International Monetary Fund

Read the text and say what role the International Monetary Fund plays in macroeconomic policy of the world.

The International Monetary Fund was established in December 1945 following ratification of the Articles of Agreement of the Fund, formulated at the United Nations Monetary and Financial Conference held at BRETTON WOODS, New Hampshire in 1944. The fund became a specialized agency of the United Nations in 1947. The purposes of the fund are to encourage international monetary co-operation, facilitate the expansion and balanced growth of INTERNATIONAL TRADE, assist member countries in correcting BALANCE OF PAYMENTS deficits and promote FOREIGN EXCHANGE stability. The “Bretton Woods System”, or international monetary system established by the fund, was based upon a policy of FIXED EXCHANGE RATES, the elimination of exchange restrictions, CURRENCY CONVERTIBILITY and the development of a multilateral system of international payments. Exchange rates were based upon a par value system which required member countries to constrain fluctuations in their exchange rates within a margin of plus or minus one per cent round a par value expressed in terms of US dollars, which in turn were directly convertible into gold at a fixed rate. However, following the 1971 decision of the US to suspend the convertibility of dollars into gold, the ministers and CENTRAL BANK governors of the Group of Ten (see below) met in December 1971 at the Smithsonian Institute in Washington DC and ratified the 'Smithsonian Agreement' which resulted in a 10 per cent devaluation of the dollar and a realignment of exchange rates, including wider margins of fluctuation in lieu of par values. This adjusted par value system was largely abandoned when, following another dollar devaluation in 1973, the EUROPEAN COMMUNITY member countries introduced a joint system of floating their currencies against the dollar. In 1972, following the initial collapse of the Bretton Woods System of exchange rates, the fund established a Committee on Reform of the International Monetary System and Related Issues which issued a set of recommendations eventually adopted in 1976 by the Jamaica Agreement (see below).

The fund relies upon members' contributions and borrowing arrangements to finance its operations. Member contributions, payable in SDRs (see below), other members' currencies or its own currency, are determined by a quota system which assigns each member a quota related to its NATIONAL INCOME, MONETARY RESERVES, ratio of EXPORTS to national income and other economic indicators. A members' quota, which is periodically reviewed and revised, also determines its drawing rights on the funds under both regular and special facilities, its allocation of SDRs and its voting power. In 1962 an agreement was concluded whereby the Group of Ten: Belgium, Canada, France, the Federal Republic of Germany, Italy, Japan, the Netherlands, Sweden, the UK and the US along with Switzerland (an associate member of the fund), undertook to provide up to $6900 million in their own currencies if required by the fund. These General Arrangements to Borrow were reformed in 1983 and renewed for 5 further years from 1988. Until 1983 only the Group of Ten plus Switzerland could borrow under the scheme, but this right was extended to other members of the IMF and the funds available were increased to SDR 17 billion. This increase together with the increase in quotas in 1984 was necessary to permit the IMF to come to grips with the debt problems of the developing countries. These countries had borrowed heavily from commercial banks in the 1970s and largely because of the oil price hike of 1975—80 and the collapse of primary product prices in the early 1980s (the result of the world recession) they were unable to service their debts. The Fund working closely with the IBRD has played a crucial role in a series of ad hoc rescue packages, as the two institutions were in a unique position of being able to provide finance in support of adjustment programms in debtor countries and act as a catalyst for other private and official lenders.

A number of credit regulations, known as tranche policies, control members' access to the fund's general resources. In general, the tranche policies limit purchases of foreign currencies by a member to some multiple of its quota but this figure can be as much as 440 per cent for countries which can avail themselves of all the existing facilities. Access to the various facilities is only granted to countries, which have accepted certain conditions laid down by the fund with respect to appropriate policies towards the balance of payments, growth and employment creation, financial stability, structural reform and restrictions on trade and payments. These terms, which have to be accepted by a borrower, are known as conditionality. In addition to the normal stand-by facilities, the fund has established a compensatory scheme for financing temporary export fluctuations, a BUFFER STOCK financing facility, an extended facility which provides medium term financing for up to 4 years to enable members to overcome structural balance of payments difficulties, a structural adjustment facility and an enhanced structural adjustment facility. (The latter 2 facilities are designed to help low income countries improve their growth prospects.)

Against a background of inadequate growth in gold production in the early 1960s discussions took place on how to augment international LIQUIDITY. At the IMF meeting at Rio de Janeiro in 1967 a draft outline for a scheme of Special Drawing Rights (SDRs) was produced. In 1969 the members of IMF agreed to an amendment in the fund's articles to permit the fund to operate a Special Drawing Fund in addition to its General Fund and the first allocation of SDRs took place in 1970, with subsequent allocations in 1971,1972, 1979, 1980 and 1981. The SDR is an accounting creation without any backing, which, subject to a variety of conditions, debtor countries may use to settle debts. Debtors run down their drawing rights, while creditors' balances are increased. The SDR has also been adopted by other international and regional financial institutions. Initially the value of the SDR was equivalent to that of the US dollar. However, following the emergence of floating exchange rates in 1973, the value of the SDR was based upon a weighted basket of 16 currencies, where the weights reflect the importance of members' currencies according to the relative share of their economy in the volume of world exports. In 1981, the basket of currencies used to determine the value of the SDR was changed to include only the US dollar, the West German Deutschmark, the French franc, the Japanese yen and the UK pound sterling as these were the currencies of the five members having the largest volume of exports between 1975 and 1979. The fund has also distributed SDRs according to the above quota system in order to supplement the reserve assets of member countries. SDRs have not been as successful as their protagonists had hoped as they play only a very minor role in the total of international settlements. The fund's Articles of Agreement were substantially revised following the 'Jamaica Agreement' concluded at Kingston, Jamaica in May 1976. The agreement reduced the role of gold in the international monetary system, acknowledged the system of 'floating' exchange rates, revised the valuation and possible uses of the SDR and authorized the sale of the fund's gold reserves for the benefit of developing member countries.

Apart from making loans the other main function of the IMF is the surveillance of the exchange rate policies of members in an attempt to secure consistency in macroeconomic policies at the world level. This is done by engaging in annual or biennial discussions with members.

Executive authority for the Fund's operations is vested in a Board of Governors composed of two representatives from each member country. Daily activities of the fund are conducted by a permanent staff under the supervision of the Managing Director and Board of Executive Directors.