Arab Monetary Fund Overview

Introduction

The Arab Monetary Fund is a regional organization that was founded in Rabat Morocco in 1976 by the Economic Council of League of Arab States (Anon. “Arab Monetary Fund (AMF)” 1). The fund started operations in 1977 with 22 member countries on board who constituted mainly of the Middle East and North African Arab countries. The fund which is hosted by United Arab Emirates has its headquarters based in Abu Dhabi (AMF 1). The fund is managed by a board of governors who form the general assembly assisted by the board of executive directors. Its formation was mainly prompted by the spiraling oil prices on 1970s. As a result, the Arab countries decided to use proceeds from the oil sales to set up the Fund to help the poorer Arab nations reduce their balance of payment problems. Later the Fund was enhanced to avail funding for Pan Arab development projects. The funds unit of account is the Arab Accounting Dinar while its authorized capital has been set at 600 million Arab Accounting Dinars. However, the funds Board of Governors reserves the right to increase the capital. The amount of lending to member states varies from time to time. For example in 1989 the lending soured up to $290 compared to $67 in 1990 (Anon. “Arab Monetary Fund (AMF)” 1).

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One of the most important parts of the fund is the Arab trade financing program (ATFP) established in 1989. The bulk of its stake is held by the AMF while the rest is shared by the Arab Fund for Economic and Social development in conjunction with member countries central banks, commercial banks, and other financial agencies (Abu Dhabi: Arab Trade Financing Program 1). ATFP main function is promotion of trade and exports among member countries through provision of sound financial aid. With the help of international finance corporation and IBCA, AMF in 1995 created The Inter-Arab Rating Company. This was geared towards enhancing the financial markets in the member countries along with promoting the sharing of information on credit worthiness of debt issuers. This would help improve the credit ratings of the member countries (IMF 1)

Major objectives of the AMF

Elimination of payment and trade restrictions

Part of the objectives of the fund was to eliminate restrictions on payment and trade by member countries which would speed up faster realization of the fund’s goals (Anon. “Objectives and Means” 1). Other restriction on movement of capital and transfer of profits among the member states would also be removed in the process of integration.

Stabilization of the exchange rates

The fund was mandated to regulate petrodollars which enabled the member countries to reduce dependency on the western countries in handling their surplus money as had been the case before its formation (Anon. “Arab Monetary Fund” 1). The massive inflow of foreign exchange in the region as a result of the oil exports had led to inflationary pressure on the local currencies which experienced heavy fluctuations. This made the local currencies unattractive prompting the action of the AMF to arrest the situation.

The development of Arab capital and financial markets

These would be vital in mobilization of resources for spurring economic growth and development in the region (Anon. “Company Profile: Arab Monetary Fund” 1). The idea behind them was to promote self reliance in financing large infrastructural projects through the capital market. A sound financial market was also seen as a prerequisite to fast economic growth and attraction of both domestic and foreign investment.

Correction of the balance of payment problems

This would be achieved through lending of short term and long term loans to finance the balance of payment deficits. The AMF aimed at allocating adequate funds from its resources to the member countries to settle their payments in accordance to the laid down procedures set by the board of governors (El”Naggar 16).

Integration of the economies

The fund aimed at enhancing the utilization of the countries resources by increasing efficiency in the division of labor. This is to be achieved by using the factors of production and goods without discrimination on the basis of origin or the destination of the commodities within the member states. This called for harmonization of prices of goods in the region for equivalent commodities and services geared towards creating uniformity. This enabled perfect mobility and substitutability of goods within the regions (Haseeb, Makdisi, & al’Arabiyah 11). To make this possible AMF championed for removal of all barriers to mobility of capital, labor, goods and services within the region. However, for the integration to become a reality there was need for creation of institutional and regulation framework that would pursue the removal of all forms of discrimination and bias that would curtail the integration process.

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Functions of the Arab Monetary Fund

The Arab Monetary fund since its launch has played a very important role in the monetary system of the Arab world. With its major function being the integration of the Arab economies, the AMF has sought to create a system for multilateral settlement (Haseeb, Makdisi, & al’Arabiyah 443). Over the recent years the Fund has taken keen interest in scrutinizing the functionality of the financial and money market in the Arab world with the aim of developing them. The core functions of the fund include:

Lending long term and short term loans to the member countries

This has enabled it stimulate economic growth in the region. As a result infrastructural development has become possible in the member countries (Haseeb, Makdisi, & al’Arabiyah 444). This is evidenced by numerous infrastructural development projects initiated by the member countries which include roads, ports, energy producing projects, and ports among others.

Issuance of the Arab Dinar

The Arab Dinar serves as the Arab currency unit. This has encouraged the continuous spread in the use of the Arab currency in the region for both bilateral and multilateral trade relations. The movement of labor and capital in the Arab region has facilitated the use of common Arab Dinar for transactions (Anon. “Objectives and Means” 1).

Multilateral clearing operations

The monetary fund has been undertaking the opening of credit accounts for member countries central banks. It also earns some income to those banks with surplus accounts (Haseeb, Makdisi, & al’Arabiyah 444). This helped to facilitate speedy undertaking of business transactions among the member states.

Stabilization of the member’s currencies

This would put them in a better position to compete with the dollar. The fund in the process has also made it easier to stem out inflation in the economies (Anon. “Company Profile: Arab Monetary Fund” 1). Imbalances arising from temporary surpluses and deficits have been corrected more easily which has acted as a stimulus for foreign direct investment in the region. As a result, this has in turn brought about relative economic stability in the region.

Coordination of monetary policies

The establishment of the Arab economic zone under the Arab Monetary Fund for the member countries to jointly control the money supply served to coordinate the monetary policies of the member countries. This served to bring uniformity among different economic regimes in the region in order to bring about balanced growth in the region. This in addition increased the volumes of bilateral and multilateral trade among the member countries (Anon. “Arab Monetary Fund (AMF)” 1). As a result there was an increased stability in interest rates leading to increased attractiveness to investors.

Reduction of trade restrictions

All barriers to trade were removed during the integration process. Those tariffs and quotas that led to protectionism of member countries economies were abolished while other minimized to encourage easy flow of goods and services by the member countries. As a result there was marked increase in bilateral and multilateral trade among the member countries. Restrictions of conversion of one form of currency to another were abolished which was a huge boost to regional and international trade among the member countries (El”Naggar 12). This enabled the currencies to compete on a level ground and also helped to remove price distortions in the market.

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Promotion of capital flows

To encourage ease of capital flow among these countries, the member countries were encouraged to liberalize the movement of capital within the region. This was supplemented with standardization of the regulatory policies regarding capital flows from within and outside the member countries. This was a big boost to capital investment in the region leading to a surge in foreign direct investments in the region and also domestic capital injections by the local entrepreneurs. The member countries also engaged in the channeling of surplus proceeds mainly from oil to foreign investments (Haseeb, Makdisi, & al’Arabiyah 15)

Provision of advisory services to member states on economic planning

This is carried out by the Economic Policy Institute. The institute provides both advisory and consultancy services on sound management of the economy and economic planning. This serves a very crucial role especially in times of economic difficulties and when initiating development projects (Anon. “Objectives and Means” 1).

Reduction of the internal economic difficulties among the member states

These internal problems include fluctuations in commodity prices in the member states resulting from high oil prices. This has been made possible by injection of stimulus funds to revamp the economy during such harsh periods. Using these funds the countries have been able to stabilize their level of employment and also to secure reasonable output levels for the resuscitation of the economy.

Challenges facing the AMF

Defaults on loans by member states

For example, in 1993 some member states including Somalia, Iraq, and Sudan were being threatened with suspension following default in loan payments (Anon. “Arab Monetary Fund” 1). This has become a great bottleneck to the financial position of the Arab monetary fund. As a result the fund has experienced a reduced capacity in implementation and funding of development projects in the member countries. This threatens to undermine the mandate of the fund and its ability to meet its objectives. The result has been a lag in the pace of growth of the member countries.

Imbalanced economic development

The member countries are characterized by glaring differences in the level of economic development. Despite determined efforts to spur economic development in the nations some members remain very poor as compared to others who have been recording robust economic growth e.g. United Arab emirate, Bahrain among others. As a result the AMF faces the challenge of promoting balanced economic growth among the members while ensuring the countries maintain their financial soundness (El-Naggar 26). As a result of the integration, some oil producing countries realized heavy growth in the manufacturing, construction, and service sector. This was as opposed to others who as a result of a lag in the infrastructural development experienced problems that led to a rise in inflation and a distorted escalation of exchange rates. In these countries the growth of non oil sector and import substituting industries were hampered. This has contributed heavily to the skewed development of the countries.

Fluctuations in the world oil prices

These fluctuations have had terrible consequences in the region largely dependent on oil exports. This over dependency has led to balance of payment problem to especially those countries that had not developed other sector of the economy. Those with highly developed manufacturing and service sector easily adapted to reduction in foreign earnings. The adjustment difficulties have been rising for the highly oil dependent countries and those that depend on interest earnings from foreign assets. In 1986, all oil exporting countries experienced a drop in foreign exchange earnings (El-Naggar 25).

Weak monetary policies

Most of the member countries emphasize heavily on the fiscal policies at the expense of the monetary policies. As a result, the role of the monetary policy has largely been subordinated. The result has been a surge in real interest rates with the decline in inflation. This has caused recessionary effects in the regional economies leading to a decline in investor confidence who have responded by cutting back on their demand for credit (Haseeb, Makdisi, & al’Arabiyah 16)

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Protectionism by member countries

Although the regional integration policies led to increased opening up of the member country economies, some form of protectionism is still evident in the member economies. This is evident in stringent procurement policies by the members’ government in securing government contracts and issuance of heavy subsidies to domestic producers. This has continued to be a big impediment to the countries’ domestic investment and output levels.

Increased current account deficits

Even with the marked decline in the imports, the member countries have continued to register a sharp decline in foreign exchange as a result of reduction in oil exports. This has had an adverse effect on the countries’ current account leading to huge deficits which have put the economies in awkward positions. For example, current account deficits in 1986 ranged between 10-20% of the GDP (El’Naggar 28). For those that did not experience the deficits, they were faced with a sharp plunge in their current surpluses.

Political instability

Political unrest and poor governance in such countries as Iraq, Algeria, Somalia, Palestine, and Comoros has hampered the functioning of the fund. Civil strife for instance has become one of the major impediments of some member states especially in North Africa and the horn of Africa. This has led to slow economic growth in those countries. Heavy infrastructural damage has also been caused by wars in such countries as Sudan, Somali, and Iraq hence becoming a major bottleneck for economic development. Several other development projects by the fund were suspended or withdrawn altogether as a result of the unrests. High rates of poverty and unemployment have become the order of the day in these countries. Sometimes state sponsored atrocities have led to heavy loss of lives and livelihoods in the member countries such as Sudan where the government sponsored factional fighting has led to the loss of close to a million people in the Darfur region. The case was also mirrored in Iraq during the Saddam regime where thousands of Kurds and rival religious group were killed using chemical weapons and buried in mass graves. Apart from the attacks, those regions were denied any form of infrastructural development leading to high level of poverty and underdevelopment.

Low accountability and corruption

Some member countries are faced with high level of corruption and misappropriation of public resources. Due to low accountability and weak regulatory structure combined with poor institutional frameworks, state officials have been involved in siphoning out of state funds leading to stalling of development projects and misallocation of state resources. The resultant consequences have been low levels of economic growth and a widening gap between the rich minority and the poor majority. Misallocation of resources alongside the unequal distribution of state resources has also led to glaring differences in regional development in the countries sometimes leading to political upheavals in the member countries.

Conclusion

The Arab Monetary fund was founded in 1976 with the prime aim of dealing with balance of payment problem. It mainly constituted of the Northern African and Middle East countries. Its major objectives were elimination of payment and trade restrictions among the member countries, stabilization of the exchange rates, and development of the capital and financial markets and integration of the economies. In order to achieve these, the fund engaged in the lending long term and short term loans to the member countries, issuance of the Arab Dinar, multilateral clearing operations, stabilization of the member’s currencies, coordination of monetary policies, reduction of trade restrictions, promotion of capital flows, and provision of advisory services to member states.

Works Cited

Anon. “Arab Monetary Fund (AMF)”. eNotes.com. 2006. Web.

Anon. “Arab Monetary Fund”, Helicon Publishing 2010. Web.

Anon. “Company Profile: Arab Monetary Fund”. Goliath, 2009. Web.

Anon. “Objectives and Means”. AMF, not dated. 2010. Web.

Arab Monetary Fund. “Arab Monetary Fund (AMF).” Abu Dhabi: Arab Monetary Fund, 1997. Web.

Arab Trade Financing Program. “Arab Trade Financing Program.” Abu Dhabi: Arab Trade Financing Program, 2006. Web.

El’Naggar, Sa’id. “Adjustment policies and development strategies in the Arab world”, International Monetary Fund, 1987.

Haseeb, Khair El-Din; Makdisi, Samir and al’Arabiyah, Markaz Disarat al-Wahdah. “Arab monetary integration: Issues and prerequisites”. London. Routledge, 1982.

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