INTERNATIONAL MONETARY FUND AND WORLD BANK

Origin: In June 1944 representatives of 44 allied powers met at Bretton Woods, New Hampshire, USA to give concrete shape to the objectives of finding a system which would (a) help in removing the restrictions on trade. (b)ensure free convertibility of currencies which was suspended during the war period due to multitude of exchange controls and (c) maintain stability in exchange rates among the currencies. The agreement reached at the meeting provided for establishing two institutions which came to be known as Bretton Woods twins the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development - IBRD (World Bank). In these efforts USA represented by H.D.White & UK represented by Lord Keynes had a greater role to play.

1.

2.

3.

4.

5.

To promote international monetary co-operation through a permanent institution which will provide machinery for consultation and collaboration on international monetary problems. Promoting the growth of international trade to achieve high level of employment and real income. Promoting exchange rate stability, to maintain orderly exchange arrangements among members and to avoid competitive exchange depreciation. Establishing a system of multilateral payments in respect of current transactions, elimination of foreign exchange restrictions which hamper the growth of world trade and encouraging convertibility of currencies. Building a reserve base to be available to members to correct disequilibrium in the BOPs.

IMF was meant to achieve two main objectives

(1) it is an organisation to monitor the proper conduct of international monetary system and (2) a source of liquidity for countries in need of foreign exchange to finance temporary balance of payment difficulties.

1.

2.

3.

4.

5.

6.

Reviewing and monitoring national and global economic and financial developments and advising members on their economic policies Lending them hard currencies to support adjustment and reform policies designed to correct BOP and promote sustainable growth Offering wide range of technical assistance as well as training for government and central bank officials . Working with governments, international organisations, regulatory bodies and the private sector to strengthen the international monetary and financial system. Working along with world Bank to asses the financial sectors of countries to help identify actual and potential weaknesses. Working with the Basel Committee on Banking Supervision to improve the regulatory standards

I. Quotas

The main resource for IMF is members quotas It represents the subscription of a country to the capital of IMF It is fixed for each country based broadly on its economic size Quotas also forms the basis for determining its drawing right from the IMF, its voting power and share in allocation of SDRs. All these are available in proportion to the quota allotted to it. Initially 25% of a countrys quota was paid in the form of gold or USD and 75% in the countrys own currency. At present instead of gold, 25% is contributed in the form of SDRs or widely accepted foreign currency i.e USD, Euro, Yen, GBP. Current quota formula is a weighted average of GDP (weight 50%), Openness (30%) economic variability (15%) and international reserves (5%).

I. Quotas Since quotas are fixed on the economic strength, developed countries had largest share of quotas hence voting rights. Decision making rests with a few industrially advanced countries. Quotas are reviewed by the IMF at intervals of not more than 5 years. Initially the quotas totalled approx. USD 7 billion and currently it stands at USD 720 billon. The latest fourteenth is under review will be over by January 2013.

IMF quotas.pdf

II. Borrowings To supplement quota subscriptions IMF can borrow from members : GAB, NAB and Trust Funds
General Arrangement to Borrow introduced in 1962 under which 10 countries G-10 (Belgium, Canada, France, Germany, Italy, Japan, Nederland, Sweden, UK and USA). Switzerland joined later making it 11. agreed to lend to IMF their own currencies when the funds are needed for a participant in the arrangement.

New Arrangement

to Borrow- similar to GAB, IMF entered into a new arrangement to borrow in 1998, under which 25 countries have agreed to lend SDR 34 billion. The stipulation for IMF is that borrowings under GAB and NAB cannot exceed SDR 34 billion Trust Funds IMF provides financial assistance to low-income countries through concessional lending under Poverty Reduction and Growth Facility (PRGF) and debt relief under Heavily Indebted Poor Countries (HIPC) initiatives. Resources for these programs are through bilateral contributions and are separate from the quota subscriptions and IMF only acts as a trustee.

Different lending programs of IMF What is Special Drawing Rights (SDR), why was it created and how does it work ?