Case Studies in IMF's Investment on the African Continent

Central banks intervene in foreign exchange markets by “influencing the monetary funds transfer rate of a nation’s currency” with the purpose of building reserves, keeping the exchange rate stable, to correct imbalances, to avoid volatility and keep credibility. It implies changing the value of a currency against another one. It creates demand or supply of a currency by buying or selling the country’s currency in the foreign exchange market. (Foreign Exchange Intervention)

After World War II, the Bretton Woods Agreement established the gold standard and two support institutions called the International Monetary Fund (IMF) and the World Bank. This would lead to a shift, away from the gold standard, to more relaxed systems. The idea of currency purely backed by gold was slowly being shifted to a trust based currency. These institutions purpose was to regulate the economies by injecting or taking money in a process called sterilization. Sterilization is to protect certain countries from a going bankrupt. If a country goes bankrupt, it chain a chain reaction of bankruptcies. So, in order to maintain balance, currencies need to be stable enough, so that it can be in debt without having to declare bankruptcy. The idea is

The euphoria of victory was short lived and the events from 1945 to 1949 brought about a rapid, transformational change due to the human and economic devastation caused by World War II. Leading the post victory effort was the International Monetary Fund (IMF) along with the World Bank, formed in 1944 at the Bretton Woods Conference, with the goal to regulate the international monetary and financial order after the conclusion of World War II. In 1945, President Harry S. Truman proposed a charter for the formation of an International Trade Organization (ITO). Although the ITO Charter never achieved ratification due to a lack of Congressional approval, the concept of an international trade organization would finally come to fruition in 1995 with the formation of the World Trade Organization (WTO). The next transformation occurred in 1946 with the formation of the United Nations Security Council. The great powers that were the victors of World War II—Russia, the United Kingdom, France, China, and the United States—serve as the body's five permanent members. Finally, in order to solidify military stabilization between the US and Europe and foster economic trade, the North Atlantic Treaty Organization (NATO) was formed in 1949. All of the above organizations formed in the hope that future generations would not have to define victory as complete human and economic

America at home: By the end of 1945, war induced prosperity launched the United States into an era of unprecedented economic growth. Pent up demand after years of wartime mobilization made Americans eager to spend. Over the next two years, the GDP tripled, benefiting a wider segment of society than anyone would have dreamed possible in the dark days of the Depression. American global supremacy rested in part on economic institutions created at a United Nations conference at Bretton Woods, New Hampshire, in July 1944. The International Bank for Reconstruction and Development (known commonly as the World Bank) provided private loans for the reconstruction of war-torn Europe as well as for the development of Third World countries. A second institution, the International Monetary Fund (IMF), was set up to stabilize the value of currencies and provide a predictable monetary environment for trade, with the U.S dollar serving as the benchmark for other currencies. The United States dominated the World Bank and the IMF because it contributed the most capital and the strongest currency. In 1947, multinational trade negotiations resulted in the General Agreement on Tariffs and Trade (GATT), which led to the establishment of an international body to oversee trade rules and practices. The

* The first post-war period (1945-1975) witnessed strong economic growth and gradual increase in globalization under the Bretton Woods institutions. What do we mean by “the Bretton Woods institutions” (Background Brief: Bretton Woods Institutions)? What role did the US play in setting up these institutions and what were its motives?

Further assumed that the export and import of goods and services between country A and country B perfectly offset one another. The balance of payments accounts of country A and B in theory would be zero. Otherwise, when exports are greater than imports, balance of payments would be in a deficit. In contrast, when exports are less than imports, balance of payments would be in a surplus. As more countries entered global commerce, determining the balance of payments required, netting of all the transactions of goods and services in respective currencies involved. Consequently, a fluctuation in relative currency strength could alter a country’s the balance of payments. Conversely, a country’s balance of payments surplus or deficit could strengthen or weaken its currency relative to others. Hence, stable global monetary system was essential for a stable global commerce. Accordingly many countries adopted the gold standard. Under the gold standard, a currency derived its value from gold. The gold standard provided an automatic rebalancing mechanism for trade imbalances. For instance, when gold reserve is used to settle a deficit balance of payment, it triggered a reduction in money supply, causing interest rate to rise, shrinking the economy and ultimately reducing consumption. The reduced consumption eventually returned the balance of payment to equilibrium. In contrast to a deficit, a surplus balance of payment led to the price inflation, making export less competitive, thereby correcting the surplus and returned the balance of payment to equilibrium. The gold standard, thus was an efficient system to manage the balance of payment accounts. Nevertheless, the one drawback of the gold standard was the scarcity of gold itself. Thus, consequence of limited gold supply was limited money supply which can lead to high interest rates impeding economic growth, a deflationary

During these wars, Keynes impacted the role in negotiations shaping the post-war international economic order, and in 1944, led the British delegation to the Bretton Woods conference in the U.S. planning of the World Bank and the International Monetary Fund. Best known for his proposal that government should borrow and spend money to boost economic activity when national economies suffer a downturn and the results from the economic growth should repay the

In Bretton Woods, New Hampshire, representatives from the Allied nations met to change that. The agreement they struck, known as the Bretton Woods system, provided what they believed to be the necessary infrastructure to facilitate this increasingly global economy. All currencies would have a set exchange rate, in gold-backed dollar terms. This would, in theory, make global transactions involving different currencies simple and easy to regulate. The International Monetary Fund was established to make sure that these exchanges ran smoothly and that countries could meet their obligations.

Reserve currency is the currency in which large amounts are held by governments or financial institutions as part of their foreign exchange reserves. US dollars play important role in the international monetary It has an effect on global financial markets and government central banks. Reserve currencies are used in international transactions. Citizens of a country that produces a reserve currency can buy imports, cross-border borrowing more and at a lower cost than nationalities of other countries because they do not need to make a currency change. commercial banks around worlds do a lot of their business on the dollars. it gives the countries that opportunity to take the deposit in dollars, extend land also it helps when they have financial

participants in this conference created three organizations to help regulate the international economy. The first is the International Monetary Fund (IMF) which was established with the idea of regulating monetary policy. One of the benchmarks of the IMF is the stabilization of exchange rates and the loaning of money to help stabilize countries with balance of payments deficits. The second organization established was the General Agreement on Tariffs and Trade (GATT) whose main focus was on a liberal trading order.

The Bretton Woods System was formed as a result of the collapse of the Golden Standard and The Great Depression. These closely related events prompted the need to establish an international monetary system, whose main aim was to revive the economies of the Post World War as well as fostering international economic relations that would end inter-war conflicts.

The Bretton Woods Conference in 1944 spawned two IFIs, the International Monetary Fund (IMF) and the World Bank, in order to rebuild a

Here the International Monetary Fund and the International Bank for Reconstruction and Development, later divided into the World Bank and Bank for International Settlement, were established. To regulate the international policy economy these institutions become known as the Bretton Woods institutions and became operational in 1946. The IMF, founded to stabilize countries' currencies in relation to each other, holds money in trust, which member countries can borrow according to terms set by the institution. The World Bank instead gives more long-term loans and sells bonds to corporations and governments, which bind the issuer to pay the bondholder the amount of the loan plus interest. However, the countries taking advantage of the opportunity to borrow money to improve their affected economy are obliged to launch a set of policies, known as the Washington Consensus, which was first presented in 1989. The reforms introduced by the Institute for International Economics include "deregulation, privatization, currency devaluation, social spending cuts, lower corporate taxes, export driven strategies, and removal of foreign investment restrictions" . More, "these loans are only granted when the countries agree to the adoption to a comprehensive programme of macro-economic stabilization and structural economic reform."

While preparing to rebuild the international economic system after WWII, 730 delegates of the 44 allied nations met in New Hampshire, United States, to form the Bretton Woods agreement. The aim was to set up rules and regulations to stabilize the global monetary system and ensure the free movement of capital goods through a global market. The agreement established two regulatory institutions, firstly the International Monetary Fund (IMF) to control the exchange rates and bridge temporary imbalances of payment. Secondly, the International Bank of

The IMF is currently accountable to and governed by 189 countries, all of which play a part in delivering its primary goals of “promoting international financial stability and monetary cooperation, through its activities of Surveillance, Financial, and Technical Assistance.” (Imforg, 2016)