INTERNATIONAL

MONETARY FUND.

What is International Monetary Fund?

The International Monetary Fund (IMF) is an international
organization that provides financial assistance and advice to
member countries. This article will discuss the main functions of
the organization, which has become an enduring institution
integral to the creation of financial markets worldwide and to
the growth of developing countries.

What Does It Do?

The IMF was born at the end of World War II, out of the Bretton
Woods Conference in 1945. It was created out of a need to prevent economic
crises like the Great Depression. With its sister organization, the World Bank, the
IMF is the largest public lender of funds in the world. It is a specialized agency of
the United Nations and is run by its 186 member countries. Membership is open to
any country that conducts foreign policy and accepts the organization's statutes.
The IMF is responsible for the creation and maintenance of the international
monetary system, the system by which international payments among countries
take place. It thus strives to provide a systematic mechanism for foreign
exchange transactions in order to foster investment and promote balanced global
economic trade.
To achieve these goals, the IMF focuses and advises on
the macroeconomic policies of a country, which affect its exchange rate and its
government's budget, money and credit management. The IMF will also appraise a
country's financial sector and its regulatory policies, as well as structural policies
within the macroeconomy that relate to the labor market and employment. In
addition, as a fund, it may offer financial assistance to nations in need of
correcting balance of payments discrepancies. The IMF is thus entrusted with

nurturing economic growth and maintaining high levels of employment within

countries.

Governance Structure of IMF

The IMF's mandate and governance have evolved along with changes in the global economy,
allowing the organization to retain a central role within the international financial architecture.
The diagram below provides a stylized view of the IMF's current governance structure.

Board of Governors.
The Board of Governors is the highest decision-making body of the IMF. It consists of one
governor and one alternate governor for each member country. The governor is appointed
by the member country and is usually the minister of finance or the head of the central
bank.
While the Board of Governors has delegated most of its powers to the IMF's Executive
Board, it retains the right to approve quota increases, special drawing right (SDR)
allocations, the admittance of new members, compulsory withdrawal of members, and
amendments to theArticles of Agreement and By-Laws.
The Board of Governors also elects or appoints executive directors and is the ultimate
arbiter on issues related to the interpretation of the IMF's Articles of Agreement. Voting by
the Board of Governors usually takes place by mail-in ballot.
The Boards of Governors of the IMF and the World Bank Group normally meet once a year,
during the IMF-World Bank Spring and Annual Meetings, to discuss the work of their
respective institutions. The Meetings, which take place in September or October, have
customarily been held in Washington for two consecutive years and in another member
country in the third year.
The Annual Meetings usually include two days of plenary sessions, during which Governors
consult with one another and present their countries' views on current issues in
international economics and finance. During the Meetings, the Boards of Governors also
make decisions on how current international monetary issues should be addressed and
approve corresponding resolutions.
The Annual Meetings are chaired by a Governor of the World Bank and the IMF, with the
chairmanship rotating among the membership each year. Every two years, at the time of

the Annual Meetings, the Governors of the Bank and the Fund elect Executive Directors to
their respective Executive Boards.

Ministerial Committees.

The IMF Board of Governors is advised by two ministerial committees, the International
Monetary and Financial Committee (IMFC) and theDevelopment Committee.
The IMFC has 24 members, drawn from the pool of 187 governors. Its structure mirrors that
of the Executive Board and its 24 constituencies. As such, the IMFC represents all the
member countries of the Fund.
The IMFC meets twice a year, during the Spring and Annual Meetings. The Committee
discusses matters of common concern affecting the global economy and also advises the
IMF on the direction its work. At the end of the Meetings, the Committee issues a joint
communiqu summarizing its views. These communiqus provide guidance for the IMF's
work program during the six months leading up to the next Spring or Annual Meetings.
There is no formal voting at the IMFC, which operates by consensus.
The Development Committee is a joint committee, tasked with advising the Boards of
Governors of the IMF and the World Bank on issues related to economic development in
emerging and developing countries. The committee has 24 members (usually ministers of
finance or development). It represents the full membership of the IMF and the World Bank
and mainly serves as a forum for building intergovernmental consensus on critical
development issues

The Executive Board

The IMF's 24-member Executive Board takes care of the daily business of the IMF. Together,
these 24 board members represent all 189 countries. Large economies, such as the United
States and China, have their own seat at the table but most countries are grouped in
constituencies representing 4 or more countries. The largest constituency includes 24
countries.
The Board discusses everything from the IMF staff's annual health checks of member
countries' economies to economic policy issues relevant to the global economy. The board
normally makes decisions based on consensus but sometimes formal votes are taken. At the
end of most formal discussions, the Board issues what is known as a summing up, which
summarizes its views. Informal discussions may be held to discuss complex policy issues
still at a preliminary stage.

Governance Reform

To be effective, the IMF must be seen as representing the interests of all its 189 member
countries. For this reason, it is crucial that its governance structure reflect todays world
economy. In 2010, the IMF agreed wide-ranging governance reforms to reflect the
increasing importance of emerging market countries. The reforms also ensure that smaller
developing countries will retain their influence in the IMF.

Structural adjustment.
Some of the conditions for structural adjustment can include:

Cutting expenditures, also known as austerity.

Focusing economic output on direct export and resource extraction,

Devaluation of currencies,

Trade liberalisation, or lifting import and export restrictions,

Increasing the stability of investment (by supplementing foreign direct investment with the
opening of domestic stock markets),

Balancing budgets and not overspending,

Removing price controls and state subsidies,

Privatization, or divestiture of all or part of state-owned enterprises,

Enhancing the rights of foreign investors vis-a-vis national laws,

Improving governance and fighting corruption.

Origin of IMF:
The origin of the IMF goes back to the days of international chaos of the 1930s. During the
Second World War, plans for the construction of an international institution for the
establishment of monetary order were taken up.
At the Bretton Woods Conference held in July 1944, delegates from 44 non-communist countries
negotiated an agreement on the structure and operation of the international monetary system.
The Articles of Agreement of the IMF provided the basis of the international monetary system.
The IMF commenced financial operations on 1 March 1947, though it came into official
existence on 27 December 1945, when 29 countries signed its Articles of Agreement (its charter).

Today (May 2012), the IMF has near-global membership of 188 member countries. Virtually,
the entire world belongs to the IMF. India is one of the founder- members of the Fund.

Objectives:
Article 1 of the Articles of Agreement (AGA) spell out 6 purposes for
which the IMF was set up.
These are:
I. To promote international monetary cooperation through a permanent institution which provides the
machinery for consolation and collaboration on international monetary problems?
II. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to
the promotion and maintenance of high levels of employment and real income and to the development
of the productive resources of all members as primary objective of economic policy.
III. To promote exchange stability, to maintain orderly exchange arrangements among members, and
to avoid competitive exchange depreciation.
IV. To assist in the establishment of a multilateral system of payments in respect of current
transactions between members and in the elimination of foreign exchange restrictions which hamper
the growth of world trade.
V. To give confidence to members by making the general resources of the Fund temporarily available
to them under adequate safeguards, thus providing them with the opportunity to correct
maladjustments in their balance of payments, without resorting to measures destructive of national or
international prosperity.
VI. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in
the international balance of payments of members.
To promote international cooperation; to facilitate the expansion and balanced
growth of international trade; to promote exchange stability; to assist in the
establishment of a multilateral system of payments; to make its general
resources available to its members experiencing balance of payments difficulties
under adequate safeguards; and to shorten the duration and lessen the degree
of disequilibrium in the international balance of payments of members.

Functions:
The principal function of the IMF is to supervise the international monetary
system. Several functions are derived from this. These are: granting of credit to
member countries in the midst of temporary balance of payments deficits,
surveillance over the monetary and exchange rate policy of member countries,
issuing policy recommendations. It is to be noted that all these functions of the
IMF may be combined into three.
These are: regulatory, financial, and consultative functions:
Regulatory Function:

The Fund functions as the guardian of a code of rules set by its (AOA Articles of
Agreement).
Financial Function:
It functions as an agency of providing resources to meet short term and medium
term BOP disequilibrium faced by the member countries.
Consultative Function:
It functions as a centre for international cooperation and a source of counsel and
technical assistance to its members.
The main function of the IMF is to provide temporary financial support to its
members so that fundamental BOP disequilibrium can be corrected. However,
such granting of credit is subject to strict conditionality. The conditionality is a
direct consequence of the IMFs surveillance function over the exchange rate
policies or adjustment process of members.
The main conditionality clause is the introduction of structural reforms. Low
income countries drew attraction of the IMF in the early years of 1980s when
many of them faced terrible BOP difficulties and severe debt repayment problems. Against this backdrop, the Fund took up stabilisation programme as well
as structural adjustment programme. Stabilisation programme is a demand
management issue, while structural programme concentrates on supply
management. The IMF insists member countries to implement these
programmes to tackle macroeconomic instability.
Its main elements are:
(i) Application of the principles of market economy;
(ii) Opening up of the economy by removing all barriers of trade
(iii) Prevention of deflation.
The Fund provides financial assistance. It includes credits and loans to member
countries with balance of payments problems to support policies of adjustment
and reform. It makes its financial resources available to member countries
through a variety of financial facilities.
It also provides concessional assistance under its poverty reduction and growth
facility and debt relief initiatives. It provides fund to combat money- laundering
and terrorism in view of the attack on the World Trade Centre of the USA on 11
September 2001.
In addition, technical assistance is also given by the Fund. Technical assistance
consists of expertise and support provided by the IMF to its members in several
broad areas : the design and implementation of fiscal and monetary policy;
institution-building, the handling and accounting of transactions with the IMF; the
collection and retirement of statistical data and training of officials.

Maintenance of stable exchange rate is another important function of the IMF. It

prohibits multiple exchange rates.
It is to be remembered that unlike the World Bank, the IMF is not a development
agency. Instead of providing development aid, it provides financial support to
tide over BOP difficulties to its members.