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International Monetary Fund

World Depression of 1929 cancelled the gold standard It resulted in difficulties in World Trade, Exchange of Money and the Investment at the international level. The second   World War badly affected financial position of those countries involved in the War. In order to improve the financial position and the smooth settlement of financial transaction, economic co-operation was essential. There was a need of the Central Bank of the Central Banks. This kind of institutions was established in the form of the IMF.


1.  Establishment

Experts from U.S.K., U. K. and other countries discussed at a length the issue of international economic co-operation. The outcome of this discussion was the United Nation Monetary and Financial Conference at Bretton Wood, New Hampshire, U.S.A. the conference was organized on 1st July 1944 to 22nd 1944. The representative of the 44 countries attended the conference. It completed the final draft of article of agreement of the IMF and the IBRD. The articles of agreement of IMF and IBRD were accepted by a majority of the participants by December 27,1945 the representative of 29 governments had signed the articles in Washington on that day. Six months later on June 25th 1946 the World Bank was opened for the business. At the end of 1980, the number of members was 152 and the last decade of 20TH Century it was 175.


2. Objectives

World Depression of 1929 and Second World War (1939-45) resulted in instability of monetary and economic position of the world. In order to have stability in the World Economy the IMF was established. In order to achieve this objectives the IMF prepared code of conduct to be followed by all member countries. 

It also ensures that the member country strictly observe the code of conduct. If the balance of payment of a member country shows a deficit then to provide finance in the respective country was determined as one of the objectives. In order to achieve basic objectives, the article of agreement of IMF has given the following objectives.

1. To promote international monetary co-operation through a permanent institution this provides the machinery for consultation and collaboration on international monetary problems.

2. To facilitate the expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of productive resources of all members as primary objectives of economic policy.

3. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

4. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions that hampers the growth of world trade.

5. To give confidence to the members by making the general resources of the fund   temporarily available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.

6. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balance of payments of members.

The basic aspects of these objectives are to harmonise the national economic interests with those of other members of the international community, provide financial assistance on temporary basis in order that countries may restore balance of payments equilibrium and promote economic growth and high employment. The policies and decisions of the fund are guided by the purposes or objectives set out in the article.


3. Organization and Management

 1. Membership

Membership is open to every independent country provided the country is prepared to fulfill the obligations of membership stated in the Fund’s Articles of Agreements. The Articles provided that membership consists of the Fund’s original and other members. The original  members are those countries which attended Bretton woods Conference and whose governments accepted membership of the IMF before  Dec. 31,1945.Those were 30 in all. 

Other members are all those countries which joined later. Any country seeking membership to the fund should be a member of the United Nations Organization. There is no basic difference in the qualification for membership except the date of membership and the size of the quota. The Board of Governors is vested with the power to admit new members.

A member can withdraw from the IMF after settling the accounts with it. Withdrawal may be voluntary or compulsory.


2. Board of Governors

The Board of Governors has a Governor and also an Alternate Governor for every member country appointed by the Government. The Board is the highest policy making authority. The Governor is chosen by the member and is generally the finance minister or Governors of the central bank of the country. 

The Board selects one of the Governors as the Chairman. The powers of the Board are wide ranging and cover matters such as the admission of new members, the determination of quotas and allocation of SRDs. The Board meets once a year along with the Board of Governors of the World Bank usually in September. After two consecutive meeting   in Washington, the general practice is to organize such a meeting in a member country outside the US every third year.


3. Executive Directors

The day-today work is carried out by the Executive Board consisting of Executive Directors. They are responsible for the functioning of the organization. Under the Article of Agreement, Executive Directors can be elected only for two years year. The Executive Board selects a Managing Director who is also the chairman of the Executive Directors. In 1989, there were 22 Directors on the Board, 6 appointed by five largest quota holders and 16 elected Directors. Every Executive Director has an Alternate Director. 

The Executive Directors have wide powers. They are in fact the fund’s top managers and matters of member countries and appointment of the Managing Director fall within the purview by their authority. Their voting strength is determined by the size of the quotas of the countries represented by them.

The Executive Directors and Alternates are supposed to stay in Washington or be there frequently in order to attend the meetings, Meetings are held 3-4 times a week especially because the of members is large and there and problem which need urgent decision of the Board.


4. Managing Director

The Managing Director is the chief executive of the IMF. He is appointed by the Board of Executive Directors and has a term of 5 years which may be renewed. He conducts the day-to-day business of the fund under the general direction of the executive directors. He should not be a Governor or an Executive Director. He is the Chairman of the Board of Executive Directors. He has no right to vote except in case of equal decision when he has the deciding vote. He should not be less than 65 years of age and not more than 70 years during the period of his tenure. Generally he is appointed from a Western European Country. He is the highest official of the IMF and also acts as a link between the Executive Board, the Board of Governors and other Managerial Staff of the Fund.


5. Deputy Managing Director

He is appointed by the Executive Board and assists the Managing Director. There are no clear cut or well defined functions of the Deputy Managing Director and they depend on the individual who holds this post. He has been traditionally selected from the USA. Normally he is the Former Executive Director of the US to the IMF.


6. Staff                   

The IMF has large full time staff. It has increased over the years. Mostly there are international civil servants working only for the IMF while there are some who are on deputation from central banks of member countries for a specified term. The number of American and British occupying higher post in the IMF is very large. The number of employees from developing countries occupying lower post is more than those occupying higher post.


7. Departments

There are various departments of the IMF including 5 area departments, 5 functional departments and 3 departments for providing special services.


8. Voting powers

The volume of quota in the fund determines the voting of Executive Directors. It also shows how influential a country is in deciding the IMF Policies. However, in practice, decisions are rarely taken by vote i.e. Formal voting is hardly observed in the history of the IMF. Most of the work is carried out on the basis of consensus.


9. Quotas

The provide resources for the fund. A Country which has the larges quota has greater ability to S.D.R., and greater voting power. The Brett On Woods Conference agreed upon the quota system and quota is a standard assistance of the member countries. Part of the quota is paid in terms of gold and the remaining in member country’s currency. Under the IMF agreement quota can be revised from time to time in order to provide adequate liquidity to members to settle their balance of payments and to promote expansion of world trade. The borrowing by the member country is through purchase of other currencies against its own currency.


4. Functions

IMF is a financial institution engaged in lending to and borrowing from the member countries. It lends resources which it gets or borrows from some country. The important functions of IMF are:

1. The Financial Functions

The IMF, unlike a central bank or a commercial bank cannot create money. The members contributed the resources which are used for lending to those members who face balance of payments problems. The fund supplies liquidity for temporary periods to members. It is a pool of national currencies and SDRs. Quotas constitute subscriptions by member countries of the capital funds of the IMF. Originally quotas were expressed in U.S. Dollars but after it was devalued in 1971, quotas are being expressed in SDRs-a kind of international currency. Quotas are significant element of the IMF system. 

The reflect the relative importance of the member country in the world economy and determine their voting power. Quotas are fixed in relation to the member country, national income, foreign exchange reserves, level of imports, variation in exports and the importance of exports in relating to National income. If a member demands financial assistance in excess of its quota, the IMF lends provided the member is ready to follow certain conditions. These conditions nearly force that country to correct its balance of payments disequilibrium by reducing its growth rate and controlling high inflation. 

Future loan assistance is suspended to a country if it violates the conditions agreed with the IMF. The fund provides mainly temporary assistance for correcting adverse balance of payment. In case the member country fails to fulfill  the obligations, the IMF management has the power to declare that the member is not eligible for access to the resource of the Fund.

The Financial Assistance is provided to member countries in standby arrangement. The borrowing by the member is through purchase of other currency against its own currency. Initially it was equal to members gold subscription. Credit is available in four stages. Each stage is 25% of the member’s quota.

Under stand-by arrangements a member country is able to purchase from the fund currencies of other members’ up to a certain amount and for a certain period on an assured basis. The is, however, subject to the approval of the IMF. Stand-by-arrangement was introduced in 1952. The facility is available so long as the member countries fulfils the conditions mentioned in the letter of intent. A country is sure that fund assistance will be available in times of need. If a country borrows from the funds, (generally for 1 year) a certain amount and makes repayment after a few months, it can borrow the entire amount again in the same year.


2. Regulatory Function

The fund plays an important role in regulating the international monetary order. It has a code of conduct for the international monetary system. Under its Article of Agreement, all member countries have to adopt appropriate and mutually consistent policies. The IMF regulates the working of the international monetary system in such a way as to prevent any such practice that will contract or reduce world trade. 

Its regulatory function concentrates on the payments mechanism and adjustment in order to regulate the exchange rate policies by keeping a check on member country’s policies, and assisting them to tide over their balance of payments problems. It has developed a code of conduct for member countries. In order to get financial assistance from the IMF the country must follow this code. The fund provides liquidity according to the requirements of the international monetary system.

The fund has also designed a code of conduct to check imbalance in the balance of payments of the member countries regarding international trade and transaction. The members abide by the code and the fund regulates their policies to avoid bilateral and regional arrangements which are detrimental to the interest of other members.

Another code of conduct was designed for maintaining convertibility of currency of member countries. It introduced the SDR as an international currency in 1969 in order to prevent currency crisis.

The IMF carries out the regulatory function in order to improve the international trade relation and stabilization of exchange rate system. Through surveillance over member countries’ policies it attempts to prevent contraction of international trade and transaction.


3. The Consultative Function

The fund’s role as a consultative machinery is very important. Member countries are obliged to consult the IMF and seek its prior approval in matters like exchange rate changes. Consultations are regarded as a means to safeguard the interests of the whole. If consultations are not carried out a member country may not be considered eligible to borrow from the IMF. Consultations are therefore held on a wide scale on the fiscal, monetary and exchange policies of member countries. 

It is customary for the member countries to keep the fund informed about their policies. Consultations between the member country and the IMF may be in many forms e.g. members furnish to the IMF economic and financial data or information at regular intervals which may be published in the fund’s journal called the International Financial Statistics.

 Apart from collecting data the Fund may also send a team to visit a member country in order to study the economic and financial situation and the policies followed by that country. Moreover, the Executive Directors and their Alternates frequently visit the country they represent. They serve as a channel for communication between the Fund and the member country. 

Mutual consultation is healthy for achieving international monetary co-operation. The representatives of different countries explain frankly their economic and financial policies and problems. In turn, the Executive Directors provide useful comments. In this way, consultations lead to the good of the international community. The consultative function is carried out in order to achieve the objectives of the IMF.


Other Services

A number of newly independent countries have joined the fund and their requests for technical assistance have increased. The fund has started technical assistance in the sphere of fiscal matters, monetary and balance of payments policy as well as central banking service. The IMF provides facilities for training to member countries in Financial Analysis and Policy, Balance of payments Methodology, Public Finance etc. 

The Central Banking Service of the Fund provides advice and experts to member countries for assistance in connection with central banking activities. It also provides advisory assistance in areas like fiscal and financial policy, central banking, development of local financial markets and financial institutions.


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