Tit-Bits

TRIPS issues

The UNDP Human Development Report has signaled repeated warnings against the negative consequences of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), particularly on food security, indigenous knowledge, bio-safety and access to vital medicines and health care. The wave of economic and corporate restructurings undertaken in response to an increasingly competitive global market, the widespread dismantling of social security systems and decline of standards in social services all have resulted in unemployment, work insecurity, evictions and homelessness, landlessness, lost livelihoods, harm to health and worsening labor conditions. These conditions lead to violations of core economic and social rights obligations of State for which our policy makers bear civil responsibility.

http://www.hicnet.org/articles.php?pid=1905

IMF QUOTA and Developing Nations

As acknowledged in the recent G-20 Summit at Pittsburgh, it had been the emerging economies which had been instrumental in lifting the developed nations from the abyss of depression. Also acknowledged in the Summit had been the reality that the changed situation requires a global economic restructuring which, in the light of the strong growth in dynamic emerging markets, will correct imbalances that now prevail in favour of developed nations.

The immediate outcome had been the landmark decision at the G-20 Summit to increase the share of IMF quotas of developing countries by five per cent. India, China and Brazil had wanted a seven per cent increase so that developing nations would have wielded control over that body through having 51 per cent of quotas, but vehement opposition by European nations such as Belgium and Holland had resulted in a compromise. Yet the increase in every way reflects the relative weights of IMF members in the world economy, which have changed substantially in view of the growth in emerging markets. India played a leading role in wresting the concessions from the affluent countries. This indicates her growing confidence as an international player.

The Assam Tribune 30 Sep 2009, Editorial.

SPECIAL DRAWING RIGHTS (SDR)

The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. SDRs are allocated to member countries in proportion to their IMF quotas. The SDR also serves as the unit of account of the IMF and some other international organizations. Its value is based on a basket of key international currencies.

The Special Drawing Right (SDR) was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in world foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets— gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.

Under the amended rules, the activities of the Fund were conducted under two separate accounts. The general transactions of the Fund including the sales of foreign currencies, to member countries, were conducted through the General Account. In other words, the Genral Account dealt with the general drawing rights of the member countries. But with the new scheme, a new account had been opened known as Special Drawing Account. All operations and transactions involving special drawing rights were conducted through the special drawing account. In other words, this account dealt with the special drawing rights of the member countries.

However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.

Today, the SDR has only limited use as a reserve asset, and its main function is to serve as the unit of account of the IMF and some other international organizations. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.

SDR valuation

The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-value of the SDR is posted daily on the IMF's website. It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

The basket composition is reviewed every five years to ensure that it reflects the relative importance of currencies in the world's trading and financial systems. In the most recent review that took place in November 2005, the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies which were held by other members of the IMF. These changes became effective on January 1, 2006. The next review by the Executive Board will take place in late 2010.

The SDR interest rate

The SDR interest rate provides the basis for calculating the interest charged to members on regular (non-concessional) IMF loans, the interest paid and charged to members on their SDR holdings, and the interest paid to members on a portion of their quota subscriptions. The SDR interest rate is determined weekly and is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies.

SDR allocations

Under its Articles of Agreement, the IMF may allocate SDRs to members in proportion to their IMF quotas. Such an allocation provides each member with a costless asset on which interest is neither earned nor paid. However, if a member's SDR holdings rise above its allocation, it earns interest on the excess; conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall. The Articles of Agreement also allow for cancellations of SDRs, but this provision has never been used. The IMF cannot allocate SDRs to itself.

There are two kinds of allocations:

General allocations of SDRs have to be based on a long-term global need to supplement existing reserve assets. General allocations are considered every five years, although decisions to allocate SDRs have been made only twice. The first allocation was for a total amount of SDR 9.3 billion, distributed in 1970-72. The second allocation was distributed in 1979-81 and brought the cumulative total of SDR allocations to SDR 21.4 billion.

A proposal for a special one-time allocation of SDRs was approved by the IMF's Board of Governors in September 1997 through the proposed Fourth Amendment of the Articles of Agreement. This allocation would double cumulative SDR allocations to SDR 42.8 billion. Its intent is to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the Fund subsequent to 1981—more than one fifth of the current IMF membership—have never received an SDR allocation. The Fourth Amendment will become effective when three fifths of the IMF membership (111 members) with 85 percent of the total voting power accept it. As of end-March, 2008, 131 members with 77.68 percent of total voting power had accepted the proposed amendment. Approval by the United States, with 16.75 percent of total votes, would put the amendment into effect.

(From internet.)

Merits and demerits of SDRs must be studied as well.

IMF and International Liquidity Problem

International Liquidity is the sum total of international reserves of all the nations participating in the world monetary and trading system. The term ‘International Liquidity’ comprises all those financial resources and facilities which are available to monetary authorities of member nations for financing the deficits in their international balance of payments. The various components of international liquidity are: (i) Gold held by Central Banks (gold held by private individuals is not included), (ii) Foreign currencies held by Central Banks, (iii) Borrowing facilities available from the IMF under different schemes, (iv) Special Drawing Rights first introduced in 1970 by IMF as an international monetary asset and (v) A country’s borrowing capacity in the international money market.

The problem of international liquidity is concerned with the imbalances in the demand for and supply of international liquidity. International liquidity shortage leads to recession in the world economy, whereas international liquidity surplus tends to have an inflationary impact on international economy. Solution to the problem relates to attempts at balancing supply and demand for international liquidity.

In case all the countries have equilibrium in their balance of payments (BOPs), there can be no problem of international liquidity. Secondly, if the national currencies of all the countries become fully convertible, and freely acceptable in international payments, no shortage of international liquidity can arise. Thirdly, if all the deficit countries are allowed to have an unlimited and unconditional access to borrowing and trading, there would have been no problem of international liquidity.

The liquidity problem has two aspects: qualitative and quantitative.

The Qualitative Aspect of the problem refers to the nature and composition of international reserves. In the composition of international liquidity, gold and reserve currencies (mainly dollar after World War II) play a dominant role. But since gold reserves cannot be increased much, growing international liquidity requirements are to be met by increasing reserve currency holdings. This means creating BOPs deficits in the reserve currency’s country (USA), if the other nations tend to accumulate the reserve currency. This leads to the confidence problem.

Quantitative Aspect: Although the international liquidity reserves had expanded from $48 billion to nearly $800 billion during 1950-88, yet it is too small in comparison with the expanding world trade. The reasons for the shortage of international liquidity are the following:
Payments deficits: BOPs deficits of all nations except Japan, Germany, Switzerland, Belgium and OPEC. This problem was aggravated by oil crisis of 1970s. The deficit of non-oil producing countries has increased by 4 times during 70s and early 90s.
Redistribution of international reserves: The international reserves are distributed more favourably to the DCs. International reserves are flowing away from USA amd developing nations since 1960s to countries like France, Germany, Italy, Belgium, Scandinavian nations, Japan, Switzerland etc.
Attitude of the DCs: The DCs are not reducing their BOPs surpluses by buying from the LDCs. They allege that the LDCs are responsible for this crisis. Their problems of international liquidity has arisen due to mismanagement of their economies, extravagant public expenditure, unproductive wasteful expenditure, over ambitious social and economic goals and trying to do too many things at the same time.
Little access to markets of DCs: LDCs have very little access to the markets of the DCs. They are putting tariff walls against the imports of developing nations. The DCs are forming economic unions imposing high common external tariff.

If satisfactory arrangements are not made to overcome the problem of shortage of international liquidity, both rich and poor countries tend to suffer in the long run. The problem of international liquidity forces LDCs to resort to import restrictions, exchange controls, devaluation, restrictions on capital flows etc, which adversely affects the DCs as well.

Many proposals have been made to solve the problem of international liquidity. The IMF contributes to international liquidity in two ways: by providing (a) conditional liquidity and (b) unconditional liquidity.

(a) Conditional Liquidity. The IMF provides conditional liquidity under its various lending schemes. The credit provided to its members is generally subject to certain conditions. Most of the IMF loans require an adjustment programme to be undertaken by the member nation for improving its BOPs position. Moreover, funds from the IMF under agreed conditions increases the member’s access to international capital market.

Important credit facilities by IMF are:
Basic Credit Facility
Extended Fund Facility
Compensatory Financing Facility
Buffer Stock Facility
Supplementary Financing Facility
Trust Fund
Structural Adjustment Facility etc.

In order to make the resources easily and more adequately available, the IMF has been introducing various procedural changes from time to time.

(b) Unconditional Liquidity. The supply of unconditional liquidity takes the form of reserve assets that can be used for BOPs financing. The IMF provides unconditional liquidity through the allocation of Special Drawing Rights (SDRs), and also in the form of reserve positions in the Fund. Member nations can use their holdings of SDRs and reserve positions in the Fund to finance their BOPs deficits without having to enter into policy commitments with the Fund.

IMF: Objectives, Procedures of Borrowing and Repayment

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 also offers financial and technical assistance to its members, making it an international lender of last resort. Its headquarters are located in Washington, D.C., USA.

The IMF describes itself as "an organization of 185 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". The present Managing Director Dominique Strauss Kahn of France.

After the First World War, every country imposed trade restrictions, exchange controls and resorted to exchange appreciation in order to encourage exports. There was a decline in the world trade. In order to end this international economic and political crisis and furhter ease the tension, 44 nations assembled at the United Nations Monetary and Financial Conference in the Mount Washington Hotel at Bretton Woods, New Hampshire (USA) from July 1 to July 22, 1944.

The IMF was formally organized on December 27, 1945, when the first 29 countries signed its Articles of Agreement. The statutory purposes of the IMF today are the same as when they were formulated in 1944. It started functioning from March 1, 1947.

Objectives of IMF:
1) International Monetary Cooperation. To promote international monetary cooperation by providing a convenient forum for member nations to get together and provide means to strengthen out international monetary problems.
2) Stability in Foreign Exchange Rates. To fix parity rate of currencies and bring the members closer to a regime of stable exchange rates.
3) Elimination or Reduction of Balance of Payments Disequilibrium. To assist members in overcoming short-run disequilibrium in balance of payments (BOPs) by lending the required foreign currencies on specified terms and conditions.
4) Promotion of International Trade. To provide technical guidance and consultation to members for facilitating orderly growth of world trade and economic cooperation.
5) Establishment of a Multilateral Trade and Payments System. To replace the old bilateral trade agreements which obstructed world trade by a system of multilateral trade and payments sytem.
6) Balanced Economic Growth. To contribute to the promotion of rising level of employment, particularly in backward nations.


Membership:
Membership of the IMF is voluntary. But withdrawal of membership may be voluntary or compulsory.

Quota:
After becoming a member, a country is assigned a quota of subscription (membership fee), which determines its voting power and its drawing rights.

A subscription quota is fixed on the basis of the economic importance of the members, such as its exports, imports, GDP and gold and foreign exchange reserves. 25% of that amount of subscription is to be paid in the form of gold or US dollar and the remaining 75% amount in terms of domestic currency of the country concerned. The former part is called gold tranche (slice) and the latter is called credit tranch (credit in the sense that this part is to be paid in gold or US dollars later on).

The quota amount is revised from time to time (normally once in five years). India’s subscription was the fifth largest at the beginning (1947), but her current position is eleventh, with 4158.2 million SDR quota amount, which is 2.44% of the total subscription amount of the Fund. (The table is kept here for reference purpose.)

Table showing the top 21 member countries:

IMF Member Country
Quota: Millions of SDRs
Quota: Percentage of Total

Australia
3236.4
1.49
Belgium
4605.2
2.12
Brazil
3036.1
1.4
Canada
6369.2
2.93
China
8090.1
3.72
France
10738.5
4.94
Germany
13008.2
5.99
India
4158.2
2.44
Italy
7055.5
3.25
Japan
13312.8
6.13
Korea
2927.3
1.35
Mexico
3152.8
1.45
Netherlands
5162.4
2.38
Russian Federation
5945.4
2.74
Saudi Arabia
6985.5
3.21
Spain
3048.9
1.4
Sweden
2395.5
1.1
Switzerland
3458.5
1.59
United Kingdom
10738.5
4.94
United States
37149.3
17.09
Venezuela
2659.1
1.22
Remaining 165 countries
60081.4
29.14


Lending Operations:
IMF caters to the short run loan requirements of member countries. The resources of the Fund consists of gold and specified quantities of currencies of the member countries in the form of quota subscription. A member facing temporary BOPs problem could borrow the required currency or currencies from the Fund.

Restrictions on borrowing as per original rule:
Borrowing may be only for temporary duration, not more than five years to adjust short run current payment difficulties in BOPs.
The capacity to borrow of the member nations is in proportion to their respective quota subscription.
A country cannot borrow more than 25% of its quota in any one year, by paying equivalent domestic currency at declared parity rate to the IMF.
No member country could borrow to an extent which would cause the Fund’s holdings of currency of that country exceed 200% of the debtor country’s quota. (This rule is discretionary and could be relaxed in exceptional cases.)
Currency borrowed from the Fund cannot be used for affecting capital transfer from one country to another.

Conditions of borrowing:
The conditions of borrowing refer to set of conditionalities which the IMF intends to apply to the borrowing nations for ensuring a high degree of economy in performance and of policies of the borrowing country. Therefore, the Executive Board of IMF prescribes certain specific guidelines and conditions which the recipient country is expected to fulfil for securing financial accommodation for correcting BOPs deficit. These guidelines are –
The recipient country is required to undertake such tax reforms as provide incentives to the producers to step up domestic production and export.
It is required to reduce/remove controls on prices so that favourable conditions are created in the economy for increasing production and export.
The prices of products of public sector enterprises should not be administered as these would entail loss in efficiency for the undertakings.
Artificial supports such as subsidies should be eliminated wherever possible.
Borrowing country should take appropriate steps for export promotion.
Investment programme of the country should be production oriented.

Repayment:
The borrowing country will have to repay the dollar loan or in other words, repurchase its own excess over-quota currency by paying dollar or gold or other approved hard currencies so that the debtor country’s currency with the IMF reaches 75% of quota again. Except for the gold tranche, the Fund charges an interest on borrowing on sliding scale, which rises steeply with the rise in the excess holdings of the borrower’s currency.


[An example to illustrate the borrowing and repayment procedures:

Suppose the exchange rate is $ 1 = Rs 10.
Suppose India is required to pay Rs 1000 as subscription quota. Of this, Rs 250 is in gold/dollars and Rs 750 in Indian currency.
According to rules, India can borrow upto 200% of its quota, i.e. Rs 2000 (which is the ceiling).

Borrowing: Suppose India needs a short term loan of $125 to tide over BOPs problem. ( Note: With $100 = Rs 1000 quota, India cannot borrow more than $125).
So India has to deposit equivalent amount in Indian currency with the Fund i.e Rs 1250. ($1=Rs 10, $125=Rs1250).
This will raise Indian currency with the Fund to Rs 2000. (Rs 750 in credit tranche + Rs 1250 deposited for borrowing $125).
IMF then lends India $125. For the first 25% of quota, there is no interest charged. The rate of interest charged for excess holding of borrower’s fund goes on rising at a sliding rate.

Repayment: Now India has Rs 1250 in excess of its quota in Rupee with the Fund. So India will have to repurchase this with gold/ dollars or any hard currency. Thus the dollar loan of $125 is paid back along with whatever interest rate that IMF charges.


An interesting digression: If some nation borrows currency of a particular nation, then the borrowing capacity of the lender nation rises.
Suppose, as in the previous example, India borrows $125 and in exchange kept Rs 1250 with the Fund, increasing Indian rupee to Rs 2000 with the Fund.
Now suppose Bangladesh is in need of Indian rupee and borrows Rs 100 from the Fund. So Indian rupee with the Fund becomes Rs 1900 (Rs 2000-100). This makes it possible for India to borrow another $10 (=Rs100) from the Fund, because Bangladesh’s borrowing has reduced its borrowing extent to 190% from 200% and so it can borrow another 10% ($10 in this example) again.
While repaying, India has to repurchase only Rs 1150 (Rs 1900-750) back. While borrowing India kept Rs 1250 initially (borrowed $125), now it can buy back only Rs 1150 or pay back only $115 to the Fund. This has been possible because Bangladesh borrowed Rs 100 from the Fund. As for Bangladesh, it will repay the Rs 100 loan in the usual procedure.]