International Monetary Fund (IMF): General Objectives and Major Functions

By Smriti Chand

International Monetary Fund (IMF): General Objectives and Major Functions!
A landmark in the history of world economic co­operation is the creation of the International Monetary Fund, briefly called IMF. The IMF was organised in 1946 and commenced operations in March, 1947.

The fundamental object of the IMF was the avoidance of competitive devaluation and exchange control that had characterised the era of 1930s. It was set up to administer a “code of fair practice”, in the field of foreign exchange and to make short-term loans to member nations experiencing temporary deficits in their balance of payments, to enable them to meet these payments without resorting to devaluation or exchange control, while at the same time following’ international policies to maintain domestic income and employment at high levels.
Thus, basically there are three general objectives of the IMF:
(i) The elimination or reduction of existing exchange controls,
(ii) The establishment and maintenance of currency convertibility with stable exchange rates, and
(iii) The widest extension of multi-lateral trade and payments.
In essence the Fund is an attempt to achieve the external or international advantages of gold standard system without subjecting nations to its internal disadvantages, and at the same time maintaining the internal advantages of paper standard while bypassing its external disadvantages.
The following are the major functions of the IMF:
1. It functions as a short-term credit institution.
2. It provides machinery for the orderly adjustments of exchange rates.
3. It is a reservoir of the currencies of all the member countries from 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 also provides machinery for altering sometimes the par value of the currency of a member country. In this way, it tries to provide for an orderly adjustment of exchange rates, which will improve the long-term balance of payments position of member countries.
6. It also provides machinery for international consultations.
In fine, the Fund contributes to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all member nations.
The Fund is an autonomous organisation affiliated to the UNO. IMF’s constitution represents a departure in the formation of an international organisation. It is financed by the participating countries, with each country’s contribution fixed in terms of quotas according to the relative importance of its prevailing national income and international trade.
Thus, the quota assigned to a country is determined by its contribution to the capital of the Fund. The quotas of all the countries taken together constitute the total financial resources of the Fund. Moreover, the contributed quota of a country determines its borrowing rights and voting strength.
India being one of the largest quota-holders (600 million dollars) has the honour of having a permanent seat on the Board of Executive Directors. Each member nation of the IMF is required to subscribe its quota partly in gold and partly in its own currency.
Specifically, a member nation must contribute gold equal to 25 per cent of its quota or 10 per cent of its gold stock and U.S. dollar holdings, whichever is less. The portion of subscription paid in a nation’s own currency is generally paid in the form of deposit balance in favour of the IMF held in the nation’s central bank. Thus, the Fund gets a pool of foreign currencies to lend, together with gold enables it to acquire additional amounts of currencies whenever its initial supply of some currencies becomes depleted.
The lending operations of the Fund technically take the form of sale of currency. Any member nation running short of foreign currency may buy the required currency from the Fund, paying for it in its own currency.
Since each member contributes gold to the extent of 25 per cent of its quota, the Fund freely permits a member to draw up to the amount of its gold contribution. Additional drawings are permitted only after certain careful and strict scrutinizes. Since the purpose of the Fund is to make temporary and long-term loans, it expects repayment of loans within 3 to 5 years.
The Fund has also laid down provisions relating to exchange stability. At the same time, the Fund started functioning; members were required to declare the par values of their currencies in terms of gold as a common denominator or in terms of U.S. dollar.
Thus, under IMF arrangements, gold retains its role in determining the relative values of currencies of different nations. And once the par values of different currencies are fixed, it is quite easy to determine the exchange rate between any two member nations.
However, if at any time a member country feels there is a fundamental disequilibrium in its balance of payments position, it may propose a change in the par value of its currency, i.e., its devaluation.
But devaluation is allowed or even advised by the IMF for the purpose of correcting a fundamental disequilibrium and not for undue competition or for other advantages. Thus, the decision to devalue should not be taken unilaterally by the member concerned, but only after consultation with the Fund.
The Fund has also laid down that member countries should not adopt a system of multiple exchange rates. That is to say, 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 countries deviating from the principle of fixed exchange rates. Secondly, it was laid down that a member country should not purchase or sell gold internationally at prices other than those indicated by the par values.
In essence, these provisions were laid down in order to secure the chief advantage of the gold standard system, viz., exchange stability. At the same time, the exchange rates are not rigidly fixed as in the case of gold standard and exchange depreciation or devaluation is permissible only for correcting a fundamental disequilibrium in the balance of payments of a country. Similarly, the Fund may ask a member enjoying a persistent surplus position to revalue its currency and set things right.
With a view to eliminate or minimise exchange control tactics, the Fund laid down that there should be no restrictions in ordinary trade and other current transactions. Although the Fund laid down that exchange controls and other restrictions should not be used for normal current transactions, it allows their use at all times to control international capital movements, especially capital flights.
Moreover, exchange controls are expressly permitted in the case of currencies which may be declared “scarce” by the Fund. It is also permitted during the “transition period.” Thus, the elements of exchange control have been incorporated in the provision of the Fund.
In short, the IMF may be described as a bank of central banks of different countries, because it collects the resource of the various central banks in the same way in which a country’s central bank collects cash reserves of all the commercial banks, assists them in times of emergency.
However, while a central bank can control the credit policy of its member banks, the Fund cannot control the domestic economic and monetary policies of member nations. It only seeks to maintain a multiple payments system through an orderly adjustment of the exchange rates.