Problem of International liquidity | What is the problem of International liquidity?

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Hello friends, welcome to my website “Khan Study”. In today’s article we are going to know about the Problem of International liquidity (What is International liquidity?). So let’s discuss in details.

What is International liquidity?

International liquidity Meaning – International liquidity refers to the availability of internationally acceptable means of payment. International reserves has been defined to include official holdings of gold, foreign exchange, SDR, reserve position in the IMF (International Monetary Fund), etc.

What are the components of international liquidity?

Under the present international monetary system the main component of international liquidity or the main composition of international liquidity are as follow –

• Gold reserves of the national monetary authorities with the IMF.

• SDR of the IMF.

• Dollar reserves of countries other than USA.

• Sterling reserves of the countries other than USA.

• Reserve position in the fund.

Problem of international liquidity

The Problem of international liquidity or international liquidity problem mentioned below –

It refers to the problem of the nature and availability of means of international payments. It has two aspects – Quantitative and Qualitative.

The quantitative aspect means the problem of adequacy of international liquidity. The qualitative aspect means (relates) to the nature and composition of international reserves.

Causes of International liquidity problem

The liquidity problem is much more serious for developing countries because of the following reasons –

(i) The developing countries required foreign resources to meet long term needs of economic development.

(ii) The developing countries are chronically capital deficient and technologically backward. For this reason they need huge amount of funds for importing goods and technology.

(iii) This countries mostly export cheaper primary goods and import costly capital goods. The foreign demand for primary goods has been declining and their terms of trade becomes unfavourable.

(iv) Recent recession in the developed countries has led developing countries to adopt protective trade policies which disturbs the terms of trade position.

(v) The developing countries face serious repayment problem and the rich countries do not provide sufficient assistance to help these countries.

Role of IMF in solving Problem of International liquidity

• In order to solve the problem of international liquidity the IMF has raised the member countries quota from time to time.

• The IMF provides short term credit facilities to the members of the adjustment of BOPs deficit.

• With the objective of international liquidity the fund has been extending credit facilities through some new windows such as – compensatory financing facility, buffer stock financing facility, etc.

• The borrowing limit for the member nations under the credit facility has been gradually raised over the years.

• In 1952, the stand by arrangement were introduced to permit member countries assurance of additional reserve in the event of need or emergency.


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