ROLE OF IMF . . .• The IMF is the world central organization for international monetary cooperation• The IMF’s primary purpose is to ensure the stability of the international monetary system (IMS).• IMS is the system of exchange rates and international payments that enables countries (and their citizens) to buy goods and services from each other.• The IMF provides technical assistance and training to help countries when they need for economic stability and growth. provides advice to its 184 member countries Encourage them to adopt policies that foster economic stability, reduce their vulnerability to economic and financial crises, raise living standards, and Makes financing temporarily available to member countries to help them address balance of payments and/or foreign trade balance problems
Why do we need the IMF?Smoothing the bumps in the flow of foreign exchangeBefore buy or sell anything there is a basic problem i.e. Buyers haveto be able to change their money from their countrys currency to thesellers national currency. This is called "foreign exchange. This is the "exchange rate." Without a reliable supply of foreignexchange and relatively stable exchange rates, world trade would dropdrastically.The IMF was founded over 50 years ago to allow currency to beexchanged freely and easily between member countries. They ensurethat members always have enough foreign.
HISTORY OF THE IMF• IMF was introduced as there arouse a need for International cooperation in economics, trade and balance of payment affairs.• United States made a proposal for establishment of International Stabilization Fund. It was known as White plan.• The IMF was established in July 1944 by 45 government representatives in Bretton Woods town, New Hempshire (USA).• They agreed on a framework for international economic cooperation.• It was believed that such a framework was necessary to avoid a repetition of disastrous economic policies that had contributed to the Great Depression of thee 1930s.• Thus IMF came in to existence to promote economic and financial co-operation among the member countries.
ORGANIZATIONAL STRUCTURE BOARD OF •Interim GOVERNORS Committee •Development committee EXECUTIVE BOARD OF DIRECTORS MANAGING DIRECTOR IMF SECRETARIAT
Growth in IMF’s membership• In the beginning 29 member countries• Today,185 member Countries• Staff of about 2680 persons• Two-thirds are economists in 139 countries• Headquarters in Washington, D.C.
IMF MAIN BUSINESS : MACROECONOMICAND FINANCIAL SECTOR POLICIES I. Macroeconomic policies relating to the government’s budget, the management of money and credit, and the exchange rate. II. Macroeconomic performance – government and consumer spending, business investment, exports and imports, output (GDP), employment, and inflation. III. Balance of payments - that is, the balance of a country’s transactions with the rest of the world. IV. Financial sector policies, including the regulation and supervision of banks and other financial institutions. V. Structural policies that affect macroeconomic performance such as those governing labor markets, the energy sector, and
KEY MEMBERS Quota: Millions of SDRs IMF Member Country Quota: PercentageAustralia 3236.4 1.49Belgium 4605.2 2.12USA 37149.5 17.09United Kingdom 10738.5 4.94 4158.3 1.91India 3036.1 1.4Brazil
LARGEST CONTRIBUTORS TO IMF 18.320 Percent of Total Quotas1510 5.7 5.7 5.1 5.150 US Germany Japan Britain France
PRINCIPAL DUTIES OF IMF SURVEILLANCE ( Like a Doctor ):- Help in providing policy advise to low income countries by:- i. Establishing Economic Frameworks that support sustained growth and poverty reduction. ii. Identify and manage sources of macroeconomic risk and vulnerabilities. iii. Strengthen institutions and policies that underline sound macroeconomic management. Progress report is annually published in Global Monitoring Report by IMF and World Bank.
Technical Assistance (like a teacher) :-•Strengthening human skills and institutional capacity of countries•Helps members in strengthening their policy formulation andimplementation, and the legal, institutional, and market frameworkswithin which they operate.•It also constitutes an important complement to IMF surveillance andlending operations in member countries. Financial Assistance (like a banker) :-• Lending to countries to support reforms•Improving financial sector surveillance.•Development of standards and codes of good practice.•Enhancement of transparency in the IMF and its member countries.Involvement of the private sector in crisis resolution
HOW IS IMF FINANCED?• The IMF is financed by member countries who contribute funds on joining or from existing members• IMF stands at $300 billion financed from its 183 member countries• The U.S deposited the largest amount.• Quota subscriptions generate most of the IMFs financial resources.• Each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy.• A members quota determines its maximum financial commitment to the IMF and its voting power, and has a bearing on its access to IMF financing.• A new country is assigned an initial quota in the same range as the quotas of existing members
IMF MEMBERS WITH LARGEST QUOTA SHARES(as of April 2007) Member Quota share (%) Votes (% of total) United States 17.14 16.83 Japan 6.14 6.04 Germany 6.00 5.90 France 4.95 4.87 United Kingdom 4.95 4.87 Italy 3.26 3.21 Saudi Arabia 3.22 3.17 China 3.73 3.67 Canada 2.94 2.89 Russia 2.74 2.70 13
IMF LENDING FACILITIES• Stand-By-Arrangements as designed to deal with short term balance of payments problems• The IMF introduced the Extended Fund Facility to help countries address balance of payment difficulties related partly to structural problems that may take longer to correct than macroeconomic imbalance• Under its Poverty Reduction and Growth Facility, the IMF provides concessional loans – loans with an annual interest rate of 0.5 percent and a maturity of 10 years - to its poorest member countries.• The IMF provides Emergency Assistance to countries coping with balance of payments problems caused by natural disasters or military conflicts. The interest rates are subsidized for low-income countries.• The Trade Integration Mechanism allows the IMF to provide loans under one of its facilities to a developing country whose balance of payments suffers.
IMF vs. WORLD BANK•World Bank provides long-term loans for promoting balanced economicdevelopment, while IMF provides short-term loans to member countriesfor eliminating BOP disequilibrium.•Both these institutions are complementary to each other. Feweconomists have even suggested that the two organizations should bemerged.•IMF and World bank collaborate regularly and are involved in severaljoint initiatives.•The IMF and the World Bank introduced the concept of Aid for Tradefor the least developed countries
HOW DOES THE IMF HELP POOR COUNTRIES The quota allotted by the IMF to each member country has to be deposited partly in the member’s own currency and the remainder in the form of foreign exchange. IMFs loans to low-income countries are made on concessional terms, under the Poverty Reduction and Growth Facility. IMF introduced in 2005—the Policy Support Instrument, countries can request that the IMF regularly and frequently review their economic programs to ensure that they are on track. The IMF also participates in debt relief efforts for poor countries that are unable to reduce their debt to a sustainable level even after benefiting from aid, concessional loans, and the sound policies.
ROLE TOWARDS MEMBER NATIONSThe financial assistance and advice the IMF offers to its poorestmembers are geared partly to helping them achieve these goals :-1. Eradicate extreme poverty and hunger2. Achieve universal primary education3. Promote gender equality and empower women4. Reduce child mortality5. Improve maternal health6. Combat HIV/AIDS, malaria, and other diseases7. Ensure environmental sustainability8. Develop a global partnership for development
ROLE OF IMF IN INDIA•Joined IMF on 27 DEC, 1945•India borrowed SDR 3.9 billion (1981-82) & SDR 2.2 billion (1991-93).• In recent years, the fund provided to India was in governmentsecurities, foreign exchange market, public expenditure management &tax & custom administrations.Current scenario SDR (Net cumulative allocation)- 681.17 m Holdings - 6.78 m Outstanding purchases & loans - None•By James Gordon (Washington based multilateral institutionsrepresentative) ―India does not need any financing from IMF considering thatthe country had crossed $103 billion of FOREX reserves‖ Emerging market economy Feb 13, 2004Acc to indiatimes - India borrowed from IMF in crisis of 1990’s & fullyrepaid its loan.•So now India has that potential to be include into IMF financialtransactions plan (40 countries) By P Uaidynathan Iyer in New Delhi Jan 19, 2004
IMF & INDIAIndia’s current quota in the IMF is SDR 4158.2 millonin the total quota of SDR213 billion, giving it a shareholding of 1.95 per cent. India’s relative positionbased on quota is 13th. However, based on voting share, India (together with itsconstituent countries, viz., Bangladesh, Bhutan and Sri Lanka) is ranked 21st inthe list of 24 constitutencies.The IMF members can either retain SDRs, use them in payments etc. or sellthem to other member countries.IMF has played an important role in Indian economy. IMF has providedeconomic assistance from time to time to India and has also providedappropriate consultancy in determination of various policies in the country.Till 1970, India was among the first five nations having the highest quota withIMF and due to this status India was allotted a permanent place in ExecutiveBoard of Directors.In July 2004, India and IMF joint training programme at the National Institute ofBank Management, Pune was established.
India’s relation with IMF• Provides financial assistance to boost our economy• IMF suggests that India can become a financial superpower by bringing in reforms in the economic policies.• India has become a creditor and stopped taking loans from it.
CRISIS MANAGEMENT BY THE IMF• Many observers thought the collapse of the Bretton Woods system in 1973 would diminish the role of the IMF within the international monetary system• However, the activities of the IMF have expanded due to the periodic financial crises since 1973• IMF deals with three challenges – currency crises – banking crises – foreign debt crises
CURRENCY CRISIS• Speculative attack on a currency’s exchange rate value results in: – a sharp depreciation in the value of the currency – forcing authorities/central bank to defend its currency and the prevailing exchange rate by: • expending international currency reserves • sharply increasing interest ratesBANKING CRISIS• The loss of confidence in the banking system that leads to a run on banks, as individuals and companies withdraw their deposits
FOREIGN DEBT CRISIS• Country cannot service its foreign debt obligations, whether private- sector or government debt• Usually the result of macroeconomic causes: – high relative price inflation – a widening current account deficit – excessive expansion of domestic borrowing – asset price inflation
CRITICISMS OF THE IMF The IMF has created an immoral system of modern day colonialism that drains the poor The IMF serves wealthy countries and Wall Street The IMF is a secretive institution with no accountability IMF says, it makes loans in exchange for policy reform,it has not been successful in turning countries to the free market. Instead,the fund has created loan addicts, ―more than 70 nations have depended on imf aid for 20 or more years,24 countries have received IMF creidts for 30 or more years. One of the biggest critiques of the IMF and world bank is that they hardly ever co-ordinate their activities