Lecture 6-International payment systems.pptx

Kwame Nkrumah University of Science & Technology, Kumasi, Ghana ECON 568 International Payments System Enock Kojo Ayesu (PhD) [email protected] // 0240405996 2023/2024 Academic Year...

Kwame Nkrumah University of Science & Technology, Kumasi, Ghana ECON 568 International Payments System Enock Kojo Ayesu (PhD) [email protected] // 0240405996 2023/2024 Academic Year 1  Goals and objectives Questions  Why the need for international payment system?  How do countries use international payment system to achieve both internal and external balances? www.knust.edu.gh 07/03/2024 2  Evolution of international payments system  In theory a number of exchange-rate regimes are possible, because between the two extremes of perfectly rigid (or fixed) and perfectly (freely) flexible exchange rates, there exists a range of intermediate regimes of limited flexibility.  For the purpose of this lecture, the main regimes, beginning by the two extremes are discussed. www.knust.edu.gh 07/03/2024 3  The two extremes and intermediate regimes  One extreme is the perfectly and freely flexible exchange rates. This system is where the monetary authorities do not intervene in the foreign exchange market.  Therefore the exchange rate (both spot and forward) of the currency with respect to any foreign currency is left completely free to fluctuate in either direction and by any amount on the basis of the demands for and supplies of foreign exchange coming from all the other operators.  The other extreme is the rigidly fixed exchange rates. Here various cases are to be distinguished.  The first and oldest is the gold standard (existed between 1870- 1914), where each national currency has a precisely fixed gold content. (for our purposes it is irrelevant whether gold materially www.knust.edu.gh circulates in the form of gold coins or whether circulation is made of paper currency which can be 07/03/2024 4 immediately converted into gold on demand).  The two extremes and intermediate regimes  In this case, the exchange rate between any two currencies is automatically and rigidly fixed by the ratio between the gold content of the two currencies (which is called the mint parity): if, in fact, it were different, a profit could be made by shipping gold between the two countries concerned.  Let us assume, for example, that the gold content of the pound sterling is 0.04631 and the US dollar is 0.02857 ounces of gold, the exchange rate between the two currencies will be 0.04631/0.02857 ≡ 1.621, that is, 1.621 dollars to the pound (with one pound, one gets 1.621 dollars ).  If, in fact, the monetary authorities stated a different rate, for example, 1.7831 dollars to the pound, anyone could sell pounds for dollars, give these to the US Fed in exchange for gold, ship the gold to England and obtain pounds in exchange for it, thus ending up with 10% more www.knust.edu.gh pounds 07/03/2024 (with one pound, one gets 1.7831 dollars and then 1.78315 x  The two extremes and intermediate regimes  As long as the exchange rate is out of line with the gold content ratio, the outflow of gold from the United States would continue, a situation which cannot be maintained: either the monetary authorities halt it by administrative measures (for example by suspending convertibility, in which case we have gone off the gold standard system) or are compelled to fix the rate at 1.621 dollars to the pound.  It is clear that we would arrive at the same result if the exchange rate were lower, for example 1.474 dollars to the pound (gold would flow from England to the United States, etc.).  To be precise, the exchange rate can diverge from mint parity within certain margins - called the gold points - which depend on the cost of transport and insurance of the gold shipped from one country to another. www.knust.edu.gh 07/03/2024 6  The two extremes and intermediate regimes  It is self-evident that the operations described are not profitable if these costs exceed the gain deriving from the divergence between the exchange rate and mint parity.  Conceptually similar to the gold standard is the gold exchange standard, in which, without itself buying and selling gold, a country stands ready to buy or sell a particular foreign currency which is fully convertible into gold.  This system enables the international economy to economize gold with respect to the gold standard, because the ultimate requests for conversion into gold of the convertible foreign currency are normally only a fraction of the latter (foreign currency).  It must be emphasized that, for this system to be a true gold exchange www.knust.edu.gh standard, 07/03/2024 the convertibility of the foreign currency must be free and 7  The two extremes and intermediate  If, on the contrary, the convertibility is restricted, for example solely to regimes the requests from central banks, we are in the presence of a limping gold exchange standard, in which case the automatic mechanisms governing the gold standard no longer operate, and the concept itself of convertibility has to be redefined: now convertibility simply means that private agents have the right to freely exchange the various currencies between each other at fixes rates.  When convertibility into gold is completely eliminated, even between central banks, we have a pure exchange standard, in which a country buys and sells foreign exchange (or a stipulated foreign currency) at fixed rates.  Classification of countries into exchange rate regimes is in most cases not clear cut. Traditionally (since 1950), the IMF Annual Report on Exchange Arrangements and Exchange Restrictions is thewww.knust.edu.gh main source of information about the exchange rate policies pursued by member 07/03/2024 8  The two extremes and intermediate regimes  The classification contained therein has been used to document the evolution of exchange rate regimes over time.  There has been an expanding literature on the discrepancy between what policy makers announce they do regarding the exchange rate policy (exchange rate regime de jure), and what they actually implement (exchange rate regime de facto): countries may not always be following the exchange rate policy that they have officially declared to IMF.  To address these shortcomings, the IMF adopted a new classification scheme based on the de facto policies, which has become official since January 1999 (for the evolution of the IMF’s Classification Taxonomies, see Habermeier et al. 2009). www.knust.edu.gh  The IMF provides annual reports that incorporate both the declared 07/03/2024 9  The two extremes and intermediate regimes ranks them on the regimes  The IMF in its classification system of official de facto exchange rate basis of the following broad principles: (a) the degree to which the exchange rate is determined by the market rather than by official action, with market-determined rates being on the whole more flexible; (b) the degree of flexibility of the arrangement or a formal or informal commitment to a given exchange rate path.  The methodology classifies the prevailing exchange rate regimes into four major categories:  hard pegs (such as exchange arrangements with no separate legal tender and currency board arrangements)  soft pegs (including conventional pegged arrangements, pegged exchange rates within horizontal bands, crawling pegs, stabilized www.knust.edu.gh arrangements, and crawl-like arrangements) 07/03/2024 10  floating regimes (such as floating and free floating)  Hard Pegs (a)Exchange arrangements with no separate legal tender  Here, the currency of another country circulates as the sole legal tender. Adopting such an arrangement implies complete surrender of the monetary authorities’ control over domestic monetary policy.  There are two types of exchange arrangements with no separate legal tender.  One is formal dollarization where the currency of another country circulates as the sole legal tender.  The other is shared legal tender where members belonging to a monetary or currency union share the same legal tender (Eurorization).  As stated by the IMF, exchange arrangements of the countries www.knust.edu.gh that belong 07/03/2024 to a monetary or currency union in which the same legal tender 11  Hard Pegs (b) Currency board  A currency board arrangement is a monetary arrangement based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuance authority to ensure the fulfillment of its legal obligation.  This implies that domestic currency is usually fully backed by foreign assets, eliminating traditional central bank functions.  In the regimes (a) and (b), countries do not issue an independent currency. www.knust.edu.gh 07/03/2024 12  Soft Pegs (a)Conventional pegged arrangements  The country formally or de facto pegs its currency at a fixed rate to another currency or a basket of currencies, where the basket is formed by the currencies of major trading or financial partners (eg. dollar, euro, pound) and the weights reflect the geographic distribution of trade, services, or capital flows, or the Special Drawing Right (SDR).  The anchor currency or basket weights are public or notified to the IMF.  The country authorities stand ready to maintain the fixed parity through direct intervention. Note: The SDR is an international reserve asset created by the IMF in 1969 to supplement the official reserveswww.knust.edu.gh of its member countries. The SDR is not a currency per se. It is a potential claim on the freely usable currencies of IMF members. As such, 07/03/2024 13 SDRs can provide a country with liquidity. A basket of currencies defines the SDR: the US dollar (43.38), Euro (29.31),  Soft Pegs (b) Pegged exchange rates within horizontal bands  The value of the currency is maintained within certain margins of fluctuation of at least ˙1% around a fixed central rate, OR a margin between the maximum and minimum value of the exchange rate that exceeds 2 %.  An example is the case of the multilateral exchange rate mechanism (ERM) of the European Monetary System (EMS), replaced with ERM II on January 1, 1999.  This system was suggested by Halm (1965) under the name of wider band. www.knust.edu.gh 07/03/2024 14  Soft Pegs (c) Crawling pegs  With this arrangement, the currency is pegged at a fixed rate but it is adjusted in small amounts at a fixed rate or in response to changes in selected quantitative indicators, such as past inflation differentials vis- à-vis major trading partners or differentials between the inflation target and expected inflation in major trading partners.  The commitment to maintaining crawling pegs imposes constraints on monetary policy.  This system was suggested by Harrod (1933), Meade (1964),Williamson (1965, 1981). www.knust.edu.gh 07/03/2024 15  Soft Pegs (d) Stabilized arrangements  Classification as a stabilized arrangement entails a spot market exchange rate that remains within a margin of 2% for six months or more (with the exception of a specified number of outliers or step adjustments) and is not floating.  The required margin of stability can be met either with respect to a single currency or a basket of currencies.  After the set period has expired, the margin will be redefined. www.knust.edu.gh 07/03/2024 16  Soft Pegs (e) Crawl-like arrangements  The exchange rate must remain within a narrow margin of 2% relative to a statistically identified trend for six months or more (with the exception of a specified number of outliers), and the exchange rate arrangement cannot be considered as floating. www.knust.edu.gh 07/03/2024 17  Floating regimes  There are two types: (a)Pure Floating  A floating exchange rate is largely market determined, without an ascertainable or predictable path for the rate.  Here there is no government intervention whatsoever. (b) Free floating  A floating exchange rate can be classified as free floating if intervention occurs only exceptionally and aims to address disorderly market conditions and if the authorities have provided information or data confirming that intervention has been limited to at most three instances in the previous six months, each lasting no more than three www.knust.edu.gh business 07/03/2024 days. 18  Other Managed  Any arrangement that does not fall into any of the categories described (hard pegs, soft pegs, floating regimes) is assigned to this category.  Arrangements characterized by frequent shifts in policies may fall into this category. www.knust.edu.gh 07/03/2024 19 The Bretton Woods System/Arrangement  The exchange rate system that was put into being after the end of World War II and which is called the Bretton Woods system (after the name of the New Hampshire town where the negotiations took place and where the final agreement was signed in 1944; 1944-1973), belonged to the category of the gold exchange standard with important modifications.  To synthesize to the utmost, each country declared a par value or parity of its own currency in terms of gold, from which the bilateral parities automatically derived.  However, at that time, the only currency convertible into gold at the fixed price of US$35 per ounce of gold was the US dollar, which in this sense became the key currency. www.knust.edu.gh  The convertibility of the other currencies into dollars qualified the 07/03/2024 20 The Bretton Woods System/Arrangement  The member countries were required to stand ready to maintain the declared parity in the foreign exchange market by buying and selling foreign exchange (usually dollars, which thus became the main intervention currency) [when there is surplus and deficit]; more precisely, the actual exchange rate could vary only within the so-called support (or intervention) points, which were initially set at 1% above or below parity.  The modifications consisted in the fact that parity, notwithstanding the obligation to defend it, was unchallengeable, but could be changed in the case of “fundamental disequilibrium” in accordance with certain rules: changes up to 10% could be made at the discretion of the country, whilst for greater changes (>10%) the country had first to notify the IMF (which is one of the international organizations set up by the Bretton Woods agreement) and obtain its approval.www.knust.edu.gh 07/03/2024 21  The obligation to maintain the declared parity together with the The Bretton Woods System/Arrangement  The idea behind it was a compromise between rigidly fixed and freely flexible exchange rates, and it is clear that the greater or lesser extent to which it approached either system depended principally on the interpretation of the rules for changing parity.  The prevailing interpretation was restrictive, in the sense that, parity was to be defended at all costs and changed only when it was unavoidable. The monetary authority’s intervention  In any case, the defense of a given parity requires a continuous intervention of the monetary authorities in the foreign exchange market: the authorities stand ready to meet both the market excess www.knust.edu.gh demand 07/03/2024 for foreign exchange and the market excess supply when 22 The Bretton Woods System/Arrangement The monetary authority’s intervention…  The alternative to this intervention is to act on other macroeconomic variables of the system, so as to eliminate or reduce the excess demand, or to introduce administrative controls on foreign exchange.  In the latter case (administrative controls), the foreign exchange is rationed (limited or controlled) by the monetary authorities, and therefore economic agents cannot freely engage in international transactions.  Excluding this case, what happens is that if, for example, at the given parity the market demand for foreign exchange is higher than the supply by a certain amount, the monetary authorities must intervene by supplying the market with that amount, because if they did not, the pressure of excess demand for foreign exchange would cause a www.knust.edu.gh depreciation 07/03/2024 in the exchange rate. And vice versa in the case of 23an The Bretton Woods System/Arrangement  The monetary authority’s intervention…  To put this in a diagram, let us consider Figure 3.1, where a simple partial equilibrium analysis of the foreign exchange market has been depicted, on the assumption that the supply of foreign exchange is a well-behaved (increasing) function of its price (the exchange rate) and the demand for foreign exchange is a decreasing function of the exchange rate.  In reality these demands and supplies are not necessarily well behaved and depend on many other factors, which will determine shifts in the schedules (but these complications are ignored in this analysis).  We further assume that the market behaves as all other markets, i.e., the price (in our case the price of foreign currency is www.knust.edu.gh the exchange rate) 07/03/2024tends to increase (decrease) if there is an excess demand (excess 24 The Bretton Woods System/Arrangement  The monetary authority’s intervention… www.knust.edu.gh 07/03/2024 25 The Bretton Woods System/Arrangement  The monetary authority’s intervention…  Let us now suppose that the exchange rate has to be pegged at whilst the market is in equilibrium at.  In the absence of official intervention, the exchange rate would move towards , (downward) driven by the excess supply of foreign exchange.  To prevent this from happening, the monetary authorities must absorb, as residual buyers, the excess supply (providing the market with the corresponding amount of domestic currency).  If, on the contrary, the exchange rate were to be pegged at , to prevent it from depreciating towards in response to the pressure of excess demand for foreign exchange, the monetary authorities would have to meet (as residual sellers) the excess demand, by supplying an amount of foreign currency to the market (absorbing from the market the corresponding amount of domestic currency). www.knust.edu.gh 07/03/2024 26 The Bretton Woods System/Arrangement  The monetary authority’s intervention…  It should be pointed out that, as the schedules in question represent flows, the monetary authorities must (ceteris paribus) go on absorbing , or supplying , of foreign exchange per unit of time.  This may well give rise to problems, especially in the case , because by continuously giving up foreign exchange, the monetary authorities run out of reserves. The collapse of the Bretton Wood system  The Bretton Wood System worked very well in the 1950s, and part of 1960s. In the 1960s, countries like US, UK and France experienced increasing balance of payment deficit due to their failure to adhere to the rule and guidelines by the IMF. www.knust.edu.gh 07/03/2024 27 The Bretton Woods System/Arrangement The collapse of the Bretton Wood system..  These countries could devalue their currencies to overcome the challenge but the Bretton Wood System does not allow that. o Devaluation is the deliberate downward adjustment of the value of a country's currency relative to another currency. It is a monetary policy tool used by countries with a fixed exchange rate or semi-fixed exchange rate.  Given this, the IMF designed a policy called Special Drawing Right (SDR), for all nations to salvage them from the economic difficulties.  There were further BOP deficits and therefore more SDRs. The US exchange rate increased from US$35 = 1 ounce of Gold to US$38 = 1 ounce of Gold. The BOP deficits persisted for US (and other countries) and hence abolished the exchange rate and the system www.knust.edu.gh collapsed. 07/03/2024 28 The Bretton Woods System/Arrangement The collapse of the Bretton Wood system..  Again, in the 1960s, there was a dollar crisis because the United States had run large Balance of payment deficits in the 1950s.  Concerns over large holdings of dollars led to an increased demand for gold but the Central Bank cooperation in an international gold pool managed to stabilize gold prices but the pressure continued.  Although the problem of chronic US deficits and Japanese and European surpluses could been resolved by revaluing the currencies (upward adjustment to a country's official exchange rate) of Japanese and Europeans, the surplus countries argued that it was the responsibility of the United States to restore BOP equilibrium.  The failure to realign currency values in the midst of the fundamental economic change marked the beginning of the end of the gold exchange www.knust.edu.gh standard of the Bretton Wood agreement. 07/03/2024 29 The Bretton Woods System/Arrangement The collapse of the Bretton Wood system..  By the late 1960s, the foreign dollar liabilities of the United States were much larger than the US gold stock.  The pressures of this “dollar glut” (a term for the accumulation of American finally culminated in dollars outside of the United States as a reserve currency) August 1971, when the President Nixon declared the dollar to be unconvertible and announced the closure of the Bretton Wood era of fixed exchange rate and convertible currencies.  After the collapse, the Bretton Woods system was replaced by a situation in which many countries adopt a regime of managed or dirty float, where no officially declared parities exist (except for possible agreements among specific countries forming a currency area) and the exchange rates float, albeit with more or less noticeable www.knust.edu.gh interventions 07/03/2024 on the part of the monetary authorities. 30  The Current Non-System  After the collapse of the Bretton Woods system, no other replaced it, if we define system as a coherent set of rules (rights and obligations) and a precise exchange rate regime universally adopted By countries.  Williamson (1976) rightly coined the name “non-system” to denote such a situation, still in force.  Each country can choose the exchange-rate regime that it prefers and notify its choice to the IMF, so that various regimes coexist.  Some countries peg their exchange rate to a reference currency (usually the dollar, but also the French franc and other currencies) with zero or very narrow margins; naturally, they will follow the reference currency’s regime with respect to the other countries. www.knust.edu.gh 07/03/2024 31  The Current Non-System  There are other countries which peg their currency to a composite currency such as the IMF’s Special Drawing Right (SDR).  Groups of countries enter into monetary agreements to form currency areas, by maintaining fixed exchange rates among themselves, or monetary unions with a common currency, such as the European Monetary Union.  The situation as at 2014 is given in Table 3.1, but it is continually changing. o Consult the monthly International Financial Statistics published by the International Monetary www.knust.edu.gh Fund where a table is presented to show the exchange rate arrangements that exist. 07/03/2024 32  The Current Non-System www.knust.edu.gh 07/03/2024 33  International Financial Institutions  There are several international organizations that deal with economic issues but for the purpose of this lecture, we will focus on the International Monetary Fund (IMF) and the World Bank.  The American and British governments, in the hope of avoiding the international economic disorder that followed the World War I, in the early 1940s decided to bring together governments and experts to design rules and institutions for post-World War II monetary and financial relations.  The agreements that emerged were adopted by 44 nations at a conference held in Bretton Woods (new Hampshire) in July 1944.  The system that was set up took the name of Bretton Woods system (as discussed earlier). www.knust.edu.gh 07/03/2024 34  International Financial Institutions  Although this system collapsed in 1971, the institutions that were created at the Bretton Woods conference still exist, and are the IMF and the International Bank for Reconstruction and Development (IBRD), commonly known as the World Bank.  The International Monetary Fund (IMF) was set up to deal with monetary issues;  The World Bank was to promote a flow of long-term loans for purposes of reconstruction and development.  The Fund was seen as center of the international monetary system. www.knust.edu.gh 07/03/2024 35  International Monetary Fund (IMF)  The International Monetary Fund began operations in Washington, DC in May 1946 with 39 members; 188 members as of 2015 and currently has 190 countries (as of July 2023) [https://www.imf.org/external/np/sec/memdir/memdate.htm]  The IMF operate on the quota system. On joining the IMF, each member country contributes a certain sum of money called a quota subscription, based broadly on its relative size in the world economy, which determines its maximum contribution to the IMF’s financial resources.  The IMF uses a quota formula to help assess a member’s relative position.  The current quota formula is a weighted average of GDP (weight of 50%), openness to the global economy (30%), economic variability www.knust.edu.gh (15%), 07/03/2024 and international reserves (5%). 36  International Monetary Fund (IMF)  The Fourteenth General Review of Quotas was in December 2012, with a decision to double the IMF’s quota resources to SDR (Special Drawing Right) 477 billion and a major realignment of quota and voting shares to emerging and developing countries (with a more than 6% quota shift to dynamic emerging market and developing countries and under-represented countries.  In 1946, the 39 members paid in the equivalent of US$7.6 billion; by 2015, the 188 members had paid in the equivalent of about US$327 billion, and there is a proposal to raise quotas to a still higher value.  Quotas serve various purposes including;  they constitute the resources from which the IMF draws to make loans to members in financial difficulty. www.knust.edu.gh 07/03/2024 37  International Monetary Fund (IMF)  they are the basis for determining how much a member can borrow from the IMF, or receives from the IMF in periodic allocations of special assets known as SDRs.  they determine the voting power of the member. Each IMF member’s votes comprised basic votes plus one additional vote for each SDR 100,000 ($1.47683 = 1 SDR) of quota.  The highest link of the chain of command in the Fund is the Board of Governors and Alternate Governors.  These persons are ministers of finance or heads of central banks. The Board of Governors meets once each year at the IMF-World Bank Annual Meetings. www.knust.edu.gh  Twenty-four of the Governors sit on the International Monetary and 07/03/2024 38 Financial Committee (IMFC) and normally meet twice each year.  International Monetary Fund (IMF)  The day-to-day management of the Fund is delegated to the Executive Board chaired by the Managing Director.  The Executive Board consists of 24 Directors. Together, these 24 board members represent all 188 (190) countries.  Large economies, such as the United States and China, have their own seat at the table but most countries are grouped in constituencies representing 4 or more countries. The largest constituency includes 24 countries.  By tradition, the Managing Director is a non-US national, while the President of the World Bank is a US national. www.knust.edu.gh 07/03/2024 39  International Monetary Fund (IMF)  The IMF performs three main functions in the interest of an orderly functioning of the international monetary system:  Surveillance:  After the collapse of the Bretton Woods system, it seemed that the preeminent role of the IMF would disappear.  But it did not, as under the current system, the IMF has been entrusted with the examination of all aspects of any member’s economy that are relevant for that member’s exchange rate and with the evaluation of the economy’s performance for the entire membership. This entails more scope for the IMF to monitor members’ policies.  The activity is called by the IMF “surveillance” over members’ www.knust.edu.gh exchange 07/03/2024 policies, and is carried out through periodic consultations 40  International Monetary Fund (IMF)  Surveillance:  It provides regular assessment of global prospects in its World Economic Outlook, of financial markets in its Global Financial Stability Report, and of public finance developments in its Fiscal Monitor, and publishes a series of regional economic outlooks.  Financial assistance:  This is perhaps the most visible activity to the general public: as of July 1998, for example, the IMF had committed about US$35 billion to Indonesia, Korea and Thailand to help them with their financial crisis (the Asian crisis) and around US$21 billion to Russia to support its economic program.  Deep crises in Latin America and Turkey kept demand for IMF www.knust.edu.gh resources 07/03/2024 high in the early 2000s. IMF lending rose again in late 2008 41  International Monetary Fund (IMF)  Financial assistance:  In response to the global economic crisis, the IMF strengthened its lending capacity and approved a major overhaul of its financial support mechanisms in April 2009, with further reforms adopted in 2010 and 2011.  These reforms focused on enhancing crisis prevention, mitigating contagion during systemic crisis, and adapting instruments based on members’ performances and circumstances.  The general rules for obtaining financial assistance from the Fund are the following: o Lending procedure www.knust.edu.gh o Access 07/03/2024 to financing 42  International Monetary Fund (IMF)  Lending procedure  Upon request by a member country, IMF provides resources under a lending “arrangement,” which may entail specific economic policies and measures a country agrees 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 Fund’s Executive Board in a “Letter of Intent” and is further detailed in the annexed “Memorandum of Understanding”.  Access to Financing  The amount of financing a member can obtain from the IMF (its access www.knust.edu.gh limit) 07/03/2024 is based on its quota. For example, under Stand-By and Extended 43  International Monetary Fund (IMF)  Lending Instruments  The IMF has developed various loan instruments tailored to address the specific circumstances of members.  Low-income countries may borrow on concessional terms through the Extended Credit Facility (ECF), the Standby Credit Facility (SCF) and the Rapid Credit Facility (RCF).  Concessional loans carry zero interest rates until the end of 2016. Non-concessional loans are provided mainly through Stand-By Arrangements (SBA), the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL), and the Extended Fund Facility (which is useful primarily for medium-term needs).  The IMF also can provide emergency assistance via the Rapid www.knust.edu.gh Financing 07/03/2024 Instrument (RFI) to all its members facing urgent balance44of  International Monetary Fund (IMF)  Lending Instruments  All non-concessional facilities are subject to the IMF’s market-related interest rate, known as the “rate of charge,” and large loans carry a surcharge.  The rate of charge is based on the SDR interest rate, which is revised weekly to take into account changes in short-term interest rates in major international money markets.  The maximum amount that a country can borrow from the IMF, its access limit, differs depending on the loan category, but is typically a multiple of the country’s IMF quota.  This limit may be exceeded in exceptional circumstances. www.knust.edu.gh 07/03/2024 45  International Monetary Fund (IMF)  Technical Assistance  Members (for example developing countries, countries moving from planned to market economy such as Russia, Eastern European countries, etc.), may sometimes lack expertise in highly technical areas of central banking and public finance, and thus turn to the IMF for technical assistance, including advice by Fund’s experts, training of the member’s officials in Washington or locally.  In particular, the IMF provides technical assistance in its areas of core expertise: macroeconomic policy, tax policy and revenue administration, expenditure management, monetary policy, the exchange rate system, financial sector stability, legislative frameworks, and macroeconomic and financial statistics. www.knust.edu.gh 07/03/2024 46  The World Bank  The International Bank for Reconstruction and Development, commonly know as World Bank, provides loans and development assistance to creditworthy poor countries as well as to middle-income countries.  Its organization is conceptually similar to that of the IMF: it is like a cooperative, made up of 188 (190) member countries which are shareholders with voting power proportional to the members’ capital subscriptions, that in turn are based on each country’s economic strength.  These member countries, or shareholders, are represented by a Board of Governors, who are the ultimate policymakers at the World Bank.  Generally, the governors are member countries’ ministerswww.knust.edu.gh of finance or ministers 07/03/2024 of development. They meet once a year at the Annual 47  The World Bank  Each member appoints a Governor and an Alternate Governor, who meet once a year.  The day-to-day management of the World Bank is carried out by a Board consisting of 25 Executive Directors chaired by a President (by tradition a national of the United States).  The five largest shareholders appoint an executive director, while other member countries are represented by elected executive directors.  While the task of the IMF is to promote a well functioning and orderly international monetary system, the main task of the World Bank is to promote growth of poorer countries.  Contrary to the IMF, whose resources are the members’ quotas, the www.knust.edu.gh World 07/03/2024 Bank raises almost all its funds in financial markets 48by  The World Bank  Over the years the World Bank has become a group, consisting of five institutions:  IBRD proper (lends to governments of middle-income and creditworthy low-income countries).  IDA (International Development Association, that provides interest- free loans, or credits, and grants to governments of the poorest countries).  IFC (International Finance Corporation, which provides loans, equity, and advisory services to stimulate private sector investment in developing countries).  MIGA (Multilateral Investment Guarantee Agency, which provides political risk insurance or guarantees to foreign investors against losses caused by noncommercial risk to facilitate foreign direct investment in developing countries). www.knust.edu.gh 07/03/2024 49  www.knust.edu.gh 07/03/2024 50