PROJECT ON The IMF: A Birds Eye View of its Role

and Operations
Master of Commerce
Semester -I
(2014 2015)
Submitted
In Partial Fulfillment of the requirements
For the award of degree of
M.Com
By

Kothapalli Balakrishna V.
Seat No. _79_
Tolani College of Commerce
Sher E Punjab society,
Andheri (East),
Mumbai 400 093.

PROJECT ON The IMF: A Birds Eye View of its Role

and Operations
Master of Commerce
Semester -I
(2014 2015)
Submitted
In Partial Fulfillment of the requirements
For the award of degree of

M.Com
By

Kothapalli Balakrishna V.
Seat No. _79_

Tolani College of Commerce

Sher E Punjab society,
Andheri (East),
Mumbai 400 093.
CERTIFICATE
This is to certify that Kothapalli Balakrishna V. of M.Com.
Semester I (2014 2015) has successfully completed the project on
The IMF: A Birds Eye View of its Role and Operations under
the guidance of Prof. Vasudev Iyer.
Project Guide: -

_____________

Course Co-Ordinator: -

_____________

External Examiner: -

_____________

Principal: -

_____________

DECLARATION
I, Kothapalli Balakrishna V. the student of M.Com. Semester I
(2014 2015) hereby declare that I have completed the project on
The IMF: A Birds Eye View of its Role and Operations in the
course International Economics.
The information submitted is true and original to the best of
my knowledge. References have been cited wherever necessary.
Date: - _________
Place: - Mumbai

Signature of Student
(Kothapalli Balakrishna V.)

ACKNOWLEDGEMENT

Preparing the project on The IMF: A Birds Eye View of its Role and
Operations has given me extensive practical knowledge related to the
course.
I would like to first thank our Principal Dr. A. A. Rashid, for his valuable
support in preparing this project.
I express my deep sense of Gratitude to the Course Co-ordinator,
Ms.Sadhana Venkatesh for the valuable guidance and support during my
project work.
I am thankful to my guide Prof. Vasudev Iyer for providing me the
guidance throughout the course of this project. I am also thankful to him/her
for patiently and critically evaluating the content of this project.
I would like to take this opportunity to express my gratitude to all the staff of
the Library and the Computer Lab for their support.

Meaning of IMF:
The International Monetary Fund (IMF) is the central institution embodying the
international monetary system and promotes balanced expansion of world trade, reduced trade
restrictions, stable exchange rates, minimal trade imbalances, avoidance of currency
devaluations, and the correction of balance-of-payment problems. The IMF's goal is to prevent
and remedy international financial crises by encouraging countries to maintain sound economic
policies. Because of its size, the IMF is also a forum for discussion of global economic policies.
The IMF, also known as the Fund, was conceived at a United Nations conference convened in
Bretton Woods, New Hampshire, United States, in July 1944. The 44 governments represented at
that conference sought to build a framework for economic cooperation that would avoid a
repetition of the vicious circle of competitive devaluations that had contributed to the Great
Depression of the 1930s.

About the IMF

The International Monetary Fund (IMF) is an organization of 188 countries, working to foster
global monetary cooperation, secure financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and reduce poverty around the world.

Overview
The IMF works to foster global growth and economic stability. It provides policy advice and
financing to members in economic difficulties and also works with developing nations to help
them achieve macroeconomic stability and reduce poverty.

What we do
With its near global membership of 188 countries, the IMF is uniquely placed to help member
governments take advantage of the opportunities and manage the challenges posed by Globalization
and economic development more generally. The IMF tracks global economic trends and performance,
alerts its member countries when it sees problems on the horizon, provides a forum for policy
dialogue, and passes on knowhow to governments on how to tackle economic difficulties.
The IMF provides policy advice and financing to members in economic difficulties and also
works with developing nations to help them achieve macroeconomic stability and reduce poverty.

Marked by massive movements of capital and abrupt shifts in comparative advantage,

globalization affects countries' policy choices in many areas, including labor, trade, and tax
policies. Helping a country benefit from globalization while avoiding potential downsides is an
important task for the IMF. The global economic crisis has highlighted just how inter-connected
countries have become in todays world economy.

Key IMF activities

The IMF supports its membership by providing policy 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, and
Technical assistance and training to help countries improve the management of their
economies.

Original Aims
The IMF was founded more than 60 years ago toward the end of World War II (see History). The
founders aimed to build a framework for economic cooperation that would avoid a repetition of
the disastrous economic policies that had contributed to the Great Depression of the 1930s and
the global conflict that followed.
Since then the world has changed dramatically, bringing extensive prosperity and lifting
millions out of poverty, especially in Asia. In many ways the IMF's main purpose to provide the
global public good of financial stability is the same today as it was when the organization was
established. More specifically, the IMF continues to;
Provide a forum for cooperation on international monetary problems,
Facilitate the growth of international trade, thus promoting job creation, economic growth,
and poverty reduction,
Promote exchange rate stability and an open system of international payments; and
Lend countries foreign exchange when needed, on a temporary basis and under adequate
Safeguards, to help them address balance of payments problems.

An adapting IMF
The IMF has evolved along with the global economy throughout its 65year history, allowing the
organization to retain its central role within the international financial architecture
As the world economy struggles to restore growth and jobs after the worst crisis since the
Great Depression, the IMF has emerged as a very different institution. During the crisis, it
mobilized on many fronts to support its member countries. It increased its lending, used its cross
country experience to advise on policy solutions, supported global policy coordination, and

reformed the way it makes decisions. The result is an institution that is more in tune with the
needs of its 188 member countries.
Stepping up crisis lending: The IMF responded quickly to the global economic crisis,
with lending commitments reaching a record level of more than US$250 billion in 2010.
This figure includes a sharp increase in concessional lending (thats to say, subsidized
lending at rates below those being charged by the market) to the worlds poorest nations.
Greater lending flexibility: The IMF has overhauled its lending framework to make it
better suited to countries individual needs. It is also working with other regional
institutions to create a broader financial safety net, which could help prevent new crises.
Providing analysis and advice: The IMFs monitoring, forecasts, and policy advice,
informed by a global perspective and by experience from previous crises, have been in
high demand and have been used by the G20.
Drawing lessons from the crisis: The IMF is contributing to the ongoing effort to draw
lessons from the crisis for policy, regulation, and reform of the global financial
architecture.
Historic reform of governance: The IMFs member countries also agreed to a
significant increase in the voice of dynamic emerging and developing economies in the
decision making of the institution, while preserving the voice of the low-income
members.

Membership

The IMF currently has a near global membership of 188 countries. To become a member, a
country must apply and then be accepted by a majority of the existing members. In April 2012,
Republic of South Sudan joined the IMF, becoming the institution's 188th member.
Upon joining, each member country of the IMF is assigned a quota, based broadly on its
relative size in the world economy. The IMF's membership agreed in November 2010 on a major
overhaul of its quota system to reflect the changing global economic realities, especially the
increased weight of major emerging markets in the global economy.
A member country's quota defines its financial and organizational relationship with the IMF,
including:

Subscriptions:
A member country's quota subscription determines the maximum amount of financial resources
the country is obliged to provide to the IMF. A country must pay its subscription in full upon
joining the IMF: up to 25 percent must be paid in the IMF's own currency, called Special
Drawing Rights (SDRs) or widely accepted currencies (such as the dollar, the euro, the yen, or
pound sterling), while the rest is paid in the member's own currency.

Voting power:
The quota largely determines a member's voting power in IMF decisions. Each IMF member's
votes are comprised of basic votes plus one additional vote for each SDR 100,000 of quota. The
number of basic votes attributed to each member is calculated as 5.502 percent of total votes.
Accordingly, the United States has 421,965 votes (16.76 percent of the total), and Tuvalu has 759
votes (0.03 percent of the total).

Access to financing:

The amount of financing a member country can obtain from the IMF is based on its quota. For
instance, under Stand By and Extended Arrangements, which are types of loans, a member
country can borrow up to 200 percent of its quota annually and 600 percent cumulatively.

SDR allocations:
SDRs are used as an international reserve asset. A member's share of general SDR allocations is
established in proportion to its quota. The most recent general allocation of SDRs took place in
2009.

Evolution of IMF:
Cooperation and reconstruction (1944 - 71) :
During the Great Depression of the 1930s, countries attempted to shore up their failing
economies by sharply raising barriers to foreign trade, devaluing their currencies to compete
against each other for export markets, and curtailing their citizens' freedom to hold foreign
exchange. These attempts proved to be self defeating. World trade declined sharply (see chart
below), and employment and living standards plummeted in many countries.
This breakdown in international monetary cooperation led the IMF's founders to plan an
institution charged with overseeing the international monetary system-the system of exchange

rates and international payments that enables countries and their citizens to buy goods and
services from each other. The new global entity would ensure exchange rate stability and
encourage its member countries to eliminate exchange restrictions that hindered trade.

The Bretton Woods agreement

The IMF was conc e ive d in July 1944, when representatives of 45 countries meeting in the
town of Bretton Woods, New Hampshire, in the northeastern United States, agreed on a
framework for international economic cooperation, to be established after the Second World
War. They believed that such a framework was necessary to avoid a repetition of the disastrous
economic policies that had contributed to the Great Depression.
The IMF came into formal existence in December 1945, when its first 29 member countries
signed its Artic le s of Agree me nt. It began operations on March 1, 1947. Later that year, France
became the first country to borrow from the IMF.

The IMF's membership began to expand in the late 1950s and during the 1960s as many
African countries became independent and applied for membership. But the Cold War limited
the Fund's membership, with most countries in the Soviet sphere of influence not joining.
Par value system
The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates
(the value of their currencies in terms of the U.S. dollar and, in the case of the United States,
the value of the dollar in terms of gold) pegged at rates that could be adjusted only to correct a
"fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement.
This par value system also known as the Bretton Woods systemprevailed until 1971, when
the U.S. government suspended the convertibility of the dollar (and dollar reserves held by
other governments) into gold.

The end of the Bretton Woods System (1972 - 81) :

By the early 1960s, the U.S. dollar's fixed value against gold, under the Bretton Woods system
of fixed exchange rates, was seen as overvalued. A sizable increase in domestic spending on
President Lyndon Johnson's Great Society programs and a rise in military spending caused by the
Vietnam War gradually worsened the overvaluation of the dollar.

End of Bretton Woods system

The system dissolved between 1968 and 1973. In August 1971, U.S. President Richard Nixon
announced the "temporary" suspension of the dollar's convertibility into gold. While the dollar
had struggled throughout most of the 1960s within the parity established at Bretton Woods, this
crisis marked the breakdown of the system. An attempt to revive the fixed exchange rates failed,
and by March 1973 the major currencies began to float against each other.

Since the collapse of the Bretton Woods system, IMF members have been free to choose
any form of exchange arrangement they wish (except pegging their currency to gold): allowing
the currency to float freely, pegging it to another currency or a basket of currencies, adopting the
currency of another country, participating in a currency bloc, or forming part of a monetary
union.
Oil shocks
Many feared that the collapse of the Bretton Woods system would bring the period of rapid
growth to an end. In fact, the transition to floating exchange rates was relatively smooth, and it
was certainly timely: flexible exchange rates made it easier for economies to adjust to more
expensive oil, when the price suddenly started going up in October 1973. Floating rates have
facilitated adjustments to external shocks ever since.
The IMF responded to the challenges created by the oil price shocks of the 1970s by adapting its
lending instruments. To help oil importers deal with anticipated current account deficits and
inflation in the face of higher oil prices, it set up the first of two oil facilities.
Helping poor countries
From the mid1970s, the IMF sought to respond to the balance of payments difficulties
confronting many of the world's poorest countries by providing concessional financing through
what was known as the Trust Fund. In March 1986, the IMF created a new concessional loan
program called the Structural Adjustment Facility. The SAF was succeeded by the Enhanced
Structural Adjustment Facility in December 1987.

Debt and painful reforms (1982 - 89) :

The oil shocks of the 1970s, which forced many oil importing countries to borrow from
commercial banks, and the interest rate increases in industrial countries trying to control inflation
led to an international debt crisis.

During the 1970s, Western commercial banks lent billions of "recycled" petrodollars,
getting deposits from oil exporters and lending those resources to oil importing and developing
countries, usually at variable, or floating, interest rates. So when interest rates began to soar in
1979, the floating rates on developing countries' loans also shot up. Higher interest payments are
estimated to have cost the non oil producing developing countries at least $22 billion during
197881. At the same time, the price of commodities from developing countries slumped
because of the recession brought about by monetary policies. Many times, the response by
developing countries to those shocks included expansionary fiscal policies and overvalued
exchange rates, sustained by further massive borrowings.
When a crisis broke out in Mexico in 1982, the IMF coordinated the global response, even
engaging the commercial banks. It realized that nobody would benefit if country after country
failed to repay its debts.
The IMF's initiatives calmed the initial panic and defused its explosive potential. But a long
road of painful reform in the debtor countries, and additional cooperative global measures, would
be necessary to eliminate the problem.

Societal Change for Eastern Europe (1990 - 2004) :

The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union in 1991 enabled the
IMF to become a (nearly) universal institution. In three years, membership increased from 152
countries to 172, the most rapid increase since the influx of African members in the 1960s.
In order to fulfill its new responsibilities, the IMF's staff expanded by nearly 30 percent in six
years. The Executive Board increased from 22 seats to 24 to accommodate Directors from Russia
and Switzerland, and some existing Directors saw their constituencies expand by several
countries.
The IMF played a central role in helping the countries of the former Soviet bloc transition from
central planning to market driven economies. This kind of economic transformation had never
before been attempted, and sometimes the process was less than smooth. For most of the 1990s,

these countries worked closely with the IMF, benefiting from its policy advice, technical
assistance, and financial support.
By the end of the decade, most economies in transition had successfully graduated to market
economy status after several years of intense reforms, with many joining the European Union in
2004.
Asian Financial Crisis
In 1997, a wave of financial crises swept over East Asia, from Thailand to Indonesia to Korea
and beyond. Almost every affected country asked the IMF for both financial assistance and for
help in reforming economic policies. Conflicts arose on how best to cope with the crisis, and the
IMF came under criticism that was more intense and widespread than at any other time in its
history.
From this experience, the IMF drew several lessons that would alter its responses to future
events. First, it realized that it would have to pay much more attention to weaknesses in
countries banking sectors and to the effects of those weaknesses on macroeconomic stability. In
1999, the IMF together with the World Bank-launched the Financial Sector Assessment
Program and began conducting national assessments on a voluntary basis. Second, the Fund
realized that the institutional prerequisites for successful liberalization of international capital
flows were more daunting than it had previously thought. Along with the economics profession
generally, the IMF dampened its enthusiasm for capital account liberalization. Third, the severity
of the contraction in economic activity that accompanied the Asian crisis necessitated a
reevaluation of how fiscal policy should be adjusted when a crisis was precipitated by a sudden
stop in financial inflows.

Debt relief for poor countries

During the 1990s, the IMF worked closely with the World Bank to alleviate the debt burdens of
poor countries. The Initiative for Heavily Indebted Poor Countries was launched in 1996, with

the aim of ensuring that no poor country faces a debt burden it cannot manage. In 2005, to help
accelerate progress toward the United Nations Millennium Development Goals (MDGs), the
HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI).

Globalization and the Crisis (2005 present) :

The IMF has been on the front lines of lending to countries to help boost the global economy as
it suffers from a deep crisis not seen since the Great Depression.
For most of the first decade of the 21st century, international capital flows fueled a global
expansion that enabled many countries to repay money they had borrowed from the IMF and
other official creditors and to accumulate foreign exchange reserves.
The global economic crisis that began with the collapse of mortgage lending in the United States
in 2007, and spread around the world in 2008 was preceded by large imbalances in global capital
flows.
Global capital flows fluctuated between 2 and 6 percent of world GDP during 198095, but since
then they have risen to 15 percent of GDP. In 2006, they totaled $7.2 trillion- more than a tripling
since 1995. The most rapid increase has been experienced by advanced economies, but emerging
markets and developing countries have also become more financially integrated.
The founders of the Bretton Woods system had taken it for granted that private capital flows
would never again resume the prominent role they had in the nineteenth and early twentieth
centuries, and the IMF had traditionally lent to members facing current account difficulties.
The latest global crisis uncovered a fragility in the advanced financial markets that soon led to
the worst global downturn since the Great Depression. Suddenly, the IMF was inundated with
requests for standby arrangements and other forms of financial and policy support.

The international community recognized that the IMFs financial resources were as important as
ever and were likely to be stretched thin before the crisis was over. With broad support from

creditor countries, the Funds lending capacity was tripled to around $750 billion. To use those
funds effectively, the IMF overhauled its lending policies, including by creating a flexible credit
line for countries with strong economic fundamentals and a track record of successful policy
implementation. Other reforms, including ones tailored to help low income countries, enabled
the IMF to disburse very large sums quickly, based on the needs of borrowing countries and not
tightly constrained by quotas, as in the past.

For more on the ideas that have shaped the IMF from its inception until the late 1990s, take a
look at James Boughton's "The IMF and the Force of History: Ten Events and Ten Ideas that
Have Shaped the Institution."

FUNCTIONS OF THE IMF

The IMF performs the following functions :
1. The IMF operates in such a way as to fulfill its objectives as laid down in the Bretton
Woods Articles of Agreements. It is the Funds duty to see that these provisions are
observed by member countries. Some of the provisions of the original Articles such as
relating to exchange rates have become obsolete due to international monetary events.
Accordingly the Fund has amended its Articles of Agreement to make appropriate
adjustments.
2. The fund gives short-term loans to its members so that they may correct their temporary
balance of payments disequilibrium.

3. The Fund is regarded as the guardian of good conduct in the sphere of balance of
payments. It aim at reducing tariffs and other trade restriction by the member countries.
Articles VII of the Charter provides that no member shall, without the approval of the
fund, impose restrictions on the making of payment or engage in discriminatory currency
arrangements or multiple currency practices. It is the functions of the Fund to have a
surveillance of the policies being adopted by the member countries.
4. The fund also renders technical advice to its members on monetary and fiscal policies.
5. It conduct research studies and publishes them in IMF staff papers, Finance and
development, etc.
6. It provides technical experts to member countries having BOP difficulties and other
problems.
7. It also conduct short training courses on fiscal, monetary and balance of payments for
personnel for member nations through its Central Banking Service development, the
Fiscal Affairs Department, the Bureau of Statistics and the IMF Institute.
Thus the Fund Performs financial, supervisory and controlling functions.