TAMILNADU NATIONAL LAW SCHOOL

TIRUCHIRAPALLI

ECONOMICS

PROJECT PRESENTATION- INTERNATIONAL MONETARY FUND AND

ITS ORGANIZATION, FUNCTIONS

FOURTH SEMESTER 2016

PRAVEEN.C

BA0140041
 ACKNOLEDGEMENT

This project could not have been done without the help, guidance, and support
of few people who stood by my side from the very beginning of this project.

Im very glad and grateful to Prof. Mr.Balachandran who was the initiative and
inspired me to take up this project. His contribution to this project is an
immense one.

Im also grateful to my parents and friends who all stood as a pillar of support
for me during this entire research work. Their contribution to this project is an
indispensable one.
DECLARATION OF AUTHORSHIP

I, PRAEEN.C hereby declare that this project titled submitted to Tamil Nadu National Law
School, Tiruchirappalli, is the record of a bona fide work done by me under the expert
guidance of the venerated ECONOMICS faculty of Tamil Nadu National Law School,
Tiruchirappalli.

All authentic information furnished in the project is true to the best of my knowledge and
belief.

Submitted to: Asst. Prof. Balachandran

Submitted by: PRAVEEN.C

 INTERNATIONAL MONETARY FUND AND ITS ORGANIZATION,
FUNCTIONS

INTRODUCTION

The International Monetary Fund was created in 1946, a result of the 1944
international financial conference at Bretton Woods, New Hampshire. It was
created in order to prevent a return of the international financial chaos that
proceeded and in some ways precipitated World War II. During the 1930s, many
countries pursued beggar-thy-neighbor economic policies restricting purchases
from abroad in order to save scarce foreign exchange, cutting the value of their
currencies in order to underprice foreign competitors, and hampering international
financial flows in ways that deepened the world depression and accelerated the
decline in economic activity. The IMF was designed to limit or prevent this kind
of economic behaviour.

The IMF is a specific agency of the United nation yet it works essentially freely
of in UN control. The IMF must obey mandates of the U.N. Security Council,
but it need not agree to orders from the U.N. General Assembly or other U.N.
agencies.

Rather of being organized out on a one-country, one-vote premise,

similar to the United nation, the IMF has weighted voting. The IMF has 184
member countries, whose voting offer relies on upon the measure of their share
or financial commitment to the organization. A countrys quantity is controlled
by its size and its level of cooperation on the world economy. The amount a
country can borrow from the IMF is controlled by the measure of its share. The
United States is the largest single shareholder, with a 17.2% voting share.
Together, the nine Executive Directors (EDs) representing to the G-7 countries
and other propelled countries in Europe have about 56% of the vote. Most
decisions is generally expressed by consensus. Some exceptional matters
(changes in the Articles of Agreement or endorsement of new standard
increments, for example) require a 85% positive vote. No country can block or
veto advances or other operational policy decisions by the IMF. Nonetheless, in
light of the fact that the U.S. vote exceeds 15%, no amount expands, alterations
or other real activities can become effective without its consent. The same can
be said for other major blocks of IMF member countries.
The IMF's Purposes

As set forth in its Articles of Agreement which entered into force in December
1945 the purposes of the IMF are

(1) To promote international cooperation on international currencies problems

(2) To facilitate the expansion and balanced growth of international trade,

promoting high levels of employment and real income and the development of
productive resources in all member countries

(3) To promote exchange rate stability and to avoid competitive exchange rate
depreciation

(4) To help establish a multilateral system of payments among countries for

current transactions and to help eliminate foreign exchange restrictions which
hamper world trade

(5) To make loans to member countries on a temporary basis with adequate

safeguards for repayment, thus providing them with opportunity to correct
maladjustments in their balance of payments without resorting to measures
destructive of national or international prosperity,

(6) To shorten with such loans the duration and to lessen the degree of
disequilibrium in the international balances of payments of members.

The International Monetary Fund is an international financial institution (IFI)

which deals mainly with Balance Of Payments (BOP), exchange rate, and
international currencies concerns. Initially, the IMF concentrated basically on
macroeconomic issues. It observed the macroeconomic and exchange rate
policies of member countries of and it offered countries some assistance with
overcoming BOP crises with short term loans conditioned on their making
changes in their macroeconomic performance. Institutional and microeconomic
issues were for the most members considered the territory of the World Bank
and the other multilateral Development Banks (MDBs). As of recent year,
nonetheless, the Fund has found that these issues have a much larger impact of
countries' capacities to seek after viable macroeconomic and exchange rate
policies. Increasingly, it has included them among the subjects which need to be
addressed in the context of its loan programs. It has likewise given expanded
thoughtfulness regarding institutional and microeconomic issues in its counsels
with member country governments, its observation exercises, and the technical
assistance it offers to member countries.

The IMF is a currencies institution, establishment not a development agency. Its

sister organization, the World Bank, was created in the same time as the IMF so
as to give long term loan and to stimulate growth and economic improvement
in war-harmed and developing countries. Even so economic development and
growth are core objective of the IMF, as determined in purposes 2 and 4 above.
The originators trusted that international currencies dependability would
encourage the development of world trade and that this thus would create higher
level of employment, increased income, and extended development and
expanded growth and development in the countries participating in the post-
World War II international economy.

The organizers likewise expected (purposes 5 and 6) that the IMF would be a
methods through which countries could cure their local currencies issues
without falling back on the sorts of "Beggar- thy-neighbour" practices which
tried to move the weight of conformity onto different countries. Countries with
chronic balance of payments deficits could get short-term IMF loans to help
them weather a balance of payments crisis. It was generally presumed that BOP
deficits, inflation, unemployment and low levels of economic activity were the
result of inappropriate domestic economic policies. Better policies and
adjustments in the exchange rate for the countrys currency were deemed to be
the appropriate response to this situation.

It was expected that IMF assistance would help countries shorten the depth and
duration of their economic problems and help contain or prevent the spread of
currencies instability to other countries.

As the largest single contributor ($50.4 billion in total) to the IMF, the United
States has a main members in forming the IMF's lending, surveillance, and
advisory operations. Both House and Senate councils oftentimes hold hearings
on IMF exercises in creating countries and on IMF reform. Other countries are
also concerned that steps should be taken to make the IMF more effective.
STRUCTURE

The funds organisation structure is mentioned in Article of agreement. Art XII

states that the fund shall have a board of governors, an executive board, a
managing Director, and staff. the highest authority of found is the board of
governor, in which each of the 184 member countries is represented by a
governor Governor whose member are uasally ministers of finance or heads of
central banks in their countries normally meet once a year and vote on major
institutional decisions such as whether to increase the Funds financial resources
or admit new members.

The International Currencies and Financia Committee(IMFC) comprising

of 24 members is primarily responsible for the Funds political oversight.1 The
IMFC meet twice a year and advises the fund on the broad direction of policies.
A development committee which also has 24 members of the ministerial rank
advises the board of governors of the IMF about the issues facing the
developing member countries. It meets twice a year.

The head of IMF is the managing Director who is selected by the executive
Board of Directors which consists of 24 members of whom five members are
appointed by five largest quota holder countries the united states of America,
Japan, Germany, France and the united kingdom .Members from the five
country , three other countries china, Russia and Saudi Arabia have large
enough quotas to elect heir own Executive directors. The rest 176 countries are
organised into 16 constituencies each of which elects an Executive director. At
present the IMF has over 2700 staff drawn from more than 140 countries most
of whom work at the IMF headquarters in Washington, D.c. the IMF staff is
organised into department with each department headed by a director who
reports to the managing Director.

The Role of Congress in Making IMF Policy

The President has a definitive power under U.S. law to coordinate

U.S. policy and instruct the U.S. delegates at the IMF, and the multilateral
development banks (MDBs). The President, thus, has for the most members
designated power to the Secretary of the Treasury. The Treasury's Under
Secretary for International Affairs and his staff manage everyday U.S.
participation. With the advice and consent of the Senate, the President names
individual to speak to the United States on the executive boards of the MDBs.
1 Monetary theory by M C Vaish pg 590,591
The Executive Board manages operations and must approve any loan or policy
decision.

The Secretary of the Treasury serves as the U.S. representative on the World
Bank Board of Governors, where every nation has its own agent. The Board of
Governors is the most of the highest level decision making body of the World
Bank. In both the World Bank Executive Board and Board of Governors
countries have voting offers equivalent to their financial contributions. At the
World Bank, the United States has a 16% vote in the foremost advance window.

Congress must give its assent by law before the United States might
consent to take an interest in any new financing understandings. The Senate has
counsel and assent power over all persons named to speak to the United States
at the IMF and the multilateral advancement banks. On numerous events,
Congress has sanctioned enactment indicating what U.S. arrangement should be
in the universal money related foundations (IFIs) and how the U.S. official
executives at these organizations might vote and the goals they should seek
after. For instance, the Anti-Terrorism and Effective Death Penalty Act of 1996
trains the Treasury Department to contradict any advance or other utilization of
IFI assets to or for any nation for which the Secretary of State has decided is a
state-backer of terrorism. Congress has additionally oftentimes made particular
recommendations to the Administration through Sense of Congress resolutions
or dialect in advisory group reports going with enactment proposing particular
objectives and needs the United States should underline in the IFIs. Since the
World Bank and the other multilateral foundations are not organizations of the
U.S. government, but instead universal foundations, their exercises and
strategies are not subject to U.S. law.

The IMF's Main Functions and Activities

The IMF has three primary functions and activities:

(1) Surveillance of financial and currencies conditions in its member

countries and of the world economy,

(2) Financial assistance to help countries overcome major balance of

payments problems,

(3) Technical assistance and advisory services to member countries.

 Surveillance

IMF members agree, as a condition of membership (Article IV), that they

will " collaborate up with the Fund and different members to assure orderly
exchange arrangement and to promote a stable system of exchange rates.
specifically, they consent to seek after economic and financial polices related
strategies that will deliver deliberate economic growth with reasonable price
stability, to keep away from whimsical interruptions in the international currencies
system , not to manipulate their exchange rates in order to attain unfair competitive
advantage or shift economic burdens to other countries, and to follow exchange
rate policies compatible with these commitments.

The IMF Articles of Agreement require (Article IV) that it "supervise the
international currencies system to guarantee its powerful operation" and to
"regulate the consistence of every member with its commitments" to the Fund.
Specifically, "the Fund should practice firm surveillance over the exchange
rate policies member countries and might receive particular standards for the
direction of all individuals with respect to those policies." Countries are
required to furnish the IMF with information and to counsel with the IMF upon
its request. The IMF staff by and generally meets every year with every member
of countries for "Article IV consultations " in regards to its current financial and
currencies policies related arrangements, the condition of its economy, its
exchange rate circumstance, and other relevant concerns. The IMF's reports on
its yearly Article IV discussions with every country are introduced to the IMF
official board alongside the staff's perceptions and proposals about
improvements in the countrys economic approaches and practices.

Access to Information.

The information in these reports about their currencies conditions, performance

and policies is the property of the country concerned and may not be uncovered
without their consent. As of late, be that as it may, the IMF has effectively
convinced most countries to permit distribution of their Article IV conference
reports, loan document, and other information about their economic policies and
conditions. Most countries now additionally distribute on their IMF country
page impressive information (regularly the verbatim content of their letters of
comprehension with the IMF) concerning the adjustment programs they plan to
seek after regarding an IMF loan. These are by and large the result of close
exchanges between IMF staff and country officials. The IMF official board
won't regularly affirm an advance unless the condition epitomized in these
arrangements is satisfactory to it. The IMF official board must favor the
distributions at every phase of these loan programs. Its distributed comments
frequently give the peruser extensive understanding into the borrower's
execution and its level of consistence with credit "contingency."

In exercising its oversight and surveillance function, the IMF likewise

distributes various reports every year on economic conditions and patterns on
the world economy. These incorporate, for example, its World Economic
Outlook (which gives every year a review of conditions on the world economy)
and International Financial Statistics (a month to month assemblage of nitty
gritty currencies information on all countries.) The Fund is required (Article
VIII, Section 7) to distribute a yearly cover its operations, exchanges, and assets
and it is approved to distribute "such different reports as it deems desirable for
carrying out its purposes.

This authority does not extend, in any case, to the publication of information
about the internal conditions in members countries. Countries are required
(Article VIII, Section 5) to give the IMF information about their currencies and
fiscal conditions and worldwide currencies and budgetary connections.
Nonetheless, this information is for the most members regarded to be the
property of the nation which gave it and their assent is required for its discharge.
The Fund may not distribute reports including changes in the central structure of
the currencies association of individuals (Article XII, Section 8) without their
assent. It might im members its perspectives casually to any members nation
about any applicable issue. A 70% vote of the official board is required, in any
case, before any report can be distributed on financial, fiscal or equalization of
instalments conditions in a nation if the nation being referred to does not need it
discharged. It doesn't create the appear that the IMF official board has ever
practiced this power.

Crisis prevention

A few analysts are concerned that IMF surveillance is not sufficient

in preventing financial crises. In a recent report, the U.S. General Accounting
Office (GAO) attested that the IMF's surveillance mechanisms, including the
Fund's half-yearly World Economic Reports (WEOs) and its Early Warning
Systems (EWS) have not performed well in predicting crises. In an answer to
the report, First Deputy Managing Director Anne Kreuger noticed that it is
troublesome for the IMF to openly predict crises. If the Fund openly reported a
countries economic weaknesses , this alone may accelerate the extremely
currencies emergencies everyone wishes to stay away from. Some contend that
the IMF ought to formally isolate its observation exercises from its loaning
operations trying to get around this issue. It is hard to perceive how this would
take care of the issue, be that as it may, since its observation capacities are for
the most members the methods by which the IMF gets inside information about
financial conditions in members countries. The IMF would damage its tenets in
the event that it discharged information of this sort without a nation's assent and
it would likely make the procurement of precise information about currencies
conditions in members countries more troublesome later on. In addition, if a
flame divider were raised between the two capacities, the IMF staff in charge of
its credit project would not have prepared access to the information got from
reconnaissance as conditions turned out to be more genuine in an imminent
borrower nation.

The IMF's lending function just becomes possibly the most important factor
when a nation applies for help to manage a pending or current currencies
emergency. Countries regularly delay this progression until the emergency is
practically upon them, since it is frequently seen as an affirmation of
disappointment by the administration. The IMF has sought for quite a long time
to urge countries to come to it for help before their currencies issues achieve
emergency extents. Nonetheless, it has no limit for obliging them to do as such.
Essentially, the IMF can't oblige countries to address currencies issues even
those which are of wide global concern, for example, Japan's perpetual
equalization of instalments surplus or the United States' incessant BOP
deficiency if those countries have adequate assets and they choose not to apply
to it for assistance.

A few critics say that the IMF ought to understand this by neither doing
observation nor lending. Instead, private lending would figure out if or not to
give capital in light of certainty, currencies approaches, and appropriate risk
premium. This is, as a result, another adaptation of the contention that the IMF
exacerbates the situation on the world economy and that business money related
markets would be more productive and successful in their methodology. The
contention accept that countries will impart to private moneylenders the same
sorts of information they as of now impart to the IMF and that private loan
specialists would will to loan to countries in profound budgetary emergency on
terms that they can manage. It presumes that countries will run their economies
better and will be additionally ready to embrace financial changes in the event
that they have no response to an association such as the IMF. It likewise expect
that the world economy won't endure if a few countries are cut off from credit
amid money related emergencies since they can't or won't meet whatever terms
their private creditors demand.

Those who oppose this view and support the IMF argue that the history of the
world economy during the nineteenth and the twentieth century up to 1945 give
much evidence which contradicts the assumptions stated above.

Financial Assistance

When its member countries experience balance of payments (BOP) difficulties,

either through capital account or current account crises, the IMF can make loans
designed to help them stabilize their international payments situation and adopt
policy changes sufficient to reverse their situation and overcome their problems.
In some cases, the IMF makes short-term loans to help prevent countries
economies from spiralling into financial crisis and to facilitate renewed inflows
of private sector capital. Many financial crises in developing countries in
recent years were the result of a lack of confidence by the international
financial markets and the sudden stop or reversal of capital inflows to
developing countries which often occurs at the outset of a crisis. In other cases,
the IMF makes loans to help countries deal with BOP crises but the loan
repayment period is longer and the conditionality includes problems which are
more deeply rooted and require more time than is usually possible in the IMFs
usual timeline.

The IMF is required by its Articles to ensure that countries use of its resources
will be temporary and that loans will be repaid. To insure this end, as well as to
guarantee oft-needed economic reforms, the Fund splits the disbursement of its
loans into tranches and requires that specified economic conditions must be met
for the continued disbursement of IMF funds. The IMF has redesigned its
conditionality guidelines to better tailor its lending arrangements to the specific
financial needs of each recipient country. The IMFs area departments, which
interact with borrower countries and prepare loan agreements, may well have a
different perspective on this question than do the IMFs functional departments
which must approve a prospective loan agreement before it goes to the
executive board. On one hand, the IMF wants to tailor its loan programs to the
particular situation in the borrower country. On the other hand, the IMF also
needs to have a consistent approach and policies which are equally applicable in
all parts of the world.

Officially, the amount a country is able to borrow from the IMF is related to the
countrys quota, its ownership and contribution share in the IMF. In most
instances, countries may borrow several multiples of their quota in response to
particular circumstances. The conditionality and performance standards
attached to a loan become more rigorous and demanding as its size (relative to
the borrowers quota) increases. In many cases, deemed exceptional by the IMF
executive board at the time, countries have received loans from the IMF which
are much larger than the normal guidelines would allow. In December 1997, for
example, the IMF made a $21 billion IMF loan to South Korea, which was
1939% of its IMF quota.

The IMF has several loan programs.2 (See Appendix 1 for details.) Most are
funded with money drawn from the quotas subscribed by member country
governments and charge market-based repayment terms. Quotas are, in effect,
lines of credit which IMF member countries extend to the IMF in case it needs
money to finance its operations. The IMF generally draws only upon the quota
resources subscribed by the countries with strong currencies. The IMF charges
its borrowing countries interest (rate of charge) at a rate slightly higher than
the market rate for short-term loans in major currency markets. The IMF pays
interest (rate of remuneration) to the countries, when it uses their quota
resources, at this blended market rate. In some instances, particularly for loans
with long repayment periods or for loans which are particularly large, compared
to the size of the borrowers economy, the borrower may be required to pay a
higher interest rate (surcharge) and the IMF may borrow money on market
terms to supplement its quota resources.

The IMF makes loans to its poorest member countries on highly concessional
repayment terms through its Poverty Reduction and Growth Facility (PRGF).
These also aim to help countries overcome BOP problems, but their
conditionality puts less emphasis than is usual for IMF loans on austerity and
more on economic growth. The IMF does not use its regular quota resources to
fund these loans. Rather, PRGF loans are funded with money borrowed in
world capital markets and contributions from donors countries offset the interest
cost of these loans. Hence, the IMF can charge its PRGF borrowers an interest
2How Does the IMF Lend, A Factsheet, April 2003. Available through the IMF web
site at [http://www.imf.org].
rate (one-half of one percent) similar to the rate the World Bank charges its
poorest borrowers to cover the cost of making and administering PRGF
loans.

Technical Assistance

The IMF's technical help and counselling programs have turned out to be
progressively critical lately. Undoubtedly, a few examiners now trust this is
IMF's most critical capacity. While the particular sorts of change differ from
case to case, IMF specialized help operations concentrate fundamentally on its
centre zones of ability (basically currencies and macroeconomic strategy
administration). Any members nation might ask for that the IMF furnish it with
specialized help. In spite of the fact that it is a different project, the IMF needs
to make specialized help a more necessary piece of its Article IV interviews and
loaning programs.

The IMF's Technical Assistance division assumes a key members in the usage of
the IMF's improvement situated procedure. Numerous sub-offices are reporting
expanded interest for help with zones, for example, government
straightforwardness, consistence with global guidelines and codes, fortifying
residential money related frameworks and neediness diminishment. Request has
been particularly awesome in the ranges of financial arrangement and
organization of specialized help. Notwithstanding offering countries some
assistance with designing fitting currencies strategies, the last territories offer
them some assistance with building the foundations expected to backing and
actualize them.

The IMF's Role in the International Economy

The world financial system created at the 1944 Bretton Woods

gathering was an altered equality ("fixed but adjustable ") conversion standard
exchange rate system. In actuality, the United States characterized the
estimation of its dollar as far as gold and different countries characterized their
currencies forms as far as the U.S. dollar. Central banks should balance out the
estimation of their national currencies through their household currencies
policies and use of foreign exchange reserves. With the earlier assent of the
IMF, countries could devalue their currency if their current standard quality
demonstrated unsustainable. The principle issue confronting the IMF during this
period was convertibility: whether countries' currencies standards could be
utilized uninhibitedly as a members of world markets or whether countries
would keep up coin controls confining the surge of outside trade and indicating
that their currency must be traded for different currencies standards inside of
their domain. Money controls of this sort put genuine restrictions on world
exchange. A noteworthy achievement of the IMF and its individuals amid its
initial two decades was the steady spread of convertibility to incorporate a large
portion of the world's significant economies and most largest exchanging
trading nations.

In 1971, the United States separated the connection between the dollar
and gold. Consequently, the dollar was justified regardless of a dollar, as
opposed to any settled amount of gold or different materials. The "gold
window" at the U.S. Treasury was shut and, in spite of former authority
affirmations, remote governments could no more trade dollars for their identical
worth in gold. This activity by the United States delivered incredible
vulnerability in world coin markets. It was not clear how the cash of one nation
ought to relate in quality to the coin of another. A few countries characterized
the estimation of their cash as far as gold, others connected their coin to some
other real money, and others basically chose to give the estimation of their
money a chance to rise or fall ("float") in world cash markets.

Without affixed anchor of value, the world money supply and

purchaser costs grew four-fold in the decade taking after 1971 though the
world's GDP in steady costs developed by stand out third3. Numerous business
analysts trust that currencies strains which originated before the U.S. choice to
disjoin the gold-dollar join and the interruptions and currencies stuns which
took after are as yet being felt in differing shapes today. A 85% dominant
members vote of the IMF enrolment would be required to build up a settled or
whatever other uniform arrangement of conversion standard strategies (Article
IV, Section 4). In numerous regards, the present adaptability and liquidity of
world financial markets can be attributed to the reduction of barriers and other
shifts which have occurred since the early 1970s.

3 International Financial Statistics, 1987 Yearbook. Pp. 90-1, 944-5, 114-5, 160-1.
Ironically, it was the former achievement in accomplishing the prepared
convertibility of the real currencies forms which laid the basis for the new
arrangement of drifting trade rates. The estimation of a currency was no more
decided at the trade window of its central bank. Rather, the rate for convertible
currencies forms would be resolved second-to-second every day by supply and
request conditions on the world market.

At the time, numerous concurred that the IMF expected to make

another world financial system to clear up and settle the circumstance, yet
contradictions among the significant countries made this for all intents and
purposes impossible. In 1978, the members from the IMF embraced a change to
the IMF Articles of Agreement which let members countries choose for
themselves what swapping scale framework they would utilize. The amendment
severed officially the link between currency and gold. IMF members countries
were restricted from characterizing the estimation of their money as far as gold
and the IMF was precluded from loaning gold or characterizing its advantages
as far as gold. Countries could utilize any framework they needed (other than
utilizing valuable metals as a base) for characterizing the estimation of their
currencies forms. Former IMF endorsement of conversion standard changes
would never again be required. Most significant countries let the estimation of
their coin drift in world trade markets after 1978 (however they may try to
impact that esteem through changes in their residential fiscal approach or
through buys or deals in cash markets). Different countries characterized the
estimation of their cash as far as a settled amount of another nation's coin.
Especially for little countries, this ensured their economies against the
poisonous impacts of fast changes in cash values because of particular events(a
likely plausibility in little economies with coasting rates). In any case, it
gambled cataclysmic currencies accidents if (as has been the situation
commonly in the previous three decades) the business sector quality and
authority trade rates for their currency separated and the national bank did not
have enough outside trade stores to balance market weights for depreciation.

Financial Liberalization

Financial liberalization in the developing countries coincided with

a major liquidity boom in the Western countries. The size and scope of capital
flows increased dramatically during the 1990s. Instead of a relatively small
number of banks lending to foreign governments, as was the case in the 1980s,
developing countries turned to the new global capital markets and were raising
money through the issuance of sovereign debt and private capital flows. The
crises of the late 1990s were influenced as much by this rapid increase in private
financial flows and market sentiment as by the underlying macroeconomic
fundamentals of the crisis countries.

In recent years, major crises have occurred when governments allowed banks in
their country to borrow substantial amounts of short-term money from abroad in
order to fund long-term undertakings (a classic debt/asset mismatch). Problems
occurred when, in an uncertain situation, the creditors found that a countrys
central bank lacked sufficient resources to cover all the short-term obligations
which were scheduled to come due. In that case, rather than simply rolling over
their loans, as had been their standard practice in the past, creditors all sought to
get their money out in order to avoid default. This often precipitated a collapse
which entangled creditors in the very situation they wished to avoid.

Financial Liberalization and IMF policy

The expanded significance of private capital markets, and the open

deliberation over its impacts on creating nation arrangement making has
majorly affected IMF operations. Rather than being the focal figure, as in the
old altered equality framework, the IMF turned out to be just another member
(however ostensibly the most vital one) on the world financial framework. Since
1979, with the conceivable special case of South Korea in 1998, just creating
countries have provided to the IMF for with some much needed help in
managing their universal money related issues. The significant countries have
managed their issues all alone, through changes in their money related and
conversion scale strategies and through the G-7. They have not go to the IMF
for credits or (for the most members) specialized help and strategy counsel. This
has majorly affected the work of the IMF. It has needed to bargain progressively
with the specific needs of creating countries where, despite the fact that it is not
an advancement office, the IMF's approaches and operations can majorly affect
improvement prospects. It has constrained the IMF to think about new issues
that were not some portion of its unique command. These incorporate limit
working in countries with feeble foundations, improvement strategy concerns,
the scattering of information about currencies conditions and approaches in
members countries, and the production of norms and rules for worldwide
budgetary and money related practices. Furthermore, the IMF has needed to re
examine its emergency expectation and administration operations.
 The IMF works on the general rule that the liberalization of exchange
obstructions and decreases in cash limitations will fortify the world economy
and bring expectations for everyday comforts up in individual countries. As of
not long ago, it likewise by and large assumed that most BOP emergencies in
countries stemmed chiefly from improper financial and fiscal approaches
prompting poor macroeconomic execution. The IMF's run of the mill cure
included measures to decrease the borrower nation's financial plan shortage, to
raise loan costs, and to change descending the worldwide estimation of the
nation's cash so as to establish the framework for future development. Later
experience appeared, in any case, as talked about underneath, that a few
emergencies could be driven by mix-ups openly area approach yet that ot public
sector policy but that others were caused more by the interaction between
structural and institutional problems and private sector activity.

Washington Consensus Reforms

The expression "Washington Consensus" was initially utilized as a

members of 1990 to abridge the general approach changes that numerous
specialists concurred were proper for creating countries in Latin America and
other creating countries. The agreement exemplified three principle thoughts:
macroeconomic order, a business sector economy, and openness to worldwide
exchange and remote direct speculation. . The IMF, the World Bank and other
international lending agencies put strong emphasis on these concepts in their
loan programs during much of the 1990s.

After the financial crises of the late 1990s, the expression "Washington
Consensus" tackled a more negative intention. Some contended that market-
accommodating currencies approaches were constrained on creating countries
by the IMF and by real business banks with a specific end goal to make venture
opportunities in creating countries that would advantage financial specialists in
the propelled economies.

Second Generation Reforms

In 1994, the rundown of "Washington Consensus" changes was

extended to incorporate the supposed "second era changes." The thought of
second era changes is that without solid national organizations (legitimate,
budgetary, and bureaucratic), it is troublesome, maybe unthinkable, to execute
"Washington Consensus" macroeconomic changes. The macroeconomic
standards which lie at the heart of a great members of the IMF's exercises may
not fill in of course if the basic establishments in borrower countries are frail or
broken. Solid residential foundations are progressively essential for countries to
oversee substantial capital streams and are being demonstrated progressively
imperative for long term economic growth.

Many economists decided, in the late 1990s, that these reforms needed to be
better incorporated into IMF assistance programs. Simply put, many felt that
the IMF could not successfully pursue its core functions and purposes unless the
fit between its basic economic concepts and the institutional reality in recipient
countries was improved. Analysts find that without strong institutions, a
country is more likely to suffer persistent domestic challenges including
economic inequality, and intermittent dictatorship.4 Good national institutions
are integral to providing a framework for citizens to conduct their business and
for government to create effective policy, collect taxes, and effectively regulate
the economy.

Proper diagnosis of the origins of a financial crisis are important. The troubles
of the borrower countries might be intensified if the IMF does not have the
correct apparatuses or if its devices and approaches which may be suitable for
emergencies that originate from poor macroeconomic administration are lacking
for emergencies whose beginnings are inferable more to powerless
establishments and poor administration of nation records.

The IMF said, in its appraisal of the Asian money related emergency of
1997-8, for instance, that the sudden breakdown of South Korea, Thailand and
Indonesia's currencies standards was because of poor obligation administration
arrangements, unsound managing an account establishments, and frail bank
oversight techniques than to a particular issues with macroeconomic approach.
This was, the IMF reported, "another type of currencies emergency." The Fund
reacted to the emergency at first with the sorts of apparatuses and strategies
suitable for emergencies created by unsound macroeconomic strategy, however
it changed gears rapidly and added institutional and auxiliary changes to the
plan as nature of the issue got to be clear. The Fund assumed at first that its
macroeconomic projects would be adequate, together with extensive financing
bundles, to restore certainty. Development was relied upon to moderate,
however to stay positive. Neither the IMF nor different onlookers expected the
profound subsidences that happened. The impacts of auxiliary and institutional
4 Jeffrey A. Frankel, Promoting Better National Institutions: The Role of the IMF.
IMF Staff Papers, Vol. 50, Special Issue 2003
change are felt considerably more gradually in an economy than are those of
macroeconomic approach change.

In each of the three countries, money related approach must be fixed

energetically to end the breakdown of their trade rates. As per the IMF, the
fixing went 'well past what may have been justified by basics' keeping in mind
the end goal to keep the cash breakdown from transforming into wild
expansion. Basic and institutional components were significant patrons to the
profundity of the emergency. Then, currencies arrangement in the three
countries was additionally fixed, on the mixed up supposition that
administration overspending was a piece of the issue. All things considered, the
IMF recognized, this was not genuine, especially for Indonesia and South
Korea. IMF staff reported that, if currencies strategy had been facilitated all the
more rapidly, the ensuing subsidences in the countries would have been less
serious.

The IMF and other observers drew several conclusions from the Asian
crisis. They concluded, for example, that when institutional and structural
issues are the problem crisis prevention is the preferable strategy. The course
of the crisis clearly showed, the IMF reported, the difficulty of stopping such
developments once they have started. More emphasis should be put on
surveillance, particularly identifying and remedying weaknesses in countries
exchange rate and financial systems before a crisis occurs. Greater transparency
of economic and financial data was also essential, they found, to strengthen
market discipline and avoid adverse surprises. Further effort to restructure
countries financial and corporate sectors were needed and the legal
commercial framework for their economies needed to be updated. Care also
need be taken regarding the pace and sequencing of capital account
liberalization, particularly when the soundness of domestic financial institutions
is doubtful, so that short-term capital flows do not make a countrys economy
more vulnerable to instability.

IMF Activity in the Poorest Countries

Somewhere around 1976 and 1980, the IMF sold 50 million ounces of
gold from its stockpile, halfway at authority costs and mostly at business sector
costs, to raise cash to low-salary countries. Until that time, the IMF had no ease
office to offer poor countries who some assistance with having trouble with its
standard business sector rate terms. The returns were collected into the Gold
Trust Fund, which loaned SDR 3 billion ($3.8 billion) to poor countries
somewhere around 1977 and 1981 on profoundly concessional reimbursement
terms. A portion of the reimbursements from these advances were put in the new
Structural Adjustment Facility (SAF), which loaned another SDR 1.8 billion
($2.4 billion) on the same premise somewhere around 1986 and 1995. Later
reconstituted as the Enhanced Structural Adjustment Facility (ESAF), this
system turned into the centerpiece of the IMF's technique for lowing pay
countries. Utilizing reimbursements from Trust Fund and SAF credits and in
addition new commitments from benefactors, the ESAF loaned SDR 7.6 billion
($10.7 billion) to 56 low-salary countries somewhere around 1987 and 1999.

Numerous commentators whined, in any case, that the ESAF was

loaning to poor countries with the same kind of restriction it connected for its
customary credits. These countries couldn't bear to utilize spending plan cuts
and gravity as gadgets for pivoting constant parity of instalments shortages.
Rather, they contended, the IMF expected to put more accentuation in its
concessional advance system on development, neediness easing, and auxiliary
change in the economies of its low-salary borrower countries.

In 1999, the IMF and the World Bank affirmed another joint
methodology for their destitution lessening endeavors at all created and creating
countries. The fundamental organization of the ESAF was modified.
Reconstituted as the Poverty Reduction and Growth Facility (PRGF), the
system should coordinate the goals of neediness diminishment and development
all the more completely into its macroeconomic concerns. The IMF says, in its
PRGF factsheet, that its concessional credit program and the concessional help
system of the World Bank are currently worked around a Poverty Reduction
Strategy Paper (PRSP). The PRSP is readied by the borrower government with
information from individuals from common society and the universal money
related establishments.

The PRGF has significantly expanded the scope and range of IMF
assistance in its poorest countries. Distinguishing features of the PRGF are as
follows: greater country ownership of the reform process through increased
government input; broader country participation among civil society and the
poor; and IMF lending is embedded in a broader, poverty-reduction framework
(the PRSPs). PRGF loans allow countries to create budgets that reorient
government spending towards the social sectors, and basic infrastructure,
include tax reforms favouring the poor; ensure greater flexibility in fiscal
targets; and have a more selective use of structural conditionality.

Eligibility for the PRGF is essentially in view of a nation's for every

capita pay, drawing on the slice off point for qualification to World Bank
concessional loaning (presently the 2001 cut off per capita gross national salary
of $875). PRGF advances convey a yearly loan cost of 0.5% with
reimbursements made semi every year, starting 5 years and completion 10
years after the dispensing. Qualified countries might get up to a most extreme of
140% of their IMF standard under a three-year PRGF game plan. The obtaining
rate might be expanded to 185 percent because of excellent circumstances.

A study of the PRGF done by IMF staff in 2002 and 2003 found that the
programs supported by PRGF lending are more pro-poor and pro-growth than
those previously funded by ESAF. However, some critics maintain that the
balance needs to be shifted further. They claim, for example, that the terms of
PRGF loans are not much different from those previously required for ESAF
loans. They say these are too hard for poor countries, still putting too much
emphasis on improvements in macroeconomic policy and requirements for
structural reform and diverting resources and attention from poverty-alleviation
activities. Supporters argue, by contrast, that poverty can best be alleviated by
economic growth and that effective economic policy and better institutions are
crucial to that goal. They note that the guidelines of the PRGF were changed
from those of the ESAF to give more explicit emphasis to growth and poverty
alleviation than was the case before and they argue that the balance has been
well shifted in that direction.

In FY2003, roughly $1.76 billion was dispensed under the PRGF, an

expansion from $1.36 billion in FY2002, and $.81 billion in FY2001. PRGF
advances are controlled by the IMF through the PRGF and PRGF-HIPC Trusts.
The trusts get assets from national banks, national governments, and authority
organizations for the most members at business sector related financing costs,
and loan them on a go through, concessional premise to qualified countries.
Interest expenses are sponsored by giver commitments. In 1999, the IMF "sold"
14 million ounces of its gold stockpile, through an off-business sector
deal/buyback plan, to store its investment in the HIPC program. This
empowered it to move $3.8 billion from its general record to an uncommon
venture account whose pay is devoted to the HIPC program. Alongside
commitments from two-sided benefactors, this has possessed the capacity to
support the majority of the IMF's offer of the HIPC program. Assets were
likewise exchanged by the IMF from some unique store records to settle PRGF-
HIPC costs.

Another members of the PRGF project is the IMF's contribution with

the Heavily Indebted Poor Countries (HIPC) obligation diminishment activity.
The IMF and World Bank have started this joint activity to diminish to the
supply of obligation for the poorest countries through obligation pardoning. The
objective of the HIPC system is to lessen the obligation load of its recipient
countries to an "economical" level (for the most members characterized as
150% of fare pay). Since the greater members of this obligation was obtained on
concessional reimbursement terms, the yearly cost of adjusting the obligation is
just a little division of the aggregate. For the 27 countries which had met all
requirements for obligation alleviation toward the end of 2003, yearly
obligation administration tumbled from $3.7 billion (18% of fare income) in
1998 to $2.45 billion (9.7% of fare income) in 2003.

There are numerous connections between the HIPC system to IMF supervision
and loaning exercises. A prerequisite of qualification is the fruition of a PRSP.
In reality, the Bank and Fund appear to be utilizing the PRSP process as an aide
component of the HIPC obligation cancelation procedure, to energize further
approach and institutional change in HIPC hopeful countries. In addition, HIPC
countries must be under an IMF program, and should "build up a reputation of
change and sound arrangements." Finally, an IMF program must be set up for a
HIPC nation to get obligation alleviation from the Paris Club gathering of
authority leasers.

IMF Activity in Institution Building

Analysts have found that countries with great money related

frameworks and the imperative microeconomic establishments will probably
utilize capital successfully and empower improvement through financial
development and exchange. By complexity, there is little confirmation that
inadequately working budgetary frameworks have numerous attractive impacts,
however they can be valuable to advantaged or very much associated bunches.
By and by, the procedure of improving budgetary organizations in a nation can
be difficult. Extra inputs of capital or ventures to contain danger might be
required, cost(counting overabundance business and overcapacity) might should
be lessened, and the extraordinary recipients of the current framework might
should be induced or compelled to acknowledge change. In numerous examples,
the expenses of change might be more apparent than are the future advantages,
so resistance might be solid. This might be especially genuine if winning loan
costs should be raised to market levels. The vested membersies who trust
themselves harmed will probably oppose the changes more overwhelmingly
than will the less all around composed and maybe unconscious persons who will
be the principle recipients of change.

The Financial Sector Assessment Program (FSAP) is a case of how the IMF is
expanding its movement in local money related reconnaissance and budgetary
division organization building. Made by the IMF and World Bank in 1999 to
concentrate on and evaluate the currencies segments of their individuals, the
project has three essential segments: (1) an assessment of the stability of the
financial system; (2) an assessment of the extent to which relevant international
financial sector standards, codes, and good practices are observed; and (3) an
assessment of the financial sectors reform and development needs. This
includes their national institutional setting and legal and regulatory restrictions.

The IMF and the World Bank have supported 11 universal

measures and codes, of which the IMF made three (those identifying with the
opportune and precise dispersal of money related information, financial
straightforwardness, and fiscal and budgetary arrangement straightforwardness.)
The IMF additionally gets ready and distributes Reports on the Observance of
Standards and Codes (ROSCs) that summerize a nation's adherence to the
globally embraced currencies codes and benchmarks. The IMF can't distribute a
ROSC without a nation's authorization, yet a nation's not permitting production
would propose resistance. Besides, money related business sector members
frequently take adherence to gauges and codes as an intermediary for sound
currencies administration when settling on venture choices. The ROSCs and
more extensive FSAP reports shape the premise of Financial System Stability
Assessments (FSSAs). The FSSAs consider issues applicable to IMF
observation, including the money related division's capacity to retain
macroeconomic stuns and different dangers to macroeconomic steadiness.
While the FSAP is still in a test stage, sooner or later the FSAP reports may turn
out to be a piece of the Article IV counsel, a yearly appraisal of members
countries' economies.

REFERANCE
Monetary theory by M C Vaish

Indian Economy by Ramesh sing

Indian economy by Dutt& sundharam