History

The IMF has played a part in shaping the global economy since the end of World War II.

Cooperation and reconstruction (194471)

As the Second World War ends, the job of rebuilding national economies begins. The IMF is
charged with overseeing the international monetary system to ensure exchange rate stability and
encouraging members to eliminate exchange restrictions that hinder trade.

The end of the Bretton Woods System (197281)

After the system of fixed exchange rates collapses in 1971, countries are free to choose their
exchange arrangement. Oil shocks occur in 197374 and 1979, and the IMF steps in to help
countries deal with the consequences.

Debt and painful reforms (198289)

The oil shocks lead to an international debt crisis, and the IMF assists in coordinating the global
response.

Societal Change for Eastern Europe and Asian Upheaval

(19902004)
The IMF plays a central role in helping the countries of the former Soviet bloc transition from
central planning to market-driven economies.

Globalization and the Crisis (2005 - present)

The implications of the continued rise of capital flows for economic policy and the stability of
the international financial system are still not entirely clear. The current credit crisis and the food
and oil price shock are clear signs that new challenges for the IMF are waiting just around the
corner.
DEFINITION of 'International Monetary Fund - IMF'

An international organization created for the purpose of:

1. Promoting global monetary and exchange stability.
2. Facilitating the expansion and balanced growth of international trade.

3. Assisting in the establishment of a multilateral system of payments for current transactions.

INVESTOPEDIA EXPLAINS 'International Monetary Fund - IMF'

The IMF plays three major roles in the global monetary system. The Fund surveys and monitors
economic and financial developments, lends funds to countries with balance-of-payment
difficulties, and provides technical assistance and training for countries requesting it.
What it is:

The International Monetary Fund (IMF) is the central institution embodying the international
monetary system and promotes balanced expansion of world trade, reduced trade restrictions,
stable exchange rates, minimal trade imbalances, avoidance of currency devaluations, and the
correction of balance-of-payment problems. The IMF's goal is to prevent and remedy
international financial crises by encouraging countries to maintain sound economic policies.
Because of its size, the IMF is also a forum for discussion of global economic policies.
The IMF is headquartered in Washington, D.C., but has offices in Paris, Tokyo, New York, and
Geneva.
How it works/Example:

The IMF formally came into existence in December 1945 with 29 member countries after it was
conceived during negotiations of the Bretton Woods Agreement in 1944. It was originally tasked
with establishing exchange rates after World War II through regulation of rates among the
member countries.
Between 1944 and 1971, most of the world operated under a fixed exchange-rate system, which
required each country to maintain a reserve balance of other currencies in order to weather
temporary supply and demand problems. Thus, the IMF required each member country to
deposit currency into an interest reserve fund. The IMF then loaned these funds to nations with
balance-of-payment problems.
Today, the IMF promotes its objectives through surveillance and consultation with member
countries rather than regulation. It still provides short-term loans to member countries having
balance-of-payment problems, and countries seeking assistance must meet or exceed certain
thresholds related to inflation rates, budget deficits, money supplies, and political stability.
Mechanics of the IMF
The IMF is run by a board of governors, which makes decisions on major policy issues but
delegates day-to-day decision making to the executive board. All member countries are

represented on the board of governors, which meets once per year. Each member country
appoints a governor and an alternate governor to represent it to the IMF. The governors are
usually the ministers of finance or governors of their central banks.
The IMF's 24-member executive board is chaired by a managing director. The managing director
is selected by the executive board every five years, and three deputy managing directors, each
from a different region of the world, report to the managing director.
The executive board meets three times a week, and the IMF's five largest shareholders (the
United States, Japan, France, Germany, and the United Kingdom) as well as China, Russia, and
Saudi Arabia, each have a seat on the board. The other sixteen directors are elected for two-year
terms by groups of countries.
There are several committees within the IMF. The International Monetary and Financial
Committee, which is a committee of the board of governors, meets twice per year to evaluate
policy issues relating to the international monetary system. The IMF Development Committee,
which is composed of members of the boards of governors of both the IMF and the World Bank,
advises and reports to the IMF governors on matters concerning developing countries.
The IMF has a weighted voting system that gives more votes to countries with larger economies.
However, according to the IMF, most decisions are not made based on formal voting, but by
consensus.
The IMF is funded by the subscriptions countries pay upon joining the IMF or when their
subscriptions are increased. Members pay 25% of their subscriptions in Special Drawing Rights
(SDRs) or in major currencies. The IMF can call on the remaining 75% as needed for lending.
The IMF determines a country's subscription amount based on its relative size in the world
economy. The IMF may borrow money to supplement the funds received from subscriptions.
Generally, the IMF may borrow money from several countries that participate in one of two
standing lending agreements with the IMF.
IMF Operations
The IMF monitors economic and financial developments and policies in member countries and at
the global level and then gives policy advice to its members based on its observations and
experience. IMF advice generally focuses on macroeconomic, financial-sector regulation, and
structural policies. To do this, the IMF engages in three types of surveillance: country
surveillance, global surveillance, and regional surveillance. During country surveillance, which
occurs annually, a team of economists visits a member country to collect data, examine policies,
and meet with government and bank officials. The team submits its findings to the IMF
executive board, which makes recommendations to the country. The IMF's global surveillance

functions center around the publication of the World Economic Outlook and Global Financial
Stability reports, which are issued twice a year. Regional surveillance usually occurs within a
series of internal IMF discussions about developments in certain regions or within groups of
countries.
The IMF also provides technical help and training to the market participants and governments of
member countries. This often comes in the form of advice on banking regulation, tax
administration, and budget formulation as well as managing statistical data and drafting or
reviewing legislation. They also provide training courses for government and central bank
officials.
One of the IMF's single biggest functions is lending money to members in need. If a country is
unable to make payments to other countries without taking "measures destructive of national or
international prosperity," such as implementing trade restrictions or devaluing its currency, it
may borrow money from the IMF. When the IMF lends a country money, it often requires the
borrower to follow a program aimed at meeting certain quantifiable economic goals, which are
described in a letter of intent from the borrowing government to the IMF's managing director.
IMF loans are not provided to fund particular projects or activities, they are provided to promote
a country's overall economic health. The duration, payment terms, and lending conditions vary
on a case-by-case basis. The IMF charges borrowers a market-related interest rate and also
requires service charges and a refundable commitment fee. Low-income countries pay as little as
0.5% interest per year.
The IMF also lends money to countries dealing with sudden losses of financial confidence, such
as after natural disasters or wars, in order to prevent the spread of financial crises stemming from
those countries. There are five main facilities from which the IMF makes loans: IMF Stand-By
Arrangements (for short-term lending), the Extended-Fund Facility, the Poverty Reduction and
Growth Facility, the Supplemental Reserve Facility, and the Exogenous Shocks Facility.
When a country borrows from the IMF, the proceeds are deposited in the country's central bank.
The repayment period varies for each loan, but maturities usually extend from six months to up
to ten years. The international community places considerable pressure on a borrower to repay
the IMF so that those funds are available to other countries, and the IMF in turn is diligent about
timely repayment in order to maintain its status as a preferred creditor.
Why it Matters:

The IMF, like the World Bank, is one of the most powerful and controversial legislative bodies
in the world. The IMF's objectives focus on macroeconomic performance and policies, while the
World Bank focuses on long-term economic development and poverty-reduction issues. The IMF
works actively with the World Bank, the World Trade Organization, the United Nations, and

other international bodies that share an interest in international trade.

Whether the IMF truly benefits the international economy is the subject of considerable debate.
Much of the criticism centers on the IMF's requirements to adopt certain economic policies in
order to receive IMF loans, which may encourage poor countries to neglect social concerns in
order to comply. Supporters note that the IMF strengthens the economic and financial-integration
effects of globalization and helps low-income countries benefit from globalization through the
development of sustainable economic policies and debt reduction in the poorest countries. They
also state that IMF approval often indicates a country's economic policies are favorable, which
may reassure and motivate investors and other governments who might provide additional
financing to the country in need. This not only attracts capital, it prevents investors from
withdrawing funds from an economy, which could create further distress for that country and
possibly for other countries.

Criticism of IMF
Over time, the IMF has been subject to a range of criticisms, generally focused on the conditions
of its loans. The IMF has also been criticised for its lack of accountability and willingness to lend
to countrys with bad human rights record.
Many Criticisms of IMF include:
1. Conditions of Loans
On giving loans to countries, the IMF make the loan conditional on the implementation of certain
economic policies. These policies tend to involve:

Reducing government borrowing Higher taxes and lower spending

Higher interest rates to stabilise the currency.

Allow failing firms to go bankrupt.

Structural adjustment. Privatisation, deregulation, reducing corruption and bureaucracy.

The problem is that these policies of structural adjustment and macro economic intervention
make the situation worse.

For example, in the Asian crisis of 1997, many countries such as Indonesia, Malaysia and
Thailand were required by IMF to pursue tight monetary policy (higher interest rates) and
tight fiscal policy to reduce the budget deficit and strengthen exchange rates. However,
these policies caused a minor slowdown to turn into a serious recession with mass
unemployment.

In 2001, Argentina was forced into a similar policy of fiscal restraint. This led to a
decline in investment in public services which arguably damaged the economy.

2. Exchange Rate Reforms. When the IMF intervened in Kenya in the 1990s, they made the
Central bank remove controls over flows of capital. The consensus was that this decision made it
easier for corrupt politicians to transfer money out of the economy (known as the Goldman
scandal). Critics argue this is another example of how the IMF failed to understand the dynamics
of the country that they were dealing with insisting on blanket reforms.
The economist Joseph Stiglitz has criticised the more monetarist approach of the IMF in recent
years. He argues it is failing to take the best policy to improve the welfare of developing
countries saying the IMF was not participating in a conspiracy, but it was reflecting the interests
and ideology of the Western financial community.
3. Devaluations In earlier days, the IMF have been criticised for allowing inflationary
devaluations.
4. Neo Liberal Criticisms There is also criticism of neo-liberal policies such as privatisation.
Arguably these free market policies were not always suitable for the situation of the country. For
example, privatisation can create lead to the creation of private monopolies who exploit
consumers.
5. Free Market Criticisms of IMF
As well as being criticised for implementing free market reforms Other criticise the IMF for
being too interventionist. Believers in free markets argue that it is better to let capital markets
operate without attempts at intervention. They argue attempts to influence exchange rates only
make things worse it is better to allow currencies to reach their market level. [criticism of IMF]

There is also a criticism that bailout countries with large debt creates moral hazard.
Because of the possibility of getting bailed out it encourages people to borrow more.

6. Lack of Transparency and involvement

The IMF have been criticised for imposing policy with little or no consultation with
affected countries.

Jeffrey Sachs, the head of the Harvard Institute for International Development said:

In Korea the IMF insisted that all presidential candidates immediately endorse an
agreement which they had no part in drafting or negotiating, and no time to understand.
The situation is out of handIt defies logic to believe the small group of 1,000
economists on 19th Street in Washington should dictate the economic conditions of life to
75 developing countries with around 1.4 billion people.source

7. Supporting Military dictatorships.

The IMF have been criticised for supporting military dictatorships in Brazil and
Argentina, such as Castello Branco in 1960s received IMF funds denied to other
countries.

Response to Criticism of IMF

1. Crisis Always lead to some Difficulties.

Because the IMF deal with economic crisis, whatever policy they offer, there is likely to
be difficulties. It is not possible to deal with a balance of payments without some painful
readjustment.

2. IMF have had Some Successes.

The Failures of the IMF tend to be widely publicised. But, its successes less so. Also
criticism tends to focus on short term problems and ignores longer term view

3. Confidence

The fact there is a lender of last resort provides an important confidence boost for
investors. This is important during current financial turmoil

4. Countries are not Obliged to take an IMF loan

It is countries who approach the IMF for a loan. The fact so many take loans suggest
there must be at least some benefits of the IMF.

5. IMF Easy target.

Sometimes countries may want to undertake painful short term adjustment but there is a
lack of political will. An IMF intervention enables the government to secure a loan and
then pass the blame on to the IMF for the difficulties.

External pages

Role of IMF

The International Monetary Fund is a global organisation founded in 1944. It aims was to help
stabilise exchange rates and provide loans to countries in need. Nearly all members of the United
Nations are members of the IMF with a few exceptions such as Cuba, Lichtenstein and Andorra.

The IMF is independent of the World Bank although both are United Nations
agencies and both are aiming to increase living standards. The World Bank
concentrates on long term loans to developing countries.

Functions of IMF
1. International Monetary Cooperation
2. Promote exchange Rate stability
3. To help deal with Balance of Payments adjustment
4. Help Deal With Economic Crisis by providing international coordination
What The IMF does

1. Economic Surveillance. IMF produces reports on member countries economies and suggest
areas of weakness / possible danger. The idea is to work on crisis prevention by highlighting
areas of economic imbalance. A list of IMF reports on member countries are available at: IMF
Countries
2. Loans to Countrys with financial crisis. The IMF has $300 billion of loanable funds. This
comes from member countries who deposit a certain amount on joining. In times of financial /
economic crisis, the IMF may be willing to make available loans as part of a financial
readjustment.

the IMF has arranged more than $180 billion in bailout packages since 1997.

3. Technical assistance and economic training. The IMF produce many reports and
publications. They can also offer support for local economies. More on technical assistance
How is the IMF Financed?

The IMF is financed by member countries who contribute funds on joining. They can also
increase this throughout their membership. The IMF can also ask its member countries for more
money. IMF financial resources have risen from about $50 billion in 1950 to nearly $300 billion
last year, sourced from contributions from its 183 members.This initial amount depends on the
size of the countries economy. E.g. the US deposited the largest amount with the IMF. The US
currently has 16% of voting rights at the IMF, a reflection of its quotas deposited with IMF. The
UK has 4% of IMF Voting rights. Loans are also available to developing countries to deal with
poverty reduction.
Special Drawing Rights SDR

The IMF use Special drawing rights to provide a unit for the amount of foreign currency member
states can draw on. SDRs are defined in terms of a basket of major currencies including: Euro,
Pound Sterling, Japanese yen and US Dollar.

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Wednesday, 8 August 2012

Write a note on the IMF or objective and functions of the IMF

INTERNATIONAL MONETARY FUND :International Monetary Fund was established in 1947. Following were the main
objectives of this fund.
1. To promote exchange rate stability among the different countries.
2. To make an arrangement of goods exchange between the countries.
3. To promote short term credit facilities to the member countries.
4. To assist in the establishment of International Payment System.
5. To make the member countries balance of payment favourable.
6. To facilitate the foreign trade.

7. To promote The international monetary corporation.

Management Of Fund :The twelve member executive committee manages the affairs of IMF. Five members
are the representatives of U.K, U.S.A, China, France and India. The remaining are
elected by the other members countries. Its head office in in U.S.A.
Source Of IMF :The initial capital of IMF was 8.5 billion dollar which was contributed by the 49
members. The quota of each member country was fixed in proportion to the
national income and volume of foreign trade. Every country was required to pay in
the form of gold and domestic currency.

FUNCTIONS OF IMF FUND

1. Merchant Of Currencies :IMF main function is to purchase and sell the member countries currencies.
2. Helpful For The Debtor Countries :If any country is facing adverse balance of payment and facing the difficulty to get
the currency of creditor country, it can get short term credit from the fund to clear
the debt. The IMF allows the debtor country to purchase foreign currency in
exchange for its own currency upto 75% of its quota plus an addition 25% each
year. The maximum limit of the quota is 200% in special circumstances.
3. Declared Of Scarce Currency :If the demand of any particular country currency increases and its stock with the
fund falls below 75% of its quota, the IMF can declare it scare. But IMF also tries to
increase its supply by these methods.
1. Purchasing :- IMF purchases the scare currency by gold.
2. Borrowing :- IMF borrows from those countries scare currency who has surplus
amount.
3. Permission :- IMF allows the debtor countries to impose restrictions on the
imports of creditor country.
4. To promote exchange stability :- The main aim of IMF is to promote
exchange stability among the member countries. So it advises the member
countries to conduct exchange transactions at agreed rates. On the other hand one
country can change the parity of the currency without the consent of the IMF but it
should not be more than 10%. If the changes are on large scale and IMF feels that

according the circumstances of the country these are essential then it allows. The
country can not change the exchange rate if IMF does not allow.
5. Temporary aid for the devalued currency :- When the devaluation policy is
indispensable or any country then IMF provides loan to correct the balance of
payment of that country.
6. To avoid exchange depreciation :- IMF is very useful to avoid the competitive
exchange depreciation which took place before world war 2.
Posted by Mirza saab at 10:23
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At a Glance - India and the IMF

India joined the IMF on December 27, 1945, as one of the IMF's original
members.

For India's Governor, quota, and voting power in the IMF, see
www.imf.org/external/np/sec/memdir/members.htm

For India's Executive Director in the IMF and constituency, see

www.imf.org/external/np/sec/memdir/eds.htm

India accepted the obligations of Article VIII Article VIII of the IMF Articles of
Agreement on current account convertibility on August 20, 1994.

India subscribes to the IMF's Special Data Dissemination Standard. Countries

belonging to this group make a commitment to observe the standard and to
provide information about their data and data dissemination practices.

Financial Assistance

While India has not been a frequent user of IMF resources, IMF credit has been instrumental in
helping India respond to emerging balance of payments problems on two occasions. In 1981-82,

India borrowed SDR 3.9 billion under an Extended Fund Facility, the largest arrangement in IMF
history at the time. In 1991-93, India borrowed a total of SDR 2.2 billion under two stand by
arrangements, and in 1991 it borrowed SDR 1.4 billion under the Compensatory Financing
Facility. Further information on India's financial position in the Fund, see
http://www.imf.org/external/
np/tre/tad/exfin2.cfm?memberKey1=430
Technical Assistance

In recent years, the Fund has provided India with technical assistance in a number of areas,
including the development of the government securities market, foreign exchange market reform,
public expenditure management, tax and customs administration, and strengthening statistical
systems in connection with the Special Data Dissemination Standards. Since 1981 the IMF
Institute has provided training to Indian officials in national accounts, tax administration, balance
of payments compilation, monetary policy, and other areas.