IMF ( International Monetary Fund)

                               

 TOPIC :- IMF ( International Monetary Fund)

Author:- MATRAVI MISHRA, a student of SRM UNIVERSITY DELHI-NCR, SONEPAT (HARYANA)

ABSTRACT :-

The International Monetary Fund (IMF) is a major international financial institution that plays a crucial role in maintaining global financial stability and promoting sustainable development. This summary provides an overview of the IMF's fees, operations, and impact on global savings. The IMF was founded in 1944 and its main purpose is to promote international financial cooperation, ensure the stability of the international monetary system, and promote world trade. It is a forum for member states to cooperate and address fiscal policy issues, exchange rate fluctuations, and global profitability imbalances. This summary outlines the main functions of IMF surveillance, lending, and special support. The IMF's oversight includes covering the income-generating programs and performance of member countries, providing policy advice, and publishing reports on the world savings outlook. Through its loan programs, the IMF helps countries with balance of payments difficulties and helps them stabilize livestock production and implement the necessary reforms. In addition, the IMF provides member countries with special support and capacity-building programs to strengthen their financial institutions and promote sustainable and profitable economic growth. The impact of the IMF on global sustainability is enormous. The conditioning of the association during the financial crisis helped to stabilize the economy, restore confidence in applications and mitigate the contagion. IMF loan programs have provided important support to countries during times of uncertainty about profitability, enabling policy adjustments, restoring financial discipline, and promoting inclusive growth. In addition, the IMF's policy advice and special support have helped improve revenue-generating programs, strengthen financial systems, and promote good governance around the world. While the IMF has played an important role in stabilizing austerity and easing fiscal tensions, it has also faced scrutiny and challenges. companies were highlighted due to the conditions of fiscal support, the indirect social and profit impact of political recommendations, and the representative and decision-making structures of the association.

Introduction 

The International Monetary Fund (IMF) is a major international financial institution that plays a crucial role in maintaining global financial stability and promoting sustainable development. This summary provides an overview of the IMF's fees, operations, and impact on global savings. The IMF was founded in 1944 and its main purpose is to promote international financial cooperation, ensure the stability of the international monetary system, and promote world trade. World war 2 had its adverse affect on the global economy. To remedy the situation, at Bretton woods in America. It was attended by the representatives of 44 countries. India also participated there in. it was decided in this conference that two institution be set up for the economic development of all countries:- 

International Monetary fund ((IMF)

 International bank for reconstruction & development Or World bank. 

Consequently, IMF was founded on 27 December, 1945. It began functioning with effect from 1st march, 1947. The fund was established with objective of solving the problem of balanced growth of world trade, international monetary cooperation and reduce disequilibrium in the BPO of member countries.

Objective of IMF:-

The fund has the following objective:-

International monetary cooperation:- The main objective of the fund is to promote cooperation among the different countries of the world. It will provide the machinery for consultation and collaboration to solve international monetary problems.

Multilateral payment & Development of trade :- The fund aims at providing and establishing multilateral payment and trade system in place of bilateral agreements.

Stability in the rate of exchange :- It will endeavour to stabilise the exchange rates of member countries.

 Abolition of exchange restrictions:- It will try to remove all restrictions and control on foreign exchange imposed by the member countries.

Help in international payment :- It will lend or sell to its members countries currencies of other countries. This facilitates foreign exchange transactions among the members 

Aid to members during emergency :- The fund aims at providing short term monetary help to member countries during emergency. 

Reduction in the disequilibrium in BOP :- The fund also aim to provide monetary help to member countries in order to shorten the duration and lessen the degree of disequilibrium in their BOP.

Profitable investment of capital:- Another objective of the fund is to help the member countries invest their long-term funds in profitable activities. It provides specials help to rich countries to invest their capital in poor countries.

Help in balanced economics development:- The fund also facilitate the expansion and balanced growth of international trade and to contribute there by to the promotion and maintenance of high level income of member countries.

Membership of IMF :-

There are two type of members of the fund, i.e, (a) original members and (b) ordinary members. All those countries whose representative took part in Bretton woods conference and who agreed to be the member of the fund prior to 31st December, 1945, are called original member. All those who become its member subsequently are called ordinary members. In 1947, the number of member countries was 40, now there are 190 countries as members.

Organisation and management of IMF:-

In order to manage the fund, the following administrative boards have been set up:-

Board of Governors :- it consists of one governor and an alternative Governor for each member country. It meets once a years. It frames the policies of the fund.

Board of Directors:- It conducts day-to-day affairs of the fund. It consists of 21 directors, and 7 of whom are permanent directors and other are temporary directors. Permanent directors belong to those countries that have the largest quotas in the fund. Currently, these countries are USA, Britain, France, Japan, Germany, Italy& Canada. 14 others directors are elected by others members countries. India is one of the elected directors.

Capital Resources of IMF:- 

The capital resources of the fund are subscribed by the various member countries by way of their respective quotas. Each member’s quota is determined before its enrolment as a member. These days quota of each member is fixed in terms of SDR. Each country has to give 25% of its quota amounts in terms of reserve assets like SDRs. Or any other unable currency and 75% in terms of its own currency. A country’s relations with the fund are determined by the amount of its quota.

For example, (a) voting powers of a member country depends upon the amount of its quota. Each country has 250 minimum votes. Besides, on each one lakh SDRs one vote is increased.

(b) The maximum limit of the financial assistance from the fund by the member country to correct its BOP depends on the amount of its quota.

(c) share of a country in the allocation of SDRs depends on the amount of quota of fund are made after every 5years. Quotas of members countries have been raised from time to time. In 2010, the fund raised the quota to 476.8 billion SDRs from 288.4 Billion SDR.

Three things are clear from the quota of a member country:-

1.The share of a member country in the capital of the fund.

2. loan a member country can receive from the fund. 

3. The total number of votes that a member country can cast.

America has the maximum quota. It constitutes 23% of the total capital of the funds.

Borrowing by IMF :-

The fund is an important financial institution besides performing regulating and consultative functions. The fund’s bulk financial resources come in the from of quota subscriptions from members countries. Further, it can borrow from governments, centrals banks or private institutions of industrialised countries and even from OPEC.

General Agreement To Borrow (GAB)

The fund can borrow from its 11 industrialised members under GAB in order to Cope with an impairment of the international monetary system. The GAB remained in force from October 1962 to December 1998. At that time its total borrowings was SDR 17 billion. Under the new arrangements to borrow, the developed countries have sanctioned $ 25 billion.

Borrowings From IMF (credit tranches )

 A member country can draw up to 100% of its quota in 4 Installment from credit tranches. The borrowing members has to satisfy the fund that the viable programme is being adopted to ensure financial stability. It means the drawing from credit tranches is conditional. The fund has gradually raised the limit of borrowing by members to meet the severe BOP Problems. Now a members can borrow upto 300% of their new quotas on the total net use of the funds resources. Drawing are made under BSFF,SFF, SAF, etc. are excluded from this limit of 300%

Others credit facilities :-

Several new credit facilities have been credit by the fund since 1960’s, These credit facilities are exclusive of borrowing made under credit tranches and these loans are available for a long period of time. These credit facilities are :-

Buffer Stock Financing Facility (BSFF):- It was created in 1989 for financing the commodity buffer stock by member countries. A members can draw upto 30 % of its quota under BSFF. The member has to cooperate with the fund is establishing prices of commodity within the country.

Extended fund facility (EFF) :- The facility was created in 1974. The credit under EFF is provided to meet their BOP deficits. The amounts provided under normal credit facilities. This facility is provided for a maximum period of 10 years. The amount of loan under EFF is Allowed up to 300% of member’s quota. The sanction is based on performance criteria and drawing instalments. 

Supplementary financing facility (SFF) :- In 1977, another facility called SFF was created to provide supplementary financing under extended or stand-by arrangements. The main purpose of it was to provide funds to members countries to meets serious BOP deficits which are large in relation to their economics and quotas. This facility was extended to low income developing member countries also. The fund established a subsidy account in 1980 to reduce the cost of borrowing under SFF to such low income developing countries. Subsidy Account means an account through which fund makes subsidy payment to borrower countries.

Structural Adjustment Facility (SAF) :- It was established in March 1986. The main purpose of SAF was to provide concessions to carry out medium-term macro-economic and structural adjustment programmes. The loans are also granted to them to solve their BOP problem. The loans are made available to the poorer countries on highly concessional terms. The rate of interest charged from them ranges between 0.5 to 1% and the repayment period between 5-10 years with 5 year grace period. Disbursements are made on annual basis and are linked to the approval or annual arrangements with members receiving equivalents with members receiving equivalent to 15% of their quota under the first, 20% under the second and 15% under the third annual arrangement. The SAF was created with the resources of SDRs 2.7 billion. The resources came mainly from repayments on loans from Trust.

Enhanced Structural Adjustment Facility (ESAF) :- ESAF was created in December 1987 with SDR 6 billion of resources. It was created to meet the medium-term financing needs of low income countries. ESAF has same objectives, eligibility and basic programmes as are of SAF. The only difference among both is of the amount of assistance. The members can receive up to 100% of quota over a 3Year programme period, with a provision for up to 250% in expectional circumstance. Disbursements under the ESAF are bi-annual instead of annual. 

Compensatory & Contingency Financing Facility(CCFF):- it was created in august 1988. The main purpose of it was to provide timely compensation for temporary shortfalls or excesses in cereal import costs due to factors beyond the control of the member. This facility was provided to a member to maintain the momentum of fund supported adjustment programmes. In 1990, the fund introduced an important element temporarily up to the end of 1991 to help members to come out of gulf war crisis.

Systematic Transformation Facility:- In April 1993, STF was established with $6 billion to help Russia and other central Asia Republic to face BOP crisis.

Emergency structural Adjustment loans (ESAL) :- ESAL facility was established in early 1999 by the fund to help the Asian and Latin American countries which were suffering from financial crisis. The interest charged by the fund was 3-5% above the fund’s normal lending rates for short period.

Contingency Credit Line (CCL) :- In April 1999, CCL was created to protected fundamentally sound countries from the contagion of financial crisis occurring in other countries. Those countries were considered eligible which can finance medium term BOP disequilibrium comfortably and have strong debtor- creditor relations. No country has borrowed under this facility.

Special Drawing Rights (SDR):-

Settlement rights, often called SDRs, were introduced in 1969. It refers to the reserve currency created by the International Monetary Fund (IMF) and used worldwide. It replaces the current cash reserves of IMF member states. It was created in response to concerns about the limitations of gold and the dollar as the only international means of settlement. SDRs contribute to the growth of global liquidity by strengthening standard reserve currencies. Special Rights Understanding (SDR). The IMF uses the SDR as an artificial currency instrument and relies on it for internal accounting. SDR is made up of popular currencies from around the world. The IMF grants special borrowing rights to its member states, thus demonstrating its full confidence and support in their governments. The SDR is reevaluated every five years. The SDR was given the vision of becoming a center for international reserves. On the other hand, gold and reserve currencies would form a small marginal part of such assets. To join the SDR system, a member state must have access to official financial resources. Such an official reserve consisted of gold reserves owned by a central bank or government and globally accepted foreign currencies. They could be used to buy local currency from the foreign exchange market to keep the exchange rate stable. However, the international supply of the two main reserves, the US dollar and gold, was not sufficient to support the growth of global trade and the ongoing financial transactions associated with it. This deficit encouraged member states to accumulate international reserves under the management of the International Monetary Fund. The value of the SDR is calculated based on a weighted basket of major currencies, which includes the US dollar, the Chinese yuan, the Japanese yen, the euro and the British pound. Its value is presented in US dollars. The IMF uses the SDR interest rate (SDR) to calculate the interest rate of loans taken from it by member states. The obligations of creditors paid to the IMF are also repaid to members with the same interest rate. How do special cancellation rights work? The SDR is not a currency or a proxy for IMF funds. Rather, it is a potential claim against publicly traded currencies belonging to IMF member states. The treaty rules of the IMF define a freely usable currency that is widely used in international transactions and is often traded in currency markets. IMF members holding SDRs can exchange them for freely available currencies in two ways. They can agree to a voluntary exchange. Alternatively, countries with stable economies or larger foreign exchange reserves can purchase special borrowing rights from weaker member states according to IMF guidelines. IMF members can borrow special drawing rights from their funds at low-interest rates. In most cases, this is done to facilitate the balance of payments. Besides the SDR, it is the unit of account of the IMF.

Functions of the International Monetary Fund (IMF). 

The International Monetary Fund (IMF) has several functions, including: 

Facilitating international monetary cooperation: The IMF aims to promote the stability of international monetary policy and reduce the risks of economic and financial crisis by facilitating cooperation between its member states.

Providing financial assistance: The IMF provides financial assistance to member states that have balance of payments problems or other financial problems. Financial aid can be provided in the form of loans or other financial instruments, and is usually conditioned by the fulfilment of certain criteria aimed at improving the economic position of the country. 

Monitoring: The IMF monitors economic and financial developments in member countries and offers policy recommendations to support economic stability and growth. 

Technical support: The IMF provides technical support and training to help its members develop their capacity in areas such as fiscal policy, monetary policy and financial regulation. 

Research: The IMF produces research and publications on a wide range of economic and financial topics, including the global economy, financial stability and poverty alleviation.

 Overall, the IMF aims to promote global poverty reduction, sustainable economic growth and international economic stability.

IMF Achievements: 

Based on this IMF balance sheet, we can now assess its performance over the past 64 years. First, let's talk about the foundation's achievements. The IMF functions as an international institution focused on both financing and adjustment for the benefit of its members. It provided financial assistance to countries with budget deficits to correct temporary imbalances The purpose of the fund is to promote exchange rate stability. Initially, the fund took measures to avoid weakening competing exchange rates. He tried to solve the problem of international liquidity. In order to create international liquidity, special drawing rights (SDR) were created in 1969 - an artificial currency - as a monetary reserve specifically for the benefit of developing countries. SDR allocations are given to member states to finance balance sheet deficits. It is the institution through which economic matters are constantly negotiated. It is a forum to discuss the economic, financial and financial policies of member states in the problems of the image of payments. In the past, the poorest developing countries did not receive adequate care from the fund. But in the 1980s and 1990s - when debt crises broke out in poor countries - the fund decided to channel its financial assets into those countries. In the 1980s, centrally planned economies were still not members of the foundation. After the collapse of the Soviet Union in 1991, former communist countries became members of the fund, and the fund supports those countries in implementing market economy principles. He decided to raise funds to fight terrorism and money laundering. Finally, the IMF helped its members formulate appropriate monetary, fiscal and trade policies.

Failures of IMF:

 Despite these achievements, its failures are glaring. In other words, its success is generally limited. There are serious allegations against this institution that cannot be ignored. These are: The Fund provides its members with short-term financing to correct the balance of payments. For this purpose, it adopted an adjustable needle system in the first stage of its life. However, it failed to establish a stable exchange rate. Its role in guiding competing currency devaluation policies of members has come under serious scrutiny, even though it was designed as a balance of payments to avoid devaluation as much as possible. In fact, the IMF is not capable of making independent policy decisions. It follows the "orders" of the superpowers. In addition, it has little influence on the political decisions of the main industrialized countries. In these cases, its mandate to exercise "tight control" over any influential member or superpower is almost meaningless - it has no effect on the US deficit or European interest rates. Second, the fund sets conditions for poor countries when issuing loans. It now ignores its main concern: exchange rate management and balance of payments problems. It now defends the issue of "market principle". This suggests that poor developing countries reduce spending, borrowing and subsidies, raise prices of SOEs, privatize SOEs, etc. If such measures, generally known as structural adjustment programs, are accepted only then IMF credit. Most of these activities are anti-national in nature. The third world debt crisis is said to be caused by the policies and actions of the foundation. Third, the fund has failed to remove currency restrictions imposed by its members, which hinder the growth of trade.

India and IMF :- 

India and the IMF (International Monetary Fund) have had a long relationship. The IMF is an international organization established in 1944, whose main objectives are to promote global financial cooperation, ensure financial stability, facilitate international trade and promote sustainable economic growth. India became a member of the IMF in 1945, shortly after independence. India has been cooperating with the IMF for many years through various programs, negotiations and policy dialogues. India has sought help from the IMF during economic crises or balance of payments difficulties. These aid programs often include conditions and policy guidelines designed to address the country's major economic problems. In recent years, India's cooperation with the IMF has developed. Although India has not sought financial assistance from the IMF since the early 1990s, it continues to engage in regular policy consultations and discussions with the IMF. These consultations provide a platform for India to discuss its economic policies, reforms and challenges with IMF experts and seek their advice and recommendations. India's engagement with the IMF goes beyond its own economic problems. As one of the major developing countries, India has actively participated in IMF discussions and decision-making processes to ensure that the interests of developing countries are taken into account. India supported reforming the IMF's governance structure to give emerging economies a greater voice and representation. India has also contributed money to the IMF in recent years, increasing the fund's lending capacity. For example, in 2012 India pledged to finance the IMF's New Borrowing Facility (NAB), an additional financial instrument that ensures the IMF's ability to provide financial assistance to member countries. Overall, India's relationship with the IMF has been multifaceted and in the past has included political negotiations, participation in decision-making and occasional financial assistance. The collaboration between India and the IMF reflects the importance of international cooperation and coordination in responding to global economic challenges and promoting sustainable development.

Conclusion :- 

The International Monetary Fund (IMF) is a global financial institution that plays a key role in promoting international monetary cooperation, stability and economic growth. Looking at its functions, effects and criticisms, one can conclude about the IMF. The main objective of the IMF is to ensure the stability of the international monetary system, promote international trade, promote sustainable economic growth and provide financial assistance to member states with balance of payments difficulties. It achieves these goals through a number of mechanisms, including monitoring, technical assistance, and funding programs. One of the main advantages of the IMF is its ability to provide financial assistance to countries experiencing economic crises or imbalances. Through its lending programs, the IMF can help stabilize the economy, restore investor confidence and support necessary political adjustments. These actions helped prevent and resolve financial crises around the world. In addition, the IMF's surveillance activities help monitor the development of the global economy, identify potential risks and provide policy advice to member states. This function helps prevent and mitigate economic imbalances and promote sound macroeconomic policies. However, the IMF has also faced criticism and controversy over the years. Some argue that its policies and loan conditions may be too harsh and exacerbate socioeconomic inequality. Critics argue that these policies often prioritize fiscal discipline and structural reforms over social welfare, resulting in austerity measures that disproportionately affect vulnerable populations. In addition, representation and decision-making in the IMF is a concern. The distribution of voting rights and influence is oriented towards developed economies, which limits the right of developing countries to vote and participate in the institution's decision-making processes. Overall, the IMF plays a key role in promoting global economic stability, facilitating trade and providing financial assistance to countries in need. Its activities have helped prevent and resolve financial crises and promote overall economic growth. However, to ensure a fair and inclusive global financial system, criticisms of political conditions and IMF representation should be taken into account. Efforts to address these issues and improve the agency's effectiveness and engagement should further increase its impact on the global economy.