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IMF IN GLANCE

IMF is an international monetary institution established

by different countries after the World War II to provide

exchange stability throughout the world & increasing

liquidity so that balanced multilateral trade is promoted.

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WHAT LED TO THE ESTABLISHMENT

OF IMF

Before World War I, gold was the medium of

international payments. However, the onset of World War

I forced most of the countries to abandon gold standards

and put restriction on the movement of gold.

After the World War I, most of the countries came back

on gold standard but the gold standard could not work

well between the periods 1919-1931.

The world faced the Great Depression (1926-1936) which

led to a decline in prices, profits, employment & income.

World War II further disrupted the patterns of

International trade.

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BRETTON WOODS SYSTEM

A conference of 44 major countries was held

at Bretton Woods, New Hampshire in July

1944 to establish a stable internationalMonetary order.

The result of this conference was IMF and

IBRD. These 2 institutions are known asBretton Woods Twins.

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FUNCTIONS OF BRETTON WOODS

SYSTEM

It provided a comprise between Fixed &

Floating exchange rate systems.

It established an international harmony andexchange rate stability associated with gold

standard.

It allowed individual countries to pursue theirown macroeconomic policy.

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THE END OF THE "BWA"

End of Bretton Woods system (197281) :

The system dissolved between 1968-1973.

Since the collapse of the Bretton Woods system,

IMF members have been free to choose any form

of exchange arrangement they wish.

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FAST FACTS ON THE IMF

IMF came into existence in December 1945.

It is an autonomous organisation & isaffiliated to U.N.O.

Headquarters are in Washington.

Membership: 188 countries

Executive Board: 24 Directors representingcountries or groups of countries

Staff: Approximately 2,475 from 156countries.

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ADMINISTRATIVE STRUCTURE OF

IMF

Int. Monetary &

Financial

Committee

Board Of Governors

IMF-World Bank

Development

Committee

Executive

Board

Managing

Director

Independent

Evaluation

Office

Staff

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IMF Becoming a Universal

Institution:

The fall of the Berlin wall in 1989

Expansion to fulfill responsibilities

Soviet Block Transition

Debt relief for poor countries

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BIGGEST SHAREHOLDERS

USA

UK

FRANCEGERMANY

JAPAN

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WHAT THE IMF DOES??

Key IMF Activities

Original Aims

An Adapting IMF

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KEY ACTIVITIES

Policy advice

to

governments

& central

banks

Research,

statistics,

analysis,

forecast

Loans to

help

countries

Fight poverty

in

developing

countries

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ORIGINAL AIMS

Provide a forum for cooperation on internationalmonetary problems.

Facilitate the growth of international trade.

Promote exchange rate stability.

Lend countries foreign exchange when neededon a temporary basis.

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AN ADAPTING IMF

Enhancing IMF lending facilities

Strengthening the monitoring of global, regional &country economies.

Resolve global economies imbalances.

Analyzing capital market developments

Working to cut poverty

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COLLABORATION WITH OTHERS

The World Bank.

Regional Development Banks.

WTO.

UN agencies & other international bodies.

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QUOTA

IMF main resources : subscription (quotas)

Countries pay 25% of their quota subscriptions

in SDR or major currencies.

IMF can call on the remainder, payable in the

members own currency to be made available for

lending as needed.

The largest member is the US.

The smallest member is the TUVALU.

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PRIMARY FUNCTIONS OF IMF

Surveillance.

Financial assistance.

Technical assistance.

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"Surveillance"

It provides regular assessment of global

prospects in its World Economic Outlook.

The IMF provides advice to its membercountries.

Focus on the assessment of the exchange rate

& BOP.

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"Financial assistance"

Provide short term loans to countriesexperiencing BOP problems.

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"Technical Assistance"

The IMFs goal for its technical support is tocontribute to the development of the

productive resources of member countries.

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Advantages to INDIA

Freedom from Sterling.

Membership of the World bank.

Facility of Foreign Exchange.

Economic Consultation.

SDRs.

Help during emergency.

Importance in Int. sector.

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ACHIEVEMENTS OF IMF

Expansion of Fund : IMF has progressed both

in membership and resources.

Provision of Credit: Provides Financial Creditto its member countries.

Exchange Stability: Promotes Exchange

Stability among Member Countries. Expansion of World Trade: It contributes to

the expansion of International Trade by:-

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a) Providing Credit facilities to member

countries.

b) It helps the deficit countries to correctdisequilibrium in their BOP.

Increase in International Liquidity: With the

establishment of SDRs, IMF has increasedliquidity.

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FAILURES OF IMF

It has failed to achieve its basic objective of

international exchange stability.

The fund has failed to establish a stable andsound international monetary system.

The problem of international liquidity hasnt

been solved. The IMF quota has not been revised. The

share of quotas in relation to world trade has

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Been fast declining.

The fund has adopted a favourable attitude

towards U.S.A as most of its decisions are takento protect U.S.A.

The fund has been criticised as being RichMens

Club because of the dominance of rich countries.

The underdeveloped and developing countries

usually do not get financial help from IMF.

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The IMF has been widely criticised for

interfering in the economic policies of poor

countries.

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SPECIAL DRAWING RIGHTS (SDRs)

The establishment of SDR was an attempt ofIMF to solve the problem of internationalliquidity.

These were intended to be an asset held inforeign exchange rates under the BrettonWoods System of fixed exchange rates.

The scheme for creating SDRs was outlined atAnnual General Meeting of the IMF in October1967 at Rio de Janeiro (Brazil)

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However the proposal was approved in 1968 and

came into being on August 1969.

The objective of SDRs is to assure an adequategrowth of monetary reserves.

Allocation of SDRs is made on the basis of a

countrys quota.

Possession of SDRs entitles a country to obtain an

equivalent of currency from other countries.

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FEATURES OF SDRs

Additional Reserve Asset: In addition to thetraditional assets like gold, SDRs scheme providesa new international asset.

Cheque Book Currency: SDRs are simple bookkeeping entries at the IMF in accounts for themember countries.

Transferrable Asset: SDRs are transferrable assets& the member countries are required to providetheir currencies in exchange for SDRs.

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Backing of SDRs: SDRs are a liability of IMF

and there is no backing in the form of an

assets. Basis of SDRs: It is created on the basis of

Credit Creation.

Allocation of SDRs: SDRs are allocated to thecountries on the basis of their quotas.

Special Drawing Account: The IMF has 2

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Accounts-

a) General Account: which deals with general

transactions relating to quotas.b)Special Drawing Account: which deals with

SDR transactions.

Fiduciary Reserve System: SDRs are created by

IMF, accepted by member countries and used for

settlement of international payments.

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Units of Accounts: OPEC countries, airlines,

monetary organizations are using SDRs as

units of accounts.

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VALUATION OF SDRs

Initially the value of SDR was fixed in terms of

gold. The value of SDR was equal to 0.88867

gm of fine gold. In 1974, the standard technique was adopted

and the value of SDR was fixed in terms of a

basket consisting of 16 currencies.

The value of SDR is calculated daily on the

basis of market exchange rates.

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WORKING OF SDRs

Transactions with designation

Transactions by agreement

Transactions with General Account

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Transaction with Designation

A member country may use its SDR to obtain

foreign exchange from other member country

designated by the fund. The fund designates

the member country, with a strong B.O.P and

reserve positions to provide currency in

exchange for SDRs.

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Transactions By Agreement

A member country may use its SDRs to obtain

balances of its own currency held by another

participant country by agreement with thatparticipant.

The member countries are expected to utilise

their SDRs to meet adverse balance of

payments.

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Transactions with General Account

SDRs can be used by member countries in

operations and transactions conductedthrough IMFs General Account (i.e, in settling

transactions with the IMF)

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USES OF SDRs

In SWAP arrangements, a member country

may transfer SDRs to another country in

exchange for currency.In Forward transactions, in which members

can buy or sell SDRs for delivery at a future

date.

In the settlement of financial obligations.

In making donations.

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Repayment of loans and payment of interest

can be made with the help of SDR.

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SDRs IN INDIA

Allocation of SDR to India were 75.4 crores in

1970-1971 & 120.5 crores in 1980-1981.

These SDRs have been allocated in theGovernment of Indias account.

SDRs have been used for repurchase from the

fund and paying of interest.

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Merits Of SDR

It is a simple and flexible scheme.

It provides stable international currency

The scheme ensures adequate but not excessivegrowth of monetary reserves.

SDRs can be used unconditionally.

Holding of SDRs is beneficial to a country as theyare an interest earning asset.

It avoids the confidence problem faced under the

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Currency reserve standard.

The SDR scheme implies a partial

demonetisation of gold. The SDRs cause permanent increase in

liquidity.

Countries using SDR are not required to repayaccording to fixed schedule.

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Criticism of SDRs

The allocation of SDRs is not just and on

equitable basis. They are allocated among the

member countries in proportion of theirquotas and not according to their needs.

In spite of creation of this new reserve asset,

the liquidity problem of inadequate reserves

still continues.

The less developed countries are not provided

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Sufficient SDRs to meet their increasing

requirements.

The scheme is purely fiduciary in nature.There is every likelihood of reduction in the

public confidence in the SDRs.

Unrestricted SDRs as an international reserveasset to finance the payments deficits may

lead to global inflation

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