POLITICAL SCIENCE[PSCI1235]

ASSIGNMENT

TOPIC- INTERNATIONAL MONETARY

FUND:AN OVERVIEW

SUBMITTED TO SUBMITTED BY
Adv. Anuradha Upadhyay Sanya Gupta
FACULTY A032134721094
SECTION B
BALLB [2021-2026]
 ACKNOWLEDGEMENT

I would like to extend my heartfelt gratitude towards our University, Amity

University, Noida, for including Political Science subject in our curriculum.

Also, I would like to thank our professor Adv. Anuradha Upadhyay for her
guidance and motivation and giving me the opportunity to work on this project from which I
could gain ample amount of knowledge.

Sanya Gupta
(A032134721094)
S.NO TOPIC

1. WHAT IS IMF

2. ORIGIN OF IMF

3. OBJECTIVES

4. FUNCTIONS & ELEMENTS

5. ORGANISATION & MANAGEMENT OF IMF

6. SPECIAL DRAWING RIGHTS

7. WORKING OF IMF

8. ACHIEVEMENTS & FAILURES OF IMF

9. CRITICISM

10. CONCLUSION

11. REFRENCES
INTERNATIONAL MONETARY
FUND (IMF): AN OVERVIEW
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.

Origin of IMF:

The origin of the IMF goes back to the days of international chaos of the 1930s. During the
Second World War, plans for the construction of an international institution for the
establishment of monetary order were taken up.

At the Bretton Woods Conference held in July 1944, delegates from 44 non-communist
countries negotiated an agreement on the structure and operation of the international monetary
system.

The Articles of Agreement of the IMF provided the basis of the international monetary system.
The IMF commenced financial operations on 1 March 1947, though it came into official
existence on 27 December 1945, when 29 countries signed its Articles of

Agreement (its charter). Today (May 2012), the IMF has near-global membership of 188-
member countries. Virtually, the entire world belongs to the IMF. India is one of the founders-
members of the Fund.
 Objectives:

Article 1 of the Articles of Agreement (AGA) spell out 6 purposes for which the IMF was set
up. These are:

• To promote international monetary cooperation through a permanent institution which

provides the machinery for consolation and collaboration on international monetary
problems.
• To facilitate 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 and to the development of the productive resources of all members as primary
objective of economic policy.
• To promote exchange stability, to maintain orderly exchange arrangements among
members, and to avoid competitive exchange depreciation.
• To assist in the establishment of a multilateral system of payments in respect of current
transactions between members and in the elimination of foreign exchange restrictions
which hamper the growth of world trade.
• To give confidence to members by making the general resources of the Fund
temporarily available to them under adequate safeguards, thus providing them with the
opportunity to correct maladjustments in their balance of payments, without resorting
to measures destructive of national or international prosperity.

All these objectives of the IMF may be summarised:

To promote international cooperation; to facilitate the expansion and balanced growth of

international trade; to promote exchange stability; to assist in the establishment of a multilateral
system of payments; to make its general resources 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 balance of payments of members.
 Functions:

The principal function of the IMF is to supervise the international monetary system.

Several functions are derived from this. These are: granting of credit to member countries in
the midst of temporary balance of payments deficits, surveillance over the monetary and
exchange rate policy of member countries, issuing policy recommendations. It is to be noted
that all these functions of the IMF may be combined into three.

These are: regulatory, financial, and consultative functions:

Regulatory Function:

The Fund functions as the guardian of a code of rules set by its (AOA— Articles of Agreement).

Financial Function:

It functions as an agency of providing resources to meet short term and medium term BOP
disequilibrium faced by the member countries.

Consultative Function:

It functions as a centre for international cooperation and a source of counsel and technical
assistance to its members.

The main function of the IMF is to provide temporary financial support to its members so that
‘fundamental’ BOP disequilibrium can be corrected. However, such granting of credit is
subject to strict conditionality. The conditionality is a direct consequence of the IMF’s
surveillance function over the exchange rate policies or adjustment process of members.

The main conditionality clause is the introduction of structural reforms. Low income countries
drew attraction of the IMF in the early years of 1980s when many of them faced terrible BOP
difficulties and severe debt repayment problems. Against this backdrop, the Fund took up
‘stabilisation programme’ as well as ‘structural adjustment programme’. Stabilisation
programme is a demand management issue, while structural programme concentrates on supply
management. The IMF insists member countries to implement these programmes to tackle
macroeconomic instability.
 Its main elements are:

• Application of the principles of market economy;

• Opening up of the economy by removing all barriers of trade; and

• Prevention of deflation.

The Fund provides financial assistance. It includes credits and loans to member countries with
balance of payments problems to support policies of adjustment and reform. It makes its
financial resources available to member countries through a variety of financial facilities.

It also provides concessional assistance under its poverty reduction and growth facility and
debt relief initiatives. It provides fund to combat money- laundering and terrorism in view of
the attack on the World Trade Centre of the USA on 11 September 2001.

In addition, technical assistance is also given by the Fund. Technical assistance consists of
expertise and support provided by the IMF to its members in several broad areas : the design
and implementation of fiscal and monetary policy; institution-building, the handling and
accounting of transactions with the IMF; the collection and retirement of statistical data and
training of officials.

Maintenance of stable exchange rate is another important function of the IMF. It prohibits
multiple exchange rates.

It is to be remembered that unlike the World Bank, the IMF is not a development agency.
Instead of providing development aid, it provides financial support to tide over BOP difficulties
to its members.
 Organisation and Management of the IMF:

Like many international organisations, the IMF is run by a Board of Governors, an Executive
Board and an international staff. Every member country delegate a representative (usually
heads of central banks or ministers of finance) to the Board of Governors—the top link of the
chain of command. It meets once a year and takes decision on fundamental matters such as
electing new members or changing quotas.

The Executive Board is entrusted to the management of day-to-day policy decisions. The Board
comprises 24 executive directors who supervise the implementation of policies set by the
member governments through the Board of Governors.

The IMF is headed by the Managing Director who is elected by the Executive Board for a 5-
year term of office.

Rights and obligations, i.e., the balance of Powers in the Fund is determined by a system of
quotas. Quotas are decided by a vote of the Board of Governors. Quotas or subscriptions
roughly reflect the importance of members in the world economy. It is the quota on which
payment obligation, credit facilities, and voting rights of members are determined.
 Special Drawing Rights (SDRs):

The Special Drawing Rights (SDRs) as an international reserve asset or reserve money in the
international monetary system was established in 1969 with the objective of alleviating the
problem of international liquidity. The IMF has two accounts of operation—the General
Account and the Special Drawing Account.

The former account uses national currencies to conduct all business of the fund, while the
second account is transacted by the SDRs. The SDR is defined as a composite of five
currencies—the Dollar, Mark, Franc, Yen and Pound. The SDRs are allocated to the member
countries in proportion to their quota subscriptions. Only the IMF members can participate in
SDR facility.

SDRs being costless, often called paper gold, is just a book entry in the Special Drawing
Account of the IMF. Whenever such paper gold is allocated, it gets a credit entry in the name
of the participating countries in the said account. It is to be noted that SDRs, once allocated to
a member, are owned by it and operated by it to overcome BOP deficits.

Since its inception, there have been only four allocation to SDRs—the first in 1970, and the
last in 2008-09—mainly to the developing countries.
 Working of the IMF:

There are two phases in the working of the IMF over the last 65 years. The first phase covers
the period late 1940s (i.e., 1947) to 1971. This phase is popularly known as the ‘Bretton Woods
System’. The IMF system or the Bretton Woods System provides for exchange rate stability in
the short run but allowed for the possibility of exchange rate adjustment when a country
experienced ‘fundamental’ disequilibrium in its BOP accounts. Thus, the pegged exchange rate
was adjusted in accordance with the IMF. Hence the name ‘adjustable peg system’.

As the system was the source of some major problems, it was abandoned in 1971 and more
flexibility was introduced in the monetary system. In other words, the demise of the Bretton
Woods System made room for the floating exchange rate regime, requiring changes in the role
of the IMF. After prolonged negotiations (1973-78), the IMF started its second-leg journey in
1978.

The decade of the 1970s saw massive borrowing by the developing countries. It rose to $600
billion by 1982. Meanwhile, the rise in interest rates in the USA from 1979 and the appreciation
of dollar caused tremendous difficulties to the developing countries in servicing their debts. On
the other hand, the switch to the floating exchange rate system coincided with the deteriorating
economic conditions in the industrialised countries.

Debt crisis that emerged in many developing countries had a dramatic effect. Mexico a Latin
American country announced its failure to honour debt obligations. The IMF now played a
crucial role to put the international financial system in order. It came in for mobilisation of
additional financial resources so as to reduce the debt burden. As a result of this and other
related measures, many countries regained access to the international banks and creditors and
the severity of the debt problem moderated considerably in Latin America in the early 1990s.

With the breakup of the Soviet Union in 1989, a new category of countries, especially the
erstwhile communist countries, joined the IMF. The IMF now came forward to assist countries
undergoing transition from a centrally planned economy to a market- oriented economy.
Privatisation is indeed a crucial element of the transition process. That is why the IMF is
providing financial assistance and technical support for the development of sound economic
management and the privatisation of state enterprises.

In 1997, the East Asian financial crisis began when the currencies of the ‘Asian tiger’
economies (South Korea, Singapore, Hong Kong, Taiwan) plummeted, and the stock market
crashed. Rescue packages were launched by the IMF under strong authority conditions.
 Achievements:

From this balance sheet of the working of the IMF, we are now in a position to evaluate its
performance over the last 65 years or so. First, we state the achievements of the Fund.

• The IMF acts both as a financing and an adjustment-oriented international institution

for the benefit of its members It has been providing financial assistance to the deficit
countries to meet their temporary disequilibrium in BOP.

• The Fund aims at promoting exchange rate stability. In its early phase, the Fund decided
of avoidance of competitive exchange depreciation.

• It has tried to solve the problem of international liquidity. To create international

liquidity. Special Drawing Rights (SDRs)—an artificial currency—were created in
1969 as foreign exchange reserves to benefit the developing countries in particular.
SDR allocations are made to member countries to finance the BOP deficits.

• It is an institution through which consultation in monetary affairs takes place in an on-

going way. It acts as a forum for discussions of the economic, fiscal and financial
policies of member countries, keeping the BOP problems in mind. Previously, the
poorest developing countries did not receive adequate treatment from the Fund. But
from 1980s onwards—when the debt crisis broke out in poor countries—the Fund
decided to divert its financial resources to these countries.

• In 1980s, centrally planned economies were not hitherto members of the Fund. With
the collapse of the Soviet Union in 1989, ex-communist countries became members of
the Fund and the Fund is aiding these countries so as to instil, the principles of market
economy. It has decided to finance resources to combat terrorism and money-
laundering.

• Finally, the IMF has assisted its members in the formulation of appropriate monetary,
fiscal, and trade policies.
 Failures:

Despite these achievements, its failures are glaring. In other words, its success is, on the whole,
limited. There are some serious charges against this institution that cannot escape attention.
These are:

• The Fund provides short-term finance to its members to tackle BOP disequilibrium. For
this purpose, it adopted an adjustable peg system in the first phase of its life. But it
failed to establish a stable exchange rate. Its role in controlling the competitive
exchange depreciation policies adopted by the members was subject to serious scrutiny,
although it was created to avoid devaluation as a BOP measure as much as possible.

• The IMF is incapable of taking independent policy decisions. It complies with the
‘order’ of the superpowers. Further, it has minimal influence over the policy decisions
of the major industrial powers. In these cases, its mandate to exercise ‘firm surveillance’
over some influential members or superpowers is virtually meaningless—it has no
influence over the US deficits or European interest rates.

• Secondly, the Fund imposes conditions on the poor countries while sanctioning loans.
Now, it is ignoring its central concern—exchange rate management and the BOP
problems. It is now championing the issue of ‘market principle’. It suggests poor
developing countries to cut expenditure-borrowing-subsidy, raise prices of state
enterprises, privatisation of state-owned enterprises, etc. If such measures—most
popularly known as structural adjustment programmes—are adopted only then the IMF
credit would follow. It is said that the third world debt crisis is due to the Fund policies
and working.

• Thirdly, the Fund has failed to eliminate foreign exchange restrictions imposed by its
members that hamper the growth of trade.

• In view of these, the developing countries are blaming the IMF for their economic
malaise. It is said that the IMF has outlived its mission and the time has come for it to
go into oblivion. Sixty- five years is long enough!
 CRITICISM OF THE INTERNATIONAL MONETARY FUND

• Developed countries were seen to have a more dominant role and control over less
developed countries (LDCs).

• The Fund worked on the incorrect assumption that all payments disequilibria were
caused domestically. The Group of 24 (G-24), on behalf of LDC members, and the United
Nations Conference on Trade and Development (UNCTAD) complained that the IMF did not
distinguish sufficiently between disequilibria with predominantly external as opposed to
internal causes.

• This criticism was voiced in the aftermath of the 1973 oil crisis. Then LDCs found
themselves with payment deficits due to adverse changes in their terms of trade, with the Fund
prescribing stabilization programs similar to those suggested for deficits caused by government
over-spending. Faced with long-term, externally generated disequilibria, the G-24 argued for
more time for LDCs to adjust their economies.

• Some IMF policies may be anti-developmental in the sense that deflationary effects of
IMF programmes quickly led to losses of output and employment in economies where incomes
were low and unemployment was high. Moreover, the burden of the deflation is
disproportionately borne by the poor.

• The IMF's initial policies were based in theory and influenced by differing opinions and
departmental rivalries. Critics suggest that its intentions to implement these policies in
countries with widely varying economic circumstances were misinformed and lacked
economic rationale.
 CONCLUSION

Therefore, the role of IMF could be summarized as an international institution with its primary
function as to oversee the fixed exchange rate arrangements between countries, thus helping
national governments manage their exchange rates and allowing these governments to
prioritize economic growth, and to provide short-term capital to aid the balance of payments
and prevent the spread of international economic crises.

The IMF's role was fundamentally altered by the floating exchange rates after 1971. It shifted
to examining the economic policies of countries with IMF loan agreements to determine
whether a shortage of capital was due to economic fluctuations or economic policy. The IMF
also researched what types of government policy would ensure economic recovery.

In addition, the IMF negotiates conditions on lending and loans under their policy of
conditionality, which was established in the 1950s. Low-income countries can borrow on
concessional terms, which means there is a period of time with no interest rates, through the
Extended Credit Facility (ECF), the Standby Credit Facility (SCF) and the Rapid Credit
Facility (RCF).

Non-concessional loans, which include interest rates, are provided mainly through the Stand-
By Arrangements (SBA), the Flexible Credit Line (FCL), the Precautionary and Liquidity Line
(PLL), and the Extended Fund Facility.

The IMF provides emergency assistance via the Rapid Financing Instrument (RFI) to members
facing urgent balance-of-payments needs.
 REFERENCES

[1] Ariel Buira, AN ANALYSIS OF IMF CONDITIONALITY, (G-24 Discussion

Paper No. 22) August 2003

[2] Todd Benson, Report Looks Harshly at I.M.F.’s Role in Argentine Debt Crisis, The
New York Times, http://www.nytimes.com/2004/07/30/business/report-looks-harshly-at-imf-
s- role-in-argentine-debt-crisis.html (last visited 14th Nov. 2014)

[3] Independent Evaluation Office( IEO), The Role of the IMF in Argentina, 1991- 2002,
http://www.imf.org/external/np/ieo/2003/arg/index.htm (last visited 14th Nov, 2014)

[4] Carol Graham and Paul Robert Masson, The IMF’s Dilemma in Argentina: Time for a
New Approach to Lending?
http://www.brookings.edu/research/papers/2002/11/globaleconomics- graham (last visited
14th Nov, 2014)

[5] Fyodor I. Kushnirsky, Ukraine and The IMF: An Uneasy Cooperation (July 2014),
http://thejournalofbusiness.org/index.php/site/article/view/572 (last visited 14th Nov. 2014)

[6] IMF Survey, Ukraine Unveils Reform Program with IMF Support,
http://www.imf.org/external/pubs/ft/survey/so/2014/new043014a.htm (last visited 14th Nov,
2014)