International Monetary Fund (IMF)

The International Monetary Fund (IMF), is an international monetary institution established by 44 nations under the Bretton Woods Agreement of July 1944. It was established to –

(a) promote economic and financial cooperation among its members

(b) to facilitate the expansion and balanced growth of world trade

Membership

At present 186 countries are members of the International Monetary Fund. To join the IMF, a country must deposit a sum of money called a quota subscription, the amount of which is based on the wealth of the country’s economy. Quotas are reconsidered every five years and can be increased or decreased based on IMF needs and the prosperity of the member country. Voting rights are allocated in proportion to the quota subscription.

Objectives of International Monetary Fund (IMF) →

The main objectives of International Monetary Fund are as follows –

→ International Monetary Cooperation – Due to widespread devastation after the Second World War monetary cooperation among member countries was needed to prevent the outbreak of another war.

→ To ensure stability in foreign exchange rates – the instability in foreign exchange rates produced adverse repercussions on international trade; hence the IMF was established to curb this situation.

→ To eliminate exchange control – IMF strives to remove or relax exchange controls with a view to give encouragement to the flow of International Trade.

→ To establish a system of multilateral trade and payments system – This was considered necessary as the old bilateral trade agreements obstructed the free flow of international trade.

→ To help member nations to achieve balanced economic growth of international trade.

→ To eliminate the disequilibrium in the balance of payments.

→ To promote investment of capital in undeveloped countries.

Organization and structure of International Monetary Fund (IMF)

The structure of the International Monetary Fund consists of –

→ Board of Governors

→ An Executive Board

→ A managing Director

→ A Council and a staff with its headquarters at Washington, USA.

→ There are adhoc and standing committees appointed by the Board of Governor and the Executive Board.

→ There is also an Interim Committee appointed by the board of governors.

The Board of Governors and the Executive Board are decision making organs of the Fund.The Board of Governors is the top structure composed of one Governor and one alternate Governor appointed by each member. The Board has now 24 members who meet annually to take decisions regarding policies of the fund and fund activities.

The Executive board has 21 members, five Executive Directors appointed by five members with the largest quotes and 15 Executive Directors are elected at intervals of two years by the remaining members according to the constituencies on a geographical basis. Its power relate to all regulatory, supervisory and financial activity of the fund.

The Managing director of the fund is elected by the Executive Directors. He is the non-voting Chairman of the Executive Board and the Head of the Fund staff and is responsible for its organization, appointment and dismissal.

The Interim Committee was established along with the development committee in October 1974 to advise the Board of Governors on supervising the management and report all aspects of the transfer of real resources to developing countries respectively. Both the committees consist of 22 members currently.

Functions or activities of the International Monetary Fund (IMF)

It can be divided into two broad categories –

Financial Assistance – The basic objective of the IMF is to provide the financial support to the member countries in order to develop their resources. The assistance is provided in the form of loan in order to expand the volume of trade at international level. It also assists in stabilization of currencies and arrangement of financial fund. The member countries can request IMF for financial help in order to control the Balance of payment situation.The loan taken by the IMF also helps in economic growth and development. IMF has got a variety of arrangement or loan facility. The programme of such arrangement is formulated by the member country in consultation with the executive board of IMF. The loan amount is released in installment as per the programme the various instruments or facilities are according to the specific circumstances for the diverse membership. Some of the schemes are –

(a) Poverty reduction and growth facility (PRGF)

(b) Extended fund facility

(d) IMF also extends finance for recovering from various natural disasters and conflicts.

Technical Assistance – The technical services provided by IMF have developed the productive resources of the member countries to help them to manage their economic and financial affairs. It helps to strengthen the human and institutional resources. The technical assistance provide by it is free of charge to the requested member countries if it is within the resource limits of IMF. About 90% of such services are provided to the middle group and low income group countries.

The technical assistance is provided in the following areas –

◊ Revenue Administration

◊ Financial Statistics

◊ Tax Policy Administration

◊ Exchange Rate System

◊ Financial Sector Sustainability

◊ Monetary Policy System

Special Drawing Rights (SDR)

Special Drawing Rights are also known as paper gold, are a form of international reserves created by the International Monetary Fund in 1960 to solve the problem of international liquidity. They are international units of account in which the official accounts of the IMF are kept. They are allocated to the International Monetary Fund members in proportion to their fund quotas and are used to settle balance of payments deficits between them.

SDR are used as a means of payment by Fund members to meet Balance of payment deficits and their total reserve position with the Fund. They cannot be used for any other purpose. Thus SDR act both as an international unit of account and a means of payment. The SDR scheme has been criticized on the grounds of inequitable distribution and high interest rate.

Advantages of International Monetary Fund (IMF) →

→ Establishment of a monetary reserve fund – Under this system, the fund is able to accumulate a sufficient stock of the national currencies of different countries which meets the foreign exchange requirements of the member countries.

→ Setting up of a Multilateral Trade and payments System – It was hoped that restrictions on foreign trade would be eliminated after the end of the transitional period.

→ Improvement in short term disequilibrium in balance of payments. This is achieved by lending foreign currencies to member countries against their national currency.

→ Stability in Foreign Exchange Rates – the fund has attached a certain amount of stability in foreign exchange rates, this stability had the effect of promoting the flow of international trade among different countries.

→ Advisory and Technical assistance – It helped member countries through its policy advice and technical assistance in formulating sound policies and building robust institution.

Criticism of International Monetary Fund (IMF) →

→ Limited scope – Its scope is limited as it deals only with imbalances in payments which arise from current trade transactions and not with the repayments of war loans or of blocked reserves.

→ Fixation of unscientific quotes – The quotes of the various member countries have not been fixed on any scientific basis. It is criticized that the fund has been continuously dominated by few countries.

→ Inability to remove exchange control – It has not succeeded in persuading member countries to eliminate exchange controls and other restrictions on foreign trade.

→ Inadequate provision of liquidity – The fund found it difficult to meet the foreign exchange requirements of its members because of its limited resources. Despite various efforts there has been no perceptible improvement in the international liquidity situation.

→ Inadequate representation of developing country – About 90% of the members of the International Monetary Fund are developing countries but they have been given only 38% of the total voting power in the affairs of the fund.

India and International Monetary Fund (IMF) →

→ India was among the first five nations having the highest quota with IMF and it has been also allotted a permanent place in Executive Board of Directors.

→ Independence of India Rupee – Since the existence of International Monetary Fund the Indian rupee has become independent. Its value is no longer determined by the pound sterling but is expressed in terms of gold.

→ Membership of the World Bank – It is on account of its membership of the fund that India could become a member of the world Bank, which has provided several loans to India for various economic purposes.

→ Economic advice from the Fund – India can seek the expert advice of the firm for solving its economic problems. Fund has given valuable advice to the Government of India on matters regarding financing of the Five Year Plans.

→ Increase in Quota – Being an important member of the International Monetary Fund, India’s quota was 400 million SDR which rose to 4158.2 million SDR in 1998.

→ International exchange standard – By virtue of membership of the IMF, Indian currency has been connected with international exchange standard allowing India to make payment in any country of the world easily.

International Monetary Fund (IMF) – Objectives, Membership, Organization structure, Functions, Advantages, Criticism, India and International Monetary Fund