About the IMF

The International Monetary Fund (IMF) is an organization of 187 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.

Overview
The IMF works to foster global growth and economic stability. It 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.

What we do
The IMF promotes international monetary cooperation and exchange rate stability,
facilitates the balanced growth of international trade, and provides resources to help
members in balance of payments difficulties or to assist with poverty reduction.

Membership
The IMF has 187 member countries. It is a specialized agency of the United Nations but
has its own charter, governing structure, and finances. Its members are represented
through a quota system broadly based on their relative size in the global economy.

How we do it
Through its economic surveillance, the IMF keeps track of the economic health of its
member countries, alerting them to risks on the horizon and providing policy advice. It
also lends to countries in difficulty, and provides technical assistance and training to help
countries improve economic management. This work is backed by IMF research and
statistics.

Collaborating with others

The IMF works with other international organizations to promote growth and poverty
reduction. It also interacts with think tanks, civil society, and the media on a daily basis.

Organization & Finances

The IMF has a management team and 17 departments that carry out its country, policy,
analytical, and technical work. One department is charged with managing the IMF's
resources. This section also explains where the IMF gets its resources and how they are
used.
Management
The IMF has a Managing Director, who is head of the staff and Chairman of the
Executive Board. He is assisted by a First Deputy Managing Director and two other
Deputy Managing Directors.

Staff of international civil

servants
The IMF's employees come from all over the world; they are responsible to the IMF and
not to the authorities of the countries of which they are citizens. The IMF staff is
organized mainly into area; functional; and information, liaison, and support
responsibilities.

Quotas
The IMF's resources come mainly from the money that countries pay as their capital
subscription when they become
members.

Special Drawing Rights

The IMF's resources come mainly from the money that countries pay as their capital
subscription when they become
members.

Gold
The IMF also has some of the largest official holders of gold in the world.

Borrowing arrangements
The IMF keeps track of its future ability to lend by monitoring its one-year forward
commitment capacity, which gives an indication of resources available for lending.

Income model reform

In May 2008, the IMF's Board of Governors endorsed a new income model for the IMF,
aimed at ending the organization's over-reliance on lending income

Governance
The IMF is accountable to the governments of its member countries.

Governance Structure
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.
Country Representation

How countries are represented is key to the IMF's legitimacy as an international

organization representing the interests of its 187 member countries.

Accountability
The IMF is held accountable by multiple stakeholders, including by its own internal
watchdog, member governments, the media, civil society, and academia.

Our Work
The IMF's fundamental mission is to help ensure stability in the international system. It
does so in three ways: keeping track of the global economy and the economies of
member countries; lending to countries with balance of payments difficulties; and giving
practical help to members.

Surveillance
The IMF oversees the international monetary system and monitors the financial and
economic policies of its members. It keeps track of economic developments on a
national, regional, and global basis, consulting regularly with member countries and
providing them with macroeconomic and financial policy advice.

Technical Assistance
To assist mainly low- and middle-income countries in effectively managing their
economies, the IMF provides practical guidance and training on how to upgrade
institutions, and design appropriate macroeconomic, financial, and structural policies.

Lending
The IMF provides loans to countries that have trouble meeting their international
payments and cannot otherwise find sufficient financing on affordable terms. This
financial assistance is designed to help countries restore macroeconomic stability by
rebuilding their international reserves, stabilizing their currencies, and paying for imports
—all necessary conditions for relaunching growth. The IMF also provides concessional
loans to low-income countries to help them develop their economies and reduce poverty.

Tackling current challenges

The IMF is helping many emerging market countries tackle the problems brought on by
the devastating global economic crisis. Its lending to low-income countries has also been
stepped up, as these countries start to feel the effects of the crisis. And it is providing
policy advice to advanced countries, for instance on how to address problems in their
financing and banking sectors, and how to design effective stimulus packages. As part of
its response, the IMF has already more than doubled its financial assistance to low-
income countries, with new IMF concessional lending commitments to low-income
countries through mid-July 2009 reaching $2.9 billion compared with $1.5 billion for the
whole of 2008.

As the global economy continues to struggle in 2009, and with both trade and capital
flows plummeting, the IMF is foreseeing mounting problems for many countries. The
Fund is therefore seeking to add to its resources, and has already negotiated borrowing
agreements with a number of countries. The Fund has already made good progress
toward its target of $250 billion in bilateral government loans as part of moves to triple
the IMF’s lendable resources to $750 billion. Agreements are already in place with Japan
($100 billion), Canada ($10 billion), and Norway ($4.5 billion), and a number of other
countries have committed funds either through loans or the purchase of IMF notes.

In addition, the Fund is closely tracking economic and financial developments worldwide
so that it can provide policymakers with the latest forecasts and analysis of developments
in financial markets. And it is engaging with the Group of 20 (G-20) leading economies
and other stakeholders on issues related to the evolution of the international financial
system.

Emergency lending to emerging markets

Emerging market countries are facing increasing difficulties around the world because of
the spreading global economic crisis, with demand falling for their exports, investment
slumping, and cross-border lending drying up. A growing number of emerging
economies have found room for policy maneuver becoming increasingly limited, and
large-scale official support has been needed from bilateral and multilateral sources.

Since 2008, the IMF has committed more than $160 billion in lending to a number of
countries affected by the crisis, including Belarus, Hungary, Iceland, Latvia, Pakistan,
Poland, Romania, Serbia, Sri Lanka, and Ukraine. It announced a precautionary loan for
El Salvador and an IMF team has also been in negotiations with Turkey.
Helping low-income countries fight the crisis

The global economic crisis is threatening to undermine recent economic gains and to
create a humanitarian crisis in the world’s poorest countries. In response, the IMF has
stepped up lending to low-income countries to combat the impact of the global recession
with a new framework for loans to the world’s poorest nations, including increased
resources, a doubling of borrowing limits, zero interest rates until the end of 2011, and
new lending instruments that offer more flexible terms. Most low-income countries
escaped the early phases of the global crisis, which began in the financial sectors of
advanced economies. But it is now hitting them hard, mainly through trade, as financial
problems in advanced countries trigger recessions that dampen demand for imports from
low-income countries.

In addition, more than $18 billion of a planned $250 billion allocation of IMF Special
Drawing Rights (SDRs) will go to low-income countries. These countries can benefit by
either counting the SDRs as extra assets in their reserves, or selling their SDRs for hard
currency to meet balance of payments needs.

Advocating global fiscal stimulus

The IMF is also providing policy advice to advanced countries, for instance on how to
address problems in their financing and banking sectors, and how to design effective
stimulus packages.

Because of the constraints on the effectiveness of monetary policy, fiscal policy must
play a central role in supporting demand. The IMF has advised countries that a key
feature of a fiscal stimulus program is that it should support demand for a prolonged
period of time and be applied broadly across countries with policy space to minimize
cross-border leakages.

But countries also need to be mindful of medium-term fiscal sustainability. The cost of
fiscal stimulus packages to revive economies battered by the financial crisis, combined
with tax revenue losses from output decline and the huge price tag for financial sector
restructuring, will be very large.

Reforming the international financial system

The global economic crisis has sparked a rethinking of how the international financial
system is structured. The IMF is assisting the G-20 industrialized and emerging
economies with recommendations to reshape the system of international regulation and
governance. To a large extent, global efforts thus far have been focused on the crisis at
hand, but reforms are in progress with a view toward the post-crisis world.

As input into the reform process, the IMF published a comprehensive study of the causes
of the global financial crisis. The study takes stock of the initial lessons learnt from the
crisis and presses for a worldwide rethink of how to handle systemic risk management.

Although economic and financial sector policies will remain primarily the business of
national governments, ongoing changes to the global financial architecture—including to
the IMF—can reduce the frequency and depth of future crises. Additional changes could
also include addressing some of the shortcomings of the decision-making structure of the
G-20 by allowing greater scope for joint decision making on a wider set of international
economic and financial issues, with the IMF in its newly expanded role as a central
player

International Monetary Fund - Objectives, Functions and Role

After the First World War, most of the countries of the world were of the opinion
that monetary cooperation was necessary to get the economic stability at
international level. But the world wide depression in 1930 and the fall of gold
standard system in 1931 gave rise to a number of problems in exchange rates,
The second world war also became the reason of cancellation of a trade pact
among powerful countries (America, England and France). Due to the multiple
exchange rate practices, difficulties arose in international trade and it was felt
that without monetary cooperation, economic development was not possible, A
well known British Economist, John Maynard Keynes and the American expert
Harry D. White prepared their separate plans for International Clearing Union and
'United and Associated Nations Stabilisation Fund' respectively.

The basic features of these plans were fused into a common plan evolved at the
United Nations Monetary and Financial Conference of 44 nations held at Bretton
Woods, New Hampshire in the U.S.A. in July 1944. This conference gave birth to
the 'International Monetary Fund' and the International Bank for Reconstruction
and Development (World Bank).

In view of this, the paper attempts to--

(i) Discuss in brief the history and objectives of IMF;
(ii) Study the working and performance of IMP and its relationship with India; and
(iii) Highlight the role of IMF in solving the problems of International liquidity.

In order to ensure new world economic order and peace, it was necessary to
restore stability in monetary system at international level and find effective means
to reconstruct the war ravaged economies of the European countries. But stable
peace could be achieved only by diverting a part of the world resources to the
undeveloped and under-developed poor countries of Asia, Africa and Latin
America. An effective solution to the problem of economic reconstruction and
development was necessary for ensuring world economy and for dismantling the
complex trade and exchange restrictions that had grown during the previous
decade.

In order to abolish all trade and exchange restrictions effectively and to promote
the multilateral trade system, IMF was established on December 27, 1945. It
started functioning from March 1, 1947.
The main objective of IMF is to grant loans in foreign currencies to member
countries to correct any disequilibrium in their balance of payments, when
disequilibrium is of temporary nature and likely to be removed in the earliest
possible period. According to the Article 1st of the agreement, the objectives of
the IMP are-

(i) To promote international monetary cooperation through a permanent

institution of the fund which provides the machinery for Consultation and
Collaboration on international monetary problems?
(ii) To facilitate the expansion and balanced growth of international trade and to
contribute thereby to the promotion and maintenance of high level of employment
and real income;
(iii) To promote exchange stability and maintain orderly exchange arrangements
among members by avoiding competitive exchange depreciation;
(iv) To assist in the establishment of a multi-lateral system of payments in
respect of current transactions between members and elimination of foreign
exchange restrictions which hamper the growth of world trade.
(v) To create confidence among members by making the general resources of
the fund temporarily available to them and providing opportunity to correct mal-
adjust¬ments in their balance of payments without resorting to the measures
destructive of national or international prosperity.

IMF is governed by a board of governors, board of executive directors and a

managing director. Board of governors is the highest authority. Every member
country of IMF appoints one governor and an alternate governor for a period of 5
years. The board of governors has delegated many of its powers to the board of
executive directors. Executive board deals regularly with a wide variety of
administrative and polity matters. It is responsible for conducting the business of
the fund. There are at present 21 executive directors. Managing director is
appointed by the executive board. He conducts the ordinary business of the fund
under the directions of the executive board. To improve the functioning of IMF
and to advise it from time to time, an Interim Committee was appointed in 1974. It
has 20 members. A Development Committee was also appointed in 1974 to
solve the problems of developing countries and to give suggestions to the
governors of IMF and the World Bank. The decisions of IMP are taken on the
basis of majority. Every member country has 250 votes. Besides it, for a quota of
everyone lakh dollar, there is one more vote. In this way a country having more
quotas will have more votes.

International Liquidity
International liquidity is generally used as a synonym for international reserves.
Such reserves include a country's official gold stock, holdings of its convertible
foreign currencies, SDRs and its net position in the IMF. It is the aggregate stock
of inter-nationally acceptable assets held by the central bank to settle a deficit in
the balance of payments of a country. In other words international liquidity
provides a measure of a country's ability to finance its deficit in the balance of
payments without resorting to adjustment measures.

The sources of international liquidity include - owned reserves and borrowed

reserves. Borrowed reserves were constituted by Capital imports in the form of
borrowing from abroad and direct investments by foreign countries. The demand
for international liquidity was increasing more than its supply due to which the
problem of international liquidity arose. The shortage of international liquidity was
due to the increasing deficits in the balance of payments of the majority of
countries in the world. Too much dependence on exports exposed these
economies to international fluctuations in the prices of their products. IMF in 1970
introduced a scheme for the creation and issue of Special Drawing Rights
(SDRs) as unconditional reserve asset to remove all the related problems of
international liquidity. Now SDR is the principal source of international liquidity to
its members.
As one of the main objectives of establishing the IMF was to bring the stability in
exchange rates by stopping the competitive devaluation of currencies of the
member nations, so that they could get foreign exchange easily, to get this
objective done IMF accepted gold as a medium to determining the exchange
rate. The cur¬rency value of every country was fixed in'gold and American dollar.
At that time American dollar was the most powerful international currency so it
'was fixed as IMF's 'Money of Account'. The value of one unit of dollar was equal
to 0•888671 gm of gold. But due to the regular fluctuation's in the value of dollar
and irregular supply, IMP gave up dollar and introduced SDR.

SDR is like a fiat money behind which there is no reserve but it is the medium Of
international payments. It is only the 'Money of Account'. It is intangible money
which is written only in account and is used as gold in international payments.
Therefore, it is also called 'Paper Gold'. It is an easy and important source of
increas¬ing the international liquidity.

On July 1974, the value of one unit of SDR was fixed on the basis of a 'Basket of
Currencies' of 16 countries. In 1978, the currencies of Denmark and South Africa
were excluded from the basket of currencies and the currencies of Iran and
Saudi Arabia were included. In 1981, the value of SDR was again fixed in five
currencies in which American dollar, British pound, Mark of Germany, Franc of
France and Japani yen were included. At present, the value of currency of every
country is fixed in SDR. Mutual Exchange rates of different currencies can be
increased or decreased accord¬ing to the demand and supply in the market and
thus, the par value system started by IMF has been ended by the floating rate
system.

Sources and Uses of IMF

The resources and the capital of the fund are determined on the basis of quotas
obtained in gold and legal money from the member countries. At the time of
establishment, the resources of IMF were estimated at at $ 1000 crore but due to
the exclusion of Russia, these stood at $ 880 crore only. Every country had to
pay 25 per cent of its fixed quota or 10 per cent of its authorised reserves of gold
and dollars whichever is lesser in gold and the balance quota was to be
deposited by the member nation in its legal currency. There was no change in
these quotas till the end of 13 years since the establishment of IMP.

The assistance given by the IMF is equal to the quota of applicant country. This
assistance is given in foreign currency temporarily to correct the disequilibrium in
balance of payments of a member country. IMF provides assistance to the
Central Bank of the member nation and does not make any transaction with the
local persons. The assistance provided by IMF cannot increase 100 per cent of
quotas of the member country. This assistance is provided into four parts and
every part is equal to the 25 per cent of quota.

Besides the general assistance provided by IMF, there are also some special
facilities in addition to 100 per cent quotas as Extended Fund facility,
compensatory financing, Buffer stock financing facility, Trust fund, structural
adjustment facility, Extended structural adjustment facility, technical assistance
and training programmes. In Extended fund facility introduced in 1974, medium
term assistance is provided in instalments to the member countries for a period
of 3 years to do the structural adjustments and economic reforms. The
Compensatory financing facility is provided to the member nations facing the
balance of payments difficulties due to the temporary export shortfall for reasons
beyond the members' control since 1963. In 1988 Compensatory and
Contingency financing facility was provided by IMF. Under this facility, assistance
given to the member coun-tries may be compensatory assistance, contingency
assistance and the assistance for the import of foodgrains. Buffer stock financing
facility is available since 1969 for building international buffer stock in order to
prevent fluctuations in the export earnings of member countries. In May 1976, the
trust fund
was established to give assistance to those poor countries whose per capita
income in 1973 was not more than 300 SDR.

This fund was created from the profits obtained by selling the gold reserves of
IMP. In March 1986, structural adjustment facility was initiated to help the poor
countries in improving their balance of payment system by structural
adjustments. This assistance is given from the Special Disbursement Account. It
is provided only to those countries which are eligible to get aid from the
International Development Association (IDA). Extended structural adjustment
facility was also started from April 1988 for very poor countries. For this purpose,
the resources were raised by special contributions.

The technical assistance and advice provided by the fund to its members is an
integral part of its activities. These take many forms, which operate at all levels of
authority and cover a wide array of topics ranging from broad policy issues to
narrow technical problems. Much of the assistance provided by the fund is in the
nature of regular / annual consultations with members which provide an
opportunity for review and appraisal of the country's economic and financial
situation. When a member country develops a financial stabilisation programme,
the fund assists in its execution and in monitoring its effectiveness. IMF also
advises its members on specific, economic and financial problems encompassing
aspects of general economic policy, problems arising from inflation, exchange
and trade system, balance of payments, macro economic modelling, computer
programme for economic analysis and data processing.

In May 1964, IMF institute was established to conduct various courses for
officials in Washington. In order to provide technical assistance in the field of
central banking, the central banking service was started in 1963. The Fiscal
Affairs department was created in 1964 to provide technical assistance in public
finance. IMF also created a legal department to render technical assistance in
banking, central banking, currency exchange and negotiable instruments in close
association with the central banking service. It also renders technical assistance
in fiscal affairs in close association with the fiscal affairs department

involving primarily the drafting of legislation on individual and corporation income

taxes, direct taxes, capital gain taxes and land taxes.

India and IMF

India has close relationship with IMF. It has been giving its contribution in the
execution of its functioning and policy making. India has been benefited many
times by the advice and economic aid of IMF. It is one of the founder members of
IMP. Finance minister is the ex-officio governor in the board of governors of IMF.
RBI is the alternate governor. India is represented at the IMF by an executive
director who represents three other countries, viz. Sri Lanka, Bangladesh and
Bhutan. India ranked 5th till 1970 among the countries which had the largest
quota in IMF. At present India has lost her permanent membership because her
quota in IMF ranks 11th which is less than the first five countries. India's current
quota in IMF is SDR 4158•20 million.

On the starting of IMF, Indian Rupee was equal to 0•268601 gm pure gold or
30•25 American cent but in December 1949 it was devalued and was fixed equal
to 0•186621 gm gold. On January 6, 1966 it was again devalued and stood equal
to 0•118489 gm gold. At the end of parvalue system, Indian Rupee was related to
the pound sterling. After it, it was affiliated to a basket of currency. Now the
exchange rate of rupee is determined on the basis of free market.

During the year 2002-06 India has made purchases transaction of SDRs 493•230
million and four repurchase transactions of SDRs 466•474 rr@ion. On July 2004,
India and IMF established a joint training programme in national banking
management Institute at Pune. First training programme was started in July
2006. India also donates money in Subsidy Account of IMF. India has paid 10
lakh dollar as 13th annual instalment in the Subsidy Account of Poverty
Reduction Growth Facility (PRGF) during July 2006. India provided 205
million( dollar in two separate instalments of IMF as loan under Financial
Transaction Plan in May ahd June 2003.

IMF at one side has benefited its member countries by providing help in balance
of payments, determining their exchange rates, spreading of technical
knowledge, improving international economic relations, acting as a friend at the
time of need and making member countries free from political pressure while on
the other side, it has often failed in achieving stability in exchange rates (the
value of various currencies is increasing or decreasing in the open market),
achieving stability in the prices of gold; establishing a free trade system, getting
stability in international money market. However IMF functions as a light-house
for monetary and financial hindrances. It manages the financial oil for the
economic machine of the world. It is in reality an international institution which
helps the needy countries at the time of financial difficulties in balance of
payments.

Finally it may be said that IMF has strengthened the monetary discipline among
its members by timely assisting them to tide over their balance of payments
deficits. It has helped the members in technical mat¬ters relating to fiscal and
monetary policies, debt servicing, balance of payments, currency devaluation etc.
IMF working during last 62 years since 1947 shows that all has not been well
with it. It has met only with limited success. Members have violated Fund's rules
regarding the alteration in the par values of the currencies. The countries whose
currencies were in short-supply did not take any material step to rectify it. The
success of the IMF towards the establishment of multi-lateral system of trading
will depend upon the degree to which the underdeveloped countries can
implement their development plans with the framework of financial stability free
from the distorting effects of inflation.