IMF Intervention: Debt Relief For Poor Countries

IMF Intervention
Over the past two decades, the poorest countries in the world have had to turn increasingly to
the World Bank and IMF for financial assistance, because their impoverishment has made it
impossible for them to borrow elsewhere. The World Bank and IMF attach strict conditions to
their loans, which give them great control over borrower governments. On average, low-income
countries are subject to as many as 67 conditions per World Bank loan. African countries, in
need of new loans, have had no choice but to accept these conditions.
The IMF played a central role in helping the countries of the former Soviet bloc transition from
central planning to market-driven economies. This kind of economic transformation had never
before been attempted, and sometimes the process was less than smooth. For most of the 1990s,
these countries worked closely with the IMF, benefiting from its policy advice, technical
assistance, and financial support.
Debt relief for poor countries
During the 1990s, the IMF worked closely with the World Bank to alleviate the debt burdens
of poor countries. The Initiative for Heavily Indebted Poor Countries was launched in 1996,
with the aim of ensuring that no poor country faces a debt burden it cannot manage. In 2005,
to help accelerate progress toward the United Nations Millennium Development
Goals(MDGs), the HIPC Initiative was supplemented by the Multilateral Debt Relief
Initiative (MDRI).
In May 2010, the IMF participated, in 3:11 proportion, in the first Greek bailout that totalled
110bn. This bailout was notable for several reasons: the funds were funnelled directly to the
(largely European) private bondholders, which endured no haircuts to the chagrin of the
Swiss, Brazilian, Indian, Russian, and Argentinian Directors; the Greek authorities (at the
time, George Papandreou and Giorgos Papakonstantinou) themselves ruled out a haircut of
the private bondholders; the Greek private sector was happy to curtail the 13th and 14th
month civil service pay scheme, because the Greek government was otherwise impotent.A
second bailout package of more than 100bn was agreed over the course of a few months
from October 2011, during which time Papandreou was forced from office. The so-called
Troika, of which the IMF is part, are joint managers of this programme, which was approved
by the Executive Directors of the IMF on 15 March 2012 for SDR 23.8bn, and which saw
private bondholders take a haircut of upwards of 50%. In the interval between May 2010 and
February 2012 the private banks of Holland, France and Germany managed to reduce their
exposure to Greek debt from a total of 122bn to a total of 66bn.
As of January 2012, the largest borrowers from the IMF in order were Greece, Portugal, Ireland,
Romania and Ukraine.
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YUAN Devaluation
Since the economic reform started in 1979, the Chinese currency (yuan) had been devalued
several times until 1994 when the two-tier foreign exchange system was ended. While the official
rate of yuan had been maintained constant over seven years since 1998, the pressure on the
revaluation of yuan intensified. It has been perceived by some economists that the yuan is
undervalued on an order of 15 to 35% (Frankel 2006, Zhang and Pan, 2004, Chang and Shao,
2004, Goldstein and Lardy, 2003, among others). After years of speculation and hearsay, China
finally revalued the yuan by 2.1% in July 2005. While the currency remains effectively pegged to
a basket of hard currencies, it is allowed to fluctuate against the US dollar (USD) by less than 0.3
per day in either direction.
Joseph Stiglitz (2005) also argues that the yuan revaluation will have little effect on the trade
balance for the US and the global economy, since the gaps in reduced Chinese imports in the US
could be easily filled by increased imports from other developing countries.
The dual rate system followed by China meant that official exchange rate was used in non-trade
transactions and Market exchange rate was used in the exchange market. By following this
policy China achieved some significant results such as:

Balance of payment and foreign reserve were improved, while trade deficit was reduced,
the size of economy grew significantly, together with high inflation
in 1978, China announced the economic reforms, which included policies controlling the
exchange rate. The reform of exchange rate regime is a key factor in Chinas growing
role in international trade. In the early of 1980s, China started easing its policy control
on trade and current account transactions. The stability of the RMB exchange rate has
played an important role in mitigating the crisis s impact, contributing significantly to
Asian and global recovery, and demonstrating China's efforts in promoting global
rebalancing. China has had a high current account surplus for many years, mainly
driven by high export growth.
The undervalued renminbi helps Chinas export sector by making foreign imports more
expensive, and Chinese exports cheaper in foreign markets
Since 2007 China has become the United States' principal source of imports accounting
for 19% of total imports in 2009 China is also the third largest export market for the
U.S. with 6.6% of total exports in 2009. It has become the "largest foreign supplier of
computer equipment in 2008 with a 53.6% share of total U.S. imports" and the third
largest supplier of agricultural products with 4.3% share of such products imported by
U.S the volume of imports from China grew much more rapidly than U.S. exports to
China. China has had a high current account surplus for many years, mainly driven by
high export growth.
RELATIONSHIP BETWEEN MONEY SUPPLY, PRICE INFLATION AND
CURRENCY EXCHANGE RATES
When people in one country demand products from firms in another country, they must enter
into another market first, to buy that nations currency. Supply and demand for products shift
to change the prices of those products, the constant shifts in the supply and demand for foreign
currency result in changing prices of currency. As a result, the price of money changes as
demand for foreign currencies changes.
A number of factors can increase demand for a foreign currency. If the other nations products
sell at a lower price than domestic products, consumers will increase their demand for imports.
If domestic incomes rise or domestic inflation rates are higher than those in other nations,
demand for imports will rise, as well. In capital markets, if another nations interest rate (return
on investment) is higher than the domestic interest rate, some people will choose to invest in the
other nations securities. When consumers import more products from a country or invest in
that countrys securities, their demand for that currency increases. This increase in demand
pushes the price of the currency higher, so their currency appreciates (rises in value).
In the international market today, the supply and demand for currencies and the resulting
relative values of currencies can affect the demand for imports and exports.
In the cycle of international trade, changes in relative incomes, inflation rates, product prices,
and interest rates can affect the international value of currencies. And at the same time, changes
in the international value of currencies can affect the demand for products and securities in the
international marketplace.
IMFS ONE-SIZE-FITS-ALL APPROACH

A report by the World Development Movement revealed that 23 countries saw serious civil
unrest last year caused by anger at economic policies mostly recommended by the IMF. The
report catalogues a welter of belt-tightening economic initiatives for developing countries from
Angola to Zambia, which have created violent protest.
The obvious example is Argentina, once seen as the IMF's star pupil. In return for $20 billion in
loans, Argentina did virtually everything it was asked to do, including, most significantly, the
adoption of the dollar peg in 1991.
But Argentina's overvalued currency stymied exports and its economy wasn't strong enough to
service its debt. The IMF's withholding a of a 1.2bn payment earlier this year triggered the
banking crisis that forced Argentina's middle classes on to the streets.
According to Avinash Persaud of State Street Bank, Argentina suffered from 'instability born out
of the pursuit of stability itself'.
It is countries such as India, which has ignored IMF 'advice', that are growing at more
sustainable rates.
The 'one size fits all' policies formulated by the architects of global economics go under the
banner of macro-economic stability and market liberalisation. They are meant to be catalysts for
growth and beacons for foreign investment.
The South African government's growth, employment and redistribution macro-economic policy,
he believes, has again followed IMF orthodoxy to the letter. High interest rates, low inflation,
liberalisation and reduction of budget deficits has resulted in 26 per cent unemployment and
widening inequality. As growth stalls, it is the renewal of infrastructure and health systems paid
for by public spending that is intended to lay the foundations for new prosperity. It does seem
there's one rule for the rich and another for the poor
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IMF Intervention

policy China achieved some significant results such as:

IMFS ONE-SIZE-FITS-ALL APPROACH

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