International Monetary Fund(IMF): Structure & Roles

Table of Contents

About

IMF is an international financial institution
It has 190 member countries
The International Monetary Fund (IMF) works to achieve sustainable growth and prosperity for all of its 190 member countries by supporting economic policies that promote financial stability and monetary cooperation
Currently IMF consists 189 member countries.
The IMF works on three missions:
1. Furthering international monetary cooperation
2. Encouraging the expansion of trade and economic growth
3. Discouraging policies that would harm prosperity
The IMF works for international financial stability by:
1. Policy Advice
2. Financial Assistance
3. Capacity Development

Objectives of IMF

International Monetary Co-Operation
To promote and facilitate international trade
Promote employment and sustainable economic growth
Eliminate exchange controls
Ensure foreign Exchange Stability
Establish a multilateral trade and payment system
To help member countries to attain balanced economic growth
To help member countries in maintaining balance of payments

Short History of IMF

During the Great Depression
- countries raised barriers to trade to protect their economies
- this led to devaluation of national currencies
- this further led to a decline in world trade
In July 1944, 44 countries met at UN conference in Bretton Woods, New Hampshire, US, to discuss international economic cooperation. Here the IMF was conceived
The IMF formally came into existence on 27 December 1945
IMF’s design allowed to balance the rebuilding of international capitalism with the maximization of national economic sovereignty and human welfare. This concept is also known as embedded liberalism
IMF attempted to encourage international financial cooperation by introducing a system of convertible currencies at fixed exchange rates. The dollar was redeemable for gold at $35 per ounce
Countries were not eligible for membership in the International Bank for Reconstruction and Development (IBRD) created to fund the post war European reconstruction, unless they were members of the IMF
After the fall of Bretton Woods system in the 1970s , IMF promoted the system of floating exchange rates, where the market forces determine the currency exchange rates

Functions of IMF

Provides Financial Assistance
- Lending to member countries to
  - resolve balance of payments problems
  - replenish international reserves
  - stabilize currencies
  - promote positive conditions for economic growth
- IMF facilitates economic growth and stability by various instruments called as “facilities”.
- An IMF loan is provided under an “arrangement,” which requires a borrowing country to undertake the specific policies and measures to resolve its balance of payments problem
- Member countries finance most of the IMF loans by using payments of quotas. This means the IMF’s lending capacity is mainly determined by the total amount of quotas.
- Quotas are pooled funds of member nations,and they generate most of the IMF funds.The size of a member’s quota depends on its economic and financial importance.
- Any country, whether or not a member of the UN, may become a member of the IMF in accordance with IMF Articles of Agreement and terms prescribed by the Board of Governors.
IMF Surveillance
- This means the IMF closely monitors each member country’s economic and financial developments
- IMF after assessing the member’s economic conditions and risks to financial stability, provides policy recommendations
- IMF also keeps an eye on Global developments
- IMF publishes
  - World Economic Outlook
  - Global Financial Stability Report
Capacity Development
- IMF provides technical assistance to member countries
- This is done to help them strengthen and develop capacity to implement effective policies in the following 4 areas
  1. Monetary and financial policies
  2. Fiscal policy and managemen
  3. Statistics
  4. Economic and financial legislation

Organizational Structure

1. Board of Governors

The Board of Governors, comprises one governor from each country. Each governor of the Board is appointed by his/her respective member country.
Each member country appoints its two governor
It is the highest decision-making body of the IMF
It usually meets once each year at the IMF Annual Meetings
Functions of Board of Governors
- Elect and appoint executive directors to Executive Board
- Approving quota increases and SDR allocations
- Admit new members
- Compulsory withdrawal of member
- Amend articles, agreements and By-Laws
In practice the board has delegated most of its powers to the IMF’s executive board
Board of Governors is advised by two committees
- International Monetary and Financial Committee (IMFC)
- Development Committee
Boards of Governors of IMF and World Bank Group meet annually

2. Ministrial Committees

2.1.International Monetary and Financial Committee (IMFC)
- It is a 24 member committee
- Its members are drawn from the pool of governors of all countries
- Functions
  1. Discuss management of international monetary & financial system
  2. Discuss proposals by Executive Board to amend Articles of Agreement
  3. Discuss any other matter concerning the global economy.
2.2 Development Committee
- It is a joint committee consisting of 25bmembers from IMF Board of Governors and the World Bank
- Functions
  1. To advise IMF Board of Governors and the World Bank on economic development in developing countries
  2. To build consensus on development issues

3. Executive Board

It is a 24-member board elected by Board of Governors
It discusses all the aspects of the Funds.
The Board normally makes decisions based on consensus, and sometimes basis voting
Its powers are delegated by Board of Governors

4. Managing Director

The MD leads the IMF
MD is the head of the staff and serves as Chairman of the executive board
It is the most powerful position at the IMF
MD is appointed by Executive Board by voting or consensus

5. Chief Economist

The chief economist leads the research division

6. IMF members

Any country can join IMF and they need not be a member of UN
A country needs to be a member of IMF before being considered for IBRD membership

Subscription Quotas

The IMF is a quota-based institution.
On joining IMF, a member country contributes a certain sum of money, called a quota subscription
The size of quota is decided basis the country’s economic and financial importance
Quotas are denominated in Special Drawing Rights (SDRs), which is the IMF’s unit of account.
What makes Quotas Important ?
- They determine the maximum amount of finance a member is to provide to IMF
- They determine the voting power of members
- They determine the maximum amount of financing a member can obtain from the IMF under normal access.
- They determine a member’s share in a general allocation of SDRs.
- A quota formula is used to help assess members’ relative position in the world economy

Special Drawing Rights

SDR means the IMF’s unit of account
It is not a currency
SDRs were created in 1969 for use as a supplementary foreign exchange reserve. This was due to a lack of US dollars and gold, which at the time were the main assets held in foreign exchange reserves.
Its value was initially defined as USD 1= 0.88gram of Gold
This was intended to be used in the context of the Bretton Woods fixed exchange rate system.
After the collapse of Bretton Woods in 1973, the SDR was defined basis a basket of major currencies.
Its currency value is determined by summing values of SDR basket of currencies in USD, basis market rates.The currencies are chosen based on how important and widely traded they are in international exchange markets. The basket of currencies include
1. USD
2. Euro
3. Japanese Yen
4. British Pound Sterling
5. Chinese Renminbi
Holding this basket of major currencies helps the IMF manage the exchange rate volatility of any single currency.
SDRs still serve as a supplement to foreign currency reserves, however, much less after 1973. When the US dollar is weak , countries may prefer special drawing rights
SDRs represent a claim to currency held by IMF member countries for which they may be exchanged.
As per IMF around SDR 660.7 billion have been allocated so far.
The SDR value in terms of the U.S. dollar is determined daily basis of fixed currency amounts of the currencies included in the SDR basket and market exchange rates
The value of SDR interest rate (SDRi), is determined weekly .
SDR is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members.
IMF uses SDRs for internal accounting purposes
SDRs can be traded for freely usable currencies between IMF members through voluntary trading agreements. These agreements are facilitated by the IMF and can be done to adjust reserves or meet balance of payments needs.
The SDR interest rate provides the basis for calculating the interest rate charged to member countries when they borrow from the IMF
SDRs are allocated based on the quota amounts of each member country. The higher the quota amount, the larger the SDR allocation a country will receive
After SDRs have been allocated to each country, they have options on how they can use them.
1. They can hold them as part of their foreign exchange reserves
2. They can sell their reserves
3. They can use their reserves
Countries receive interest basis their SDR Holdings
Countries pay interest basis their SDR Allocations
When a country trades SDRs for freely usable currencies, their SDR holdings decrease and their foreign exchange reserves increase.
By helping stabilize vulnerable countries, an SDR allocation can help mitigate risks of economic and social fragility, minimize spillovers, and enhance stability
An SDR is called paper gold because at the time of its creation it was viewed as an asset that could act as a reserve asset that would supplement gold reserves
It is important to note that SDRs are not loans. It means they do not need to be repaid and do not get categorize as debt or borrowings.

IMF & INDIA

India is a founder member of the IMF.
India has not taken any financial assistance from the IMF since 1993.
IMF helped India deal with BOP issues
IMF also gave loans to tackle financial difficulties due to Indo – Pak conflicts of 1965 and 1971
IMF gave loans during rising prices of of imports, food, fuel and fertilizers

INDIA’s SDR Holdings

The total SDR holdings of India now stands around SDR 13.66 billion
The SDR money can be invested to help India’s social and health systems
India’s allocation is 2.6% of the overall allocation, proportionate to its share of voting right
SDRs are not part of the consolidated fund of India but are credited to RBI that augument its foreign exchange reserves.
India now has the world’s fourth largest foreign exchange reserve.

Criticism of IMF

Domination by Europe and US leaves little hope for emerging economies who do not have large voting share
Loan Conditions are intrusive
- They compromise economic and political sovereignty of receiving countries
‘Conditionality’
- refers to forceful conditions for loans
- Ex – fiscal and monetary policies, banking regulations.
- These changes can cause domestic disputes
IMF demands countries to privatize government services

IMF : NEED FOR REFORMS AND WAY FORWARD

IMF quota means more voting rights and borrowing capacity. IMF Quota’s formula is designed in such a way that USA itself has 17.7% quota which is higher than cumulative of several countries.
The G7 group contains more than 40% quota
India & Russia have only 2.5% quota
IMF imposes policies on countries without understanding domestic scenarios. This should change and country specific process should be followed.
Difficult to reform the current quota system, political will is required to bring suitable changes.
IMF should focus on lower income countries and support other developing countries’ market funds raising activities

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Sumit Teotia

Sumit is Creator and Author at learncrisp.com. He started this learning platform with a mission to emerge as an aspirants resource hub, especially for those preparing in self study mode. He loves writing and his interests are History, Security and Diplomacy.