Finance

Objectives of International Monetary Fund – IMF

International Monetary Fund. IMF is one of the two institutions that were established as a result of the Brettonwoods Conference in 1944; the other institution was the International Bank for Reconstruction and Development. IMF aims at promoting international monetary co-operation with a view to achieving certain mutually agreed international economic goals. It is also a lender of short-term funds to member-countries, mainly to adjust balance of payments deficits.

Objectives of International Monetary Fund

The Articles of Agreement of the IMF set out the following as the objectives of the Fund:

1. To promote international monetary co-operation through a permanent institution which provides the machinery for consultation and collaboration on international problems.

2. To facilitate the expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of high level of employment and real income and to the development of the productive resources of all members as primary objective of economic co-operation.

3. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

4. To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive to national or international prosperity.

5. In accordance with the above, to shorten the duration and the degree of disequilibrium in the international balance of payments of members.

Structure of International Monetary Fund

The central office of the IMF is in Washington. It is an autonomous body with 155 countries as members. It is affiliated to the UNO. The highest authority of the IMF is the Board of Governors at which each member-country is represented by a Governor and an alternate Governor. The Board of Governors is the policy-making body. It meets normally every year.

The administrative responsibilities and detailed functioning of the IMF are vested with a Board of Executive Directors. At present there are 22 executive directors -5 appointed by the USA, UK, Federal Republic of Germany, France and Japan, being the first five countries with largest quota: one appointed by Saudi Arabia, being the largest creditor country and the rest 15 elected by remaining 195 members of IMF. The day-to-day functioning of the IMF is the responsibility of the Managing Director, who is elected by the Board of Executives.

Member Quotas of International Monetary Fund

Quota represents the subscription by a member-country to the capital fund of the IMF. Quotas are fixed for each country taking into account such factors as the country’s national income, reserves, export variability and the ratio of exports to national income. Apart from representing the subscription of a country to the IMF, the quota also forms the basis for determining its drawing rights from the IMF, its voting power and share in the allocation of SDRs. 25% of a country’s quota is to be contributed in the form of SDRs or foreign exchange (formerly the contribution was in the form of gold) and 75% in the country’s own currency. Quotas are reviewed by the IMF at periods of not more than five years.

Use of Resources in International Monetary Fund

IMF provides temporary assistance to member-countries to tide over balance of payments deficits. When the country requires foreign exchange, it tenders its own currency to the IMF and gets the foreign exchange. This is known as drawing from the Fund. When the balance of payments position of the country improves, it should repurchase its currency from the IMF and repay the foreign exchange.

Ordinarily, a member-country should not borrow more than 25% of its quota in any twelve-month period. The total borrowing of a country can go up to a level where the IMF’s holding of the country’s currency reaches 200% of the quota. For example, if India’s quota is SDRs 1,000 million of which SDRs 750 million were contributed by her in the form of Indian rupees, the maximum amount that India can borrow from the IMF would be Rs 1,250 million so that the total holding of Indian rupees by the IMF does not exceed SDRs 2,000 million.

Exchange Rate Policy in International Monetary Fund

After the second amendment to the Articles of Agreement of IMF which came into effect on April 1, 1978 every member is free to choose its own exchange rate arrangements, except that maintenance of value in terms of gold is prohibited. After this amendment SDR has become the international reserve asset and unit of account for the IMF.

Some of the countries have pegged their currencies to SDR; some others to currencies of other countries. Members are free to adopt any system. But the IMF is required to exercise surveillance over the exchange rate policies of members and is free to express its frank opinion on the policies of the members. Each member is required to see that its foreign exchange policies:

1. Endeavour to direct its economic and financial policies towards the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;

2. Seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;

3. Avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over the other members.

India and IMF

India is a founder-member of the IMF holding sixth largest est quota. She has extensively burrowed from the IMF on many occasions, almost on a continuous basis.

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