The currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, and pound sterling). The SDR currency value is calculated daily (except on IMF holidays or whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five years.
up to 25 percent must be paid in SDRs or widely accepted currencies (such as the U.S. dollar, the euro, the yen, or the pound sterling), while the rest is paid in the member's own currency.
World Bank provides long-term loans for promoting balanced economic development, while IMF provides short-term loans to member countries for eliminating BOP disequilibrium. Both these institutions are complementary to each other. Few economists have even suggested that the two organizations should be merged.
Imf and india
•The International Monetary Fund (IMF) is an international organization that was conceived on July 22, 1944 originally with 45 members.•Presently it has 187 registered countries as a part of this organization.• Goal is to stabilize exchange rates and assist the reconstruction of the world’s international payment system.• It is a specialized agency of the United Nations but has its own charter, governing structure, and finances.• Upon joining, each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy.• They have concept of SDR as minimum 25% payment by any member country who joins IMF.
Provision of M onetary C ooperation to the m em ber countries
The fund s aim s at provid ing and establishing m ultilateral paym ents and trad e system in place of bilateral agreem ents
It will lend or sell to its m em ber -countries currencies of other countries. This facilitates foreign exchange transactions am ong the m em bers.
The fund aim s at provid ing short - termm onetary help to m em ber countries d uring em ergency.
To lesson the chances ofd isequilibrium in the international BO P of m em ber countries.
To red uce the poverty in m em ber countries and to prom ote high em ploym ent by facilitating sustainable econom ic growth.
Another objective of the fund is to help the m em ber countries investtheir long - term fund s in profitable activities.
Quota subscriptions are a central component of the IMF’s financial resourcesQuotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit ofaccount.The IMF uses a quota formula to guide the assessment of a member’s relativeposition.The current quota formula is a weighted average of:GDP (weight of 50 percent)Openness (30 percent)Economic variability (15 percent)International reserves (5 percent)
GDP is measured as blends of GDP based on market exchange rates (weight of60 percent) and on PPP exchange rates (40 percent)Up to 25 percent must be paid in SDRs or widely accepted currencies (such asthe U.S. dollar, the euro, the yen, or the pound sterling), while the rest is paid inthe members own currency.Largest Member is U.S: SDR 42.1 BillionSmallest Member Tuvalu : SDR 1.8 MillionIndia : SDR 5.8 BillionAs on March 9 SDR rates are: 1 USD = SDR 0.648429
A member’s Quota describes Financial and Organizational relationship with IMF:Subscriptions (Quota Share) determines the amount it is required to pay upon joining the Fund. Voting power (Voting Share) determines member’s voting power in IMF decisions.Access to Financing The amount of financing a member can obtain from IMF is also based on Quota.
Under Stand-By and Extended Arrangements, a member can borrow up to • 200 percent of its quota annually • 600 percent cumulatively Access may be higher in exceptional circumstances
For India :Governor = Finance Minister Pranab MukherjeeAlternate Governor = RBI Governor D.Subbarao
IMF v/s The World BankWhat according to you is the major difference???
policy advice technical assistance financial support debt reliefto achieve its eight MDGs (Millennium Development Goals)
eradicating extreme Combating HIV/AIDS poverty and hunger malaria and other achieving universal diseases primary education ensuring environmental promoting gender sustainability equality and creation of a global empowering women partnership for reducing child mortality development, with improving maternal targets for aid, trade, health and debt relief.
Global Monitoring Report 2011 Global Monitoring Report: two-thirds of developing countries close to all the MDGs. Clear progress in reducing hunger and achieving universal primary education and access to clean water. health-related progress much slower, with many countries likely to miss MDGs on child and maternal mortality.
Financial assistance: The Extended Credit Facility The Standby Credit Facility The Rapid Credit Facility.Non Financial assistance: Policy Support Instrument
• India still had a fixed exchange rate system which lead to balance of payment crisis.•Reasons Debt waiver for small farmers shaved off 1% of GDP. Ramped up exports to soviet union by 50% at the cost of trade with hard currency areas.
Choices Provided To go for adjustments and have an orderly, growth-oriented adjustment program with external financial support Not go for adjustments and cut itself from international capital markets and reduce growth.
• Opted for policies and got bailout package from IMF for $1.8 Billion.• Had to pledge 20 tons of gold to Union Bank of Switzerland and 47 tons to Bank of England Resource allocation shifted from public sector to privatization. The Indian economy became an open end economy.
Although a trade off had to be between growth and adjustment costs such job losses. Political developments interfere with structural reform process started in 1991. Administrative decisions essential for the processing of projects got delayed.
India: Financial Position in the Fund as of February 29, 2012
May 2003India contributed $498 million to the IMFs Financial Transaction Plan, thus turning from a debtor into a lender to the IMF What are the implications of the same???
Feb 13 2003: Considering that Indias foreign exchange reserves of $73 billion could sustain 15 months import, Gordon said, "it is extremely comfortable.“ "As of now, IMFs role in India is that of surveillance” IMF’s new roles are in surveillance, lending and technical assistance
"Reforms in multilateral agencies like IMF and WB are necessary to give fair representation to the countries that are providing stability to the global economy," BRIC countries are anchoring the global economy at a time when the developed economies are faltering.
As multilateral lending agency IMF may need more funds to help countries facing a sovereign debt crisis in Europe, India plans to pledge additional support of $4 billion to the fund.This would increase Indias total commitment to the IMF to $14 billion, as it had already pledged $10 billion in March this year (2011) for countries facing a financial crisis.
Positives:Youngest Labor Force in the world for the next 50 yearsExtremely Vibrant Private SectorIndia doesn’t borrow in foreign currency. Risks and Constraints:Inclusive growth Large Fiscal Deficit & Debts to the range of 8% of GDP350 million living below the poverty line
India’s current need of the hour is Infrastructure projects which need a more mature debt-markets or corporate-bond markets. Reforms are required to be made in labour laws and tackling with unions and other such issues. Change from pull based to push based economy
The history of Indias engagement with IMF illustrates thatwith premeditated planning it is possible to alleviate amacroeconomic calamity and sustain the rights of reformpackage without negotiating on democratic organizationsor international policy autonomy.