INTRODUCTION OF INTERNATIONAL MONETARY FUND

AND INDIA

1.1 INTRODUCTION
International Monetary Fund (IMF) was established along with the International Bank for
Reconstruction and Development at the Conference of 44 nations held at Bretton Woods, New
Hampshire, USA in July 1944. At present, 187 nations are members of IMF. India is a founder
member of the IMF. India has not taken any financial assistance from the IMF since 1993.
Repayments of all the loans taken from International Monetary Fund have been completed on 31
May, 2000. The objectives of IMF is macro-economic growth, alleviation of poverty and
economic stability, policy advice & financing for developing countries, forum for cooperation in
monetary system, promotion of exchange rate stability and international payment system.
Finance Minister is the ex-officio Governor on the Board of Governors of the IMF. RBI
Governor is the Alternate Governor at the IMF. India is represented at the IMF by an Executive
Director , who also represents three other countries as well, viz. Bangladesh, Sri Lanka and
Bhutan.
Indias current quota in the IMF is SDR (Special Drawing Rights) 5,821.5 million,
making it the 13th largest quota holding country at IMF and giving it shareholdings of 2.44%.
However, based on voting share, India (together with its constituency countries Viz. Bangladesh,
Bhutan and Sri Lanka) is ranked 17th in the list of 24 constituencies at the Executive Board.
1.2 OBJECTIVE OF THE STUDY
This study is following objective : To study Objective and Function of IMF.
To study Organization and Governance of IMF.
To study Effect of IMF in India.

1.3 METHOD OF RESERCH

This project is based from Secondary Data such as Reference Book , e-book , e-data ,
Magazine , Newspaper , Journals etc.

1.5 SCOPE OF THE STUDY

The IMF is a truly international colossus organization. Its policies have far-reaching
implications for every country in the world - whether an IMF member or not. Especially, after
the globalization of the world economy consequent to the emergence of the WTO (World Trade
Organization), the IMFs role and responsibility in maintaining a balance in the international
economy has increased multi-fold.

OBJECTIVE AND FUNCTION OF IMF

3.1 INTRODUCTION
The International Monetary Fund (IMF), conceived in July 1944 at a UNs conference
held in Bretton, New Hampshire, U.S.A is a leading global financial organization made up of 188
countries. Its main goals concentrate on securing financial stability, facilitating international
trade, alleviating high rates of unemployment and reducing poverty around the world. During its
establishment, the 44 governments, which were represented in the conference, created a credible
framework that would eradicate competitive devaluations that were witnessed after the First
World War that caused 1930s Great Depression. This is an international organization whose
functions keeps on expanding year by year owing to various economic, social and political
factors.

3.2 OBJECTIVE OF IMF

The objectives of the international monetary funds are
1.

The main objective of the fund is to promote monetary cooperation among the different
countries of the world.

2.

The funds aims at providing and establishing multilateral payments and trade system in
place of bilateral agreements.

3.

It will try to remove all restrictions and controls on foreign exchange imposed by the It
will.

4.

It will lend or sell to its member - countries currencies of other countries. This facilitates
foreign exchange transactions among the members.

5.

The fund aims at providing short - term monetary help to member countries during
emergency.

6.

The fund is also to provide monetary help to member country in order to shorten the
duration and lessen the degree of disequilibrium in their international balance of payment.
7.
Another objective of the fund is to help the member countries invest their long - term
funds in profitable activities.
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8.

The fund is also to facilitate the expansion and balanced growth of international trade and
to contribute thereby to promotion and maintenance of high levels of employment and real
income of member countries.

3.4 The Bretton Woods Monetary System

From 1946 to 1971, the main purpose of the IMF was regulatory, ensuring IMF members
compliance with a par value exchange rate system. This was a two-tiered currency regime using
gold and the U.S. dollar. Each IMF member government could choose to define the value of its
currency in terms of gold or the U.S. dollar, which the U.S. government agreed to support at a
fixed gold value of one ounce of gold being equal to $35. Unlike in the classic gold standard
period (1880-1914), monetary policy was not strictly restricted by a countrys holdings of gold.
Member countries were allowed to intervene in the currency market but were obligated to keep
their exchange rates within a 1% band around their declared par value.
When currencies (other than the U.S. dollar) came under pressure from short-term
balance of payments imbalances that normally arose through international trade and finance
exchanges, countries would receive short-term financial support from the IMF. In cases where
the currency peg was considered fundamentally misaligned, a country could devalue (or
revalue) its currency. By providing monetary independence limited by the peg, the Bretton
Woods monetary system combined exchange rate stability, the key benefit of the 19th century
gold standard, with some of the virtues of floating exchange rates, principally independence to
pursue domestic economic policies geared toward full employment.

3.5 CHARACTER OF IMF

The IMF can be described as a cooperative multilateral, intergovernmental, monetary and
financial institution. Its policies and activities are guided by its Charter, known as the Articles of
Agreement (the Articles). Forty-five members founded the institution at Bretton Woods, New
Hampshire, USA in 1944. Today, 187 countries are members of the organisation. The IMF is
located at the centre of the international financial system and, indeed, throughout its history, the
institution has played a central role in the evolution of that system. Today, for many countries,
the IMF is the single most important global international financial institution, for a programme
agreed with the IMF is often a necessary condition for that country to attract additional
international financial resources.
The IMF was established in the closing years of the Second World War. Initial
discussions were held over a period of nearly four years in fact, from almost immediately after
the war commenced on the need for a new international monetary order, which could bring
about stability in the international monetary system.

The initial dialogue took place between the USA and Britain, with two key individuals
leading the discussion: Harry Dexter White, who at the time was the Deputy Secretary of State in
the US and John Maynard Keynes, who led the discussions for Great Britain. Both individuals,
as well as the teams they led, were concerned to establish an institution and a system that could
marka fresh start from the situation of collapse in international monetary relations that had
characterised much of the period since the First World War. They looked back to the 1920s,
which had witnessed hyperinflation in Germany, and to the collapse, in 1929, of the stock market
in the US; and they sought to take account of the need for an international system of monetary
cooperation which would help avoid the profound economic recession that had prevailed through
the early- and mid-1930s.
A. Surveillance
The Articles of Agreement provide the IMFs international staff with a mandate to
oversee the exchange rate policies of its member countries in order to ensure the effective
operation of the international monetary system. To this end, the IMF assesses whether members
economic developments
and policies are consistent with the achievement of sustainable growth and macroeconomic
stability. This review and assessment process has come to be known as the process of IMF
surveillance over the economic policies of its member countries.
The IMF conducts its surveillance of members economic policies by holding regular
discussions with member countries about their economic and financial policies. The IMF fulfils
its country surveillance responsibilities through a process of annual bilateral consultations with
individual countries.
Because this responsibility is mandated by Article IV of the IMFs founding constitution, the
annual surveillance exercise in each member

The Article IV surveillance exercise focuses on an examination of the following

issues in each member country:
Exchange-rate, fiscal and monetary policies
Balance of payments and external debt developments
The influence of its policies on its external accounts
The international and regional implications of its policies
The identification of potential vulnerabilities
Capital-account, financial and banking-sector issues and, where relevant to
macroeconomic stability,
Such issues as labour markets, governance and the environment.
Access to Information

The information in these reports about their economic conditions, performance and policies is the
property of the countries concerned and may not be disclosed without their consent. In recent
years, however ,the IMF has successfully persuaded most countries to allow publication of their
Article IV consultation reports, loan documents, and other information about their economic
policies and conditions. The IMF makes these available to the public on its country information
page, available at [http://www.imf.org]. Most countries now also publish on their IMF country
page considerable information (often the verbatim text of their letters of understanding with the
IMF) concerning the stabilization programs they plan to pursue in connection with an IMF loan.
These are generally the product of close discussions between IMF staff and country officials. The
IMF executive board will not normally approve a loan unless the condition embodied in these
plans is acceptable to it. The IMF executive board must approve the disbursements at each stage
of these loan programs. Its published remarks often give the reader considerable insight into the
borrowers performance and its degree of compliance with loan conditionality.
Crisis Prevention
Some analysts are concerned that IMF surveillance is not sufficient in preventing
financial crises. In a recent report, the U.S. General Accounting Office (GAO) asserted that the
IMFs surveillance mechanisms, including the Funds biannual World Economic Reports
(WEOs) and its Early Warning Systems (EWS) have not performed well in predicting crises. In
a reply to the report, First Deputy Managing Director Anne Kreuger noted that it is difficult for
the IMF to publicly predict crises.
B. Financing
The IMF is probably best known for the financial assistance it provides to member countries. The
Fund provides this assistance by means of credits and loans. Financing is provided to members who
request such financing. Members make these requests for a variety of reasons. Later in this unit, you
will study in more detail the variety of financing facilities provided by the IMF, and you will also observe
that when the IMF lends to a member country, it imposes a variety of conditions on that lending.
The IMFs approach in attaching conditions to its lending has been the subject of very
considerable criticism since the IMFs establishment. The imposition of conditionality has been
criticised as being too severe, inappropriate, resulting in debilitating limitations on the sovereign decision
making of member countries, ineffective, based on erroneous policy advice and partial to the interests of
some sections of the IMFs members, broadly the creditor members of the IMF. You will study in more
detail some of the controversies that have raged around the IMFs policy on conditionality later in this
unit.

IMF Loan Programs

The IMF has several loan programs. The Stand-By Arrangement (SBA), which provides
the bulk of IMF assistance to middle-income countries, addresses short-term balance-ofpayments problems and typically lasts one to two years. The Extended Fund Facility (EFF)
addresses longer-term balance-of-payments problems requiring fundamental economic reforms
and generally runs for three years or longer.

In 2009, following the financial crisis, the IMF created the Flexible Credit Line (FCL).
The FCL provides a credit line to countries that have strong economic fundamentals and policies,
and that the credit line can be drawn on without new conditionalities being imposed. Unlike the
SBA and the EFF, the FCL relies on ex-ante conditionality. As of July 2011, Colombia, Mexico,
and Poland have accessed the FCL. In 2010, the IMF introduced the Precautionary Credit Line,
now known as the Precautionary and Liquidity Line (PLL), for countries whose financial
situations would make them ineligible for the FCL. A country can request a PLL for six months
with a limit of five times its quota. The only PLL program approved to date was for Macedonia
in January 2011,although many expected some Eurozone countries to request access to credit.
The IMF provides loans to its poorest member countries on concessional repayment
terms. These aim to help countries overcome balance-of-payments problems, but their
conditionality puts less emphasis on cutting spending and more on economic growth-enhancing
reforms.
There are three lending facilities for low-income countries:
The Extended Credit Facility (ECF), which provides flexible medium-term
support to low-income members that have protracted balance of payments
problems.
The Standby Credit Facility (SCF), which addresses short-term and precautionary
balance of payments needs, similar to the Stand-By Arrangements in regular
Fund lending.
The Rapid Credit Facility (RCF), which provides rapid access at low levels with
limited conditionality to meet urgent balance-of-payments needs.

C. Technical Assistance
The third major function performed by the IMF is the provision of technical assistance to its
members, which includes several broad areas:

Design and implementation of fiscal and monetary policy

Institution-building (such as the development of central banks or treasuries)
Handling and accounting of transactions with the IMF
Collection and refinement of statistical data
Training officials.

The IMFs approach to stabilisation policy is also promoted through the provision of technical
assistance. For in providing such assistance, the IMF promotes its view as to how stabilisation can be best
achieved in countries receiving its financial support.
While the IMFs three major functions surveillance, financing and technical assistance are
distinct activities of the institution, they are all nevertheless closely related. For example, the Article IV
surveillance report for a member country may reveal inherent weaknesses in that countrys financial
system, which need corrective action by strengthening financial institutions or making more effective the
7

financial regulatory system in the country. This in turn informs the IMFs policy on technical assistance to
the country, with technical assistance provided to help the country correct the various perceived
regulatory weaknesses. In addition, the process of deciding whether the IMF will lend resources to a
member country a process that you will study in considerable detail in Unit 2 also often reveals
institutional and other weaknesses that may need addressing. This information is also used to help the
IMF assemble a package of technical assistance for the country concerned.

SETTING PRIORITIES
Demand for the IMFs technical assistance exceeds its capacity. This requires prioritization and
allocation of technical assistance resources among member countries and regions. As part of this process,
the IMFs area (regional) departments play an important role in helping to identify and prioritize
countries technical assistance needs, often in consultation with other donors. For example, one of the
priorities is to provide technical assistance to countries eligible for the IMF and World Bank Heavily
Indebted Poor Countries (HIPC) initiative.
The IMFs Executive Board has paid increasing attention to technical assistance matters in recent
years. In addition to commenting on the importance of technical assistance in individual country cases,
the Board has provided guidance on evaluation of technical assistance, financing arrangements, and areas
of priority.

TYPES OF TECHNICAL ASSISTANCE

Technical assistance is provided through a number of IMF departments.

Monetary and Exchange Affairs Department focuses its assistance on central banking and
exchange systems issues and on designing and improving monetary policy instruments.
Fiscal Affairs Department is chiefly responsible for providing advice on tax and customs
administration, public expenditure management and budgeting, tax policy, pension reform and
social safety net design, and public expenditure reviews.
Statistics Department helps members comply with internationally accepted standards of
statistical reporting.
Legal Department provides assistance to members in drafting legislation and educating senior
government lawyers, mainly in laws of central banking, commercial banking, foreign exchange,
and fiscal affairs.
Treasurers Department provides technical assistance on the IMFs financial organization and
operations, the establishment and maintenance of IMF accounts, and accounting for IMF
transactions and positions by members.

As mentioned previously, there is also a large training program that addresses all areas of
interest to the IMF, that is provided in Washington, at regional institutes, and, from time to time,
in member countries by the IMF Institute.
Delivering technical assistance
Advisory missions provide an important component of the IMFs technical assistance
activities. They offer advice on monetary, fiscal, and statistical problems that often lie at the heart
of the macroeconomic imbalances that countries wish to address. In addition, the IMF places
experts in the field for periods ranging from six months to two years to assist in the
implementation of policy reform recommendations.

Traditionally, IMF technical assistance has had a single, well-focused objective and a relatively
short time span. However, in recent years, technical assistance projects have grown both larger
and more complex. Time horizons have lengthened, and multiple sources of financing have been
needed to underwrite costs. Large projects now may involve more than one IMF department and
more than one donor.

External cooperation and coordination

Beginning in 1989, the IMF took formal steps to coordinate its technical assistance
policies and cooperate with other multilateral and bilateral agencies to minimize conflicting
advice and redundant activities. It also began to explore ways of complementing its own
resources through various financing arrangements with other technical assistance providers. The
cooperation has led to a more integrated approach to the planning and implementation of
technical assistance. There are now comprehensive multiyear programs of technical assistance
that are being implemented with the United Nations Development Program (UNDP), the World
Bank, and the European Union. The Japanese government has continued to make annual
contributions to the IMF technical assistance and scholarship programs.
SPECIAL DRAWING RIGHTS (SDRs)
A Special Drawing Right (SDR) is basically an international monetary reserve asset.
SDRs were created in 1969 by the IMF in response to the Triffin Paradox. The Triffin Paradox
stated that the more US dollars were used as a base reserve currency, the less faith that countries
had in the ability of the US government to convert those dollars to gold. The world was still
using the Bretton Woods system, and the initial expectation was that SDRs would replace the US
dollar as the global monetary reserve currency, thus solving the Triffin Paradox. Bretton Woods
9

collapsed a few years later, but the concept of an SDR solidified. Today the value of an SDR
consists of the value of four of the IMFs biggest members currenciesthe US dollar, the
British pound, the Japanese yen, and the eurobut the currencies do not hold equal weight.
SDRs are quoted in terms of US dollars. The basket, or group of currencies, is reviewed every
five years by the IMF executive board and is based on the currencys role in international trade
and finance. The following chart shows the current valuation in percentages of the four
currencies.
Currency

Weighting

US dollar

44 percent

Euro

34 percent

Japanese yen

11 percent

British pound

11 percent

The SDR is not a currency, but some refer to it as a form of IMF currency. It does not constitute a
claim on the IMF, which only serves to provide a mechanism for buying, selling, and exchanging
SDRs. Countries are allocated SDRs, which are included in the member countrys reserves.
SDRs can be exchanged between countries along with currencies. The SDR serves as the unit of
account of the IMF and some other international organizations, and countries borrow from the
IMF in SDRs in times of economic need.

INTRODUCTION
In addition to describing the intended objectives of the institution, the IMFs Articles of Agreement also
set out its organisational structure. The IMF Articles provide for a three-tiered governance structure with a
Board of Governors, an Executive Board, and a Managing Director.
The Articles provide for four key organs of the Fund. These are
1.
2.
3.
4.

A Board of Governors
An Executive Board
A Managing Director and three Deputy Managing Directors
The Staff of the IMF.

In the simplest descriptive framework, it could be said that the first two of these, the Board of
Governors and the Executive Board, comprise officials from the member countries. The latter two, the
Managing Director, Deputy Managing Directors and staff of the institution, represent the institution.
However, as you will see, this is in fact merely a convenient simplification for descriptive purposes.

10

Indeed, when the IMF was established, the overarching vision of Keynes, White and its other founders
was that it would actively seek to minimise differences that might emerge among members,
and that its operations would be conducted impartially.
Consequently, Keynes and others strongly emphasised the imperative that the IMFs staff would
represent an international, independent expert group of individuals, whose mandate would be to
impartially assess the economic and financial wellbeing of the institutions members and to offer
impartial, expert advice on how to remedy any distortions or policy failures which threaten global
economic and financial stability. The international, impartial character of the IMFs staff has been
strongly emphasised since the IMF was established, with its management consistently insisting that no
single country or set of countries should exert influence over the appointment of IMF staff members; that
such decisions are the prerogative of management; and that the staff should not come under pressure from
any country member to have their judgement compromised by specific national interests. The challenge is
a significant one and despite strong efforts by management and by the staff themselves, over the years the
institution has repeatedly been accused of favouring in particular the interests of the larger and more
powerful members of the institution.

Figure 1. IMF Governance

11

Source: International Monetary Fund, adapted by CRS

4.1. THE BOARD OF GOVERNORS

The highest decision-making body of the IMF is the Board of Governors. The Articles of
Agreement provide that all powers of the Fund shall be vested in the Board of Governors. The Board of
Governors consists of one Governor (and in his or her absence, one Alternate Governor) for each of the
187 member countries. For this reason, it can be said that the ultimate decision making power in the Fund
is located in the member countries, which are the shareholders of the Fund.
The countrys Governor to the IMF is appointed by the member country and is usually the
Minister of Finance or the Governor of the central bank. All powers of the IMF are vested in the Board of
Governors. The Board of Governors may delegate to an Executive Board (see below) all, except certain
reserved, powers. In practice, this is in fact the case, with most of the responsibilities of the Board of
Governors having been delegated by the Governors to the Executive Board. The Board of Governors has,
however, retained several very important powers, including the power to admit and suspend country
members and to increase or decrease the authorised quota or shareholding of the Fund. The Board of
Governors is also responsible for approving amendments to the Articles of Agreement and endorsing the
institutions financial statements and budgets.

12

The Boards of Governors of the IMF and the Bank meet in joint session at Annual Meetings.
There the Governors decide on key IMF policy issues for the coming year. The views of individual
governments, however, are represented throughout the year by the members of the Executive Board.

THE EXECUTIVE BOARD

As noted above, the conduct of the general operations of the IMF is delegated by the Funds
Governors to an Executive Board, or Board of Executive Directors. That Board is composed of 24
Directors, who are appointed or elected by member countries or by groups of countries, as well as a
Managing Director, who serves as its Chairperson. Executive Directors are based at the IMFs
headquarters in Washington DC. The Board of Executive Directors is the policymaking organ of the Fund
and is accordingly responsible for policy decisions affecting the Funds operations and for the approval of
all facilities provided by the IMF.
The Executive Board conducts the day-to-day business. It acts on the basis of the powers
assigned to it under the Articles of Agreement and delegated to it by the Board of Governors. Meetings of
the Executive Board are usually called by the Chairperson or Acting Chairperson. However, any
Executive
Director can request that a meeting be called. A quorum exists when a majority of Executive Directors
having not less than 50 percent of the total voting power is present. The practice is, in fact, for all chairs
to be occupied at all times.
The Board functions in continuous session and meets as often as Fund business dictates.
Generally, meetings are held at least three times a week.
Major Executive Board responsibilities
The major responsibilities of the Board are to:

Conduct surveillance of the economies of member countries

Discuss, approve and review adjustment and reform programmes under the various facilities of
the Fund, which includes the facility most frequently used by low-income member countries,
known as the Poverty Reduction and Growth Facility (PRGF)

Decide on general Fund policies and initiatives, such as the Heavily Indebted Poor Country
(HIPC) debt initiative and the Multilateral Debt Relief Initiative, the role of the Fund in
governance issues, guidelines on data dissemination and international codes of conduct for
example, on transparency and on the conduct of monetary policy

Conduct general surveillance of the global economy.

The Executive Board also does the background work for the International Financial and Monetary
Committee (IMFC), which meets twice a year. Several Board committees also exist, including those for
the Budget, Personnel, Evaluation and Administrative Matters. However, unlike the Board committee
13

system in other multilateral organisations, such as the World Bank Group, for example, the Funds Board
conducts the overwhelming bulk of its work in the formal sessions of the Board.
The Executive Board carries out its work largely on the basis of papers prepared by IMF
management and staff. Typically, the Board spends about 60 percent of its time on member country
matters and most of its remaining time on policy issues, such as an evaluation of the worlds economic
outlook, developments in international capital markets, the IMFs financial resources, surveillance, data
issues, the debt situation and issues related to IMF facilities and programme design.

4.3 The Managing Director and Deputy Managing Directors

The Managing Director is both the chairperson of the Executive Board, which appoints
the Managing Director, as well as the chief of the operating staff of the Fund. He or she is
ultimately responsible for all aspects of the internal management and working of the institution
and its relations and communications with the outside world. The Managing Director is also
directly responsible for relations with the Board of Governors and the Executive Board. The
Managing Director serves a five-year term and may be re-elected to successive terms. The
Managing Director is seconded by three Deputy Managing Directors, one of whom comprises a
First Deputy Managing Director.
The First Deputy Managing Director maintains general oversight on all issues facing the
institution. Each of the three Deputy Managing Directors chairs selected Executive Board
meetings, oversees staff work in specific areas and maintains contacts with member
governments, Board members,
the media and other institutions. In discharging these functions, each Deputy Managing Director
speaks with equal authority for the Fund. Each Deputy Managing Director is available, as
needed, to deal with all aspects of the management of the institution head of the IMF is
controversial, for by tradition the individual is selected from only one among the several groups
of countries that comprise the IMFs membership. The article is challenging and illustrates
several of the controversies associated with the operations and practices of the IMF, which you
will study in more detail as you progress through this course.

4.4 THE CHIEF ECONOMIST AND OTHER OFFICERS

During various periods in the IMFs history, a variety of other individuals have come to
play an important role in shaping the institutions policies. Most significant among these has
been the role of the IMFs Chief Economist. Depending on the individual concerned, the position
of Chief Economist has often assumed very significant status. During the period of the East
Asian crisis, for example, when the position was occupied by the economist Michael Mussa, the
position assumed very significant weight in
the overall policy decision-making framework of the IMF, with Mussa providing guidance on a
wide range of issues of crucial policy importance.
These included :-

14

Assessing the reasons for the problems that emerged during the East Asian crisis and
pointing to the nature of the IMFs response

Influencing the extent to which the IMF would provide financial support to members
confronting very large scale balance of payments crises

Determining the IMFs stance as to the reasons for global economic imbalances

Taking responsibility for providing projections about the future direction of the global
economy.

At other times during the IMFs history, other individuals have also exercised particularly
important influence. Some department heads, for example, have come to be identified as having
exerted significant influence over IMF policies. In the 1990s, the head of the Policy
Development and Review Department of the IMF came to be associated with the new focus on
very large scale financial packages for emerging market economies, and also came to be
identified as one of the main architects of the IMFs new thrust into lending to very small, lowincome countries.
In the article you have just read, Kapur explains that the most senior management figure in
the IMF is the Managing Director, who is vested with very significant powers. Given the desire
by the founders of the IMF to ensure that the institution and its staff remain impartial at all times,
the responsibilities of the IMF Managing Director are significant indeed.

THE EXECUTIVE
ADVISORY ORGANS

BOARD,

CONSTITUENCY

SYSTEM

AND

Built around the four major organs of the Fund is an intricate array of relationships, both internal
to the IMF and with other institutions participating in the realm of international finance. Chief among
these are the constituency system, or the system through which the 187 member countries of the IMF
arrange their participation in the institution, the major international committees whose work is closely
linked to that of the IMF and a series of international financial institutions with which the IMF has regular
dealings as it carries out its work.

A. The Executive Board and the Constituency System

According to the Articles of Agreement, the five largest shareholders France, Germany, Japan,
the United Kingdom and the United States are each entitled to appoint one Executive Director.
All other countries a grouped into constituencies, each represented by an Executive Director elected by
a country or group of countries. The member country decides which group to join.

B. Progressive expansion of the Executive Board

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When the IMF started functioning in May 1946, there were 12 Executive Directors on its
Board: five of them represented the largest shareholders of the Fund, and the remaining seven
represented the 40 other members. As more countries joined the IMF, the number of countries
requiring representation on the Board of Executive Directors grew, from the original 45 members
to todays 187. To accommodate the increased membership, the number of Directors has
progressively expanded. As a result there are at present 24 Executive Directors, or double the
number at the establishment of the Fund.
The five largest shareholders remain entitled under the Articles of Agreement to appoint
their own Executive Director. In addition, three other countries China, the Russian Federation
and Saudi Arabia comprise single-country constituencies in the Executive Board. The remaining
16 Executive Directors are elected by groups of countries, or constituencies. Constituencies are
generally formed more or less along geographic lines, with political and cultural factors playing
some part in the groupings. A four-per-cent minimum voting power, excluding the combined
votes of the five members that appoint their individual Executive Directors, is required before a
constituency can be formed. However, a lower threshold can be considered if the Board of
Governors, through the recommendation of the Executive Board, so decides.
C. The International Monetary and Financial Committee (IMFC)
The International Monetary and Financial Committee (IMFC) came into being on
September 30, 1999, as the Advisory Committee of the Board of Governors, replacing the
Interim Committee, which operated since October 1974. The IMFC advises and reports to the
Board of Governors on managing and adapting the international monetary and financial system.
This includes the continuing operation of the adjustment process and the transfer of resources to
developing countries. The IMFC also considers proposals by the Executive Board to amend the
Articles of Agreement and deals with disturbances that might threaten the system.
The IMFC members are Governors of the IMF. Each member country that appoints and
each group that elects an Executive Director appoints a member of the IMFC, which, like the
Executive Board, has 24 members.
D. The Development Committee
The Development Committee, established in 1974, is known formally as the joint Ministerial
Committee of the Boards of Governors of the World Bank and the International Monetary Fund
on the Transfer of Real Resources to Developing Countries. The Committee has 24 members,
typically comprising Finance Ministers or other officials of comparable rank. Members represent
all the shareholders that elect an Executive Director to the Boards of the two institutions.
The Committee generally meets at the same time as the IMFC. The Committee advises and
reports to the Board of Governors of the Fund and the Bank on all aspects of the transfer of real resources
to developing countries. It also sets guidelines to be followed by the Executive Directors of both
institutions in implementing the conclusions reached by the Boards of Governors. The committee meets
usually twice a year, in the spring (AprilMay) and in conjunction with the Annual Meetings in the
autumn. The Chairperson of the Development Committee is usually from a developing member country
16

from Africa, Asia or Latin America by rotation. The Chairperson generally holds office for two
consecutive years.

Functional and Special Services Departments

There is a range of functional departments that are central to the quality of resources
provided to the member countries of the IMF. There are currently eight major functional
departments. These comprise:

Fiscal Affairs Department

Monetary and Capital Markets Department
Strategy, Policy and Review Department
Research Department
Statistics Department
Finance Department
Legal Department
The IMF Institute.

In addition, the IMF has an External Relations Department, which serves as a mechanism for
disseminating information about the Fund to its members, and an Independent Evaluation Office
(IEO).
The following sections briefly outline the roles and functions of each of these major
functional departments.
The Fiscal Affairs Department
This is responsible for activities involving public finance in IMF member countries. It
participates in area department missions, or visits to IMF member countries on fiscal issues,
reviews the fiscal content of IMF policy advice and IMF-supported adjustment programmes,
contributes to fiscal policy design in member countries and provides technical assistance in
public finance. It also conducts research and policy studies on fiscal issues, as well as on social
sector issues, public expenditure policy and the environment.
The Monetary and Capital Markets Department
This department works closely with the relevant area departments, to conduct financial
sector surveillance. It provides technical assistance to member countries in such areas as
monetary and exchange-rate policies, financial sector policies and capital-market development.
This includes assessments of financial sector soundness and stability, the assessment of antimoney laundering and anti-terrorism financing regimes and offshore financial centres. The
department also assists in the development of internationally recognised standards and codes in
the financial sector. It assigns experts to central banks where long-term technical assistance is
sought. In addition, the department monitors trends and developments in international capital
17

markets, assesses systemic risks and related policy issues. It also contributes to the exercise of
IMF jurisdiction on exchange practices and restrictions. This is the department that prepares the
IMFs semi-anuual Global Financial Stability Report.
The Strategy, Policy and Review Department
This plays a central role in the design and implementation of IMF financial facilities and
operations, in surveillance policies and in other areas. It advises management and prepares Board
papers on the development and review of IMF policies and facilities, including surveillance and
Article IV consultation policies. It plays a key role in the IMFs participation in the IMFC and
Development Committee and its relationships with the World Bank, the UN and other
international and bilateral institutions and agencies.
The Research Department
This department conducts policy analysis and research in areas relating to the IMFs work. It
coordinates multilateral surveillance work and such bilateral surveillance activities as the
monitoring of exchange rates, com modities and energy markets. It plays a prominent role in the
development of IMF policy concerning the international monetary system and exchange rates
issues for the Board. It prepares the semi-annual World Economic Outlook report for the IMFC
and periodic reports on World Economic and Market Developments (WEMD) for the Board. The
Research Department also prepares surveillance notes for regional groupings, including the G-7
and G-20, and conducts a multilateral assessment of exchange rates for a number of advanced
and emerging market economies. The department also maintains contacts with the academic
community and with other research organisations.
The Statistics Department
The Statistics Department maintains databases of country, regional and global economic and
financial statistics and reviews country data in support of the IMFs surveillance role. It is
responsible for developing statistical concepts in balance of payments, government finance, and
money and financial statistics, as well as producing methodological manuals. The department
provides technical assistance and training to help members develop statistical systems and
produces the IMFs statistical publications. In addition, it is responsible for developing and
maintaining standards for the dissemination of data by member countries.
The Treasurers Department
This department formulates the IMFs financial policies and practices, and conducts and
controls financial operations and transactions in a variety of financial accounts. It advises
management and the Board on the IMFs liquidity and its income. It invests assets held in trust,
develops policies and advises on the financial aspects of access to IMF facilities. The Finance
Department also assess the financial risks to the IMF of large lending arrangements.
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Many developing country members in the IMF are very familiar with the Finance
Department, as it is this department that coordinates members regular payments of obligations
due to the Fund.
The Legal Department
The Legal Department advises management, the Board and the staff on the applicable rules
of law. It prepares most of the decisions and other legal instruments necessary for the IMFs
activities. The department serves as counsel to the IMF in litigation and arbitration cases,
provides technical assistance on legislative reform and responds to inquiries from national
authorities and international organisations on the law of the IMF.
The External Relations Department
The External Relations Department edits, produces and distributes the IMFs non-statistical
publications, provides information services to the press and general public, maintains contacts
with non-governmental organisations and parliamentary bodies and manages the IMFs website.
The IMF maintains four offices in Asia and the Pacific, in Europe, in Geneva and at the United
Nations Headquarters in New York to foster close contacts with other international and regional
institutions.
The Independent Evaluation Office (IEO)
As part of its ongoing measures to improve transparency, governance and accountability in
the Fund, the Executive Board approved the establishment of an Independent Evaluation Office,
which became operational in August 2001. The office, which reports to the Board, conducts
independent evaluations of Fund policy and operations with the full cooperation of Fund
Management. Since its establishment, the IEO has initiated work on a variety of projects,
including an evaluation of the prolonged use of IMF financial resources and the implications of
long use of IMF resources by its members, for the institution.
The Flexible Credit Line (FCL)
The IMF introduced a new FCL in March 2009. The facility is available to countries with very
strong economic and financial policies and strong track records of policy implementation, and its key
purpose is to help these countries prevent crises from occurring in their domestic financial systems. The
IMF approves FCL arrangements for countries meeting pre-set qualification criteria, giving these
countries certainty that they will have access to the resources if they meet these criteria. In addition,
unlike other IMF arrangements, which require conditions to be met before disbursements are made, the
FCL is disbursed without conditionality, either at the time of disbursement or on an ongoing basis.
The FCL is a renewable facility, which lasts for either six or twelve months, based on the
members choice. Its repayment period is between three-and-aquarter years and five years, allowing a
19

country experiencing major problems to have a reasonable period to work through the crisis before
repaying. There are also no limits on the level of access to these facilities for eligible countries; and there
is flexibility to either utilise the resources by drawing down on the facility, or to treat the facility as a
precautionary arrangement, in case a crisis occurs.
The FCL is a highly flexible arrangement, suited to the needs of many types of countries facing external
crises. However, there are qualification criteria. Before a member country is considered eligible to access
an FCL, the IMF conducts an assessment to confirm that the country has strong economic fundamentals
and institutional policy frameworks, is implementing and has a sustained record of implementing very
strong policies and remains committed to maintaining these policies. To conduct this assessment, the IMF
relies on a number of criteria.
These include whether or not the country has the following:
1. A sustainable external position and a capital account position dominated by private flows
2. A track record of access to international capital markets at favourable terms
3. A reserve position that is relatively comfortable
4. Sound public finances and a sustainable public debt position
5. Low and stable inflation and a sound monetary and exchange rate Position
6. No bank solvency problems posing systemic threats to banking system stability
7. Effective financial sector supervision and data integrity and transparency.

3. The Extended Fund Facility (EFF)

The EFF was established in 1974 to provide medium term assistance in particular to members
with
a) an economy suffering serious payments imbalances relating to structural maladjustments in
production and trade and where price and cost distortions had become widespread; or
b) an economy characterised by slow growth and an inherently weak balance of payments
position that prevents pursuit of an active development policy.
The length of an EFF arrangement is typically three years and disbursement is conditional on the
borrower meeting specified performance requirements, including structural reforms. The facility has
longer repayment periods than other facilities, four-and-one-half to 10 years, to allow time for reforms to
take effect. The expected repayment period may be shortened to four-andone- half to seven years if the
countrys external position allows it to repay earlier. An example of a country that has used this facility in
recent years is Albania, which undertook an EFF arrangement in 2006.

4. Emergency assistance
The IMF can also provide emergency financial assistance to a member facing balance of
payments difficulties caused by a natural disaster, and has indeed provided such assistance on a number of
occasions. The assistance is available through outright purchases, usually limited to 25 percent of the
members shareholding subscription, or quota, provided that the member is cooperating with the IMF to
find a solution to its balance of payments problem. In most cases, this assistance has been followed by an
arrangement with the IMF under one of its regular facilities, such as the SBA.

20

In 1995, the IMF policy on emergency assistance was expanded to cover countries in postconflict situations. This assistance may be provided when the members institutional or administrative
capacity has been disrupted as a result of a conflict but there is still sufficient capacity for planning and
policy implementation and a demonstrated commitment on the part of the authorities, and where there is
an urgent balance of payments need and IMF support could be catalytic and is part of a concerted
international effort.
Conditions for such assistance include a statement of economic policies, a quantified
macroeconomic framework to the extent possible and a statement of the authorities intention to move as
soon as possible to an SBA or, in the case of qualifying low-income countries, to an Extended Credit
Facility Arrangement. The conditionality is tailored to the individual country situation and to rebuilding
the countrys administrative and institutional capacity. In recent years, several countries have made use of
these facilities, including Albania, Rwanda and Tajikistan. These facilities are not provided on a
concessional financing basis. However, for low-income countries using them, some form of concession
has typically been provided through the intervention or support of one or more creditor members of the
IMF.

5 Concessional lending
In addition to its non-concessional lending, the IMF also provides concessional or low-interest loans to
low-income member countries. Until January 2010, these concessional facilities were provided through
the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF). From
January 2010, however, these facilities have been modernised and strengthened, to address the needs of
the IMFs low-income country members for short-term and emergency support in the context of the
current global financial crisis. The PRGF arrangements has been replaced by and Extended Credit Facility
(ECF), which provides medium-term support to low-income countries. A new Standby Credit Facility
(SCF) has been introduced to address low-income countries; short-term and precautionary needs The SCF
replaces the former ESF. Finally, a new facility, the Rapid Credit Facility (RCF), has been created to
provide for urgent financing needs with limited conditionality.
The IMF also provides grants to qualifying members under the Initiative for Heavily Indebted Poor
Countries (HIPCs) and the Multilateral Debt Relief Initiative (MDRI), to help reduce external debt
burdens.

MACROECONOMIC EFFECTS
DEREGULATION IN INDIA

OF

LABOR

AND

PRODUCT

MARKET

Tightly-regulated labor and product markets in India have given rise to a large informal
sector, sub-optimal level of employment, and low productivity. Our analysis suggests that
reforms can increase employment, improve competitiveness, and boost potential growth. A
package of reforms reinforces the gains, minimizes short-term costs, and increases the
acceptability of these politically-difficult reforms. These reforms will help harness demographic
dividend by absorbing Indias rapidly-growing labor force.

21

1. Despite some progress, product and labor markets remain tightly regulated in India.
Although significant progress has been made in liberalizing product markets in India, product
market competition remains low. The OECDs product market regulation index (2008) suggests
that product markets in India are less competitive compared to other OECD countries
2. High labor and product market rigidities have resulted in a large informal sector in
India and sub-optimal employment. The unorganized sector employs nearly 90 percent of the
Indian workforce, and contributes almost half of Indias GDP . The large size of the informal
market has been attributed to tightly regulated formal (organized) sector, which forces firms to
remain small and informal to avoid regulations (Ulyssea, 2010 and WTO, 2009).
3. In addition, tight regulations have hurt productivity and labor welfare. On average,
value added per worker in Indias informal manufacturing sector is about one tenth that of the
formal sector. With an incentive to remain in the informal sector (to avoid regulations), firms fail
to benefit from economies of scale, and are generally much less productive than formal sector
enterprises.
4. A dynamic stochastic general equilibrium (DSGE) model with informality and product
and labor market rigidities for India is used to study the impact of deregulation. The model
estimated on ten key macroeconomic variables from 1996 to 2008 using Bayesian estimation
techniques adds the informal sector and unemployment in a standard small open economy DSGE
model.
5. Results suggest that labor market and product market reforms can increase output,
exports, employment and formality in the long run. A relaxation of labor market regulations in
the formal sector (reduced hiring/firing costs and bargaining power) increases labor hiring by the
formal sector firms, higher employment and size of the formal sector .

CONCLUSION
The IMF is suffering from serious structural distortions that have slowly developed since
the Second Amendment to the Articles of Agreement. These problems create a substantial barrier
to the effective functioning by the IMF. They can only be corrected through a broad ranging
reform program that will overhaul the structure and operating principles of the IMF. Without
undertaking this reform program, it is unclear if the IMF will ever be able to effectively make
any useful contributions to solving the complex problems of poverty, inequality and inadequate
governance which plague developing countries today.
Unfortunately the problems that exist in the IMF are only the most extreme version of a
problem that exists in all international organizations. All those organizations that have great
economic power in the developing world -- the World Bank, the regional development banks and
the WTO share, although maybe in less extreme forms, the same problems. Those UN
22

specialized agencies that lack adequate resources, influence and power such as UNESCO, FAO,
UNICEF, WHO often suffer from the reverse problem. They lack influence and power because
they are deemed to be too sensitive to developing countries. The result is that industrialized
countries loose interest in them. If international organizations are to perform the global
governance functions that were envisaged for them and if they are to play an effective role in
dealing with the complex problems that exist in the developing countries and the extreme
inequalities of power and wealth that exist between developing and developed countries, they
will need to undergo their own reform programs, that will be complimentary to the one this paper
proposes for the IMF.
Two organizations are really the misguided target for the legitimate concerns people of all
ideological stripes have had about the rapid pace of globalization in the past half century. It is
likely this globalization would have occurred whether or not there had been a Bretton Woods
conference, and it is all but certain it will continue in the future regardless of the policies pursued
by the IMF and World Bank. While it is true that they have often been too driven by U.S. foreign
policy concerns, in the end the influence of both institutions has been widely overstated. And
despite their mistakes during the past half century, they have rarely been given credit for many of
the little things they do well. For example, both institutions perform economic surveillance over
most of the world's economy, a valuable task that no other international or private organization
could perform with such skill. Both agencies also serve as a store of expert knowledge and
wisdom for countries throughout the world that lack trained specialists. While neither the IMF
nor the World Bank has met the lofty goals of their founders or wielded the nefarious influence
charged by their critics, they have and should continue to play a small but important role in
promoting prosperity and
economic
stability
worldwide.

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