INTERNATIONAL MONETARY FUND(IMF)

IMF or International Monetary Fund was established way back in 1944 with a vision to improve as well as stabilize world economy. Keeping in mind the economic crisis that the world has experienced during the Great Depression and World War II, the representatives of 45 countries assembled in Bretton Woods, New Hampshire in the United States to create a new economic framework to avoid such crisis in future. The International Monetary Fund was established by an international treaty in 1945 to help promote the health of the world economy. Headquartered in Washington,D.C.,it is governed by its almost global membership of 184 countries. The IMF is the central institution of the international monetary system- the system of international payments ands exchange rates among national currencies that enable business to take place between countries.

The Origins of the IMF

The new monetary system initiated at the conference became known as Bretton Wood system. International Monetary Fund, the brain child of this conference came into being in July, 1944, and started its operation in 1947 with the membership of 30 countries. Though Bretton Wood system collapsed, IMF is still instrumental in carrying out its financial operation, and is headquartered in Washington, D.C., USA.

OBJECTIVES OF IMF (PURPOSES)

International Monetary Fund (IMF) is an international financial institution that promotes economic cooperation among the member countries for ensuring rapid economic development throughout the world. The purposes of the International Monetary Fund are: 1.To promote international monetary cooperation through a a permanent institution which provide the machinery for consultation and collaboration on international monetary problems.2. Another important objective is the expansion of global trade, which in turn will not only promote high level of employment and income, but would also be able to sustain it. IMF also intends to promote international trade by removing foreign exchange restrictions. It aims at maintaining balanced growth of the world economy. 3.To provide confidence to members by making general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with an opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.

INTERNATIONAL MONETARY FUND ORGANISATION CHART

International Monetary and Financial Committee

Board of Governors

ExecutiveBoard

MANAGING DIRECTOR Deputy Managing Directors

Joint IMF-World Bank Development Committee1

Independent Evaluation Office

Investment Office-Staff Retirement Plan

Office of Budget & Planning

Office of Internal Audit and Inspection

Organization of IMF

The IMF is accountable to its member countries, and this accountability is essential to its effectiveness. The day-to-day work of the IMF is carried out by an Executive board, representing the IMF’s 184 members, and an internationally recruited staff under the leadership of a Managing Director and three Deputy Managing Directors – each member of this management team being drawn from a different region of the world.The powers of the Executive Board to conduct the business of the IMF are delegated to it by the Board of Governors, which ultimate oversight rests.

Board of Governors

The Board of Governors are represented by all member countries and it is the highest authority governing the IMF . It usually meets once a year, at the Annual Meetings of the IMF and the World Bank. Each member country appoints a Governor – usually the country’s minister of finance or the governor of its central bank – and an Alternative Governor. The Board of Governors decides on major policy issues but has delegated day-to-day decision-making to the Executive Board.

Executive BoardIt consists of 24 Executive Directors, with the Managing Director as Chairman. The Executive Board usually meets three times a week, in full-day sessions, and more often if needed, at the organization’s headquarters in Washington, D.C. 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 on the Board. The other 16 Executive Directors are elected for two-year terms by groups of countries , known as constituencies.

Managing Director

The Executive Board selects the Managing Director, who besides serving as the chairman of the Board, is the chief of the IMF staff and conducts the business of the IMF under direction of the Executive Board. Appointed for a renewable five-year term, the Managing Director is assisted by a First Deputy Managing Director and two other Deputy Managing Directors. IMF employees are international civil servants whose responsibility is to the IMF, not to the national authorities. The organization has about 2,800 employees recruited from 141 countries. About two-third of their professional staff are economists. The IMF maintains offices in Paris and Tokyo for liaison with other international and regional institution, and with organizations of civil society. It also has offices in New York and Geneva, mainly for liaison with other institutions in the UN system.

The IMF supports its membership by providingpolicy advice to governments and central banks based on analysis of economic trends and cross-country experiences; research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets; loans to help countries overcome economic difficulties;concessional loans to help fight poverty in developing countries; andtechnical assistance and training to help countries improve the management of their economies.

Key IMF activities

Financing of the IMF

The IMF’s resources come mainly from the quota (or capita) subscription that countries pay when they join the IMF, or following periodic reviews in which quotas are increased. Countries pay 25% of their quota subscription in Special Drawing Rights (SDR’s) or major currencies, such as U.S. dollars or Japanese yen; the IMF can call the remainder, payable in the member’s own currency, to be made available for lending as needed. Quotas determine not only a country’s subscription payments, but also the amount of financing that it can receive from IMF, and its share in SDR allocations. Quota also are the main determinant of countries’ voting power in the IMF. Quotas are intended broadly to reflect members’ relative size in the world economy: the larger a country’s economy in terms of output, and the larger and more variable its trade, the higher its quota tends to be.

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Example: The United States of America, the world’s largest economy, contributes most to the IMF, 17.5% of the total quotas; palau, the world’s smallest, contributes 0.001% . If necessary, the IMF may borrow to supplement the resources available from the quotas .

Determination of Member Country’s Quota A member quota is broadly determined by its economic position relative to other members . When a country joins the IMF , it is assigned an initial quota in the same range as the quotas of existing members considered by the IMF to be broadly comparable in economic size and characteristics. Quotas are denominated in Special Drawing Rights (SDR’s). Functions of QuotasA member’s quota delineates basic aspect of its financial and organizational relationship with the IMF, including:1. Subscriptions: A member’s quota subscription determines the

maximum amount of financial resources the member is obliged to provide to the IMF.A member must pay its subscription in full upon joining the Fund; 25 % must be paid in SDRs or widely accepted currencies (such as US dollar, the euro, the yen, or the pound sterling), while the rest paid in the member’s own currencies .

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2. Voting power: The quota largely determines a member’s voting power in IMF decisions. Each IMF member has 250 basic votes plus one additional vote for each SDR 100,000 of quota.Example: Accordingly, the United States has 371,743 votes(17.1% of the total) and Palau has 281 votes (0.013% of the total)3. Access to Financing: The amount of financing a member can obtain from the IMF (its access limit) is based on its quota.4. SDR allocation : A member share of the general SDR allocations established in proportion to its quota.

Role of IMF in serving its Members1.Advice in Policies and Global oversight: The IMF’s Articles of Agreement calls for it to oversee the international monetary system, including by exercising firm “surveillance” – that is , overlooking – over its member countries’ exchange rate policies. It conducts three ways:(a)Country surveillance(b)Global surveillance(c) Regional surveillance

2.Lending to Help Countries in Difficulty: The IMF lends foreign exchange to countries with balance of payment problems.

3. Technical Assistance and Training: The IMF shares its expertise with member countries on a regular basis by providing technical assistance and training in a wide range of areas.

4. Reducing Debt Burdens: In 1996, the world bank and the IMF unveiled the HIPC initiative to reduce the debt burdens of the world’s poorest countries.

Criticism of IMF

It is said that IMF policy makers support capitalist dictatorship, and is friendly to American and European corporations. The IMF frequently advocates currency devaluations, criticized by proponents of supply – side economics as inflationary . Secondly, they link higher taxes under “austerity program’s “ with economic contraction.

Relationship Between IMF And India

India & IMF Relations:

India joined International Monetary Fund (IMF) on 27 December, 1945. The relationship between India and the IMF dates back to the time when India needed economic reform packages to strengthen its international reputation and fiscal policy. It is among one of the developing economies that effectively employed the various Fund programmes to fortify its fiscal structure. Through productive engagement with the IMF, India formulated a consistent approach to expand domestic and global assistance for economic reforms. Whenever India underwent balance of payments crises, it sought the help of IMF and in turn the internationally recognized reserve willingly helped India to overcome the difficulties.

The Current Relationship Between IMF and India

The relationship between the IMF and India has grown strong over the years. In fact the country has turned into a creditor to the IMF and has stopped taking loans from it. India and IMF must continue to boost their relationship this way, as it will prove to be advantageous for both.

International Bank For Reconstruction and Development (World Bank)

The world bank is one of the world’s largest sources of finance and knowledge to its member countries to improve the condition of health centers, provide water and electricity , fight disease , and protect the environment. In June 1994, 17 countries met in Atlantic City, USA to prepare the agenda for the Bretton Woods Conference, and 44 countries which signed the final agreement established the bank. India was one of the 17 countries and one of the 44 countries which signed the agreement. It was India which suggested the name “International Bank For Reconstruction and Development” (IBRD) to the drafting committee . The India delegation was led by Sir Jeremy Raisman, Finance Member of the GOVT. of India and included Sir C.D. Deshmukh , Sir Theodore Gregory , Sir R.K. Shanmugan Chetty, Mr. A.D. Shroff and Mr. B.K. Madan. Besides , it also has three affiliates named : 1. The International Finance Corporation ( IFC) . 2. The International Centre For Settlement of Investment Disputes (ICSID). 3. The Multilateral Investment Guarantee Agency (MIGA).

The IBRD is the main lending organization of the World Bank Group and, like its sister institution, the International Monetary Fund (IMF), was born of the Allies' realization during World War II that tremendous difficulties in reconstruction and development would face them in the postwar transition period, necessitating international economic and financial cooperation on a vast scale. The IBRD, frequently called the "World Bank," was conceived in July 1944 at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire, US.

IBRD

IBRD (World Bank)

All five of these institutions together make up the World Bank Group. Total member countries in each institutions : 1. The International Bank for Reconstruction and Development (IBRD) = 184 2. The International Development Association(IDA) = 165 3. The International Finance Corporation (IFC) = 178 4. The Multilateral Investment Guarantee Agency (MIGA) = 167 5. The International Centre For Settlement Of Investment Disputes (ICSID) = 142

COMMON LOGO

UNBALANCED SCALE

Purpose of Organization

Although one of the Bank's early functions was to assist in bringing about a smooth transition from wartime to peaceful economies, economic development soon became the Bank's main object. Today, the goal of the World Bank is to promote economic development that benefits poor people in developing countries. Loans are provided to developing countries to help reduce poverty and to finance investments that contribute to economic growth. Investments include roads, power plants, schools, and irrigation networks, as well as activities like agricultural extension services, training for teachers, and nutrition-improvement programs for children and pregnant women. Some World Bank loans finance changes in the structure of countries' economies to make them more stable, efficient, and market oriented. The World Bank also provides technical assistance to help governments make specific sectors of their economies more efficient and more relevant to national development goals

Organization of World Bank (Structure)Board of Governors :All powers of the Bank are vested in its Board of Governors, composed of one governor and one alternate from each member state. Ministers of Finance, central bank presidents, or persons of comparable status usually represent member states on the Bank's Board of Governors. The board meets annually. The Bank is organized somewhat like a corporation. According to an agreed-upon formula, member countries subscribe to shares of the Bank's capital stock. Each governor is entitled to cast 250 votes plus 1 vote for each share of capital stock subscribed by his country. Executive Directors The Bank's Board of Governors has delegated most of its authority to 24 executive directors. According to the Articles of Agreement, each of the five largest shareholders—the United States, Japan, Germany, France and the United Kingdom—appoints one executive director. The other countries are grouped in 19 constituencies, each represented by an executive director who is elected by a group of countries. The number of countries each of these 19 directors represents varies widely. For example, the executive directors for China, the Russian Federation, and Saudi Arabia represent one country each, while one director speaks for 24 Francophone African countries and another director represents 22 mainly English-speaking African countries.

Cont…….President and Staff The president of the Bank, elected by the executive directors, is also their chairman, although he is not entitled to a vote, except in case of an equal division. Subject to their general direction, the president is responsible for the conduct of the ordinary business of the Bank. Action on Bank loans is initiated by the president and the staff of the Bank. The amount, terms, and conditions of a loan are recommended by the president to the executive directors, and the loan is made if his recommendation is approved by them. According to an informal agreement, the president of the Bank is a US national, and the managing director of the IMF is a European. The president's initial term is for five years; a second term can be five years or less. Past presidents of the Bank include Robert S. McNamara (1968–81), A. W. Clausen (1981–86), Barber B. Conable (1986–91), and Lewis T. Preston (1991–95). James D. Wolfensohn became president on 1 June 1995. On September 27, 1999, Mr. Wolfensohn was unanimously reappointed by the Bank's Board of Executive Directors to a second five-year term as president beginning June 1, 2000. He is the third president in World Bank history to serve a second term. He heads a staff of more than 8,000 persons from over 130 countries. The IBRD's headquarters are at 1818 H Street, N.W., Washington, DC 20433 .

Basics Facts about World BankEstablished on: July, 1944,Bretton Woods, New HampshireHeadquarters: Washington DCPresident : Paul WolfowitzMembership: 184Affiliates: IDA, IFC, MIGA, ICSID

Budget :A total administrative budget of US $1,924 million was approved for fiscal year 2002 .

Activities

A. FUND GENERATION: IBRD finance by selling AAA-rated bonds

in the world’s financial markets . While IBRD earns a small margin on this lending, the greater proportion of its income comes from lending out its own capital. The capital consists of reserves built up over the years and money paid in the bank’s 184 member country shareholder.

Additional funds are regenerated through repayments of loan principal on 35- to- 45 year, no interest loans, which are then available for relending. IDA accounts for nearly 40 %of our lending.

B. LOANS: IBRD offers two basic types of loans and credits.Investment loans are made to countries for goods, works and services

in support of economic and social development projects in a broad range of economic and social sectors.

Development policy loans provide quick-disbursing financing to support countries’ policy and institutional reforms.

The Bank may guarantee, participate in, or make loans to any member or any political sub-division thereof and any business, industrial, and agricultural enterprise in the territories of a member.

C. GRANTS: Grants are given for development projects by encouraging innovation, co-operation between organization and local stakeholders’ participation in projects. In recent years, grants have been used for numerous purposes . Some of them are:1.Relieve the debt burden of heavily indebted poor countries.2. Improve sanitation and water supplies.3. Support civil society organization.D. ANALYTIC AND ADVISORY SERVICES: IBRD also provides analysis, advice and information to member countries. IBRD has a big knowledge bank which contains wealth of contacts, knowledge , information and experience that it has acquired over the years, country by country, and project by project. Following are some ways through which it provides analyses, advice and knowledge to members:1. Sector Reports2. Poverty Assessment3. Knowledge Sharing4. Public Expenditure Review

International Development Association (IDA)The IDA is the soft loan section of the World Bank established in 1960. Its loans are different from World Bank loans in several manners. It provides concessional loans which have maturity of up to 40 years compared with 15 to 25 years maturities of IBRD. The IDA can also grant grace period of 10 years before repayment of principal or interest begins, whereas the grace period of World Bank usually does not exceed 5 years.

International Finance Corporation (IFC)

IFC was established in July 1956 to help strengthen the private sector in developing countries, through the provision of long term loans, equity investment, guarantees, risk management and quasi- equity instruments such as subordinated loans, preferred stock and income notes, through advice and technical assistance to business and government.

Multilateral Investment Guarantee Agency(MIGA)

It was established in 1988, with an objective to create an attractive investment climate and to encourage equity investment and other direct investment flows to developing countries . To promote FDI, MIGA provides three services:1. Political Risk Insurance: To promote foreign investment in

developing countries.2. Technical Assistance: To promote and create conducive climate for

foreign investment and to established new investment opportunity in developing countries.

3. Dispute Mediation: It provides dispute mediation services to remove obstacles and to unlock bottlenecks in the way of foreign investment.

International Centre Of Settlement of Investment Disputes(ICSID)It comes into existence in 1996 with an objective to work as a facilitator in settlement of investment disputes between government and foreign investors. ICSID has an Administrative Council and Secretariat. The President of the World Bank is also the chairpersons of Administrative Council. All the members of ICSID are also the member of World Bank.

Asian Development Banks(ADB)The ADBs equivalent of the World Bank’s concessionary – finance arm IDA is called the Asian Development Fund(ADF) and the Bank is known as Asian Development Bank. ADBs development work is aimed at improving the welfare of the people of Asia and the Pacific, especially of the 690 million poor living on less than a dollar a day.ADB has the following objectives:1. Economic Growth2. Human Development3. Gender and Development4. Environment Protection and so on.

The South Asian Association for Regional Cooperation(SAARC)The South Asian Association for Regional Cooperation(SAARC) was established on December 8, 1985. It involves seven states of the Indian sub-continent- Bangladesh ,Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.AREAS of Cooperation: SAARC seeks cooperation in the following thrust areas:1.Energy2. Tourism3.Transport4. Women, youth and Children and so on.

The Association of Southeast Asian Nations (ASEAN)

The Association of Southeast Asian Nations (ASEAN) is a primary multinational trade group of Asia. The goals of this group are economic integration and cooperation through complementary industry programmes. It was established on August 8,1967 in Bangkok by the five original member countries, namely, Indonesia, Malaysia, Philippines , Singapore and Thailand.

South Asian Preferential Arrangement(SAPTA)

South Asian Preferential Arrangement(SAPTA) was signed by SAARC members on April 11, 1993 and came into force in December 1995. The objective of SAPTA is the creation of trade among the SAARC countries through the reduction of tariffs and on preferential basis. Basic principles underlying SAPTA are:1. recognition of the special needs of the Least Developed States

and agreement on concrete preferential measures in the favour ;and

2. Inclusion of all products, manufactures and commodities in their raw, semi- processed and processed forms.