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International Monetary Fund (IMF)

International Monetary Fund (IMF)

 

Basics and Background:
  • The International Monetary Fund (IMF) is an organization of 189 member countries, each of which has representation on the IMF’s executive board in proportion to its financial importance, so that the most powerful countries in the global economy have the most voting power.
  • The IMF, also known as the Fund, was conceived at a UN conference in Bretton Woods, New Hampshire, United States, in July 1944.
  • The 44 countries at that conference sought to build a framework for economic cooperation to avoid a repetition of the competitive devaluations that had contributed to the Great Depression of the 1930s.
  • Countries were not eligible for membership in the International Bank for Reconstruction and Development (IBRD) unless they were members of the IMF.

 

Objectives:
  • Foster global monetary cooperation
  • Secure financial stability
  • Facilitate international trade
  • Promote high employment and sustainable economic growth
  • And reduce poverty around the world

 

Functions
  • Regulatory functions: IMF functions as a regulatory body and as per the rules of the Articles of Agreement, it also focuses on administering a code of conduct for exchange rate policies and restrictions on payments for current account transactions.
  • Financial functions: IMF provides financial support and resources to the member countries to meet short term and medium term Balance of Payments (BOP) disequilibrium.
  • Consultative fun­ctions: IMF is a center for international cooperation for the member countries. It also acts as a source of counsel and technical assistance.

 

IMF Quotas:
  • IMF funds come from two major sources – Quota and Loans.
  • Quotas which are pooled funds of member nations, generate most IMF funds.
  • The size of a member’s quota depends on its economic and financial importance in the world.
  • Nations with larger economic importance have larger quotas.
  • The quotas are increased periodically as a means of boosting the IMF resources in the form of Special Drawing Rights.

 

Special Drawing Rights:
  • Special Drawing Rights (SDRs) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF)
  • SDR is not a currency, instead represents a claim to currency held by IMF member countries for which they may be exchanged.
  • The value of an SDR is defined by a weighted currency basket of four major currencies – the US Dollar, the Euro, the British Pound, the Chinese Yuan and the Japanese Yen.
  • Central bank of member countries held SDR with IMF which can be used by them to access funds from IMF in case of financial crises in their domestic market.

 

Concern with Quota System:
  • The 15th General Review of Quotas (GRQ),the most recent attempt to revise the size and composition of the system, was to be completed by October 2017, but now extended to 2019.
  • The delay was not unexpected, given the poor precedent set by the long delay in adoption in 2016 of the previous GRQ (originally approved in 2010).
  • That had doubled the overall size of the quotas to $659 billion (from $329 billion) while allotting an additional 6% of quotas to the developing world.

 

India and IMF:
  • International regulation by IMF in the field of money has certainly contributed towards expansion of international trade. India has, to that extent, benefitted from these fruitful results.
  • Post-partition period,India had serious balance of payments deficits, particularly with the dollar and other hard currency countries. It was the IMF that came to her rescue.
  • The Fund granted India loans to meet the financial difficulties arising out of the Indo–Pak conflict of 1965 and 1971.
  • From the inception of IMF up to March 31, 1971, India purchased foreign currencies of the value of INR. 817.5 crores from the IMF, and the same have been fully repaid.
  • Since 1970, the assistance that India, as other member countries of the IMF, can obtain from it has been increased through the setting up of the Special Drawing Rights(SDRs created in 1969).
  • India had to borrow from the Fund in the wake of the steep rise in the prices of its imports, food, fuel and fertilizers.
  • India wanted large foreign capital for her various river projects, land reclamation schemes and for the development of communications.
  • India has availed of the services of specialists of the IMFfor the purpose of assessing the state of the Indian economy. In this way India has had the benefit of independent scrutiny and advice.
  • The balance of payments position of India having gone utterly out of gear on account of the oil price escalation since October 1973, the IMF has started making available oil facility by setting up a special fund for the purpose.
  • The foreign reserves started picking up with the onset of the liberalisation policies in 1991.
  • India has occupied a special place in the Board of Directorsof the Fund. Thus, India had played a creditable role in determining the policies of the Fund. This has increased the India’s prestige in the international circles.

 

Criticism:
  • This delay is raising the question of relevance of the Bretton Woods Institutions among the developing countries.
  • Also at stake is the potency of the IMF in keeping up with the changed fundamental needs of developing economies.
  • The developing world is looking beyond the short-term crisis management toolsthat the IMF, as the sole international lender of last resort, has traditionally offered them for decades now.
  • China, for instance, with its steadily rising influence on the global economy, has grown to be the focal point for economies seeking alternative sources of capital to fund their long-term growth needs.
  • India announced that it is seeking $2 billion from the New Development Bank,set up by the BRICS countries in 2015 with a more equitable power structure, to fund infrastructure projects.
  • The Asian Infrastructure Investment Bank,launched in 2014, could be an even bigger threat to the IMF’s influence given its larger membership, lending capacity and international reach.
  • In this environment of competition, the IMF will have to do more than just superficially tinker with its asymmetric power structure and out-dated quota system.

 

Bangladesh set to overtake India in per capita GDP:
  • Recently, the International Monetary Fund (IMF)has released its World Economic Outlook (WEO) report.
  • In the IMF’s latest Economic Outlook, Bangladesh surpasses India in per capita GDP.
  • India is currently the fifth-largest economy in the world and is considered the most developed country in South Asia. But recently, the result of the IMF’s economic outlook has come as a shocker for India.
  • From 5 years India’s per capita GDP is 25% more than Bangladesh but now India lagged behind. Per capita GDP is obtained by dividing the GDP of a country by the population of that country.

 

Key points of the IMF report
  • India’s economy has registered a decline of 3% in 2020-21 while the global economy has registered a decline of 4.4% in the same period but Bangladesh’s economy has recorded a growth of 4%.
  • India’s GDP per capita in the last five years was 24% more than the GDP of Bangladesh.
  • As a result of the coronavirus, India’s per capita GDP has fallen below Bangladesh’s per capita GDP.
  • IMF has estimated that India’s per capita income will increase from Bangladesh’s income in 2021 but will decrease again by 2025.

 

Reasons of this situation
  • Bangladesh’s GDP has been steadily increasing since 2004. Whereas India’s economy is trying to cope with the 2008 economic slowdown and reforms like demonetization and GST reforms.
  • The economic effects of the recent coronavirus have affected India more than Bangladesh. This year, where India was registering a decline of around 10%, the economy of Bangladesh was growing at a rate of 4%.
  • In the last 15 years, where the population of India has grown rapidly (at a pace of about 21%), the population of Bangladesh has increased at the rate of 18% i.e. Bangladesh has succeeded to some extent in controlling its population.
  • In Bangladesh, where the majority of the population is dependent on industries, the population of India is dependent on agriculture. Along with this, in the last few years, Bangladesh has also paid special attention to the social sector like health, hygiene.
  • In the last few years, while India has faced trade stress from countries like China, America, trade stress on Bangladesh is less.
  • India is the most affected country from Covid-19, whereas Bangladesh has a bright spot in it.

 

World Economic Outlook

  • WEO is a survey by the IMF that is usually published twice a year in the months of April and October.
  • It analyses and predicts global economic developmentsduring the near and medium term.
  • In response to the growing demand for more frequent forecast updates, the WEO Update is published in January and July between the two main WEO publications released usually in April and October.

 

IMF Reforms:
  • IMF Quota:a member can borrow up to 200 percent of its quota annually and 600 percent However, access may be higher in exceptional circumstances.
  • IMF quota simply means more voting rights and borrowing permissions under IMF. But it is unfortunate that IMF Quota’s formula is designed in such a way that USA itself has 17.7% quota which is higher than cumulative of several countries. The G7 group contains more than 40% quota whereas countries like India & Russia have only 2.5% quota in IMF.
  • Due to discontent with IMF,BRICS countries established a new organization called BRICS bank to reduce the dominance of IMF or World Bank and to consolidate their position in the world as BRICS countries accounts for 1/5th of World GDP and 2/5th of world population.
  • It is almost impossible to make any reform in the current quota system as more than 85% of total votes are required to make it happen. The 85% votes does not cover 85% countries but countries which have 85% of voting power and only USA has voting share of around 17% which makes it impossible to reform quota without consent of developed countries.
  • 2010 Quota Reformsapproved by Board of Governors were implemented in 2016 with delay because of reluctance from US Congress as it was affecting its share.
  • Combined quotas (or the capital that the countries contribute) of the IMF increased to a combined SDR 477 billion (about $659 billion) from about SDR 238.5 billion (about $329 billion). It increased 6% quota share for developing countriesand reduced same share of developed or over represented countries.
  • More representative Executive Board: 2010 reformsalso included an amendment to the Articles of Agreement established an all-elected Executive Board, which facilitates a move to a more representative Executive Board.
  • The 15thGeneral Quota Review (in process) provides an opportunity to assess the appropriate size and composition of the Fund’s resources and to continue the process of governance reforms.

 

Way Forward
  • India’s share has increased to 75% from 2.44%, making it the 8thlargest shareholder in the quota system.
  • The quota system of is most controversial due to its asymmetric power structure.
  • Today the world is looking towards developing countries due to their fast growing economy, but their say in IMF is minimal.
  • Hence considering the current economic scenario there is an urgent need to make comprehensive reforms in the current quota system.