International Monetary Fund (IMF)

IMF is also one of the post war international monetary

institution
The United States Treasurer in 1943 published a
proposal for establishment of international Stabilization
Fund (White Plan)
UK around the same time also proposed the
establishment of the International Clearing Union
(Keynes Plan)
These two plans became the basis for the International
Monetary and Financial Conference at Bretton Woods,
New Hampshire during July 1-22, 1944.
An agreement was reached to establish International
Monetary Fund by 44 nations in this conference.
As on September 2016, IMF has 189 members.

International Monetary Fund (IMF)

IMF came into being to promote economic and
financial cooperation amongst the member countries
with a view of facilitating the expansion and balance
growth of world trade.
IMF is central institute of International monetary
systems.
IMF Aims to prevent financial crises by encouraging
countries to adopt sound economic policies.
IMF gives funds on temporary basis to members to
address balance of payment problems
IMF membership is pre-condition for IBRD/World Bank
members due to close working relationship between
IBRD and IMF

Main Objectives
Avoid the Competitive devaluation and exchange
Control
Establish and maintain currency convertibility with
stable exchange rates
Develop multilateral trade and payments

Purposes
1. To promote international monetary cooperation through a
permanent institution through consultation and
collaboration on international monetary problems
2. To Facilitate the expansion of balanced growth of
international trade-real income, full employment,
development of productive resources
3. To promote exchange stability
4. To assist in the Establishment of the Multilateral systems
of payments in respect to current transactions between
members and elimination of foreign exchange restrictions,
which might hamper the growth of world trade.
Contd/-

Purposes
5. To lend confidence to members by making the Funds
resources available to them under adequate safeguards,
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 international balances of payment of
members.

Functions
1. The fund is regards as The guardian of good conduct in
the area of balance of payment
2. IMF aims at reducing tariffs and other trade restrictions
by the member countries.
3. IMF provides technical advice to its members regarding
monetary and fiscal policies.
4. IMF provides machinery for the orderly adjustment of
exchange rate.
5. It functions as a reservoir of currencies of member
countries and enables the members to borrow the other
currencies.
6. It functions as a lending institution of foreign currencies.
Contd/-

Functions
7. IMF provides short term financial assistance to its
members to get rid of the balance of payment
problems/crisis.
8. It also provides machinery for international consultancy
9. It conducts short-term training courses on fiscal,
monetary and balance of payments for employees of
member countries through its Central Banking Services
Department, the Fiscal Affairs Department, Bureau of
Statistics and the IMF institute.
10.It conducts research studies and publishes the reports

Organization structure
It consists of:
Board of Governors
Executive Board
A Managing Director
IMF Secretariat helps managing director in carrying out the
activities
Interim Committee
Development Committee.

Organization structure
Board of Governors: Highest authority governing the IMF-exercises powers and
takes decision.
Decision-Making Organ of the Fund
It consist of Governor and alternate Governor appointed by
each member country.
The member country appoints its Finance Minister and the
Governor of the Central Bank as its Alternate Governor.
Meets once a year
Any member with 25% of the total voting rights can
convene a special meeting

Organization Structure

Executive Board: 24 Executive Directors-MD will be chairman

5 major members of the Fund are appointed by countries having
the largest quota-USA, UK, Germany, France and Japan
The 6th Executive Director is appointed by Kingdom of Saudi
Arabia
Remaining members are elected by rest of member countries
The Executive Board is an important organ of IMF (Fund activitiesRegulatory, Supervisory and Financial)
The Executive Board meets three times a week.
The larger the economy, the more voting power-5 largest
shareholder-US, Japan, Germany, France, UK along with China,
Russia, Saudi Arabia

Organization Structure
Executive Board:- (contd/-)
The Board has a voting system. To bring major changes 85%
of voting rights is essential. But most decisions are based on
consensus
Key policies relating to international monetary system are
considered twice yearly in a committee of Governors called
the International Monetary and Financial committee or
IMFC.
Managing Director: Ms. Christine Lagarde
The IMFs Managing Director is both Chairperson of the
Executive Board and Head of IMF staff.
He or she is appointed by the Executive Board for a renewable
term of five years. The managing Director is the Non-Voting
Chairman of the Board and head of the Fund Staff

Organization Structure
The interim Committee:
22 members
This committee was created in 1974
Objectives of the Interim Committee area:
To advise and report to the Board of Governors on Supervising the
management
To advise the Board of Governors on adaption of international
monetary system with a view to avoid disturbance
The Development Committee:
This committee was established in 1974
22 members
Objectives:
To advise and report to Board of Governors on all aspects of
transfer of real resources to developing countries.

Financing Facilities and Policies

IMF provides loans under arrangements
These Arrangements are based on economic programs
formulated by countries in consultation with IMF
Letter of intent has to be approved by Executive Board
Loans are then released in phased installments
Volumes of loan issued have fluctuated over time

Financing Facilities and Policies

Concessional and non-concessional lending:
Concessional Loans:
Tailor made loans
Poverty Reduction and Growth Facility (PRGF)-IMF gives
loans to Low incomes countries at concessional rate
Non-concessional loans: (Market related interest rates &
surcharge)
Stand-By Arrangement (SBA)
Extended Fund Facility (EFF)
Supplemental Reserve Facility (SRF)
Contingent Credit Lines (CCL)
Compensatory Financing Facility (CFF)

IMF Facilities
PRGF (Poverty Reduction and Growth Facility):
Loans to developing countries through Enhanced Structural
Adjustment Facility (ESAF) under PRGF
Loans under Heavily Indebted Poor Countries (HIPC) Initiative:
Poverty Reduction Strategy Papers (PRSPs) are documents
required by the International Monetary Fund (IMF) and World
Bank before a country can be considered for debt relief within the
Heavily Indebted Poor Countries (HIPC) initiative.
Interest Rate: 0.5% & loan is repaid over 5.5-10 years
Stand By Arrangements (SBA):
Address Short term balance of payment problems
Widely used by IMF
12-18 months
Repayment is expected within 2.5 to 4 years unless an extension
is approved
Surcharges apply

IMF Facilities
Extended Fund Facility(EFF):
Help countries to address more protracted balance of
payment problems
Duration of Loan: 3 years
Repayment is normally expected within 4.5 to 7 years
extension
Surcharges are applicable
Supplemental Reserve Facility (SRF):
Need to meet requirement for short term financing on large
scale
Sudden loss of market confidence
Countries have to repay within 1 to 1.5 years-extension to 1
year
Substantial surcharge of 3-5%

IMF Facilities
Contingent Credit Lines (CCL):
Helps members to prevent crisis
Countries implementing sound economic policies, but find
themselves threatened by a crisis elsewhere in world
economy-Financial Contingency
Countries to repay within 1 to 1.5 years-extension to 1 year
Small surcharge apply
Compensatory Financing Facility (CFF):
Assist countries facing a sudden shortfall in export earnings
E.g. Impact on exports due to the increase in cost of cereal
imports caused by fluctuations in world commodity markets
No surcharge
Countries to repay within 1 to 1.5 years-extension to 1 year

IMF Facilities
Emergency assistance:
Natural disaster or the country is emerging from
conflict.
Emergency loans are subject to the basic rate of
charge, although interest subsidies are available for
some countries, subject to availability.
Loans must be repaid within 3.55 years.

Training and Technical Assistance

Economic Management
Assistance is given in areas of Financial Analysis and Policy,
Fiscal Policy, Balance of Payments methodology, Public
finance, Central Banking services
Extensions Programs: IMF sends experts to provide training,
formulation of draft legislation, conducting surveys,
formulation of monetary policy
Expansion of global trade:
Provides credit facility to member countries
Facilitates multi lateral payments and trade
Granting developmental loans
Introduction of more liberal credit policy
Simplification for multiple exchange system

The Quota System

Each member of the IMF is assigned a quota, based broadly on

its relative size in the world economy, which determines its
maximum contribution to the IMFs financial resources.
IMF uses a quota formula to help assess a members relative
position.
The current quota formula is a weighted average of GDP
(weight of 50 percent), openness (30 percent), economic
variability (15 percent), and international reserves (5 percent).
Upon joining the IMF, a country normally pays up to onequarter or 25% of its quota in the form of SDRs or widely
accepted currencies (such as the U.S. dollar, the euro, the yen,
or the pound sterling. In November 2015, the IMF decided that
the Renminbi (Chinese Yuan) would be added to
the basket effective October 1, 2016. )
The remaining three-quarters or 75% are paid in the
countrys own currency.

 Quotas are used to distribute Special Drawing Rights

(SDRs), the IMFs unit of account.
The largest member of the IMF is the United States, with a
current quota of SDR 42.1 billion (about $58 billion), and
the smallest member is Tuvalu, with a current quota of
SDR 1.8 million (about $2.47 million).
Quotas are reviewed at least every five years.
Any changes in quotas must be approved by an
85 percent majority of the total voting power, and a
members quota cannot be changed without its consent.
There are two main issues addressed in a general
quota review: the size of an overall increase in capital
and the distribution of this increase among the
members.

 On 15th December 2010, the 14th General Review of Quotas was

completed, and the IMFs members agreed that the Funds quota
resources should be in doubled i.e. increased from SDR
238.5 billion to approximately SDR 476.8 billion.
IMF members also agreed for a major realignment of quota shares
a shift of more than 6 percent from over-represented to underrepresented members and a more than 6 percent quota shift to
dynamic emerging market and developing countries.
China will become the third largest member country in the IMF, and
there will be four EMDCs (Brazil, China, India, and Russia) among
the 10 largest shareholders in the Fund
Deadline for Implementation is December 15, 2015
EMDC: Emerging Market and Developing country

Voting Power
The quota largely determines a member's voting power in
IMF decisions.
Each IMF members votes are comprised of basic votes
plus one additional vote for each SDR 100,000 of quota.
Access to financing:
The amount of financing a member can obtain from the IMF
(its access limit) is based on its quota.
For example, under Stand-By and Extended Arrangements,
a member can borrow up to 200 percent of its quota
annually and 600 percent cumulatively.
However, access may be higher in exceptional
circumstances.

International Liquidity
Central Banks of the countries maintain the internationally
acceptable assets like bullion, international borrowings,
commercial credit operations, hard currencies, foreign
securities and SDRs in order to settle the deficit balance of
payment position
The aggregate stock of such assets of all the central banks in
the world is called INTERNATIONAL LIQUIDITY or
INTERNATIONAL RESERVES
The international liquidity assets may be Owned or borrowed.
If country has excess foreign reserve after meeting the import
obligations of both current account and capital account, such
reserves are treated as OWNED ASSETS
E.g.: GOLD RESERVES of the country are also OWNED
RESERVES

 The BORROWED ASSETS will include the borrowings from

other countries and borrowings from the international
financial institutions.
The international liquidity may be CONDITIONED OR
UNCONDITIONED.
Unconditional liquid reserves include countrys gold, foreign
exchange surplus, SDRs, private holdings of international
assets.
The country has unconditional right to use these reserves
Most of the borrowed funds are CONDITONAL ASSETS, as
the country has only conditional right in using these assets
regarding the nature of use.

 Problem of International Liquidity:

Developing countries have higher imports and less exports.
1. The developing countries are the initial importer of
consumer goods and then the importers of the capital
goods at the later stage of development
2. Due to Globalization many Developing countries have
became the Dumping area for developed countries
3. Imports also depend on the Structural Changes in Many
Countries (like Change from agriculture to industrial sector
to Service Sector)
4. Exports from developing countries have to pass through
lots of standards in order to be accepted in Developed
Markets. Hence their cost of production are usually high.

Special Drawing rights (SDRs)

Adequate International Liquidity is important for the progress
of developing countries.
The scarcity of domestic capital in the developing countries
has made the availability of the external capital essential for
their development.
The Provision of Special Drawing Account by IMF was made
towards this direction (July 1969) to supplement its member
countries official reserves.
Special drawing rights (SDRs) are supplementary foreign
exchange reserve assets, defined and maintained by the
International Monetary Fund (IMF).
SDR is Not a currency
Instead SDRs represent a claim to currency held by IMF
member countries for which they may be exchanged.

Special Drawing rights (SDRs)

The Value of SDR is based on a basket of four key
international currencies(USD, Japanese Yen, Euro and Pound
Sterling) (Renminbi (Chinese Yuan) would be added to the
basket effective October 1, 2016
The basket will consist of the following five currencies: U.S.
dollar 41.73%, Euro 30.93%, Chinese yuan 10.92%, Japanese
yen 8.33%, British pound 8.09%.
SDRs can be exchanged for freely usable currencies.
SDRs are also referred as PAPER GOLD
The exchange rate of 13rd Sep 2016, 1 SDR = 1.400480 USD.
(http://www.imf.org/external/np/fin/data/rms_sdrv.aspx)
SDRs are distributed among participants in proportion to their
fund quotas
Countries having higher quotas received a larger share of SDR
allocation.

Special Drawing rights (SDRs)

USA, UK, Canada, Japan-have been allotted 45% of the total
SDRs which shows that the distribution of SDRs are not in relation
to the development needs of the world economy.
The IMF's SDR Department keeps records of members' SDR
allocations and holdings; the SDR Department is also the channel
through which all transactions and operations involving SDRs are
conducted.
Once allocated, members can hold their SDRs as part of their
international reserves or sell part or all of their SDR allocations.
Members can exchange SDRs for freely usable currencies among
themselves and with prescribed holders
IMF members can also use SDRs in operations and transactions
involving the IMF, such as the payment of interest on and
repayment of loans, or payment for future quota increases.
VOLUNTARYDESIGNATION MECHANISM

Interest of the SDR

The Fund pays interest to each holder of SDRs
The member also receive interest at the SDR interest rate on
the amount that their holdings exceed their cumulative
allocations.
Interest on SDR holdings and allocations are received and paid
quarterly.
The SDR interest rate is determined weekly on each Friday and
is based on a weighted average of representative interest rates
on 3-month debt in the money markets of the four SDR basket
currencies (i.e., the U.S. dollar, Japanese yen, euro, and pound
sterling).
The only other cost borne by members is a very small levy to
cover the operational costs of the SDR Department.

How many SDRs have been allocated?

The general SDR allocation of August 28, 2009 is by far the
biggest allocation to date :
SDR 9.3 billion was allocated in yearly instalments in 197072.
SDR 12.1 billion was allocated in yearly instalments in 197981.
SDR 161.2 billion was allocated on August 28, 2009.
A special one-time allocation of SDR 21.5 billion (March 17,
2015) took effect on September 9, 2009, bringing total
cumulative allocations to about SDR 204
billion(9.3+12.1+161.2+21.5) (equivalent to about US$318
billion).
It was further decided to increase from approximately SDR
238.5 billion to approximately SDR 476.8 billion (Yet to be
implemented)

 The recent survey shows that developing countries are

going to face the situations of foreign exchange gap to the
tune of USD 32 Billion and their foreign aid position is very
bleak and to what extend would the SDRs be used to
provide the development finance.
Hence a proposal has been made by the Governors of
different countries to IMF to link SDRs with development
Finance.
It requires the allocations of more and more SDRs to the
developing countries on the basis of their development
needs.
The Skewed distribution of international reserves is a
reflection of the uneven distribution of income and wealth
in the world
The quotas under the IMF have been fixed on the basis of
the members importance in international trade and credit.

 Industrialized countries account for two-thirds of the IMF

quota and hence have larger SDRs allocation and rest of
countries account for 1/3th of the quota have
proportionately lesser allocation of these SDRs
As per 6th General Review the US quota is 8405 Million
SDR and quota for country like Grenada is SDR 3 Million
MSACs (Most seriously affected Countries) are the poor
countries and they grow at the annual rate of 1% per year.
They would take 70 years to double their income and
industrialized countries grow at the faster rate of 9 to
10%
Because of brain drain, the poor countries get more
repatriation amount that what they get the way of aid.
Rich countries spend USD 200 billion on armaments and
just less that USD 12 billion a year for aid