Presented by: Amena Ahmed Yahya

INSTRUCTOR: DR.REHANA PARVEEN

Commercial Organizatio

ns

The Role of IMF on the Global Monetary Systems

Research Abstract

• The International Monetary Fund (IMF) has been operating for more than seventy years and it has a great role in the global economy and the monetary systems. The establishment of the IMF came after the global economy has faced one of its greatest crises. It came as the answer to solve all the problems that faced the global economy. To be able to understand the exact role of the IMF we must first the purposes of its establishment. Why did the world leaders decide to create such fund and what are its benefits? And also we must differentiate between the IMF and the World Bank which is the other institution that has a great impact on the world economy. Both these institutions can be mistaken by each other due to their similar roles and purposes. And lastly, the role of IMF in the monetary systems. In what way does the IMF help the global economy? What is the scope of its authorities and administration?

History of Monetary Systems

• Societies created many different ways of trading to obtain goods and services. • The original form of trade is traced back to barters. • A barter is an exchange of goods between the

parties involved. • Trade developed and people started using gold and

silver coins, known as bullion.

History of Monetary Systems

• “Gold Standard” monetary system • Many economies around the world based

their currency on the gold standard • The gold standard is considered the reason

that lead to the Great Depression.

History of Monetary Systems • The Great Depression resulted in:

Collapse of investments and debts Weak banking systems Unemployment Severe economic deflation

• Economic historians consensually agreed that the gold standard represented the Great Depression

• countries that did not follow the gold standard managed to evade the Great Depression

• While countries on the gold standard only started to recover from the economic crisis when they stopped following the principle of the gold standard

International Monetary Fund• World leaders of the affected

countries gathered to establish a new monetary form.

• Purpose: Establish a new system that stabilizes currency exchange rates without relying on the gold standard.

International Monetary Fund• At the international Bretton Woods

Conference held in July 1944 Bretton Woods, New Hampshire, in the United States, delegates from 44 countries negotiated the agreement on the structure and operation of the new international monetary system.

International Monetary Fund• Official existence on 27

December 1945, when 29 countries signed its Articles of Agreement

• the IMF has near-global membership of 189 member countries

Difference between IMF and World Bank

IMF World Bank

Mandate

promotion of cooperation between global economies by

providing policy advice and technical assistance

promotion of long term economic development

and reduction of poverty worldwide by supporting

countries

Loans helps in designing the policy programs that

will help solve balance of payments problems.

Helps in establishing the necessary projects for a country’s development

Loan term

short term and medium term loans

that are funded mainly by the quota

contribution of IMF members.

Longs terms funded by the contributions of

member countries and also funded by bond

issuance.

IMF and World Bank

• The roles of the IMF and World Bank can be easily confused because both of these institutions collaborate regularly to assist the member countries.• In 1989, their cooperation agreement was set out to

ensure their effective cooperation in the areas where they share the responsibility. • The IMF and World Bank maintain a high level of

coordination through their annual meetings that are conducted by the governors of both institutions who consult and present the issues and status of the international economics and finance

IMF and World Bank

• The fundamental difference: • the Bank is primarily a development institution; the IMF is

a cooperative institution that seeks to maintain an orderly system of payments and receipts between nations.

• Each has a different purpose, a distinct structure, receives its funding from different sources, assists different categories of members, and strives to achieve distinct goals

Purposes of IMF

1. To promote international monetary cooperation

2. To facilitate the expansion and balanced growth of international trade

3. To promote exchange stability

4. To assist in the establishment of a multilateral system of payments

5. To give confidence to members by making the general resources of the Fund temporarily available to them

6. to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members

The Role of IMF on the Global Monetary Systems

The Role of IMF on the Global Monetary Systems

• The role that the IMF plays in the global monetary systems can be demonstrated in three important aspects:

1. Surveillance

2. Maintaining exchange rates and policies

3. stabilizing capital flow in financial sector issues

Surveillance

• effective surveillance of the economy of member countries, the IMF would be able to avoid the problems that the global economy in the 1930s• an instrument to deal with the imbalances

that might corrupt the global economy and the financial system• They monitor the policies and

performances of individual countries that affect the functioning of the monetary system

Maintaining exchange rates and policies

• In order to have a successful exchange rate flexibility there are four components that need to be followed which are:

1. deep and liquid foreign exchange market2. coherent intervention policy3. inflation targeting system4. suitable systems to review and manage

the exchange rates of public and private sectors

stabilizing capital flow in financial sector issues

• The IMF surveillance extends to the capital accounts of members and it administers the size and composition of their debts. • The IMF role is to maintain the flow of

capital even when countries face financial problems. • The IMF can provide the information it

gathers from its collected data to the private sector which would help in maintain the capital flow.

• The IMF plays an important role in the global

economy, as it aims to create a stable and

well-grounded monetary system that is

capable of withstanding any economic

fluctuations that may put the global economy

in another devastating economic crisis.

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