Role and functions of International monetary fund.pptx
- 1. INTERNATIONAL MONETARY FUND PREPARED BY DR.RUCHI SHARMA GGDSD COLLEGE CHANDIGARH
- 2. 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 countries negotiated an agreement on the structure and operation of the international monetary system.
- 3. • The Articles of Agreement of the IMF provided the basis of the international monetary system. • The IMF com menced 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 (2020), the IMF has near-global membership of 190 member countries. India is one of the founder- members of the Fund.
- 4. OBJECTIVES •To promote international monetary coope ration through a permanent institution which provides the machinery for consolation and collaboration on international monetary problems. •To assist in the establishment of a multila teral 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.
- 5. •To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. • Abolition of exchange restrictions • Help in international payments :IMF will lend or sell to its member countries currencies of other countries.
- 6. • Aid to members during emergency • To give confidence to members by making the general resources of the Fund tempo rarily available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments, without resor ting to measures destructive of national or international prosperity.
- 7. • Profitable investment of capital: IMF helps the member countries to invest their long term funds in profitable activities. It provides special help to rich countries to invest their capital in poor countries. • 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.
- 8. SPECIAL DRAWING RIGHTS (SDRS) • The Special Drawing Rights (SDRs) as an international reserve asset or reserve money in the international monetary system was established in 1969 with the objective of alleviating the problem of international liquidity. • The IMF has two accounts of operation—the General Account and the Special Drawing Account.
- 9. The former account uses national currencies to conduct all business of the fund, while the second account is transacted by the SDRs. The SDR is defined as a composite of five currencies— • Dollar • Mark • Franc • Yen and • Pound. • The SDRs are allocated to the member countries in proportion to their quota subscriptions. Only the IMF members can participate in SDR facility.
- 10. • SDR is just a book entry in the Special Drawing Account of the IMF. • Whenever SDR is allocated, it gets a credit entry in the name of the participating countries in the said account. • It is to be noted that SDRs, once allocated to a member, are owned by it and operated by it to overcome BOP deficits.
- 11. SDR AS AN INSTRUMENTS OF IMF LENDING AND LOAN CONDITIONALITY • The financial assistance provided by the Fund is loan. • The following technique is employed: If a country calls on the Fund it buys foreign currencies from the IMF in return for the equivalent in the domestic currency. • This, in legal and technical terms, is called a ‘drawing’ on the Fund.
- 12. HOW MUCH A COUNTRY CAN DRAW? • The total amount that a country is entitled to draw is determined by the amount of its quota. • A member is entitled to draw an amount not exceeding 25 p.c. of its quota. • The first 25 p.c. called the ‘gold tranche’ (‘tranche’ a French Word meaning slice) or ‘reserve tranche’ can easily be drawn by countries with BOP problems.
- 13. • This 25 p.c. of the quota is the members’ owned reserves and therefore no conditions are attached to such drawings. • This may be called ‘ordinary, drawing rights; even the Fund cannot deny its use. • However, no interest for the first credit tranche is required to be paid though such drawings are subject to repayment within 3-5 years period.
- 14. BORROWING METHODS USED BY THE FUND ARE (i) Stand-by Arrangements • The drawings are made to meet short- term BOP problems • Under this form of borro wing, a member state obtains the assurance of the Fund that, usually over 12-18 months, requests for drawings of foreign exchange (i.e.,) up to a certain amount will be allowed if the country concerned wishes. • However, the stand-by arrangements can be extended up to 3 years while repayments are required to be made within 3-5 years of each drawing.
- 15. EXTENDED FUND FACILITY (EFF) • Developing countries suffer from chronic BOP problems which could not be remedied in the short run. • Such protracted BOP difficulties experienced by the LDCs were the result of structural imbalances in production and trade. • It then necessitated an adjust ment programme and redemption scheme of longer duration.
- 16. • In the 1970s, the Fund recognised this idea and built up the EFF in 1974. • The EFF is designed to provide assistance to members to meet their BOP deficits for longer period (3-4 years) and in amounts larger in relation to their quotas. • Repayment provisions of EFF cover a period of 4-10 years. • However, conditions for granting loans are very stringent.
- 17. COMPENSATORY FINANCING FACILITY (CFF) • Apart from the ordinary drawing rights, there are some ‘special finances’ windows to assist the developing countries to tide over BOP difficulties. • Under it, members were allowed to draw up to 25 p.c. of its quota when CFF was introduced. • It can now draw up to 45 p.c. Since the mid- 1990s, this has been the least- used facility.
- 18. STRUCTURAL ADJUSTMENT FACILITY (SAF) AND THE ENHANCED SAF (ESAF) • Under it, credit facilities for economic reform programmes are available at a low interest rate of 0.5 p. c compared to 6 p.c. for most Fund facilities. Loans are for 10 years with a grace period of five and a half years. • An extended version of SAF—ESAF—was introduced in 1987. The ESAF has been replaced by a new facility, called Poverty Reduction and Growth Facility in 1999.
- 19. POVERTY REDUCTION AND GROWTH FACILITY (PRGF) • Under this facility, low-income member countries are eligible to borrow up to 140 p.c. of its quota for a 3-year period. • Rate of interest that is charged is only 0.5 p. c and repayment period covers 5 1/2-10 years, after disbursement of such facility.
- 20. SUPPLEMENTAL RESERVE FACILITY (SRF) • This instrument provides additional short-term financing to member countries facing exceptional BOP difficulties because of a sudden and disruptive loss of market confidence reflected in capital outflows of countries concerned. • Consequent upon the eruption of East Asian financial crisis, the SRF was introduced in 1997. • Till date (March, 2012), the top three largest borrowing nations are Greece, Portugal and Ireland from the IMF.
- 21. INDIA AND IMF • INDIA TOOK A LOAN OF 1.78 BILLION DOLLAR(RS.3275 CRORES). • CUTTING DOWN SUBSIDIES,REDUCTION OF PUBLIC EXPENDITURE AND RAISING OF TAXES WERE PROPOSED BY IMF. • DEVALUATION UPTO 20 % IN RELATION TO Dollar ,Mark ,Franc ,Yen and Pound was another action. • SEVERAL CHANGES IN INDUSTRIAL AND MONETARY POLICIES
- 22. • BANK RATES WERE INCREASED TO REDUCE IMPORTS • TO GET ADDITION LOAN FROM IMF INDIAN ECONOMY WAS OPENED FOR FOREIGN INVESTMENT
- 25. STRINGS OF CONDITIONALITY • The IMF practice of tying loans to conditions reflects the dominant influence of the capitalist world. • The conditionality is always intended to restore internal and external balance and price stability. • The Fund prepares ‘stabilisation’ programme and ‘adjustment’ programme which member states will be required to adopt to tackle macroeconomic instability.
- 26. Stabilisation and structural programmes includes • Monetary and fiscal policies • Exchange rate policy (i.e. devaluation) • Liberalisation or deregulation • Privatisation • Reforming institutions to carry governments’ new role, • Freeing markets to determine prices, • Reforming the labour sector. • Almost all stabilisation programmes intend to curb effective demand.
- 27. WORKING OF THE IMF • There are two phases in the working of the IMF over the last 73 years. • The first phase covers the period late 1940s (i.e., 1947) to 1971. • This phase is popularly known as the ‘Bretton Woods System’. • The IMF system or the Bretton Woods System provides for exchange rate stability in the short run when a country experi enced ‘fundamental’ disequilibrium in its BOP accounts. • Thus, the pegged exchange rate was adjusted in accordance with the IMF. Hence the name ‘adjustable peg system’.
- 28. • As the system was the source of some major problems, it was abandoned in 1971 and more flexibility was introduced in the monetary system. In other words, the demise of the Bretton Woods System made room for the floating exchange rate regime, requiring changes in the role of the IMF. After prolonged negotiations (1973-78), the IMF started its second-leg journey in 1978.
- 29. • The decade of the 1970s saw massive borro wing by the developing countries. • It rose to $600 billion by 1982. • Meanwhile, the rise in interest rates in the USA from 1979 and the appreciation of dollar caused tremendous difficulties to the developing countries in servicing their debts. • On the other hand, the switch to the floating exchange rate system coincided with the deteriorating economic conditions in the industrialised countries.
- 30. • With the breakup of the Soviet Union in 1989, a new category of countries, especially the erstwhile communist countries, joined the IMF. • The IMF now came forward to assist countries undergoing transition from a centrally planned economy to a market-oriented economy. • Privati sation is indeed a crucial element of the transition process. • That is why the IMF is providing financial assistance and technical support for the develop ment of sound economic management and the privatisation of state enterprises.
- 31. • In 1997, the East Asian financial crisis began when the currencies of the ‘Asian tiger’ economies (South Korea, Singapore, Hong Kong, Taiwan) plummeted, and the stock market crashed. Rescue packages were launched by the IMF under strong authority conditions.
- 33. PROMOTION OF INTERNATIONAL TRADE • The IMF has contributed in several ways to the enlargement of global trade. • It has created facilities for the member countries for financing and adjusting the balance of payments deficits. • As the multilateral assistance can enable the member countries to correct their temporary or fundamental payments disequilibrium, they need not take recourse to tariffs, import quotas, exchange controls and other restrictive practices. • Thus, it has attempted to create conditions for unrestrained expansion of international trade.
- 34. BROADENING OF THE CREDIT STRUCTURE • IMF continues to provide credit to the member countries for short-term adjustments in BOP disequilibrium, IMF has started providing loans also for specific development projects. • During 1950’s and 1960’s, the repayments of IMF loan had to be made within 3 to 5 years periods. • During 1970’s and 1980’s, different types of credit facilities were created. • The repayments are extended over a longer period.
- 35. • For instance, under the Extended Fund Facility (EFF), the repayments are to be made over a period of 4 to 10 years in the case of loans from IMF’s own resources and 3-1/2 to 7 years, if the loan is made out of Fund’s borrowed financial resources.
- 36. MULTILATERAL PAYMENTS SYSTEM • The IMF has achieved success in the establishment of a multilateral system of international payment particularly in respect of current transactions. • At the time of establishment of fund there were many restrictions on foreign trade and most of the countries were exercising exchange control.
- 37. INSTITUTION FOR CONSULTATION AND GUIDANCE • The International Monetary Fund has created a consciousness among the member countries that their economic problems are the matters of concern not only exclusively for them but for the whole international community. • The IMF provides an excellent forum for discussions on various monetary, fiscal, financial, trade and exchange problems in general and international payments problems in particular. • The Fund is a specialised institution to undertake research about various economic problems through its numerous missions and provides an expert guidance to the member nations for efficiently dealing with them.
- 38. IMF AND DEVELOPING COUNTRIES • The IMF has rendered assistance to the less developed countries in several ways. • The IMF in the beginning confined its activities to the adjustment of member nation’s balance of payments deficits of essentially short- term character and the stabilisation of exchange rate. • However, in recent years, the IMF has started rendering more positive assistance to the poor countries in their economic transformation.
- 39. • Firstly, it has undertaken to provide financial assistance for offsetting the fundamental disequilibrium in the BOP. • Secondly, the IMF has started providing concessional long-term liquidity to the member countries for not only adjusting the balance of payments but also for furthering development through increased imports of development goods and services from other countries. • Thirdly, the IMF suggests structural reforms to the less developed countries for removing the constraints from the development process.
- 40. • Fourthly, the IMF has rendered assistance to the member countries in the formulation of growth-oriented monetary, fiscal, exchange and trade policies. • Fifthly, the IMF has organised the Central Banking Advisory Service for providing technical advice to the less developed countries in the improvement of the working of their central banks. • Sixthly, the IMF has created since 1964, an institute for training the officials of the member countries in various fields.
- 41. • Seventhly, the IMF has made a revolutionary innovation in the form of Special Drawing Rights (SDR’s) to tackle the problem of international liquidity. Thus the IMF operations have really achieved much significance from the point of view of the less developed member nations.
- 42. • International monetary cooperation • Reconstruction of European Countries • Increase in international liquidity • Helpful in times of difficulties