You are on page 1of 32

INTERNATIONAL MONETARY

FUND
The scenario in 1930
The depression weakened the industrial
economy
Increasing restrictions on imports
Worse condition in world trade, output and
employment
Devaluation in currencies
Reduction in standard of living
To regulate orderly conduct of
international trade:
Objectives: ( in June 1944 met 44 allied powers)
Help remove the restriction on trade
Ensure free convertibility of currencies
Maintain stability of exchange rates
Gave birth to two institutions called Bretton woods
twins namely
IMF-International monetary fund
IBRD- International Bank for Reconstruction And
Development ( world bank)
Objectives
Consultation and collaboration on international
monetary problems
Maintenance of high level employment and real
income
Promote exchange stability and avoid competitive
exchange depreciation
Establish multilateral system of payments and
eliminate foreign exchange restrictions
Give confidence to members through fund supplies
shorten the disequilibria in balance of payments
Functions
Reviewing and monitoring global financial developments
Lending hard currencies and reform policies to promote
sustainable growth
Offering wide range of technical assistance and training for
government and central bank officials
Working with its member governments, international
organizations, regulatory bodies and private sector to
strengthen financial system
Make assessment of member countries to identify actual and
potential weakness
Improve regulatory standards
Preparation of reports
Publishing information
Organisational structure
Central office in Washington
Autonomous body affiliated to UNO
Highest authority- Board governors of each member
countries- also policy making bodies
Meets once a years
Day to day decision making executive board
International monetary and financial committee- 24
governors representing group of countries- meet twice a
year- discuss key policy issues of IMF
Joint committee of IMF & world bank called development
committee advises and reports to governors on
developmental issues concerning developing countries
Organisational structure
Central office in Washington
Autonomous body affiliated to UNO
Highest authority- Board governors of each member
countries- also policy making bodies
Meets once a years
Day to day decision making executive board
International monetary and financial committee- 24
governors representing group of countries- meet twice a
year- discuss key policy issues of IMF
Joint committee of IMF & world bank called development
committee advises and reports to governors on
developmental issues concerning developing countries
Organisational structure
Staff in executive board are recruited under the
leadership of managing director and deputy
managing director representing different regions of
the world
Of the 24 members, 8executive directors represent
individual countries like china, France, Germany,
Japan, Russia, Saudi Arabia, UK and USA and other
16 representing group of countries. They meet once
in three weeks. Take care of conduct of business,
changes in exchange rates,lending and appointment
of managing directors.
Executive directors meet on alternate days
Financial operations
Resources: quota of member countries and supplement
borrowings.
QUOTAS: subscription by member countries to capital fund
-fixed for each country based on economic size
-forms the basis for deciding SDRs, voting power,and share in
allocation of SDRs
-25% of countries quota should be paid in gold/US dollars
-75% in own currency
-reviewed at intervals of 5years
The more powerful the country the larger the quota
-member country can draw to meet BOP deficits
Borrowings
GENERAL AGREEMENT TO BORROW
(GAB) 1962- 4years
Under this agreement 10 indutrialised countries agreed to
lend to IMF (Belgium, Italy, Netherlands, France, West
Germen, Japan, Sweden, UK, USA)
At present the SDR 17 billion and 1.5 billion through
associated agreement with Saudi Arabia.
NEW AGREEMENT (NAB)-1998: 25 countries agreed to
lend. It cannot exceed 34 billion.
TRUST AGREEMENT: IMF provides financial assistance at
concessional rates under poverty Reduction and Growth
facility (PRGF)scheme and debt relief under Heavily
Indebted POOR countries (HIPC)
LENDING
Temporary Assistance to member countries to tide over the BOP
When need for foreign exchange, it render its own currency and
renders foreign exchange. On improvement of BOP it has to purchase
back its currency and pay foreign exchange
TRANCHE POLICIES: (means slice) 25% of countries quota as first
tranche. In the first tranche IMF may be liberal. But higher tranche
requires great security.
LOAN INSTRUMENTS: Diverse loan arrangements are tailored to
the specific needs of member countries
A.concessional loans: PRGF, HIPC
B. Non-concessional loans: stand-by arrangements SBA, Extend Fund
Facility EFF, Supplemental Reserve Facility SRF, Contingent Credit
Lines CCL,and Compensatory financing Facility CFF. It charges rate of
charge at 2.9%
Discourages large loans through surcharge
HEAVILY INDEBTED POOR COUNTRIES

Designed to reduce external credit burdens of


eligible countries enabling them to service their
external debt without further credit& compromising
growth.multilateral , Paris club and other bilateral
creditors took this approach.
Countries eligible for PRGF and IDA are eligible for
this loan. They maintain a strong track of this policy
performance and relief mechanism.
POVERTY REDUCTION AND GROWTH FACILITY
Assistance given to low-income countries through
Enhanced Structural Adjustment Facility (ESAP)
In 1999, in order to strengthen the poor countries PRGF was
evolved. Interest rate is 0.5% for a period of 51/2 to 10
years
It is based on Poverty Reduction Strategy Paper
(PRSP)which is prepared in cooperation with civil society
and development partners of world bank.
Concessional lending is provided through PRGF trust which
was established in 1987 which borrows at market related
rates from central banks governments and institutions. Also
maintains a reserves account that provides security
Standby arrangements

Member countries draw up to a specific limit with in


an agreed period.
Negotiated between individual member and IMF
12-18 months length. Normally repayment expected
within 21/4- 4 years unless an extension is approved
Surcharges apply to high level access.
Desist from imposing strict exchange and trade
restrictions
EXTENDED FUND FACILITY
Established in 1974 to countries with more protracted
BOP
Facility available for 3 years also large amounts than
allowed in tranche policies
Countries with structural maladjustments in
production, trade and prices
The country should be prepared to implement
comprehensive corrective policies over 2-3 years
Repayment expected normally within 41/2-7 years
Surcharges apply to high level access.
SUPPLEMENTAL RESERVE FACILITY
SRF was introduced in 1997 to finance very short
term loan at large scale.
Expected to repay within 1-11/2years & extension
up to 1 year
All SRF loans carry 3-5% surcharge
CONTINGENT CREDIT LINES
Established in1999
Designed for countries implementing sound
economic policies
Subject to all conditions as that of SRF
Surcharge21/2- 31/2%
COMPENSATORY FINANCE
FACILITY
Established in 1960 to assist countries experiencing
sudden shortfall in export earning or increase in cost
of cereal imports caused by world commodity prices
All provisions as that of SBA apply
No surcharge
EMERGENCY ASSISTANCE
Given to countries suffering natural disaster
Emerging conflict
Subjected to basic charge
31/4- 5 years duration
Key features of IMF lending
Lends to help members to tackle BoP and have sustainable
economic growth
IMF funds are not provided to finance particular activities
or projects
Borrowing country must adopt policies that promise to
correct BoP
The country and IMF should agree on policies and actions
needed
The assistance ranges between 6 months to 4 years
The country that borrow under non concessional loan must
pay market rate of interest plus commitment fee
Lending by IMF is a signal for countrys progress on right
track and added security for additional borrowing
EXCHANGE RATE ARRANGEMENT
(original IMF system also known as Bretton Woods System)
Each member country should declare its par value of currency
(i.e) in terms of gold or US dollars
US dollar was fixed at 35 per ounce of fine gold
Monetary reserves of member country should be in the form of
gold and US dollar. Thus Us dollars are in the position of
reserve asset
Each country should agree to maintain its value at a margin of
1% of its par value
Members were free to devalue but not exceeding 10% of par
value
Grant only short term assistance
CURRENT SCENARIO

Major change took place with its second amendment


to its articles in 1978
Every member is free to choose its own exchange
rate system
Along with IMF and other member each country
should ensure stability in exchange rate
Manipulation of exchange should be prohibited
IMF can put forward its opinion freely in case of
manipulations by members
SURVEILLANCE
IMF is to over see the international monetary system to ensure:
Orderly exchange system
Stable exchange rates
Avoid manipulation
Direct policies
Ensure growth with price stability
Help single dangers ahead
This surveillance is done in three ways. They are
1.COUNTRY SURVEILLANCE
It takes place yearly in consultation with the member
country. It is referred as article IV consultation.
The review is on fiscal, monetary and exchange rate.
Assess the soundness of financial system
Examine industrial, social, environmental,labour and
other issues
Report submitted to the countrys government
2.GLOBAL SURVEILLANCE
Review by the IMF executive board on trends of
economic developments
Review based on world economic outlook and global
financial stability
Reports are prepared twice a years before the semi
annual meetings of the International Monetary
committee
3.REGIONAL SURVEILLANCE

Examine policies under regional agreements.


Participate in surveillance discussions with G-7 and
APEC( Asia-Pacific Economic Cooperation forum)
Evaluation
ACHIEVEMENTS

Stability in exchange rates


Growth in world trade
Increasing international liquidity
Economic cooperation
Flexible approach
International debt crisis solved debt problem of
Mexico in95 and Asian crisis in 97
Newly developing countries
Evaluation
CRITISISM

Conditional ties
Interference with internal policies
Rich countrys club
Fixed exchange rate not achieved
Failure to take action-1971 dollar crisis
Insufficient resources
Secondary role
Exchange restrictions
Cause for currency crisis
INDIA AND IMF
Status : founder member, has fifth largest quota, having one
permanent Director on board. Lost this position in
1970.Now India occupies 13th place with quota subscription
of 4.16 billion
Exchange rate policy:
When India joined IMF its rupee value was declared
equivalent to 0.268601 grams of gold. In 1949, gold content
of rupee was reduced to 0.186621 grams.
In 1966 rupee value devalued to 0.133333. When USA
suspended conversion of Us dollar into gold in 1971 India
pegged its currency to US dollar
In 1993, the external rupee was made fully dependant on
market forces
INDIA AND IMF
Utilisation of facilities: India has been the major
beneficiary. In 1948, it purchased 100million to
meet BoP deficit.
Between 1957-1975 in 8 occasions borrowed an
aggregate sum of R1,764 million.
In 1981, it availed 5.6 billion under structural
adjustment
In 1991, the loan was 551.92 million under standby
arrangement for 3 months period. In the same
period, the second loan of 1,656million was also
availed.
INDIA AND IMF
Derived benefits:
By virtue of being a member in IMF India became
member of IBRD and received long term large scale
loans for development projects
India has been getting advice on economic policies
under surveillance .
India is getting training to its personnel on monetary
fiscal and foreign exchange policies through short
term courses
Questions

What are quotas?


What do you mean by reserve tranche?
What are general agreements to borrow?
How is the executive board constituted?
What are the objectives of IMF?
What are the sources for IMF?