IMF AND SDR IN ECONOMICS

1. INTERNATIONAL MONETARY FUND [IMF]
 The International Monetary Fund(IMF) is anorganizationof 186
countries, working to foster globalmonetary cooperation, securefinancial
stability, facilitate international trade, promote high employment and
sustainableeconomic growth, and reducepoverty around the world.
 The IMF works to foster global growth and economic stability.
 Itprovides policy advice and financing to members in economic difficulties
and also works with developing nations to help them achieve
macroeconomic stability and reduce poverty.
 The IMF tracks global economic trends and performance, alerts its member
countries when it sees problems on the horizon, provides a forumfor policy
dialogue, and passes on know-how to governments on how to tackle
economic difficulties

2. Key IMF Activities
o The IMF supports its membership by providing:
o policy advice to governments and central banks based on analysis of
economic trends and cross-countryexperiences;
o research, statistics, forecasts, and analysis based on tracking of global,
regional, and individual economies and markets;
o loans to help countries overcomeeconomic difficulties;
o concessionalloans to help fight poverty in developing countries;
o technical assistanceand training to help countries improve the
management of their economies.
Purposes of the IMF
 Promote international monetary cooperation.
 Expansion and balanced growth of international trade.
 Promote exchange rate stability.
 The elimination of restrictions on the international flow of capital.
 Make resources of the Fund available to members
 Help establish multilateral systemof payments and eliminate foreign
exchange restrictions.
 Shorten the duration and lessen the degree of disequilibriumin
international balances of payment.
 Foster economic growth and high levels of employment.
 Temporary financial assistanceto countries to help the balance of
payments adjustments.
IMF Functions
o The IMFs main goal is to ensurethe stability of the international monetary
and financial system. Ithelps resolve crises, and works with its member
countries to promotegrowth and alleviate poverty.
o Economic and Financial Surveillance : TheIMF promotes economic
stability and global growth by encouraging countries to adopt sound
economic and financial policies. To do this, it regularly monitors global,
regional, and national economic developments.

3. o Technical Assistance andTraining: IMF offers technicalassistanceand
training to help member countries strengthen their capacity to design and
implement effective policies. Technical assistanceis offered in several
areas, including fiscal policy, monetary and exchange rate policies, banking
and financial systemsupervision and regulation, and statistics.
o IMF Lending: In the event that member countries experience difficulties
financing their balance of payments, the IMF is also a fund that can be
tapped to facilitate recovery.
o ResearchandData : Supporting all three of these activities is the IMFs
economic and financial research and statistics.
Objectives of IMF
 To promote international monetary cooperation
 To facilitate the expansion and balanced growth of InternationalTrade
 To promote exchange rate stability
 To make its resources available to its members who are experiencing BOP
problems
 To establish a multilateral systemof payments
Conditionality
 IMF lends to its member countries, ensuring that, members are pursuing
policies that will improveexternal payment problems.
 Commitment to implement corrective measures.
 To repay in a timely manner.
Membership
I. The IMF currently has a near-global membership of 186 countries. To
become a member, a country must apply and then be accepted by a
majority of the existing members.
II. Upon joining, each member of the IMF is assigned a quota, based
broadly on its relative size in the world economy.

4. Special Drawing Rights (SDR)
 SDR is an international reserve asset
 Supplements members’ existing reserveassets – gold, forex.
 Unit of accountfor IMF operations and transactions
 Value of SDR is based on basketof major currencies used in IB.
 Weights assigned show relativeimportance.
 France, Ger, Jp, UK, US – Largestexports
 US – 0.557; EURO-0.426; YEN– 21.0; POUND- 0.0984
 More stable.
Subscriptions
 A members quota subscription determines the maximum amount of
financial resources themember is obliged to provide to the IMF.
 A member must pay its subscription in full upon joining the IMF: up to 25
percent must be paid in the IMFs own currency, calledSpecial Drawing
Rights (SDRs) or widely accepted currencies (such as the dollar, the euro,
the yen, or pound sterling), while the restis paid in the members own
currency.
 Voting power. The quota largely determines a members voting power in
IMF decisions. Each IMF member has 250 basic votes plus one additional
vote for each SDR100,000 of quota.
 Access tofinancing. The amountof financing a member can obtain from
the IMF (its access limit) is based on its quota. Under Stand-By and
Extended Arrangements, which aretypes of loans, a member can borrow
up to 200 percent of its quota annually and 600 percent cumulatively.
Organization & Management
The IMF has a management team and 17 departments that carry out its country,
policy, analytical, and technical work.

5. Governance Structure
 The Board of Governors is the highest decision-making body of the IMF. It
consists of one governor and one alternate governor for each member
country. The governor is appointed by the member country and is usually
the minister of finance or the head of the central bank.
 While the Board of Governors has delegated most of its powers to the
IMFs ExecutiveBoard, it retains the rightto approve quota increases,
special drawing right (SDR) allocations, theadmittance of new members,
compulsory withdrawalof members, and amendments to the Articles of
Agreement and By-Laws. Italso elects or appoints executive directors
 The Boards of Governors of the IMF and the World Bank Group normally
meet once a year
 Ministerial Committees: TheIMF Board of Governors is advised by two
ministerial committees, the International Monetary and Financial
Committee (IMFC) andthe Development Committee.
 The IMFChas 24 members, drawn fromthe pool of 186 governors

6.  The Executive Board: The IMFs 24-member Executive Boardtakes care of
the daily business of the IMF. Together, these 24 board members
representall 186 countries.
Finances
Quotas: The IMFs resources comemainly fromthe money that countries pay as
their capital subscription when they become members.
Quotas broadly reflect the sizeof each members economy: the larger a countrys
economy in terms of output and the larger and morevariable its trade, the larger
its quota tends to be.
They also help determine how much countries can borrow fromthe IMF and their
sharein allocations of special drawing rights or SDRs (the reservecurrency
created by the IMF in 1969).
Gold: The IMF holds a relatively large amount of gold among its assets, for
reasons of financial soundness, also to meet unforeseen contingencies. The IMF
holds 103.4 million ounces (3,217 metric tons) of gold, worth about$83 billion as
of end-August2009, making itthe third-largestofficial holder of gold in the world.

7. ROLE OF IMF
 Promoting research in various areas of international economics and
monetary economics.
 Providing a forumfor discussion and consultation among member
countries. Being in the center of competence.
 Focusing on its coremacroeconomic and financial areas of responsibility.
 Working in a complementary fashion with other institutions established.
Conclusion
The IMF works to foster global growth and economic stability. Itprovides policy
advice and financing to members in economic difficulties and also works with
developing nations to help them achieve macroeconomic stability and reduce
poverty.

8. Special Drawing Rights (SDRs)
 Special Drawing rights (SDR) are the monetary unit of the reserveassets of
the InternationalMonetary Fund (IMF).
 The SDR unit is defined as a weighted sumof contributions of four major
currencies, re-evaluated and adjusted every five years, and computed daily
in terms of the USD.
 The currencies are-U.S. dollars ($), euro (€), pounds sterling (£), Japanese
yen (¥).
SDR or Paper Gold
 A country's IMF quota, the maximum amount of financial resources thatit
is obligated to contribute to the fund, determines its allotment of SDRs.
 Itcannot be used for trading purposes.
 Only central governments can hold SDRand no private firmcan have its
ownership rights.
 They can only be exchanged for Euros, Japaneseyen, pounds sterling, or
US dollars.  Any new allocations mustbe voted on in the SDR Department
of the IMF and pass with an 85% majority.

9. Purpose of SDR
o SDRs are used as a unit of account by the IMF and severalother international
organizations.
o A few countries peg their currencies against SDRs, and it is also used to
denominate some private international financial instruments.
o In the Euro Zone, the Euro is displacing the SDR as a basis to set values of
various currencies, including the Latvian Lats.
o SDRs wereoriginally created to replace gold and silver in large international
transactions and providecost free alternative to member states for building
reserves.
Structure of the SDR
The IMF is responsiblefor all transactions, i.e. the IMF acts as a broker.
o SDRs are equal to a basketof 4 currencies with fixed amounts, however due
to changing FX rates the relative weightings change with last time.
o If a country has more SDRs than allocated by the IMF it receives SDR interest
fromthe IMF, and if a country has less SDRs than allocated by the IMF, it has
to pay interest to the IMF.
o No Bid/offer spread
o IMF calculates SDRinterest rates on an weekly basis.
o Interestrates calculated on the basis of 3 months Eurepo, 3 months Japanese
Treasury DiscountBills, 3 months UK treasury bills and 3 months U.S Treasury
Bills.
2 types of SDR transactions:
(a) Voluntary : Transactions take place with a voluntary counterparty.
(b) Designation:In caseno voluntary counterparty can be found, the IMF
designates the counterparty.
2 Types of allocation:
(a) General: Based on long term need to increase existing reserveassets.
(b) Specific: ensureall members of IMF the relative same amount of SDRs,
since countries join the IMF at different times.

10. Pros and Cons of SDR
KEY TAKEAWAYS
 Special drawing rights, or SDR, are an artificial currency instrumentcreated
by the InternationalMonetary Fund, which uses them for internal
accounting purposes.
 The value of the SDRis calculated froma weighted basketof major
currencies, including the U.S. dollar, the euro, Japaneseyen, Chinese yuan,
and British pound.
 The SDR interest rate (SDR) provides the basis for calculating the interest
rate charged to member countries when they borrow fromtheIMF and
paid to members for their remunerated creditor positions in the IMF.
Created in response to concerns about the limitations of gold and dollars as the
sole means of settling international accounts, SDRs augment
international liquidity by supplementing the standard reserve currencies.
An SDR is essentially an artificial currency instrument used by the IMF, and is
built from a basket of important national currencies. The IMF uses SDRs for
internal accounting purposes. SDRs are allocated by the IMF to its member
countries and are backed by the full faith and credit of the member countries'
governments. The makeup of the SDR is re-evaluated every five years.