Relationship between IMF And International Liquidity

IMF And International Liquidity 1976:

International monetary system based on IMF or Bretton Woods System has/had been the chief source and mechanism by which international liquidity had been provided in the past. It was one of Fund’s main objectives.

The Fund, since its inception, had been trying hard to cope with the problem of international liquidity, in various ways, that is, by increasing the quantity, by changing the composition, by ensuring equitable distribution of the available sources.

The Fund managed the various forms and means of providing international liquidity like gold, foreign exchange, quotas and other borrowing facilities and credit arrangements. There is no disagreement amongst the economists that the IMF must somehow be so reformed as to augment international liquidity

. In fact, the IMF continues to hold a commanding position on two fronts—exchange stability and international liquidity. Its attempts and achievements in fostering the growth of international liquidity have, no doubt, been impressive; but a bigger and more important role lies ahead in making need-based allocation of quotas and SDRs. It will be proper to examine the main features of Jamaica Plan of March 1976, concerning international liquidity.

IMF And International Liquidity—1988 Onwards:

With the allocation of about five billion dollars worth of SDRs, at the beginning of 1981, the IMF made another important contribution to the strengthening of international monetary system. International economic conditions during 1980s onwards favour a case for undertaking new series of allocations.

However, for their creation an agreement of international community is essential, which at times becomes difficult to arrive at due to conflicting opinions and interests—is said to be a great limitation in the creation of SDRs.

But the resources and the credibility of the IMF are now stretched to the limit. IMF needs resources to meet heavy demands for repayment of debts particularly from developing countries whose total debt burden is estimated at over $ 1000 billion (one trillion dollars in 1987-88. It was only $ 90 billion in 1971. It has increased by 11 times due to hike in petrol, coal and energy prices. In the beginning of the 1980s IMF had been looking for additional funds particularly from oil exporting OPEC countries.

That is why the Fund had been much in the news during the 1980s, largely because of its role in helping countries with their debt problems. The Fund has taken the initiative in helping resolve debt problems by bringing together various parties and by coordinating actions on a pragmatic case-by-case basis a role which may have to be continued in future also—however, this role is a clear departure from its traditional regulatory role before the 1980s.

During this period, there had been greater realization and appreciation of the adjustment problem on the part of borrowing countries. The onset of the world debt crisis in August 1982 strengthened the Fund’s view that BOP adjustment was unavoidable and needed to be pursued vigorously.

Today the Fund is regarded as one of the most vital and effective international organizations. Its membership has grown to over 150, encompassing virtually all countries except a few, principally in the Eastern Bloc. During the early 1980s, the People’s Republic of China has taken up the representation of China, and two East European countries—Hungary and Romania—have become members. Resources from members quota subscription have increased 12 times to nearly SDR 90 billion.

The Fund has been able to supplement its resources by temporary borrowing from governments and central banks of its members. The Fund is credited to have played a key and crucial role in containing a world financial crisis that might otherwise have resulted from severe debt servicing difficulties that arose in mid-1982 or so in the following years. This is largely due to Fund’s ability to adapt its activities, policies, procedures. Articles in response to changing circumstances.

The Fund has undergone a metamorphosis change due to the challenges and difficulties of the 1970s through the 1980s like 1973 rise in oil prices, amendment of the Articles of IMF 1976, second round of oil price increased in 1979-80, most severe recession in 1981-82 followed by the Wall Street slump of October 1987; large payments deficits specially of developing countries, critical external indebtedness of developing economies, increasing protectionism of industrial countries, continued swings in floating exchange rates after 1976 Jamaica Plan, etc.

Despite all these obstacles the Fund held firm to the objectives stated in its Articles by:

(i) Collaborating, co-operating and consulting on international monetary problems of its members ;

(ii) By facilitating the expansion and balanced growth of international trade ;

(iii) Thereby promoting the high levels of employment and income and development of productive resources of all its members;

(iv) By consistently helping members to attain sustainable balance of payments position;

(v) By fostering a liberal trade and payments regime ;

(vi) By strengthening its surveillance over the policies of all members ;

(vii) By encouraging the scale of lending back d by sizable Fund borrowing and acting as financial intermediary borrowing from some members to lend to other needy members ;

(viii) By being flexible within the framework of its basic purposes.

From the above narration of IMF and international liquidity from 1976 to 1988 and onwards, it is evident the Fund will remain at the centre and be better equipped than in the past to shape its future development according to changed circumstances. Any discussion of the future of the Fund after Jamaica and beyond 1980s has to deal with two important and closely interrelated subjects of exchange stability and international liquidity. A bigger battle, however, lies ahead—a need-based allocation of quotas and SDRs.

The new articles put the SDR into central place vacated by gold. Hence, the Fund will continue to hold a commanding position in the international monetary system and arrange for both adjustment as well as increased international liquidity.

It is, thus, wrong to say that with the abolition of conventional Bretton Woods System (1946), the role of the IMF is over. As a matter of fact, IMF has been radically empowered to perform its new role in a more effective manner under the dynamic circumstances of world economy. That is why it is said that the new international monetary system is not ‘evolving’ but ’emerging’ as a result of amendments of Articles which became operative in April 1978, and the events that followed through the 1980s.