International Monetary Fund (IMF)

Origin of IMF:

Even before the Second World War ended, monetary experts in the USA and the UK began planning to solve the monetary problems likely to be faced after the war. Known after their authors as the Keynes Plan and the White Plan, both sets of proposals were subjected to intensive discussion and furnished the basis for the Bretton Woods Conference which decided to set up the two organizations, the IMF and the IBRD. The creation of the Fund represents a major effort at international monetary co-operation. Its main objectives are:

1. To promote exchange stability and orderly exchange arrangements and to avoid competitive devaluation.
2. To help re-establish multilateral system of trade and payments and to eliminate foreign exchange restrictions.
3. To provide for international adjustment, superior to deflation, by making available increased international reserves.
4. To facilitate the expansion and balanced growth of international trade.

The basic functions of IMF are:

1. To lay down ground rules for the conduct of international finance.
2. To provide short and medium term assistance for overcoming short term balance of payments deficits.
3. Creation and distribution of reserves in the form of SDRs (special drawing rights).

The Fund has 184 member-countries accounting for about 80% of the total world production and 90% of the world trade. Members’ quotas in the fund amount to approximately SDR 212 billion. Quotas are used to determine (i) the voting power of members, (ii) their contribution to the Fund’s resources, (iii) members’ access to these resources, and (iv) their share in the allocation of SDRs. India’s quota in the Fund is SDR 4, 158.2 million.

Main Features of the International Monetary System (1973 basis):

Par Value System: The exchange value of a member’s currency was fixed in terms of gold. Since the price of gold was officially fixed at US $35 per ounce, it also meant that par values were fixed in terms of dollar. Dollar was used as the intervention currency as at that time dollar was as good as gold. In fact, members preferred to keep dollars in reserve, inasmuch as dollars earned interest while gold reserves did not.

Change in par Value: In order to achieve short term balance of payments equilibrium members could borrow funds from the International Monetary Fund. If the IMF help did not serve the purpose, the IMF could permit devaluation of the currency. If permit devaluation of the currency. If a member proposed a change up to 10% no prior approval from the IMF was required. If the proposed was greater than 10%, it could be allowed provided (i) there was a fundamental disequilibrium, and (ii) devaluation would be the right remedy for solving the fundamental disequilibrium. Fundamental disequilibrium was nowhere defined, but experience has shown that severe depression abroad with prolonged unemployment at home and cases of structural disequilibrium could be taken as cases of fundamental disequilibrium.

Exchange control was not permitted on current transactions except (i) when a member’s currency was under massive attack, and (ii) when the Fund declared some currency as scarce. Members could use exchange control so far as the use of that currency was concerned.

Changes made after 1973

A member can peg its currency to (i) either a single major currency ,or (ii) a basket of currencies, or (iii) allow it to float independently., or (iv) adjust it to a set of indicators. Thus, there is a complete departure from the par value system. It is however, subject to surveillance by the Fund.

A reduction in the role of gold in the International Monetary System. There is now no statutory price for gold. In fact, one-third of the gold stock with the IMF was disposed of to create a Trust Fund to be used to provide additional balance of payments support on discounted terms to 59 eligible developing members. SDR is now the unit of account for Fund’s transactions.

Assistance provided by the Fund:

Ordinarily, Fund member subscribes its quota in the fund by paying 25% in reserve assets and 75% in its own currency. When a member draws on the Fund’s resources it purchases the currencies of other member-countries or SDRs with its own currency, leading to a rise in Fund’s holdings of the member’s currency. The borrowing member must buy back its own currency within a specified period with SDRs or currencies specified by the Fund. The Fund’s financial resources are made available to its members through a variety of policies, which differ mainly in the type of balance of payments need they address and in the degree of conditionality attached to them. The rules governing access to the use of the Fund’s general resources apply uniformly to all members.

For any purchase, a member is required to represent to the Fund that the desired purchase is needed because of its balance of payments or reserve position or developments in its reserves.

Access to Fund resources is determined in relation to a member’s quota. The annual access limit is 100% of the quota and the cumulative access limit is 300% of the quota.