International Monetary Fund - Objectives, Functions and Role After the First World War, most of the countries

of the world were of the opinion that monetary cooperation was necessary to get the economic stability at international level. But the world wide depression in 1930 and the fall of gold standard system in 1931 gave rise to a number of problems in exchange rates, The second world war also became the reason of cancellation of a trade pact among powerful countries (America, England and France). Due to the multiple exchange rate practices, difficulties arose in international trade and it was felt that without monetary cooperation, economic development was not possible, A well known British Economist, John Maynard Keynes and the American expert Harry D. White prepared their separate plans for International Clearing Union and 'United and Associated Nations Stabilisation Fund' respectively.

The basic features of these plans were fused into a common plan evolved at the United Nations Monetary and Financial Conference of 44 nations held at Bretton Woods, New Hampshire in the U.S.A. in July 1944. This conference gave birth to the 'International Monetary Fund' and the International Bank for Reconstruction and Development (World Bank).

In view of this, the paper attempts to-(i) Discuss in brief the history and objectives of IMF; (ii) Study the working and performance of IMP and its relationship with India; and (iii) Highlight the role of IMF in solving the problems of International liquidity.

In order to ensure new world economic order and peace, it was necessary to restore stability in monetary system at international level and find effective means to reconstruct the war ravaged economies of the European countries. But stable peace could be achieved only by diverting a part of the world resources to the undeveloped and under-developed poor countries of Asia, Africa and Latin America. An effective solution to the problem of economic reconstruction and development was necessary for ensuring world economy and for dismantling the complex trade and exchange restrictions that had grown during the previous decade.

In order to abolish all trade and exchange restrictions effectively and to promote the multilateral trade system, IMF was established on December 27, 1945. It started functioning from March 1, 1947. The main objective of IMF is to grant loans in foreign currencies to member countries to correct any disequilibrium in their balance of payments, when disequilibrium is of temporary nature and likely to be removed in the earliest possible period. According to the Article 1st of the agreement, the objectives of the IMP are-

(i) To promote international monetary cooperation through a permanent institution of the fund which provides the machinery for Consultation and Collaboration on international monetary problems? (ii) To facilitate the expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of high level of employment and real income; (iii) To promote exchange stability and maintain orderly exchange arrangements among members by avoiding competitive exchange depreciation; (iv) To assist in the establishment of a multi-lateral system of payments in respect of current transactions between members and elimination of foreign exchange restrictions which hamper the growth of world trade. (v) To create confidence among members by making the general resources of the fund temporarily available to them and providing opportunity to correct mal-adjustments in their balance of payments without resorting to the measures destructive of national or international prosperity.

IMF is governed by a board of governors, board of executive directors and a managing director. Board of governors is the highest authority. Every member country of IMF appoints one governor and an alternate governor for a period of 5 years. The board of governors has delegated many of its powers to the board of executive directors. Executive board deals regularly with a wide variety of administrative and polity matters. It is responsible for conducting the business of the fund. There are at present 21 executive directors. Managing director is appointed by the executive board. He conducts the ordinary business of the fund under the directions of the executive board. To improve the functioning of IMF and to advise it from time to time, an Interim Committee was appointed in 1974. It has 20 members. A Development Committee was also appointed in 1974 to solve the problems of

developing countries and to give suggestions to the governors of IMF and the World Bank. The decisions of IMP are taken on the basis of majority. Every member country has 250 votes. Besides it, for a quota of everyone lakh dollar, there is one more vote. In this way a country having more quotas will have more votes.

International Liquidity International liquidity is generally used as a synonym for international reserves. Such reserves include a country's official gold stock, holdings of its convertible foreign currencies, SDRs and its net position in the IMF. It is the aggregate stock of inter-nationally acceptable assets held by the central bank to settle a deficit in the balance of payments of a country. In other words international liquidity provides a measure of a country's ability to finance its deficit in the balance of payments without resorting to adjustment measures.

The sources of international liquidity include - owned reserves and borrowed reserves. Borrowed reserves were constituted by Capital imports in the form of borrowing from abroad and direct investments by foreign countries. The demand for international liquidity was increasing more than its supply due to which the problem of international liquidity arose. The shortage of international liquidity was due to the increasing deficits in the balance of payments of the majority of countries in the world. Too much dependence on exports exposed these economies to international fluctuations in the prices of their products. IMF in 1970 introduced a scheme for the creation and issue of Special Drawing Rights (SDRs) as unconditional reserve asset to remove all the related problems of international liquidity. Now SDR is the principal source of international liquidity to its members.

As one of the main objectives of establishing the IMF was to bring the stability in exchange rates by stopping the competitive devaluation of currencies of the member nations, so that they could get foreign exchange easily, to get this objective done IMF accepted gold as a medium to determining the exchange rate. The currency value of every country was fixed in'gold and American dollar. At that time American dollar was the most powerful international currency so it 'was fixed as IMF's 'Money of Account'. The value of one unit of dollar was equal to 0888671 gm of gold. But due to the regular fluctuation's in the value of dollar and irregular supply, IMP gave up dollar and introduced SDR.

SDR is like a fiat money behind which there is no reserve but it is the medium Of international payments. It is only the 'Money of Account'. It is intangible money which is written only in account and is used as gold in international payments. Therefore, it is also called 'Paper Gold'. It is an easy and important source of increasing the international liquidity.

On July 1974, the value of one unit of SDR was fixed on the basis of a 'Basket of Currencies' of 16 countries. In 1978, the currencies of Denmark and South Africa were excluded from the basket of currencies and the currencies of Iran and Saudi Arabia were included. In 1981, the value of SDR was again fixed in five currencies in which American dollar, British pound, Mark of Germany, Franc of France and Japani yen were included. At present, the value of currency of every country is fixed in SDR. Mutual Exchange rates of different currencies can be increased or decreased according to the demand and supply in the market and thus, the par value system started by IMF has been ended by the floating rate system.

Sources and Uses of IMF The resources and the capital of the fund are determined on the basis of quotas obtained in gold and legal money from the member countries. At the time of establishment, the resources of IMF were estimated at at $ 1000 crore but due to the exclusion of Russia, these stood at $ 880 crore only. Every country had to pay 25 per cent of its fixed quota or 10 per cent of its authorised reserves of gold and dollars whichever is lesser in gold and the balance quota was to be deposited by the member nation in its legal currency. There was no change in these quotas till the end of 13 years since the establishment of IMP.

The assistance given by the IMF is equal to the quota of applicant country. This assistance is given in foreign currency temporarily to correct the disequilibrium in balance of payments of a member country. IMF provides assistance to the Central Bank of the member nation and does not make any transaction with the local persons. The assistance provided by IMF cannot increase 100 per cent of quotas of the member country. This assistance is provided into four parts and every part is equal to the 25 per cent of quota.

Besides the general assistance provided by IMF, there are also some special facilities in addition to 100 per cent quotas as Extended Fund facility, compensatory financing, Buffer stock financing facility, Trust fund, structural adjustment facility, Extended structural adjustment facility, technical assistance and training programmes. In Extended fund facility introduced in 1974, medium term assistance is provided in instalments to the member countries for a period of 3 years to do the structural adjustments and economic reforms. The Compensatory financing facility is provided to the member nations facing the balance of payments difficulties due to the temporary export shortfall for reasons beyond the members' control since 1963. In 1988 Compensatory and Contingency financing facility was provided by IMF. Under this facility, assistance given to the member coun-tries may be compensatory assistance, contingency assistance and the assistance for the import of foodgrains. Buffer stock financing facility is available since 1969 for building international buffer stock in order to prevent fluctuations in the export earnings of member countries. In May 1976, the trust fund was established to give assistance to those poor countries whose per capita income in 1973 was not more than 300 SDR.

This fund was created from the profits obtained by selling the gold reserves of IMP. In March 1986, structural adjustment facility was initiated to help the poor countries in improving their balance of payment system by structural adjustments. This assistance is given from the Special Disbursement Account. It is provided only to those countries which are eligible to get aid from the International Development Association (IDA). Extended structural adjustment facility was also started from April 1988 for very poor countries. For this purpose, the resources were raised by special contributions.

The technical assistance and advice provided by the fund to its members is an integral part of its activities. These take many forms, which operate at all levels of authority and cover a wide array of topics ranging from broad policy issues to narrow technical problems. Much of the assistance provided by the fund is in the nature of regular / annual consultations with members which provide an opportunity for review and appraisal of the country's economic and financial situation. When a member country develops a financial stabilisation programme, the fund assists in its execution and in monitoring its effectiveness. IMF also advises its members on specific, economic and financial problems encompassing aspects of general economic policy, problems arising from inflation, exchange and trade system, balance of payments, macro economic modelling, computer programme for economic

analysis and data processing.

In May 1964, IMF institute was established to conduct various courses for officials in Washington. In order to provide technical assistance in the field of central banking, the central banking service was started in 1963. The Fiscal Affairs department was created in 1964 to provide technical assistance in public finance. IMF also created a legal department to render technical assistance in banking, central banking, currency exchange and negotiable instruments in close association with the central banking service. It also renders technical assistance in fiscal affairs in close association with the fiscal affairs department

involving primarily the drafting of legislation on individual and corporation income taxes, direct taxes, capital gain taxes and land taxes.

India and IMF India has close relationship with IMF. It has been giving its contribution in the execution of its functioning and policy making. India has been benefited many times by the advice and economic aid of IMF. It is one of the founder members of IMP. Finance minister is the ex-officio governor in the board of governors of IMF. RBI is the alternate governor. India is represented at the IMF by an executive director who represents three other countries, viz. Sri Lanka, Bangladesh and Bhutan. India ranked 5th till 1970 among the countries which had the largest quota in IMF. At present India has lost her permanent membership because her quota in IMF ranks 11th which is less than the first five countries. India's current quota in IMF is SDR 415820 million.

On the starting of IMF, Indian Rupee was equal to 0268601 gm pure gold or 3025 American cent but in December 1949 it was devalued and was fixed equal to 0186621 gm gold. On January 6, 1966 it was again devalued and stood equal to 0118489 gm gold. At the end of parvalue system, Indian Rupee was related to the pound sterling. After it, it was affiliated to a basket of currency. Now the exchange rate of rupee is determined on the basis of free market.

During the year 2002-06 India has made purchases transaction of SDRs 493230 million and four repurchase transactions of SDRs 466474 rr@ion. On July 2004, India and IMF established a joint training programme in national banking management Institute at Pune. First training programme was started in July 2006. India also donates money in Subsidy Account of IMF. India has paid 10 lakh dollar as 13th annual instalment in the Subsidy Account of Poverty Reduction Growth Facility (PRGF) during July 2006. India provided 205 million( dollar in two separate instalments of IMF as loan under Financial Transaction Plan in May ahd June 2003.

IMF at one side has benefited its member countries by providing help in balance of payments, determining their exchange rates, spreading of technical knowledge, improving international economic relations, acting as a friend at the time of need and making member countries free from political pressure while on the other side, it has often failed in achieving stability in exchange rates (the value of various currencies is increasing or decreasing in the open market), achieving stability in the prices of gold; establishing a free trade system, getting stability in international money market. However IMF functions as a light-house for monetary and financial hindrances. It manages the financial oil for the economic machine of the world. It is in reality an international institution which helps the needy countries at the time of financial difficulties in balance of payments.

Finally it may be said that IMF has strengthened the monetary discipline among its members by timely assisting them to tide over their balance of payments deficits. It has helped the members in technical matters relating to fiscal and monetary policies, debt servicing, balance of payments, currency devaluation etc. IMF working during last 62 years since 1947 shows that all has not been well with it. It has met only with limited success. Members have violated Fund's rules regarding the alteration in the par values of the currencies. The countries whose currencies were in short-supply did not take any material step to rectify it. The success of the IMF towards the establishment of multi-lateral system of trading will depend upon the degree to which the underdeveloped countries can implement their development plans with the framework of financial stability free from the distorting effects of inflation.