International Monetary Fund (IMF) was created to administer a code of fair exchange practices and provide compensatory financial assistance to member countries with balance of payments difficulties. IT was established at the same time as the World Bank to tackle the problem of international investment. It is to be noted that countries are members of the IMF. It is one of the most important players in the current international financial system. The five points below clearly explain, “What IMF does?”
- It provides international monetary cooperation for consultation and collaboration on international monetary problems.
- It facilitates the expansion and balanced growth of international trade, and contribute thereby to the promotion and maintenance of high levels of employment and real income and the development of the productive resources of all members as primary objectives of economic policy.
- IMF promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
- It assists in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions that hamper the growth of world trade.
- It gives confidence to members by making the Fund’s resources available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in the balances of payments without resorting to measures destructive of national or international balances of payments of members.
Knowing what IMF does, Now let us understand how it is done. When a member entered the IMF, it is obliged to submit a par value of its currency in gold or US dollars. Once that value was established it could only vary by 1 per cent either way and any changes required the permission of the IMF. All transactions with other members will then exercised at that rate.
The resources of the IMF cames from the subscriptions for member countries. Subscriptions are determined based on the member’s relative economic size, 25% of the quota is to be paid in gold and the rest in the member’s domestic currency. The size of the quota is important because it determines the member’s voting power and the amount it could borrow. In practice, members could borrow up to the first 25% of their quota, which is called the “gold tranche” beyond the gold tranche, the IMF has imposed conditions.
Although the goals and ground rules for membership are still the same, the IMF has changed considerably since its creation. Its capital has been increased several times. The gold tranche has become the “first credit tranche” and other “upper credit tranches” have been added. In 1969 it created the first (Special Drawing Rights) SDRs. The IMF has evolved with the perceived problems of the times. In 1963 it introduced the Compensating Financing Facility to help countries with temporarily inadequate foreign exchange reserves resulting from events such as crop failure. In 1974 it set up the Oil Facility to help oil-importing developing countries. It also set up the Extended Fund Facility for countries with structural difficulties, created the Trust Fund of 1976 to allow the sale of gold for the development of third world countries and in the 1980s it negotiated special standby facilities for countries with foreign debt problems.
These are the role of IMF in the international monetary system.