International Monetary Fund (IMF): Origin, Objectives and Functions

Origin of IMF:

The origin of the IMF goes back to the days of international chaos of the 1930s. During the
Second World War, plans for the construction of an international institution for the establishment
of monetary order were taken up.

At the Bretton Woods Conference held in July 1944, delegates from 44 non-communist countries
negotiated an agreement on the structure and operation of the international monetary system.

The Articles of Agreement of the IMF provided the basis of the international monetary system.
The IMF commenced financial operations on 1 March 1947, though it came into official
existence on 27 December 1945, when 29 countries signed its Articles of Agreement (its
charter). Today (May 2012), the IMF has near-global membership of 188 member countries.
Virtually, the entire world belongs to the IMF. India is one of the founder- members of the Fund.

Objectives:

Article 1 of the Articles of Agreement (AGA) spell out 6 purposes for which the IMF was set up.

These are:

I. To promote international monetary cooperation through a permanent institution which

provides the machinery for consolation and collaboration on international monetary problems.

II. 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 the productive resources of all members as primary objective of economic
policy.

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

IV. 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 which
hamper the growth of world trade.

V. To give confidence to 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.

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

Financial Structure of the IMF:

The capital or the resources of the Fund come from two sources:

(i) Subscription or quota of the member nations, and

(ii) Borrowings.

Each member country is required to subscribe an amount equivalent to its quota. It is the quota
on which payment obligations, credit facilities, and voting right of members are determined. As
soon as a country joins the Fund, it is assigned a quota which is expressed in Special Drawing
Rights (SDRs). At the time of formation of the IMF, the quota of each member was made up of
25 p.c. in gold or 10 p.c. of its net official holdings of gold and US dollars (whichever was less).
Now this has been revised.

The capital subscriptions or quota is now made up of 25 p.c. of its quota in SDRs or widely
accepted currencies (such as the US dollar, euro, the yen or the pound sterling) instead of gold
and 75 p.c. in country’s own currency. The size of the Fund equals the sum of the subscriptions
of members. Total quotas at the end-August 2008 were SDR 217.4 billion (about $341 billion).

The Fund is authorised to borrow in special circumstances if its own resources prove to be
insufficient. It sells gold to member countries to replenish currency holdings. It is entitled to
borrow even from international capital market. Though the Articles of Agreement permit the
Fund to borrow from the private capital market, till today no such use has been made by the IMF.
International Development Association (I.D.A.): Objectives and Working

The International Development Association (IDA) was established in 1960, affiliated to the
World Bank.

It was started to provide finance to less developed members on a “soft” loan basis, that is, on
terms imposing a lower servicing charge on loans than what the conventional bank charges.

Objectives:

The following are the principal objectives of the IDA:

1. To provide development finance on easy terms to less developed member countries.

2. To promote economic development, increase productivity and thus, raise the standards of
living in the underdeveloped areas.

Working:

Thus, IDA is looked upon as a means of furthering the development activities of the World Bank
and as a supplementary to the Bank’s activities. Under its charter, the IDA is to support projects
which are calculated to contribute to the development of the country concerned, whether they are
directly productive or not.

The IDA credits would be called development credits to distinguish them from conventional
loans, and these would be repayable mostly in the currency lent rather than in the currency of the
borrower. Since IDA charges nominal rates of interest on its loans, it has also been nicknamed
the “Soft-Loan Window.”

IDA has granted a number of credits to India for her development schemes. The grant of credits
for development projects given by IDA to India has been in the nature of a continuous flow. But
for the funds that have been made available by IDA to India, our development pace would have
been considerably slower.

In fine, it may be said that the IDA is expected to make a distinct contribution to the economic
development of backward nations, furthering their development projects and supplementing the
activities of the World Bank. Moreover, unlike the World Bank loans which are meant to cover
only the foreign exchange costs, the IDA loans can be utilised to finance both foreign exchange
and local currency costs.
International Bank for Reconstruction and Development (I.B.R.D.) |
World Bank
Introduction to I.B.R.D:

The International Bank for Reconstitution and Development (popularly known as World Bank)
was set up as a result of the decision taken in Bretton Woods Conference New Hampshire.

The conference was held in July 1944 and attended by 44 nations.

There it was decided to set up two organisations i.e., (a) the I.M.F. and (b) the I.B.R.D., to solve
the monetary and financial problems of the less developed countries likely to be faced in Post-
World War II period.

When I.B.R.D. was Set Up?

The I.B.R.D. or World Bank was set up on December 27, 1945. When its Articles of Agreement
was signed by 29 members Government in Washington. On 30th June, 1996, 185 countries were
its members. If a country resigns its membership, it is required to pay back all loans with interest
on due dates. If the Bank incurs a financial loss in the year in which a member resigns, it is
required to pay its share of the loss on demand.

Capital Structure:

The I.B.R.D. was started with an authorised capital of $ 10 billion divided into 1,00,000 shares
of $ 1,00,000 of this $ 9,400 million was actually subscribed. On 30th June 1988 the authorised
Capital Stock of the I.B.R.D. Comprised 7,16,500 authorised Shares of the par value of S.D.R.
(Special Drawing Rights) 1,00,000 each. In July 1994 the total authorised bank capital was $ 185
billion with a capital increase of $ 9.3 billion.

Principal Purposes or Objectives of the Bank:

The principal purposes as set forth in its Articles of Agreement (or charter) are as follows:

1. To assist in the reconstruction and development of its member countries by facilitating the
investment of capital for productive purposes, thereby promoting long range growth of
international trade and improvements in standard of living.

2. To promote private foreign investment by guarantees of and participation in loans and other
investments made by private investors.

3. When private capital is not available or reasonable terms to make loans for productive
purposes out of its own resources or the funds borrowed by it.
4. To arrange the loans made or guaranteed by it in relation to international loans through other
channels so that more useful and urgent small and large projects are dealt with first.

Principal Activities Performed to Achieve these Purposes:

In order to achieve these purposes, the charter authorizes the World Bank to engage in the
following financing activities:

(i) It may lend funds directly, either from its capital funds or from the funds it borrowed in
private investment markets.

(ii) It may guarantee loans advanced by other or it may participate in such loans.

(iii) Loans may be advanced to member countries directly or any of their political sub-divisions
or to private business or agricultural enterprises in the territories of members.

(iv) It has provided loans to the developing countries for development projects and programmes
because credit rating of many developing countries is poor—hence they feel difficulties in
raising funds in international capital markets.

(v) The World Bank is a vital source to the developing countries, when the member Government
in whose territory the project is located, is not the borrower, the World Bank asks the member
Government for a guarantee.

Characteristics of Bank Loan:

Some basic provisions of Bank Loan may be mentioned as such:

1. They are meant for high priority productive purposes mainly to develop the infrastructure for
the development such as:

(a) Electric supply,

b) Power,

(c) Rail,

(d) Roads,

(e) Ports and inland waterways airlines and airports etc.

2. They must be used to meet only the foreign exchange components of the projects.

3. The interest rate of the bank is somewhat lower in relation to market rate.

4. From July 1, 1982-Bank adopted a policy of resulting its lending rates half-yearly.
Other Helps Extends By I.B.R.D.:

Various other helps have been provided by the World Bank and they are as follows:

1. The I.B.R.D. helps in providing training, technical assistance, inter-organisational co-

operation, research and studies and in the settlement of investment disputes of its members.

2. The Bank has established a Staff College, known as the Economic Development Institute
(E.D.I.) for training senior officials of the member developing countries. It helps to improve the
management of their economies and to increase the efficiency of their investment programmes.

3. It provides technical assistance to the needy country under two categories: (a) engineering
related such as engineering design and construction supervision, and (b) Institution related such
as diagnostic policy and institutional studies, management support and training.

4. The bank also extends inter-organisational Co-operational. Co-operation between the I.B.R.D.
and other international organisation like the F.A.O.; the W.H.O.; the G.A.T.T.; the United
Nations Environment Programme (U.N.E.P), the U.N.D.P., the United Nations Industrial
Development Organisation (U.N.I.D.O.) the Industrial Fund for Agricultural Development
(I.F.A.D.) etc.

5. Centre for Settlement of Investment Disputes: The bank has established the International
Centre of Settlement of Investment Disputes (I.C.S.I.D.) between States and Nationals of other
states. All members of the Bank have signed over the paper. The Bank in this has successfully
mediated in solving many international investment disputes such as the River Water Dispute
between India and Pakistan and of the Suez Canal between Egypt and the U.K.

In the end we can say that the Bank’s overall performance must be judged not on its lending but
on its success in providing advice and technical assistance. The Bank is laying greater emphasis
on developing human resources health and nutrition and on environment.

Economists View over the Working of the I.B.R.D.:

Economists are of this view that the Bank has been quite successful in achieving the principal
objective of reconstruction and developing. No doubt it has helped in the reconstitution of
Europe after the destruction in the Second World War. But some economists are not lacking in
saying that its lending policies are not proper and satisfactory.

Further they have written that:

1. The Bank charges a very high rate of interest on loans as also an annual commitment charge
on undistributed balance.

2. Further they have said that it has failed to meet the financial needs of the developing countries
fully. Its loan has just touches the fringes of the total capital requirements for their economic and
social uplift.
3. The lending procedure of the bank is faulty because it lays emphasis on the repaying capacity
of the borrowing country before granting any loan. Such a condition is not proper rather it is
harsh and discriminatory for developing countries which are mostly poor and need financial help
on a large scale.

4. The Bank has also been criticised for being discriminatory in its purpose-wise and region-wise
assistance to its members.

India and the World Bank:

As we are aware that India is one of the founder members of the Bank and has occupied a
permanent seat on its Board of Executive Directors for a number of years.

Therefore, India is very much attached and is in link with the bank and has received many
benefits which are as follows:

1. The Bank has extended assistance to India in its planned economic development by granting
loans, conducting field surveys, rendering expert advice and training Indian personnel at the
E.D.I. (Economic Development Institute).

2. The Bank has established a Chief of Mission of the Bank at New Delhi, who monitors the
aided projects in India.

3. It is said that India has been the largest receiver of the World Bank assistance.

4. The Bank also helped India to solve amicably its river water dispute with Pakistan.

In the end it can be said that India has gained much for being the member of the World Bank for
the development of agriculture, industry, energy and transport. In future India, will have to
borrow more from the Bank.