12 Major Functions of International Monetary Fund

The following points highlight the twelve major functions of International Monetary Fund (IMF).

They are: 1. Fixation of par value of currencies in terms of Gold or Dollar 2. Alternation of limit within par value 3. Loans of foreign currency 4. Drawing Rights 5. Stand by Arrangements and Others.

Function # 1. Fixation of Par Value of Currencies in terms of Gold or Dollar:

Every member country has to declare the par value of her currency in terms of US Dollars or in gold.

The main objective of IMF is to maintain stability in exchange rates of the member countries.

In fact, the IMF fixes the maximum or minimum limit of the par values of various countries.

Function # 2. Alternation of Limit within Par Value:

There is over rigidity in the par values of the currencies of different countries. If Fund finds that there is fundamental disequilibrium in the balance of payments of a country, it can change the par values of its currency, A country is allowed to alter its basic par value within well defined limits i.e. upto 10 per cent after making her intention known to the Fund.

Under certain circumstances, the Fund itself can make proportionate alterations in par values of all the member countries.

Function # 3. Loans of Foreign Currency:

The Fund realises that a stable exchange is very essential for the proper growth and expansion of the free world trade. Therefore, it take-s steps to check the fluctuations in the par values by eliminating the disequilibrium in the balance of payment of the member countries.

A member country can buy foreign currency from the Fund to tide over her temporary balance of payments deficit. The Fund sells currencies to members against their subscriptions for short period to enable them to remove the difficulties of the balance of payment.

Function # 4. Drawing Rights:

A member country during hardships of the balance of payments can buy the required foreign currency from the Fund by offering more of its own currency over and above its original subscription. The Fund provides both maximum and normal limits of financial assistance for a short period. A member country can request for any currency under the credit line of 25 per cent of its quota in one year.

This is known as gold tranche or reserve tranche drawing. But the full amount drawn under these drawings should not exceed by 200 per cent of the Fund’s holdings of a country’s currency quota. The member countries do not borrow more than 150 per cent of quota, because any further borrowing in subject to increasing interference by the Fund.

Function # 5. Stand by Arrangements:

Under the agreement of the Fund guarantee is given to provide a specific sum of money for a given period of time to a member country. Normally, the satisfaction as to the legitimacy and purpose of drawing is considered before a standby is granted. Since the standby is a part of the quota, it forms a part of the total drawing power.

Function # 6. Liquidity of Fund’s Resources:

If the borrowing countries are buying the currency of other countries, the Fund may accommodate such currencies as are not demanded. In fact, the Fund will not be able to act as a reserve Fund. Thus, it becomes necessary that the Fund should keep its resources in a liquid form so that the borrowing country may repurchasing of domestic currency.

There are certain rules to maintain the liquidity of resources such as:

(i) Any member country can buy the currency of any other member country by depositing gold in the Fund.

(ii) If the currency of a country with the Fund exceeds its quota, then that country can purchase its own currency in exchange for gold.

(iii) Every country, under special circumstances, can buy a part of its own currency from the Fund in exchange for gold or other currency.

Function # 7. Currency in Short Supply:

It is possible that a country’s currency may be in short supply. Short supply of a currency in foreign exchange market indicates a favourable balance of payment. If the Fund finds that a particular member country is having a surplus in its balance of payment and its supply of currency is inadequate relative to demand, the Fund may ask the surplus country to revalue its currency.

On the contrary when the Fund declares a particular currency as scarce, the member country revalues the currency, thus, raising costs and prices. This would increase its imports and the Fund can operate its operations more effectively.

Function # 8. Position of Gold in Fund’s Scheme:

Under the Fund’s scheme, status was given to gold as every member country has to deposit in gold the Fund upto 25 percent of its quota or 10 per cent of its gold holdings. Under the agreement of the Fund, the par values of currencies of members are expressed in terms of gold, SDR and the US Dollars. In Fund’s scheme, gold had been retained as a basis of determination of the par values of member’s currencies.

A member can deal with the Fund “only through its treasury, central bank, stabilisation fund or other similar agency”. An alteration in par value is permitted only within limits. If the fund is short of any particular currency, it can purchase the same for gold. The value of gold has been fixed by the Fund at 35 dollars per five ounce.

According to Prof. Williams, Fund’s Planning is akin to gold standard. But according to Lord Keynes, Under Fund’s planning, a system has been created, by means of international agreement, that is far removed from the old political gold standard system.

It is so because:

(a) It is not based on gold currency as was gold standard.

(b) Under Fund’s planning, value of the currency is not fixed in terms of gold forever.

(c) Under gold standard, gold occupied the position of a master but under Fund’s planning it is given the place of a servant. By virtue of the amendments made in the regulations of the Fund, since 1976 gold has no place in Fund’s planning.

Function # 9. A Central Bank’s Bank:

IMF may be described as a bank of Central Banks of different countries. It collects the resources of the various Central Banks in the same way in which a country’s Central Bank collects cash reserves of all commercial banks in a country.

Function # 10. Facilities during the Transition Period:

The Fund gets all the exchange control removed so that the world trade may flourish smoothly. During the transitional period, the Fund has empowered the member countries to impose such restrictions on imports and foreign exchanges according to its necessity.

As the transitional period is over, member countries are supposed to remove the restrictions imposed on international trade and foreign exchanges. Therefore, the member countries can continue with their control to the desirability of the Fund.

Function # 11. Training:

The Fund also imparts training to the representatives of member-countries. This training is imported to the senior officers of the central banks and Finance Departments.

Function # 12. Facilities during Emergency:

Although IMF is opposed to any sort of controls either on foreign exchange or foreign trade. Still member-countries have been given the right to resort to these controls during emergency in the hope that they will lift it as early as the situation warranted.