Role of IMF in International Monetary System - 2 - 2

Role of IMF in International
Monetary System
IMF
 The International Monetary Fund was conceived in July 1944 and came into
existence in December 1945
 The main goal of IMF is to stabilize exchange rates and assist the
reconstruction of the world's international payment system.
 It works to improve the economies of its member countries.
 The IMF’s primary purpose is to ensure the stability of the international

monetary system (IMS).
 IMS is the system of exchange rates and international payments that enables
countries (and their citizens) to buy goods and services from each other.
Functions of IMF
 The IMF is an organization of 187 countries which work to
 foster global monetary cooperation,
 secure financial stability,
 facilitate international trade,
 promote high employment and sustainable economic growth, and
 reduce poverty".
History of IMF
 IMF was introduced after a proposal made by the united States for International
cooperation in economics, trade and balance of payment affairs.
 The IMF was established in July 1944 by 45 government representatives in Bretton

Woods town, New Hempshire (USA).
 They agreed on a framework for international economic cooperation.
 It was believed that such a framework was necessary to avoid a disastrous economic
policies.
Thus IMF came in to existence to promote economic and financial co-operation

among the member countries.
ORGANIZATIONAL STRUCTURE
•INTERIM
BOARD OF COMMITEE
GOVERNORS •DEVELOPMENT
COMMITEE
EXECUTIVE BOARD OF
DIRECTORS
MANAGING DIRECTOR
IMF SECRETARIAT
IMF Main Business : Macroeconomic and
Financial Sector Policies.
I. Macroeconomic policies relating to the government’s budget, the
management of money and credit, and the exchange rate.
II. Macroeconomic performance – government and consumer spending,
business investment, exports and imports, output (GDP),employment,
and inflation.
III. Balance of payments - that is, the balance of a country’s transactions
with the rest of the world.
IV. Financial sector policies, including the regulation and supervision of
banks and other financial institutions.
V. Structural policies that affect macroeconomic performance such as those
governing labor markets, the energy sector, and trade.
Principal Duties of IMF
 SURVEILLANCE ( Like a Doctor ):- Help in providing policy advise to low

income countries by:-
i. Establishing Economic Frameworks that support sustained growth and
poverty reduction.
ii. Identify and manage sources of macroeconomic risk and vulnerabilities.
iii. Strengthen institutions and policies that underline sound macroeconomic
management.
Progress report is annually published in Global Monitoring Report by IMF
and World Bank.
Technical Assistance (like a teacher) :-
• Strengthening human skills and institutional capacity of countries
• Helps members in strengthening their policy formulation and implementation,
and the legal, institutional, and market frameworks within which they operate.
• It also constitutes an important complement to IMF surveillance and lending
operations in member countries.
 Financial Assistance (like a banker) :-

• Lending to countries to support reforms
• Improving financial sector surveillance.
• Development of standards and codes of good practice.
• Enhancement of transparency in the IMF and its member countries
• Involvement of the private sector in crisis resolution
Special Drawing Rights
The SDR (Special Drawing Right) is an artificial "basket" currency used by the
IMF (International Monetary Fund) for internal accounting purposes. The SDR
is also used by some countries as a peg for their own currency, and is used as an
international reserve asset.
The exchange rates used by the IMF to calculate the official SDR are the noon
rates in the London foreign exchange market. When the London market is
closed, noon rates in the New York market are used, and Frankfurt fixing
rates are employed when the New York market is also closed. The table shows
the composition of the SDR.
International Monetary System
• International monetary systems are a set of the policies and official

arrangements related to the balance of payments.
• These include exchange rates, international reserves, current payments, and

capital flows.
• The key purpose of the system is –
• To facilitate the expansion & balanced growth of international trade.

• To promote exchange stability.
• To assist in the establishment of multilateral payment.
Role of IMF in IMS
1. Combating poverty in low income countries.
2. Providing a forum for discussion and consultation among member

countries
3. Increase global supply of international reserves.
4. Supervising the adjustable peg system .

IMF vs. WORLD BANK
• World Bank provides long-term loans for promoting balanced economic

development, while IMF provides short-term loans to member countries for
eliminating BOP disequilibrium.
• Both these institutions are complementary to each other. Few economists

have even suggested that the two organizations should be merged.
• IMF and World bank collaborate regularly and are involved in several
joint initiatives.
HOW DOES THE IMF HELP POOR
COUNTRIES
 Follows 2 pillar strategy.
 Provides poverty reduction strategies, mobilizes the financial and technical
support, debt relief.
 2 initiatives to combat poverty: Poverty Reduction Strategy (PSR), Heavily
Indebted Poor Countries (HIPC)
 In PSR IMF provides loans to low-income countries are made on
concessional terms.
 In HIPC provide debt relief.
 Also provides Multilateral Debt Relief Initiative where it provides debt relief
by cancelling obligations to specific multilateral institutions.
 IMF introduced in 2005—the Policy Support Instrument, countries can
request that the IMF regularly and frequently review their economic
programs to ensure that they are on track.
Role towards member nations
The financial assistance and advice the IMF offers to its poorest members are
geared partly to helping them achieve these goals :-
1. Eradicate extreme poverty and hunger
2. Achieve universal primary education
3. Promote gender equality and empower women
4. Reduce child mortality
5. Improve maternal health
6. Combat HIV/AIDS, malaria, and other diseases
7. Ensure environmental sustainability
8. Develop a global partnership for development
IMF IN INDIA
• Joined IMF on 27 DEC, 1945
• India borrowed SDR 3.9 billion (1981-82) & SDR 2.2 billion (1991-93).
• In recent years, the fund provided to India was in government
securities, foreign exchange market, public expenditure management &
tax & custom administrations.
Current scenario
 SDR (Net cumulative allocation)- 681.17 m
 Holdings - 6.78 m
 Outstanding purchases & loans - None
• By James Gordon (Washington based multilateral institution's

representative)
“India does not need any financing from IMF considering that the
country had crossed $103 billion of FOREX reserves”
Emerging market economy Feb 13, 2004
Acc to Indiatimes - India borrowed from IMF in crisis of 1990’s & fully
repaid its loan.
•So now India has that potential to be include into IMF financial
transactions plan (40 countries)
By P Uaidynathan Iyer in New Delhi Jan 19, 2004
IMF & INDIA
India’s current quota in the IMF is SDR 4158.2 million in the total quota of SDR
213 billion, giving it a shareholding of 1.95 per cent. India’s relative position
based on quota is 13th. However, based on voting share, India (together with its
constituent countries, viz., Bangladesh, Bhutan and Sri Lanka) is ranked 21 st in
the list of 24 constituencies.
The IMF members can either retain SDRs, use them in payments etc. or sell
them to other member countries.
IMF has played an important role in Indian economy. IMF has provided
economic assistance from time to time to India and has also provided
appropriate consultancy in determination of various policies in the country.
Till 1970, India was among the first five nations having the highest quota with
IMF and due to this status India was allotted a permanent place in Executive
Board of Directors.
In July 2004, India and IMF joint training programme at the National Institute
of Bank Management, Pune was established.
India’s relation with IMF
•Provides financial assistance to boost our economy
• IMF suggests that India can become a financial

superpower by bringing in reforms in the economic policies.
• India has become a creditor and stopped taking loans from

it.
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Role of IMF in International

 It works to improve the economies of its member countries.

 The IMF’s primary purpose is to ensure the stability of the international

 The IMF is an organization of 187 countries which work to

 foster global monetary cooperation,

 secure financial stability,

 facilitate international trade,

 promote high employment and sustainable economic growth, and

 The IMF was established in July 1944 by 45 government representatives in Bretton

 They agreed on a framework for international economic cooperation.

Thus IMF came in to existence to promote economic and financial co-operation

 SURVEILLANCE ( Like a Doctor ):- Help in providing policy advise to low

 Financial Assistance (like a banker) :-

• International monetary systems are a set of the policies and official

• These include exchange rates, international reserves, current payments, and

• The key purpose of the system is –

• To facilitate the expansion & balanced growth of international trade.

1. Combating poverty in low income countries.

2. Providing a forum for discussion and consultation among member

3. Increase global supply of international reserves.

4. Supervising the adjustable peg system .

• World Bank provides long-term loans for promoting balanced economic

• Both these institutions are complementary to each other. Few economists

• By James Gordon (Washington based multilateral institution's

•Provides financial assistance to boost our economy

• IMF suggests that India can become a financial

• India has become a creditor and stopped taking loans from

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