International Monetary Fund

International Financial Management

Submitted by Sridip Sarkar Roll No. 610030, Finance

International Monetary Fund

The International Monetary Fund (IMF) is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. It was born at the end of World War II, out of Bretton Woods Conference in 1945. Purpose & Goals of IMF : 1. Promoting global monetary and exchange stability 2. Facilitating the expansion and balanced growth of international trade 3. Assisting in the establishment of multilateral system of payments for current transactions 4.It surveys and monitors economic and financial developments 5. Lends funds to countries with Balance-of-Payment (BOP) difficulties 6.Provides technical assistance and training for countries requesting it Functions : IMF main function is to purchase and sell the member countries currencies. 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 debit. The IMF allows the debtor country to purchase foreign currency in exchange for its own currency up to 75% of its quota plus an addition 25% each year. The maximum limit of the quota is 200% in special circumstances. 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.IMF purchases the Scare currency by gold. 2. IMF borrows from those countries scare currency that has surplus amount. 3. IMF allows the debtor countries to impose restrictions on the imports of creditor country. IMF is very useful to avoid the competitive depreciation which took place before World War II. How it Works : The IMF gets its money from quota subscriptions Paid by member states. The size of each quota is determined by how much each government can pay as per the Size of the Economy. The quota in turn determines the weight of each country has within the IMF and hence its voting rights as well as how much financing it can receive from the IMF. Twenty Five percent of each countrys quota is paid in the form of Special Drawing Rights (SDRs). SDR is an artificial currency used by the IMF and defined as a "basket of national currencies". The IMF uses SDRs for internal accounting purposes. SDRs are allocated by the IMF to its member countries and are backed by the full faith and credit of the member countries' governments. It has 4 types of currencies namely : Dollar, Pound, Euro and Yen. It acts as an Unit of Account for IFM.

Each member country is assigned a certain amount of SDRs based on how much the country contributes to the fund (Based on the size of the Economy). However, the need for SDRs lessened when major economies dropped the fixed exchange rate and opted for floating rate instead. The IMF does all of its accounting in SDRs and commercial banks accept SDR denominated accounts. The value of SDR is adjusted daily against a basket of currencies, which currently includes US Dollar, Japanese Yen, the Euro & British Pound. Thus, this unit of account is used by member countries to exchange with one another to settle international accounts. Larger the country, the larger is its contribution, thus US contributes about 18% of total quotas. In total, IMF has SDR 212 Billion (USD 290 Billion) in quotas and SDR 34 Billion (USD 46 Billion) available to borrow.