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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.
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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.
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BRETTON WOODS SYSTEM
A conference of 44 major countries was held
at Bretton Woods, New Hampshire in July
1944 to establish a stable internationalMonetary order.
The result of this conference was IMF and
IBRD. These 2 institutions are known asBretton Woods Twins.
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FUNCTIONS OF BRETTON WOODS
SYSTEM
It provided a comprise between Fixed &
Floating exchange rate systems.
It established an international harmony andexchange rate stability associated with gold
standard.
It allowed individual countries to pursue theirown macroeconomic policy.
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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.
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FAST FACTS ON THE IMF
IMF came into existence in December 1945.
It is an autonomous organisation & isaffiliated to U.N.O.
Headquarters are in Washington.
Membership: 188 countries
Executive Board: 24 Directors representingcountries or groups of countries
Staff: Approximately 2,475 from 156countries.
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ADMINISTRATIVE STRUCTURE OF
IMF
Int. Monetary &
Financial
Committee
Board Of Governors
IMF-World Bank
Development
Committee
Executive
Board
Managing
Director
Independent
Evaluation
Office
Staff
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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
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BIGGEST SHAREHOLDERS
USA
UK
FRANCEGERMANY
JAPAN
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WHAT THE IMF DOES??
Key IMF Activities
Original Aims
An Adapting IMF
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KEY ACTIVITIES
Policy advice
to
governments
& central
banks
Research,
statistics,
analysis,
forecast
Loans to
help
countries
Fight poverty
in
developing
countries
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ORIGINAL AIMS
Provide a forum for cooperation on internationalmonetary problems.
Facilitate the growth of international trade.
Promote exchange rate stability.
Lend countries foreign exchange when neededon a temporary basis.
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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
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COLLABORATION WITH OTHERS
The World Bank.
Regional Development Banks.
WTO.
UN agencies & other international bodies.
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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.
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PRIMARY FUNCTIONS OF IMF
Surveillance.
Financial assistance.
Technical assistance.
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"Surveillance"
It provides regular assessment of global
prospects in its World Economic Outlook.
The IMF provides advice to its membercountries.
Focus on the assessment of the exchange rate
& BOP.
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"Financial assistance"
Provide short term loans to countriesexperiencing BOP problems.
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"Technical Assistance"
The IMFs goal for its technical support is tocontribute to the development of the
productive resources of member countries.
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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.
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ACHIEVEMENTS OF IMF
Expansion of Fund : IMF has progressed both
in membership and resources.
Provision of Credit: Provides Financial Creditto its member countries.
Exchange Stability: Promotes Exchange
Stability among Member Countries. Expansion of World Trade: It contributes to
the expansion of International Trade by:-
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a) Providing Credit facilities to member
countries.
b) It helps the deficit countries to correctdisequilibrium in their BOP.
Increase in International Liquidity: With the
establishment of SDRs, IMF has increasedliquidity.
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FAILURES OF IMF
It has failed to achieve its basic objective of
international exchange stability.
The fund has failed to establish a stable andsound 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
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Been fast declining.
The fund has adopted a favourable attitude
towards U.S.A as most of its decisions are takento protect U.S.A.
The fund has been criticised as being RichMens
Club because of the dominance of rich countries.
The underdeveloped and developing countries
usually do not get financial help from IMF.
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The IMF has been widely criticised for
interfering in the economic policies of poor
countries.
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SPECIAL DRAWING RIGHTS (SDRs)
The establishment of SDR was an attempt ofIMF to solve the problem of internationalliquidity.
These were intended to be an asset held inforeign exchange rates under the BrettonWoods System of fixed exchange rates.
The scheme for creating SDRs was outlined atAnnual General Meeting of the IMF in October1967 at Rio de Janeiro (Brazil)
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However the proposal was approved in 1968 and
came into being on August 1969.
The objective of SDRs is to assure an adequategrowth 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.
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FEATURES OF SDRs
Additional Reserve Asset: In addition to thetraditional assets like gold, SDRs scheme providesa new international asset.
Cheque Book Currency: SDRs are simple bookkeeping entries at the IMF in accounts for themember countries.
Transferrable Asset: SDRs are transferrable assets& the member countries are required to providetheir currencies in exchange for SDRs.
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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 thecountries on the basis of their quotas.
Special Drawing Account: The IMF has 2
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Accounts-
a) 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.
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Units of Accounts: OPEC countries, airlines,
monetary organizations are using SDRs as
units of accounts.
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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.
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WORKING OF SDRs
Transactions with designation
Transactions by agreement
Transactions with General Account
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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.
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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 thatparticipant.
The member countries are expected to utilise
their SDRs to meet adverse balance of
payments.
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Transactions with General Account
SDRs can be used by member countries in
operations and transactions conductedthrough IMFs General Account (i.e, in settling
transactions with the IMF)
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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.
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Repayment of loans and payment of interest
can be made with the help of SDR.
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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 theGovernment of Indias account.
SDRs have been used for repurchase from the
fund and paying of interest.
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Merits Of SDR
It is a simple and flexible scheme.
It provides stable international currency
The scheme ensures adequate but not excessivegrowth of monetary reserves.
SDRs can be used unconditionally.
Holding of SDRs is beneficial to a country as theyare an interest earning asset.
It avoids the confidence problem faced under the
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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 repayaccording to fixed schedule.
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Criticism of SDRs
The allocation of SDRs is not just and on
equitable basis. They are allocated among the
member countries in proportion of theirquotas 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
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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 reserveasset to finance the payments deficits may
lead to global inflation
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