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Unit 9: International Financial Institutions-I

from financial crisis. The interest charged by the Fund was 3% to 5% above the Fund’s notes
normal lending rates for short period.
9. Contingency Credit Line (CCL): In April 1999, CCL was created to protect fundamentally
sound countries from the contagion of financial crisis occurring in other countries. Those
countries were considered eligible which could finance medium-term BOP comfortably,
enjoy financial sector and had strong debtor-creditor relations. No country has borrowed
under this facility.

Did u know? Compensatory credit Contingency Financing Facility (CCFF) was established
in August 1988.

9.3.4 strategy regarding exchange rates Policy

Members are under obligation to collaborate with the Fund and with others members, as
expressed in Article I of the Articles of Agreements, to assure orderly exchange arrangements
and to promote a stable system of exchange rates. The exchange rate policies are to be followed,
as per the New Article IV of the second amendment of the Articles, with commitment to:
Endeavour to direct its economic and financial policies toward the objective of fostering orderly
economic growth with reasonable price stability, with due regard to its circumstances;
1. Seek to promote stability by fostering orderly underlying economic and financial conditions
and a monetary system that does not tend to produce erratic disruptions.
2. Avoid manipulating exchange rate or the international monetary system in order to prevent
effective balance of payments adjustment or to gain an unfair competitive advantage over
other members.
3. These three principles were also given to oversee the compliance by each member of these
obligations and to assure the effective operation of the international monetary system. As
per the Second Amendment, these specific principles are necessary to be adopted for the
guidance of members regarding exchange rate policies. These are enunciated as below:
A member shall avoid manipulating exchange rates or the international monetary system in
order to prevent: effective balance of payments adjustments or to gain an unfair competitive
advantage over other members.
1. A member should intervene in the exchange market, if necessary, to counter disorderly
conditions which may be characterized inter alia by disruptive short-term movements in
the exchange value of its currency.

2. Members should take into account in their intervention policies, the interests of other
member, including those of the countries in whose currencies they intervene.
3. The original Fund Agreement provided that the par value of each member country was to
be expressed in terms of gold of certain weight and fineness or US dollars. The idea behind
it was to create a system of stable exchange rate with orderly cross rates. Later on, the Fund
agreed to change in the exchange rates which did not exceed ± 1 per cent of the initial par
value. A further change of ± 1 per cent is allowed but with the permission of the Fund.
These provisions were changed from fixed exchange rates to flexible exchange rates in
1971. Now, the Fund has no control over the exchange rate adjustment policies of member
countries. The member countries are not required to maintain and establish par values
with gold or dollar.
Any country can now change the par value of its currency by 10 percent, after notifying to the
Fund. If a country wants to make 20 per cent change in its par value, it must seek prior approval
of the Fund. In such a case, the Fund has to communicate its decision within 72 hours. In case of

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