembly
positively influence IMF loan decisions
Holding a non-permanent seat in the UN Security Council
positively related to the probability to get IMF money
Entering a program after, but not before elections

Robustness Checks
Importance of Factors of Aid Flows (less robust)
Level of democracy and corruption in the recipient countries, as
well as the former colonial link between countries are strong
determinants of bilateral aid decisions (non-concessional)
Only level of democracy index is significant to PRGF but other
factors are not.
Multilateral aid decisions have settled by international
institutions to help non-geopolitical important countries but
results shown that it is not consistent with what the aid
literature had assumed.

Robustness Checks
Importance of Recidivism
Results have shown that SBA/EFF are found to be rather
persistent

Robustness Checks
On the Factor Analysis: Testing the variables entering the
factor
All variables, except UN Military strength, are significant and
positively linked to the decision and the amount to lend through
SBA/EFF.
In PRGF, the only significant variables are the oil reserves,
nuclear plant, and nuclear weapon. It is because the Fund lend
to countries with small endowment in resource which is in line
with its (PRGF) development objective and without nuclear civil
and military power. (Poor countries are economically not enough
to build up nuclear power i.e. Pakistan)
Results have shown that it is robust in SBA/EFF

Conclusion

Conclusion
Can Geopolitics influence the IMF decision?

YES.

According to the results found, Fund favored


geopolitically important countries when lending nonconcessional facilities and also favoring those countries
which are close to the geopolitically important countries.
Concessional ones are tend to be attributed to nongeopolitically important countries not because they are not
geopolitically important but because these countries are eligible
to get concessional loans from IMF.

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