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International Monetary Fund March 29, 2010

Posted by Chetan Chitre in International Business Management, International Organisations.
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Introduction –

The International Monetary Fund (IMF) was established in 1944 as an outcome of the Bretton Woods Conference. The Great Depression of the 1930s and the following policy response lead to a substantial instability in international economic environment.

Some of the policy responses such as competitive devaluation, closing of economies for foreign trade, etc. lead to an environment of uncertainty in the arena of international trade. As a result world trade declined from USD 33 bn in 1929 to USD 12.7 bn in 1932. The revival thereafter was slow and it had reached mere USD 22.7 bn by 1938. The War further led to a slump in the World Trade.

As a result of all these destabilizing events in the International economic environment, the important nations of the world met in Bretton Woods in US in July 1944. The Bretton Woods Agreement led to the formation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) for post war re-construction which was later merged in the World Bank Group.

Objectives –

The aim of the IMF was to remove the instability in international business and economy by creating a climate of mutual co-operation between countries in economic matters. The objectives of the IMF included –

(i) Promoting international monetary co-operation

(ii) Facilitating balanced growth of international trade

(iii) Promoting exchange rate stability

(iv) Providing resources to members with Balance of Payment difficulties

While these were the broad objectives of the IMF at the time of formation, over time, the IMF has adapted to changing world economic environment. Some of the changes in the IMF as reflected in its objectives include –

(i) Enhancing lending facilities to emerging market economies

(ii) Helping resolve global economic imbalances

(iii) Monitoring the financial sector and assessing its vulnerabilities o a continuous basis

(iv) Working towards eradication of poverty and helping countries achieve Millennium Development Goals

(v) Working closely with WTO and other multi lateral agencies to assist LDCs in integrating with the multilateral trading system.

Structure –

The IMF follows a membership structure. All nations are members of the IMF. The members are allotted Quotas depending on their position in the World economy. Members contribute to the resources of the IMF (SDRs) in proportion to their quotas. Members also get voting rights in proportion to their quotas. The quotas are reviewed after every 5 years. The quotas also have a bearing on the amount of loans that a member can borrow from the IMF.

Organization Structure –

The IMF is headed by Board of Governors. Each member country appoints its Finance Minister or Head of Central Bank as its representative in the Board of Governors. The Board of Governors take advise from several sources such as G-7, G-20, G-24, International Monetary and Finance Committee, etc.

An Executive Board is drawn from the Board of Governors. The Executive Board formally oversees the decisions of the IMF. Reporting to the Executive Board is the Managing Director. Currently Mr. Dominique Strauss Kahn from France is the Managing Director of the IMF.

Functionally the staff of IMF is divided into several departments such as Finance, Fiscal affairs, Monetary and Capital markets, Strategy and Policy Review, Legal Department, etc. IMF also has departments concentrating on region specific requirements such as Africa, Asia-Pacific, Europe, etc. A detailed organizational structure of the IMF is available at http://www.imf.org/external/np/obp/orgcht.htm

Special Drawing Rights –

The members contribute to the resources of the IMF by way of subscribing to the Special Drawing Rights (SDRs). SDRs were floated by the IMF in 1969 as an attempt to create and International currency. During the late 1960s and early 1970s the US found it increasingly difficult to maintain the dollar value against gold. Also other countries were finding it difficult to maintain a fixed exchange rate against the USD. During this period a need was felt to create and alternative reserve currency for the world which would have international acceptability and whose value would remain relatively stable against major currencies of the world.

SDRs were thus created with the possibility of replacing the USD as an international reserve currency. While they have had a limited success in this role, they have assisted the IMF in raising resources from member countries and assisting its members in the time of need.

Subscription to SDRs – SDRs provided a low-cost reserve currency to member nations in order to boost their foreign exchange reserves. Members were asked to subscribe to SDRs in proportion to their quotas in the IMF. If a member’s SDR holdings rise above its allocation, it earns interest on the excess; conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall. Further, the subscription had to be paid as – 25% of the amount in USD or some other internationally accepted currency and the balance 75% by way of the domestic currency.

The value of the SDR is based on a basket of key international currencies—the euro, Japanese yen, pound sterling, and U.S. dollar. The SDR interest rate is determined weekly and is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies.

Allocations of SDRs – Decisions to allocate SDRs have been made three times: in 1970-72, for SDR 9.3 billion; in 1979–81, for SDR 12.1 billion; and in August 2009, for an amount of SDR 161.2 billion.

In addition to the above, a special one-time allocation of SDRs was done in September 2009. The purpose of this special allocation was to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the Fund after 1981—more than one-fifth of the current IMF membership—had never received an SDR allocation.

With the general SDR allocation of August 2009 and the special allocation of September 2009, the amount of SDRs increased from SDR 21.4 billion to SDR 204.1 billion (currently equivalent to about $317 billion).

Resources of IMF –

In addition to the SDRs subscribed to by its members, the IMF has borrowing arrangements with some of the developed countries of the world who have committed to segment the resources of the IMF to the extent of SDRs 34 bn (USD 52 bn) in times of need.

Lending Facilities of the IMF –

IMF lends to governments with a specific objective of helping them tide over their problems pertaining to BoP and international payments related difficulties.

Stand-By Arrangements (SBA) – The SBA is designed to help typically middle-income countries address short-term balance of payments problems. Fund disbursements are made conditional on achieving certain milestones related to corrective policy measures for achieving sustainable correction in the country’s BoP position. The length of a SBA is typically 12–24 months, and repayment is due within 3¼-5 years of disbursement.

Flexible Credit Line (FCL) – The FCL is for countries with very strong fundamentals, policies, and track records of policy implementation and is particularly useful for crisis prevention purposes. The length of the FCL is 6 months or 1 year (with a mid-term review) and the repayment period the same as for the SBA. Disbursements under the FCL are not conditioned on implementation of specific policy understandings as is the case under the SBA.

Extended Fund Facility (EFF) – This facility was established in 1974 to help countries address longer-term balance of payments problems requiring fundamental economic reforms. Arrangements under the EFF are thus longer than SBAs—usually 3 years. Repayment is due within 4½–10 years from the date of disbursement.

Emergency assistance – The IMF provides emergency assistance to countries that have experienced a natural disaster or are emerging from conflict. Emergency loans are subject to the basic rate of charge, although interest subsidies are available for poor countries, subject to availability. Loans must be repaid within 3¼–5 years.

Apart from these the IMF has several concessional facilities for Low-income countries through the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF), Heavily Indebted Poor Countries (HPIC) Initiative, etc. Some of these schemes are now sought to be integrated under the normal lending windows of the IMF.

India and the IMF

Type of Assistance Availed in SDRs (mn)
Extended Fund Facility Nov, 1981 5000
Stand-by Arrangement Jan, 1991 552
Stand-by Arrangement Oct, 1991 1656

India’s share in SDRs – 1.91% (SDRs 4158 mn)

Voting Rights – 1.89 %

Current SDR Value (on 29-03-2010) – I USD = SDR 0.6606

Current SDR Interest Rate (on 29-03-2010) – 0.26%

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