Chapter 1

Introduction
1.1 Background of the study
The international financial institutions make up institutional arrangements for international business. During the end of the World War II, many countries started mulling the plight of the future world. There were valid concerns about reconstruction of devasted areas, and re-building and developing the war-hit economies. Remarkable decisions were made in Bretton Woods conference in 1944 to boost international trade and economic growth, and to achieve monetary stability in the global economy. Along with IMF (International Monetary Fund), IBRD (World Bank) and ITO (International Trade Organization) were the outcomes of the historical Bretton Woods Conference. However, in this report we focus on IMF as a financial institution and its activities and contribution in Nepalese economy.

1.2 Objectives of the study

To know about the IMFs role in Strengthening the International Financial System To know the role of IMF in resolving economic crisis. To find out the impact of IMF in monetary policy. To know the IMFs role to meet the changing needs of its member countries in an evolving world economy. To find out the impact of IMF in Nepalese economy. To know about the IMF lending in Nepal.

1.3 Importance of the study

The following are the points, which throw light on the importance of this fieldwork: It serves as the partial fulfillment of requirement of B.B.A. program. It has helped us to boost up our confidence. It has helped us to gain an experience of working in group. It might be useful for the other researchers, who can take it to be their guideline. It might be useful for the library, so that any student wanting to prepare a report on such field can have some ideas and basic guidelines.

1.4 Limitations of the study

This study has the following limitations: We had to collect the information in very short period of time so all the required information couldnt be collected adequately. All expenses related to this project are managed by students themselves. We could not find information as the source of relevant information and data was only internet and book. The help and cooperation provided by the personal administration of the department was not sufficient. The researcher couldnt go beyond the responses provided.

Chapter 2

An introduction to IMF
The IMF is the world's central organization for international monetary cooperation. It is an organization in which almost all countries in the world work together to promote the common good. The IMF's primary purpose is to ensure the stability of the international monetary systemthe system of exchange rates and international payments that enables countries (and their citizens) to buy goods and services from each other. This is essential for sustainable economic growth and rising living standards. The IMF is an international organization of 185 member countries. It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment. Since the IMF was established its purposes have remained unchanged but its operations which involve surveillance, financial assistance, and technical assistancehave developed to meet the changing needs of its member countries in an evolving world economy.

2.1 The origins of IMF

The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton Woods, New Hampshire, in the northeastern United States, agreed on a framework for international economic cooperation. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s. During that decade, attempts by countries to shore up their failing economiesby limiting imports, devaluing their currencies to compete against each other for export markets, and curtailing their citizens' freedom to buy goods abroad and to hold foreign exchange proved to be self-defeating. World trade declined sharply, and employment and living standards plummeted in many countries. Seeking to restore order to international monetary relations, the IMF's founders charged the new institution with overseeing the international monetary system to ensure exchange rate stability and encouraging member countries to eliminate exchange restrictions that hindered trade. The IMF came into existence in December 1945, when its first 29 member countries signed its Articles of Agreement. Since then, the IMF has adapted itself as often as needed to keep up with the expansion of its membership185 countries as of June 2006and changes in the world economy. The IMF's membership jumped sharply in the 1960s, when a large number of former colonial territories joined after gaining their independence, and again in the 1990s, when the IMF welcomed as members the countries of the former Soviet bloc upon the latter's dissolution. The needs of the new developing and transition country members were different from those of the IMF's founding members, calling for the IMF to adapt its instruments. Other major challenges to which it has adapted include the end of the par value

system and emergence of generalized floating exchange rates among the major currencies following the United States' abandonment in 1971 of the convertibility of U.S. dollars to gold; the oil price shocks of the 1970s; the Latin American debt crisis of the 1980s; the crises in emerging financial markets, in Mexico and Asia, in the 1990s; and the Argentine debt default of 2001. Despite the crises and challenges of the postwar years, real incomes have grown at an unprecedented rate worldwide, thanks in part to better economic policies that have spurred the growth of international tradewhich has increased from about 8 percent of world GDP in 1948 to about 25 percent todayand smoothed boom-and bust cycles. But the benefits have not flowed equally to all countries or to all individuals within countries. Poverty has declined dramatically in many countries but remains entrenched in others, especially in Africa. The IMF works both independently and in collaboration with the World Bank to help its poorest member countries build the institutions and develop the policies they need to achieve sustainable economic growth and raise living standards. The IMF has continued to develop new initiatives and to reform its policies and operations to help member countries meet new challenges and to enable them to benefit from globalization and to manage and mitigate the risks associated with it. Cross-border financial flows have increased sharply in recent decades, deepening the economic integration and interdependence of countries, which has been beneficial overall although it has increased the risk of financial crisis. The emerging market countriescountries whose financial markets are in an early stage of development and international integrationof Asia and Latin America are particularly vulnerable to volatile capital flows. And crises in emerging market countries can spill over to other countries, even the richest. Particularly since the mid-1990s, the IMF has made major efforts to help countries prevent crises and to manage and resolve those that occur. Globalization, poverty, the inevitability of occasional crises in a dynamic world economy and, no doubt, future problems impossible to foreseemake it likely that the IMF will continue to play an important role in helping countries work together for their mutual benefit for many years to come.

2.2 Purposes of IMF

To promote international cooperation by providing the machinery for consultation and collaboration on international monetary issues To facilitate balanced growth of international trade and its expansion so as to contribute to the promotion and maintenance of high levels of employment and real income and to the development for the productive resources of all members as primary objectives of economic policy. To promote exchange stability and orderly exchange arrangements among its members. To foster a multilateral system of payments in respect of current transactions between members and seek elimination of foreign exchange restrictions which hamper the growth of world trade. To provide financial resources temporarily to correct maladjustment in BOPs. To shorten the duration and magnitude of payment imbalances.

2.3 IMFs Organization and Operation

Board of Governors

Executive Board

Managing Director

Board of Governors
The IMF is governed by, and is accountable to, its member countries through its Board of Governors. There is one Governor from each member country, typically the finance minister or central bank governor. The Governors usually meet once a year, in September or October, at the Annual Meetings of the IMF and the World Bank. Key policy issues related to the international monetary system are considered twice a year by a committee of Governors called the International Monetary and Financial Committee, or the IMFC. A joint committee of the Boards of Governors of the IMF and the World Bankthe Development Committeeadvises and reports to the Governors on development policy and other matters of concern to developing countries.

Executive Board
The day-to-day work of the IMF is carried out by the Executive Board, which receives its powers from the Board of Governors, and the IMF's internationally recruited staff. The Executive Board usually meets three times a week, in full-day sessions, and more often if needed, at the IMF's headquarters in Washington, D.C. Of the 24 Executive Directors on the Board, 8 are appointed by single countriesthe IMF's 5 largest quota-holders (the United States, Japan, Germany, France, and the United Kingdom) and China, Russia, and

Saudi Arabia. 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 IMF's Managing Director, who is appointed for a renewable five-year term. The Managing Director reports to the Board and serves as its chair and the chief of the IMF's staff and is assisted by a First Deputy Managing Director and two other Deputy Managing Directors.

Unlike some international organizations (such as the United Nations General Assembly) that operate under a one-country-one-vote principle, the IMF has a weighted voting system. The larger a country's quota in the IMFdetermined broadly by its economic sizethe more votes the country has, in addition to its "basic votes," of which each member has an equal number. But the Board rarely makes decisions based on formal voting; most decisions are based on consensus. In the early 2000s, in response to changes in the weight and role of countries in the world economy, the IMF began to reexamine the distribution of quotas and voting power to ensure that all members are fairly represented. IMF employees, who come from over 140 countries, are international civil servants. Their responsibility is to the IMF, not to the national authorities of the countries of which they are citizens. About one-half of the IMF's approximately 2,700 staff members are economists. Most staff works at the IMF's Washington, D.C., headquarters, but the IMF also has over 85 resident representatives posted in member countries around the world. In addition, it maintains offices in Brussels, Paris, and Tokyo, which are responsible for liaison with other international and regional institutions and civil society organizations, as well as in New York and Geneva, which focus on liaison with institutions in the UN system. The Geneva office is also responsible for liaison with the World Trade Organization. Evaluating the IMF's operations: In 2001, the IMF's Executive Board established the Independent Evaluation Office (IEO), which reviews selected IMF operations and presents its findings to the Board and to IMF management. The IEO operates independently of management and at arm's length from the Board, although the Board appoints the IEO's director. The IEO establishes its own work program, selecting operations for review based on suggestions from stakeholders inside and outside the IMF. Its recommendations strongly influence IMF policy and activity. In recent years, it has reviewed the IMF's role in Argentina in 19912001, the Poverty Reduction Strategy Paper process, IMF technical assistance, and IMF global surveillance, among other things. The IMF conducts its operations through: General Department (GRA- General Resource Account, SDA-Special Disbursement Account & Investment Account) Special Drawing Rights Department

2.4 IMF Member Countries

The current 185 member countries of IMF are as follows:

Afghanistan, Islamic Republic of Albania Algeria Angola Antigua and Barbuda Argentina Armenia Australia Austria Azerbaijan, Republic of Bahamas, The Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bhutan Bolivia Bosnia and Herzegovina Botswana Brazil Brunei Darussalam Bulgaria Burkina Faso Burundi Cambodia Cameroon Canada Cape Verde Central African Chad Chile China Colombia Comoros Congo, Democratic Republic of the Congo, Republic of Costa Rica Cte d'Ivoire

Croatia Cyprus Czech Republic Denmark Djibouti Dominica Dominican Republic Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Fiji Finland France Gabon Gambia, The Georgia Germany Ghana Greece Grenada Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras Hungary Iceland India Indonesia Iran, Islamic Republic of Iraq Ireland Israel Italy Jamaica Japan Jordan Kazakhstan

Kenya Kiribati Korea Kuwait Kyrgyz Republic Lao People's Democratic Republic Latvia Lebanon Lesotho Liberia Libyan Arab Jamahiriya Lithuania Luxembourg Macedonia, former Yugoslav Republic of Madagascar Malawi Malaysia Maldives Mali Malta Marshall Islands Mauritania Mauritius Mexico Micronesia, Federated States of Moldova Mongolia Montenegro, Republic of Morocco Mozambique, Republic of Myanmar Namibia Nepal Netherlands New Zealand Nicaragua Niger Nigeria Norway 7

Oman Pakistan Palau Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Qatar Romania Russian Federation Rwanda St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines Samoa San Marino So Tom and Prncipe

Saudi Arabia Senegal Republic of Serbia Seychelles Sierra Leone Singapore Slovak Republic Slovenia Solomon Islands Somalia South Africa Spain Sri Lanka Sudan Suriname Swaziland Sweden Switzerland Syrian Arab Republic Tajikistan Tanzania Thailand

Timor-Leste Togo Tonga Trinidad and Tobago Tunisia Turkey Turkmenistan Uganda Ukraine United Arab Emirates United Kingdom United States Uruguay Uzbekistan Vanuatu Venezuela, Repblica Bolivariana de Vietnam Yemen, Republic of Zambia Zimbabwe

2.5 Sources of IMFs funds

Most resources for IMF loans are provided by member countries, primarily through their payment of quotas. Concessional lending and debt relief for low-income countries are financed through separate contribution-based trust funds. The IMF's annual operating expenses are largely paid for by the difference between its interest receipts and its interest payments. The quota system

Quota subscriptions generate most of the IMF's financial resources. Each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy. A member's quota determines its maximum financial commitment to the IMF and its voting power, and has a bearing on its access to IMF financing. Total quotas at end-July 2006 were SDR 213.5 billion (about $317.3 billion). A member's quota is broadly determined by its economic position relative to other members. Various economic factors are considered in determining changes in quotas, including GDP, current account transactions, and official reserves. 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. The IMF uses a set of quota formulas to guide the assessment of a member's relative position.

Quotas are denominated in Special Drawing Rights (SDRs), the IMF's unit of account. The largest member of the IMF is the United States, with a quota of SDR 37.1 billion (about $55.1 billion), and the smallest member is Palau, with a quota of SDR 3.1 million (about $4.6 million). The functions of quotas: A member's quota delineates basic aspects of its financial and organizational relationship with the IMF, including: 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: up to 25 percent must be paid in SDRs or widely accepted currencies (such as the U.S. dollar, the euro, the yen, or the 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 has 250 basic votes plus one additional vote for each SDR 100,000 of quota. Accordingly, the United States has 371,743 votes (17.08 percent of the total), and Palau has 281 votes (0.01 percent of the total). Access to financing: The amount of financing a member can obtain from the IMF (its access limit) is based on its quota. Under Stand-By and Extended Arrangements, for instance, a member can borrow up to 100 percent of its quota annually and 300 percent cumulatively. However, access may be higher in exceptional circumstances. SDR allocations: A member's share of general SDR allocations is established in proportion to its quota. Gold holdings

Valued at current market prices, the IMF's gold holdings are worth about $65 billion as of end-July 2006, making the Fund one of the largest official holders of gold in the world. However, the IMF's Articles of Agreement strictly limit its use. Under some circumstances, the IMF may sell gold or may accept gold as payment by member countries; but the IMF is prohibited from buying gold or engaging in other gold transactions. The IMF's lending capacity

The IMF can only use its quota-funded holdings of currencies of financially strong economies to finance lending. The IMF's Executive Board selects these currencies every three months. Most are issued by industrial countries, but the list also has included currencies of developing countries such as Botswana, China, and India. The IMF's holdings of these currencies, together with its own SDR holdings, make up its usable resources. The amount the IMF has readily available for new (non-concessional) lending is indicated by its one-year forward commitment capacity. This is determined by its usable resources, plus projected loan repayments over the subsequent twelve months, less the resources that 9

have already been committed under existing arrangements, less a precautionary balance. As of end-July 2006, the Fund's one-year forward commitment capacity was $175 billion. Borrowing arrangements

If the IMF believes that its forward commitment capacity might fall short of its members' needsfor example, in the event of a major financial crisisit can activate supplementary borrowing arrangements. The first and principal resort is the New Arrangements to Borrow (NAB), which was established in 1998. Under the NAB, 26 countries have agreed to lend SDR 34 billion (about $50 billion). IMF concessional lending and debt relief

The IMF provides two primary types of financial assistance to low-income countries: lowinterest loans under the Poverty Reduction and Growth Facility (PRGF), and the Exogenous Shocks Facility (ESF), and debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). These resources come from member contributions and the IMF itself, rather than from the quota subscriptions. IMF income and expenses The IMF's annual expenses are financed largely by the difference between annual interest receipts and annual interest payments and by the returns on its investment account. In fiscal year 2006, interest and charges received from borrowing countries and other income totaled $ 2.5 billion, while interest payments on the portion of members' quota subscriptions used in IMF operations and other operating expenses amounted to $2.2 billion. The remainder was added to the IMF's reserves.

Table 2.1: Fast facts on IMF Resources Fast facts on IMF Resources Total quotas: Total usable resources: IMF one-year forward commitment capacity: Non-concessional credit outstanding: Concessional credit outstanding: Gold holdings: Source:www.imf.org (as of July 31, 2006)

$317 billion $227 billion $175 billion $22 billion $6 billion 103.4 million fine ounces

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Fig. 2.1 Available IMF resources

(Source: IMF survey.1-4-2007) As shown in above figure, the available IMF resources are in variable trend. Recently, the IMF resources have increased to more than $175 billion SDR (according to July 2006 data).

Fig. 2.2 Total IMF credit and loan outstanding, by region

(Source: IMF survey.1-4-2007)

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The above chart shows that the total IMF credit and loans outstanding is higher of Latin America in years 2003 and 2004. However, in the recent year (2006), Europe has higher credit outstanding than other regions. That of Latin America has decreased substantially showing that it has repaid its outstanding loans to the IMF. Fig. 2.3 Largest outstanding loans

(Source: IMF survey.1-4-2007) Turkey has highest outstanding non-concessional loans of about 6.51 billion SDRs. It is followed by Ukraine and so on as shown in above table. Pakistan on the other side has highest concessional loan of 0.94 billion SDRs.

2.6 SDR (Special Drawing Rights)

SDRs are defined in terms of a basket of major currencies used in international trade and finance. At present, the currencies in the basket are the Euro, the pound sterling, the Japanese yen and the United States dollar. Before the introduction of the Euro in 1999, the Deutsche mark and the French franc were included in the basket. The amounts of each currency making up one SDR are chosen in accordance with the relative importance of the currency in international trade and finance. The determination of the currencies in the SDR basket and their amounts is made by the IMF Executive Board every five years. The weights of the currencies in the basket in the past were and currently are: 19811985: USD 42%, DEM 19%, JPY 13%, GBP 13%, FRF 13% 19861990: USD 42%, DEM 19%, JPY 15%, GBP 12%, FRF 12% 19911995: USD 40%, DEM 21%, JPY 17%, GBP 11%, FRF 11% 19962000: USD 39%, DEM 21%, JPY 18%, GBP 11%, FRF 11% 20012005: USD 45%, EUR 29%, JPY 15%, GBP 11% 20062010: USD 44%, EUR 34%, JPY 11%, GBP 11% Purpose: 12

SDRs are used as a unit of account by the IMF and several other international organizations. A few countries peg their currencies against SDRs, and it is also used to denominate some private international financial instruments. For example, the Warsaw convention, which regulates liability for international carriage of persons, luggage or goods by air, uses SDRs to value the maximum liability of the carrier. SDRs basically were created to replace gold in large international transactions. Being that under a strict (international) gold standard, the quantity of gold worldwide is relatively fixed, and the economies of all participating IMF members as an aggregate are growing, a need arose to increase the supply of the basic unit or standard proportionately. Thus SDRs, or "paper gold", are credits that nations with balance of trade surpluses can 'draw' upon nations with balance of trade deficits. So-called "paper gold" is little more than an accounting transaction within a ledger of accounts, which eliminates the logistical and security problems of shipping gold back and forth across borders to settle national accounts. Some economists have argued that the usage of SDRs is the prelude to the creation of a single world currency. Value: The value of one SDR in terms of United States dollars is determined daily by the IMF, based on the exchange rates of the currencies making up the basket, as quoted at noon at the London market. (If the London market is closed, New York market rates are used; if both markets are closed, European Central Bank reference rates are used.) The latest value of the SDR in terms of the US dollar is available from the IMF, updated daily.

2.7 IMF activities

The IMF helps its member countries by Performing following different activities: a) Advice on policies and global oversight

When a country joins the IMF, it agrees to subject its economic and financial policies to the scrutiny of the international community. And it makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, to avoid manipulating exchange rates for unfair competitive advantage, and to provide the IMF with data about its economy. The IMF's regular monitoring of economies and associated provision of policy adviceknown as surveillanceis intended to identify weaknesses that are causing or could lead to trouble. It has provisions of following three surveillances: Country surveillance takes the form of regular (usually annual) comprehensive consultations with individual member countries, with interim discussions as needed.. A summary of the Board's views is transmitted to the country's government. In this way, the views of the global community and the lessons of international experience are brought to bear on national policies.

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Global surveillance entails reviews by the IMF's Executive Board of global economic trends and developments. The main reviews are based on World Economic Outlook reports and the Global Financial Stability Report, which covers developments, prospects, and policy issues in international financial markets; both reports are normally published twice a year. In addition, the Executive Board holds more frequent informal discussions on world economic and market developments. Regional surveillance involves examination by the IMF of policies pursued under regional arrangements such as currency unionsfor example, the Euro area, the West African Economic and Monetary Union, the Central African Economic and Monetary Community, and the Eastern Caribbean Currency Union. Lending to countries in difficulty

b)

Any member countryrich or poorcan turn to the IMF for financing if it has a balance of payments needthat is, if it cannot find sufficient financing on affordable terms in the capital markets to make its international payments and maintain an appropriate level of reserves. The IMF is not an aid agency or a development bank. Its loans are intended to help its members tackle balance of payments problems, stabilize their economies, and restore sustainable economic growth. Unlike the World Bank and other development agencies, the IMF does not finance projects. In the first two decades of the IMF's existence, over half of its lending went to the industrial countries, but, since the late 1970s, these countries have been able to meet their financing needs in the capital markets. At present, all IMF borrowers are developing countries, countries in transition from central planning to market-based systems, or emerging market countries. Many of these countries have only limited access to international capital markets, partly because of their economic difficulties. In most cases, IMF loans provide only a small portion of what a country needs to finance its balance of payments. But, because IMF lending signals that a country's economic policies are on the right track, it reassures investors and the official community and helps generate additional financing. Thus, IMF financing can act as a catalyst for attracting funds from other sources. c) Technical assistance and training

The IMF is probably best known for its policy advice and its loans to countries in times of economic crisis. But the IMF also shares its expertise with member countries by providing technical assistance and training in a wide range of areas, such as central banking, monetary and exchange rate policy, tax policy and administration, and official statistics. The objective is to help improve the design and implementation of members' economic policies, including by strengthening skills in institutions such as finance ministries and central banks. More than 75 percent of the IMF's technical assistance goes to low-income and lowermiddle-income countries, particularly in sub-Saharan Africa and Asia. Post conflict countries are major beneficiaries, with Timor-Leste, the Democratic Republic of the Congo, Iraq, and Afghanistan among the top recipients in the early 2000s. 14

Technical assistance is delivered in a variety of ways. IMF staff may visit member countries to advise government and central bank officials on specific issues or the IMF may provide resident specialists on a short- or a long-term basis. The IMF offers training courses for government and central bank officials of member countries at its headquarters in Washington, D.C., and at regional training centers in Austria, Brazil, China, India, Singapore, Tunisia, and the United Arab Emirates. Supplementary financing for IMF technical assistance and training is provided by several countries, of which Japan is the biggest donor, and international agencies such as the African Development Bank, the Arab Monetary Fund, the Asian Development Bank, the European Commission, the Inter-American Development Bank, the United Nations, the United Nations Development Program, and the World Bank.

2.8 How does the IMF help poor countries?

Most of the IMF's loans to low-income countries are made on concessional terms, under the Poverty Reduction and Growth Facility. They are intended to ease the pain of the adjustments these countries need to make to bring their spending into line with their income and to promote reforms that foster stronger, sustainable growth and poverty reduction. An IMF loan also encourages other lenders and donors to provide additional financing, by signaling that a country's policies are appropriate. The IMF is not a development institution. It does notand, under its Articles of Agreement, it cannotprovide loans to help poor countries build their physical infrastructure, diversify their export or other sectors, or develop better education and health care systems. This is the job of the World Bank and the regional development banks. The IMF also participates in debt relief efforts for poor countries that are unable to reduce their debt to a sustainable level even after benefiting from aid, concessional loans, and the pursuit of sound policies. (A country's debt is considered sustainable if the country can easily pay the interest due using export earnings, aid, and capital inflows, without sacrificing needed imports.) In 1996, the IMF and the World Bank unveiled the Heavily Indebted Poor Countries (HIPC) Initiative. The initiative was enhanced in 1999 to provide broader, deeper, and faster debt relief, to free up resources for investment in infrastructure and spending on social programs that contribute to poverty reduction. Part of the IMF's job is to help ensure that the resources provided by debt reduction are not wasted: debt reduction alone, without the right policies, might bring no benefit in terms of poverty reduction. In 2005, the finance ministers and heads of government of the G-8 countries (Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States) launched the Multilateral Debt Relief Initiative (MDRI), which called for the cancellation of the debts owed to the IMF, the International Development Association of the World Bank Group, and the African Development Fund by all HIPC countries that qualify for debt reduction under the HIPC Initiative. The IMF implemented the MDRI in January 2006 by cancelling the debt owed to it by 19 countries. Most of the cost is being 15

borne by the IMF itself, with additional funds coming from rich member countries to ensure that the IMF's lending capacity is not compromised. To ensure that developing countries reap full benefit from the loans and debt relief they receive, in 1999 the IMF and the World Bank introduced a process known as the Poverty Reduction Strategy Paper (PRSP) process. To qualify for loans under the Poverty Reduction and Growth Facility and debt relief under the HIPC Initiative, countries must draw up their own strategies for reducing poverty, with input from civil society. The IMF and the World Bank provide an assessment of the strategies, but the latter are "owned" by the countries that formulate them. In 2005, the IMF and the World Bank introduced the concept of Aid for Trade for the least developed countries. Aid for Trade includes analysis, policy advice, and financial support. The IMF provides advice to countries on such issues as the modernization of customs administration, tariff reform, and the improvement of tax collection to compensate for the loss of tariff revenues that may follow trade liberalization.

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Chapter-3

IMF in Nepal
Nepal joined IMF in September 6, 1961. She has gained through IMF by overcoming difficulties of balance of payments (BOP). IMF has also assisted Nepal in her reforms program, Enhanced Structural Adjustment Facility, now Poverty Reduction and Growth Facility. The IMF resident office in Nepal is housed in NRB, the central bank, situated in Baluwatar, Kathmandu. IMF conducts various research and surveys in Nepal. As of press release on Nov. 13, 2006, the Executive Board of IMF has finished its second and third review of Nepalese economic performance under the three-year Poverty Reduction and Growth Facility (PRGF) Arrangement which enables Nepal to draw an amount equivalent to SDR 14.3 million (about US$21.2 million) under the arrangement. Completion of these reviews will bring total disbursements under the program to SDR 28.5 million (about US$42.5 million). The Executive Board also approved a request for waivers for the non-observance of a quantitative performance criterion related to the second review, and eight structural performance criteria related to the second and third reviews. The Board also decided to extend the current PRGF arrangement by one year to November 18, 2007. The Executive Board approved the three-year arrangement on November 19, 2003 (see Press Release No. 03/202) for amount equivalent to SDR 49.9 million (about US$74.3 million). Similarly in IMF Survey, Jan. 15, 2007, the current political situation of Nepal has been addressed. The seven-party alliance of government and the Communist Party of Nepal (Maoist) (CPN-M) signed on the peace agreement on Nov. 21, 2006 putting an end to 11year armed insurgency during which Nepal suffered most. Nepals real GDP fell from 5 percent to 2 percent during 2000/01-2005/06. However, there was stability in the macroeconomic. Inflation remained in single digit. The projected change in Nepalese economy as per World Economic Survey (Sept. 2006) is Projected % Change Real GDP Consumer Prices 2006 1.9 7.9 2007 4.2 7.6

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3.1 Financial Position in the Fund as of Dec. 31, 2006

General Resources Account: Quota Fund holdings of currency Reserve Position Holdings Exchange Rate SDR Department: Net cumulative allocation Holdings Outstanding Purchases and Loans: PRGF Arrangements Latest Financial Arrangements: Date of Type Arrangement PRGF Nov 19, 2003 PRGF Oct 05, 1992 SAF Oct 14, 1987 Expiration Date Nov 18, 2007 Oct 04, 1995 Oct 13, 1990

SDR Million 71.30 71.31 0.00

%Quota 100.00 100.02 0.00

SDR Million 8.10 6.00 SDR Million 28.52

%Allocation 100.00 74.00 %Quota 40.00

Amount Approved Amount Drawn (SDR Million) (SDR Million) 49.90 28.52 33.57 16.79 26.11 26.11

Projected Payments to Fund 1/ (SDR Million; based on existing use of resources and present holdings of SDRs): Forthcoming 2007 2008 2009 2010 2011 Principal 1.43 2.85 2.85 Charges/Interest 0.23 0.23 0.23 0.22 0.20 Total 0.23 0.23 1.65 3.07 3.05 1/ When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

Nepals total outstanding credit as of Jan. 31, 2007 is 28,520,000 in SDR.

3.2 Transactions with the Fund from May 01, 1984 to January 31, 2007
(In SDRs)

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General Resources Account Year Purchases Charges Disbursemen Repurchas Paid ts es 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6,300,000 2,100,000 10,250,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 787,500 3,937,500 8,537,500 5,387,500 0 0 0 3,933,750 3,933,750 0 0 0 0 0 0 0 0 0 0 0 0 0 0 33,526 344,420 1,109,842 1,488,227 1,154,821 1,026,465 592,076 187,187 372,502

Poverty Reduction and Growth Facility/ Enhanced Structural Adjustment Facility Structural Adjustment Facility/Trust Fund Loans Disbursements 14,260,000 0 7,130,000 7,130,000 0 0 0 0 0 0 0 0 5,595,000 5,595,000 5,595,000 0 0 7,460,000 11,190,000 7,460,000 0 0 0 Interest Repayments Paid 0 0 559,500 2,238,000 3,357,000 3,357,000 3,357,000 4,289,500 79,308 94,496 18,663 12,009 22,616 39,471 56,256 76,833

Total Purchases and Loans Disbursements 14,260,000 0 7,130,000 7,130,000 0 0 0 0 0 0 0 0 5,595,000 5,595,000 5,595,000 0 0 7,460,000 11,190,000 13,760,000 2,100,000 10,250,000 0 Repayment s 0 0 559,500 2,238,000 3,357,000 3,357,000 3,357,000 4,289,500 4,849,000 5,222,000 5,222,000 5,222,000 3,730,000 1,492,000 787,500 3,990,361 8,963,100 6,773,500 2,333,729 2,651,528 2,725,728 6,233,878 4,693,214 Charges and Interest Paid 79,308 94,496 18,663 12,009 22,616 39,471 56,256 76,833 101,458 126,791 239,962 190,732 92,641 163,379 170,029 541,009 1,228,18 9 1,563,79 1 1,181,57 4 1,059,86 1 631,371 239,575 434,249

4,849,000 101,458 5,222,000 126,791 5,222,000 239,962 5,222,000 190,732 3,730,000 92,641

1,492,000 163,379 0 136,503 52,861 196,589 425,600 118,347 1,386,000 2,333,729 2,651,528 2,725,728 2,300,128 759,464 75,564 26,753 33,396 39,295 52,388 61,747

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Chapter-4

Conclusion
IMF helps the member countries to overcome the balance of payment difficulties and enhance the economic growth. It advises the member countries in various issues like poverty reduction, reform of various sectors such as real sector, fiscal sector, monetary sector etc. It helps to solve such issues by providing technical and financial assistance to the member countries. Nepal being a member country of IMF is getting assistance in overcoming the BOP difficulties and reducing the poverty. IMF is advising Nepal to adopt various strategies to have the balanced economy. Nepal has to raise the productivity across the country to achieve higher growth. Likewise, in manufacturing Nepal must boost competitiveness through increased investment and reduced transportation and transaction cost. Nepal should exploit its hydropower and tourism sector as well. There should be also sound macro-economic policies. On fiscal side, it should increase the spending on social sectors and infrastructures should be increased and of security related should be decreased. On the financial side, it will be essential to mobilize the domestic resources effectively and improve intermediation to finance the development activities. Enhanced legal and regulatory frameworks should be established to meet WTO commitments to financial sector liberalization in 2010. More broadly, Nepal must improve governance and service delivery to ensure that the benefits of higher growth are shared equitably. Strong efforts are required to better target programs for the poor, while reconstruction, rehabilitation, and relief help heal the scars of the conflict. The IMF has been a part of the international communitys efforts to support Nepal.

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BIBLIOGRAPHY
IMFs official website(www.imf.org) and publication IMF Survey, Vol. 36, no. 1, Jan 15, 2007 Arhan Sthapit, International Business (Text and Cases), Taleju Prakshan, 2005

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