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Answer on Other Management Question for Subramanian

Question #50293
Explain the role played by IMF in solving Liquidity crisis and promoting the same through SDRS.
Expert's answer
International Liquidity is the sum total of international reserves of all the nations participating in the world monetary and trading system. The term ‘International Liquidity’ comprises all those financial resources and facilities which are available to monetary authorities of member nations for financing the deficits in their international balance of payments. The various components of international liquidity are: (i) Gold held by Central Banks (gold held by private individuals is not included), (ii) Foreign currencies held by Central Banks, (iii) Borrowing facilities available from the IMF under different schemes, (iv) Special Drawing Rights first introduced in 1970 by IMF as an international monetary asset and (v) A country’s borrowing capacity in the international money market.
The problem of international liquidity is concerned with the imbalances in the demand for and supply of international liquidity. International liquidity shortage leads to recession in the world economy, whereas international liquidity surplus tends to have an inflationary impact on international economy. Solution to the problem relates to attempts at balancing supply and demand for international liquidity.
In case all the countries have equilibrium in their balance of payments (BOPs), there can be no problem of international liquidity. Secondly, if the national currencies of all the countries become fully convertible, and freely acceptable in international payments, no shortage of international liquidity can arise. Thirdly, if all the deficit countries are allowed to have an unlimited and unconditional access to borrowing and trading, there would have been no problem of international liquidity.

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