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Chapter: 12th Economics : International Economic Organisations

International Monetary Fund

The purpose of International Monetary Fund is to secure and promote economic and financial cooperation among member countries.

International Monetary Fund

The purpose of International Monetary Fund is to secure and promote economic and financial cooperation among member countries. The IMF was established to assist the member nations to tide over the Balance of Payments disequilibrium in the short term. At present, the IMF has 189 member countries with Republic of Nauru joined in 2016.


 

1. Objectives of IMF

i.               To  promote  international  monetary cooperation among the member nations.

ii.               To facilitate faster and balanced growth of international trade.

iii.               To ensure exchange rate stability by curbing competitive exchange depreciations.

iv.               To eliminate or reduce exchange controls imposed by member nations.

v.               To establish multilateral trade and payment system in respect of current transactions instead of bilateral trade agreements.

vi.               To promote the flow of capital from developed to developing nations.

vii.               To solve the problem of international liquidity.

 

2. Functions Of IMF


i) Bringing stability in exchange rate

The IMF is maintaining exchange rate stability and emphasising devaluation criteria, restricting members to go in for multiple exchange rates and also to buy or sell gold at prices other than declared par value.

ii) Correcting BOP Disequilibrium

The IMF is helping the member countries in eliminating or minimizing the short-period disequilibrium in their balance of payments either by selling or lending foreign currencies to the member nation.

iii) Determining par values

IMF enforces the system of determination of par values of the currencies of the member countries. According to the Articles of Agreement of the IMF, every member nation should declare the par value of its currency in terms of gold or US dollars. Under this article, IMF ensures smooth working of the international monetary system, in favour of some developed countries.

iv) Balancing demand and supply of currencies

IMF is entrusted with the important function of maintaining balance between demand and supply of various currencies. The Fund (IMF) can declare a currency as scarce currency which is in great demand and can increase its supply by borrowing it from the country concerned or by purchasing the same currency in exchange of gold.

v) Reducing trade restrictions

The Fund also aims at reducing tariffs and other trade barriers imposed by the member countries with the purpose of removing restrictions on remittance of funds or to avoid discriminating practices.

vi) Providing credit facilities

IMF is providing different borrowing and credit facilities with the objective of helping the member countries. These credit facilities offered by it include basic credit facility, extended fund facility for a period of three years, compensatory financing facility and structural adjustment facility.

The functions of the IMF are grouped under three heads.

1. Financial – Assistance to correct short and medium term deficit in BOP;

2. Regulatory – Code of conduct and

3. Consultative - Counseling and technical consultancy.

 

3. Facilities offered by IMF

The Fund has created several new credit facilities for its members. Chief among them are:

(i) Basic Credit Facility:

The IMF provides financial assistance to its member nations to overcome their temporary difficulties relating to balance of payments. A member nation can purchase from the Fund other currencies or SDRs, in exchange for its own currency, to finance payment deficits. The loan is repaid when the member repurchases its own currency with other currencies or SDRs. A member can unconditionally borrow from the Fund in a year equal to 25% of its quota. This unconditional borrowing right is called the reserve tranche.

Special Drawing Rights (SDRs)

The Fund has succeeded in establishing a scheme of Special Drawing Rights (SDRs) which is otherwise called ‘Paper Gold’. They are a form of international reserves created by the IMF in 1969 to solve the problem of international liquidity. They are allocated to the IMF members in proportion to their Fund quotas. SDRs are used as a means of payment by Fund members to meet balance of payments deficits and their total reserve position with the Fund. Thus SDRs act both as an international unit of account and a means of payment. All transactions by the Fund in the form of loans and their repayments, its liquid reserves, its capital, etc., are expressed in the SDR.

The achievements of the fund can be summed up in the words of Haien that ‘Fund is like an International Reserve Bank.’

(ii) Extended Fund Facility

Under this arrangement, the IMF provides additional borrowing facility up to 140% of the member’s quota, over and above the basic credit facility. The extended facility is limited for a period up to 3 years and the rate of interest is low.

(iii) Compensatory Financing Facility

In 1963, IMF established compensatory financing facility to provide additional financial assistance to the member countries, particularly primary producing countries facing shortfall in export earnings. In 1981, the coverage of the compensatory financing facility was extended to payment problem caused by the fluctuations in the cost of cereal inputs.

(iv) Buffer Stock Facility

The buffer stock financing facility was started in 1969. The purpose of this scheme was to help the primary goods (food grains) producing countries to finance contributions to buffer stock arrangements for the stabilisation of primary product prices.

(v) Supplementary Financing Facility

Under the supplementary financing facility, the IMF makes temporary arrangements to provide supplementary financial assistance to member countries facing payments problems relating to their present quota sizes.

(vi) Structural Adjustment Facility

The IMF established Structural Adjustment Facility (SAF) in March 1986 to provide additional balance of payments assistance on concessional terms to the poorer member countries. In December 1987, the Enhanced Structural Adjustment Facility (ESAF) was set up to augment the availability of concessional resources to low income countries. The purpose of SAF and ESAF is to force the poor countries to undertake strong macroeconomic  and structural programmes to improve their balance of payments positions and promote economic growth.

 

4.  Achievements Of IMF

The main achievements of International Monetary Fund are as follows:

i) Establishment of monetary reserve fund

The Fund has played a major role in achieving the sizeable stock of the national currencies of different countries. To meet the foreign exchange requirements of the member nations, IMF uses its stock to help the member nations to meet foreign exchange requirements.

ii) Monetary discipline and cooperation

The IMF has shown keen interest in maintaining monetary discipline and cooperation among the member countries. To achieve this objective, it has provided assistance only to those countries which make sincere efforts to solve their problems.

iii) Special interest in the problems of UDCs

The notable success of the Fund is the maintenance of special interest in the acute problems of developing countries. The Fund has provided financial assistance to solve the balance of payment problem of UDCs. However, many UDCs continue to be UDCs, while the developed countries have achieved substantial growth.

 

5.  India and IMF

Till 1970, India stood fifth in the Fund and it had the power to appoint a permanent Executive Director. India has been one of the major beneficiaries of the Fund assistance. It has been getting aid from the various Fund Agencies from time to time and has been regularly repaying its debt. India’s current quota in the IMF is SDRs (Special Drawing Rights) 5,821.5 million, making it the 13th largest quota holding country at IMF with shareholdings of 2.44%. Besides receiving loans to meet deficit in its balance of payments, India has benefited in certain other respects from the membership of the Fund.


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