Question No.- 28

IMF’s Policies during The World Recession

Introduction

Global economy is dangerously close to recession

International Monetary Fund-The International Monetary Fund (IMF) is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments. It is an organization formed to stabilize international exchange rates and facilitate development.

Recession-- A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters

In other words, IMF is an international body, governing all countries when the central bank of the countries fails. IMF helps its members in correcting temporary deficit of BOP through its funds. It does not control the price but help the countries to manage their deficit by paying to each country according to the amount they have contributed to IMF. And there are set rules, regulations and quota limit for contribution to be made and later on fund to be granted in times of needs whereas recession means no money supply in the economy which leads to low level of income, output and employment which even leads to job cuts .So countries take help of IMF to increase the money supply in the economy by providing more loans at low interest.

Discussion

During recession, IMF helps the countries to implement adjustment policies and reforms that will restore conditions for strong and sustainable growth, employment, and social investment and according to the cause of problem IMF provides assistance. Before a member country can receive a loan, the country's authorities and the IMF must agree on a program of economic policies i.e.., loan is required or not. A country's commitment to undertake certain policy actions are an integral part of IMF lending. The funds which are provided for example- for recession, so it should be used for that purpose only. And IMF also helps to get loan from other sources. If a country suffering from capital flight needs to address the problem that led to the loss of investor confidence: perhaps interest rates that too low, a large government budget deficit and debt stock that is growing too fast, or an inefficient, poorly regulated domestic banking system.

For example- America granted loan at negligible rate of interest to its citizen leading to the reduction in funds from bank. So it leads to a consequence of decreasing the price of property which leads to the emergence of recession. America now not being able to fulfil its loan obligation to international monetary institutions like IMF, World Bank so the rating has also being decreased leading to more recession.

In the absence of IMF financing, the adjustment process for the country would be more difficult. For example, if investors become unwilling to provide new financing, the country has no choice but to adjust—often though a painful compression of imports and economic activity. IMF financing can facilitate a more gradual and carefully considered adjustment.

The largest amount of funds is provided through Stand-By Arrangements (SBA), which charge market-based interest rates on loans to assist with short-term balance of payments problems. The IMF also provides other types of loans to the countries that have experienced a natural disaster or are emerging from armed conflict or recession. Many emerging market countries currently see an unmet need for insurance against large and volatile capital flows. In recent years, the IMF has been re-examining its instruments that help prevent and respond to crises to ensure they continue to meet emerging-market members’ needs. Low-income countries have differing needs. Some require debt relief, and others concessional financing. Meanwhile, some no longer need financing, but seek the reassurance of policy support and signalling.

Though IMF playing a significant role in the period of recession. But Center for Economic and Policy Research (CEPR) said that due to some over optimistic assumptions of economic growth were made by IMF created trouble in the form of pro cyclical policies. This occurred because the policies of IMF were too restrictive which doesn’t leads to long lasting economic growth and the real GDP was not taken correctly. So, the fund could not be expected to anticipate the depth of the world recession and its impact on developing countries through exports, capital inflows,remittances, access to trade credits and other channels. In actual, IMF explained, the main point of this report is that growth forecasts were too optimistic when programs were designed, leading to excessively tight fiscal and monetary policies. Reality is quite the opposite. In virtually all programmes, fiscal targets were quickly and substantially relaxed once the extent of the crisis became apparent. Monetary and fiscal policies have deliberately sought to offset the fall in global demand.

References

www.imf.org/external/index.htm

www.economictimes.indiatimes.com

en.wikipedia.org

Conclusion

IMF’s policy during world recession helped the economy to overcome from the deficits and to overcome the low rate of GDP problem of developing economies. But as IMF is the main international body, so indirectly it controls all the money supply and when IMF also doesn’t receive the share which a country should contribute it will increase more recession in the economy as IMF will fail to help to other nations. But IMF is important in maintaining the condition of recession in the economy. It does importantly 3 works i.e.,Surveillance involves the monitoring of economic and financial developments, and the provision and policies.

Lend to countries with balance of payments difficulties, to provide temporary financing and to support policies.

IMF provides countries with technical assistance.

Thank You

Submitted by: Richa Jain

MBA sem1 C

Submitted to: Prof. Gurdeepak Singh