BCom 3rd Year International monetary Fund Study Material Notes 

BCom 3rd Year International monetary Fund Study Material Notes: Objective of International Monetary Fund Membership of International Monetary Fund  Financial Resources of International Monetary Fund  Features of Special Drawing Refights Functions  of International Monetary Fund Criticism of the International Monetary Fund   India and the International Monetary Fund Exercise Questions  Long Answer Questions Short Answer Questions  Objective Questions

BCom 3rd Year Nature Importance Financial Money Study Material notes in hindi

INTERNATIONAL MONETARY FUND

The establishment of the International Monetary Fund can be seen as a consequence of the worldwide depression and the fall in the value of gold standard. The world economy was badly affected after the end of the World War – I. Again after the Great Depression of 1929-30 and the fall in the value of gold standard in 1931 and their bad impacts on the international trade. Every country started devaluation of its currency for reducing imports and promoting exports. In place of an international monetary cooperation, there started a feeling of monetary nationalism. It is said that among the many causes of the World War II one was the economic cause. That is why even when the World War II was going on there emerged a worry in the minds of economists and specialists about the possibility of another war after the end of World War II. Thus in the leadership of USA and the Great Britain the specialists of many countries started having an unanimous opinion that there should be such a permanent scheme that would be of help in promotion and expansion of international trade through international monetary cooperation.

Two different schemes were presented in two different countries for the implementation of this scheme. The first was the proposal for International Clearing Union put forwarded by Keynes on behalf of the Great Britain. In this scheme, it was proposed that there should be a separate organisation under the title ‘International Payment Organisation’ for international payments. He advised to name it ‘Bancor’. According to this the differences in payments were proposed to be paid in banks.

Similarly, in 1943 itself, another scheme was put forward by Dr. Harry Dexfor White on behalf of the USA. In this scheme, there was the suggestion for the formation of ‘International Stabilization Fund.’

International monetary Fund Study

If we analyse these two schemes separately, we will find that in the Keynes’ scheme, there was, a suggestion for the establishment of an international banking system. On the other hand, the White’s Scheme was related to the formation of a fund so that a balance in the payment remainders can be established and the foreign trade can be promoted by stabilishing the exchange rate.

In the superficial observation there appeared many good points in both these schemes. But the USA and the Great Britain found many faults with the scheme for each other. Then, after the discussion of specialists on both these schemes a joint statement was published. Again in July 1944 a conference of the representatives of 44 countries was called at Brettonwoods in the USA. In it, India also had her representation. After a lot of deliberation in this meeting a scheme was accepted which was called the Brettonwoods Agreement. According to this agreement, following two monetary institutions were setup:

1. International Monetary Fund

2. International Bank for Reconstruction and Development(IBRD)

Thus, after the international discussion the ‘International Monetary Fund’! was established on 27th December, 1945. But it started its work on 1st March 1947. Its head office is in the USA.

International monetary Fund Study

OBJECTIVE OF INTERNATIONAL MONETARY FUND

According to the Article 1 of International Monetary Fund Agreement, the main objectives of the International Monetary Fund are:

(1) International Monetary Co-operation: The most important objective of the International Monetary Fund is establishing monetary relationship among the member countries through a permanent Organisation. There should not be any lacking in fulfilling this objective, so regular advice is given to it through the committee of Specialists related to the fund.

(2) Promotion of Balanced Growth of International Trade : The International Monetary Fund plays an important role in promoting a balanced development of trade and establishing a high level of employment in the member countries. According to the provision of the fund a member country can not put any ban on the international transactions with out the permission of the International Monetary Fund.

(3) Stability of Exchange Rate: It is also an objective of the International Monetary Fund to bring stability in the exchange rate. If there arises a possibility of fall in exchange rate of a country the fund gives proper suggestions and cooperation to that country.

(4) Multilateral Payments : One objective of the International Monetary Fund is to co-operate in the arrangement of multilateral payments by ending exchange regulation of different countries.

(5) Financial Assistance : The International Monetary Fund gives economic assistance to poor countries to consolidate their financial conditions by granting them short term loans. This helps in maintaining the balance of trade among the member countries.

(6) Duration and Degree of Disequilibrium : An objective of the International Monetary Fund is to try to minimize the duration and degree of disequilibrium of member countries.

International monetary Fund Study

MEMBERSHIP OF INTERNATIONAL MONETARY FUND

Any country can obtain the membership of the International Monetary Fund. The only condition for this is that the country has to promise to follow all provisions of the articles of International Monetary Fund Agreement. If a country disobeys any provisions/article of the International Monetary Fund Agreement its membership can be terminated. 30 countries had taken the membership of the International Monetary Fund on 27th December, 1945 at the time of its foundation. The membership increased to be 40 on 1st March, 1947. The number of members was 155 and 183 in 1991 and 1994 respectively. At present, there are 186 member countries of the International Monetary Fund.

If any country wants to give up the membership of the International Monetary Fund, it can do this by giving written information. The International Monetary Fund cannot compel a country to continue its membership.

MANAGEMENT AND ORGANISATION OF INTERNATIONAL MONETARY FUND

The management of International Monetary Fund is done by two Organisational institutions which are as follows:

(1) Board of Governors: One representative from every member country of the International Monetary Fund is appointed in the Board of Governors. Their tenure is of 5 years. A member country can also appon Governor who can take part in the meeting only in the absence of the Governor. At least one meeting of the board is essential within a year. The main functions of the Board of Governors include making policies, making amendments in quotas of the member countries, giving admission to new member countries, electing managers and taking financial decisions about the equity rates of the currencies of member countries.

(2) Board of Directors There is a Board of Directors consisting of 21 members for the operation of the function of the International Monetary Fund. It has seven permanent members out of which the maximum quota of 5 members are elected from faraway Pacific Ocean region. 1 member comes from Canada. Besides 3 mem-bers from Latin American countries and 2 from European countries.

International monetary Fund Study

FINANCIAL RESOURCES OF INTERNATIONAL MONETARY FUND

Quotas and Their Fixation: The International Monetary Fund has been formed by gold and legal currencies of the member countries obtained in the form of quotas. Before becoming the member of the International Monetary Fund the quota of every country is determined. In the beginning the resources of the International Monetary Fund were speculated to sum up to 1,000 crore dollars, but it remained limited to 880 crore dollars as Russia did not join it.

According to the provision of the International Monetary Fund, at the time of its establishment it was arranged that every member country should deposit 25 percent of its quota or 10 percent gold and dollar whatsoever be less, in the form of gold and the remaining part in the form of its legal currency. Again according to later provisions it was said that every country should pay 25 percent of its quota in gold. Now the member countries have to pay 75 percent of their quotas in their currencies and have to keep the remaining 25 percent in the form of Reserve Assets. Under the Reserve Asset SPECIAL DRAWING RIGHTSs(Special Drawing Right) or the currencies of the nations approved by the International Monetary Fund is kept according to their consensus.

Change in Quotas : For the consideration of the quotas of the member nations the Foreign Exchange Reserve, the condition of payment of Balance, the gold Reserve the Political and international importance, national income etc. are kept under consideration,

According to the conditions laid down in the agreement paper of the International Monetary Fund there is a need of reconsideration in the quotas of member countreis after every-five years. There was less demand of resources up to a few years after the foundation of the International Monetary Fund, so the need of reconsideration was not felt. The first change in the quotas of the member countries was made in the meeting of the governors in 1958. In this meeting the decision of approving quota by 50 percent was approved. The second Change was made in 1965 in which the quota was raised by 25 percent. Similarly, Where has been reconsideration regarding the quotas from time to time. So far stile now, there have been 13 reconsiderations.

In the management of the International Monetary Fund the Unit of Account was used in the form of US dollar. But due to instability in the value of dollar, the Special Drawing Rights came into use in its place. Its evaluation is done on the basis of daily changes occurring in the reputed currencies all over the world.

International monetary Fund Study

SPECIAL DRAWING RIGHTS—(SDR)

Dollar was a very strong currency at the time of the foundation of the International Monetary Fund. So, it was granted the form of Unit of Account. The value of one unit of gold was equal to 0.88867 1 gram gold. In the following days there rose the problem of international liquidity due to the devaluation of dollar. The proposal of Special Drawing Rights was brought to solve this problem. There was only debate and discussion on this scheme for four years. Finally in 1967 it was accepted in principle and was implemented from 1st January, 1970.

Thus Special Drawing Rights is a new source of obtaining foreign currency which is based on the co-operation of various countries. The place occupied earlier by gold in the foreign payments is now occupied by Special Drawing Rights, hence it is also called ‘Paper Gold’. In other words, Special Drawing Rights is a mode of credit creation by the International Monetary Fund. The International Monetary Fund creates international funds in the formats of Special Drawing Rights in the same way as the Commercial Banks do the creation of credit. Thus, it can be said that Special Drawing Rights or Paper Gold is a kind of Foreign Exchange Reserve which is used generally for completing the foreign payments.

Exchange Rate of Special Drawing Rights : Before 1972, a unit of Special Drawing Right was equal to 1 US dollar, the one unit of which valued equal to price of 0.888671 gram gold. But after the devaluation of dollar in 1972 and 1973, one unit of Special Drawing Right became equal to 1.20635 dollar. Again according to a decision taken in April 1974, the relation of Special Drawing Right with gold was delinked. From July, 1974 the price of one unit fo Special Drawing Right was fixed on the basis of mixed values of the currencies of 16 countries. This system of determining the exchange rate was called the ‘Standard Basket System of Valuation’. In 1981 the ‘Currency Basket’ determining the Value of Special Drawing Right was reduced in size and now it contained only 5 currencies namely the US Dollar, German Mark, Japanese Yen, French Frank and British Pound.

International monetary Fund Study

FEATURES OF SPECIAL DRAWING RIGHTS

The main features of Special Drawing Rights scheme are as follows:

(1) Special Drawing Rights is the credit without security which is formed by the International Monetary Fund only on basis of book entry.

(2) To implement the scheme of Special Drawing Rights a majority of 85 percent of its votes should be in its favour.

(3) It is used for international payments as an alternative for foreign currencies and gold.

(4) The allocation of Special Drawing Rights is done among the member countries on the basis of their present quotas. It is also used for obtaining Currencies from other countries.

(5) The International Monetary Fund collects interest from countries using Special  Drawing Rights and distributes it among the countries retaining Special Drawing Rights.

(6) Any member of the International Monetary Fund can take part in Special Drawing Rights scheme. But it is not essential for the member countries to do so. If a country joins for once, it can also separate itself from it.

(7) The member countries can use Special Drawing Rights only for some specific purpose such as for meeting the deficit in the balance of trade, for bringing its fund at a normal rate etc.

(8) A member country of Special Drawing Rights scheme has to keep at least 30 percent of its stipulated share in its account as daily remainder. If it fell below 30 percent, it has to bring it up to 30 percent by the end of the fixed period of five years. But from 1st January, 1979 onwards the average of daily remainder has been reduced to be 15 percent.

(9) The foreign exchange reserve of member countries increase through special drawing right.

(10) Many restrictions have been imposed on the creation and use of Special Drawing Right. It can not just be used only for increasing liquidity.

International monetary Fund Study

FUNCTIONS OF THE INTERNATIONAL MONETARY FUND

The International Monetary Fund performs the following functions to meet its objectives.

(1) Giving Economic Aid: The International Monetary Fund is a running fund, so the loan granted by it cannot be left with a member country for a long time. The main objective of the International Monetary Fund is providing economic assistance for balancing the trade deficit. The International Monetary Fund grants its member countries loans up to the equal of their quotas. This aid is given for a period from 3 to 5 years. The International Monetary Fund is called ‘Emergency Friend’. If the condition deteriorates in a country due to political or economic reasons, the International Monetary Fund gives short term credit for improvement.

(2) Determination of Exchange Rate : An important work of the International Monetary Fund is determining the exchange rates for the member countries. It is essential for the member countries to follow the rules related to the exchange rates made by the International Monetary Fund. The exchange rates are determined in gold or dollar.

(3) Technical Assistance : The International Monetary Fund not only provides economic aids to member countries but also grants them technical aids. With the view of giving technical aids, the International Monetary Fund helps its member countries in determining currencies, taxes, exchange rates and policies through its specialists, sometimes the International Monetary Fund also sends the external experts into member countries for assistance and consultations.

(4) Training Programmes : The International Monetary Fund has been arranging the system of training related to international payment, economic development, financial managements etc. since 1951. Generally the period of training for the high ranks officials of the central banks and governments is from 6 to 12 months. Generally the medium of training is speeches and debates.

(5) Advice on Exchange control : Many suggestions are given by the International Monetary Fund for regulation of foreign exchanges from time to time. Monetary and financial policies are discussed while giving such suggetions.

International monetary Fund Study

ADVANTAGES OF THE INTERNATIONAL MONETARY FUND

On the basis of services provided by the International Monetary Fund, following are its advantages:

(1) Helpful in Balancing Payments : If the developing countries face a situation of imbalance in their current payments due to investing more money in their various projects. The International Monetary Fund provides aids for removing this imbalance. Those countries which received such assistance include India, Pakistan, Japan, France, Canda, England, Argentina, Holland, Indonesia etc.

(2) Helpful in Foreign Payments : The International Monetary Fund retains the store of currencies of many countries. Thus, it has become easy to make payment in the currency of any country through it. The members of the International Monetary Fund can exchange their currencies easily as per their needs.

(3) Control of Competitive Currency Devaluation : There rose much competition after the Worldwide depression and before the foundation of the International Monetary Fund. Every country was trying to devaluate its currency to discourage its imports and encourage its exports. It didn’t have far reaching positive impacts. A healthy global environment was created with the establishment of the International Monetary Fund. Now any country can’t devaluate her currency without the permission of the International Monetary Fund.

(4) Stability in Foreign Exchange Rates : After the foundation of the International Monetary Fund, there emerged a kind of stability in the exchange rates of different countries. The foreign trade gets promoted due to stability in their exchange rates. The member countries of the International Monetary Fund can retain the stability of their exchange rates even after following their independent economic policies.

(5) International Economic Platform : It is great usefulness of the International Monetary Fund that it gives an economic platform at the international level, where the developed and developing countries come in contact with each other and many economic problems are solved.

(6) Expansion of Economic Technology: The International Monetary Fund informs its member countries about the monetary, economic and tax related technologies through its experts for their economic development.

(7) No Interference in the Internal Economy of Countries : The International Monetary Fund is an monetary institution but it doesn’t interfere in the internal monetary and economic matters, nor does it try to influence

(8) No Political Pressure: Generally in the process of international credit exchange the creditor country tries to put political pressure on the debtor country, but there is no such pressure in taking loans from the International Monetary Fund.

CRITICISM OF THE INTERNATIONAL MONETARY FUND

The main criticism of the International Monetary Fund are as follows:

(1) Rich Countries Club : It is a charge from some African countries that it works only according to the wishes of the rich countries. So they called it the “Rich Country Club’. France devalued its currency in 1948 violating the norms of the International Monetary Fund. Similarly in 1979 the help given to the Vietnam was stopped under the pressure of the USA.

But this charge is not proper in the present scenario because today most of the members of the International Monetary Fund are from developing countries.

(2) Non-Scientific Basis of Determination of Quotas : The Quotas of the member countries are determined at the time of granting membership only. The critics say that there is no scientific basis of the determination of the quotas of the member countries while the voting capacity of the members is determined on the basis of quotas. It is a charge of critics that in determining the quotas of the USA and Great Britain their political status were kept under consideration.

(3) Lack of Long term Loan Facility: The International Monetary Fund generally grants the short term loan facilities to its member countries, while the underdeveloped and developing countries generally need long term loans. However, it is a matter of satisfaction now that along with the short term loans. long term loans are also provided by the International Monetary Fund.

(4) Developed countries Representation : About 90 percent members of the International Monetary Fund are from the underdeveloped and developing countries, but according to the regulation of the International Monetary Fund, they retain only 35 percent of its voting power. Thus, the International Monetary Fund has the supremacy of the developed countries.

(5) Unsatisfactory Progress : The critics held that an imagination of international development was done at the time of the foundation of the International Monetary Fund. But the assistance granted by it is not satisfactory. The foreign aid is received even in the absence of this institution. But if we say without any partiality, it would not be wrong to say that even in the initial days the speed of the progress was slow but in the following time it worked quite charitably. This institution played a crucial role ins stopping the devaluation of sterling

(6) Discriminatory Practices : In the view of the critics, the International Monetary Fund gives greater priority to the developed countries as compared to underdeveloped countries. For example 70 percent of loans granted by the International Monetary Fund during the year 1965-66 were given to England the USA alone.

But the critics must not forget that the legality of getting loans is determined at the time of getting membership itself. At the same time, the critics should not analyse the functioning of the International Monetary Fund on the basis of its performances for a particular year.

(7) Failure in Exchange Stability : It is said that one of the objectives of the foundation of the International Monetary Fund was to bring stability in exchange. But it is also a charge against the International Monetary Fund that it has not achieved sufficient success in achieving this objective. Some countries devaluated their currencies violating the instructions of the International Monetary Fund but no action has been take against them.

(8) No solution of Liquidity : It is true that International Monetary Fund has started the SPECIAL DRAWING RIGHTS scheme to increase the international liquidity. This scheme is certainly praise worthy. But it is not a final solution of the problem of liquidity.

(9) Mortgage of Nationality: Prof. Mishel, the famous economist of Canada has charged that the International Monetary Fund has retained the nationality of many countries like India on mortgage under the influence of strong nations. He has said regarding India that an economy based on native resources as in India’s a favour; otherwise India would become such an independent country which will have its now flag but the rope of that flag will be with some big countries associated to the International Monetary Fund.

(10) Wrong Method of selection the Board of Directors : The rules according to which the member countries are selected in the Board of Directors are not proper. The USA has a permanent membership in this 21 membership board. Despite the 3 members are elected from Latin America. It means increasing the hold of the USA on the International Monetary Fund. Thus, there are many charges against the International Monetary Fund But despite it we can say that the foundation of the International Monetary Fund for the international cooperation is certainly an encouraging step. No matter how much criticism is against it, its importance can’t be ignored. It is clear from its ever increasing membership that its functioning is useful for the member countries.

International monetary Fund Study

INDIA AND THE INTERNATIONAL MONETARY FUND

India is one of the founder members of the International Monetary Fund. It was also one of the 44 countries that took part in the conference. India was also among the countries while signing the Agreement paper of the International Monetary Fund on 27th December, 1945. In the initial phase, India was among the 5 member countries which had the maximum quotas. That is why India was given a permanent place in the Managing Committee of the International Monetary Fund. But when the quotas were raised in 1970, the quotas of Japan, Canada, and Italy became more than that of India. Consequently, India lost its permanent place in the Board of Directors.

In the initial days of the membership of the International Monetary Fund the Indian Rupee was valued equal to 0.268601 gm gold or 30.225 US cent. At the time of devaluation of Indian Rupee in 1949, its value was made equal to 0.186621 gm gold or 21 US cents. Again when it was devalued on 6th June, 1966 its value was made equal to 0.118489 gm gold on 13.33 US cents. When there was devaluation of Dollar in 1972, the value of Indian rupee went down further. After this, the International Monetary Fund implemented the Special Drawing Rights scheme.

In March, 1947, India had paid 400 million dollar quotas in gold, dollar, Indian Rupee and bond without interest. Thus, the initial quota of India was 400 million dollars which increased to be 600 million dollars in 1956 and 750 million dollars after 1965, India’s quota became 940 million dollars when there was an increase in quotas in 1970. India’s quota had been increased by 21 percent in 1976. This decision came into effect in 1978 and India’s quota became 1145 million Special Drawing Rights. It was about 2.98 percent of the total capital fo the International Monetary Fund. Again in 1980, it reached to 1717 million Special Drawing Rights and in 1983 it was 2207.7 million Special Drawing Rights in January 1999, India’s quota was 4185.2 million Special Drawing Rights which was 1.96 percent of total quotas.

At present India’s quota is 4158.2 million Special Drawing Rights which is 1.91 percent of the total quota. According to the decision taken on 28th April 2008 in the meeting the Special Drawing Rights of India has been raised to 582.15 crore Special Drawing Rights which is 2.44 percent of the total quota. It has 41832 votes. At present Finance Minister of India is the Governor representing India. Governer of Reserve Bank of India is representing as the alternative Governor.

India has got much benefit from the International Monetary Fund. India has been getting help from different agencies of the International Monetary Fund from time to time. India received a loan of 100 million dollar two times between 1947 and 1955 Again the International Monetary Fund gave loans 8 times to India between 1957 and 1975 which amounted to 1764 million dollars.

India got the biggest loan of 5 thousand million Special Drawing Rights or 420 crores in 1981 for a three yearly term. An agreement under EFS ‘Extended Facility Scheme’ was done for this loan India has also been timely repaying the loans.

Besides monetary help, India has also been getting other kinds of help. At the time of first Five Year Plan the experts of the International Monetary Fund on their tour to India advised the ways of maintaining the monetary stability along with the policy of financial deficit.

Thus the International Monetary Fund has proved to be a boon for the progress of India.

International monetary Fund Study

EXERCISE QUESTIONS

Long Answer Type Questions

1 Discuss the objectives of International Monetary Fund.

2. Explain the organization and functions of International Monetary Fund.

3. Discuss the advantages of the International Monetary Fund.

4. State the criticism of the International Monetary Fund.

Short Answer Type Questions

1 Write a note on Special Drawing Rights-Special Drawing Rights.

2. Explain the organizational structure of International Monetary Fund.

3. Explain the features of Special Drawing Rights.

4. Explain the relationship between India and the International Monetary Fund.

III. Objective Type Questions

Choose the correct option

1 When was the International Monetary Fund founded ?

(a) 1945

(b) 1947

(c) 1951

(d) 1974

2. The head office of the International Monetary Fund is in:

(a) India

(b) the USA

(c) Japan

(d) The Great Britain

3. At present the transactions of the International Monetary Fund are expressed in:

(a) Special Drawing Rights

(b) Dollar

(c) Gold

(d) All of the above

4. How many countries had participated in the Brettenwoods Conference in July 1944 ?

(a) 30

(b) 34

(c) 44

(d) 54

5. The main objective of the International Monetary Fund is/are:

(a) Stability in exchange rates

(b) Multilateral payments

(c) Providing economic assistance

(d) All of the above

6. Every governor of the International Monetary Fund has tenure of:

(a) 3 years

(b) 4 years

(c) 5 years

(d) 7 years

[Ans. : 1.(b), 2. (b), 3. (a), 4. (c), 5.(d), 6. (c)

State whether the following statements are True or False :

1. India is one of the founder members of IMF.

2. IMF was founded on 27th December 1945.

3. SDR is also called as paper gold.

4. IMF is an international economic platform

5. There are 16 members in the board of directors of IMF.

[Ans.: 1. True, 2. True, 3. True, 4. True, 5. False.]