IMF – Objectives, Functions of International Monetary Fund UPSC

What is IMF?

The IMF was founded at a UN conference in Bretton Woods, New Hampshire, United States, in July 1944. The International Monetary Fund (IMF) was established on 27th December 1945 with 29 member countries with the objectives of boosting economic growth and eradicating poverty across the world.

Initially, there were 29 members of the International Monetary Fund (IMF) including India as the founding member. At present, the organization has 190 members that govern the IMF, also known as the ‘Fund’. The Principality of Andorra is the 190th member of the IMF.

When was IMF Established?

One can trace the origin of the International Monetary Fund to the 1930s, a period of worldwide turmoil. During World War II, the allies, under the guidance of the US, developed plans for the establishment of an international institution to establish an international monetary order. Delegates from 44 non-communist countries agreed on the basis and operation of the IMF at the Bretton Woods Conference in July 1944.

Although the International Monetary Fund [IMF] began financial operations on March 1, 1947, it was not fully established until December 27, 1945, when 29 countries ratified the charter of the IMF.

Objectives of IMF

The IMF is considered to be an essential organization in the international economic system emphasizing reconstructing the international capital along with expanding the national economic sovereignty and welfare of the individuals.

The IMF was founded in response to the Great Depression with the goals of boosting international economic cooperation, increasing employment generation, gaining financial stability, alleviating poverty around the world, and reorganizing the global payment system.

Some of the major objectives of the International Monetary Fund (IMF) are discussed below:

• Global Monetary Cooperation: One of the major objectives of the IMF is to promote international monetary cooperation with the support of its members.
• Financial Stability: IMF aims to ensure economic stability by removing or mitigating the risks engaged in exchange rate fluctuations.
• Employment: The objective of the IMF is to promote employment generation through economic assistance and sustainable growth.
• International trade: The foremost aim is to furnish a balanced international trade.
• Poverty: Eradication of poverty across the world is one of the primary objectives of the IMF.

International Monetary Fund [IMF] Governance

The “Board of Governors” and the “Executive Board” govern the International Monetary Fund. Each member country sends a delegate to the Board of Governors, usually the heads of central banks or finance ministers.

It meets once a year to make critical decisions such as appointing new members and revising quotas. The Executive Board makes the day-to-day policy decisions of the IMF. The Board of Governors chooses 24 executive directors to oversee policy implementation of member countries. The “Managing Director” heads the IMF. The Executive Board appoints the MD for a five-year tenure.

IMF Functions

The functions of the International Monetary Fund (IMF) are categorized into three major types:

Surveillance Function

• The primary function of the IMF is to monitor the international monetary system along with the economic and financial policies of the 190 member countries. This surveillance process happens at regional, global, and country levels.
• The International Monetary Fund (IMF) analyzes stability and growth risks and suggests and assists countries in essential policy adjustments for sustainable economic growth and financial and economic stability.

Financial Function

• Economic crises can arise at anytime in any form. It can be a balance of payment crisis, high fiscal deficits or debts, etc.
• The International monetary fund provides financial assistance to countries that are hit by the crisis and help them to restore economic stability in the country.
• It also provides precautionary financial advice to the members to prevent and get prepared for the crisis.

Technical or Capacity Development Function

The International Monetary Fund also provides training and capacity development assistance to the central banks, tax authorities, finance ministers, and economic institutions of the member countries. These efforts help the countries to achieve the objectives of sustainable growth and development. The capacity development efforts of the IMF focus mainly on the following parameters:

Public Finance

• IMF guides the countries on the better mobilization of revenues and effective management of expenditure by using fiscal instruments such as tax & custom duties, budget management, public finance, debt management, etc.
• The training helps the countries to improve the infrastructure of the country such as better schools, hospitals, roads, etc, attract foreign direct investments, ensure fiscal health, foster transparency, mitigate the risk of climate change, and reduce the risks of exchange rate fluctuations, etc.

Monetary and Financial Policies

• The IMF works with the central banks of the countries on modernizing the monetary and financial policies so that they can cope with the crisis.
• Recently, the IMF has also started providing capacity development on cyber-risk and fintech.

Legal Framework

The IMF also guides the countries to align their legal and governance framework with international standards to support financial reforms, address the issues of money laundering and black money, etc.

Statistics

• It also helps the countries in the compilation, management, and analysis of financial and macroeconomic data.
• This helps the countries to better understand the economy and formulate more effective economic policies that can cater to the needs of the economy.

What are the IMF Quotas?

When the country joins the International Monetary Fund (IMF), it is assigned a quota based on the economic size of the country in relation to the global economy and the existing member countries. Quotes are provided in the denominations of the Special Drawing Rights (SDRs).

• The review of these quotes is conducted usually after every five years through which the IMF looks at the adequacy of quotes according to the needs of the member countries for liquidity and financial stability. The quota of the member countries determines the voting power of each member and its access to IMF financing.
• 250 basic votes are provided to each member plus one additional vote for each SDR 100,000 quota. India holds the position of eighth-highest quota-holding member of the IMF.

Structure of the International Monetary Fund

The highest decision-making authority is possessed by the Board of Governors of the International Monetary Fund [IMF]. Each citizen of the country comprises one governor and one alternate governor. The member of the countries leads to the appointment of the Minister of Finance or the head of the central bank. Two ministerial committees, the International Monetary and Financial Committee and the Development Committee have the responsibility of advising the Board of Governors.

• The Board of Governors have consigned most of their authorities to the Executive Board of the International Monetary Firm and keeps back the authority to approve the quotas, and allocations of the SDR [special drawing right], admit new members, and mandatorily withdraw the members and alterations or amendments of the Articles of Bylaws and Agreements.
• The International Monetary Fund’s executive board comprises 24 members. The Board of Governors plays an instrumental role in electing the Executive Board. It directs the daily affairs of the IMF and exerts the powers consigned to it by the Board of Governors and the authorities provided to it by the Articles of Agreements. The Board puts forth on the basis of consensus, sometimes the votes are taken.

Special Drawing Rights (SDR) of IMF

The Special Drawing Right [SDR] has been established by the International Monetary Fund. It is an international reserve asset that is interest-bearing. The SDR corresponds to the plethora of international currencies consisting of the dollars of the United States, Japanese yen, Euro, Chinese Renminbi, and pound sterling. The SDR value of a currency is determined by the value of dollars in the United States.

• It is also elicited by the market exchange rates, of an SDR basket of currencies. The Special Drawing Rights are also evaluated over the span of five years. The SDR possesses the claim of freely usable currencies of the members of the International Monetary Funds, this is not just a currency.
• The Special Drawing Rights are only allocated to the members of the International Monetary Funds who make active participation in the SDR department.
• As of now, all the members of the Special Drawing Rights are a part of the SDR Department. India possesses the current quota of SDR to be 5,821.5 million, leading it to be called the 13th largest quota-handling country at International Monetary Funds and providing its shareholdings at 2.44%.

Criticism of IMF

The criticism of the IMF is widely publicized as they are more, outnumbered the success of the organization in recent years. The main areas of criticism are:

• Conditions associated with the loans are obtrusive and compromise the economic and political sovereignty of the receiving countries.
• The policies of the International Monetary Fund are imposed without comprehending the definite features of the respective countries.
• The organization allows for inflationary devaluations
• The IMF policies are implemented all at go. It does not follow an adequate sequence.

IMF and India

India is one of the founding members of the International Monetary Fund. On May 31, 2000, India paid off all loans to the International Monetary Fund. The Finance Minister of India serves as the ex-officio Governor on the Board of Governors. Also, the Governor of the Reserve Bank of India acts as the Alternate Governor. Dr. Rakesh Mohan, Executive Director of India at the IMF, also represents Bangladesh, Sri Lanka, and Bhutan.

• Following the footsteps of the Bretton Woods System, the IMF now assists countries experiencing a balance-of-payments problem. Moreover, it also supports governments in dealing with multiple economic issues.
• The IMF also offers technical support and capacity building to developing and impoverished countries.
• IMF laid assistance to India during a post-partition crisis.
• The International Monetary Fund allocated funds to India when it was facing an economic crisis during the Indo-Pak conflict of 1965 and 1971. The aid that India can attain through IMF has surged due to the SDR. India has also attained a position on the Board of Directors.
• The country plays an instrumental role in specifying the policies of the IMF. India has also taken assistance to track the status of the Indian economy. Since 1933 India has not taken any economic aid from the IMF and the repayment of loans finished on 31 May 2000.
• The Finance Minister of India is part of the ex-officio Governor on the Board of Governors of the International Monetary Fund. The Governor of the Reserve Bank of India is the alternate governor at the International Monetary Fund.

Recent News Related to IMF

The World Economic Outlook 2022 by IMF has been published and cut its forecast for India’s Gross Domestic Product (GDP) growth in FY 2022-23 to 8.2%, leading it to be the fastest-growing major economy in the world. The International Monetary Fund (IMF) surged the weighting of the US dollar and Chinese yuan (Renminbi) in the Special Drawing Rights (SDR) basket of currencies. The latest and modified weightings will be effective from August 1st.

IMF UPSC

The International Monetary Fund [IMF] is a pivotal topic in the UPSC syllabus. To get a deeper understanding of the International Monetary Fund and the Economy the candidate can refer to the NCERT books. This topic beholds high importance in the Prelims and the Mains exam.

The aspirants who are eyeing and preparing comprehensively for the upcoming IAS exam must have a well-versed knowledge of these topics of Economy. You must kickstart solving the previous year papers when completed with the syllabus. The International Monetary Fund is pivotal for the upcoming exam and a candidate must be having an in-depth knowledge of all the aspects pertaining to the topic. This PDF comprises all the information of the International Monetary Fund and the 15th Finance Commission.

IMF UPSC Questions

The candidates must solve the previous year’s questions and the sample questions to be able to solve to analyze the concept and answer the questions accordingly. Some questions have been curated by the experts to aid the candidates in achieving excellence in all the topics.

Question: Which of the following two pairs are referred to as “Bretton Woods Twins”? (A) IMF and World Bank, (B) WTO and World Bank, (C) WTO and IMF, (D) UN and World Bank

Answer: (Option A) IMF and World Bank

Question: Which of the following is not a function of the IMF?1. Promote international monetary cooperation. 2. Promote economic development and structural reforms in developing countries. 3. Promote exchange stability among its members.

Options: A) 1 only, B) 2 and 3 only, C) 1 and 3 only, and D) 1,2 and 3

Answer: Option C 1 and 3 only

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