International Monetary Fund

International Monetary Fund


Establishment of IMF

World war II had its adverse effect on the global economy.To remedy the situation,an international monetary conference was convened in 1994,at Bretton Woods in America.It was attended by the representatives of 44 countries.India also participated therein.It was decided in this Conference that two institutions be set up for the economic development of all countries:

1) International Monetary Fund

2) International Bank of Reconstruction and Development/World Bank.

Consequently,International Monetary Fund(IMF) was founded on 27thDecember1945.The Fund was established with the objective of solving the problem of balanced growth of world trade,international monetary co-operation,the balance of payments of member countries and their temporary disequilibrium.In 2009,the number of member countries of IMF was 186.Its headquarters are in Washington.Currently there are 188countries who are members of International Monetary Fund.

Purpose of IMF

According to the Article I of the Bretten Woods Agreements,the following are the main purposes of the IMF.

  1. To promote international monetary cooperation through a permanent institution, which provides the machinery for consultation and collaboration on international monetary system.
  2. To facilitate expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of high level of employment and real income to the development of the productive resources of all members as primary objectives of economic policy.
  3. To promote exchange stability,to maintain orderly exchange arrangements among members and to avoid competitive exchange depreciation.
  4. To assist member-nations in the establishment of a multilateral system of payments in respect of current transactions and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
  5. To give confidence to members by making the Fund’s resources available to them to correct maladjustments in their balance of payments and to prevent them from restoring to measures destructive of national or international prosperity.
  6. In accordance with the above objectives,to shorten the duration and lessen the degree of disequilibrium in the international balance of payments of members.


Objectives of International Monetary Fund

1.To promote International Monetary Co-operation

The main objective of the Fund is to promote monetary cooperation among member countries of world.It provides expert advice for solving international monetary problems.

2.To establish a system of Multilateral Payments

The Fund aims at establishing multilateral payments system among member countries.For this,IMF provides for conversion of currency of different countries into each other.It also has its own currency i.e.,Special Drawing Right(SDR,which is acceptable to all member nations.IMF also lends or sells currencies of other countries countries to its member countries.By developing system of multilateral payments IMF promotes international trade.

3.To maintain Stability in Exchange Rate

Earlier maintaining stability in the rate of exchange was one of the objectives of IMF.But at present this objective is dropped.Now rate of exchange is decided on the basis of market forces of demand and supply.

4.To abolish Exchange Restrictions

It will try remove all restrictions and control on foreign exchange imposed by the member countries.

5.To Provide aid to members during Emergency

The fund aims at providing short-term monetary help to member countries during emergency.

6.To reduce disequilibrium in balance of Payments

The fund also provides monetary help to member countries to reduce disequilibrium in their balance of payments.

7.To help in profitable investment of capital

Another objective of the fund is to help the member countries invest their long-term funds in profitable activities special help to rich countries to invest their capital in poor countries.

8.To promote Balanced Economic Development

The fund aims at promoting economic development of member nations.For this,it promotes foreign trade thereby increases employment opportunities and national income.

9.To prevent Spreading of financial Crisis

IMF encourages member nations to adopt healthy economic policies so   that spread of financial crisis could be prevented from one nation to other    nations.


There are two types of members of the Fund:

1.Original Members

2.Ordinary Members

All those countries whose representatives whose representatives took part in Bretton woods Conference and who agreed to be the member off Fund prior to 31st December,1945 are called the original members of the Fund. All those countries who became its member subsequently are called ordinary members.Any country can cease to be its member after giving a notice in writing to that effect.Fund can terminate the membership of such a country, which does not observe its rules.In 1945,the number of member countries was 44,in year 2009 the number of member countries was 186.

Organization and management

In order to manage the fund,the following administrative boards have been set up:

1) Board of Governors:

The Board of Governors is the highest decision-making body of the IMF. It consists of one governor and one alternate governor for each member country. The governor is appointed by the member country and is usually the minister of finance or the head of the central bank.

2) Ministerial Committees

The IMF Board of Governors is advised by two ministerial committees, the International Monetary and Financial Committee(IMFC) and theDevelopment Committee. The IMFC has 24 members, drawn from the pool of 187 governors. Its structure mirrors that of the Executive Board and its 24 constituencies. As such, the IMFC represents the entire member countries of the Fund.The IMFC meets twice a year, during the Spring and Annual Meeting. The Committee discusses matters of common concern affecting the global economy and also advises the IMF on the direction its work. At the end of the Meetings, the Committee issues a joint communiqué summarizing its views. These communiqués provide guidance for the IMF’s work program during the six months leading up to the next Spring or Annual Meetings. There is no formal voting at the IMFC, which operates by consensus.

3.The Executive board

The IMF’s 24-member Executive Board takes care of the daily business of the IMF. Together, these 24 board members represent all 188 countries. Large economies, such as the United States and China, have their own seat at the table but most countries are grouped in constituencies representing 4 or more countries. The largest constituency includes 24 countries.The Board discusses everything from the IMF staff’s annual health checks of member countries’ economies to economic policy issues relevant to the global economy. The board normally makes decisions based on consensus but sometimes formal votes are taken. At the end of most formal discussions, the Board issues what is known as a summing up, which summarizes its views. Informal discussions may be held to discuss complex policy issues still at a preliminary stage.

The main functions of IMF

1.Lending for meeting temporary Unfavourable Balance of Payments Position

The IMF lends o member countries that havetemporary balance of payment problems. The IMF does not lend for developmental projects.The financial assistance provided by IMF enables the members to reduce its deficit of balance of payments and other short-term external liabilities.These lendings are to be paid back in three to five years.

2. Purchase and Sale of foreign Currency

The fund buys and sells the currencies of the member countries.Whenever a country buys the currency of another country from the Fund,the latter makes it available by purchasing the same from the country concerned,of which it constitutes the national currency.In any one year a member country can purchase from the Fund foreign currency up to the maximum of 25% of its quota.But in some cases IMF can raise this limit to even 100 per cent of quota.

3. Bank of Central Banks

The fund is called the bank of the central banks of different member countries of the world.Just as a central bank holds the cash of the commercial banks of the country,likewise IMF also holds reserves of the central banks of the member countries.

4. Technical Assistance

The fund also provides technical assistance to its member countries.The fund sends its experts on deputation to member countries to advise them on matters like exchange control,foreign payments,credit control,central banking and economic policy etc.The fund also publishes many technical journals and magazines.

5. Imparts training

It also imparts training to the representatives of member countries.This training is imparted to the senior officers of the central banks and finance departments.In 1975,a training centre was set up to impart training to policy makers of different nations.

6. Facilities during Emergency

Although IMF is opposed to any sort of controls either on foreign exchange or on foreign trade,yet 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 warrants.

7. Increases International Liquidity

IMF has increased international international liquidity by creating a new currency in the form of SDR.IMF also lends foreign currency to member countries.All this increases international liquidity.

8. Determining Exchange rate for every member country

When a country becomes member of the fund,it has to declare par value of its currency in terms of dollar or gold. This facilities multilateral convertibility of that currency.But now exchange rate is determined by market forces of demand and supply,so this function has been dropped.

9. Poverty Reduction

For helping low income countries having extreme poverty,IMF has set up a special fund.In this fund,contribution is received from developed nations and from emerging developing nations.India is also contributing US$1 million per year in this fund.

10. Change in Exchange rate

i. If any country wants to change its exchange rate from 11 to 20 percent, no prior permission is needed from IMF. Simply intimation to IMF will be sufficient.
ii. If any country wants to change its exchange rate from 11 to 20 percent,prior permission of IMF is required for such change.
iii. If the country wants to change its exchange rate by more than 20 percent,then such decision is taken with the consent of 2/3 of its members.At present determination of exchange rate and change in exchange rate are decided by the market forces,i.e. now a country cannot decide the par value of its currency,the exchange rate is decided by the demand and supply of that currency in the foreign exchange market.
11. Research Functions:

IMF has setup a separate statistical bureau for conducting research regarding balance of payments,money and banking,finance and fiscal policy etc. IMF publishes report of such research work.Its main publications are-Finance and Development,IMF Survey,Balance of Payments year Book,Direction of Trade,International Financial Statistics,etc.These publications are useful for member nations for framing economic policies.

12. Special Lending facilities of IMF: Following are the main lending facilities provided by IMF to member nation:

i. Compensatory and Contingency Financing Facility(C.C.F.F.)
Under this scheme,special financial assistance is provided to the member nations for compensating them for shortfall in exports,because of some contingencies like flood,earthquakes,drought etc.
ii. Buffer stock Financing Facility(B.S.F.F):
Under this scheme,special financial assistance is provided to member nations for maintain buffer stocks(Reserve stock) of primary products like foodgrains.
iii. Structural adjustment Facility(S.A.F):
Under this scheme concessional loans are provided by IMF to least developed member nations for meeting deficit in balance of payments.Under this scheme,the rate of interest is between 0.5% to 1% p.a.
iv. Enhanced Adjustment Facility (S.A.F.)
It is also known as Enlarged Access policy.Under this scheme,enhanced loans are provided toleast developed member nations with heavy debt burdens for making economic reforms. Under this scheme,a member country can take loans upto 425% of its quota.

Success/achievements of International Monetary Fund

According to Halm,”funds is like an international reserve Bank”.The fund has performed the significant functions to attain its objectives.Following are the main achievements of IMF:

1) International Monetary Cooperation

One of the main objectives of the Fund is to present a forum where most of the countries of the world ay b able to solve their monetary problems by mutual cooperation,The fund has created feeling among the member countries that their economic problems are not only their exclusive problems,but of the whole international society.IMF has succeeded in achieving this objective.

2) Reconstruction Of European Countries

Because of the efforts of the Fund,rich countries like America gave liberal economic assistance under Marshal Plan for the reconstruction of European countries without this Plan war-devastated European countries could not have been rehabilitated.

3) Multilateral System of foreign Payments

At the time of the establishment of the Fund,almost all countries were exercising exchange control in one way or the other.There were many restrictions on foreign trade.IMF has succeeded in reducing the same and in establishing multilateral systems of foreign payments,and thus promoted world trade.

4) Increase in international Liquidity

Corresponding to increase in international trade,the Fund has succeeded in increasing international liquidity.It has created a new liquid asset in the form of SDRs.As a result,international liquidity has increased manifold.It provides credit facilities to member countries in foreign currency.

5) Increase in International Trade

The Fund has succeeded in expanding the international trade and making it free from restrictions to a large extent.It has rendered payments relating to international trade easy.By helping the countries suffering from trade disequilibrium,it has promoted their trade.

6) Special Aid to Developing Countries

The fund has done a special service to developing countries in finding a solution to their problems.It has been actively helping them in correcting their unfavourable balance of payments and achieving monetary stability.These countries have been receiving adequate guidance from the fund in framing their monetary,export-import and exchange policies.

7) Providing Statistical data and information

IMF has set up a separate statistical bureau for conducting research regarding balance of payments,money and banking,finance and fiscal policyetc.It also publishes report of such research work.These publications are useful for member nations for framing economic policies.

8) Helpful in Times of difficulties

The fund has come to the rescue of all member countries faced with economic crisis.On account of hike in petrol prices many countries of the world experienced acute shortage of foreign exchange.In order to ease this situation,it set up Petrol Facility Fund.

9) Easiness and flexibility in Making International Payments

Because of use of SDRs the dependence on gold for making international payments has reduced.Through the facility of payments have become easier and flexible.

10) Special Lending to Crisis hit Nations

In year 208-2009,the growth momentum in world economy is adversely affected by the global financial crisis.In April 2009,the growth momentum in world economy is adversely affected by the global financial crisis. IMF made a special fund for lending to crisis hit countries. IMF seeks to inject cash into the world economy and help the crisis hit nations to overcome global financial crisis.

Failures of international Monetary Fund

The IMF has failed to achieve some of its objectives.Its main failures are as under:-

1) Lack of stability in Exchange rate

The fund has failed to achieve its main objective of exchange rate stability.It succeeded till 1972 in maintaining fixed rat of exchange.Thereafter,it became variable once again.Lack of stability in exchange rate is the major failure of the Fund. At present,rate of exchange is determined by market forces of demand and supply.

2) Lack of stability in the Price of Gold

Many efforts were made by the fund to bring stability in the price of gold but it failed miserably. Upto 1971 the price of gold was kept stable at $35 per ounce(oz.),but thereafter it has increased manifold.

3) Inability to Remove Restrictions on foreign Trade

The fund has failedto remove restrictions on foreign trade and control on foreign exchange. Many countries of the world have resorted to policy of protection with greater vigour.

4)Rich Nations Club

Critics say that IMF is a club of rich countries like America,Britain etc. and helps their supporters.It pursues a policy of description.

5)No help for Developmental Projects

IMF has been giving loans only for meeting temporary balance of payments deficit.It provides no loans for development projects to promote development.

6)No Solution of Problem of international Liquidity

Fund is not a proper solution of problem of international liquidity.Although Fund has considerably increased its permanent resources and helped in problem of the creation of new currency in form of Special Drawing Rights(SDRs),yet the problem of liquidity persists.Consequently it will be difficult for the Fund to lend resources to developing countries and help them overcome their balance of payments deficit.

7)Interference in Domestic Economies

While providing loans,IMF imposes many conditions on member nations, e.g. reduction in growth rate of money supply,measures to control wages/salaries and prices,devaluation,reduction in fiscal deficit etc.It results in excessive interference of IMF in the working of domestic economies of member nations.


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