1International Monetary Fund

Macro Economics Assignment

INTERNATIONAL MONETARY FUND

Submitted to:
Mr. Murganantham
MBA, M.Phil, UGC-NET PhD
Lecturer- DOMS, NIT

Submitted by:
Rajiv Kumar
Roll No. :215109077
Ist year MBA

NATIONAL INSTITUTE OF TECHNOLOGY

TIRUCHIRAPPALLI
2International Monetary Fund

IMF

Introduction

The International Monetary Fund (IMF) is an organization of 186 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.
The establishment of an International Monetary Fund was the outcome of a conference held
at Bretton Woods, New Hampshire, in the summer of 1944. The main purpose for which the
I.M.F was set up were to provide exchange stability, temporary assistance to countries falling
short of foreign exchange and international sponsoring of measures for curing fundamental
causes of disequilibrium in balance of payments. The I.M.F. is a pool of central bank reserves
and national currencies which are available to its members under certain conditions. It can be
regarded as an extension of the central bank reserves of the member-countries.

As the Second World War ends, the job of rebuilding national economies begins.
The IMF is charged with overseeing the international monetary system to ensure exchange
rate stability and encouraging members to eliminate exchange restrictions that hinder trade.
IMF emerged from the ashes of the Second World War as one of the corner stone’s of a
strong economic and financial global economic system, based on cooperation, solidarity, the
"rule-of-law" in international economic relations, and instruments to help countries in
financial distress.

Objective:

1) To promote international monetary co-operation through a permanent institution.

2) To facilitate the expansion and balanced growth of international trade, and to
contribute thereby to the promotion and maintenance of high levels of employment of
the member-countries.
3) To promote exchange stability, to maintain orderly exchange arrangements among
members, and to avoid competitive depreciation.
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4) To assist in the establishment of a multilateral system of payments in a respect of

current transaction between members and in the elimination of foreign exchange
restrictions.
5) To give confidence to members by making the Fund’s resources available to them
under adequate safeguard, thus providing them with opportunity to correct
maladjustments in their balance of payments without resorting to measures
destructive of national or international prosperity.
6) To shorten the duration and lessen the degree of disequilibrium in the international
balance of payments of members.

The objective was to help members achieve high living standards, and sustainable economic
growth and development, while eschewing the beggar-thy-neighbour policies that had
contributed to the Great Depression.

History:

During the Great Depression of the 1930s, countries attempted to shore up their failing
economies by sharply raising barriers to foreign trade, devaluing their currencies to compete
against each other for export markets, and curtailing their citizens' freedom to hold foreign
exchange. These attempts proved to be self-defeating. World trade declined sharply, and
employment and living standards plummeted in many countries.

Reasons for Founding the IMF

• Eliminate any disastrous repetitions of the Great Depression.

• Facilitate global financial stability by stabilizing prevailing exchange rates.

• Reduce poverty so that economic growth is triggered.

• Increase international trade and employment.

The IMF was conceived in July 1944, when representatives of 45 countries meeting in the
town of Bretton Woods, New Hampshire, in the north-eastern United States, agreed on a
framework for international economic cooperation, to be established after the Second World
War. They believed that such a framework was necessary to avoid a repetition of the
disastrous economic policies that had contributed to the Great Depression.
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The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates
(the value of their currencies in terms of the U.S. dollar and, in the case of the United States,
the value of the dollar in terms of gold) pegged at rates that could be adjusted only to correct
a "fundamental disequilibrium" in the balance of payments, and only with the IMF's
agreement. This par value system—also known as the Bretton Woods system—prevailed
until 1971, when the U.S. government suspended the convertibility of the dollar (and dollar
reserves held by other governments) into gold. Since the collapse of the Bretton Woods
system, IMF members have been free to choose any form of exchange arrangement they wish
(except pegging their currency to gold): allowing the currency to float freely, pegging it to
another currency or a basket of currencies, adopting the currency of another country,
participating in a currency bloc, or forming part of a monetary union. The IMF responded to
the challenges created by the oil price shocks of the 1970s by adapting its lending
instruments. From the mid-1970s, the IMF sought to respond to the balance of payment
difficulties confronting many of the world's poorest countries by providing concessional
financing through what was known as the Trust Fund. In March 1986, the IMF created a new
concessional loan program called the Structural Adjustment Facility. The SAF was succeeded
by the Enhanced Structural Adjustment Facility in December 1987. The oil shocks of the
1970s, which forced many oil-importing countries to borrow from commercial banks, and the
interest rate increases in industrial countries trying to control inflation led to an international
debt crisis.

During the 1970s, Western commercial banks lent billions of "recycled" petrodollars, getting
deposits from oil exporters and lending those resources to oil-importing and developing
countries, usually at variable, or floating, interest rates. So when interest rates began to soar
in 1979, the floating rates on developing countries' loans also shot up. Higher interest
payments are estimated to have cost the non-oil-producing developing countries at least $22
billion during 1978–81. At the same time, the price of commodities from developing
countries slumped because of the recession brought about by monetary policies. Many times,
the response by developing countries to those shocks included expansionary fiscal policies
and overvalued exchange rates, sustained by further massive borrowings.

When a crisis broke out in Mexico in 1982, the IMF coordinated the global response, even
engaging the commercial banks. It realized that nobody would benefit if country after country
failed to repay its debts. The IMF's initiatives calmed the initial panic and defused its
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explosive potential. But a long road of painful reform in the debtor countries, and additional
cooperative global measures, would be necessary to eliminate the problem.

The IMF played a central role in helping the countries of the former Soviet bloc transition
from central planning to market-driven economies. This kind of economic transformation had
never before been attempted, and sometimes the process was less than smooth. For most of
the 1990s, these countries worked closely with the IMF, benefiting from its policy advice,
technical assistance, and financial support. During the 1990s, the IMF worked closely with
the World Bank to alleviate the debt burdens of poor countries.

In 1997, a wave of financial crises swept over East Asia, from Thailand to Indonesia to Korea
and beyond. Almost every affected country asked the IMF for both financial assistance and
for help in reforming economic policies. Conflicts arose on how best to cope with the crisis,
and the IMF came under criticism that was more intense and widespread than at any other
time in its history.

Functions of I.M.F:
The work of the IMF is of three main types. Surveillance involves the monitoring of
economic and financial developments, and the provision of policy advice, aimed especially at
crisis-prevention. The IMF also lends to countries with balance of payments difficulties, to
provide temporary financing and to support policies aimed at correcting the underlying
problems; loans to low-income countries are also aimed especially at poverty reduction.
Third, the IMF provides countries with technical assistance and training in its areas of
expertise. Supporting all three of these activities is IMF work in economic research and
statistics.

In recent years, as part of its efforts to strengthen the international financial system, and to
enhance its effectiveness at preventing and resolving crises, the IMF has applied both its
surveillance and technical assistance work to the development of standards and codes of good
practice in its areas of responsibility, and to the strengthening of financial sectors.

The IMF also plays an important role in the fight against money-laundering and terrorism.

With its near-global membership of 186 countries, the IMF is uniquely placed to help
member governments take advantage of the opportunities—and manage the challenges—
posed by globalization and economic development more generally. The IMF tracks global
economic trends and performance, alerts its member countries when it sees problems on the
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horizon, provides a forum for policy dialogue, and passes on know-how to governments on
how to tackle economic difficulties.

The IMF provides policy advice and financing to members in economic difficulties and also
works with developing nations to help them achieve macroeconomic stability and reduce
poverty. Marked by massive movements of capital and abrupt shifts in comparative
advantage, globalization affects countries' policy choices in many areas, including labour,
trade, and tax policies. Helping a country, benefit from globalization while avoiding potential
downsides is an important task for the IMF. The global economic crisis has highlighted just
how interconnected countries have become in today’s world economy.

Key IMF activities

The IMF supports its membership by providing

• policy advice to governments and central banks based on analysis of economic trends
and cross-country experiences;

• research, statistics, forecasts, and analysis based on tracking of global, regional, and
individual economies and markets;

• loans to help countries overcome economic difficulties;

• concessional loans to help fight poverty in developing countries; and

• Technical assistance and training to help countries improve the management of their
economies.

Management
According to the IMF's Articles of Agreement, the Managing Director "shall be chief of the
operating staff of the Fund and shall conduct, under the direction of the Executive Board, the
ordinary business of the Fund. Subject to the general control of the Executive Board, he shall
be responsible for the organization, appointment, and dismissal of the staff of the Fund." The
IMF's Executive Board is responsible for selecting the Managing Director. Any Executive
Director may submit a nomination for the position, consistent with past practice. When more
than one candidate is nominated, as has been the case in recent years, the Executive Board
aims to reach a decision by consensus.

The current management team

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Dominique Strauss-Kahn, a French national, became the IMF's tenth Managing Director in
November 2007. Previously, he was the Finance Minister of France during 1997-99.
John Lipsky, an American, has been First Deputy Managing Director since September 2006.
Before coming to the IMF, he worked for JPMorgan Investment Bank.
Murilo Portugal, from Brazil, became Deputy Managing Director of the IMF in December
2006. From 2005 to 2006, he was Brazil's Deputy Minister of Finance.
Naoyuki Shinohara, a Japanese national, joined the IMF as Deputy Managing Director in
March 2010. Previously, he was Japan's Vice-Minister of Finance for International Affairs.
Membership:
The IMF currently has a near-global membership of 186 countries. To become a member, a
country must apply and then be accepted by a majority of the existing members. In June
2009, the former Yugoslav republic of Kosovo joined the IMF, becoming the institution's
186th member. Upon joining, each member of the IMF is assigned a quota, based broadly on
its relative size in the world economy. The IMF's membership agreed in May 2008 on a
rebalancing of its quota system to reflect the changing global economic realities, especially
the increased weight of major emerging markets in the global economy. For more on the
quota and voice reform, please go to the section on Country Representation in the
Governance section).A member's quota delineates basic aspects of its financial and
organizational relationship with the IMF, including:

Subscription A member's quota subscription determines the maximum amount of financial

resources the member is obliged to provide to the IMF. A member must pay its subscription
in full upon joining the IMF: up to 25 percent must be paid in the IMF's own currency, called
Special Drawing Rights (SDRs) or widely accepted currencies (such as the dollar, the euro,
the yen, or pound sterling), while the rest is paid in the member's own currency.

Voting power The quota largely determines a member's voting power in IMF decisions. Each
IMF member has 250 basic votes plus one additional vote for each SDR 100,000 of quota.
Accordingly, the United States has 371,743 votes (16.77 percent of the total), and Palau has
281 votes (0.01 percent of the total). The newly agreed quota and voice reform will result in a
significant shift in the representation of dynamic economies, many of which are emerging
market countries, through a quota increase for 54 member countries. A tripling of the number
of basic votes is also envisaged as a means to give poorer countries a greater say in running
the institution.

Access to financing The amount of financing a member can obtain from the IMF (its access
limit) is based on its quota. Under Stand-By and Extended Arrangements, which are types of
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loans, a member can borrow up to 200 percent of its quota annually and 600 percent
cumulatively. However, access may be higher in exceptional circumstances.

SDR allocations Allocations of SDRs, the IMF's unit of account, is used as an international
reserve asset. A member's share of general SDR allocations is established in proportion to its
quota. The most recent general allocation of SDRs took place in 2009.

Corporate Governance
The IMF's mandate and governance have evolved along with changes in the global economy,
allowing the organization to retain a central role within the international financial
architecture. The diagram below provides a stylized view of the IMF's current governance
structure.

Board of Governors:

The Board of Governors is the highest decision-making body of the IMF. It consists of one
governor and one alternate governor for each member country. The governor is appointed by
the member country and is usually the minister of finance or the head of the central bank.

While the Board of Governors has delegated most of its powers to the IMF's Executive
Board, it retains the right to approve quota increases, special drawing right (SDR) allocations,
the admittance of new members, compulsory withdrawal of members, and amendments to the
Articles of Agreement and By-Laws.
9International Monetary Fund

The Boards of Governors of the IMF and the World Bank Group normally meet once a year,
during the IMF-World Bank Spring and Annual Meetings, to discuss the work of their
respective institutions. The Meetings, which take place in September or October, have
customarily been held in Washington for two consecutive years and in another member
country in the third year.

The Annual Meetings usually include two days of plenary sessions, during which Governors
consult with one another and present their countries' views on current issues in international
economics and finance. During the Meetings, the Boards of Governors also make decisions
on how current international monetary issues should be addressed and approve corresponding
resolutions.

Ministerial Committees:

The IMF Board of Governors is advised by two ministerial committees, the International
Monetary and Financial Committee (IMFC) and the Development Committee.

The IMFC has 24 members, drawn from the pool of 186 governors. The IMFC meets
twice a year, during the Spring and Annual Meetings. The Committee discusses matters of
common concern affecting the global economy and also advises the IMF on the direction its
work. At the end of the Meetings, the Committee issues a joint communiqué summarizing its
views. These communiqués provide guidance for the IMF's work program during the six
months leading up to the next Spring or Annual Meetings. There is no formal voting at the
IMFC, which operates by consensus.

The Development Committee is a joint committee, tasked with advising the Boards of
Governors of the IMF and the World Bank on issues related to economic development in
emerging and developing countries. The committee has 24 members (usually ministers of
finance or development). It represents the full membership of the IMF and the World Bank
and mainly serves as a forum for building intergovernmental consensus on critical
development issues.

The Executive Board:

The IMF's 24-member Executive Board takes care of the daily business of the IMF. The
Board discusses everything from the IMF staff's annual health checks of member countries'
economies to economic policy issues relevant to the global economy. The board normally
makes decisions based on consensus but sometimes formal votes are taken. At the end of
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most formal discussions, the Board issues what is known as a summing up, which
summarizes its views. Informal discussions may be held to discuss complex policy issues still
at a preliminary stage.

Evaluating the IMF's operations:

In 2001, the IMF's Executive Board established the Independent Evaluation Office (IEO),
which reviews selected IMF operations and presents its findings to the Board and to IMF
management. The IEO operates independently of management and at arm's length from the
Board, although the Board appoints the IEO's director. The IEO establishes its own work
program, selecting operations for review based on suggestions from stakeholders inside and
outside the IMF. Its recommendations strongly influence IMF policy and activity. In recent
years, it has reviewed the IMF's role in Argentina in 1991–2001, the Poverty Reduction
Strategy Paper process, IMF technical assistance, and IMF global surveillance, among other
things.

Governance Reform:

Important progress was made in the reform of the Fund's governance in 2006-08. However,
enhancing the Fund's legitimacy and effectiveness must also deal with the question of
whether the significant changes since the establishment of the Fund require reform of the
institutional framework through which members' voting power is actually exercised. Among
other things, this requires careful consideration of the respective roles and responsibilities of
the Board of Governors, the IMFC, the Executive Board, and IMF management.

The IMF's main business

The IMF's job is to promote a stable international monetary system, in which member
countries can achieve high rates of employment, low inflation, and sustainable economic
growth. The IMF does this by

• Overseeing the international monetary system by regularly reviewing global and

regional economic and financial developments.

• Providing economic monitoring and policy advice to its 186 member countries in the
areas most relevant to domestic and external stability, that is, a situation where
disruptive exchange rate adjustments are unlikely. The IMF's focus is therefore on
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macroeconomic and financial policies as well as on developments in exchange rates,

the balance of payments, the real economy, and the financial sector.

• Analyzing the impact of countries' policies on others; applying lessons from cross-
country experience to each country's unique situation; and providing a forum for
international cooperation on global economic and financial problems.

The IMF's main goal is to ensure the stability of the international monetary and financial
system. It helps resolve crises, and works with its member countries to promote growth and
alleviate poverty. It has three main tools at its disposal to carry out its mandate: surveillance,
technical assistance and training, and lending. These functions are underpinned by the IMF's
research and statistics.

Surveillance

The IMF promotes economic stability and global growth by encouraging countries to adopt
sound economic and financial policies. To do this, it regularly monitors global, regional, and
national economic developments. It also seeks to assess the impact of the policies of
individual countries on other economies.

This process of monitoring and discussing countries’ economic and financial policies is
known as bilateral surveillance. On a regular basis—usually once each year—the IMF
conducts in depth appraisals of each member country's economic situation. It discusses with
the country's authorities the policies that are most conducive to a stable and prosperous
economy. Consistent with the decision on bilateral surveillance adopted in June 2007, the
main focus of the discussions is whether there are risks to the economy’s domestic and
external stability that would argue for adjustments in economic or financial policies. Member
countries may agree to publish the IMF's assessment of their economies, with the vast
majority of countries opting to do so.

The IMF also has the option to bring together, on an as-needed basis, groups of systemically
relevant economies to address issues of broad importance to the global economy. These
meetings are called multilateral consultations. A consultation on how to reduce global
imbalances took place in 2006-07.

The IMF's work on individual countries informs its work on regional economies and the
global economy. These views, along with timely analysis of important economic and
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financial issues, are published twice a year in the World Economic Outlook, various Regional
Economic Outlook reports, and the Global Financial Stability Report.

The IMF works with the World Bank to promote resilient financial systems around the world
through the joint Financial Sector Assessment Program (FSAP). Supported by experts from a
range of national agencies and standard-setting bodies, IMF and World Bank staffs assess the
stability of a country’s financial system by identifying its strengths and vulnerabilities,
determine how key sources of risks are being managed, ascertain the sector's developmental
needs, and help prioritize policy responses.

Technical assistance and training

IMF offers technical assistance and training to help member countries strengthen their
capacity to design and implement effective policies. Technical assistance is offered in several
areas, including fiscal policy, monetary and exchange rate policies, banking and financial
system supervision and regulation, and statistics.

The IMF provides technical assistance and training mainly in four areas:

• Monetary and financial policies (monetary policy instruments, banking system

supervision and restructuring, foreign management and operations, clearing
settlement systems for payments, and structural development of central banks)

• Fiscal policy and management (tax and customs policies and administration, budget
formulation, expenditure management, design of social safety nets, and management
of domestic and foreign debt)

• Compilation, management, dissemination, and improvement of statistical data

• Economic and financial legislation.

Lending

In the event that member countries experience difficulties financing their balance of
payments, the IMF is also a fund that can be tapped to facilitate recovery. A policy program
supported by financing is designed by the national authorities in close cooperation with the
IMF. Continued financial support is conditional on the effective implementation of this
program.
13International Monetary Fund

The IMF also provides low-income countries with loans at a concessional interest rate
through the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks
Facility (ESF).

Research and data

Supporting all three of these activities is the IMF's economic and financial research and
statistics. In recent years, the IMF has applied both its surveillance and technical assistance
work to the development of standards and codes of good practice in its areas of
responsibility, and to the strengthening of financial sectors. These are part of the IMF's
continuing efforts to strengthen the international financial system and improve its ability to
prevent and resolve crises.

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 103.4 million
ounces (3,217 metric tons) of gold, worth about $83 billion as of end-August 2009, making it
the third-largest official holder of gold in the world. The IMF's Articles of Agreement strictly
limit the use of the gold. But in some circumstances, the IMF may sell gold or accept gold as
payment from member countries.

Gold played a central role in the international economic system after World War II. 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. This "par value system" ceased to work after 1971.

Today, the IMF is considering selling some of the gold it has acquired over time as its
finances have become unsustainable following a large decline in outstanding credit in recent
years. A limited sale of gold was recommended by the Committee of Eminent Persons
chaired by Andrew Crockett (the Crockett Committee) as a means to develop a new income
model that relies on more diverse sources of revenue (for more on this topic, go to the section
on income model reform). The proceeds from gold sales would not have to be returned to
member countries. Instead, profits from any gold sales should be retained and could be
invested in an income-generating fund to supplement IMF income. A proposal made by the
Group of Twenty industrialized and emerging market economies calls for using additional
14International Monetary Fund

resources from agreed sales of IMF gold to provide $6 billion in additional financing for poor
countries, in a manner consistent with the IMF's new income model, over the next 2 to 3
years. The selling of gold by the IMF is rare as it requires an Executive Board decision with
an 85 percent majority of the total voting power. The last time gold was sold by the
institution was through off-market transactions completed in April 2001, with 12.9 million
ounces traded. This transaction was approved by the membership as a means to finance the
IMF's participation in the Heavily Indebted Poor Countries Initiative and the continuation of
the Poverty Reduction and Growth Facility.

The process of IMF lending

Upon request by a member country, an IMF loan is usually provided under an “arrangement,”
which may, when appropriate, stipulate specific policies and measures a country has agreed
to implement to resolve its balance of payments problem. The economic program underlying
an arrangement is formulated by the country in consultation with the IMF and is presented to
the Fund’s Executive Board in a “Letter of Intent.” Once an arrangement is approved by the
Board, the loan is usually released in phased instalments as the program is implemented.

IMF Facilities

Over the years, the IMF has developed various loan instruments, or “facilities,” that are
tailored to address the specific circumstances of its diverse membership. Low-income
countries may borrow at a concessional interest rate through the Poverty Reduction and
Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF). These facilities are
expected to be replaced by a new set of instruments when donor countries have given their
final consent to a wide-ranging reform of the Fund’s concessional facilities and financing
framework. No concessional loans are provided mainly through Stand-By Arrangements
(SBA), the Flexible Credit Line (FCL), and the Extended Fund Facility (which is useful
primarily for longer-term needs). The IMF also provides emergency assistance to support
recovery from natural disasters and conflicts, in some cases at concessional interest rates.
Except for the PRGF and the ESF, all facilities are subject to the IMF’s market-related
interest rate, known as the “rate of charge,” and large loans (above certain limits) carry a
surcharge. The rate of charge is based on the SDR interest rate, which is revised weekly to
take account of changes in short-term interest rates in major international money markets.
The amount that a country can borrow from the Fund—its “access limit ”—varies depending
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on the type of loan, but is typically a multiple of the country’s IMF quota. This limit may be
exceeded in exceptional circumstances. The Flexible Credit Line has no pre-set cap on
access.

Poverty Reduction and Growth Facility (PRGF) and Exogenous Shocks Facility (ESF).
PRGF-supported programs for low-income countries are underpinned by comprehensive
country-owned strategies, delineated in their Poverty Reduction Strategy Papers (PRSPs).
The interest rate levied on PRGF and ESF loans is only 0.5 percent, and loans are to be
repaid over a period of 5½–10 years. The ESF, which was modified in September 2008 to
make it more flexible and increase access levels, aims to meet the needs of low-income
member countries for rapid and adequately-sized shock assistance with streamlined
conditionality requirements.

Stand-By Arrangements (SBA). The bulk of Fund assistance to middle-income countries is

provided through SBAs. The SBA is designed to help countries address short-term balance of
payments problems. Program targets are designed to address these problems and Fund
disbursements are made conditional on achieving these targets (‘conditionality’). The length
of a SBA is typically 12–24 months, and repayment is due within 3¼-5 years of
disbursement. SBAs may be provided on a precautionary basis—where countries choose not
to draw upon approved amounts but retain the option to do so if conditions deteriorate—both
within the normal access limits and in cases of exceptional access. The SBA provides for
flexibility with respect to phasing, with front-loaded access where appropriate.

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. FCL arrangements are approved for countries meeting pre-set
qualification criteria. 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. Access is determined on a case-by-case
basis, is not subject to the normal access limits, and is available in a single up-front
disbursement rather than phased. Disbursements under the FCL are not conditioned on
implementation of specific policy understandings as is the case under the SBA. There is
flexibility to draw on the credit line at the time it is approved, or it may be treated as
precautionary.

Extended Fund Facility (EFF). This facility was established in 1974 to help countries
address longer-term balance of payments problems requiring fundamental economic reforms.
16International Monetary Fund

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 PRGF-eligible countries,
subject to availability. Loans must be repaid within 3¼–5 years.

Collaboration with Others:

The IMF collaborates with the World Bank, the regional development banks, the World
Trade Organization (WTO), UN agencies, and other international bodies. While all of these
organizations are involved in global economic issues, each has its own unique areas of
responsibility and specialization. The IMF also interacts with think tanks, civil society, and
the media on a daily basis.

Working with the World Bank

The IMF and the World Bank are different, but complement each other's work. Whereas the
IMF's focus is chiefly on macroeconomic and financial sector issues, the World Bank is
concerned mainly with longer-term development and poverty reduction. Its loans finance
infrastructure projects, the reform of particular sectors of the economy, and broader structural
reforms. Countries must join the IMF to be eligible for World Bank membership.

Given the World Bank's focus on antipoverty issues, the IMF collaborates closely with the
Bank in the area of poverty reduction and helping countries draw up poverty reduction
strategies. Other areas of collaboration include assessments of member countries' financial
sectors, development of standards and codes, and improvement of the quality, availability,
and coverage of data on external debt.

Cooperating with other international organizations

The IMF is a member of the Switzerland-based Financial Stability Board, which brings
together government officials responsible for financial stability in the major international
financial centres, international regulatory and supervisory bodies, committees of central bank
experts, and international financial institutions. It also works with standard-setting bodies
such as the Basel Committee on Banking Supervision and the International Association of
Insurance Supervisors.
17International Monetary Fund

The IMF collaborates with the World Trade Organization (WTO) both formally and
informally. The IMF has observer status at WTO meetings and IMF staff contributes to the
work of the WTO Working Group on Trade, Debt, and Finance. And the IMF is involved in
the WTO-led Integrated Framework for Trade-Related Technical Assistance to Least
Developed Countries, whose other members are the International Trade Commission,
UNCTAD, UNDP, and the World Bank.

The IMF has a Special Representative to the United Nations, located at the UN Headquarters
in New York. The Special Representative facilitates the liaison between the IMF and the UN
system. The general arrangements for collaboration and consultations between the IMF and
the UN include areas of mutual interest, such as cooperation between the statistical services
of the two organizations, and reciprocal attendance and participation at events.

SDR
The Special Drawing Right (SDR) is an international reserve asset, created by the IMF in
1969 to supplement the existing official reserves of member countries.The SDR is neither a
currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable
currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for
their SDRs in two ways: first, through the arrangement of voluntary exchanges between
members; and second, by the IMF designating members with strong external positions to
purchase SDRs from members with weak external positions. In addition to its role as a
supplementary reserve asset, the SDR serves as the unit of account of the IMF and some
other international organizations.

SDR’s value

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 U.S. dollar-value of the SDR is posted
daily on the IMF’s website. The basket composition is reviewed every five years by the
Executive Board to ensure that it reflects the relative importance of currencies in the world’s
trading and financial systems.The SDR interest rate provides the basis for calculating the
interest charged to members on regular (no concessional) IMF loans, the interest paid and
charged to members on their SDR holdings, and the interest paid to members on a portion of
their quota subscriptions. The SDR interest rate is determined weekly and is based on a
18International Monetary Fund

weighted average of representative interest rates on short-term debt in the money markets of
the SDR basket currencies.

SDR allocations to IMF members

Under its Articles of Agreement, the IMF may allocate SDRs to members in proportion to
their IMF quotas, providing each member with a costless asset. However, 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.

There are two kinds of allocations:

General allocations of SDRs. General allocations have to be based on a long-term global

need to supplement existing reserve assets. 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.

Special allocations of SDRs. A special one-time allocation of SDRs through the Fourth
Amendment of the Articles of Agreement was implemented 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.

Achievements:
1. The IMF has provided an excellent forum for the discussion and solution of the
economic, fiscal and financial problems having an international aspect.

2. It has promoted the expansion of international trade in a variety of ways to the mutual
benefit of the member countries.

3. It has promoted exchange stability while at the same providing for an orderly
adjustment of exchange rates.

4. It has simplified to some extent the multiple exchange system.

19International Monetary Fund

5. The Fund has been instrumental in promoting steady progress towards the
establishment of a multilateral system of payments in respect of current transaction.

6. It has liberalised the use of its resources by members in a number of ways.

7. By promising economic stability of the member countries, it has accelerated the pace
of economic development of the under-developed countries.

8. The Fund has shown great interest in the economic growth of less-developed
countries.

Shortcomings:
1. The Fund was unable to tackle the immediate post-war economic problems affecting
its members.
2. The insistence on devaluation in some cases as a cure of disequilibrium in balance of
payments was not well-advised.
3. The Fund followed as passive and weakened policy in the fixation of exchange rates
both initially and subsequently.
4. In spite of persistent shortage of dollars, it did not declare it as a ‘scarce currency’ and
take steps to ensure its ready availability.
5. It is said to have granted undue credit to certain countries without making sure of their
credit-worthiness.
6. The Fund has been charged as being partial to the developed countries and not
helping adequately the developing countries.
7. The domination of America administration over the Fund’s operations has laid it open
to severe criticism by other member countries.

Some News Related to IMF

Growth to remerge next year
The latest forecast by the IMF in its World Economic Outlook shows the global economy
contracting in 2009 by 1.3 percent. While the rate of contraction should moderate from the
second quarter of 2009 onward, output per capita is projected to decline in countries
representing three-quarters of the global economy. Growth is projected to remerge in 2010,
but at 1.9 percent it would be sluggish relative to past recoveries.
U.S. action key to implementing IMF reforms
20International Monetary Fund

IMF Managing Director Dominique Strauss-Kahn welcomed the approval by the U.S.
Congress. “This is a significant step forward that will help the IMF in its efforts to respond to
the global financial crisis and also to strengthen the governance and operations of the
institution. The decision demonstrates the strong commitment of the United States to a well-
governed and well-resourced IMF and, more broadly, to a multilateral approach to resolving
global economic and financial challenges,” he said in a statement.
“It represents important progress in implementing the proposals put forward by the G-20
leaders, and the IMF looks forward to continue working with its membership to fulfill its
mandate and to assist countries expeditiously and effectively in their efforts to weather the
global financial crisis.”

IMF to call for tax on ‘excessive’ banks

The International Monetary Fund (IMF) is on the brink of introducing a new banking tax for
financial institutions deemed to be making an ‘excessive’ profit, a newspaper report has
claimed.

According to the UK’s Daily Telegraph, the global regulator is expected to unveil a tax on
banks which have made more than a certain amount of profit. It is expected that the new
charge would be introduced alongside an Obama administration-approved balance sheet tax.

Michael Devereux, director of the Oxford University Centre for Business Taxation, told the
newspaper: "Although this is effectively a tax on banks' cash flow, if I were the IMF, I would
present it as an excess profits tax - additional to everything else and particular to banking
because that is whom we would like to tax. "Unlike a balance sheet levy, it is not designed to
change behaviour and stop them from doing silly things. It is a way of collecting money - the
most efficient way we can do it."

THE INTERNATIONAL Monetary Fund has credited the Philippines for having a resilient
banking sector—a key factor that helped spur growth of the country’s economy even at the
height of last year’s global financial turmoil.
Banks, which account for two-thirds of all financial entities in the country, helped strengthen
the entire financial system, according to the IMF.
Still, the multilateral institution said non-bank financial institutions in the country are not as
strong as banks and should adopt key reforms for development. It added that capital markets
and the insurance sector in the Philippines are lagging behind those of other countries as far
as market reach and development are concerned.
IMF said stability of the country’s banking sector—led by universal and commercial banks—
may be due to the reforms adopted following the Asian financial crisis of the late 1990s.
These include adoption of prudent lending rules and capitalization requirements. country’s
capital markets, the IMF said staff from the Securities and Exchange Commission should
begin regular on-site visits of mutual funds and other SEC-registered entities to have a better
grasp of their operations and protect the public from fraudulent companies.
The IMF also said the SEC, which had been badly criticized due to scams by investments
companies operating under the regulator’s nose, should be given more resources to be able to
perform its duties and responsibilities better.
21International Monetary Fund

Also, the IMF said the Insurance Commission should rationalize the capitalization
requirements for insurance companies in such a way that differentiation between local and
foreign-owned companies would be eliminated.
The IMF also advised the Insurance Commission to review the regulation on investments by
insurance companies to allow them to engage in a wider range of instruments. The
commission should also see to its capitalization requirements, which should be adjusted to
take into account more risks involved in their operations.

IMF team in Greece to discuss finance crisis

The IMF's arrival comes a day after a marked escalation of concerns about the situation in the
financial markets. The IMF said its team was in Greece to give advice on improving the
management of the government's finances. Euro zone nations have agreed that if Greece
needs aid, it should come partly from them and partly from the IMF. The chances that a
rescue might be needed increased on Tuesday with a sharp spike in the interest rate on Greek
government debt. The rate for 10-year borrowing went to more than 7% at one point, a sign
that markets have become more worried that Greece might default.
IMF sees big role for India, China in global revival
The International Monetary Fund has said India and China are playing a significant role in
the revival of the global economy. “When you have two relatively large economies growing
at 7 and 10 per cent, respectively, India and China, they are contributing quite a lot to global
growth,” the IMF Deputy Director, Asia and Pacific Department, Ms Kalpana Kochhar said
during a telecom conference here.
“Our forecast for global growth for next year is close to 4 per cent. I think it’s 3.9 per cent, of
which advanced countries are only contributing less than two per cent. So the rest of it is in
fact coming from emerging markets, and from within emerging markets, a large part from
China and India,” she said.
Boosting the Fund’s resources’
A substantial increase in the IMF’s resources is required to give full confidence to countries
that the Fund will have sufficient money available should they need to borrow. Japan has
already provided the IMF with an additional US$100 billion to bolster the Fund’s lendable
resources available to address the current crisis to about US$350 billion, and the European
Union has committed €75 billion. Efforts are under way to further increase IMF resources in
the run-up to the April 2 London summit of the G-20, and to at least double concessional
resources for low-income countries
Conclusion
Strengthening the monitoring of global, regional, and country economies The IMF has
taken several steps to improve economic and financial surveillance, which is its framework
for providing advice to member countries on macroeconomic policies . It is emphasizing
research into the links between the financial sector and the real economy and the sharing of
cross-country experiences. nd it is improving its ability to warn member countries of risks
and vulnerabilities in their economies.
22International Monetary Fund

Helping resolve global economic imbalances The IMF's analysis of global economic
developments, contained in its World Economic Outlook , provide finance ministers and
central bank governors with a common framework for discussing the global economy.

Analyzing capital market developments The IMF is devoting more resources to the
analysis of global financial markets and their linkages with macroeconomic policy. Twice a
year, it publishes the Global Financial Stability Report, which provides up-to-date analysis of
developments in global financial markets.

Assessing financial sector vulnerabilities Resilient, well-regulated financial systems are

essential for macroeconomic stability in a world of ever-growing capital flows. The IMF and
the World Bank jointly run the Financial Sector Assessment Program, aimed at alerting
countries to vulnerabilities and risks in their financial sectors.

Working to cut poverty: At present, more than a billion people are living on less than $1 a
day, and more than three-quarters of a billion people are malnourished. The IMF's role in
low-income countries is changing as these countries grow and mature. But its central goal
remains the same: to help promote economic stability and growth, laying the ground work for
deep and lasting poverty reduction. Its current main priority is to help low- and middle-
income countries cope with the adverse effects of the global economic crisis. To that effect, it
is stepping up lending to low-income countries to combat the impact of the global recession.

Improving IMF governance: In May 2008, the IMF's membership approved a two-year
package of reforms to improve representation of members at the Fund. For the IMF to be
fully effective in its role, it must be perceived as representing all countries in a fair manner.
With that in mind, governance reform is being accelerated to ensure a decision-making
structure that reflects current global realities. The IMF is also becoming leaner and more
efficient. It is trimming expenditures and reorganizing the way it earns revenue to pay for its
operations (See Governance).
Greater accountability and transparency. The IMF publishes almost all of its annual
economic health checks of member countries, updates about its lending programs, and a
wealth of other information on its website. The IMF's performance is assessed on a regular
basis by an Independent Evaluation Office
23International Monetary Fund

Reference:

1. www.imf.org
2. Modern Economic Theory- K.K.Dewett (S. Chand)
3. BBC news website
4. Business World magazine :March Edition
5. Thehindubusinessline.com
6. Finsys update
7. INQUIRER.net