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The current relationship between

IMF and India


IMF and India
The relationship between the IMF
and India has grown strong over
the years. In fact, the country has
turned into a creditor to the IMF
and has stopped taking loans
from it.

The World Bank


Established in 1944
The World Bank is the world's largest source
of development assistance.
It provides nearly $16 billion in loans
annually to its client countries for social
development, institution-building,
environmental protection, private business
development, stable macroeconomic
environment, and poverty reduction.
The Washington, D.C.-based Bank is owned
by its 185 member countries, and has 67
country offices around the world.

Headed by Robert.B.Zoellick who is


the president.
World Bank comprises two institutions:
-International Bank For Reconstruction
and Development (IBRD)
-International Development
Association (IDA)
Issued its first loan of US$250 million
to France for post-war reconstruction.
The bank obtains its funding through
the IBRD’s sale of AAA-rated bonds in
world financial markets

Issues two types of loans:


Investment loans- support for
economic and social development
projects
Development policy loans- support
policy and institutional reforms
Grants- given by IDA.
Other services include analytical,
advisory and educational services.
 Current focus is onMillennium
Development Goals(MDGs).

World Bank cont.


World Bank cont.
Poverty Reduction strategies
include collaboration with poor
people’s organizations such as Slum
Dwellers International and obtaining
aid through IDA.
World Bank is temporarily managing
Clean Technology Fundwhich
focuses on developing renewable
energy sources.
World Bank Institute looks after
training of staff and civil servants from
member countries.
Global Development Learning Network
(GDLN) is a network of 120 learning
centers across 80 countries facilitating

Criticism of IMF and World


Bank
Bank
Conditionalitiesincluding
Structural Adjustment Programs.
The IMF advocates Keynesian

approach of demand-side economics,


currency devaluation which is
inflationary.
Their austerity programmes are self
contradictory.
International Monetary Fund Gold
Reserve is allegedly undervalued.

Contd
Contd
The Argentinean economic crisis of 2001
due to privatization of vital national
resources and maldesigned fiscal
federalism.
Easier currency movement by Kenyan
central bank proposed by SAPs of IMF led
to the Goldenberg scandal worth billions
of Kenyan shillings.
Since 1980 over 100 countries have
experienced a banking collapse which
has reduced GDP by 4% or more.
In 21 countries of eastern Europe which

IMF at a Glance

The International Monetary Fund (IMF) came into official existence on December 27, 1945,
when 29 countries signed its Articles of Agreement at a conference held in Bretton Woods, New
Hampshire, USA, from July 1-22, 1944. The IMF began financial operations on March 1, 1947.

 Current Membership: 182 countries


 Staff: Approximately 2,600 from 110 countries
 Managing Director: Michel Camdessus assumed office in 1987
 Governing Bodies: Board of Governors, Interim Committee, Executive Board
 Total Quotas: SDR 145 billion (US $195 billion)
 Accounting Unit: Special Drawing Right (SDR). As of September 10, 1998, SDR 1
equaled US $1.36163.

Statutory Purpose

The IMF was created to promote internatioal monetary cooperation; to facilitate the expansion
and balanced growth of internatioal trade; to promote exchange stability; to assist in the
establishment of a multilateral system of payments; to make its general resources temporarily
available to its members experiencing balance of payments difficulties under adequate
safeguards; and to shorten the duration and lessen the degree of disequilibrium in the
international balances of payments of members.
How the IMF Came About

The International Monetary Fund (IMF or Fund) and the International Bank for Reconstruction
and Development (IBRD or World Bank) were both established at the United Nations Monetary
and Financial Conference, held at Bretton Woods, New Hampshire, on July 1-22, 1944. The two
were created to oversee stability in international monetary affairs and to facilitate the expansion
of world trade. Membership in the World Bank requires membership in the IMF, and they are
both specialized agencies of the United Nations. The World Bank was given domain over long-
term financing for nations in need, while the IMF's mission was to monitor exchange rates,
provide short-term financing for balance of payments adjustments, provide a forum for
discussion about international monetary concerns, and give technical assistance to member
countries. These functions are still generally true of both organizations, although the policies
determining how they are carried out have been modified and amplified over time.

The Fund's legal authority is based on an international treaty called the Articles of Agreement
(Articles or the Agreement) which came into force in December 1945. The first Article in the
Agreement outlines the purposes of the Fund and, although the Articles have been amended three
times in the course of the last 47 years prior to 1998, the first Article has never been altered.

The IMF started financial operations on March 1, 1947. Drawings on Fund reserves were made
by 11 countries between 1947 and 1948, although there were no drawings in 1950 and very few
in the following years. During this time the Fund worked on its drawings policies. One outcome
was the stand-by arrangements, established in 1952, modified in 1956, and reviewed periodically
since then. Stand-by arrangements provide a procedure for drawing on Fund resources with
conditions based on a structural adjustment program for the borrower country. Stand-by
arrangements became the model for other lending procedures designed by the Fund to meet the
needs of its members.

By the mid-1970s, the Fund found itself becoming more of a lending institution than originally
envisioned. The Fund's ability to meet the needs of its members was tested when the
Organization of the Petroleum Exporting Countries (OPEC) quadrupled the price of crude oil in
1973-1974. Prices were increased again in 1979 and in 1980. This altered the international flow
of funds as the OPEC countries' monetary reserves accumulated rapidly. At the same time, the
industrial countries experienced strong inflationary pressures. These pressures were addressed by
an increase in interest rates and a reduction of imports. This resulted in balance of payments
deficits for many of the developing countries, which were paying more for oil, paying higher
interest rates on the loans from the industrial countries, and finding reduced markets for their
exports. In response to this situation, the IMF created an Oil Facility in 1974, and enlarged it in
1975, to aid members in balance of payments difficulties. In addition, an Oil Facility Subsidy
Account was established for the poorest countries to alleviate the cost of borrowing under the Oil
Facility. During the 1970s, although the oil price shocks placed more countries in balance of
payments difficulties and forced many of the developing countries to borrow not only against the
Fund, but also against private banks which were receiving a surplus of OPEC petrodollars, it was
generally perceived at the time that the debt cads would be short-lived. It was not until Mexico
threatened to default on its loans in 1982 that the world monetary community realized the extent
and depth of the crisis. Throughout the 1980s the Fund played an increasingly larger role, not
only as "lender-of-last-resort," but also as mediator with debtor countries in relation to creditor
nations and private banks.

In the mid-1980s the Fund's lending operations increased dramatically. Stand-by arrangements
are typically for one to three years, but the exigency of the debt crisis caused the Fund to devise
programs for adjustment over longer periods. These are known as extended arrangements and,
with other medium-term programs, can be arranged through the Structural Adjustment Facility or
the Enhanced Structural Adjustment Facility. The terms of a structural adjustment program, or
stabilization program, are known as conditionality. Programs include quantified targets or
ceilings for bank credit, the budget deficit, foreign borrowing, external arrears, and international
reserves. They also include statements of policies that the member intends to follow.
Conditionality came under detailed scrutiny during the 1980s as more and more developing
countries adopted structural adjustment programs and later were unable to meet the terms of the
agreement. The philosophy of the Fund was criticized as being too oriented to the industrial
economies and not adapted to developing economies. During the late-1980s several plans were
put forth, involving not only the Fund but the creditor nations and commercial banks as well, to
reduce the debt and the debt service payments of the debtor nations. In 1989 the Fund developed
new debt reduction guidelines, providing Fund support for commercial bank debt and debt
service-reduction operations by member countries. The debt strategy is still being assessed and
its success or failure has not been determined.

Training and Technical Assistance

Assistance is extended to members in the form of training and technical assistance. Beginning in
1950, the Fund offered training courses on balance of payments statistics and on international
economics. In 1964 the IMF Institute was established fortify these training activities. The IMF
Institute provides training courses for officials from member countries in such subjects as
financial analysis and policy, balance of payments methodology, public finance, and government
finance statistics.

The technical assistance program is operated through the Monetary and Exchange Affairs
Department, the Fiscal Affairs Department, and the Bureau of Statistics. The Legal Department,
the Bureau of Computing Services, and the area departments may also participate. Assistance is
provided mainly through staff missions, field assignments by staff members or outside experts,
and studies and recommendations prepared at headquarters. In providing technical assistance, the
IMF emphasizes training government officials in macroeconomic management, reforming the
tax system and tax administration developing central banking and financing systems, and
improving statistical data. Advice is also provided on money and capital markets, central and
general banking legislation, the structure of interest rates, regional cooperation among central
banks, and the use of various instruments in monetary management. Technical assistance is most
in evidence in the transformation of the centrally planned economies of Eastern Europe and the
states of the former Soviet Union to market oriented economies. The IMF is assisting the new
members in the choice of currency, developing import and export sectors, agreeing on ground
rules for setting interest rates, reserve requirements, and credit guidelines, and in making
structural reforms.

IMF Statistical Activities

Under Article VIII of the Agreement members are required to furnish the Fund such information
as it deems necessary for its activities, including national data about their economic and financial
condition. Article VIII also dates that the Fund shall act as a center for the collection and
exchange of information on monetary and financial problems, thus facilitating the preparation of
studies designed to assist members in developing policies which further the purposes of the
Fund. The Fund uses these statistics, in consultation with the member, as part of the fulfillment
of the Fund's regulatory function, to assess the member's quota, and as part of the Fund's role in
assessing the world economic outlook. In addition, the Fund has developed standards for the
classification and presentation of balance of payments statistics and government finance
statistics. It is concerned with maintaining the accuracy and consistency in the reporting of the
data. The IMF compiles and publishes these statistics in a variety of publications.

Role of IMF

The IMF was created as an institution to support the Bretton Woods regime. It aimed to avoid the
volatility of previous decades by targeting destabilizing capital flows, exchange controls, beggar
thy neighbor policies, and trade protection. Europe required reconstruction after WWII, and the
IMF was supposed to ensure an expansion of global trade, thereby promoting recovery. After the
breakdown of the Bretton Woods system, the IMF needed to redefine its role as a financial
institution. It attempted to become a policy coordinator and advisor, a crisis manager, a provider
of credibility, and a type of development agency. In doing so, the IMF overstepped its intended
boundaries, taking on roles that are inconsistent with its original objectives.

The original mandate for the IMF was defined in the 1944 Articles of Agreement. The IMF was
intended to promote international monetary cooperation, facilitate the growth of world trade,
promote exchange rate stability, and help to establish a multilateral system of payments.
Furthermore, the fund would make available its assets to member countries with balance of
payments problems, creating confidence in the international trade system. These goals were
mainly a response to the economic history of the 1920s and 1930s. The floating exchange rates
of the interwar period were seen as highly unstable, thus the IMF was meant to monitor the
pegged exchange rate. International monetary cooperation would prevent the competitive
devaluations of the 1930s, and current account convertibility would expand world trade. The
fund would also provide short-term finance based on member contribution, akin to a credit
union.
Since the dissolution of the Bretton Woods regime, the IMF has assumed various new roles to
remain a significant international institution, an economic equivalent of the United Nations. Its
surveillance function has expanded greatly, especially in the provision of data and forecasts. This
role is consistent with the original mandate. The IMF publishes information on international
capital markets and world economic developments under the Special Data Dissemination
Standard. Among other publications, the fund puts out the World Economic Outlook, which
examines the trends of the global economy. The reports are put together by the Executive Board,
which consists of ministers of finance or central bank governors of the most prominent countries
in international trade. Global policy discussions among people in the correct political positions
encourage international monetary cooperation. The IMF is best suited for this role because
countries will usually provide accurate data to take advantage of the fund's lending capabilities.
Information from the fund is easily accessible and follows a common standard-a public good that
can foster cooperation and growth.

However, many of the new roles of the IMF are inconsistent with the original mandate. The
fund's function as lender of short term finance was meant to fix balance of payments problems,
but has expanded so much that the IMF can now be seen as an aid agency. Specifically the
Poverty Reduction and Growth Facility (PRGF), the former Enhanced Structural Adjustment
Facility (ESAF), allows the IMF to essentially subsidize interest rates for the poorest member
countries. Such lending is aimed at poverty reduction and structural overhauls, which require
large amounts of financing and long repayment periods, and can create dependency on IMF
support. However, resources often flow to corrupt governments, while the impoverished
population is put into debt (Stiglitz). The loan's conditionalities do not always benefit the
country. Furthermore, ESAF countries tend to require debt relief due to regime changes or other
systemic problems. This type of lending surpasses the original mandate-not only does it impinge
on the role of the World Bank, but can also be destructive to stability and growth.
UNBOUND ECONOMY
The Role Of IMF Now

The IMF’s main role should be monitoring and surveillance, not a direct
provider of loans

KENNETH ROGOFF
7 Nov 2008
As the global financial crisis radiates out from the developed
economies into emerging markets, it is ravaging not just
governance-challenged economies such as Venezuela, Russia
and Argentina. The crisis is also striking Brazil, Korea and
South Africa, which appeared to have made substantial and
lasting progress towards macroeconomic stability. For this
reason, the future shape of the International Monetary Fund
(IMF) is on the top of the agenda for world leaders as they
prepare to meet in Washington in mid-November.

Just a short time ago, the IMF seemed relegated to a sustained period of irrelevance
as it failed to modernise either its Euro-centric political representation or its arcane
government-to-government lending facilities. Suddenly, the Fund has moved to
centre stage as the only agency seemingly capable of stemming the downward
spiral that is currently seizing emerging-market stocks and bonds.

World leaders should be happy that the IMF stands ready to take the lead in the
next phase of the global financial crisis, even if its lending resources of
approximately $250 billion are inadequate to stem the current run on emerging
markets. Emerging-market companies alone have hundreds of billions coming due
in the next 12 months.

Unlike the US Federal Reserve chairman, Ben Bernanke, most emerging-market


central bankers are in no position to extend blank cheques across their economies
without a boomerang effect on interest rates and exchange rates.

But it would be a terrible mistake to simply super-size the IMF in its current guise
by greatly scaling up its lending facilities, as many propose. Rather, the Fund’s
role, even in the current crisis, should be sharpened as an interlocutor between
lenders and developing country borrowers, rather than simply as a replacement for
all other loan sources.

The key reforms for the IMF remain, one, improving governance by reducing
European representation while increasing that of Asia, and two, focusing the
Fund’s mission on monitoring and surveillance rather than as a direct provider of
bailout loans. Rich country governments, led by central banks, should provide the
large-scale funding needed to stem the run on developing country finances. The
Fund’s main role should be in monitoring.

Without its own currency, the IMF is poorly positioned to intervene with the
overwhelming force needed for lender-of-last-resort operations. In principle, the
IMF could be allowed to print money. But this is not realistic, given the lack of an
adequate system for global governance. Even the euro area, which is far more
cohesive, has not quite figured out how to use its central bank as lender of last
resort.

The IMF’s lending resources have shrunk dramatically relative to world trade and
income compared over the past 50 years. But increasing its resources to a trillion
dollars or more is not a realistic option, either. The IMF does not have an adequate
framework for handling the massive defaults that could easily attend a huge surge
in lending, much less the political will to distinguish between countries that are
facing genuine short-term liquidity problems and countries that are actually facing
insolvency problems.

In the short run, the IMF could help coordinate additional loans from the US, Japan
and China, to help maintain economic and political stability in the developing
world. Without directly acknowledging America’s central role in causing the
financial crisis, the US Federal Reserve has already offered to exchange up to $30
billion each with the central banks of Korea, Brazil, Mexico and Singapore.
The IMF can also play a useful role in helping surplus countries manage their
foreign exchange reserves, much as the Bank for International Settlements already
does. World leaders can allow the IMF to sell some of its gold stock to fund its
monitoring and surveillance functions. Then in the future, it will not need to make
crisis loans just to keep the lights on in the building.
As tempting as it may be to ramp up IMF lending on a long-term basis, this would
be a strategic mistake for both the world and the Fund. The rich countries, together
with China and the Middle East oil exporters, do indeed need to take bold steps to
help out emerging markets, and the Fund has a useful role to play. But super-sizing
the Fund, without sufficient governance improvements and lending constraints,
would give the world too much of a good thing.

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard


University, and was formerly chief economist at the IMF.
© Project Syndicate, 2008.