Balance of Payments Adjustment, 1945 to 1986: The IMF Experience

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Whenever such paper gold is allocated, it gets a credit entry in the name of the participating countries in the said account. Since its inception, there have been only four allocation to SDRs—the first in , and the last in —mainly to the developing countries. The IMF Articles of Agreement clearly state that the resources of the Fund are to be used to give temporary assistance to members in financing BOP deficit on current account. Of course, the financial assistance provided by the Fund is loan. The following technique is employed: If a country calls on the Fund it buys foreign currencies from the IMF in return for the equivalent in the domestic currency.

The technique, therefore, suggests that the IMF does not lend, but sells the required currency to the members on certain terms. It is meant to cover short run gaps in BOP. The total amount that a country is entitled to draw is determined by the amount of its quota. A member is entitled to draw an amount not exceeding 25 p. The first 25 p. This 25 p.

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However, no interest for the first credit tranche is required to be paid though such drawings are subject to repayment within years period. Originally, it was possible to borrow equal to p. At present, borrowing limit has been raised to p. This method of borrowing has become the most normal form of assistance by the Fund. However, the stand-by arrangements can be extended up to 3 years while repayments are required to be made within years of each drawing.

In most cases, the member does, in fact, draw. Developing countries suffer from chronic BOP problems which could not be remedied in the short run. Such protracted BOP difficulties experienced by the LDCs were the result of structural imbalances in production and trade. In the s, the Fund recognised this idea and built up the EFF in The EFF is designed to provide assistance to members to meet their BOP deficits for longer period years and in amounts larger in relation to their quotas.

Repayment provisions of EFF cover a period of years. However, conditions for granting loans are very stringent. Drawings on this account since stand at over 50 billion dollar in SDRs. CFF, introduced in , is one such special drawing provision. Under it, members were allowed to draw up to 25 p. In a new facility—the SAF—was introduced for the benefit of low income countries. It was increasingly realised that the so-called stringent and inflexible credit arrangements were too inadequate to cope with the growing debt problems of the poorest members of the Fund.

In view of this, SAF was introduced which stood quite apart from the monetary character of the Fund. Under it, credit facilities for economic reform programmes are available at a low interest rate of 0. Loans are for 10 years with a grace period of five and a half years. The PRGF that replaced the ESAF in November provides concessional lending to help the poorest member countries with the aim of making poverty reduction and economic growth —the central objectives of policy programmes.

Under this facility, low-income member countries are eligible to borrow up to p. Rate of interest that is charged is only 0. This instrument provides additional short-term financing to member countries facing exceptional BOP difficulties because of a sudden and disruptive loss of market confidence reflected in capital outflows of countries concerned. Further, the IMF lending is temporary ranging from 1 year to 3 years.

Repayment period varies from country to country and from one facility to another. The IMF may be viewed as both a financing and an adjustment-oriented international institution for the benefit of its members. The distinguishing features of the Fund loans are their cost and certain macroeconomic policy conditions. These conditionality requirements range from rather general commitments to cooperate with the IMF in setting policies to formulating a specific, quantified plan for monetary, trade, and fiscal policies. The IMF practice of tying loans to conditions reflects the dominant influence of the capitalist world.

The conditionality is always intended to restore internal and external balance and price stability. The programme design involves monetary and fiscal policy measures so that structural adjustment i. Thus, stabilisation and structural programmes not only includes monetary and fiscal policies but also exchange rate policy i. Almost all stabilisation programmes intend to curb effective demand.

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There are two phases in the working of the IMF over the last 65 years. The first phase covers the period late s i. Thus, the pegged exchange rate was adjusted in accordance with the IMF. As the system was the source of some major problems, it was abandoned in and more flexibility was introduced in the monetary system. In other words, the demise of the Bretton Woods System made room for the floating exchange rate regime, requiring changes in the role of the IMF. After prolonged negotiations , the IMF started its second-leg journey in Meanwhile, the rise in interest rates in the USA from and the appreciation of dollar caused tremendous difficulties to the developing countries in servicing their debts.

On the other hand, the switch to the floating exchange rate system coincided with the deteriorating economic conditions in the industrialised countries. Debt crisis that emerged in many developing countries had a dramatic effect. Mexico a Latin American country announced its failure to honour debt obligations. The IMF now played a crucial role to put the international financial system in order. It came in for mobilisation of additional financial resources so as to reduce the debt burden.

Balance Of Payments Adjustment To The Imf Experience

As a result of this and other related measures, many countries regained access to the international banks and creditors and the severity of the debt problem moderated considerably in Latin America in the early s. With the breakup of the Soviet Union in , a new category of countries, especially the erstwhile communist countries, joined the IMF. The IMF now came forward to assist countries undergoing transition from a centrally planned economy to a market-oriented economy. Separate treatment is given to industrial and developing countries, as their balance of payments problems have differed.

As examples, Japan.

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By Margaret Garritsen de Vries. Washington: International Monetary Fund.

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