International Monetary Fund (IMF) - History, Functions | UPSC Notes (2024)

International Monetary Fund (IMF) is an important topic for the IAS Exam and is included under the international relations and economy sections. This article will discuss the origin of the IMF and its controlling bodies, apart from India’s relations with the IMF. IAS aspirants can also download the notes PDF at the end of the article.

Aspirants can find information on the structure and other important details related to the IAS Exam, in the linked article.

Why one should read about the IMF?

The international organizations like the International Monetary Fund recur in then news. Also, GS 2 syllabus of the IAS Mains contains topic on international organizations. Hence, it becomes imperative for the aspirants to know about such institutions/organizations for their preparation.

As of February 2021, the IMF has been in the news for the following:

1. It projected the growth rate of India for 2021 to be at 11.5 percent predicting India to be the fastest-growing economy in this fiscal year.
2. The IMF’s report World Economic Outlook is important from the perspective of the GS 3 (Economy) preparation. It is published bi-annually.
3. It also releases a bi-annualGlobal Financial Stability Report.
4. IMF and COVID-19 Hub
   • Emergency Financing – IMF has responded by doubling the countries’ access to its Rapid Credit Facility (RCF) and Rapid Transfer Financing (RFI)
   • Grants for Debt Relief – With this initiative, IMF has reached out to the 29 of its poorest and most vulnerable countries through itsCatastrophe Containment and Relief Trust (CCRT).
   • Calls for Bilateral Debt Relief – IMF asked thebilateral creditors to suspend debt service payments from the low-income countries, using itsDebt Service Suspension Initiative (DSSI).
   • Enhancing Liquidity – For the global financial safety, the International Monetary Organization approved the establishment ofShort-term Liquidity Line (SLL).
   • Adjusting existing lending arrangements – The IMF’s focus is also on to adjust its lending arrangements for new needs rising amid the pandemic.
   • Policy Advice – The organization is catering to the need for policy advice to the countries to boost the economy in the time of the pandemic.
   • Capacity Development – The organization has reached out to 160 countries to address urgent issuessuch as cash management, financial supervision, cybersecurity and economic governance.

Complement your reading with the related articles linked below:

International Monetary Fund (IMF)

The formation of the IMF was initiated in 1944 at the Bretton Woods Conference. IMF came into operation on 27th December 1945 and is today an international organization that consists of 189 member countries. Headquartered in Washington, D.C., IMF focuses on fostering global monetary cooperation, securing financial stability, facilitating and promoting international trade, employment, and economic growth around the world. The IMF is a specialized agency of the United Nations.

Formation of IMF

The breakdown of international monetary cooperation during the Great Depression led to the development of the IMF, which aimed at improving economic growth and reducing poverty around the world. The International Monetary Fund (IMF) was initially formed at the Bretton Woods Conference in 1944. 45 government representatives were present at the Conference to discuss a framework for postwar international economic cooperation.

The IMF became operational on 27th December 1945 with 29 member countries that agreed to bound to this treaty. It began its financial operations on 1st March 1947. Currently, the IMF consists of 189 member countries.

The IMF is regarded as a key organisation in the international economic system which focuses on rebuilding the international capital along with maximizing the national economic sovereignty and human welfare.

Detailed information on the IMF can be checked in the video below –

Organizational Structure of International Monetary Fund (IMF)

The United Nations is the parent organization that handles the proper functioning and administration of the IMF. The IMF is headed by a Managing Director who is elected by the Executive Board for a 5-year term of office. The International Monetary Fund (IMF) consists of the Board of Governors, Ministerial Committees, and the Executive Board.

To know more about the organizational structure of IMF, refer to the table below:

Objectives of the IMF

IMF was developed as an initiative to promote international monetary cooperation, enable international trade, achieve financial stability, stimulate high employment, diminish poverty in the world, and sustain economic growth. Initially, there were 29 countries with a goal of redoing the global payment system. Today, the organization has 189 members. The main objectives of the International Monetary Fund (IMF) are mentioned below:

1. To improve and promote global monetary cooperation of the world.
2. To secure financial stability by eliminating or minimizing the exchange rate stability.
3. To facilitate a balanced international trade.
4. To promote high employment through economic assistance and sustainable economic growth.
5. To reduce poverty around the world.

What are the functions of the IMF?

IMF mainly focuses on supervising the international monetary system along with providing credits to the member countries. The functions of the International Monetary Fund can be categorized into three types:

1. Regulatory functions: IMF functions as a regulatory body and as per the rules of the Articles of Agreement, it also focuses on administering a code of conduct for exchange rate policies and restrictions on payments for current account transactions.
2. Financial functions: IMF provides financial support and resources to the member countries to meet short term and medium term Balance of Payments (BOP) disequilibrium.
3. Consultative fun­ctions: IMF is a centre for international cooperation for the member countries. It also acts as a source of counsel and technical assistance.

India & IMF

India is a founder member of the IMF. India’s Union Finance Minister is the Ex Officio Governor on the IMF’s Board of Governors. Each member country also has an alternate governor. The alternate governor for India is the Governor of the RBI. There is also an Executive Director for India who represents the country at the IMF.

• India’s quota in the IMF isSDR 13,114.4 million that gives India a shareholding of 2.76%. Read about theSpecial Drawing Rights – Created in 1969 by International Monetary Fund (IMF)at the linked article.
• This makes India the eight largest quota holding country at the organization.
• In 2000, India completed the repayment of all the loans it had taken from the IMF.
• Now, India is a contributor to the IMF.

The emerging economies have gained more influence in the governance architecture of the International Monetary Fund (IMF).

• The reforms were agreed upon by the then 188 members of the IMF in 2010, in the aftermath of the global financial meltdown.
• More than six percent of the quota shares will shift to emerging and developing countries from the U.S. and European countries.

Which countries gained?

• India’s voting rights increased to 2.63 percent from the current 2.3 percent, and China’s to 6.08 percent from 3.8. Russia and Brazil are the other two countries that gain from the reforms.

Why delay the reforms?

• Among the reasons for the delay has been the time it took the U.S Congress to approve the changes.
• Though the country holds veto power, Republicans have been agitated over “declining U.S power.”

Advantages

• For the first time, the Executive Board will consist entirely of elected executive directors, ending the category of appointed executive directors. Currently, the members with the five largest quotas appoint an executive director, a position that will cease to exist.
• The significant resource enhancement will fortify the IMF’s ability to respond to crises more effectively.
• These reforms will reinforce the credibility, effectiveness, and legitimacy of the IMF.

International Monetary Fund (IMF) UPSC Notes:- Download PDF Here

Multiple Choice Question

Consider the following Statements.

1. Loan syndication is the process of involving a group of lenders in funding various portions of a loan for a single borrower. Loan syndication most often occurs when a borrower requires an amount too large for a single lender to provide or when the loan is outside the scope of a lender’s risk exposure levels.
2. Quotas are the building blocks of the International Monetary Funds (IMF’s) financial and governance structure. An individual member country’s quota broadly reflects its relative position in the world economy. Quotas are denominated in Special Drawing Rights (SDRs), the International Monetary Fund’s (IMF’s) unit of account.
3. The Special Drawing Rights (SDR) is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
4. Bilateral Borrowing Agreements serve as a third line of defence after quotas and the New Arrangement to Borrow (NAB). Since the onset of the global financing crisis, the IMF has entered into several rounds of bilateral borrowing agreements (BBAs) to ensure that it can meet the financing needs of its members.

Choose the correct answer from the below-given options

A) Only Statements 1, 2, and 3 are true.

B) Only Statements 1, 3, and 4 are true.

C) None of the above-given statements are true.

D) None of the above-given statements are false.

Candidates can find the general pattern of the UPSC Exams by visiting the UPSC Syllabus 2022 page.

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