In the previous chapter, we have
studied the basis of trade, gains from
trade, terms of trade, BoP and foreign
exchange. When trade takes place among countries, the developed countries always stand to gain and the LDCs suffer from adverse terms of trade as well as balance of payments and they affect their exchange rates. The Great Depression of 1930s and
World War II led to purely nationalistic
policies in which almost every country
imposed trade restrictions, exchange
controls and exchange depreciation so as to boost exports and to restrict imports considerab
International Monetary Fund:
The purpose of International Monetary Fund is to secure and promote economic and financial cooperation
among member countries. The IMF was
established to assist the member nations to tide over the Balance of Payments disequilibrium in the short term. At present, the IMF has 189 member countries with Republic of Nauru joined
Objectives Of IMF:
i) To promote international monetary
cooperation among the member nations.
ii) To facilitate faster and balanced growth of international trade.
iii) To ensure exchange rate stability
by curbing competitive exchange
iv) To eliminate or reduce exchange
controls imposed by member nations.
v) To establish multilateral trade and
payment system in respect of current
transactions instead of bilateral trade
vi) To promote the flow of capital from
developed to developing nations.
vii) To solve the problem of international liquidity.
Functions Of IMF:
i) Bringing stability in exchange rate
The IMF is maintaining exchange
rate stability and emphasising devaluation criteria, restricting members to go in for multiple exchange rates and also to buy or sell gold at prices other than declared par
ii) Correcting BOP Disequilibrium The IMF is helping the member countries in eliminating or minimizing the short-period disequilibrium in their
balance of payments either by selling or
lending foreign currencies to the membe rnation.
iii) Determining par values
IMF enforces the system of determination of par values of the
currencies of the member countries.
According to the Articles of Agreement
of the IMF, every member nation should declare the par value of its currency in terms of gold or US dollars. Under thisarticle, IMF ensures smooth working of the international monetary system, in favour of some developed countries.
iv) Balancing demand and supply of
currencies IMF is entrusted with the important function of maintaining balance between demand and supply of various currencies.
The Fund (IMF) can declare a currency as scarce currency which is in great demand and can increase its supply by borrowing it from the country concerned or by purchasing the same currency in exchange of gold.
v) Reducing trade restrictions
The Fund also aims at reducing
tariffs and other trade barriers imposed
by the member countries with thepurpose of removing restrictions on remittance of funds or to avoid discriminating practices.
vi) Providing credit facilities
IMF is providing different borrowing
and credit facilities with the objective of
helping the member countries. These credit facilities offered by it include basic credit facility, extended fund facility for a period of three years, compensatory financing facility and structural adjustment facility.
The functions of the IMF are grouped
under three heads.
1. Financial – Assistance to correct short and medium term deficit in BOP;
2. Regulatory – Code of conduct and
3. Consultative – Counseling and technical consultancy.
Facilities offered by IMF:
The Fund has created several new credit facilities for its members.
(i) Basic Credit Facility:
The IMF provides financial assistanceto its member nations to overcome theirtemporary difficulties relating to balance of payments. A member nation can purchase from the Fund other currencies or SDRs, in exchange for its own currency, to finance payment deficits. The loan is repaid when the member repurchases its
own currency with other currencies or
SDRs. A member can unconditionally
borrow from the Fund in a year equal to 25% of its quota. This unconditional
borrowing right is called the reserve
(ii) Extended Fund Facility
Under this arrangement, the IMF
provides additional borrowing facility
up to 140% of the member’s quota, over
and above the basic credit facility. The
extended facility is limited for a period upto 3 years and the rate of interest is low.
Special Drawing Rights (SDRs)
The Fund has succeeded in
establishing a scheme of Special
Drawing Rights (SDRs) which is
otherwise called ‘Paper Gold’. They
are a form of international reserves
created by the IMF in 1969 to solve
the problem of international liquidity.
They are allocated to the IMF members
in proportion to their Fund quotas.
SDRs are used as a means of payment
by Fund members to meet balance
of payments deficits and their total
reserve position with the Fund.
SDRs act both as an international unit
of account and a means of payment. All
transactions by the Fund in the form of
loans and their repayments, its liquid
reserves, its capital, etc., are expressed
in the SDR.
The achievements of the fund can
be summed up in the words of Haien
that ‘Fund is like an International
(iii) Compensatory Financing Facility
In 1963, IMF established
compensatory financing facility to provide additional financial assistance to the member countries, particularly primary producing countries facing shortfall in export earnings. In 1981, the coverage of the compensatory financing facility was extended to payment problem caused by
the fluctuations in the cost of cereal inputs.
(iv) Buffer Stock Facility
The buffer stock financing facility
was started in 1969. The purpose of this
scheme was to help the primary goods
(food grains) producing countries to
finance contributions to buffer stock
arrangements for the stabilisation of
primary product prices.
(v) Supplementary Financing Facility
Under the supplementary financing
facility, the IMF makes temporary
arrangements to provide supplementary financial assistance to member countries facing payments problems relating to their
present quota sizes.
(vi) Structural Adjustment Facility
The IMF established Structural
Adjustment Facility (SAF) in March 1986 to provide additional balance of payments assistance on concessional terms to the poorer member countries. In December 1987, the Enhanced Structural Adjustment
Facility (ESAF) was set up to augment the availability of concessional resources to low income countries. The purpose of SAF and ESAF is to force the poor countries to undertake strong macroeconomic and structural programmes to improve their balance of payments positions and
promote economic growth.
Achievements Of IMF:
The main achievements of International Monetary Fund are as
i) Establishment of monetary reserve
fund The Fund has played a major role in achieving the sizeable stock of the national currencies of different countries. To meet the foreign exchange requirements of the member nations, IMF uses its stock to help the member nations to meet foreign exchange requirements.
ii) Monetary discipline and
cooperation The IMF has shown keen interest in maintaining monetary discipline and cooperation among the member countries. To achieve this objective, it has provided assistance only to those countries which make sincere efforts to solve their problems.
iii) Special interest in the problems of
UDCsThe notable success of the Fund is
the maintenance of special interest in theacute problems of developing countries. The Fund has provided financial assistance to solve the balance of payment problem of UDCs. However, many UDCs continue to be UDCs, while the developed countries have achieved substantial growth.
India and IMF:
Till 1970, India stood fifth in the
Fund and it had the power to appoint a
permanent Executive Director. India has been one of the major beneficiaries of the Fund assistance.
It has been getting aid from the various Fund Agencies from time to time and has been regularly repaying its debt. India’s current quota in the IMF is SDRs (Special Drawing Rights) 5,821.5
million, making it the 13th largest quota holding country at IMF with shareholdingsof 2.44%.
Besides receiving loans to meet
deficit in its balance of payments, India
has benefited in certain other respects
from the membership of the Fund.