INTERNATIONAL MONETARY FUND & SPECIAL DRAWING RIGHTS

GROUP MEMBERS:
Devyani Jamwal (04) Aprajita Sharma (02)

IMF IN GLANCE

IMF is an international monetary institution established by different countries after the World War II to provide exchange stability throughout the world & increasing liquidity so that balanced multilateral trade is promoted.

WHAT LED TO THE ESTABLISHMENT OF IMF

Before World War I, gold was the medium of international payments. However, the onset of World War I forced most of the countries to abandon gold standards and put restriction on the movement of gold. After the World War I, most of the countries came back on gold standard but the gold standard could not work well between the periods 1919-1931. The world faced the Great Depression (1926-1936) which led to a decline in prices, profits, employment & income. World War II further disrupted the patterns of International trade.

BRETTON WOODS SYSTEM

A conference of 44 major countries was held at Bretton Woods, New Hampshire in July 1944 to establish a stable international Monetary order. The result of this conference was IMF and IBRD. These 2 institutions are known as Bretton Woods Twins.

FUNCTIONS OF BRETTON WOODS SYSTEM

It provided a comprise between Fixed & Floating exchange rate systems. It established an international harmony and exchange rate stability associated with gold standard. It allowed individual countries to pursue their own macroeconomic policy.

THE END OF THE "BWA"

End of Bretton Woods system (197281) :
The system dissolved between 1968-1973.

Since the collapse of the Bretton Woods system,

IMF members have been free to choose any form

of exchange arrangement they wish.

OBJECTIVES OF IMF
To promote international monetary cooperation. To provide exchange stability and to avoid depreciations. To shorten the duration and lessen the degree of disequilibrium in the BOP of members. To facilitate the growth of international trade by maintaining employment opportunities. Assisting in the establishment of a multilateral system of payments.

FAST FACTS ON THE IMF

IMF came into existence in December 1945. It is an autonomous organisation & is affiliated to U.N.O. Headquarters are in Washington. Membership: 188 countries Executive Board: 24 Directors representing countries or groups of countries Staff: Approximately 2,475 from 156 countries.

ADMINISTRATIVE STRUCTURE OF IMF

Int. Monetary & Financial Committee
Board Of Governors IMF-World Bank Development Committee

Executive Board

Independent Evaluation Office

Managing Director

Staff

IMF Becoming a Universal Institution:

The fall of the Berlin wall in 1989
Expansion to fulfill responsibilities

Soviet Block Transition

Debt relief for poor countries

BIGGEST SHAREHOLDERS
USA

JAPAN

UK

GERMANY

FRANCE

WHAT THE IMF DOES??

Key IMF Activities

An Adapting IMF

Original Aims

KEY ACTIVITIES

Policy advice to governments & central banks

Research, statistics, analysis, forecast

Loans to help countries

Fight poverty in developing countries

ORIGINAL AIMS
Provide a forum for cooperation on international monetary problems.
Facilitate the growth of international trade. Promote exchange rate stability. Lend countries foreign exchange when needed on a temporary basis.

AN ADAPTING IMF

Enhancing IMF lending facilities

Strengthening the monitoring of global, regional & country economies.

Resolve global economies imbalances.

Analyzing capital market developments

Working to cut poverty

COLLABORATION WITH OTHERS

The World Bank. Regional Development Banks. WTO. UN agencies & other international bodies.

QUOTA
IMF main resources : subscription (quotas) Countries pay 25% of their quota subscriptions in SDR or major currencies. IMF can call on the remainder, payable in the members own currency to be made available for lending as needed. The largest member is the US. The smallest member is the TUVALU.

PRIMARY FUNCTIONS OF IMF

Surveillance.
Financial assistance. Technical assistance.

"Surveillance"
It provides regular assessment of global prospects in its World Economic Outlook. The IMF provides advice to its member countries. Focus on the assessment of the exchange rate & BOP.

"Financial assistance"

Provide short term loans to countries experiencing BOP problems.

"Technical Assistance"

The IMFs goal for its technical support is to contribute to the development of the productive resources of member countries.

IMF & INDIA

India is a founder member of IMF. Indias rank is 13th among 188 member countries.

Advantages to INDIA
Freedom from Sterling. Membership of the World bank. Facility of Foreign Exchange. Economic Consultation. SDRs. Help during emergency. Importance in Int. sector.

ACHIEVEMENTS OF IMF
Expansion of Fund : IMF has progressed both in membership and resources. Provision of Credit: Provides Financial Credit to its member countries. Exchange Stability: Promotes Exchange Stability among Member Countries. Expansion of World Trade: It contributes to the expansion of International Trade by:-

a) Providing Credit facilities to member countries. b) It helps the deficit countries to correct disequilibrium in their BOP. Increase in International Liquidity: With the establishment of SDRs, IMF has increased liquidity.

FAILURES OF IMF
It has failed to achieve its basic objective of international exchange stability. The fund has failed to establish a stable and sound international monetary system. The problem of international liquidity hasnt been solved. The IMF quota has not been revised. The share of quotas in relation to world trade has

Been fast declining. The fund has adopted a favourable attitude towards U.S.A as most of its decisions are taken to protect U.S.A. The fund has been criticised as being Rich Mens Club because of the dominance of rich countries. The underdeveloped and developing countries usually do not get financial help from IMF.

 The IMF has been widely criticised for interfering in the economic policies of poor countries.

SPECIAL DRAWING RIGHTS (SDRs)

The establishment of SDR was an attempt of IMF to solve the problem of international liquidity. These were intended to be an asset held in foreign exchange rates under the Bretton Woods System of fixed exchange rates. The scheme for creating SDRs was outlined at Annual General Meeting of the IMF in October 1967 at Rio de Janeiro (Brazil)

 However the proposal was approved in 1968 and came into being on August 1969. The objective of SDRs is to assure an adequate growth of monetary reserves. Allocation of SDRs is made on the basis of a countrys quota. Possession of SDRs entitles a country to obtain an equivalent of currency from other countries.

FEATURES OF SDRs
Additional Reserve Asset: In addition to the traditional assets like gold, SDRs scheme provides a new international asset. Cheque Book Currency: SDRs are simple book keeping entries at the IMF in accounts for the member countries. Transferrable Asset: SDRs are transferrable assets & the member countries are required to provide their currencies in exchange for SDRs.

 Backing of SDRs: SDRs are a liability of IMF and there is no backing in the form of an assets. Basis of SDRs: It is created on the basis of Credit Creation. Allocation of SDRs: SDRs are allocated to the countries on the basis of their quotas. Special Drawing Account: The IMF has 2

Accountsa) General Account: which deals with general transactions relating to quotas. b)Special Drawing Account: which deals with SDR transactions. Fiduciary Reserve System: SDRs are created by IMF, accepted by member countries and used for settlement of international payments.

 Interest Bearing Asset: The IMF pays interest to the countries holding SDRs and charge interest from the countries using SDRs. Use of SDRs: Countries use SDRs to meet their B.O.P requirements. Limited use of SDRs: A country can use 70% of the alloted SDR. The remaining 30% is held for meeting emergencies.

 Units of Accounts: OPEC countries, airlines, monetary organizations are using SDRs as units of accounts.

VALUATION OF SDRs
Initially the value of SDR was fixed in terms of gold. The value of SDR was equal to 0.88867 gm of fine gold. In 1974, the standard technique was adopted and the value of SDR was fixed in terms of a basket consisting of 16 currencies. The value of SDR is calculated daily on the basis of market exchange rates.

WORKING OF SDRs
Transactions with designation

Transactions by agreement

Transactions with General Account

Transaction with Designation

A member country may use its SDR to obtain foreign exchange from other member country designated by the fund. The fund designates the member country, with a strong B.O.P and reserve positions to provide currency in exchange for SDRs.

Transactions By Agreement
A member country may use its SDRs to obtain balances of its own currency held by another participant country by agreement with that participant. The member countries are expected to utilise their SDRs to meet adverse balance of payments.

Transactions with General Account

SDRs can be used by member countries in operations and transactions conducted through IMFs General Account (i.e, in settling transactions with the IMF)

USES OF SDRs
In SWAP arrangements, a member country may transfer SDRs to another country in exchange for currency. In Forward transactions, in which members can buy or sell SDRs for delivery at a future date. In the settlement of financial obligations. In making donations.

Repayment of loans and payment of interest can be made with the help of SDR.

SDRs IN INDIA
Allocation of SDR to India were 75.4 crores in 1970-1971 & 120.5 crores in 1980-1981. These SDRs have been allocated in the Government of Indias account. SDRs have been used for repurchase from the fund and paying of interest.

Merits Of SDR
It is a simple and flexible scheme. It provides stable international currency The scheme ensures adequate but not excessive growth of monetary reserves. SDRs can be used unconditionally. Holding of SDRs is beneficial to a country as they are an interest earning asset. It avoids the confidence problem faced under the

Currency reserve standard. The SDR scheme implies a partial demonetisation of gold. The SDRs cause permanent increase in liquidity. Countries using SDR are not required to repay according to fixed schedule.

Criticism of SDRs
The allocation of SDRs is not just and on equitable basis. They are allocated among the member countries in proportion of their quotas and not according to their needs. In spite of creation of this new reserve asset, the liquidity problem of inadequate reserves still continues. The less developed countries are not provided

Sufficient SDRs to meet their increasing requirements. The scheme is purely fiduciary in nature. There is every likelihood of reduction in the public confidence in the SDRs. Unrestricted SDRs as an international reserve asset to finance the payments deficits may lead to global inflation