IMF and INDIa File

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INTRODUCTION OF INTERNATIONAL MONETARY FUND

AND INDIA

1.1 INTRODUCTION

International Monetary Fund (IMF) was established along with the International Bank for Reconstruction and Development at the onference of !! nations held at Bretton "oods# $ew%ampshire# &' in uly *+!!, t present# *-. nations are members of IMF, India is a founder member of the IMF, India has not taken any financial assistance from the IMF since *++/,Repayments of all the loans taken from International Monetary Fund have been completed on /*May# 0111, 2he ob3ectives of IMF is macro4economic growth# alleviation of poverty andeconomic stability# policy advice 5 financing for developing countries# forum for cooperation inmonetary system# promotion of e6change rate stability and international payment system,

Finance Minister is the e64officio 7overnor on the Board of 7overnors of the IMF, RBI7overnor is the lternate 7overnor at the IMF, India is represented at the IMF by an 86ecutiveDirector # who also represents three other countries as well# vi9, Bangladesh# 'ri :anka andBhutan,

India;s current


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2he IMF is a truly international colossus organi9ation, Its policies have far4reachingimplications for every country in the world 4 whether an IMF member or not, 8specially# after the globali9ation of the world economy conse


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OBJECTIVE AND FUNCTION OF IMF

3.1 INTRODUCTION

2he International Monetary Fund (IMF)# conceived in uly *+!! at a &$;s conference

held in Bretton# $ew %ampshire# &,', is a leading global financial organi9ation made up of *--

countries, Its main goals concentrate on securing financial stability# facilitating international

trade# alleviating high rates of unemployment and reducing poverty around the world, During its

establishment# the !! governments# which were represented in the conference# created a credible

framework that would eradicate competitive devaluations that were witnessed after the First

"orld "ar that caused *+/1s 7reat Depression, 2his is an international organi9ation whose

functions keeps on e6panding year by year owing to various economic# social and political

factors,

3.2 OBJECTIVE OF IMF

2he ob3ectives of the international monetary funds are

*, 2he main ob3ective of the fund is to promote monetary cooperation among the different

countries of the world,

0, 2he funds aims at providing and establishing multilateral payments and trade system in place of bilateral agreements,

/, It will try to remove all restrictions and controls on foreign e6change imposed by the Itwill,

!, It will lend or sell to its member 4 countries currencies of other countries, 2his facilitatesforeign e6change transactions among the members,

=, 2he fund aims at providing short 4 term monetary help to member countries duringemergency,

C, 2he fund is also to provide monetary help to member country in order to shorten theduration and lessen the degree of dise


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-, 2he fund is also to facilitate the e6pansion and balanced growth of international trade andto contribute thereby to promotion and maintenance of high levels of employment and realincome of member countries,

3.4 The Brett! "#$ M!et%r& S&$te'

From *+!C to *+.*# the main purpose of the IMF was regulatory# ensuring IMF members;compliance with a par value e6change rate system, 2his was a two4tiered currency regime usinggold and the &,', dollar, 8ach IMF member government could choose to define the value of itscurrency in terms of gold or the &,', dollar# which the &,', government agreed to support at afi6ed gold value of one ounce of gold being e band around their declared par value,

"hen currencies (other than the &,', dollar) came under pressure from short4termEbalance of payments imbalances that normally arose through international trade and financee6changes# countries would receive short4term financial support from the IMF, In cases wherethe currency Epeg was considered fundamentally misaligned# a country could devalue (or revalue) its currency, By providing monetary independence limited by the peg# the Bretton"oods monetary system combined e6change rate stability# the key benefit of the *+th centurygold standard# with some of the virtues of floating e6change rates# principally independence to pursue domestic economic policies geared toward full employment,

3.5 CHARACTER OF IMF

2he IMF can be described as a cooperative multilateral# intergovernmental# monetary andfinancial institution, Its policies and activities are guided by its harter# known as the rticles of greement (the rticles), Forty4five members founded the institution at Bretton "oods# $ew%ampshire# &' in *+!!, 2oday# *-. countries are members of the organisation, 2he IMF islocated at the centre of the international financial system and# indeed# throughout its history# theinstitution has played a central role in the evolution of that system, 2oday# for many countries#the IMF is the single most important global international financial institution# for a programmeagreed with the IMF is often a necessary condition for that country to attract additional

international financial resources,

2he IMF was established in the closing years of the 'econd "orld "ar, Initialdiscussions were held over a period of nearly four years in fact# from almost immediately after the war commenced on the need for a new international monetary order# which could bringabout stability in the international monetary system,

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2he initial dialogue took place between the &' and Britain# with two key individualsleading the discussion@ %arry De6ter "hite# who at the time was the Deputy 'ecretary of 'tate inthe &' and ohn Maynard Geynes# who led the discussions for 7reat Britain, Both individuals#as well as the teams they led# were concerned to establish an institution and a system that couldmarka fresh start from the situation of collapse in international monetary relations that had

characterised much of the period since the First "orld "ar, 2hey looked back to the *+01s#which had witnessed hyperinflation in 7ermany# and to the collapse# in *+0+# of the stock marketin the &'H and they sought to take account of the need for an international system of monetarycooperation which would help avoid the profound economic recession that had prevailed throughthe early4 and mid4*+/1s,

A. S(r)e*++%!,e

2he rticles of greement provide the IMF;s international staff with a mandate tooversee the e6change rate policies of its member countries in order to ensure the effectiveoperation of the international monetary system, 2o this end# the IMF assesses whether members;

economic developmentsand policies are consistent with the achievement of sustainable growth and macroeconomicstability, 2his review and assessment process has come to be known as the process of IMFsurveillance; over the economic policies of its member countries,

2he IMF conducts its surveillance of members; economic policies by holding regular discussions with member countries about their economic and financial policies, 2he IMF fulfilsits country surveillance responsibilities through a process of annual bilateral consultations withindividual countries,Because this responsibility is mandated by rticle I? of the IMF;s founding constitution# theannual surveillance e6ercise in each member

2he rticle I? surveillance e6ercise focuses on an e6amination of the followingissues in each member country@

• 86change4rate# fiscal and monetary policies

• Balance of payments and e6ternal debt developments

• 2he influence of its policies on its e6ternal accounts

• 2he international and regional implications of its policies

• 2he identification of potential vulnerabilities

• apital4account# financial and banking4sector issues and# where relevant to

macroeconomic stability#• 'uch issues as labour markets# governance and the environment,

A,,e$$ t I!-r'%t*!

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2he information in these reports about their economic conditions# performance and policies is the property of the countries concerned and may not be disclosed without their consent, In recentyears# however #the IMF has successfully persuaded most countries to allow publication of their rticle I? consultation reports# loan documents# and other information about their economic policies and conditions, 2he IMF makes these available to the public on its country information

page# available at Jhttp@KKwww,imf,orgL, Most countries now also publish on their IMF country page considerable information (often the verbatim te6t of their letters of understanding with theIMF) concerning the stabili9ation programs they plan to pursue in connection with an IMF loan,2hese are generally the product of close discussions between IMF staff and country officials, 2heIMF e6ecutive board will not normally approve a loan unless the condition embodied in these plans is acceptable to it, 2he IMF e6ecutive board must approve the disbursements at each stageof these loan programs, Its published remarks often give the reader considerable insight into the borrower;s performance and its degree of compliance with loan Econditionality,

Cr*$*$ Pre)e!t*!

'ome analysts are concerned that IMF surveillance is not sufficient in preventingfinancial crises, In a recent report# the &,', 7eneral ccounting Affice (7A) asserted that theIMF;s surveillance mechanisms# including the Fund;s biannual "orld 8conomic Reports("8As) and its 8arly "arning 'ystems (8"') have not performed well in predicting crises, Ina reply to the report# First Deputy Managing Director nne Greuger noted that it is difficult for the IMF to publicly predict crises,

B. F*!%!,*!

2he IMF is probably best known for the financial assistance it provides to member countries, 2heFund provides this assistance by means of credits and loans, Financing is provided to members whore


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In 011+# following the financial crisis# the IMF created the Fle6ible redit :ine (F:),2he F: provides a credit line to countries that have strong economic fundamentals and policies#and that the credit line can be drawn on without new conditionalities being imposed, &nlike the'B and the 8FF# the F: relies on e64ante conditionality, s of uly 01**# olombia# Me6ico#and Noland have accessed the F:, In 01*1# the IMF introduced the Nrecautionary redit :ine#

now known as the Nrecautionary and :i


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s mentioned previously# there is also a large training program that addresses all areas of

interest to the IMF# that is provided in "ashington# at regional institutes# and# from time to time#

in member countries by the IMF Institute,

De+*)er*! te,h!*,%+ %$$*$t%!,e

dvisory missions provide an important component of the IMF;s technical assistance

activities, 2hey offer advice on monetary# fiscal# and statistical problems that often lie at the heart

of the macroeconomic imbalances that countries wish to address, In addition# the IMF places

e6perts in the field for periods ranging from si6 months to two years to assist in the

implementation of policy reform recommendations,

2raditionally# IMF technical assistance has had a single# well4focused ob3ective and a relatively

short time span, %owever# in recent years# technical assistance pro3ects have grown both larger

and more comple6, 2ime hori9ons have lengthened# and multiple sources of financing have been

needed to underwrite costs, :arge pro3ects now may involve more than one IMF department and

more than one donor,

Eter!%+ ,er%t*! %!# ,r#*!%t*!

Beginning in *+-+# the IMF took formal steps to coordinate its technical assistance

policies and cooperate with other multilateral and bilateral agencies to minimi9e conflictingadvice and redundant activities, It also began to e6plore ways of complementing its own

resources through various financing arrangements with other technical assistance providers, 2he

cooperation has led to a more integrated approach to the planning and implementation of

technical assistance, 2here are now comprehensive multiyear programs of technical assistance

that are being implemented with the &nited $ations Development Nrogram (&$DN)# the "orld

Bank# and the 8uropean &nion, 2he apanese government has continued to make annual

contributions to the IMF technical assistance and scholarship programs,

SPECIAL DRA"IN RIHTS SDR$6 'pecial Drawing Right ('DR) is basically an international monetary reserve asset,

'DRs were created in *+C+ by the IMF in response to the 2riffin Narado6, 2he 2riffin Narado6

stated that the more &' dollars were used as a base reserve currency# the less faith that countries

had in the ability of the &' government to convert those dollars to gold, 2he world was still

using the Bretton "oods system# and the initial e6pectation was that 'DRs would replace the &'

dollar as the global monetary reserve currency# thus solving the 2riffin Narado6, Bretton "oods

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collapsed a few years later# but the concept of an 'DR solidified, 2oday the value of an 'DR

consists of the value of four of the IMF;s biggest members; currenciesOthe &' dollar# the

British pound# the apanese yen# and the euroObut the currencies do not hold e


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Indeed# when the IMF was established# the overarching vision of Geynes# "hite and its other founderswas that it would actively seek to minimise differences that might emerge among members#and that its operations would be conducted impartially,

onse


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S(r,e International Monetary Fund# adapted by R'

4.1. THE BOARD OF OVERNORS

2he highest decision4making body of the IMF is the Board of 7overnors, 2he rticles of greement provide that all powers of the Fund shall be vested in the Board of 7overnors, 2he Board of 7overnors consists of one 7overnor (and in his or her absence# one lternate 7overnor) for each of the*-. member countries, For this reason# it can be said that the ultimate decision making power in the Fundis located in the member countries# which are the shareholders of the Fund,

2he country;s 7overnor to the IMF is appointed by the member country and is usually theMinister of Finance or the 7overnor of the central bank, ll powers of the IMF are vested in the Board of

7overnors, 2he Board of 7overnors may delegate to an 86ecutive Board (see below) all# e6cept certainreserved# powers, In practice# this is in fact the case# with most of the responsibilities of the Board of 7overnors having been delegated by the 7overnors to the 86ecutive Board, 2he Board of 7overnors has#however# retained several very important powers# including the power to admit and suspend countrymembers and to increase or decrease the authorised


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2he Boards of 7overnors of the IMF and the Bank meet in 3oint session at nnual Meetings,2here the 7overnors decide on key IMF policy issues for the coming year, 2he views of individualgovernments# however# are represented throughout the year by the members of the 86ecutive Board,

THE E7ECUTIVE BOARD

s noted above# the conduct of the general operations of the IMF is delegated by the Fund;s7overnors to an 86ecutive Board# or Board of 86ecutive Directors, 2hat Board is composed of 0!Directors# who are appointed or elected by member countries or by groups of countries# as well as aManaging Director# who serves as its hairperson, 86ecutive Directors are based at the IMF;shead


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system in other multilateral organisations# such as the "orld Bank 7roup# for e6ample# the Fund;s Boardconducts the overwhelming bulk of its work in the formal sessions of the Board,

2he 86ecutive Board carries out its work largely on the basis of papers prepared by IMFmanagement and staff, 2ypically# the Board spends about C1 percent of its time on member countrymatters and most of its remaining time on policy issues# such as an evaluation of the world;s economic

outlook# developments in international capital markets# the IMF;s financial resources# surveillance# dataissues# the debt situation and issues related to IMF facilities and programme design,

4.3 The M%!%*! D*re,tr %!# De(t& M%!%*! D*re,tr$

2he Managing Director is both the chairperson of the 86ecutive Board# which appointsthe Managing Director# as well as the chief of the operating staff of the Fund, %e or she isultimately responsible for all aspects of the internal management and working of the institutionand its relations and communications with the outside world, 2he Managing Director is alsodirectly responsible for relations with the Board of 7overnors and the 86ecutive Board, 2he

Managing Director serves a five4year term and may be re4elected to successive terms, 2heManaging Director is seconded by three Deputy Managing Directors# one of whom comprises aFirst Deputy Managing Director,

2he First Deputy Managing Director maintains general oversight on all issues facing theinstitution, 8ach of the three Deputy Managing Directors chairs selected 86ecutive Boardmeetings# oversees staff work in specific areas and maintains contacts with member governments# Board members#the media and other institutions, In discharging these functions# each Deputy Managing Director speaks with e


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• ssessing the reasons for the problems that emerged during the 8ast sian crisis and

pointing to the nature of the IMF;s response

• Influencing the e6tent to which the IMF would provide financial support to members

confronting very large scale balance of payments crises

• Determining the IMF;s stance as to the reasons for global economic imbalances

• 2aking responsibility for providing pro3ections about the future direction of the global

economy,

t other times during the IMF;s history# other individuals have also e6ercised particularlyimportant influence, 'ome department heads# for e6ample# have come to be identified as havinge6erted significant influence over IMF policies, In the *++1s# the head of the NolicyDevelopment and Review Department of the IMF came to be associated with the new focus on

very large scale financial packages for emerging market economies# and also came to beidentified as one of the main architects of the IMF;s new thrust into lending to very small# low4income countries,

In the article you have 3ust read# Gapur e6plains that the most senior management figure inthe IMF is the Managing Director# who is vested with very significant powers, 7iven the desire by the founders of the IMF to ensure that the institution and its staff remain impartial at all times#the responsibilities of the IMF Managing Director are significant indeed,

THE E7ECUTIVE BOARD: CONSTITUENCY SYSTEM AND

ADVISORY ORANS

Built around the four ma3or organs of the Fund is an intricate array of relationships# both internalto the IMF and with other institutions participating in the realm of international finance, hief amongthese are the constituency system# or the system through which the *-. member countries of the IMFarrange their participation in the institution# the ma3or international committees whose work is closelylinked to that of the IMF and a series of international financial institutions with which the IMF has regular dealings as it carries out its work,

A. The Ee,(t*)e B%r# %!# the C!$t*t(e!,& S&$te'

ccording to the rticles of greement# the five largest shareholders France# 7ermany# apan#the &nited Gingdom and the &nited 'tates are each entitled to appoint one 86ecutive Director,ll other countries a grouped into constituencies# each represented by an 86ecutive Director elected bya country or group of countries, 2he member country decides which group to 3oin,

B. Prre$$*)e e%!$*! - the Ee,(t*)e B%r#

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"hen the IMF started functioning in May *+!C# there were *0 86ecutive Directors on itsBoard@ five of them represented the largest shareholders of the Fund# and the remaining sevenrepresented the !1 other members, s more countries 3oined the IMF# the number of countriesre


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from frica# sia or :atin merica by rotation, 2he hairperson generally holds office for twoconsecutive years,

F(!,t*!%+ %!# Se,*%+ Ser)*,e$ De%rt'e!t$

2here is a range of functional departments that are central to the


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markets# assesses systemic risks and related policy issues, It also contributes to the e6ercise of IMF 3urisdiction on e6change practices and restrictions, 2his is the department that prepares theIMF;s semi4anuual Global Financial Stability Report ,

The Str%te&: P+*,& %!# Re)*e/ De%rt'e!t

2his plays a central role in the design and implementation of IMF financial facilities andoperations# in surveillance policies and in other areas, It advises management and prepares Board papers on the development and review of IMF policies and facilities# including surveillance andrticle I? consultation policies, It plays a key role in the IMF;s participation in the IMF andDevelopment ommittee and its relationships with the "orld Bank# the &$ and other international and bilateral institutions and agencies,

The Re$e%r,h De%rt'e!t

2his department conducts policy analysis and research in areas relating to the IMF;s work, Itcoordinates multilateral surveillance work and such bilateral surveillance activities as themonitoring of e6change rates# com modities and energy markets, It plays a prominent role in thedevelopment of IMF policy concerning the international monetary system and e6change ratesissues for the Board, It prepares the semi4annual "orld 8conomic Autlook report for the IMFand periodic reports on "orld 8conomic and Market Developments ("8MD) for the Board, 2heResearch Department also prepares surveillance notes for regional groupings# including the 74.and 7401# and conducts a multilateral assessment of e6change rates for a number of advancedand emerging market economies, 2he department also maintains contacts with the academiccommunity and with other research organisations,

The St%t*$t*,$ De%rt'e!t

2he 'tatistics Department maintains databases of country# regional and global economic andfinancial statistics and reviews country data in support of the IMF;s surveillance role, It isresponsible for developing statistical concepts in balance of payments# government finance# andmoney and financial statistics# as well as producing methodological manuals, 2he department provides technical assistance and training to help members develop statistical systems and produces the IMF;s statistical publications, In addition# it is responsible for developing andmaintaining standards for the dissemination of data by member countries,

The Tre%$(rer


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Many developing country members in the IMF are very familiar with the FinanceDepartment# as it is this department that coordinates members; regular payments of obligationsdue to the Fund,

The Le%+ De%rt'e!t

2he :egal Department advises management# the Board and the staff on the applicable rulesof law, It prepares most of the decisions and other legal instruments necessary for the IMF;sactivities, 2he department serves as counsel to the IMF in litigation and arbitration cases# provides technical assistance on legislative reform and responds to in


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country e6periencing ma3or problems to have a reasonable period to work through the crisis beforerepaying, 2here are also no limits on the level of access to these facilities for eligible countriesH and thereis fle6ibility to either utilise the resources by drawing down on the facility# or to treat the facility as a precautionary arrangement# in case a crisis occurs,

2he F: is a highly fle6ible arrangement# suited to the needs of many types of countries facing e6ternal

crises, %owever# there are


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*, Despite some progress# product and labor markets remain tightly regulated in India,

lthough significant progress has been made in liberali9ing product markets in India# product

market competition remains low, 2he A8D;s product market regulation inde6 (011-) suggests

that product markets in India are less competitive compared to other A8D countries

0, %igh labor and product market rigidities have resulted in a large informal sector inIndia and sub4optimal employment, 2he unorgani9ed sector employs nearly +1 percent of the

Indian workforce# and contributes almost half of India;s 7DN , 2he large si9e of the informal

market has been attributed to tightly regulated formal (organi9ed) sector# which forces firms to

remain small and informal to avoid regulations (&lyssea# 01*1 and "2A# 011+),

/, In addition# tight regulations have hurt productivity and labor welfare, An average#

value added per worker in India;s informal manufacturing sector is about one tenth that of the

formal sector, "ith an incentive to remain in the informal sector (to avoid regulations)# firms fail

to benefit from economies of scale# and are generally much less productive than formal sector

enterprises,

!, dynamic stochastic general e


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speciali9ed agencies that lack ade

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