International Monetary Fund (IMF): Establishment and Purpose

Introduction

The International Monetary Fund (IMF) is an international organization established in 1944 to promote global monetary cooperation, exchange rate stability, and balanced economic growth. The IMF also conducts economic research, monitors global economic trends, and offers technical assistance to help countries strengthen their macroeconomic policies and institutions. The International Monetary Fund (IMF) also conducts economic research, monitors global economic trends, and offers technical assistance to help countries strengthen their macroeconomic policies and institutions.

Establishment and Purpose of International Monetary Fund (IMF): 

Established in 1944 during the Bretton Woods Conference.

• Primary purpose: Promoting international monetary cooperation, exchange rate stability, balanced growth of international trade, and providing resources to help member countries in need.

Objectives of International Monetary Fund (IMF):

• Foster global monetary cooperation, 
• Secure financial stability, 
• Facilitate international trade, 
• Promote high employment and sustainable economic growth, 
• reduce poverty around the world, 
• Support macro-economic growth, 
• Provide policy advice and financing for developing countries, 
• Promote exchange rate stability and an international payment system.

Functions of International Monetary Fund (IMF):

• Financial Assistance: Provides financial assistance to member countries with balance of payments problems.
  • Aims to replenish international reserves, stabilize currencies, and strengthen conditions for economic growth.
• IMF Surveillance: Oversees the international monetary system.
  • Monitors the economic and financial policies of its 190 member countries.
  • Highlights possible risks to stability and advises on needed policy adjustments.
• Capacity Development: Provides technical assistance and training to economic institutions in member countries.
• Aids in modernizing banking systems, developing legal frameworks, improving governance, and enhancing reporting of macroeconomic and financial data.

Governance Setup of International Monetary Fund (IMF):

• Board of Governors: Comprises one governor and one alternate governor for each member country.
  • Responsible for crucial decisions, including approving quota increases, admitting new members, and amending the Articles of Agreement.
• Ministerial Committees: The International Monetary and Financial Committee (IMFC) discusses the management of the international monetary system and global economic issues.
  • The Development Committee advises on economic development in emerging markets and developing countries.
• Executive Board: 24-member board elected by the Board of Governors.
  • Conducts the daily business of the IMF, discussing all aspects of the Fund’s work.
• IMF Management: The Managing Director, appointed by the Executive Board, heads both the Executive Board and IMF staff.
• IMF Membership: Open to any state willing to comply with IMF Articles of Agreement and prescribed terms.
  • Membership is a prerequisite for joining the International Bank for Reconstruction and Development (IBRD).
• IMF Quotas: Each member contributes a quota subscription based on wealth and economic performance. 
  • Criteria: The Quota formula considers GDP, openness, economic variability, and international reserves.
• It is a weighted average of GDP (weight of 50 %)
  • Openness (30 %),
  • Economic variability (15 %),
  • International reserves (5 %).
  • The GDP of a member country is measured through a blend of GDP—based on market exchange rates (weight of 60 %) and on PPP exchange rates (40 %).
  • Special Drawing Rights (SDRs): Represent a claim to currency held by member countries.
• International Monetary Fund (IMF)’s Unit of Account-SDRs: SDRs are not a currency but the IMF’s unit of account.
  • Comprises a basket of major international currencies, including the U.S. dollar, Euro, Japanese yen, pound sterling, and the Chinese renminbi.
• International Monetary Fund (IMF)’s Role in Crisis Response: Responded to the 1973 oil crisis with the Oil Facility to aid nations affected by rising oil prices.
  • In 2008, took major initiatives to strengthen surveillance and address global economic challenges.

Special Drawing Rights (SDR)

• International Monetary Fund (IMF) Bailout: A bailout involves extending support to an entity facing the threat of bankruptcy, and in the context of the International Monetary Fund (IMF).
• • It refers to financial assistance provided to countries in crisis.
• Forms of Assistance: IMF bailouts can take various forms, including loans, cash injections, bond purchases, or stock acquisitions.
• Reasons for Bailout: Countries seek International Monetary Fund (IMF) bailouts for several reasons: 
  • Resolving macroeconomic risks, Addressing currency crises, Meeting external debt obligations, Facilitating the purchase of essential imports, and Influencing the exchange value of their currencies etc.
• Conditions for Bailout: Countries receiving IMF bailouts are expected to fulfill specific conditions, including:
  • Implementing structural reforms, such as fiscal transparency and tax reforms.
  • Undertaking reforms in state-owned enterprises.
  • Adjusting macroeconomic variables like monetary and credit aggregates.
  • Implementing reforms related to international reserves.
  • Balancing fiscal budgets and managing external borrowing.

International Monetary Fund (IMF) and India

• Founding Member: India is a founding member of the International Monetary Fund (IMF), joining in 1944.
• Contributions to International Trade: IMF’s regulations in the field of money have contributed to the expansion of international trade.
  • India has benefited from these regulations, experiencing positive outcomes.
• Balance of Payments Deficits and IMF Assistance: Post-partition, India faced serious balance of payments deficits, especially with hard currency countries.
  • IMF provided loans to address financial difficulties arising from the Indo–Pak conflicts of 1965 and 1971.
• Loans and Repayments: India purchased foreign currencies from the IMF up to March 31, 1971, and fully repaid the amount.
  • IMF loans aided India during economic challenges, including the oil price escalation from October 1973.
• Special Drawing Rights (SDRs): Since 1970, India and other member countries have been able to obtain increased assistance through the creation of Special Drawing Rights (SDRs).
• Massive Loan in 1981: In 1981, India received a significant loan of about Rs. 5,000 crores to overcome a foreign exchange crisis resulting from persistent deficits in the balance of payments.
• IMF Specialists and Independent Scrutiny: India availed the services of IMF specialists for assessing the state of the Indian economy, gaining independent scrutiny and advice.
• Oil Facility in Response to Balance of Payments Issues: In response to the balance of payments challenges due to oil price escalation since October 1973, the IMF set up a special fund to make the oil facility available.
• Emergency Loan in the Early 1990s: In the early 1990s, India secured an emergency loan of $2.2 billion from the IMF by pledging gold reserves as collateral, addressing unsatisfactory foreign exchange reserve levels.
• Structural Reforms Promise: India promised to implement structural reforms in exchange for emergency loans, including currency devaluation, fiscal deficit reduction, subsidy cuts, and various economic policy reforms.
• Liberalization Policies and Reserves Improvement: With the onset of liberalization policies, India’s foreign reserves started improving.
• Special Role in IMF Board: India occupies a special place in the Board of Directors of the IMF, playing a significant role in determining the Fund’s policies.
• No Financial Assistance Since 1993: India has not sought financial assistance from the IMF since 1993.
• Loan Repayments Completed in 2000: Repayments of all loans taken from the IMF were completed on May 31, 2000.
• Government Representation: The Finance Minister of India serves as the ex-officio Governor on the Board of Governors of the IMF. The RBI Governor is the Alternate Governor at the IMF.
• Current Quota and Voting Share: India’s current quota in the IMF is SDR 5,821.5 million, making it the 13th largest quota-holding country.
  • Based on voting share, India is ranked 17th in the list of 24 constituencies at the Executive Board, together with its constituency countries like Bangladesh, Bhutan, and Sri Lanka.

Conclusion

• The International Monetary Fund (IMF) serves as a vital global institution, providing financial assistance, policy advice, and technical expertise to member countries facing economic challenges. 
• Despite occasional controversies and criticisms, the IMF plays a crucial role in promoting stability and growth in the international financial system, helping countries navigate economic crises and pursue sustainable development. 
• Its efforts contribute to fostering economic cooperation and resilience across the globe.