International Liquidity is defined as the aggregate stock of internationally acceptable assets held by the central bank to settle a deficit in a country’s balance of payments. In other words international liquidity provides a measure of a country’s ability to finance its deficit in balance of payments without resorting International Liquidity.
International liquidity is generally used as a synonym for international reserves. Such reserves include a country’s official gold stock holding of its convertible foreign currencies and its net position in the IMF. Economists like Heller and Mckinnon use a broader definition of international liquidity to include international borrowings, commercial credit operations and the international financial structure in a country’s reserves. This definition implies international availability of liquidity and the possibility of obtaining credit from financial institutions operating in international financial markets. Thus in the broader sense international liquidity includes private as well as official holdings of international liquidity assets.
IMF and International Liquidity:
There was no problem of international liquidity prior 1960. This was because under the Bretton Woods Agreement the exchange rates of countries were fixed in terms of gold or the US dollar at $35 per ounce of gold. Member countries were forbidden to impose restrictions on payments and trade except for transitional period. They were allowed to hold their monetary reserves partly as gold and partly in dollars and sterling. These reserves were meant to incur temporary deficits by member countries while keeping their exchange rates stable. The IMF insisted on expenditure reducing policies and devaluation to correct deficit in balance of payments. Therefore apart from adhoc loans made by the IMF, the growth in liquidity needed to finance the expansion of world trade had to be found in the expansion of gold and the supply of dollar and the sterling. But the physical supply of gold is virtually limited to the output of the mines in
Consequently the
A crisis of confidence had already erupted. The pound had been devalued in November 1967. There was no control over the world gold market with the appearance of a separate price in the open market On 15 August 1970 the
In early 1970’s IMF introduced for creation and issue of Special Drawing Rights (SDRs) as unconditional reserve assets to influence the level of world reserves and to solve the problem of international liquidity. There is SDR 146 billion in the Fund’s General Account. The Fund also creates SDRs and allocates them to members in proportion to quotas. For this purpose the Fund has established the Special Drawing Account. Thus SDRs are new form of international monetary reserves which have been created to free the international monetary system from its exclusive dependence on the US dollar and fluctuations in gold prices. As the international monetary asset SDRs are held in the international reserves of central banks and governments to finance and improve international liquidity so as to correct fundamental disequilibrium in the balance of payments of Fund members.
The Fund’s scheme has been criticised for favouring rich nations. It in an inadequate scheme which had tended to make unfair distribution of international liquidity. The allocation of SDR’s to participating countries is proportional to their quotas in this sense the allocation of SDRs to developing countries is too low as compared to their needs. Low allocation of SDRs reduces the borrowing capacity of such countries.
Moreover SDR scheme does not link the creation of international reserves in the form of SDRs with the need for development finance on the part of developing countries. The need for liquidity on the part of developing countries is great “because of their higher costs of adjustment, limited access to private banking and capital markets, greater variability of exchange earnings and higher opportunity cost of holding foreign exchange reserves” Under the circumstances there is need to create more SDRs with fair distribution so that more unconditional liquidity is made available for the greater needs of developing countries.
Unfortunately due to the rigid attitude of the
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