INTRODUCTION: The International Monetary Fund (IMF) also called the Fund is an international financial institution established by 44 states under the Bretton woods agreement of July 1944.
The main goal was to prevent the economic mistake of the 1920s and 1930s. The recession was devastating in all forms of economic life, Bank fields, and agriculture prices fallen down, production costs and factories were closed down and millions of workers were made unemployed.
It was against the environment that 44 countries gathered at the United Nations monetary and fiscal conference at Bretton woods New Hampshire (USA) from 1 July to 22 July 1944. The IMF was created to facilitate economic and financial collaboration among its member countries in order to promote the development and balanced growth of global trade. It started working on 1st March 1947. In 2004 the IMF has 186 members.
IMF membership is open to every country that guides its own foreign affairs and is prepared to adhere to the IMF charter of rights and liabilities. Members can quit the IMF whenever they want.
IMF QUOTAS AND VOTING:
The IMF has a general account based on quotas allocated to its members. When a country joins the IMF, it is assigned a quota that governs the size of its subscription, its voting power, and its drawing rights.
In the beginning, each member was required to pay 25% of its quota in gold, and the remaining 75% of the quota was to be furnished in the country’s own currency, but it was kept in the country’s central bank.
Now the practice of keeping gold reserves with the fund was discontinued in April 1978. Now a member country is allowed to maintain the value of its currency and quota in terms of the special drawing rights (SDRs).
The United State the world largest economy contributes most of the IMF providing almost 20% of the quota. Germany, France, the UK, Saudi Arabia, and Japan are also the other largest contributors. In order to meet the financial requirement of the fund, the quotas are reviewed every five years and are raised from time to time. But quotas can only be raised by a resolution of the majority of 85% of the total voting power of the IMF members.
OBJECTIVE OF THE IMF:
According to Article 1, the following are the main purposes of IMF.
-To encourage international monetary cooperation through permanent institutions which provide the mechanism for consultation and joint efforts in international economic problems.
-To speed up the expansion and balanced growth of international trade, to donate thereby to the promotion and continuation of high levels of business and real income, and to the growth of the valuable resources of all members as main objectives of economic policy.
-To advance exchange stability, to sustain orderly exchange arrangements among member countries to prevent competitive exchange devaluation.
-To accommodate the formation of a multilateral system of payments in respect of current transactions between members and in the removal of foreign exchange restrictions, which restrict the growth in world trade.
-To lend assurance to member countries by making the fund’s resources accessible to them under sufficient safeguards. Thus providing them with the opportunity to correct the deficiency in their balance of payments without resorting to measures destructive to national or international prosperity.
ORGANIZATION AND STRUCTURE OF THE IMF:
The second amendment of the Articles of the agreement made important changes in the organization and structure of the IMF.
BOARD OF GOVERNORS:
The Board of Governors is at the top of the structure of the IMF. It is composed of one Governor and one alternative Governor appointed by each member. The alternative Governor can participate in the meetings of the Board but has the power to vote only in the absence of the Governor.
The Board of Governors deals with the entry of new members into the IMF, determination of quota, and distribution of Special Drawing Rights. The BOG meets annually in which the details of the IMF activities for the previous year are presented. Special meetings can be convened by any of the five members having 25% of the total voting rights.
EXECUTIVE BOARD:
The Executive Board is the most powerful organ of the IMF and exercises vast powers. It has a managing director, who is the chairman of the executive board and controls day-to-day matters of the IMF. The Executive Board has 21 members at present. Five Executive directors are appointed by the five members USA, UK, Germany, Japan, and France having the largest quotas.
Saudi Arabia has appointed a sixth Executive director by being the largest contributor. 15 Executive Governors are elected at intervals of two years by the remaining members according to constituencies on a roughly geographical basis. The managing director is the director of the IMF, who is elected by the Executive director and is usually an important international official. He is the non-voting chairman of the Executive Board.
COMMITTEES:
The are two committees in IMF.
INTERIM COMMITTEE:
The interim committee deals with international liquidity and world monetary arrangement. Moreover, this committee analyses the amendments of the Article of the agreement.
DEVELOPMENT COMMITTEE:
Whereas the development committee suggests those measures whereby the real resources could be transferred to the developing countries.
STAFF:
The IMF has stuff about 2600 headquarters with a managing director who is also the chairman of the Executive Board. Which appoints him. By tradition, the managing director is a European or at least a non-American. ( The President of the World Bank is traditionally a U.S national ). The international staff comes from 122 countries and comprises mainly economists, but also statisticians, researchers, scholars, and experts in public finance and taxation.
PROCESS OF DRAWING FUND:
A member country may draw an account totaling 125% of its quota to meet its balance of payment deficit problem. Usually, the first 25% of its quota is granted without any restriction. Beyond the first amount, the IMF becomes reluctant to loan and put conditionality in advance to the member before it considers for the loan.
IMF CONDITIONALITY:
In recent years the IMF started attaching conditionality to the use of the fund resources by the members to support circumstances. Conditionality is a requirement by which the IMF seeks to maintain a balance between financing and policy changes and a country that seeks monetary assistance must satisfy the IMF that she is pursuing financial policies which destined to eliminate its external payment problems.
The subject is to safeguard the revolving character of the Fund’s resources and meet the genuine needs of the country concerned. These conditions in effect require that the economy should function efficiently, the resource utilization should be optimal and there should be no underutilization of capacities.
The conditionality practices naturally varied with changing nature of the condition of the borrowing member and the nature and dimension of the problems faced by it.
IMF LENDING OPERATION:
The IMF has a variety of facilities for lending its resources to member countries. It is an important financial institution. It extends the loan to member countries who are facing financial problems i.e Balance of payment deficit structural adjustment of different sectors of the economy. It is not charged any interest on such drawings but is required to repay within a period of three to five years. The IMF lending operation is channelized through the following devise.
COMPENSATORY FINANCIAL FACILITY (CFF):
Under the CFF introduced in February 1963, the IMF provides financial assistance to members, particularly primary exporting countries experiencing BOP pressure arising from fluctuation in their export earnings. The members can draw a loan equivalent to 125% of their allotted quota.
BUFFER STOCK FACILITY:
This is a recent facility provided to the members in order to help them to overcome serious BOP difficulties. Financial aid is given for creating and maintaining Buffer stocks of essential commodities in danger of falling short.
THE EXTENDING FINANCIAL FACILITY (EFF):
It is another specialized facility, which was created in 1974 under EFF, the Fund provides credit to member countries to meet their Balance of Payment deficit for longer periods, and in amounts larger than their quotas under normal credit facilities. EFF provides credit for a period of 10 years.
THE SUPPLEMENTARY FINANCING FACILITY (SFF):
SFF was established in 1977 to provide supplementary financing under extended arrangements to member countries to meet serious BOP deficits that are long in relation to their economies and their quotas. This facility is being extended to low-income developing member counties of the IMF.
FUND UNDER STRUCTURAL ADJUSTMENT PROGRAMME (SAP):
The loans provided by the IMF under SAP are high conditions. They often asked for changes instances, cuts in government expenditure, and the abolition of subsidies of fertilizers, education, health, and public transportation. All they are leading to create a monopoly of capitalism in lower developing countries.
HIGHER INTEREST RATE:
The IMF is also objected to charging higher interest rates and imposition of strict conditions. As a country gets more and more loans, the conditions become strict and strict. In this way, the deficit in BOP will increase.
CONCLUSION:
It is clear that the IMF can play a vital role in achieving international economic stability and promoting healthy international monetary relations. But since its inception, the IMF has failed to achieve its objectives, especially in the early years of its operation.
Over the years the industrialized countries have been trying to establish their influence in the markets of lower developing countries. They pressurize the poor countries to adopt policies that are beneficial to the developed countries.
Despite its drawbacks, the IMF has performed well as an international monetary institution. It has been supplying different currencies to different countries for making adjustments in their Balance of Payments over a longer period. Both developed and developing countries have made extensive use of their resources.
What does an IMF do?
The International Monetary Fund (IMF) works to achieve continuous development and economic well-being for all of its member countries. It supports the financial policies which are important to increase productive resources, employment opportunities, and prosperity.
