Internat l Liqu

iona
1

idity

Role of

IMF

Liquidityability ? convert ..
The to 2

asset to cash quickly

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Define 'international liquidity
International Liquidity refers to the resources that countries or individuals have to settle international trades.

3

In the days of

gold-$ exchange standard

IL would mean access to gold that could be used to redeem a nation s currency held by foreigners.

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After 1971, with the abandonment of the dollargold exchange standard
as the world entered an era of

managed

exchange rates, some

floating

, some

pegged

international liquidity came to mean the resources available to national monetary authorities to maintain the value of their currencies as required by their exchange management programs. 5

However, for countries with free

trading regimes and floating exchange rates

international liquidity may more properly be thought of as the foreign exchange assets and credit available to residents of a country that would allow them to import from abroad at their discretion 6

International Liquidity meant the relative amount of resources available to a nation s monetary authorities that could be used to settle a balance of payments deficit.

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IL of a country Depends up on

‡ Gold reserves ‡ Foreign Exchange holdings of a country ‡ Ability to borrow from other countries and international organizations
It is not easy to determine adequacy of IL There is no exact relationship between the volume of international transactions and amount of necessary reserves.

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Problems of IL arises because Demand

More than Supply

There's

Shortage

‡ ‡ ‡ ‡ 9

BOP deficits High tariff barriers Attitude of developed countries Unequal distribution of international reserves

Suggestions to solve these problems
‡ Developing countries should reduce BOP deficit by promoting exports ‡ They should ban non essential consumer goods by selective tariffs, physical quotas etc.. ‡ A developing country should devalue its currency so as to reduce the export price and raise import price with a view to earn foreign exchange. ‡ A developing country should follow restrictive monetary and fiscal policies to reduce domestic demand for products, to reduce input price, and 10 to check inflationary pressure.

.

.

.

‡ Developed countries should reduce their BOP surplus by
± Accepting the national currencies of developing countries for payments ± Removal of trade barriers to products of developing countries ± Accepting the products of developing countries in exchange

‡ IMF should expand the international reserves by fresh allocation of quotas to members, and new issues of SDR`s to be distributed to 11 developing countries

WHY Role of IMF in IL Increased
FIXED EXCHANGE RATE. Drop in production of gold.

Collapse of Bretton Woods system

US gold stock declined

Supply of US $ inadequate in relation to the liquidity needs of countries

So as a supervisory institution in IMS ,As principle source of international liquidity the IMF had an 12 important role to device measures to increase IL

Measures taken to increase IL 1. Special Drawing Rights SDR ‡ The introduction in 1969 of the SDR, the reserve asset issued by the IMF, was prompted by the desire to establish a mechanism for the deliberate creation of international reserves that would supplement existing reserve assets ‡ 1st allotment SDR 9.3 billion, 2nd SDR 12.1 billion 13 ‡ 1 SDR = 1.54 USD = 70.4 INR

2. Quota ‡ Contribution from the member countries as subscription to meet global demand of liquidity. ‡ Reviewed every 4 years ‡ 7.6 billion in 1947 reviewed in 2010 ‡ 17.9 % US, 6.12 Japan,1.9 India ‡ 7% increase to developing nations 2010 14

3. Selling Gold increases its fund by

4. Borrowings governments, central banks, devel. bank, bank of international settlements, OPEC, private institutions 15

5. Reserves Tranche if the member has a less currency with the fund than its quota, the difference is reserves tranche. ‡ Draw 25 % of Res Tr. Automatically for its bop needs ‡ No intrest ‡ Repay 3 to 5 years. ‡ i.e. a lending activity 16

6. Credit Tranche to govern its lending activities. ‡ IMF will disperse the loan in a series of credit tranches. Tranches are a portion of the loan that is released upon the member country fulfilling conditions or requirements set forth by the IMF. ‡ draw up to 100 % annually can be increased to 300 % on new Quota. 17

7. New Credit Facilities ‡ New credit facility other than Tranches ‡ Avail. Long period ‡ BSFF, EFF, ESAF, CCFF, STF, ESAL, CCL 8. IDA Replenishments ‡ Another source for increasing international liquidity ‡ To poor countries for 3 years. ‡ IDA 15 2010 : SDR 16.5 billion (US$ 25.1 18 billion) 42 % increase from ..IDA 16 Dec.

That s all from me thank you

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