Friday, August 28, 2009

IMF, its Structure, Functions, Objectives Resources and Performance

IMF came into being on December 27, 1945 when 29 countries of the world signed on “Articles of Agreement”. It started functioning in March 1947.

Structure of IMF:

The Board of Governors is the supreme body of IMF, which is headed by a Governor and an alternate Governor who are appointed by the members of the Fund. The board of Governors deals with the entry of new members, determination of quotas and distribution of SDRs. Board of Governors consists of one Governor from each of its 184 members. 24 of the Governors sit on International Monetary and financial committee and meet twice a year. There is an annual meeting of the Fund which is held once in a year all members participate in it.

The other big authority in the IMF is “Executive Board”. It has a Managing Director who is the Chairman of the executive board and controls day-to-day matters of the Fund. IMF has two committees:

(1) Interim Committee now replaced by IM FC,

(2) Development Committee. The Interim Committee deals with international liquidity and world monetary arrangements. Moreover this committee analyses the amendments of the Articles of the Agreement. Where as the development committee suggests those measures where by the real resources could be transferred to the developing countries. Till the end of 2003 the total staffs of IMF was 2800 which was from 141 countries. The Fund has its headquarters at Washington with its offices at Paris and Genera.

Objectives of the IMF:

In the first article of the Fund’s Charter there have been described the six objectives of IMF. They are as:

1. To increase international cooperation by providing consultancy services regarding international monetary issues.

2. To assist in the balanced growth of world trade, which will be helpful in raising the efficiency, employment and income of the world.

3. To Stabilize the exchange rate and discourage the tendency of competitive devaluation.

4. To abolish those restrictions which are obstacles in the way of World Trade and create a multi-lateral system of payments.

5. The countries facing deficit in their balance of payments can borrow from IMF to finance temporarily.

6. To reduce the volume and time period of disequilibrium (deficit) in balance of payments.

Functions of IMF:

Following are some functions performed by IMF.

1. Exchange Arrangements:

As a result of 2nd amendment in Articles each country can opt for any one of the following in connection with exchange rate.

(1) A country can represent the value of its currency in terms of any other currency like dollar.

(2) The par value of a currency can be represented in SDRs.

(3) The exchange rate can be expressed in terms of some currency composite.

(4) No country is allowed to represent its currency in terms of gold.

(5) The members can make such arrangements where they can show the par value in terms of the currencies.

Accordingly, in 1985, the arrangements regarding exchange rate determination, the 32 countries had fixed exchange rate in terms of dollar, there are 14 countries whose value is fixed in terms of Franc. There 12 countries who show their value in terms of SDRs where as the large number of countries are on ‘Managed Floating’ exchange rate system.

2. Surveillance:

It is the responsibility of the Fund to see whether the members are serious regarding their functions, whether they get guidance from Fund regarding exchange rate policies. In respect of conduct of exchange rate policies fund has approved three principles (1) A member in order to get undue benefit will not prefer any other member (2) For the sake of abolition of destabilizing forces in exchange rate govt. should interfere in foreign exchange market (3) Regarding such intervention is should be kept in view that the interests of the other countries be not affected. Thus under this function there is regular dialogue and policy advice which IMF offers to each member. Hence IMF makes an appraisal of each member’s economy.

3. Exchange Restrictions:

In the light of Article VIII of the Fund, no country can put any type of restrictions on the payments regarding Current Account. However a country can impose restrictions on the movement regarding capital amount. Again no country can impose restrictions that the transactions will be made in certain currencies.

4. Consultation and Technical Assistance:

For the sake of effective performance of its functions fund must be having the information regarding the economic policies and economic conditions of its member countries. This will be possible if the fund and the members are linked to each other. In 1984, 118 countries completed their talks with fund under Article IV. Again the Fund provides technical assistance to its members regarding strengthening their capacity to design and implement effective policies. Fund assists in the areas of fiscal policy, monetary policy, exchange rate, banking and financial system etc.

5. Lending For BOP Difficulties:

Basically Fund is aimed to provide financial assistance to those member countries which suffer from BOP difficulties. But to the poor countries, it also assists in the attainment of growth and alleviation of poverty.

Resources of the IMF:

The main source of the Fund is those subscriptions which are paid by the members in form of quotas. We also know that each country has to pay 75% of its quotas in terms of the domestic currency and 25% in terms of SDRs. In 8th General Review which was promulgated in November, 1983, it was decided that 25% of quota can be paid in those currencies which are allowed by the Fund instead of SDRs. The New Arrangement to Borrow (NAB) introduced in 1997 with 25 participating countries and institutions. Under the GAB and NAB the IMF has upto SDRs 34 billion or $46 billion available to borrow.

In order to enhance its resources, the Fund can borrow from the official as well as unofficial sources. Fund obtained its first loan in 1962 under ‘General Arrangements to Borrow (GAB)’. In 1983 the GAB has been extended Accordingly under GAB Fund has borrowed from US Deutsche Bunds Bank, Japan, Saudi Arabia, France, Belgium, Holland, Italy, Canada and Swiss National Bank. Against such loans the Fund pays as much interest as it gets against the use of SDRs.

Fund gets three types of charges against the use of resources.

1. Each country has to pay 0.5% as service charges.

2. The agreement free is 25% per annum.

3. The borrowing country has to pay 7% as interest charges. However they very from facility to facility.

Performance of IMF:

We know that IMF was setup in 194 and has completed, its 60 years in 2004. Therefore we see how far the IMF has been successful in attaining its objectives. The role of IMF is discussed below.

1. IMF has been much more of value for developed countries. It not only plays an important role in the determination of exchange rate, but IMF arrangement provided the opportunities to European industrial countries to follow macro-economic management policies in better way. They followed the realistic exchange rates. They reduced the restrictions over world trade and foreign exchange, and depended upon monetary policy for economic stability. As a result not only their deficits decreased, but the inflation was also controlled. All this means that IMF helped in attaining both internal and external balances.

2. In 1960 IMF brought two big changes in operation. To increase its resources to finance the deficit countries it introduced GAB where by the IMF could be able to borrow from 10 big industrial countries. Secondly because of shortage of world’s liquidity in was authorized to issue SDRs.

3. During 1960’s IMF paid special attention on the under-developed countries. It introduced two facilities like CFF and BSF with aim of assisting those poor countries which faced fall in their export earnings.

4. During 1970’s, because of oil price like under-developed countries had to face soaring deficits. Moreover the world has to see melodrama of inflation and unemployment. In such circumstances, there was fear that rate of exchange will face big fluctuations and there will be big devaluation like 1940’s. In order to compensate the oil affected countries IMF introduced for oil Facility and 2nd oil Facility. In 1976, IMF set up TF, while in 1977 it formed SFF.

5. In 1986 and 1987 the Structural Adjustment Facility (ESAF) were introduced. Under these facilities, IMF helps those countries which are engaged in removing price distortions, maintaining real exchange rate and enhancing productive capacity. The purpose of such all reforms is to create a suitable environment for economic development. The above facilities have been renewed in 1944 with the aim of providing loans to developing countries at the concessionary rates so that they could initiate medium term programme of macro-economic stability.

6. In 1933 IMF initiated “Temporary Systematic Transformation Facility” for the assistance of former states of Soviet Union. As a result of such facility, the Central Asian States will be assisted which are transferring themselves from command economies to market-economics. Moreover IMF is providing training facilities to the staff of these states so that they could train themselves for a better macro economic management.

7. During 1977-98 Asian Financial Crisis, Fund pledged $21 billion to assist Korean to reform economy, restructure its financial and corporate sectors and recover from recession.

8. In the year 2000 IMF approved an additional sum of $52 million loan for Kenya to cope with sever effects of drought und PRGF.

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