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Term Paper on the International Monetary Fund (IMF) | Economics

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Here is a compilation of term papers on the ‘International Monetary Fund (IMF)’. Find paragraphs, long and short term papers on the ‘International Monetary Fund (IMF)’ especially written for school and college students.

Term Paper on IMF


Term Paper Contents:

  1. Term Paper on the Introduction to the International Monetary Fund
  2. Term Paper on the Organization and Structure of the IMF
  3. Term Paper on the Operations of the IMF
  4. Term Paper on the Establishment of the Special Drawing Rights (SDRS)
  5. Term Paper on the Role of the IMF in India
  6. Term Paper on the Achievements of the IMF
  7. Term Paper on the Limitations of the IMF

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Term Paper # 1. Introduction to the International Monetary Fund:

A conference was held at Bretton Woods in July 1944 the purpose of the conference was to work out the statutes for the two institutions—International Monetary Fund and World Bank, for promoting international financial cooperation in the matters of exchange rates, balance of payments, re-construction of war ravaged nations and promotion of economic developments. The IMF was organised in 1946 and commenced operations in March 1947.

Nature of the IMF:

The IMF has a two-fold function as explained below:

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1. It is a Club:

It is a club which prescribed a high code of conduct for its members and also ensures that the members comply with the code.

2. It is a Financial Institution:

IMF is a financial institution which is always ready to provide loans to member countries for relatively short periods and under proper safeguards for the following purposes:

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(i) To assist the countries in solving their balance of payments problems.

(ii) To formulate appropriate measures for correcting the disequilibrium in balance of payments.

Objectives of the IMF:

Article I of the Fund Agreement forms the cornerstone of the agreement because all decisions are guided by the purposes stated in this Article.

The objectives of the fund stated in Article I are as follows:

1. To Promote International Monetary Cooperation:

Through a permanent institution this provides the machinery for consultation and collaboration on international monetary problems.

2. To Determine the Primary Objectives of Economic Policy of All Members:

According to Article I, the following should be the primary objectives of economic policy of all member countries:

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(i) To facilitate the expansion and balanced growth of international trade.

(ii) To contribute to the promotion and maintenance of high levels of employment.

(iii) To contribute to the promotion and maintenance of high levels of real income.

(iv) To contribute to the development of the productive resources.

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3. To Establish and maintain currency convertibility:

For achieving this objective, the following secondary objectives are there:

(i) To promote exchange stability

(ii) To maintain orderly exchange arrangements among members

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(iii) To avoid competitive exchange depreciation

4. To Help in the Widest Extension of Multilateral Trade and Payments:

(i) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and

(ii) To assist in the elimination of foreign exchange restrictions which hamper the growth of world trade.

5. To Lend Confidence to Members:

The IMF should lend confidence to members by making the funds resources available to them under adequate safeguard, thus providing them with opportunity to correct mal-adjustments in their balance of payments without resorting to measures which are destructive of national or international prosperity.

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6. To Shorten the Duration and Lessen the Degree of Disequilibrium:

In accordance with the above objectives to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

The fundamental objective of the IMF was the avoidance of competitive devaluation and exchange controls that had characterised the era of 1930. In essence, the fund is an attempt to achieve the external or international advantages of a gold standard system without subjecting nations to its internal disadvantages and at the same time maintain the internal advantages of paper standards while bypassing its external disadvantages.

Functions of IMF:

From the above objectives, it is easy to explain the functions of IMF, which are as follows:

1. The IMF functions as a short term credit institution.

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2. It provides machinery for the orderly adjustment of exchange rates.

3. It is a reservoir of the currencies of all member countries for which a borrower nation can borrow the currency of other nations.

4. It is a sort of lending institution in foreign exchange. However, it grants loans for financing current transactions only and not capital transactions.

5. It provides machinery for altering sometimes the par value of the currency of a member country.

6. It tries to provide an orderly adjustment of exchange rates which will improve the long term balance of payments position of member countries.

7. It also provides machinery for international consultations.

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8. The fund contributes to the promotion & maintenance of high levels of employment and real income and to the development of the productive resources of all member nations.


Term Paper # 2. Organization and Structure of the IMF:

The fund is an autonomous organization affiliated to the U. N. O. Its main office is in Washington. At present the fund has 151 members (nations). However, former Soviet bloc nations are not members of the fund. Infact, the fund represents all the countries outside the centrally controlled economies, except Switzerland, thus greatly widening the area of international monetary cooperation.

Structure:

Under the fund structure adopted at Bretton woods, there is a Board of Governors, there being a governor for every member country, appointed by the Government concerned. Normally the countries appoint one alternate representative also. Generally the representatives of the countries are their finance ministers.

The Board normally meets only annually and exercises its power in the following important matters:

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(i) Admission of new members

(ii) Revision of quotas

(iii) Election of directors etc.

All the other important decisions are delegated to the Board of Executive directors. The Board consists of 20 executive directors of whom 5 are nominated one each by the five largest quota holding countries i.e. U.S.A., U.K., West Germany, France and India. Of the remaining 15, 3 are elected by Africa, 3 by Latin America, 5 by the Far East and Pacific areas and 4 by continental Europe. The chairman of the Board of Executive directors is the managing director who is the head of the fund. The executive Board meets two or three times each week to consider problems brought before the fund.

Voting Procedure:

(i) The IMF was to be an international organization. Decisions were to be made by weighted voting rather than by one country one vote procedure. Both the U.S.A. and U.K. agreed on this point because weighted voting would assure them jointly a dominating voice in decisions.

(ii) Voting power on the Board of Governors and the Directorate is according to the size of the member’s quota, each member having 250 votes plus one additional vote for each part of its quota equal to $1,00,000 (US).

(iii) When voting is required on the waiving of conditions applicable to the granting of an application by a member for use of the fund’s resources, the voting formula is more complex, being designed to give more voting power to surplus countries.

(iv) The normal vote of the five principal members was originally as follows:

U.S.A. – 27,750 votes (27.93%)

U.K. – 13,250 votes (13.33%)

China – 5,750 votes (5.79%)

France – 5,500 votes (5.54%)

India – 4,250 votes (4.28%)

(v) Subsequent revision of quotas have altered the absolute number of votes per member but the relative voting strength of members still favour the large rich countries.


Term Paper # 3. Operations of the IMF:

The following points will explain the operations of the IMF:

1. Provisions Relating to Lending Operations:

The lending operations of the fund technically take the form of sale of currency. Any member country running short of foreign currency may buy the required currency from the fund, paying for it with its own currency. For this purpose, the fund receives resources from member countries in the form of gold and specific quantities of the currencies of the individual member countries known as ‘Quotas’. Quotas constitute subscriptions by member countries to the capital fund of the IMF.

Since each member contributes gold to the extent of 25% of its quota, the fund freely permits a member to draw upto the amount of its gold contribution. Additional drawings are permitted only after certain careful and strict securities.

The purpose of the fund is to make temporary and short term loans therefore it expects repayment of loans within 3 to 5 years. It thus, assists the borrowing members temporarily to restore equilibrium in their payments position. In this way, the fund helps in the establishment of a liberal system of international payments by helping the members to avoid imposing restrictions on imports during balance of payment difficulties.

2. Provisions Relating to Exchange Stability:

The fund has laid down the following provisions relating to exchange stability:

(i) At the time the fund started functioning, members were required to declare the par value of their currencies in terms of gold as a common denominator or in terms of U. S. dollars. Thus under IMF arrangements, gold retains its role in determining the relative values and currencies of different nations. And once, the par values of the currencies are fixed, it is quite easy to determine the exchange rate between any two member nations.

(ii) If at any time, a member country feels that there is a ‘fundamental disequilibrium’ in its balance of payments position, it may propose a change in the par value of the currency i.e. its devaluation. But devaluation is allowed by the IMF for correcting a fundamental disequilibrium and not for undue competition or other advantages. Thus the decision to devalue cannot be taken unilaterally by the member concerned but only after consultation with the fund.

(iii) The fund has also laid down that the member countries should not adopt a system of multiple exchange rates i.e. there should not be two or more rates between the currency of one member country and that of any other member country. This was necessary to prevent the countries from departing from the principle of fixed exchange rate.

(iv) It was also laid down that a member country should not purchase or sell gold internationally at prices other than those indicated by the par value.

In essence these provisions were laid down to secure the chief advantage of gold standard system viz. exchange stability. At the same time, the exchange rates were not rigidly fixed as in the case of gold standard. In some specific cases, devaluation of currency is allowed. Similarly, the fund might ask a member enjoying a persistent surplus position to revalue its currency and set things right.

3. Provisions Relating to Exchange Control Operations:

With a view to eliminate or minimise exchange control operations, the fund laid down that in ordinary trade and other current transactions, there should be no restrictions.

But the funds allow these restrictions in the following cases:

(i) The funds allow the exchange controls and other restrictions to be used at all times to control international capital movements, especially ‘Capital Flight’.

(ii) Exchange controls are expressly permitted in the case of currencies which may be declared ‘Scarce’ by the fund.

(iii) It is also permitted during the ‘transition period’. Thus the elements of exchange control have been incorporated in the provisions of the fund.

4. Provisions Relating to the Fund’s Banking Functions:

The IMF may be described as a bank of central banks of different countries because it performs the following functions:

(i) It collects the resources of the various central banks in the same way in which the country’s central bank collects cash reserves of all its commercial banks and assist them in times of emergency.

The fund cannot control the domestic and monetary policies of the member countries; it only seeks to maintain a multiple payments system through an orderly adjustment of the exchange rates.

Exchange Transactions of the IMF:

When a member country acquires currencies from the fund in exchange for its own currency, it is called an exchange operation. When a member acquires currencies in this manner, it is said to be drawing from the fund and when it returns to the fund currencies it had acquired earlier, it is said to be making a ‘Repurchase’ of its currency.

Limits to the Quantity of Credit:

The statutes of the IMF prescribe broad limits to the quantity of credit which a member country can receive from the IMF

(i) Ordinarily, a member should not borrow more than 25% of the quota in any 12 months period.

(ii) Borrowing in excess of this limit requires a specific waiver of the Executive Board.

(iii) There is also an overall credit limit which a member can receive from the IMF. This limit is 125% of a member’s quota.

(iv) A member’s borrowing from the IMF can never go beyond a point where the IMF’s holdings of the member’s currency reach 200% of its quota.

Facilities:

The Fund has developed a number of outlets for lending. These are known as facilities- (i) Gold Tranche (ii) First Credit Tranche (iii) Second Credit Tranche (iv) Third Credit Tranche (v) Fourth Credit Tranche (vi) Standby Arrangement (vii) Compensating Financing Facility. (viii) Buffer Stock facility. (ix) Oil Facility (x) Extended Facility (xi) Trust Fund Loan Facility.

Some of the above facilities are discussed below:

i. Gold Tranche:

Gold Tranche = Member’s Gold Subscription + Credit extended by the member through the fund to other members.

ii. Credit Tranches:

The drawings in the first credit tranche can be upto 25% of the quota and according to IMF’s policy. It is to be treated on liberal basis. However the requests for drawings beyond the first credit Tranche requires substantial justification. The member would have to give a programme of actions in the fiscal, monetary and exchange fields.

iii. Standby Arrangements:

These arrangements were initiated in 1952 and they involve the advance arrangements of future needs with the IMF for such credit facility. Under this arrangement the members of the IMF are given an assurance that following a review of the country’s financial and economic policies and its balance of payments position, the members can purchase from the fund, the currencies of other members, upto an agreed amount and during a stated period.

iv. Compensatory Financing Facility:

To meet the growing needs of developmental financing of the less developed countries, the IMF introduced compensating financing facility. This facility was available to all members suffering from a shortfall in export proceeds from primary commodities. The effect of the decision was thus to permit the members to draw even though they had already exhausted their credit tranches by conventional drawings. Moreover, as a result of a floating feature introduced in 1966 liberalisation, a drawing under the compensatory financing facility did not affect a member’s tranche position. Thus a member could draw under this facility while leaving its gold tranche intact and fully available for future drawings.

v. Buffer Stock Facility:

This facility was introduced in 1969. The purpose of Buffer stock facility is to assist in the financing of members’ contributions to international buffer stocks of primary products. The drawings for this financing may be made upto 50% of quota. The fund has authorised the use of fund resources for tin, cocoa and sugar buffer stocks but drawings have been made only for tin & sugar. The repurchase provisions are almost the same as for purchase in the credit tranche.

vi. Oil Facility:

This outlet has become possible because of the resources placed at the disposal of the fund by some of the oil exporting countries. Since some of the loans are repayable over a longer period, the fund has extended the time length of its lending operations. The period of repurchase under this facility is 3 to 7 years.

vii. Extended Facility:

Under the extended fund facility the fund assists those members whose economies suffer from serious balance of payments difficulties resulting from structural imbalances in production, trade, prices and an inherently weak balance of payments position. Under this facility the period of repurchase is 4 to 10 years.

viii. Trust Fund Loan Facility:

The trust fund loans are made by the Fund out of the profits it has made by its gold rate operations.


Term Paper # 4. Establishment of the Special Drawing Rights (SDRS):

Prior to World War II, gold constituted over 90% of the international liquidity. The balance consisted of foreign exchange holdings, principally in the form of Pound Sterling and U. S. dollars. These two currencies were known as ‘Reserve Currencies. ‘Until a few years ago, gold constituted the largest component of international liquidity. Over the years the importance of Pound Sterling has steadily declined and the role of dollars has increased a great deal. A need was, therefore, felt for a new type of reserve and solution of this problem was provided by special drawings rights (SDRs) which was created in 1968 as a supplement to gold and dollars.

“The SDRs are defined as a legal tender or paper gold in international payments, almost like creation of paper currency in the national economies substituting regular coins in gold and silver. SDRs supplement the traditional reserve assets, namely gold and foreign exchange.”

The scheme of SDRs was approved in 1967 but came into operation only since January 1970.

To be a participant in the SDR facility is the right of every member country, but the members can’t be compelled to join the SDR scheme. However, most of the members have become members of the scheme also. The fund can also permit the non-participating members to engage in operations and transactions involving SDRs.

The SDRs themselves are not international money, they are like coupons. The holders of the SDRs can exchange the coupons for currencies required for making international payments.

Allocation of SDR:

The allocation of SDRs is made on the basis of the quotas of IMF of the individual member countries. If a country’s quota in IMF is 28%, then it will be allocated 28% of the SDRs also.

The authority to allocate or cancel SDRs is the Board of Governors. They take the decision on the basis of the proposals from the Administration of the fund and only by a special majority.

The SDRs can be used by members in three different ways:

(i) To obtain U.S. dollars, French Francs or pound sterling from other participants to obtain currency in exchange.

(ii) To obtain balances of its own currency held by another participant, in exchange of the SDRs, by agreement with that participant.

(iii) SDRs can be used to effect repurchases and to pay charges in the funds’ general account.

Two basic problems noticeable with regard to SDRs are as follows:

(i) The SDRs do not solve the basic problem of international monetary relations such as the inter-central movement of short term funds arising out of the disturbance in international monetary equilibrium and currency gold switches. The scheme also lacks the prevention of SDR-gold switches. Gold switches means switching over to gold from currencies and SDRs.

(ii) The distribution of SDRs on the basis of IMF quotas also fails to satisfy the canons of equity because according to the scheme, a major part of the SDRs has been allocated to the rich nations already having enough liquidity.

IMF and the Less Developed Countries:

The fund has been particularly interested in the newly developing countries of the world and has been liberally assisting them to maintain a healthy balance of payments and monetary stability at home.

Problems faced by developing countries:

(i) The less developed countries which are trying to embark on the path of economic development, trying to achieve self-reliance and self-sustained growth, need more financial assistance than the developed countries of Europe. But the main problem is that these less developed countries are already under heavy debt while at the same time their requirements of developmental finance are on the increase.

(ii) One of the essential requirements of the fast growth of these countries is high rate of investment which could make the developmental projects feasible. But the high rate of investment will be possible only when higher rate of savings are there domestically. According to Keynes, savings are a direct function of income. But the income level of these countries is low and therefore, higher domestic savings are not possible over a short span of time. This creates hindrance in the economic development of the countries.

(iii) In order to enhance their developmental efforts, the developing countries need foreign borrowing. But it imposes a lot of debt burden in the subsequent years.

(iv) The Debt Servicing Charges which include interest and amortization payments put a strain on future balance of payments, because the payments in past debts also absorb a high proportion of foreign exchange earnings from exports.

(v) These countries find it difficult to translate the domestic savings into activities which ease the shortage of foreign exchange because exports are price and income inelastic whereas imports are income elastic. The difficulties of less developed countries are partly due to conditions in the industrial market economies and partly due to their own policies.

(vi) Developing countries are directly affected by fluctuations in the industrial world. Even with a high overall growth rate they have not been able to avoid the cyclical influence of industrial countries.

(vii) These countries have also been affected by high interest rates, as a result, many developed countries are squeezed between stagnating foreign exchange and soaring interest payments on the debts.

Countries like Mexico suffer heavy burden of debt. In 1990s the condition has worsened. The countries like India are today under heavy debt and face the problem of debt servicing.

Role of IMF in the Economic Growth of Developing Countries:

As the developing countries are facing difficulties in organising their monetary, Fiscal and exchange systems, they require Fund’s growing assistance in constituting a solid monetary and exchange base for their economic growth.

The fund has helped the developing countries in the following ways:

(i) The Fund has already been providing technical assistance to its members in the past, but now its activity is substantially widened to meet the challenges. In many of these countries, the Fund’s experts have assisted in the formulation of appropriate monetary, fiscal and exchange policies or in the implementation of stabilisation programmes.

(ii) Since 1964, the Fund has organised a Fiscal Affairs department whose officers advise member countries on matters relating to tax policy, tax systems, tax administration, budgeting etc.

(iii) The Fund has also organised the Central Banking Advisory service to provide technical advice to newly developing countries to establish or improve their Central Banks.

(iv) An IMF institute was also started by the Fund in 1964 to train the officials of member nations.

(v) Above all, to solve the current international liquidity problem, the IMF has succeeded in establishing the SDR scheme.


Term Paper # 5. Role of the IMF in India:

India’s Economic Policy during the planning era has been largely at odds with the free enterprise, free market and free trade policy of the IMF and IBRD. Though the socialist pattern oriented plan strategy did not allow free flow of foreign capital into the country, India’s industrial strategy has always remained dependent on foreign capital inflows.

India’s economic planning led to a control-permit raj in the Nehruvian era and thereafter. Following the soviet model planning with due Indianisation, the country had tended to become a closed economy. This was never appreciated by the IMF and World Bank Authorities. Hence these international institutions have always tried to press their views at every opportune movement.

IMF has played an important role in Indian economy. IMF has provided economic assistance from time to time to India and has also provided appropriate consultancy in determination of various policies in the country. India is the founder Member of IMF. The Finance Minister is ex-officio Governor in IMF Board of Governors. Till 1970, India was among the first five nations having the highest quota with IMF’ and due to this status India was allotted a permanent place in Executive Board of Directors.

India has taken loans in foreign currencies from IMF for improving its balance of payments imbalances. India has also taken technical consultancy for solving its internal economic problems. The expert groups of the IMF have visited India on various occasions.

Whenever India faced a foreign exchange crisis, these international authorities tried their level best to dilute Indian industrial and trade policies e.g.:

1. In 1966, when India faced a severe problem of balance of payments, the World Bank insisted on a degree of import liberalisation as a precondition for its financial support.

2. In the 1970s and onwards, India had to change her economic policies quite often. Most of such changes were towards the process of liberalisation attributed to the IMF pressure.

3. The imposition of emergency rule in 1975 also attributed to crush the political opposition against the IMF programme and strategy. In fact, Smt. Indira Gandhi was heavily pressurised to abandon her quasi socialist policies and accept the market ideology of the west. A very patent, calculated and long term campaign was launched by the IMF and the World Bank to see that India opens up its door to Western Private Investment, technology and western exports on a growing scale in due course of time.

4. In 1981, India received 5 million dollars on SDR loan under the pretext of development assistance.

5. In 1991, when India was confronted by a severe foreign exchange and financial crisis, the IMF and World Bank came to its rescue not with sympathy but to fulfill their long cherished objective. India was forced to accept all conditions of the IMF for such assistance. The Mew Economic Policy with all its dimensions towards liberalisation was chalked out under IMF’s directions. In effect, trade and exchange liberalisations were imposed upon the Indian economy at a much faster rate which probably the country had never expected. Under the zeal of globalisation of Indian economy, less attention was paid to its age old problems of poverty, unequality and chronic unemployment.

India is a prominent founder member of IMF. India is an elected director also. India has gained also in many ways by being a member of IMF e.g.:

(i) Indian currency has become an independent currency for international payments.

(ii) India has received help on several occasions to correct its trade disequilibrium.

(iii) India has become a member of World Bank because of its membership of the IMF.

(iv) India has been receiving technical assistance from the fund also.

(v) In case of emergency, India is always assured of financial assistance from the fund.

(vi) India has a key position in the policy making of the fund. India is also a member of a committee of 20 member countries.

To summarise, it can be said that when countries like India need to borrow from the international institutions, they must be alert to discourage overt and convert attempts on the officials of these institutions from doing propaganda for only those proposals and reforms which they think as the only best for the country’s improvement, especially when they are unduly dogmatic, unreasonable and biased.

India’s 13th Place in IMF General Quota:

After the 12th General Quota Review India, with its Quota 4158.2 million SDR (1. 961% share in total Quota) has again been placed as the 13th largest quota holding country.

The largest quota holders are as follows:

1. U.S.A

2. Japan

3. Germany

4. France

5. U.K.

6. Italy

7. Saudi Arabia

8. Canada

9. Russia

10. Netherland

11. China

12. Belgium

13. India

India’s Quota and Ranking:

India’s current quota in the IMF is SDR (Special Drawing Rights) 4,158.2 million in the total quota of SDK 212 billion, giving it a share-holding of 1.961 percent. India’s relative position, based on quota is 13th. However, based on voting share, India (together with its constituency countries, viz., Bangladesh, Bhutan and Sri Lanka) is ranked 21. The 12th review of quota was completed on 31 January, 2003 with no increase in quota.

The SDR 4158.2 million quota of India in IMF comprises of Fund’s holding of currency of 3271.4 million and Reserve Position of 887.09 million SDRs.

SDRs allotment and holding by India—India was allocated 681. 170 million SDRs as part of India’s allocation from the SDRs created so far by IMF. The IMF members can either retain SDRs, or use them in payments etc., or sell them to other member countries. IMF remunerates the members holding SDRs by charging all the members for SDRs allocated to them.


Term Paper # 6. Achievements of the IMF:

Undoubtedly the IMF has made a remarkable success in achieving most of its principal objectives:

1. Exchange Rate Stability:

The primary goal of the IMF was to promote stability in exchange rates. The measure of exchange stability that the world has witnessed in the IMF era is remarkably superior to what was seen during the inter-war period or gold standard regime. IMF’s objective is to combine the merits of stability with flexibility in exchange management. It is aimed at avoiding competitive exchange depreciations by requiring members to declare the par values of their currencies fixed in terms of gold or the U.S. dollar. The IMF has also permitted an orderly adjustment of exchange rates when needed for correcting disequilibrium in a country’s balance of payments.

2. Expert Consultation and Guidance:

The IMF has also served as an expert institution for consultation and guidance in international monetary matters. The fund has created a feeling among the member nations that their economic problems are not their exclusive concern but of the whole international society.

3. Expansion in International Trade:

The fund has contributed in many ways to the expansion of the world trade. By providing credit facilities to member countries, the IMF has reduced the need for their imposing import quotas and resorting to exchange controls. It assists the deficit countries in solving their trade disequilibrium problems. It also works for facilitating multilateral trade and payments.

4. Simplification:

In recent years, the fund has achieved some success in bringing about a simplification of multiple exchange system at least in countries that have sought financial assistance from the fund.

5. Multilateral System of Payments:

The fund has been instrumental in ensuring steady progress in the establishment of a multilateral system of payments in respect of current transactions. However, little success has been achieved in this direction due to agencies and organisations out of the funds review.

6. Liberal Credit Policy:

Lately the fund has changed its attitude of a conservative credit policy by accepting a more liberal credit policy. Today the fund grants development loans also. Hence, the quantum of borrowings from the fund has shown a marked increase in recent years.

7. Special Aid to Developing Countries:

The fund has been particularly interested in the newly developing countries of the world and has been liberally assisting them to maintain a healthy balance of payments and monetary stability at home. These countries have been receiving adequate assistance from the fund in determining their monetary, export-import and exchange policies. The fund has also been providing technical assistance to its members in this respect, besides imparting technical training to their officers.

8. Reconstruction of European Countries:

The fund has helped a lot in the rehabilitation of war devastated European countries. Because of the efforts of the fund, rich countries like USA gave liberal economic assistance under Marshall Plan for reconstruction of these countries.

In a nutshell the fund has been able to secure all the advantages of the managed paper standard by maximising employment and accelerating the pace of economic development and of the gold standard by maintaining comparative economic stability, while carefully avoiding the disadvantages of either.


Term Paper # 7. Limitations of the IMF:

In its working, the IMF has revealed several inadequacies in its structure and provision, discussed as follows:

1. The post war situation was characterised by serious international payment maladjustments. Such a situation required long term aid and loans for reconstruction and not temporary loans as the fund proposed. In the initial years, the fund was practically useless.

2. The fund’s choice of the par values in terms of gold or U.S. dollar was ill advised; since the original members fixed their exchange rates at a time when over valuation of currencies was most common.

3. The Fund has failed to achieve its main objective of exchange stability. It succeeded till 1971 in maintaining fixed rate of exchange. Thereafter, it became variable once again. Lack of stability in exchange rate is the main failure of IMF.

4. The Fund has failed to prevent dollar shortage. Despite the acute dollar shortage felt by the sterling Area, the fund failed to declare dollar as scarce currency and to adopt the measures necessary to make the dollar freely available.

5. The Fund has also been blamed for granting purchasing rights to certain members without taking into account their creditworthiness.

6. The fund could not remove the trade restrictions imposed by some countries to safeguard their interests. Advanced nations have been keen on removal of trade controls by member nations so that their economic interests may brighten. But this may harm the newly developing nations who therefore strongly oppose the move. The fund has therefore become a medium of exerting rival claims.

7. The fund also failed to bring stability in the process of gold despite strenuous efforts made by it.

8. Critics say that IMF is a fund of rich countries. It works at the behest of rich countries like U.S.A discrimination.

9. IMF has provided the resources of some rich countries to their supporter countries to correct their trade disequilibriums. Instead of promoting their economic development, such a help makes them careless and increases their foreign indebtedness.

10. Although the fund has increased its permanent resources and helped in the creation of a new currency in the form of SDRs, yet the problem of liquidity persists. The fund has not been able to find a proper solution to the problem of international liquidity.

11. On certain important issues, the fund did not take timely action. For instance, during 1971-72 dollar crisis, UK etc. and helps their supporters. Thus, the fund is blamed for pursuing a policy of, IMF did not bring immediate pressure on U. S. A. Government to devalue the dollar and during the same period it allowed Japanese Yen and German Mark to float indefinitely. A global monetary crisis triggered off when USA not only devalued dollar and also stopped its convertibility into gold. Due to this crisis, the fund had to bid good bye to its objectives like gold standard and fixed exchange rate. It was the biggest failure of the fund.

Conclusion:

Despite its various shortcomings, the fund has achieved striking success in the field of international monetary cooperation. If it has not proved more successful than it did, it is because of the various inherent difficulties faced by the fund in solving the various problems. In view of the improvements and changes in operation, we can hope that in the years to follow, it will play a more dynamic and comprehensive role in achieving its objectives.


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