ROLE OF INTERNATIONAL

MONETARY FUND (IMF)

-WHAT IS THE IMF?

The International Monetary Fund (IMF) works to achieve sustainable growth

and prosperity for all of its
190-member countries. It does so by supporting economic policies that promote
financial stability and monetary cooperation, which are essential to increase
productivity, job creation, and economic well-being. The IMF is governed by
and accountable to its member countries.

HEADQUATER OF IMF
Washington, D.C., United States.

CRITICAL MISSIONS OF IMF

The IMF has three critical missions: furthering international monetary

cooperation, encouraging the expansion of trade and economic growth, and
discouraging policies that would harm prosperity. To fulfill these missions, IMF
member countries work collaboratively with each other and with other
international bodies.

The origins of the Fund and its objectives.

The midwives at the Fund's birth in 1944 were political tragedy and economic
despair. During the inter-war depression years, countries, suffering from
overcapacity and unemployment, tried to export their way out of trouble by
devaluing their currency, even while raising their own tariffs to protect against
imports. Of course, other countries had the same problem, and tried the same
solution — known colloquially as beggar-thy-neighbour policies. The result?
Global trade collapsed, while exchange rates and capital flows became volatile.

What the world needed, according to the Fund's founders, John Maynard
Keynes and Harry Dexter White, were rules to govern international exchange
and flows, and an impartial arbitrator to point out when those rules were being
violated. With the spirit of internationalism reinforced by recent memory, the
Fund was conceived at the 1944 Bretton Woods Conference with the prime
objective of facilitating the expansion and balanced growth of international
trade, and to contribute thereby to the promotion and maintenance of high levels
of employment and real income.

-OBJECTIVE OF IMF

Foster global monetary cooperation

Secure financial stability

Facilitate international trade.

Promote high employment and sustainable economic growth.

And reduce poverty around the world.

Macro-economic growth

Policy advise & financing for developing countries,

Promotion of exchange rate stability, and an international payment system.

HISTORY OF IMF

The IMF, also known as the Fund, was conceived at a UN conference in Bretton
Woods, New Hampshire, United States, in July 1944.

The 44 countries at that conference sought to build a framework for economic

cooperation to avoid a repetition of the competitive devaluations that had
contributed to the Great Depression of the 1930s.

Countries were not eligible for membership in the International Bank for
Reconstruction and Development (IBRD) unless they were members of the
IMF.

IMF, as per Bretton Woods agreement to encourage international financial

cooperation, introduced a system of convertible currencies at fixed exchange 0
rates, and replaced gold with the U.S. dollar (gold at $35 per ounce) for official
reserve.

After the Bretton Woods system (system of fixed exchange rates) collapsed in
the 1971, the IMF has promoted the system of floating exchange rates.
Countries are free to choose their exchange arrangement, meaning that market
forces determine the value of currencies relative to one another. This system
continues to be in place today. During 1973 oil crisis, IMF estimated that the
foreign debts of 100 oil-importing developing countries increased by 150%
between 1973 and 1977, complicated further by a worldwide shift to floating
exchange rates. IMF administered a new lending program during 1974–1976
called the Oil Facility. Funded by oil-exporting nations and other lenders, it was
available to nations suffering from acute problems with their balance of trade
due to the rise in oil prices.

IMF was one of the key organisations of the international economic system; its
design allowed the system to balance the rebuilding of international capitalism
with the maximisation of national economic sovereignty and human welfare,
also known as embedded liberalism.

The IMF played a central role in helping the countries of the former Soviet bloc
transition from central planning to market-driven economies.

In 1997, a wave of financial crises swept over East Asia, from Thailand to
Indonesia to Korea and beyond.

The International Monetary Fund created a series of bailouts (rescue packages)

for the most-affected economies to enable them to avoid default, tying the
packages to currency, banking and financial system reforms.

Global Economic Crisis (2008): IMF undertook major initiatives to strengthen

surveillance to respond to a more globalized and interconnected world.

These initiatives included revamping the legal framework for surveillance to

cover spillovers (when economic policies in one country can affect others),
deepening analysis of risks and financial systems, stepping up assessments of
members’ external positions, and responding more promptly to concerns of the
members.

FUNCTIONS OF IMF
Provides Financial Assistance: To provide financial assistance to member
countries with balance of payments problems, the IMF lends money to replenish
international reserves, stabilize currencies and strengthen conditions for
economic growth. Countries must embark on structural adjustment policies
monitored by the IMF.

IMF Surveillance: It oversees the international monetary system and monitors

the economic and financial policies of its 190 member countries.
As part of this process, which takes place both at the global level and in
individual countries, the IMF highlights possible risks to stability and advises
on needed policy adjustments.

Capacity Development: It provides technical assistance and training to central

banks, finance ministries, tax authorities, and other economic institutions.

This helps countries raise public revenues, modernize banking systems, develop
strong legal frameworks, improve governance, and enhance the reporting of
macroeconomic and financial data. It also helps countries to make progress
towards the Sustainable Development Goals (SDGs).

GOVERNACE SET UP OF IMF

Board of Governors: It consists of one governor and one alternate governor for
each member country. Each member country appoints its two governors.

It is responsible for electing or appointing executive directors to the Executive

Board.

Approving quota increases, Special Drawing Right allocations,

Admittance of new members, compulsory withdrawal of member,

Amendments to the Articles of Agreement and By-Laws.

Board of Governors is advised by two ministerial committees, the International

Monetary and Financial Committee (IMFC) and the Development Committee.

Boards of Governors of the IMF and the World Bank Group normally meet
once a year, during the IMF–World Bank Annual Meetings, to discuss the work
of their respective institutions. Ministerial Committees: The Board of Governors
is advised by two ministerial committees,

International Monetary and Financial Committee (IMFC): IMFC has 24

members, drawn from the pool of 190 governors, and represents all member
countries.

It discusses the management of the international monetary and financial system.

It also discusses proposals by the Executive Board to amend the Articles of

Agreement.
And any other matters of common concern affecting the global economy.

Development Committee: is a joint committee (25 members from Board of

Governors of IMF & World Bank), tasked with advising the Boards of
Governors of the IMF and the World Bank on issues related to economic
development in emerging market and developing countries.

It serves as a forum for building intergovernmental consensus on critical

development issues. Members’ voting power is related directly to their quotas
(the amount of money they contribute to the institution).

IMF allows each member country to choose its own method of determining the
exchange value of its money. The only requirements are that the member no
longer base the value of its currency on gold (which has proved to be too
inflexible) and inform other members about precisely how it is determining the
currency’s value.

IMF AND INDIA

India is a founder member of the IMF.

International regulation by IMF in the field of money has certainly contributed

towards expansion of international trade. India has, to that extent, benefitted
from these fruitful results.

Post-partition period, India had serious balance of payments deficits,

particularly with the dollar and other hard currency countries. It was the IMF
that came to her rescue.

The Fund granted India loans to meet the financial difficulties arising out of the
Indo–Pak conflict of 1965 and 1971.

From the inception of IMF up to March 31, 1971, India purchased foreign
currencies of the value of Rs. 817.5 crores from the IMF, and the same have
been fully repaid.
Since 1970, the assistance that India, as other member countries of the IMF, can
obtain from it has been increased through the setting up of the Special Drawing
Rights (SDRs created in 1969).

India had to borrow from the Fund in the wake of the steep rise in the prices of
its imports, food, fuel and fertilizers.

In 1981, India was given a massive loan of about Rs. 5,000 crores to overcome
foreign exchange crisis resulting from persistent deficit in balance of payments
on current account.

India wanted large foreign capital for her various river projects, land
reclamation schemes and for the development of communications. Since private
foreign capital was not forthcoming, the only practicable method of obtaining
the necessary capital was to borrow from the International Bank for
Reconstruction and Development (i.e. World Bank).

India has availed of the services of specialists of the IMF for the purpose of
assessing the state of the Indian economy. In this way India has had the benefit
of independent scrutiny and advice.

The balance of payments positions of India having gone utterly out of gear on
account of the oil price escalation since October 1973, the IMF has started
making available oil facility by setting up a special fund for the purpose. The
foreign reserves started picking up with the onset of the liberalisation policies.

India has occupied a special place in the Board of Directors of the Fund. Thus,
India had played a creditable role in determining the policies of the Fund. This
has increased the India’s prestige in the international circles.

India has not taken any financial assistance from the IMF since 1993.

Repayments of all the loans taken from the International Monetary Fund were
completed on 31 May 2000.

The Finance Minister of India is the ex-officio Governor on the Board of

Governors of the IMF.

RBI Governor is the Alternate Governor at the IMF.

CRITICISM OF IMF
IMF’s governance is an area of contention. For decades, Europe and the United
States have guaranteed the helm of the IMF to a European and that of the World
Bank to an American.

The situation leaves little hope for ascendant emerging economies that, despite
modest changes in 2015, do not have as large an IMF voting share as the United
States and Europe.

Conditions placed on loans are too intrusive and compromise the economic and
political sovereignty of the receiving countries. 'Conditionality' refers to more
forceful conditions, ones that often turn the loan into a policy tool.

These include fiscal and monetary policies, including such issues as banking
regulations, government deficits, and pension policy.

Many of these changes are simply politically impossible to achieve because

they would cause too much domestic opposition.

IMF imposed the policies on countries without understanding the distinct

characteristics of the countries that made those policies difficult to carry out,
unnecessary, or even counterproductive.

Policies were imposed all at once, rather than in an appropriate sequence. IMF
demands that countries it lends to privatize government services rapidly. It
results in a blind faith in the free market that ignores the fact that the ground
must be prepared for privatization.

STATUS OF IMF REFORMS

IMF’s governance is an area of contention. For decades, Europe and the United
States have guaranteed the helm of the IMF to a European and that of the World
Bank to an American.

The situation leaves little hope for ascendant emerging economies that, despite
modest changes in 2015, do not have as large an IMF voting share as the United
States and Europe.
Conditions placed on loans are too intrusive and compromise the economic and
political sovereignty of the receiving countries. 'Conditionality' refers to more
forceful conditions, ones that often turn the loan into a policy tool.

These include fiscal and monetary policies, including such issues as banking
regulations, government deficits, and pension policy.

Many of these changes are simply politically impossible to achieve because

they would cause too much domestic opposition.

IMF imposed the policies on countries without understanding the distinct

characteristics of the countries that made those policies difficult to carry out,
unnecessary, or even counter-productive.

Policies were imposed all at once, rather than in an appropriate sequence. IMF
demands that countries it lends to privatize government services rapidly. It
results in a blind faith in the free market that ignores the fact that the ground
must be prepared for privatization.

STATUS OF IMF

Quota Reforms: As part of the Fourteenth General Review of Quotas (2010,

India’s total quota has been increased to SDR 13,114.4 million from SDR
5821.5 million.

With this increase, India’s share would increase to 2.75 % (from 2.44%),
making it the 8th largest quota-holding country in the IMF.

Significantly, the reforms will lead to a realignment of quota shares of member

countries, with the shifts to dynamic Emerging Market and Dynamic Countries
(EMDCs) and from over- to under-represented countries both exceeding 6%,
while protecting the voting share of the poorest member.

Due to discontent with IMF, BRICS countries established a new organization

called BRICS bank to reduce the dominance of IMF or World Bank and to
consolidate their position in the world as BRICS countries accounts for 1/5th of
WORLD GDP and 2/5th of world population.
It is almost impossible to make any reform in the current quota system as more
than 85% of total votes are required to make it happen. The 85% votes does not
cover 85% countries but countries which have 85% of voting power and only
USA has voting share of around 17% which makes it impossible to reform
quota without consent of developed countries.The 15th General Quota Review
(in process) provides an opportunity to assess the appropriate size and
composition of the Fund’s resources and to continue the process of governance
reforms.

CONCLUSION
the International Monetary Fund utilizes its intellectual and material resources
to shape institutional change in national economies during conditions of
extreme economic uncertainty. The IMF’s financial resources and loan policy
conditionality provide an arsenal of material incentives that can create openings
for normative persuasion through iterated games over policy efficacy with
national policymakers — long-term political contests where the IMF does not
always prevail. Especially in cases where the IMF must persuade policymakers
to adopt its ideas in an environment of acute uncertainty, the informal context in
which formal institutional change takes place can thwart the organization’s
efforts to sustain an IMF-friendly policy orientation over time. In such
circumstances, institutional change is not a matter of the IMF simply diffusing
formal policy changes that are internalized at the national level and
automatically direct actors’ behaviour. Rather, at every step of the reform
process, the IMF must persuade actors to adopt — and to sustain — its long-
term policy preferences, which is an ongoing struggle because of the range of
political variables and unexpected events that intervene. The IMF’s persuasive
influence thus depends upon how policymakers interpret the political and
economic circumstances they face, and whether this leads them to see the IMF
as a useful means to achieve other political and economic objectives.