Explain the objectives and functions of International Monetary Fund (IMF).

Objectives of International Monetary Fund (IMF).

Objectives of the IMF are stated in Article 1 of the fund agreement as follows:

To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

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

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

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.

To give confidence to members by making the Fund’s resources available to them under adequate safeguards, thus providing them with opportunity to correct maladjustment’s in their balance of payments without resorting to measures destructive of national or international prosperity.

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

Functions of of International Monetary Fund (IMF).

To achieve its objectives IMF performs a number of functions. These functions may be grouped into following three categories:

  • Regulatory Functions.
  • Consultative Functions.
  • Financial Functions.

Regulatory Functions.

IMF formulates and administers a code of conduct regarding exchange rate policies and restrictions on payments for current account restrictions. IMF acts as a guardian of code setup by its Articles.

Consultative Functions.

IMF provides a center of international cooperation and a source of counsel and technical assistance to its members. For this, IMF collects and maintains upto date information on the economic conditions and policies of the member countries.

IMF provides a forum in which member countries can consult with one-another on international monetary matters. IMF has directed a major part of its research to the balance of payments. It provides training for officials dealing with the compilation of statistics and the formulations and execution of policies related to balance of payments. IMF also provides technical assistance to member countries.

Financial’ Functions.

The primary function of IMF is to provide financial assistance to its members to enable them to meet balance of payments deficits. IMF maintains a large pool of financial resources that it makes available to members countries. IMF provides financial assistance under following three forms:

  1. Ordinary Drawing Rights.
  2. Special Drawing Rights.
  3. Special or Temporary Facilities.

Ordinary Drawing Rights:

Access to the IMF’s general resources is determined primarily by the member’s balance of payments needs. Ordinary drawing rights of the member countries consist of two elements.

  • Gold or Reserve Tranche.
  • Credit Tranche.

Reserve Tranche:  A member has a reserve tranche position in the IMF to the extent that its quota exceeds the IMF’s holdings of its currency in the General Resources Account, excluding holdings arising out of purchases under all policies on the use of the IMF’s general resources.

A member may purchase up to the full amount of its reserve tranche at any time, subject only to the requirement of balance of payments need. A reserve tranche purchase does to constitute a use of IMF credit and is not subject to charges or to an expectation or obligation to repurchase.

Credit Tranche: The credit tranche policy is the IMF’s basic policy on the use of its general resources. Credit is made available in four tranches, each equivalent to 25 per cent of a country’s quota. Members may request standby arrangements in excess of this limit in the context of the enlarged access policy.

A first credit tranche purchase raises the IMF’s holdings of the purchasing member’s currency in the credit tranches to no more than 25 per cent of quota. Generally, a member may request use of the IMF’s resources in the first credit tranche when confronted with relatively minor balance of payments difficulties, the financial assistance is made available if the member demonstrates that it is making reasonable efforts to overcome its difficulties.

A member may also request the use of the first credit tranche as part of a standby arrangement.

Subsequent purchases are made in what are collectively known as the upper credit tranches. A member may use the IMF’s resources in the upper credit tranches if it adopts policies that provide appropriate grounds for expecting that the member’s payments difficulties will be resolved within a reasonable period.

Special Drawing Rights {SDRs):

Special drawing right is a unit of account issued to countries by the IMF to expand their official reserves bases. IMF provides balance of payments assistance by selling the members in exchange for their own currencies, the currencies of other members known as SDRs. SDRs can be used for acquiring currencies of other countries.

A participant has to obtain the required currency by transferring SDRs to the country willing to sell the foreign exchange in question. The users of SDRs have to deal with other participants and the role of IMF is limited to just as an intermediary. Whether transfers are arranged directly by the concerned participants or indirectly through the fund, the SDR holdings of the users decline and those of recipients increase by a corresponding amount.

Special Facilities:

Following are the special facilities provided by the IMF to deal with the development difficulties arising from balance of payments problems:

Compensatory and Contingency Financing Facility: The first special facility to be provided by IMF was the Compensatory Financial Facility renamed as Compensatory and Contingency Financing Facility (CCFF) in 1988. It was established to compensate the developing countries for shortfall of export earnings below a five-year trend centered on the middle year.

In 1988, after the change in the name to CCFF, the facility wa.s extended to cover earnings and payments brought about by other factors such as change in import prices other than cereals, interest rate changes etc. as well as tourist receipt and migrants. remittances.

Buffer Stock Financing Facility: This facility was introduced in June, 1969 with the purpose of assisting the developing countries in financing their contribution to. various international buffer stock schemes. Repurchase are made in 3¼ — 5 years.

Extended Fund Facility: This facility was established in 1974 to allow developing countries to borrow beyond quota over longer periods that are allowed under ordinary drawing rights. This is a medium-term programme aimed at overcoming structural balance of payments maladjustment’s. EFF represents an important shift in the stand of IMF as it acknowledges that, at times, rectifying the balance of payments problem could be a difficult job that cannot be accomplished in a short period.

The programme generally lasts for three years with repayment provisions extending over a range of four to ten years. Drawings under the EFF may be up to 140 per cent of the quota, but resources are provided over a three year period in the form of extended arrangements that include performance criteria and drawings in installments.

Structural Adjustment Facility: This facility was setup in 1986. Under SAF, resources are provided on concessional terms to low income developing member country facing protracted balance of payments problems, in support of medium-term macro-economic and structural adjustment programs to foster economic growth and strengthen the balance of payments.

The member country seeking SAF is required to prepare a three-year adjustment programme with assistance of the Fund and the World Bank, set out in a policy framework paper (PFP). Detailed annual programs are formulated prior to disbursement of annual loans and include quarterly benchmarks used to assess performance. Repayments are to be made in 5%-10 years.

Enhanced Structural Adjustment Facility: This facility has objectives, eligibility, and basic programs features parallel to those of the SAF. The differences relate to provisions for access, monitoring and funding. Under ESAF, a policy framework paper (PFP) and a detailed annual programs ate prepared every year.

Arrangements include quarterly benchmarks, semi-annual performance criteria and in most cases, a mid-year review. Adjustment measures are expected to be particularly strong, aiming to foster growth and to achieve a substantial strengthening of the balance of payments position. Loans are disbursed semi-annually, and repayments are made in 5½ -10 years.

Supplementary Financing Facility: This facility was established in 1977 to act as temporary measure to assist countries facing large external imbalances in relation to their quotas, pending the 7th General Review of Quotas, which ultimately provided for a 50 per cent increase. To provide resources to members needing this facility, the Fund borrowed resources from members in strong payments positions, amounting to 8 billion SDRs from 13 countries.

Enlarged Access Policy: EAP was adopted in March, 1981. Under the policy, the Fund agreed to provide assistance on a scale similar to that under the SFF after all supplementary financing had been committed and additional borrowing arrangements had been considered. The limit on borrowing is now 270 or 330 per cent of quota over a three-year period. Repurchases are made in 3½ -7 years.

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