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Wednesday, November 05, 2008

The IMF has funds available for financial crisis

The International Monetary Fund (IMF) has announced that it has about US$200 billion available for immediate lending and can draw on an additional $50 billion in additional resources if needed to assist countries that have suffered the effects of the global financial crisis.

The IMF is ready to process requests for assistance under fast-track emergency financing procedures.

Any loans will have conditions attached to it, but those conditions are focused on resolving core macroeconomic problems only.

Provided below is an excerpt from the IMF website :

"What is a crisis?

Crises take different forms. They can be characterized by a large decline in consumer demand and investment by firms, higher unemployment, and a lower standard of living. They are often accompanied by heightened uncertainty in financial markets and declines in the prices of stocks, bonds and, quite frequently, the value of the domestic currency. Crises can originate in or affect the financial sector, and can lead to difficulties in banks and the payments system, causing damage to economic activity as well. A very severe crisis (economic and/or financial) could lead to recession, debt defaults, and what is known as a sudden stop: a deep recession and a reversal in the flow of international capital.

Crises in emerging markets can be caused by several factors. External causes comprise a collapse of export prices, a drastic increase in import prices, the drying up of foreign investment and capital flows, a large depreciation or devaluation of the currency of a close trading partner, a retrenchment of local activities of international banks, or a sharp increase in interest rates in world markets.

Domestic causes include excessive monetary creation, unsustainable fiscal deficits, an overvalued domestic currency, political instability, and natural disasters. External shocks can have a multiplying effect on vulnerable countries, which tend to have relatively high levels of private or public debt, weak financial systems, and a history of instability and inappropriate policies.

The factors mentioned above often coincide, magnifying the depth and breath of a crisis. Different sectors in the economy tend to fare differently depending on the sources of the crisis and underlying vulnerabilities. All crises are, however, marked by a sudden and largely unexpected worsening of perceptions about a country's prospects, very often including the ability of the government, banks, or corporations to honor their obligations. The ensuing loss of confidence precipitates deleveraging of financial contracts and a collapse of asset prices.

Role of the IMF

Arresting economic and financial crises normally requires a timely package of decisive measures adapted to the country's circumstances. The implementation of this package is aimed at restoring confidence by improving expectations about the country's prospects. It also requires isolating the most significant problems and dealing with them without crowding the program with non-essential measures. In a crisis case, it is critical to focus only on those measures that are essential to restore stability-the conditions for recovery should be circumscribed to the source of the problem but powerful enough to ensure a country's return to economic and financial stability.

The IMF provides policy advice and financial support upon request by its members. An IMF staff team travels to the country to assess the sectors affected (for instance, the government, financial institutions, the corporate sector) and discuss with the country authorities the appropriate policy response. The discussions include estimating the future size of the country's financing needs (that cannot be met by the private sector or other sources of official assistance). Once understandings has been reached on a package, a recommendation is made to the IMF's Executive Board to endorse the program and disburse the loan. This process can be expedited under the IMF's "emergency financing procedures"."

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