International Monetary Fund: Objective, Functions and Financial Structure

Let us make an in-depth study of the International Monetary Fund:- 1. Objectives of International Monetary Fund 2. Functions of International Monetary Fund 3. Organisation and Management of the IMF 4. Financial Structure of the IMF.

Objectives of International Monetary Fund:

The origin of the IMF goes back to the days of international chaos of 1930s.

During the Second World War, plans for the construction of an international institution for the establishment of monetary order were taken up. At the Bretton Woods Conference in July 1944, delegates from 45 countries negotiated an agreement on the structure and operation of the international monetary system.

The Articles of Agreement of the IMF provided the basis of the international monetary system. The IMF commenced financial operations in 1 March, 1947, though it came into official existence on 27 December 1945, when 29 countries signed its Articles of Agreement (its charter). Today (July 2008), the IMF has 185 member countries. Virtually the entire world belongs to the IMF.

Article 1 of the Articles of Agreement spell out 6 purposes for which the IMF was set up. They are as under:

i. To promote international monetary cooperation through a permanent institution.

ii. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

iii. To promote exchange stability, to maintain orderly exchange arrangements among members and to avoid competitive exchange depreciation.

iv. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

v. To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments.

vi. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balance of payments of members.

All these objectives of the IMF may be summarised now. To promote international cooperation; to facilitate the expansion and balanced growth of international trade; to promote exchange stability; to assist in the establishment of a multilateral system of payments; to make its general resources available to its members experiencing balance of payments difficulties under adequate safeguards; and to shorten the duration and lessen the degree of disequilibrium in the international balance of payments of members.

Functions of International Monetary Fund:

The principal function of the IMF is to supervise the international monetary system. Several functions are derived from this. These are granting of credit to member countries in the midst of temporary balance of payments deficits, surveillance over the monetary and exchange rate policy of member countries, issuing policy recommendations.

The main function of the IMF is to provide temporary financial support to its members so that ‘fundamental’ BOP disequilibrium can be corrected. However, such granting of credit is subject to strict conditionality. The conditionality is a direct consequence of the IMF’s surveillance function over the exchange rate policies or adjustment process of members.

Surveillance is the process by which the IMF appraises its members’ exchange rate policies within the framework of a comprehensive analysis of the general economic situation and the policy strategy of each member. Surveillance is based on the conviction that strong and consistent domestic economic policies will lead to stable exchange rates and a growing and prosperous world economy.

The Fund provides financial assistance. It includes credits and loans to member countries with balance of payments problems to support policies of adjustment and reform. It makes its financial resources available to member countries through a variety of financial facilities. It also provides concessional assistance under its poverty reduction and growth facility and debt relief initiative. It has decided to provide fund to combat money-laundering and terrorism in view of the attack on the World Trade Centre of the USA in 11 September 2001.

In addition, technical assistance is also given by the Fund. Technical assistance consists of expertise and support provided by the IMF to its members in several broad areas: the design and implementation of fiscal and monetary policy; institution-building, the handling and accounting of transactions with the IMF; the collection and retirement of statistical data and training of officials.

Maintenance of stable exchange rate is another important function of the IMF. It prohibits multiple exchange rates. It is to be remembered that unlike the World Bank, the IMF is not a development agency. Instead of providing development aid, it provides financial support to tide over BOP difficulties to its members.

Organisation and Management of the IMF:

Like many international organisations, the IMF is run by the Board of Governors, an Executive Board and an international staff. Every member country delegates a representative (usually heads of central banks or ministers of finance) to the Board of Governors — the top link of the chain of command. It meets once a year and takes decision on fundamental matters such as electing new members or changing quotas.

The Executive Board is entrusted to the management of day-to-day policy decisions. The Board comprises 24 executive directors who supervise the implementation of policies set by member governments through the Board of Governors. The IMF is headed by the Managing Director who is elected by the Executive Board for a 5-year term of office.

Rights and obligations i.e., the balance of powers in the Fund is determined by a system of quotas. Quotas are decided by vote of the Board of Governors. Quotas or subscriptions roughly reflect the importance of members in the world economy. It is the quota on which payment obligations, credit facilities and voting rights of members are determined.

Financial Structure of the IMF:

The capital or the resources of the Fund come from two sources, viz.:

(i) Subscription or quota of the member nations, and

(ii) Borrowings.

Each member country is required to subscribe an amount equivalent to its quota. As soon as a country joins the Fund, it is assigned a quota. At the time of formation of the IMF, the quota of each member was made up of 25 p.c. in gold or 10 p.c. of its net official holdings of gold and US dollars (whichever was less). Now this has been revised.

The capital subscriptions or quota is now made up of 25 p.c. in Special Drawing Rights (SDRs) or widely accepted currencies, (such as the US dollar, euro, the yen or the pound sterling) instead of gold and 75 p.c. in country’s own currency. The size of the Fund equals the sum of the subscriptions of members. Total quotas at the end-August 2008 were SDR 217.4 billion (about $341 billion)

The Fund is authorised to borrow in special circumstances if its own resources prove to be insufficient. It sells gold to member countries to replenish currency holdings. It is entitled to borrow even from international capital market. Though the Articles of Agreement permit the Fund to borrow from private capital market, till today no such use has been made by the Fund.