Role of International Institutions - IMF

 

Role of International Institutions – IMF 

            The business across the nations are assisted and funded by the international organizations such as International Monetary Fund, World Bank and Regional Development Banks by framing economic policies and schemes for financial assistance and technical assistance. Assistance from the international organizations are substantial sources of public investment in a number of countries and such investments may help to improve the general business conditions.

International Monetary Fund:

            The IMF is the central institution of the international monetary system, established on December 27, 1945 as a result of the Bretton Woods Conference of nations and began its financial operations on March 1, 1947. It is the fund that can be tapped by members for temporary financing to address balance of payments problems and also aims to prevent crises in the system by encouraging countries to adopt sound economic policies.

Organization and Management:

    The Board of Governors, the highest authority of the governance in IMF, represented by the member countries – usually by the country’s minister of finance meets once a year at the Annual meetings of the IMF and World Bank to decide on major policy issues.

    The Executive Board, consists of 24 Executive Directors, usually meets three times a week, at the organization’s headquarters in Washington DC to discuss on day-to-day decision making, presided by Managing Director as Chairman.

    The IMF’s five largest shareholders – the United States, Japan, Germany, France and the United Kingdom – along with China, Russia and Saudi Arabia have their own seats and the rest 16 Executive Directors are elected for two-year terms by group of countries, known as constituencies.

Vision of IMF:

• Strive to promote the sustained non-inflationary economic growth that benefits all people of the world
• Center of competence for the stability of the international financial system
• Focus on its core macroeconomic and financial areas of responsibility
• Be an open institution, learning from experience and dialogue, and adapting continuously to changing circumstances

Purpose of IMF:

• Promoting the balanced expansion of world trade
• Stability of exchange rates
• Avoidance of competitive currency devaluation
• Orderly correction of a country’s balance of payments problems

Functions of IMF:

•  To provide loans to countries experiencing balance of payments problems
• To restore and rebuild the international reserves by providing financial assistance
• To help in paying for imports and exports without imposing restrictions or capital controls

Sources of Fund:

1. Quotas and Subscriptions:

    Each member is assigned a quota expressed in Special Drawing Rights (SDRs), equivalent to which every member is required to subscribe to the Fund. Quotas, that reflect the members’ economic size, are used to determine the voting power of members, their contribution to the Fund’s resources, their access to these resources, and their share in allocations of SDRs. A member is generally required to pay about 25 percent of its quota in SDRs or in currencies of other members selected by IMF; it pays the remainder in its own currency. The fund holds substantial resources in members’ currencies and SDRs, which are available to meet member countries temporary balance of needs.

2. Borrowings:

    The IMF may borrow to supplement its resources from its quotas. The IMF has two sets of standing arrangements to borrow:

• General Arrangements to Borrow (1962)
• New Arrangements to Borrow (1997)

IMF Facilities:

    IMF loans are usually provided under an arrangement, which stipulates the conditions the country must meet in order to gain access to the loan. Arrangements are based on economic programs formulated by countries in consultation with the IMF, and presented to the Executive Board in a letter of intent. All facilities are subject to market-related interest rate known as rate of charge and some carry an interest rate premium known as surcharge. The IMF has developed a number of loan instruments at concessional and non-concessional rates as follows:

Poverty Reduction and Growth Facility (PRGF):

• Financial assistance to low income countries through ESAF – Enhanced Structural Adjustment Facility, later renamed as PRGF to focus on poverty
• Interest rate: 0.5 percent
• Repayment period: 5.5 -10 years

Stand-by Arrangements (SBA):

• To address short-term balance of payment problems
• Length of facility: 12-18 months; Surcharges apply to high levels of access
• Repayment period: 2.25 – 4 years

Extended Fund Facility (EFF):

• To address more protracted balance-of-payments problems in 1974
• Length of facility: 3 years; Surcharges apply to high levels of access
• Repayment period: 4.5 – 7 years

Supplemental Reserve Facility (SRF):

• To meet a need for very short-term financing on a large scale
• Repayment period: 1-1.5 years
• Surcharge: 3-5%

Contingent Credit Lines (CCL):

• To help members prevent crises while implementing sound economic policies in 1999
• Repayment period: 1-1.5 years (same as SRF)
• Surcharge: 1.5-3.5 %

Compensatory Financing Facility (CFF):

• To assist countries experiencing either a sudden shortfall in export earnings or an increase in cost of imports
• Repayment period: 2.25 – 4 years (same as SBA)
• Length of facility: 12-18 months; No surcharge

Emergency Assistance:

• To countries that have experienced a natural disaster or emerging from a conflict
• Repayment period: 3.25-4 years

Technical Assistance:

    The IMF provides technical assistance in areas such as macro-economic policy, monetary and foreign exchange policy and systems, fiscal policy and management, external debt and macroeconomic statistics.