International Monetary Fund (IMF)

The International Monetary Fund (IMF) is a key institution in the global financial system. It play a very important role in stabilizing the international monetary affairs and also facilitates the global economic growth.

This article by C4S is aiming to the in detailed information’s about the IMF, its objective, functions, governance structure and other related concepts of IMF Quota, SDRs and more.

What is International Monetary Fund (IMF)?

• IMF is an international organization of 189 countries which works together for securing the financial stability foster global monetary cooperation, facilitate international trade, promote sustainable growth and high employment, and reduce poverty across the world.
• Chairperson of IMF:
  • Bulgarian economist Kristalina Georgieva
• IMF officially came into existence on 27 December 1945.
• It is one of the Bretton Woods Institutions.

Objectives of IMF

• Foster global monetary cooperation,
• Secure financial stability,
• Facilitate international trade,
• Promote high employment and sustainable economic growth
• Reduce poverty around the world.

Functions of IMF

• Surveillance:
  •  The International Monetary Fund oversees the international monetary system and monitors the economic and financial policies of its all 189 member countries.
    • This process takes place both at the global level and in individual countries, which highlights possible risks to stability and advises on policy adjustments if needed.
• Lending:
  •  The core responsibility of the organization is to provide loans to member countries, which are experiencing actual or potential balance of payments problems.
    • Unlike development banks, the International Monetary Fund does not lend for specific projects. Rather, it lends money to stabilize currencies, replenish international reserves, and strengthen conditions for economic growth.
• Capacity Development: 
• It undertakes capacity development, and provides technical assistance and training to its members which helps them in designing and implementing economic policies that foster growth and stability by strengthening their institutional capacity and skills.
• Promote exchange rate stability and orderly exchange arrangement.
• It assists its members in the establishment of a multilateral payment system and the elimination of foreign exchange restrictions.

Governance Structure of IMF

• Different components of its Governance Structure are explained in the sections that are as follows:

Board of Governors

• Board of Governors (BOGs) is the topmost decision-making body of the organization.
• It consists of one governor along with one alternate governor from each member country.
• The governor is appointed by the member country, who is usually the Minister of Finance or the Governor of the Central Bank.
• Union Finance Minister is the ex-officio Governor of India in the IMF and the RBI Governor is the alternative governor.
• All powers of the International Monetary Fund are vested in the Board of Governors, which performs the following functions:
  • Approval of quota increases;
  • Special drawing right allocations;
  • The admittance of new members;
  • Compulsory withdrawal of members etc.
  • Amendments to the agreements a by-laws of the MOUs signed among nations.
• The Board of Governors normally meets once a year.
• Unlike the General Assembly of the United Nations, where each country has one vote, decision-making at the IMF has been designed in a way so as to reflect the relative positions of its member countries in the global economy.

Ministerial Commitees

•  Board of Governors is advised by two Ministerial Committees:
  • International Monetary and Financial Committee (IMFC)
  • Development Committee

Executive Board

• The Executive Board of the IMF comprises of 24 Executive Directors.
• The Executive Directors represent all the 189 member countries through a geographically based roster.

Managing Director

• IMF has a Managing Director (MD), who serves as the head of the staff and Chairperson of the Executive Board.
• The Managing Director (MD) is appointed by the Executive Board for a renewable five-years term.
• The employees of the organization come from across the world.
  • They are responsible to the IMF, not to the authorities of their home countries.

IMF Quota

• IMF’s quota system was created to raise funds for providing loans.
• Each member country is assigned a quota (i.e. contribution) that reflects the country’s relative size in the global economy.
• Higher quota is directly related to high voting rights and greater borrowing permissions.
• Quota defines the amount of assistance a country will get out of the contingency fund of the IMF, as well as the power of a country to influence the lending decisions and tap into the funds themselves.
• Quotas are denominated in Special Drawing Rights (SDRs) – the IMF’s unit of account.\

Special Drawing Rights (SDRs)

• SDRs is an international reserve asset, created by the International Monetary Fund in 1969, to supplement the member countries’ official foreign reserves.
• SDRs can be exchanged for freely usable currencies.
• The International Monetary Fund allocates SDRs to its member countries.
  • A country’s quota, which represents the maximum financial resources it is required to contribute to the fund, determines its allocation of SDRs.
  • Any new allocations must be voted on in the SDR Department of the organization and passed with an 85% majority.
• Initially, the value of the SDR was defined as equivalent to one US dollar.
  • But, later its value was defined in terms of mutiple currencies.
  • With effect from October 1, 2016, the SDR basket consists of the US Dollar, Euro, the Chinese Renminbi, Japanese Yen, and British Pound Sterling.
• The SDR also acts as the unit of account for the IMF.

Major Reports Published by IMF

World Economic Outlook

• IMF publishes World Economic Outlook Report twice a year, which contains an analysis of global economic developments for the near and medium term.
• The report forecasts include key macroeconomic indicators, such as inflation, GDP, current account balance, and fiscal balance of more than 180 countries across the world.
• It also publishes the report on annual International Capital Markets.

Global Financial Stability Report

• It provides assessment of the global financial system and markets.
• It addresses emerging market financing in a global context.

Fiscal Monitor

• It was launched in 2009 to survey and analyse the latest public finance developments, update fiscal implications of the crisis and medium-term fiscal projections, and assess policies to put public finances on a sustainable footing.
• It is prepared twice a year by the Fiscal Affairs Department of the organization.
• It focuses on current market conditions and highlights systemic issues that could pose potential risks to the financial stability and sustained market access by emerging market borrowers.

India and IMF

• India has been one of the largest recipients of funds from the International Monetary Fund.
• Indian constituency countries include Bhutan, Bangladesh, and Sri Lanka.
• Presently, India holds 2.75% of the SDR quota and 2.63% of votes in the IMF.
• Though India has not been a frequent user of the organization, IMF credit has been instrumental in helping India in relevance to the Balance of Payments Crisis on multiple occasions, such as the post-partition crisis, Indo-Pakistan Conflicts of 1965 and 1971, in 1991-93, etc.

Conclusion

International Monetary Fund (IMF) has a crucial role in maintaining global financial stability and promoting economic growth. As the world faces complex economic challenges, the IMF’s role in promoting stability, growth, and international cooperation remains ever more important. Necessary reforms should be made in the institution in order to make it more efficient and relevant to the current world economic order.