IB PRESENTATION ON:

INTERNATIONAL MONETARY FUND

By: Ankita Srivastava Piyush Shukla MBA(HR & IR) IInd Semester

IMF ORIGIN OF IMF

The International Monetary Fund(IMF) is an international monetary institution established by 44 nations under the Bretton Woods Agreement of July 1944. The principal aim is to avoid the economic mistakes of 1920s and 1930s. Thus IMF was established to promote economic and financial cooperation among its members in order to facilitate the expansion and balanced growth of world trade. It started functioning from 1st March.1947. Till 31st January 2008, the Fund has 185 members.

BRETTON WOODS (1944 - 1973)

44 countries met to design a new system in 1944

Established: International Monetary Fund (IMF) and World Bank

IMF: maintain order in monetary system World Bank: promote general economic development Fixed exchange rates pegged to the US Dollar

US Dollar pegged to gold at $35 per ounce

Countries maintained their currencies 1% of the fixed rate; buy/sell own currency to maintain level

THE ROLE OF THE IMF

IMF maintained exchange rate discipline

National governments had to manage inflation through their money supply

Provides loans to help members states with temporary balance-ofpayment deficit;

flexibility

Allows time to bring down inflation Relieves pressures to devalue

Excessive drawing from IMF funds came with IMF supervision of monetary and fiscal policies

Allowed to 10% devaluations and more with IMF approval

OBJECTIVES OF IMF :
1)

2)

3)

To promote international monetary cooperation through a permanent institution which provides machinery for consultation and collaboration in international monetary problems. To facilitate the expansion and balanced growth of international trade and to ensure high level of employment. To promote exchange rate stability and to avoid competitive exchange depreciation.

4) To assist in the establishment of a multilateral system of payments in respect of current transactions between members. 5) To make the general resources of the Fund temporarily available to members in order to correct maladjustments in their balance of payments. 6) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

2. Membership and Governance

Article II, Section 2: Membership shall be open to other countries at such times and in accordance with such terms as may be prescribed by the Board of Governors. These terms, including the terms for subscription, shall be based on principles consistent with those applied to other countries that are already members.
Membership in the IMF is not conditional on membership in other organizations (e.g., UN, the World Bank) Terms of membership the policy is that new members should not have permanent rights and obligations that differ from those of original members Membership is open to an applicant who: (a) is a country within the attributes of statehood defined by international law, (b) is willing and able to perform the obligations of membership contained in the Articles, and (c) accepts the terms of a Membership Resolution of the Board of Governors. Domestic legislation is not a valid defense for not observing membership obligations

Any member may request an interpretation of the Articles of Agreement pursuant to the provisions of Article XXIX
Members can voluntarily withdraw from the Fund. Article XXVI: Any member may withdraw from the Fund at any time by transmitting a notice in writing to the Fund at its principal office. Withdrawal shall become effective on the date such notice is received. Withdrawal can also be compulsory. Procedures are outlined in Article XXVI, Section 2: Failure to fulfill obligations may result in ineligibility to use Fund resources; Suspension of voting rights; Decision by the Board of Governors by a majority having 85 percent of the total voting power on withdrawal from membership Upon withdrawal settlements are made between the Fund and the member upon agreement or as prescribed by the Articles of Agreement

IMF Organization Structure

International Monetary Interim Committee Board of Governors Joint IMF-World Bank Development Committee

Executive Board

Managing Director

IMF Secretariat

Board of Governors

Highest policy making body of the IMF: All powers not conferred directly on the Board of Governors, the Executive Board or the Managing Director shall be vested in the Board of Governors (Article XII, 2(a))

May delegate to the Executive Board the exercise of any of its powers, except those directly conferred to it

One governor and one alternate governor appointed by each member Usually finance ministers or central bank heads Weighted voting--cast the number of votes allotted to the member appointing him

Governors elect one of the governors as chairman Not in continuous session; meets once a yearAnnual Meetings May establish committees (e.g., International Monetary and Financial Committee (IMFC), joint World Bank-IMF Development Committee)

 The

Executive Board

Responsible for conducting the business of the IMF and for exercising the powers delegated to it by the Board of Governors Sits in continuous session, meeting as often as the business of the IMF may require It has 21 members at present 5 Executive Directors are appointed by the 5 members with the largest quotas (currently US, Japan, Germany, UK and France) and 15 Executive Directors are elected at intervals of 2 years by the remaining members. There is a Managing Director of the Fund who is elected by the Executive Director. Board of Governors, by an 85 percent majority of the total voting power, may increase or decrease the number of Executive Directors in the second category.

Weighted voting structure - each Executive Director casts the number of votes allotted to members that he or she represents. Most decisions of the Executive Board require only a simple majority of the votes cast; some require either 70% or 85% of the total voting power Voting is rare - most decisions are taken by consensus. The Chairman ascertain the sense of the meeting in lieu of a formal vote. Any Executive Director may require a formal vote.

 The

Managing Director, IMF Secretariat, Interim and Development Committee

Chairman of the Executive Board and chief of the operating staff Selected by the Executive Board

May not be selected from among the governors or the Executive Directors Term of 5 years, but shall cease to hold office when so decided by the Executive Board

Conducts ordinary business of the IMF under the direction of the Executive Board

Subject to general control of the Executive Board, responsible for organization, appointment and dismissal of staff

Interim Committee was established to supervise the management and adaptation of the international monetary system in order to avoid disturbances that might threaten it. Development Committee advises and reports to the Board of Governor on all aspects of the transfer of real resources to developing countries and make suggestions for their implementation.

3. Financial structure

Sources of Fund financing: (a) members quota subscriptions (currently about $305 billion) (b) borrowing to supplement the resources available from quotas (e.g., General Arrangements to Borrow (GAB) since 1962; New Arrangements to Borrow (NAB) in 1997); (c) Income from investments (Article XII, Section 6(f)(i)). Members quotas

Each member of the Fund is assigned a quota which broadly determined by its economic position relative to other members (economic considerations include the members GDP, volume of current account transactions, and official reserves) Determines a members : (i) maximum financial commitment to the IMF, (ii) voting power in the IMF, (iii) size of its access to financial resources and (iv) share in any allocation of Special Drawing Rights (SDR) Quotas are reviewed every 5 years to determine whether any adjustments are needed in light of the growth of the world economy and changes in individual countries economic positions. The Thirteenth general review is to be completed by January 30, 2008.

Members must pay subscription equal to their quotas. Up to 25 percent must be paid in reserve assets specified by the IMF (foreign currencies acceptable to the IMF or SDRs); the balance may be paid in the members own currency Voting power of each member

Each member has 250 votes (referred to as basic votes) plus one vote per 100,000 SDRs of quota. Significance of the basic votes have diminished from their original level of 11 percent of total votes to approximately 2 percent because of quota increases

A members quota cannot be changed without its consent (Article III, Section 2(d)) If a member consents to a reduction of its quota, the Fund shall within 60 days pay to the member an amount equal to the reduction (Article III, Section 3(c)) Over time some members quotas and representation in the Fund got out of line with the members relative positions in the world economy. Thus the need for reform of quota and voice.

IMF MEMBERS WITH LARGEST QUOTA SHARES (AS OF APRIL 2007)

Member
United States Japan Germany France
United Kingdom

Quota share (%)

17.14 6.14 6.00 4.95
4.95

Votes (% of total)
16.83 6.04 5.90 4.87
4.87

Italy
Saudi Arabia

3.26
3.22

3.21
3.17

China
Canada Russia

3.73
2.94 2.74

3.67
2.89 2.70

4. Functions of the IMF

(a) (b) (c)

Purposes stated in Article I translate into three main functions:

surveillance, financial assistance, technical assistance

(a) Surveillance Article IV, Section 1 requires members to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates and requires each member to:

Direct its economic and financial policies toward the objective of fostering orderly economic growth Seek to promote stability by fostering orderly underlying economic and financial conditions and an orderly monetary system Avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or gain an unfair competitive advantage Follow exchange policies compatible with the undertaking of the above

The purpose of surveillance is to enable the Fund to oversee (i) the international monetary system to ensure its effective operation (multilateral surveillance, e.g., World Economic Outlook, Global Financial Stability Report, multilateral consultations) and (ii) members compliance with the obligations specified under Article IV, Section 1 (bilateral surveillance).

(b) Financing

Article I(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 opportunity to correct maladjustments in their balance of payments...
IMF financing can only be provided to deal with balance of payments problems; cannot be provided for other purposes or specific projects. The requested use of the resources must be consistent with the provisions of the Articles and policies adopted under the Articles. IMF financing from the GRA does not take the form of loans, but rather the member receiving assistance purchases the currencies of other members that have strong balances of payments positions or SDRs with its own currency. Fund arrangements are not international agreements. IMFs resources are only meant for temporary use (revolving character) a member is required to repurchase its currency within a specified period of time. IMF financing is provided under adequate safeguards Only if a member is prepared to take the steps necessary to address its balance of payments difficulties Achieved through the member implementing a program of economic reform that deals with problem Member can purchase the reserve tranche subject to representation of balance of payments need which cannot be challenged ex-ante by the Fund and free from conditionality, charges, or repurchase obligations

(c) Technical assistance

Services provided under Article V, Section 2(b) shall not impose any obligation on a member without its consent Administration of the Poverty Reduction and Growth Facility and Exogenous Shocks Facility (PRGF-ESF) Trust (1987) and PRGF-HIPC Trust are examples of financial services provided under this Article

The PRGF is a concessional lending facility for low-income members (annual interest rate of 0.5 percent, loan maturity stretching from five-and-a-half to 10 years) Resources from the PRGF-HIPC Trust are used for debt relief operations

Other examples of technical assistance: in fiscal area (drafting of tax or budget legislation); in statistics (helping to set a framework for collection and analysis of data); banking sector reform (banking laws, supervision matters, financial sector restructuring); law reform (judicial reform). Mainly in support of private sector development Technical services are provided by the IMF staff under the authority of the Managing Director

THE ROLE OF GOLD IN IMF

Although the Fund dethroned the gold standard, yet gold continued to play an important role in the Fund till Second Amendment to the IMF Charter. With the Second Amendment, a new international currency, SDR, has been introduced for all transactions with member countries. This currency is no longer linked to gold but to a basket of five major countries. There is no official price of gold and members are required to make payments in gold to the Fund.

INDIA AND THE IMF

India is the founder members of the IMF. It signed the Fund Agreement on 27 December 1945. Indias current foreign exchange reserves of nearly $285 billion Followed by gold($10.3 billion), SDR($5.2 billion) and a reserve position in the IMF of $1.59 billion. India has been getting advisory help from the Fund. It has also been providing short term training courses on monetary, fiscal, banking policies.

SPECIAL DRAWING RIGHT(SDRS)

In early 1970s, the IMF introduced a scheme for the creation and issue of SDR, also known as paper gold. This was created through the First Amendment to the Fund Articles of Agreement on July 28,1969 . There are three principal uses of the SDR: a. The first is transactions with designation. b. SDRs are used in all the transactions with the Fund. c. Transactions are held by agreement.

THANK YOU