IMF, FOREX, and International Business in Emerging Markets

Abstract

The International Monetary Fund (IMF) and the foreign exchange market (FOREX) are inextricably linked in the global marketplace. This chapter explains how these two institutions are connected and how they affect governments’ monetary and fiscal policies. The IMF aims to promote monetary cooperation, stabilize foreign exchange rates, facilitate international business, and, most importantly, reduce poverty and extend assistance to members having balance of payments difficulties. However, the lacking ability of IMF to successfully assist a nation in coming out of the red zone has been heavily scrutinized by critics, as the IMF has on numerous occasions lacked the flexibility required to fix the situation. A related concept to the IMF is the FOREX, which aims to manage and oversee the trading of foreign exchange of major currencies. Under FOREX, monetary policy of a country is no longer dependant on the value of other countries’ currencies; it is based on demand and supply of the currency that enables the country to create its own policies to govern domestic interest rates. But the exchange rate flexibility provides no protection from foreign interest rate fluctuations when the governments reduce their interest rates to zero or even set a negative interest rate as is the case of European Central Bank. These facts lead to the debate as to the effectiveness of IMF and FOREX, particularly in the context of developing countries and emerging markets. Therefore, the chapter is designed to turn the debate into experiential learning by undertaking a series of activities in the following nine areas: IMF voting quota, the quota and governance reform, the proposed new quota formula, currency devaluation, reluctance of countries to free float their currencies, removal of pegged currencies, the role of central banks in setting interest rates, arbitrage creation, and foreign exchange speculations using Fisher effects theory.