Paper Example on International Monetary and Financial Environments

Paper Type:  Critical thinking
Pages:  7
Wordcount:  1735 Words
Date:  2022-04-04

Introduction

The global debt crisis is not a new phenomenon in the international scene. Since the time of the great depression, to the Greece debt issue, to the Asian financial crisis, individuals, firms, and government have suffered during such turmoil. Even the 2007/2008 financial crises that started with house price bubble in the USA was felt globally. The debt of national governments across the world has been increasing. Different states suffer differently as they have different external vulnerabilities due to the uniqueness of each nation. Arguably, as the world emerges from the global crisis, firms, banks, national governments, International Monetary Fund, and the World Bank have potential roles to play in the recovery process. Further, federal governments, for instance, the Kingdom of Saudi Arabia tend to perform a vital role in stimulating national economic growth.

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According to the IMF (2017a), the level of international debt hit all times high of approximately $233 trillion by the end of the second quarter of 2017. This figure was significantly higher than the figure reported same period in 2016. The IMF further reports that the highest debt was for non-financial institutions, followed by governments, financial institutions, and the households. All these borrowers borrow cash to finance both development and recurrent expenditures. Many are the times when some of the borrowers struggle to repay the interest obligations when they fall due. Governments, unlike individual borrowers, can roll over debts over long times as they don't have fixed time span. The debt crisis arises when the governments cannot be able to meet their payments or when the debt surpasses a particular rate which is considered unsustainable by the Bretton Woods institution and other stakeholders.

Firstly, in the recovery journey, the national governments have a role to play in stimulating economic activity. High levels of activity translate to higher GDP figures. The Gross domestic product of economies can be measured using the income, expenditure, and output approaches. The level of production, income flows, and spending (consumption, investment, exports, imports, and government spending dictate the activity levels in an economy. High figures increase the propensity to repay interests and principal amounts ceteris paribus. Nassif & Feijo (2016) uses the BRICS (Brazil, Russia, India, China, and South Africa) nations to show that government participation in national matters can alleviate the debt burden of a country. The authors argue that governments of such states have been able to come up with policies to recover from of the debt crises. Besides, BRIC nation's recovery from debts occurs at different rates due to the nature of systems and the external vulnerabilities of each state. Using the BRICS' case it can be argued that governments can come up with sound macroeconomic strategies that enable them to repay their loans in time and rely more on domestic sources of revenue (Nassif & Feijo, 2016). Such macroeconomic policies are geared towards achieving a high economic growth rate, stable prices, lower unemployment, and a favorable balance of payments position. However, with some corrupted administrators who embezzle funds or prioritize recurrent expenditures overdevelopment, ones using borrowed money find themselves in awkward moments. These situations arise because development projects generate revenues which could be used to finance debt obligations.

Secondly, firms also have a role to play. Some firms internationally finance their projects using debt capital rather than equity capital. Equity capital is raised through ordinary shares while debt capital can be grown using debentures, loans, and other financial instruments. Shareholder's wealth is more sustainable than debt. However, some entities mix the two in their financing strategies. Firms ought to embrace approach with a sound mix that maximizes the welfare of shareholders. Further, firms borrow from banks, individuals, and the government or international institutions. A high propensity to borrow brings forth a cycle of debts because some of the lenders are also borrowers elsewhere. To help in the alleviation of the debt crisis firms could pay their taxes efficiently to enhance the capability of the government to repay its debts. Additionally, firms could embrace technologies that improve the productive capacity of their nation to increase GDP levels. Moreover, firms can utilize internal sources of funds like retained earnings, reserve premiums among others to lower their level debt burden. A nation with highly productive firms achieves higher levels of economic growth. Further, export-oriented firms help improve the balance of payments position through the narrowing of current account deficits.

Banks and the Central Banks of countries also have a role to play in debt crisis recovery. The central banks supervise the banks and provide the regulation framework through which the banks perform their duties. The central banks of many economies act as a lender to the commercial banks; act as clearing houses, the lender of last resort, as well as in charge of printing and issuance of currency among other functions. The oversight role of the central bank is critical in curbing malpractices from the banks. For instance, the 2007/2008 crisis was spearheaded by banks. The interest rate bubble, the securitizing of mortgages and other instruments took place in bank territories. Banks can reduce the amount available for people to borrow to lower levels of indebtedness. Credit unworthy individuals and firms ought not to access loans. Similarly, the banks could reduce the amount they borrow from other institutions and the central bank through the discount window. Interbank borrowing could be done at the close oversight of the central bank (Pelinescu, 2013).

Further, the primary target of any policy adopted by the banks and the central bank should be geared towards debt reduction. Additionally, the central bank is the government's bank hence with proper procedures it could adopt policies that limit government borrowing in coordination with the treasury or finance department of the government. Again, the central bank and the banks have a critical role in exchange rate movements. Pelinescu (2013) posits that banking credit risks coupled with associated exchange rate fluctuations increases default risk of member states and blocs. Eischler (2014) further highlights that exchange rate fluctuations make debts and interest obligations cheaper or expensive after adjustments. Unstable banking sector exposes the country to currency risks with a potential of losing to the lenders.

The IMF and the World Bank have a role in alleviating world debt crisis. During the great depression, many nations suffered from the effects of the depression. Many economies experienced a recession as most of the money had been used to fund war operations. As time went by cross-border movement of capital was untamed until 1944 when the Bretton Woods system of pegging exchange rates using gold was adopted. The Bretton woods brought stability as it reduced exchange fluctuations. Its collapse brought currency risks and debt crisis to the international market. Contemporary, each of the two has its mandate even though they often cooperate at various levels (IMF (2017b).

The IMF implements policies aimed at improving global cooperation. It endeavors to help member states of the United Nations to build strong economies. Besides, it helps member states solve balance of payments issues through the provision of short and medium-term loans. On the hand, the mandate of the World Bank is to help countries achieve long-term economic development. It allows nations through poverty reduction initiatives improve the standards of living of its citizens. It builds hospitals, schools, roads, water projects, electricity among others aimed at reducing global poverty. These Programmes have helped many countries though it is criticized that the institutions are used by the United States and other top funders to manipulate the less developed countries (IMF, 2017b).

However, through the multilateral Debt relief initiative, the institutions have been able to lower external debt burdens of many Highly Indebted Countries. Through debt forgiveness programs where countries have to meet certain conditions, the level of debt has decreased. The institutions ought to continue with such initiatives to lower world debt without necessarily demanding certain conditions, for example, the experience of Structural Adjustment programs. Most of the debt forgiveness programs have clearly set out conditions or courses of action that the nations have to meet. Such conditions make the programs to be termed as tied aid/help. Also, some countries might end up over depended on such initiatives to become debt free.

The Kingdom of Saudi Arabia has a lot it can do to stimulate national activity. It is well endowed with oil reserves. The monarch state has continued to shift reliance on oil and petroleum. In 2016 the King foresaw the launching of their vision 2030 based on the political, social and economic pillars. The document has 18 commitments to achieve by 2030 with specific initiatives in energy, culture, entertainment, education, renewable energy, and manufacturing. Through the blueprint launched the kingdom has prioritized issues that would steer economic progress. Further, the proceeds from the oil industries could be used to actualize the plans, improve quality of life, and address gender quality issues. Specific projects in the various sectors would improve the productive potential of the country (Saudi Arabia Report, 2017).

Conclusion

Conclusively, the cooperation of all the stakeholders in debt management would help alleviate debt crisis. Households, firms, banks, the IMF and World Bank, and governments need to work in harmony to achieve a sustainable debt level world. Additionally, the governments should provide sound macroeconomic policies and legal framework under which these stakeholders would work together.

References

Bremmer, I. (2014). The new rules of globalization. Harvard Business Review

Cavusgil, S. T, Knight, G., & Riesenberger, J. (2016) International business: The new realities (4th ed.). Boston MA: Pearson. ISBN: 9780134324838

Eichler, S. (2014). The Impact of Banking and Sovereign Debt Crisis in the eurozone on the euro/US dollar exchange rate. Applied Financial Economics, 22(1), 1215-1232

Engberg-Pederson, L. (2016). Policy Making in Foreign Aid: Gender equality and Danish Development Policy. The Journal of Development Studies, 52(7), 933-949.

Isra Transfer. (2017). How exchange rate fluctuations affect international businesses (and ways to protect yourself) [Blog post].

IMF (2017a).World Economic Outlook. Retrieved from http://www. imf.org

IMF (2017b).IMF and the World Bank.Retrieved from http://www. imf.org

Minescu A. (2014). The debt crisis- Causes and Implications.The Petroleum-Gas University of Ploiesti, 53(2), 95-104.Nassif, N., & Feijo, C. (2016). The BRICS's Economic Growth Performance before and after the International Financial Crisis. International Journal of Political Economy, 45(1), 294-314.

Pelinescu, E. (2013). Exchange rate During the Financial Crisis. Internal Auditing & Risk Management, 2(30), 1-11.

Prasad, E. (2016). The international monetary system: Is it fit for purpose? Brookings.

Saudi Arabia Report(2017). Saudi Arabia and Political Economic & Social Development. Retrieved from http://www. imf.org

Smith, N. (2014). The dark side of globalization.The Atlantic.

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Paper Example on International Monetary and Financial Environments. (2022, Apr 04). Retrieved from https://proessays.net/essays/paper-example-on-international-monetary-and-financial-environments

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