IMF

INTRODUCTION

The IMF, also called the Fund, is an international monetary institution established by 44 nations under the Bretton Woods Agreement of July 1944. The principal aim was to avoid the economic mistakes of the 1920s and 1930s. It was established to promote economic and financial cooperation among its members in order to facilitate the expansion and balanced growth of world trade. It started functioning from MARCH 1, 1947. In JUNE 1996, the Fund had 181 members.

MEMBERSHIP

The IMF started with the initial membership of 30 countries. On JUNE 1991 its membership rose to 155. In APRIL 1980 China became the member of IMF. Afterwards in 1992, Russia along with other communist countries became the member of IMF. The current membership of IMF is 189.

OBJECTIVES

The main objectives of IMF are as follows:-

(i) International Monetary Co-Operation:

The most important objective of the Fund is to establish international monetary co-operation amongst the various member countries through a permanent institution that provides the machinery for consultation and collaborations in various international monetary problems and issues.

(ii) Ensure Exchange Stability:

Another important objective of the Fund is to ensure stability in the foreign exchange rates by maintaining orderly exchange arrangement among members and also to rule out unnecessary competitive exchange depreciations.

(iii) Balanced Growth of Trade:

IMF has also another important objective to promote international trade so as to achieve its required expansion and balanced growth. This would ensure development of production resources and thereby promote and maintain high levels of income and employment among all its member countries.

(iv) Eliminate Exchange Control:

Another important objective of the Fund is to eliminate or relax exchange controls imposed by almost each and every country before Second World War as a device to deliberately fix the exchange rate at a particular level. Such elimination of exchange controls was made so as to give encouragement to the flow of international trade.

(v) Multilateral Trade and Payments:

To establish a multilateral trade and payment system in respect to current transactions between members in place of the old system of bilateral trade agreements was another important objective of IMF.

(vi) Balanced Growth:

Another objective of IMF is to help the member countries, especially the backward countries, to attain balanced economic growth by exchange the level of employment.

(vii) Correction of BOP Maladjustments:

IMF also helps the member countries in eliminating or reducing the disequilibrium or maladjustments in balance of payments. Accordingly, it gives confidence to members by selling or lending Fund’s foreign currency resources to the member nations.

(viii) Promote Investment of Capital:

Finally, the IMF also promotes the flow of capital from richer to poorer or backward countries so as to help the backward countries to develop their own economic resources for attaining higher standard of living for its people, in general.

FUNCTIONS

The principal function of the IMF is to super­vise the international monetary system. Several functions are derived from this. These are: granting of credit to member countries in the midst of temporary balance of payments deficits, survei­llance over the monetary and exchange rate policy of member countries, issuing policy recommen­dations. It is to be noted that all these functions of the IMF may be combined into three.

These are: regulatory, financial, and consultative fun­ctions:

Regulatory Function:

The Fund functions as the guardian of a code of rules set by its (AOA— Articles of Agreement).

Financial Function:

It functions as an agency of providing resources to meet short term and medium term BOP disequilibrium faced by the member countries.

Consultative Function:

It functions as a centre for international cooperation and a source of counsel and technical assistance to its members.

The main function of the IMF is to provide temporary financial support to its members so that ‘fundamental’ BOP disequilibrium can be corrected. However, such granting of credit is subject to strict conditionality. The conditionality is a direct consequence of the IMF’s surveillance function over the exchange rate policies or adjustment process of members.

The main conditionality clause is the intro­duction of structural reforms. Low income countries drew attraction of the IMF in the early years of 1980s when many of them faced terrible BOP difficulties and severe debt repayment prob­lems. Against this backdrop, the Fund took up ‘stabilisation programme’ as well as ‘structural adjustment programme’. Stabilisation programme is a demand management issue, while structural programme concentrates on supply management. The IMF insists member countries to implement these programmes to tackle macroeconomic instability.

Its main elements are:

(i) Application of the principles of market economy;

(ii) Opening up of the economy by removing all barriers of trade; and

(iii) Prevention of deflation.

The Fund provides financial assistance. It includes credits and loans to member countries with balance of payments problems to support policies of adjustment and reform. It makes its financial resources available to member countries through a variety of financial facilities.

It also provides concessional assistance under its poverty reduction and growth facility and debt relief initiatives. It provides fund to combat money- laundering and terrorism in view of the attack on the World Trade Centre of the USA on 11 September 2001.

In addition, technical assistance is also given by the Fund. Technical assistance consists of expertise and support provided by the IMF to its members in several broad areas : the design and implementation of fiscal and monetary policy; institution-building, the handling and accounting of transactions with the IMF; the collection and retirement of statistical data and training of officials.

Maintenance of stable exchange rate is another important function of the IMF. It prohibits multiple exchange rates.

It is to be remembered that unlike the World Bank, the IMF is not a development agency. Instead of providing development aid, it provides financial support to tide over BOP difficulties to its members.

Critical Appraisal of IMF:

It would be better to make an appraisal of the activities of IMF in the form of its achievements and failures.

Achievements:

The functioning of IMF has become successful in certain areas like—expansion of fund, making adequate provision of credit for the developing countries, attaining exchange stability, expansion of world trade, raising international liquidity, removing international monetary system, setting up multilateral trade and payment system, eliminating short-term disequilibrium of balance of payments, checking competitive currency devaluation and setting up machinery for consultation so as to provide export guidance to member countries in formulating its fiscal and financial policies.

Failures:

In spite of achieving some degree of success by the IMF in certain areas, the Fund suffers as a result of failures in many fronts.

Following are some of these failures:

(i) The IMF has failed in respect of achieving the basic objectives of international exchange stability. Neither the Fund put any loan exchange fluctuations nor it prevents competitive devaluation of currencies by its members.

(ii) The Fund has followed discriminatory treatment in favour of certain members in its day to day functioning. It favours some Western countries and neglects the genuine interests of underdeveloped and backward countries.

(iii) The IMF has also failed to establish a stable and sound international monetary system and thereby experiences serious monetary crisis arising out of rapidly fluctuating exchange rates. Thus the Fund has failed to bring complete stability in foreign exchange rates.

(iv) The Fund has also failed to persuade the member countries to eliminate exchange controls and other restrictions on foreign trade.

INDIA AND IMF

India was one of the 44 countries which participated in the Bretton Woods Conference held in 1944. India, is, thus, one of the FOUNDER MEMBERS of the Fund.

The following are the advantages which INDIA gained from the IMF:-

1) INDEPENDENCE OF THE INDIAN RUPEE:- Indian Rupee was linked to the British Pound- Sterling before the establishment of IMF. But since the coming into existence of the Fund, the Indian Rupee has become independent. Its value is expressed in terms of gold. The Indian Rupee is now convertible into currency of any other country.

2) AVAILABILITY OF FOREIGN CURRENCIES:- India has been purchasing foreign currencies from the Fund from time to time in accordance with its requirements. This has greatly helped to promote the economic development of the country.

3) MEMBERSHIP OF THE WORLD BANK:- It is on account of its membership of the Fund that India could become a member of the World Bank. The Government of India has secured several loans from the World Bank for development purposes.

4) IMPORTANCE OF INDIA IN THE INTERNATIONAL FIELD:- India is one of those six countries which have been given a permanent place in the Board of Directors of the Fund. In that capacity, India has played a vital role in determining the policies of the Fund. This has aded to the prestige of the country in international field.

5) ECONOMIC ADVICE FROM THE FUND:- In its position as a member, India can seek the expert advice of the Fund for solving the economic problems.

6) INTERNATIONAL EXCHANGE STANDARD:- By virtue of membership of the IMF Indian currency has been connected with international exchange standard and thereby India can make payment in any country of the World easily.

Thus, we can conclude that India has gained much from the IMF membership.