INTERNATIONAL MONETARY FUND

International Monetary Fund An Overview

The International Monetary Fund (IMF) is an organization of 188 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

International Monetary Fund History

The IMF was conceived in July 1944 in the town of Bretton Woods, United States. It agreed on a framework for international economic cooperation to avoid a repetition of the Great Depression of 1930s . The IMF came into formal existence in December 1945 with its first 29 member countries It began operations on March 1, 1947. France became the first country to borrow from the IMF. The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates pegged in terms of the dollar and, in the case of the United States, the value of the dollar in terms of gold.

International Monetary Fund Gold

The IMF holds a relatively large amount of gold among its assets, not only for reasons of financial soundness, but also to meet unforeseen contingencies. The IMF holds about 2,814 metric tons, of gold at designated depositories. The IMF's holdings amount to about $160 billion (February 2012 market prices ) The IMF's Articles of Agreement strictly limit the use of the gold

Objectives:
Consultation and collaboration on international monetary problems. Maintenance of high level employment and real income. Promote exchange stability and avoid competitive exchange depreciation. Establish multilateral system of payments and eliminate foreign exchange restrictions. Give confidence to members through fund supplies shorten the disequilibria in balance of payments

Functions :
Reviewing and monitoring global financial developments. Lending hard currencies and reform policies to promote sustainable growth. Offering wide range of technical assistance and training for government and central bank officials. Working with its member governments, international organizations, regulatory bodies and private sector to strengthen financial system. Make assessment of member countries to identify actual and potential weakness Improve regulatory standards. Preparation of reports Publishing information.

Organisational structure:
Central office in Washington Autonomous body affiliated to UNO Highest authority- Board governors of each member countries- also policy making bodies Meets once a years. Day to day decision making executive board International monetary and financial committee- 24 governors representing group of countries- meet twice a year- discuss key policy issues of IMF Joint committee of IMF & world bank called development committee advises and reports to governors on developmental issues concerning developing countries

Financial operations:
Resources : Quota of member countries and supplement borrowings. QUOTAS: Subscription by member countries to capital fund -fixed for each country based on economic size -forms the basis for deciding SDRs, voting power, and share in allocation of SDRs -25% of countries quota should be paid in gold/US dollars -75% in own currency -reviewed at intervals of 5years. The more powerful the country the larger the quota -member country can draw to meet BOP deficits

Borrowings :
GENERAL AGREEMENT TO BORROW (GAB) 1962
Under this agreement 10 industrialised countries agreed to lend to IMF (Belgium, Italy, Netherlands, France, West Germen, Japan, Sweden, UK, USA). At present the SDR 17 billion and 1.5 billion through associated agreement with Saudi Arabia.

NEW AGREEMENT (NAB)-1998:

25 countries agreed to lend. It cannot exceed 34 billion.

TRUST AGREEMENT:
IMF provides financial assistance at concessional rates under poverty Reduction and Growth facility (PRGF)scheme and debt relief under Heavily Indebted POOR countries (HIPC)

LENDING :
Temporary Assistance to member countries to tide over the BOP. When need for foreign exchange, it render its own currency and renders foreign exchange. On improvement of BOP it has to purchase back its currency and pay foreign exchange

TRANCHE POLICIES: 25% of countries quota as first tranche. In the first tranche IMF may be liberal. But higher tranche requires great security. LOAN INSTRUMENTS: Diverse loan arrangements are tailored to the specific needs of member countries : Extend Fund Facility EFF, Supplemental Reserve Facility SRF, Contingent Credit Lines CCL, Compensatory financing Facility CFF. It charges rate of charge at 2.9% Discourages large loans through surcharge

HEAVILY INDEBTED POOR COUNTRIES:

Designed to reduce external credit burdens of eligible countries enabling them to service their external debt without further credit& compromising growth. Multilateral , Paris club and other bilateral creditors took this approach. Countries eligible for PRGF and IDA are eligible for this loan. They maintain a strong track of this policy performance and relief mechanism.

POVERTY REDUCTION AND GROWTH FACILITY:

Assistance given to low-income countries through Enhanced Structural Adjustment Facility (ESAP) In 1999, in order to strengthen the poor countries PRGF was evolved.
Interest rate is 0.5% for a period of 51/2 to 10 years It is based on Poverty Reduction Strategy Paper (PRSP) which is prepared in cooperation with civil society and development partners of world bank. Concessional lending is provided through PRGF trust which was established in 1987 which borrows at market related rates from central banks governments and institutions. Also maintains a reserves account that provides security

INDIA AND IMF :

Founder member, has fifth largest quota, having one permanent Director on board. India occupies 13th place with quota subscription of 4.16 billion Exchange rate policy.

When India joined IMF its rupee value was declared equivalent to 0.268601 grams of gold. In 1949, gold content of rupee was reduced to 0.186621 grams. In 1966 rupee value devalued to 0.133333. When USA suspended conversion of Us dollar into gold in 1971 India pegged its currency to US dollar In 1993, the external rupee was made fully dependant on market forces

Utilisation of facilities
India has been the major beneficiary. In 1948, it purchased 100million to meet BoP deficit Between 1957-1975 in 8 occasions borrowed an aggregate sum of R1,764 million. In 1981, it availed 5.6 billion under structural adjustment. In 1991, the loan was 551.92 million under standby arrangement for 3 months period. In the same period, the second loan of 1,656million was also availed.

Derived benefits
By virtue of being a member in IMF, India became member of IBRD and received long term large scale loans for development projects. India has been getting advice on economic policies under surveillance . India is getting training to its personnel on monetary fiscal and foreign exchange policies through short term courses.

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