A project Report

On
ROLE OF IMF IN THE ERA OF GLOBALIZATION
Submitted By
Seema.M.Talreja
Roll No. 36
Research Guide
Prof. Mr. Shyam Lilani

Submitted in partial fulfillment of the Degree of

M.COM (Part 1)
SEMESTER.II
Affiliated to the University of Mumbai

Smt. Chandibai Himatmal Mansukhani College of Arts,

science, Commerce
Ulhasnagar- 421003.
2015-2016.
1

Department of Commerce

Certificate
This is to certify that, Ms. SEEMA.M.TALREJA of M.Com.-I, Sem.-II (Roll
No. - 36), has successfully completed the project titled ROLE OF IMF IN
THE ERA OF GLOBALIZATION under my guidance for the Academic
Year 2015-16. The information submitted is true and original as per my
knowledge.

Prof. SHYAMLILANI
(Project Guide)

Prof. Gopi Shamnani

Dr. Manju Lalwani Pathak
(Coordinator, M. Com Course)
( I/C Principal)

External Examiner

DECLARATION

I, Ms. SEEMA.M.TALREJA student of SMT. CHANDIBAI HIMATMAL

MANSUKHANI COLLEGE, ULHASNAGAR studying in M.Com Part I,
(Semester II); I hereby declare that I have completed this project on
ROLE OF IMF IN THE ERA OF GLOBALIZATION for the subject
Economics Of Global Trade & Finance n the academic year201516.The information submitted is true and original to the best of my
knowledge.

_______________
SEEMA.M TALREJA

ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are so
numerous and the depth is so enormous.
I would like to acknowledge the following as being idealistic
channels and fresh dimensions in the completion of this project
I take this opportunity to thank the University of Mumbai
forgiving me chance to do this project.
I would like thank my Principal, Dr. Manju Lalwani Pathak for
providing the necessary facilities required for completion of this
project.
I would also like to express my sincere gratitude towards my
project guide Prof. Mr. SHYAMLILANI whose guidance and care
made the project successful.
I would like to thank my college library, for having provided
various reference books and magazines related to my project.
Last but not the least, I would like to thank almighty God, my parents, and my
friends who helped me gather these data and have sat with me for hours
discussing about the project.

OBJECTIVE

To
To
To
To
To

study about IMF

know how it works
know it help other countries
understand its creation
understand it working in monetry terms

Limitations
The project is only limited to the study of IMf only
Other issues are being disclosed.
Time, length, and depth of the study are limited as per the requirements

of college

Scope
The project begins with a brief mention of IMF is, when it was created
how it helps other member countries.

INDEX
SR.NO

TOPICS

PG.NO

INTRODUCTION TO IMF

HISTORY

WHY WAS IT CREATED

11

WHAT DOES IMF DO

12

WHO RUNS IMF

13

WHERE DOES IMF GETS ITS MONEY

14

ITS MAIN BUSINESS

15

HOW IMF HELP POOR COUNTRIES

16

GOVERNANCE,ORGANIZATION PURPOSE

18

10

BENEFITS

20

11

CRITICIMS

21

12

HOW IMF ACHIEVE GOALS

22

13

MEMBERSHIP QUALIFIACATION

32

14

LEADERSHIP

33

15

IMF & GLOBALIZATION

35

16

OBJECTIVES

36

17

FUNCTIONS

37

18

ORGANIZATIONAL STRUCTURE

38

19

SURVIELLENCE TO GLOBAL ECONOMY

39
6

20

41

21

IMF ROLE
OPPORTUNITIES AND FUTURE OUTLOOK
FOR IMF

22

RECOMMENDATION

50

23

CONCLUSION

51

24

BIBLIOGRAPHY

52

48

EXCEUTIVE SUMMARY
The International Monetary Fund (IMF) is an international organization that was initiated in 1944 at the Bretton
Woods Conference and formally created in 1945 by 29 member countries. The IMF's stated goal was to assist in
the reconstruction of the world's international payment system postWorld War II. Countries contribute money
to a pool through a quota system from which countries with payment imbalances can borrow funds temporarily.
Through this activity and others such as surveillance of its members' economies and the demand for selfcorrecting policies, the IMF works to improve the economies of its member countries.
The IMF describes itself as an organization of 188 countries, working to foster global monetary cooperation,
secure financial stability, facilitate international trade, promote high employment and sustainable economic
growth, and reduce poverty around the world. The organization's stated objectives are to promote international
economic co-operation, international trade, employment, and exchange rate stability, including by making
financial resources available to member countries to meet balance of payments needs. Its headquarters are in
Washington, D.C., United States.
Upon initial IMF formation, its two primary functions were: to oversee the fixed exchange rate arrangements
between countries, thus helping national governments manage their exchange rates and allowing these
governments to prioritize economic growth and to provide short-term capital to aid balance-of-payments. This
7

assistance was meant to prevent the spread of international economic crises. The Fund was also intended to help
mend the pieces of the international economy post the Great Depression and World War II.

INTERNATIONAL MONETARY FUND

Introduction
Toward the end of the Second World War, in July 1944, representatives of the United States, Great Britain,
France, Russia, and 40 other countries met at Bretton Woods, a resort in New Hampshire, to lay the
foundation for the post-war international financial order. Such a new system, they hoped, would prevent
another worldwide economic cataclysm like the Great Depression that had destabilized Europe and the
United States in the 1930s and had contributed to the rise of Fascism and the war.

Therefore, the United Nations Monetary and Financial Conference, as the Bretton Woods conference was
officially called, created the International Monetary Fund (the IMF) and the World Bank to prevent
economic crises and to rebuild economies shattered by the war.
The Bretton Woods strategy addressed what were considered to be the two main causes of the pre-war
economic downturn and obstacles to future global prosperitythe lack of stable financial markets around
the world that had led to the war and the destruction caused by the war itself. The IMF would be aimed at
stabilizing global financial markets and national currencies by providing the resources to establish secure
monetary policy and exchange rate regimes, while the World Bank would rebuild Europe by facilitating
investment in reconstruction and development.
Although intended to benefit the global economy and contribute to world peace, the World Bank and the
IMF, collectively referred to as international financial institutions (IFIs), have become primary targets of
the anti-globalization movement. In many countries, they are resented and are viewed as imposing Westernstyle capitalism on developing countries without regard to the social effects.
The following Issue Brief is designed to help you understand the history, purpose, structure, and activities
of the IFIs and to describe both benefits and concerns that surround the World Bank and the IMF.

HISTORY
The International Monetary Fund was originally laid out as a part of the Bretton Woods system exchange
agreement in 1944.During the earlier Great Depression, countries sharply raised barriers to foreign trade in an
attempt to improve their failing economies. This led to the devaluation of national currencies and a decline in
world trade.
This breakdown in international monetary co-operation created a need for oversight. The representatives of 45
governments met at the Bretton Woods Conference in the Mount Washington Hotel in the area of Bretton
Woods, New Hampshire in the United States, to discuss framework for post-World War II international
10

economic co-operation. The participating countries were concerned with the rebuilding of Europe and the global
economic system after the war.

There were two views on the role the IMF should assume as a global economic institution. British economist
John Maynard Keynes imagined that the IMF would be a cooperative fund upon which member states could
draw to maintain economic activity and employment through periodic crises. This view suggested an IMF that
helped governments and to act as the US government had during the New Deal in response to World War II. The
International Monetary Fund formally came into existence on 27 December 1945, when the first 29 countries
ratified its Articles of Agreement. By the end of 1946 the Fund had grown to 39 members. On 1 March 1947, the
IMF began its financial operations, and on 8 May France became the first country to borrow from it.
The IMF was one of the key organizations of the international economic system; its design allowed the system
to balance the rebuilding of international capitalism with the maximization of national economic sovereignty
and human welfare, also known as embedded liberalism.[29] The IMF's influence in the global economy steadily
increased as it accumulated more members. The increase reflected in particular the attainment of political
independence by many African countries and more recently the 1991 dissolution of the Soviet Union because
most countries in the Soviet sphere of influence did not join the IMF.
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The Bretton Woods system prevailed until 1971, when the US government suspended the convertibility of the
US$ (and dollar reserves held by other governments) into gold. This is known as the Nixon Shock.[24] As of
January 2012, the largest borrowers from the fund in order are Greece, Portugal, Ireland, Romania and Ukraine.

Why was it created?

The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton
Woods, New Hampshire, in the northeastern United States, agreed on a framework for international economic
cooperation. They believed that such a framework was necessary to avoid a repetition of the disastrous
economic policies that had contributed to the Great Depression of the 1930s.
During that decade, attempts by countries to shore up their failing economiesby limiting imports, devaluing
their currencies to compete against each other for export markets, and curtailing their citizens' freedom to buy
goods abroad and to hold foreign exchangeproved to be self-defeating. World trade declined sharply, and
employment and living standards plummeted in many countries.
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Seeking to restore order to international monetary relations, the IMF's founders charged the new institution with
overseeing the international monetary system to ensure exchange rate stability and encouraging member
countries to eliminate exchange restrictions that hindered trade. The IMF came into existence in December
1945, when its first 29 member countries signed its Articles of Agreement. Since then, the IMF has adapted itself
as often as needed to keep up with the expansion of its membership184 countries as of June 2006and
changes in the world economy.

What does the International Monetary Fund do?

The IMF is the world's central organization for international monetary cooperation. It is an organization in
which almost all countries in the world work together to promote the common good.
The IMF's primary purpose is to ensure the stability of the international monetary systemthe system of
exchange rates and international payments that enables countries (and their citizens) to buy goods and services
from each other. This is essential for sustainable economic growth and rising living standards.
To maintain stability and prevent crises in the international monetary system, the IMF reviews national,
regional, and global economic and financial developments. It provides advice to its 184 member countries,
13

encouraging them to adopt policies that foster economic stability, reduce their vulnerability to economic and
financial crises, and raise living standards, and serves as a forum where they can discuss the national, regional,
and global consequences of their policies.
The IMF also makes financing temporarily available to member countries to help them address balance of
payments problemsthat is, when they find themselves short of foreign exchange because their payments to
other countries exceed their foreign exchange earnings.
And it provides technical assistance and training to help countries build the expertise and institutions they need
for economic stability and growth.

Who runs the IMF?

The IMF is governed by, and is accountable to, its member countries through its Board of Governors. There is
one Governor from each member country, typically the finance minister or central bank governor. The
Governors usually meet once a year, in September or October, at the Annual Meetings of the IMF and the World
Bank.
Key policy issues related to the international monetary system are considered twice a year by a committee of
Governors called the International Monetary and Financial Committee, or the IMFC. A joint committee of the
Boards of Governors of the IMF and the World Bankthe Development Committeeadvises and reports to the
14

Governors on development policy and other matters of concern to

developing countries.
The day-to-day work of the IMF is carried out by the Executive Board,
which receives its powers from the Board of Governors, and the IMF's
internationally recruited staff. The Executive Board selects the IMF's
Managing Director, who is appointed for a renewable five-year term. The Managing Director reports to the
Board and serves as its chair and the chief of the IMF's staff and is assisted by a First Deputy Managing Director
and two other Deputy Managing Directors.

Where does the IMF get its money?

The IMF's resources come mainly from the quotas that countries deposit when they join the IMF. Quotas
broadly reflect the size of each member's economy: the larger a country's economy in terms of output, and the
15

larger and more variable its trade, the larger its quota tends to be. For example, the United States, the world's
largest economy, has the largest quota in the IMF. Quotas are reviewed periodically and can be increased when
deemed necessary by the Board of Governors.
Countries deposit 25 percent of their quota subscriptions in Special Drawing Rights or major currencies, such as
U.S. dollars or Japanese yen. The IMF can call on the remainder, payable in the member's own currency, to be
made available for lending as needed.
Quotas, together with the equal number of basic votes each member has, determine countries' voting power.
Quotas also help to determine the amount of financing countries can borrow from the IMF, and their share in
SDR allocations.
Most IMF loans are financed out of members' quotas. The exceptions are loans under the Poverty Reduction and
Growth Facility, which are paid out of trust funds administered by the IMF and financed by contributions from
the IMF itself and a broad spectrum of its member countries.
If necessary, the IMF may borrow from a number of its financially strongest member countries to supplement
the resources available from its quotas. It has done so on several occasions when borrowing countries needed
large amounts of financing and a failure to help them might have put the international monetary system at risk.
Like other financial institutions, the IMF also earns income from the interest charges and fees levied on its
loans. It uses this income to meet funding costs, pay for administrative expenses, and maintain precautionary
balances. In the early 2000s, there was a decline in the demand for the IMF's nonconcessional loans, reflecting
benign global economic and financial conditions as well as policies in many emerging market countries that had
reduced their vulnerability to crises. To diversify its income sources, the IMF established an investment account
in 2005. The funds in the account are invested in eligible marketable obligations denominated in SDRs or in the
securities of members whose currencies are included in the SDR basket. The Fund also began to explore other
options for reducing its dependence on lending for its income.

The IMF's main business

Macroeconomic and financial sector policies
In its oversight of member countries, the IMF focuses on the following:
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macroeconomic policies relating to the government's budget, the

management of money and credit, and the exchange rate;

macroeconomic

performancegovernment

and

consumer

spending, business investment, exports and imports, output

(GDP), employment, and inflation;

balance of paymentsthat is, the balance of a country's

transactions with the rest of the world;

financial sector policies, including the regulation and supervision of banks and other financial
institutions; and

Structural policies that affect macroeconomic performance, such as those governing labor markets, the
energy sector, and trade.

The IMF advises members on how they might improve their policies in these areas so as to achieve higher rates
of employment, lower inflation, and sustainable economic growth.

How does the IMF help poor countries?

Most of the IMF's loans to low-income countries are made on concessional terms, under the Poverty Reduction
and Growth Facility. They are intended to ease the pain of the adjustments these countries need to make to bring
their spending into line with their income and to promote reforms that foster stronger, sustainable growth and
poverty reduction. An IMF loan also encourages other lenders and donors to provide additional financing, by
signaling that a country's policies are appropriate.
17

The IMF is not a development institution. It does notand, under its Articles of Agreement, it cannotprovide
loans to help poor countries build their physical infrastructure, diversify their export or other sectors, or develop
better education and health care systems. This is the job of the World Bank and the regional development banks.
Some low-income countries neither want nor need financial assistance from the IMF, but they do want to be able
to borrow on affordable terms in international capital markets or from other lenders. The IMF's endorsement of
their policies can make this easier. Under a mechanism introduced by the IMF in 2005the Policy Support
Instrumentcountries can request that the IMF regularly and frequently review their economic programs to
ensure that they are on track. The success of a country's program is assessed against the goals set forth in the
country's poverty reduction strategy, and the IMF's assessment can be made public if the country wishes.
The IMF also participates in debt relief efforts for poor countries that are unable to reduce their debt to a
sustainable level even after benefiting from aid, concessional loans, and the pursuit of sound policies. (A
country's debt is considered sustainable if the country can easily pay the interest due using export earnings, aid,
and capital inflows, without sacrificing needed imports.)
In 1996, the IMF and the World Bank unveiled the Heavily Indebted Poor Countries (HIPC) Initiative. The
initiative was enhanced in 1999 to provide broader, deeper, and faster debt relief, to free up resources for
investment in infrastructure and spending on social programs that contribute to poverty reduction. Part of the
IMF's job is to help ensure that the resources provided by debt reduction are not wasted: debt reduction alone,
without the right policies, might bring no benefit in terms of poverty reduction.
In 2005, the finance ministers and heads of government of the G-8 countries (Canada, France, Germany, Italy,
Japan, Russia, the United Kingdom, and the United States) launched the Multilateral Debt Relief Initiative
(MDRI), which called for the cancellation of the debts owed to the IMF, the International Development
Association of the World Bank Group, and the African Development Fund by all HIPC countries that qualify for
debt reduction under the HIPC Initiative. The IMF implemented the MDRI in January 2006 by canceling the
debt owed to it by 19 countries. Most of the cost is being borne by the IMF itself, with additional funds coming
from rich member countries to ensure that the IMF's lending capacity is not compromised.
To ensure that developing countries reap full benefit from the loans and debt relief they receive, in 1999 the IMF
and the World Bank introduced a process known as the Poverty Reduction Strategy Paper (PRSP) process. To
qualify for loans under the Poverty Reduction and Growth Facility and debt relief under the HIPC Initiative,
countries must draw up their own strategies for reducing poverty, with input from civil society. The IMF and the
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World Bank provide an assessment of the strategies, but the latter are "owned" by the countries that formulate
them.
Economic growthrising average incomeis necessary for the sustained reduction of poverty, and a
considerable body of research has shown that international trade stimulates growth. Developing countries face
many obstacles, however, to expanding their trade with other countries. Access to the industrial countries'
markets is restricted by barriers such as tariffs and quotas, and developing countries themselves have barriers
that prevent them from trading with each other. The IMF and the World Bank have been urging their members
for years to eliminate barriers to trade.
Even if their access to other markets is increased, however, many developing countries may not be able to
benefit from trade opportunities. Their export sectors may be weak because of policies that discourage
investment or trade, and they may lack appropriate institutions (like customs administration) and infrastructure
(for example, electricity to run plants, and roads and ports to get products to markets).
In 2005, the IMF and the World Bank introduced the concept of Aid for Trade for the least developed countries.
Aid for Trade includes analysis, policy advice, and financial support. The IMF provides advice to countries on
such issues as the modernization of customs administration, tariff reform, and the improvement of tax collection
to compensate for the loss of tariff revenues that may follow trade liberalization. The IMF also participates in
the Integrated Framework for Trade-Related Technical Assistance, a multi-agency, multi-donor program that
helps the least developed countries by identifying impediments to their participation in the global economy and
coordinating technical assistance from different sources.

The International Monetary Fund

Governance, Organization and Purposes
Governance
The IMF is controlled by its 187 member-countries, each of whom appoints a representative to the IMF's
Board of Governors. The Board of Governors, most of whom are the finance ministers or heads of the
central bank of the members, meet once per year to discuss and possibly achieve consensus on major
issues. In the meantime, day-to-day operations are managed by a 24-person Executive Board. The world's
major economic and political powersthe United States (the IMF's largest shareholder), Great Britain,
19

Japan, Germany, France, China, Russia, and Saudi Arabiaeach have permanent seats on the executive
board, while the 16 other directors are elected for two-year terms by groups of countries divided roughly
by geography, e.g., Caribbean, Africa, Southeast Asia, etc. The executive board, in turn, is run by the
managing director, who is elected for renewable five-year terms.
The IMF also has an International Monetary and Financial Committee of 24 representatives of the
member-countries that meets twice yearly to provide advice on the international monetary and financial
system to the IMF's staff.
In all of its operations, voting power is weighted based on the size of the economy and therefore the quota
allocation of each country. Decisions are usually taken by consensus, but the United States, as the IMF's
major shareholder, has the most influence in the institution's policy-making.
Organization
The IMF's current managing director is Ms. Christine Lagarde of France, who took office on June
28, 2011. Each members of the executive board runs a particular department of the IMF. There are
offices devoted to
a) Particular regions of the world, such as Europe, Africa, Middle East, Western Hemisphere, and Asia/Pacific;
b) Functions, such as finance, technical assistance, fiscal planning, capital markets, research, and
statistics; and, c) administrative functions of the IMF itself.
The IMF has a total of 2,600 employees, mostly based in its Washington, D.C. headquarters.
Purposes
The Bretton Woods Conference set out six goals for the IMF in its Articles of Agreement. Those
goals, as shown in the accompanying box, remain the guiding principles of the IMF today.
In simpler terms, the goals are to Facilitate the cooperation of countries on monetary policy, including
providing the necessary resources for both consultation and the establishment of monetary policy in
order to minimize the effects of international financial crises.
Assist the liberalization of international trade by helping countries increase their real incomes while
lowering Unemployment.
Help stabilize exchange rates between countries. Especially after the global depression of the
1930s, it was considered vital to establish currencies that could hold their value, serve as mediums
of international exchange, and resist any speculative attacks.
20

 Maintain a multilateral system of payments that eliminates foreign exchange restrictions. Countries are
thus free to trade with each other without worrying about the effects of interest rates and currency
depreciation on their payments.
Provide a safeguard to members of the IMF against balance of payments crises, i.e., when
governments cannot balance the money they have with the money they owe to other countries. IMF
members can have the confidence to adjust the imbalances in their national accounts without resorting
to painful measures that would hamper their prosperity, such as devaluing their currency in relation to
other countries'.
Try to reduce the effects of volatility in countries' balance of payments accounts, the IMF helps
assure that global trade and financial relationships can continue at a steady rate without the risks of
global depressions like that of the 1930s.
When founded, the IMF also operated the system of international exchange on the basis of gold
reserves that its member countries pledged to it. In 1971, however, the U.S. government under President
Nixon eliminated the connection between the U.S. dollar and gold as a means to resolve a domestic
monetary crisis. By allowing the dollar's value to "float" as opposed to having it pegged to gold, the U.S.
government was able to adjust its monetary policy to deal with changes in the American economy.
Subsequently, the IMF eliminated its use of gold, and all other members were allowed to "float" their
currencies as well.

BENEFITS
The loan conditions ensure that the borrowing country will be able to repay the Fund and that the country won't
attempt to solve their balance of payment problems in a way that would negatively impact the international
economy. The incentive problem of moral hazard, which is the actions of economic agents maximizing their
own utility to the detriment of others when they do not bear the full consequences of their actions, is mitigated
through conditions rather than providing collateral; countries in need of IMF loans do not generally possess
internationally valuable collateral anyway.
Conditionality also reassures the IMF that the funds lent to them will be used for the purposes defined by the
Articles of Agreement and provides safeguards that country will be able to rectify its macroeconomic and
structural imbalances. In the judgment of the Fund, the adoption by the member of certain corrective measures
21

or policies will allow it to repay the Fund, thereby ensuring that the same resources will be available to support
other members.
As of 2004, borrowing countries have had a very good track record for repaying credit extended under the
Fund's regular lending facilities with full interest over the duration of the loan. This indicates that Fund lending
does not impose a burden on creditor countries, as lending countries receive market-rate interest on most of their
quota subscription, plus any of their own-currency subscriptions that are loaned out by the Fund, plus all of the
reserve assets that they provide the Fund.

CRITICISMS
In some quarters, the IMF has been criticized for being 'out of touch' with local economic conditions, cultures,
and environments in the countries they are requiring policy reform. [6] The Fund knows very little about what
public spending on programs like public health and education actually means, especially in African countries;
they have no feel for the impact that their proposed national budget will have on people. The economic advice
the IMF gives might not always take into consideration the difference between what spending means on paper
and how it is felt by citizens.
The view is that conditionality undermines domestic political institutions. The recipient governments are
sacrificing policy autonomy in exchange for funds, which can lead to public resentment of the local leadership
for accepting and enforcing the IMF conditions. Political instability can result from more leadership turnover as
22

political leaders are replaced in electoral backlashes. [6] IMF conditions are often criticized for their bias against
economic growth and reduce government services, thus increasing unemployment.
Another criticism is that IMF programs are only designed to address poor governance, excessive government
spending, excessive government intervention in markets, and too much state ownership. This assumes that this
narrow range of issues represents the only possible problems; everything is standardized and differing contexts
are ignored. A country may also be compelled to accept conditions it would not normally accept had they not
been in a financial crisis in need of assistance.

How Does the IMF Achieve Its Goals?

The IMF has three main activities: surveillance, financial assistance, and technical assistance.

Surveillance
Each year, the IMF sends economists to each of its member countries to analyze the country's economic
situation. The team examines fiscal and monetary policy, exchange rate, general macroeconomic stability,
and any related policies, such as labor policy, trade policy, and social policy (such as the pension system).
This process is known as an Article IV consultation, after the section authorizing it in the Articles of
Agreement. The purpose of such consultation is to provide an outside check on national decisions that might
have an affect on the international economic system.
23

After the team finishes its analysis, the IMF executive board discusses the report and gives it to the leaders
of the country in question as the official opinion of the IMF. A
version of the report is also published and available as an IMF
Public
Information Notice (PIN). The IMF also performs similar reviews of
regional policy by such organizations as the European
Union (EU), the West African Economic and Monetary Union, and
the Eastern Caribbean Currency Union.
On a global level, the IMF also publishes its analysis of the world economic system in its World
Economic Outlook twice per year and the Global Financial Stability Report, which focuses specifically on
the international capital markets, also twice per year.

Why is IMF surveillance important?

In today's globalize economy, where the policies of one country typically affect many other countries,
international cooperation is essential. The IMF, with its nearly-universal membership of 185 countries, facilitates
this cooperation. There are two main aspects to the IMFs work: multilateral surveillance or oversight of the
world economy; and bilateral surveillance, which comprises appraisal of and advice on the policies of each
member country

24

a. Country surveillance
IMF economists monitor members economies on a continuous basis, and regularlyusually once a yearvisit
member countries to exchange views with the government and central bank. The focus is on whether there are
risks to domestic and external stability that argue for adjustments in economic or financial policies. During their
mission, IMF staff also often meets with other stakeholders, such as parliamentarians and representatives of
business, labor unions, and civil society to help evaluate the countrys economic policies and direction. Upon its
return to headquarters, the mission submits a report to the IMFs Executive Board for discussion. The Boards
views are subsequently transmitted to the countrys authorities.
In recent years, surveillance has become increasingly transparent. Almost all member countries now agree to
publication of a Public Information Notice, which summarizes the views of IMF staff and the Executive Board.
In nine out of ten cases, the staff report and other accompanying analysis is also published on the IMFs website.

b.Multilateral surveillance
The IMF continuously reviews global and regional economic trends. Its key instruments of global and regional
surveillance are two semi-annual publications, the World Economic Outlook (WEO) and the Global Financial
Stability Report (GFSR). The WEO provides detailed analysis of the state of the world economy, addressing
issues of pressing interest, such as the current global financial turmoil and economic downturn. The GFSR
provides an up-to-date assessment of global financial markets and prospects and highlights imbalances and
vulnerabilities that could pose risks to financial market stability. The IMF also publishes Regional Economic
Outlook reports, Sometimes the IMF will draw attention to specific inter-linkages in the global economy, with
the option of conducting multilateral consultations to foster debate and develop policy actions as a means to
address problems of systemic or regional importance as was done in 2006-07 on global economic imbalances.
c. The evolution of IMF surveillance and its role today
Surveillance in its present form was established by Article IV of the IMFs Articles of Agreement, as revised in
the late 1970s following the collapse of the Bretton Woods system of fixed exchange rates. Under Article IV,
member countries undertake to collaborate with the IMF and with one another to promote the stability of the
global system of exchange rates. In particular, they commit to running their domestic and external economic
policies in keeping with a mutually agreed code of conduct. For its part, the IMF is charged with (i) overseeing
the international monetary system to ensure its effective operation, and (ii) monitoring each member's

25

compliance with its policy obligations. To ensure that surveillance remains effective, the IMF is constantly
reviewing its policy framework.
d. Strengthening the policy framework for surveillance
In June 2007, the policy framework of surveillance received its first major update since the 1970s, with the
adoption of the Decision on Bilateral Surveillance over Members Policies. The Decision clarifies:
That country surveillance should be focused on assessing whether countries policies promote external
stability. That means that surveillance should mainly focus on monetary, fiscal, financial, and exchange rate,
policies and assess risks and vulnerabilities;
What is and what is not acceptable to the international community in terms of how countries conduct their
exchange rate policies; and
That surveillance should be collaborative, candid, and evenhanded, taking into account countries specific
circumstances.
In order to strengthen implementation, a set of guidelines were published in August 2008. In these guidelines,
the Managing Director proposes the use of ad hoc consultations on exchange rates to supplement the usual
consultation procedures.

e. Strengthening the practice of surveillance

Surveillance needs to evolve with the global economy. For example, the current financial crisis has shown the
need for deeper analysis of the linkages between the real economy and the financial sector. Building on the
Financial Sector Assessment Program (FSAP), financial sector issues are receiving greater coverage under
surveillance and analytical tools for integrating financial sector and capital markets analysis into macroeconomic
assessments are being developed. In their advice to individual countries, IMF staff seeks to leverage crosscountry experiences and policy lessons, drawing on the organizations unique vantage point as a global financial
institution. Spillovers of members policies on other members economies also receive particular attention in
staff analysis, and the IMF has been sharpening its exchange rate assessments.

Financial Assistance
26

The central activity undertaken by the IMF is financial assistance to national treasury departments. Member
countries with balance of payments problems can receive credits and loans to pay off their obligations and
readjust their economic policies so that they will not face another crisis or near-crisis. To receive assistance,
however, the member-country must agree, through a "letter of intent," to implement changes in its fiscal and
monetary policies that IMF experts have determined are necessary. These conditions, as explained below,
are the cause of some of the most vociferous resentment toward the IMF because they often involve very
detailed changes in national policies. Nevertheless, IMF assistance is considered so essential to national
economic health that countries generally agree even when they have strong reservations
The loans are disbursed in phases to ensure that the receiving country moves forward with the reforms
required of it. Loans are generally granted for relatively short periods of time, for just a few months, or for
as long as ten years, depending on the type of loan. The receiving country must pay back loans on time,
on a rigorous schedule, because the loans are intended to be temporary assistance.
Countries are discouraged from becoming dependent on IMF loans, and, in fact, may face extra charges if
too much of their government funding comes from the IMF. Rather, the IMF hopes to play a role as a
catalyst for private banks to lend to governments, because the extension of an IMF loan is intended to
express confidence that the receiving country is getting its financial house in order.

IMF LENDING:
A core responsibility of the IMF is to provide loans to member countries experiencing balance of payments
problems. This financial assistance enables countries to rebuild their international reserves; stabilize their
currencies; continue paying for imports; and restore conditions for strong economic growth while undertaking
policies to correct the underlying problems. Unlike development banks, the IMF does not lend for specific
projects.
a.When can a country borrow from the IMF?
A member country may request IMF financial assistance if it has a balance of payments needthat is, if it
cannot find sufficient financing on affordable terms to meet its net international payments. An IMF loan
27

provides a cushion that eases the adjustment policies and reforms that a country must make to correct its balance
of payments problem and restore conditions for strong economic growth
a. The changing nature of IMF lending
The volume of loans provided by the IMF has fluctuated significantly over time. The oil shock of the 1970s and
the debt crisis of the 1980s were both followed by sharp increases in IMF lending. In the 1990s, the transition
process in Central and Eastern Europe and the crises in emerging market economies led to further surges of
demand for IMF resources. Deep crises in Latin America kept demand for IMF resources high in the early
2000s, but these loans were largely repaid as conditions improved. IMF lending rose again starting in late 2008,
as a period of abundant capital flows and low pricing of risk gave way to global deleveraging in the wake of the
financial crisis in advanced economies
b. The process of IMF lending
Upon request by a member country, an IMF loan is usually provided under an arrangement, which stipulates
the specific policies and measures a country has agreed to implement to resolve its balance of payments
problem. The economic program underlying an arrangement is formulated by the country in consultation with
the IMF and is presented to the Funds Executive Board in a Letter of Intent. Once an arrangement is
approved by the Board, the loan is usually released in phased installments as the program is implemented.

c. IMF Facilities
Over the years, the IMF has developed various loan instruments, or facilities, that are tailored to address the
specific circumstances of its diverse membership. Low-income countries may borrow at a concessional interest
rate through the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF).
Non-concessional loans are provided mainly through Stand-By Arrangements (SBA), the Flexible Credit Line
(FCL) for members with very strong policies and policy framworks, and the Extended Fund Facility (which is
useful primarily for low-income members). The IMF also provides emergency assistance to support recovery
from natural disasters and conflicts, in some cases at concessional interest rates.

28

Except for the PRGF and the ESF, all facilities are subject to the IMFs market-related interest rate, known as
the rate of charge, and large loans carry a surcharge. The rate of charge is based on the SDR interest rate,
which is revised weekly to take account of changes in short-term interest rates in major international money
markets. The amount that a country can borrow from the Fundits access limitvaries depending on the type
of loan, but is typically a multiple of the countrys IMF quota. This limit may be exceeded in exceptional
circumstances. The Flexible Credit Line has no pre-set cap on access.
Poverty Reduction and Growth Facility (PRGF) and Exogenous Shocks Facility (ESF).PRGF-supported
programs for low-income countries are underpinned by comprehensive country-owned strategies, delineated in
their Poverty Reduction Strategy Papers (PRSPs). The ESF, which was modified in September 2008 to make it
more flexible and increase access levels, aims to meet the needs of low-income member countries for rapid
shock assistance with streamlined conditionality. The interest rate levied on PRGF and ESF loans is only 0.5
percent, and loans are to be repaid over a period of 510 years.
Stand-By Arrangements (SBA). The bulk of Fund assistance is provided through SBAs. The SBA is designed
to help countries address short-term balance of payments problems. The length of a SBA is typically 1224
months, and repayment is due within 3-5 years of disbursement. SBAs may be provided on a precautionary
basiswhere countries choose not to draw upon approved amounts but retain the option to do so if conditions
deteriorateboth within the normal access limits and in cases of exceptional access. The SBA provides for
flexibility with respect to phasing, with front-loaded access where appropriate.

Flexible Credit Line (FCL).The FCL is for countries with very strong fundamentals, policies, and track records
of policy implementation and is particularly useful for crisis prevention purposes. FCL arrangements are
approved for countries meeting pre-set qualification criteria. The length of the FCL is 6 months or 1 year (with a
mid-term review). Access is determined on a case-by-case basis, is not subject to the normal access limits, and is
available in a single up-front disbursement rather than phased. Disbursements under the FCL are not conditioned
on implementation of specific policy understandings as is the case under the SBA. There is flexibility to draw on
the credit line at the time it is approved, or it may be treated as precautionary.

29

Extended Fund Facility (EFF).This facility was established in 1974 to help countries address longer-term
balance of payments problems requiring fundamental economic reforms. Arrangements under the EFF are thus
longer than SBAsusually 3 years. Repayment is normally expected within 47 years. Surcharges apply to
high levels of access.

Emergency assistance. The IMF provides emergency assistance to countries that have experienced a natural
disaster or are emerging from conflict. Emergency loans are subject to the basic rate of charge, although interest
subsidies are available for PRGF-eligible countries, subject to availability. Loans must be repaid within 35
years.

30

Technical Assistance
The IMF provides technical assistance on fiscal and monetary policy, regulatory procedures, tax policy, and
collection of statistics, among other issues. These programs are aimed at strengthening developing countries'
abilities to reform and properly manage their macroeconomic policies. The IMF dispatches its own experts
and private consultants on training missions to educate government officials and also runs the IMF Institute in
Washington, D.C. to provide courses for officials.
In addition to these three main activities, the IMF also has instituted various programs to ensure the stability of
financial system management on a global scale. For example, the IMF, along with the World Bank and other
institutions, has drafted voluntary standards and codes for countries and financial institutions to adapt in order
to increase accountability and transparency and to limit corruption. The IMF also has developed two systems of
collection and dissemination of statistical information to help assess the economic viability of the domestic and
international financial systems.
a. Who benefits from IMF technical assistance?

Technical assistance is one of the benefits of IMF membership. About 90 percent of IMF technical assistance
goes to low and lower-middle income countries. Post-conflict countries are also major beneficiaries. Apart from
the immediate benefit to recipient countries, by helping individual countries reduce weaknesses and
vulnerabilities, technical assistance also contributes to a more robust and stable global economy. Further,
technical assistance provided to emerging and industrialized economies in select cutting-edge areas helps
provide traction to IMF policy advice, and keeps the institution up-to-date on innovations and risks to the
international economy.
b. Integration of technical assistance with IMF surveillance and lending
Technical assistance contributes to the effectiveness of the IMF's surveillance and lending programs, and is
an important complement to these other core IMF functions. Specialized technical assistance from the IMF
helps build capacity in countries for effective policymaking, including in support of surveillance or lending

31

operations. Conversely, surveillance and lending work results in policy and other experiences that further
inform and strengthen the IMF's technical assistance program according to international best practices. In
view of these linkages, achieving greater integration between technical assistance, surveillance, and lending
operations is a key priority for the IMF.
c. In what areas does the IMF provide technical assistance?
The IMF provides technical assistance in its areas of core expertise: macroeconomic policy, tax policy and revenue
administration, expenditure management, monetary policy, the exchange rate system, financial sector sustainability,
and macroeconomic and financial statistics. In particular, efforts in recent years to strengthen the international
financial system have triggered additional demands for IMF technical assistance. For example, countries have asked
for help to address financial sector weaknesses identified within the framework of the joint IMF-World Bank
Financial Sector Assessment Program; adopt and adhere to international standards and codes for financial, fiscal,
and statistical management; implement recommendations from off-shore financial centers assessments; and
strengthen measures to combat money laundering and the financing of terrorism.
At the same time, there is a continuing demand for technical assistance to help low-income countries build capacity
to design and implement poverty-reducing and growth programs, and to help heavily indebted poor countries
undertake debt sustainability analyses and manage debt-reduction programs. The IMF also contributes actively to
the Integrated Framework for trade-related technical assistance, which aims to assist low-income countries expand
their participation in the global economy.
d. How is technical assistance provided?
The recipient country is fully involved in the entire process of technical assistance, from identification of
need, to implementation, monitoring, and evaluation.
The IMF delivers technical assistance in various ways. Depending on the nature of the assignment, support is
often provided through staff missions of limited duration sent from headquarters, or the placement of experts
and/or resident advisors for periods ranging from a few weeks to a few years. Assistance might also be
32

provided in the form of technical and diagnostic studies, training courses, seminars, workshops, and "on-line"
advice and support.
The IMF has increasingly adopted a regional approach to the delivery of technical assistance and training. It
operates six regional technical assistance centersin the Pacific; the Caribbean; East, West and Central
Africa; and in the Middle East. In May 2009, the IMF opened a new center in Central America, and it is
planning to open three additional regional centersin Central Asia, and two further centers in Africa. In
addition to training offered at the
IMF Institute in Washington D.C., the IMF also offers courses, workshops, and seminars for country officials
through a network of seven regional training institutes and programs.
The regional centers will be complemented by technical assistance financed through topical trust funds. A first
such fund was will start operations in May 2009, concentrating on institution building in connection with antimoney laundering and combating the financing of terrorism
e. How is technical assistance paid for?
Technical assistance accounts for about one-fifth of the IMF's operating budget. It is financed by both internal
and external resources, the latter comprising funds from bilateral and multilateral donors. Such cooperation
and resource sharing with external donors has a few benefits: it leverages the internal resources available for
technical assistance; helps avoid duplication of advice by different donors, and strengthens collaboration with
donors and other technical assistance providers.
Bilateral donors to the IMF's technical assistance program include Australia, Austria, Belgium, Brazil,
Canada, China, Denmark, Finland, France, Germany, India, Ireland, Italy, Japan, the Republic of Korea,
Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Russia, Singapore, Sweden, Switzerland, the
United Kingdom, and the United States. Multilateral donors include the African Development Bank, the Arab
Monetary Fund, the Asian Development Bank, the European Commission, the Inter-American Development
Bank, the United Nations, the United Nations Development Program (UNDP), and the World Bank. In FY
2008, external financing accounted for approximately a fifth of the IMF's total technical assistance budget.

33

MEMBERSHIP QUALIFICATIONS:
Any country may apply for membership to the IMF. The application will be considered first by the IMF's
Executive Board. After its consideration, the Executive Board will submit a report to the Board of Governors
of the IMF with recommendations in the form of a "Membership Resolution." These recommendations cover
the amount of quota in the IMF, the form of payment of the subscription, and other customary terms and
conditions of membership. After the Board of Governors has adopted the "Membership Resolution," the
applicant state needs to take the legal steps required under its own law to enable it to sign the IMF's Articles
of Agreement and to fulfill the obligations of IMF membership. Similarly, any member country can
withdraw from the Fund, although that is rare. For example, in April 2007, the president of Ecuador, Rafael
Correa announced the expulsion of the World Bank representative in the country. A few days later, at the end
of April, Venezuelan president Hugo Chavez announced that the country would withdraw from the IMF and
the World Bank. Chavez dubbed both organizations as the tools of the empire that serve the interests of
the North. As of June 2009, both countries remain as members of both organizations. Venezuela was forced
to back down because a withdrawal would have triggered default clauses in the country's sovereign bonds.
A member's quota in the IMF determines the amount of its subscription, its voting weight, its access to IMF
financing, and its allocation of Special Drawing Rights (SDRs). The United States has exclusive veto power.
A member state cannot unilaterally increase its quota increases must be approved by the Executive Board
and are linked to formulas that include many variables such as the size of a country in the world economy.
For example, in 2001, China was prevented from increasing its quota as high as it wished, ensuring it
remained at the level of the smallest G7 economy (Canada).[11] In September 2005, the IMF's member
countries agreed to the first round of ad hoc quota increases for four countries, including China. On March
28, 2008, the IMF's Executive Board ended a period of extensive discussion and negotiation over a major
package of reforms to enhance the institution's governance that would shift quota and voting shares from
advanced to emerging markets and developing countries. The Fund's Board of Governors must vote on these
reforms by April 28, 2008

34

LEADERSHIP
Board of Governor:
The Board of Governors consists of one governor and one alternate governor for each member country. Each
member country appoints its two governors. The Board normally meets once a year and is responsible for
electing or appointing executive directors to the Executive Board.
The Board of Governors is advised by the International Monetary and Financial Committee and the
Development Committee. The International Monetary and Financial Committee has 24 members and
monitors developments in global liquidity and the transfer of resources to developing countries. The
Development Committee has 25 members and advises on critical development issues and on financial
resources required to promote economic development in developing countries. They also advise on trade and
global environmental issues.

Executive Board:
24 Executive Directors make up Executive Board. The Executive Directors represent all 188 membercountries. Countries with large economies have their own Executive Director, but most countries are grouped
in constituencies representing four or more countries.
Following the 2008 Amendment on Voice and Participation, eight countries each appoint an Executive
Director: the United States, Japan, Germany, France, the United Kingdom, China, the Russian Federation,
and Saudi Arabia. The remaining 16 Directors represent constituencies consisting of 4 to 22 countries. The
Executive Director representing the largest constituency of 22 countries accounts for 1.55% of the vote.

35

Managing Director:
The IMF is led by a managing director, who is head of the staff and serves as Chairman of the Executive
Board. The managing director is assisted by a First Deputy managing director and three other Deputy
Managing Directors. Historically the IMF's managing director has been European and the president of the
World Bank has been from the United States. However, this standard is increasingly being questioned and
competition for these two posts may soon open up to include other qualified candidates from any part of the
world.
In 2011 the world's largest developing countries, the BRIC nations, issued a statement declaring that the
tradition of appointing a European as managing director undermined the legitimacy of the IMF and called for
the appointment to be merit-based. The head of the IMF's European department is Antonio Borges of
Portugal, former deputy governor of the Bank of Portugal. He was elected in October 2010.

Voting Power:
Voting power in the IMF is based on a quota system. Each member has a number of "basic votes" (each
member's number of basic votes equals 5.502% of the total votes), plus one additional vote for each Special
Drawing Right (SDR) of 100,000 of a member country's quota. The Special Drawing Right is the unit of
account of the IMF and represents a claim to currency. It is based on a basket of key international currencies.
The basic votes generate a slight bias in favour of small countries, but the additional votes determined by
SDR outweigh this bias.

36

IMF & GLOBALIZATION

Globalization encompasses three institutions: global financial markets and transnational companies, national
governments linked to each other in economic and military alliances led by the US, and rising "global
governments" such as World Trade Organization (WTO), IMF, and World Bank. Charles Debar argues in his
book People before Profit, "These interacting institutions create a new global power system where
sovereignty is globalized, taking power and constitutional authority away from nations and giving it to
global markets and international bodies." Titus Alexander argues that this system institutionalizes global
inequality between western countries and the Majority World in a form of global apartheid, in which the IMF
is a key pillar.
The establishment of globalised economic institutions has been both a symptom of and a stimulus for
globalization. The development of the World Bank, the IMF regional development banks such as the
European Bank for Reconstruction and Development (EBRD), and, more recently, multilateral trade
institutions such as the WTO indicates the trend away from the dominance of the state as the exclusive unit
of analysis in international affairs. Globalization has thus been transformative in terms of a
reconceptualizing of state sovereignty
US President Bill Clinton's administration's aggressive financial deregulation campaign in the 1990s,
globalization leaders overturned long-standing restrictions by governments that limited foreign ownership of
their banks, deregulated currency exchange, and eliminated restrictions on how quickly money could be
withdrawn by foreign investors.

37

OBJECTIVES

Consultation and collaboration on international monetary problems.

Maintenance of high level employment and real income.

Promote exchange stability and avoid competitive exchange depreciation.

Establish multilateral system of payments and eliminate foreign exchange restrictions.

Give confidence to members through fund supplies shorten the disequilibria in balance of payments.
The IMF holds a relatively large amount of gold among its assets, not only for
reasons of financial soundness, but also to meet unforeseen contingencies. The
IMF holds about 2,814 metric tons, of gold at designated depositories. The IMF's holdings amount to
about $160 billion.

FUNCTIONS

Reviewing and monitoring global financial developments.

Lending hard currencies and reform policies to promote sustainable growth.

Offering wide range of technical assistance and training for government and central bank officials.
38

Working with its member governments, international organizations, regulatory bodies and private
sector to strengthen financial system.

Make assessment of member countries to identify actual and potential weakness Improve regulatory
standards.

Preparation of reports publishing information

ORGANISATIONAL STRUCTURE
Central office:
In Washington Autonomous body affiliated to UNO Highest authority- Board governors of each member
countries- also policy making bodies Meets once a years.
39

Day to day decision making:

Executive board International monetary and financial committee- 24 governors representing group of
countries- meet twice a year- discuss key policy issues of IMF Joint committee of IMF & world bank called
development committee advises and reports to governors on developmental issues concerning developing
countries.
FINANCIAL ORGANISATIONS
Resources:
Quota of member countries and supplement borrowings.
Quotas:
Subscription by member countries to capital fund -fixed for each country based on economic size -forms the
basis for deciding SDRs, voting power, and share in allocation of SDRs -25% of countries quota should be
paid in gold/US dollars -75% in own currency -reviewed at intervals of 5years. The more powerful the
country the larger the quota -member country can draw to meet BOP deficits.
The IMF works to foster global growth and economic stability. It provides policy advice and financing to
members in economic difficulties and also works with developing nations to help them achieve
macroeconomic stability and reduce poverty. The rationale for this is that private international capital
markets function imperfectly and many countries have limited access to financial markets. Such market
imperfections, together with balance of payments financing, provide the justification for official financing,
without which many countries could only correct large external payment imbalances through measures with
adverse effects on both national and international economic prosperity. The IMF can provide other sources
of financing to countries in need that would not be available in the absence of an economic stabilization
program supported by the Fund.
The IMF's role was fundamentally altered after the floating exchange rates post 1971. It shifted to examining
the economic policies of countries with IMF loan agreements to determine if a shortage of capital was due to
economic fluctuations or economic policy. The IMF also researched what types of government policy would
40

ensure economic recovery. The new challenge is to promote and implement policy that reduces the
frequency of crises among the emerging market countries, especially the middle-income countries that are
open to massive capital outflows. Rather than maintaining a position of oversight of only exchange rates,
their function became one of surveillance of the overall macroeconomic performance of its member
countries. Their role became a lot more active because the IMF now manages economic policy instead of
just exchange rates.

SURVIELLENCE TO GLOBAL ECONOMY

The IMF is mandated to oversee the international monetary and financial system and monitor the economic
and financial policies of its 188 member countries. This activity is known as surveillance and facilitates
international co-operation. Since the demise of the Bretton Woods system of fixed exchange rates in the
early 1970s, surveillance has evolved largely by way of changes in procedures rather than through the
41

adoption of new obligations. The responsibilities of the Fund changed from those of guardian to those of
overseer of members policies.
The Fund typically analyses the appropriateness of each member countrys economic and financial policies
for achieving orderly economic growth, and assesses the consequences of these policies for other countries
and for the global economy.
In 1995 the International Monetary Fund began work on data dissemination standards with the view of
guiding IMF member countries to disseminate their economic and financial data to the public. The
International Monetary and Financial Committee (IMFC) endorsed the guidelines for the dissemination
standards and they were split into two tiers: The General Data Dissemination System (GDDS) and the
Special Data Dissemination Standard (SDDS).
The primary objective of the GDDS is to encourage IMF member countries to build a framework to improve
data quality and increase statistical capacity building. Upon building a framework, a country can evaluate
statistical needs, set priorities in improving the timeliness, transparency, reliability and accessibility of
financial and economic data. Some countries initially used the GDDS, but later upgraded to SDDS.

GOOD GOVERNANCE- IMFS ROLE

Good governance is important for countries at all stages of development. . . . Our approach is to concentrate
on those aspects of good governance that are most closely related to our surveillance over macroeconomic
policies.
The International Monetary Fund has long provided advice and technical assistance that has helped to foster
good governance, such as promoting public sector transparency and accountability. Traditionally the IMFs
42

main focus has been on encouraging countries to correct macroeconomic imbalances, reduce inflation, and
undertake key trade, exchange, and other market reforms needed to improve efficiency and support sustained
economic growth. While these remain its first order of business in all its member countries, increasingly the
IMF has found that a much broader range of institutional reforms is needed if countries are to establish and
maintain private sector confidence and thereby lay the basis for sustained growth.
Mirroring the greater importance the membership of the IMF places on this matter, the declaration
Partnership for Sustainable Global Growth that was adopted by the IMFs Interim Committee at its meeting
in Washington on September 29, 1996, identified "promoting good governance in all its aspects, including
ensuring the rule of law, improving the efficiency and accountability of the public sector, and tackling
corruption" as an essential element of a framework within which economies can prosper. The IMFs
Executive Board then met a number of times to develop guidance for the IMF regarding governance issues.
The Guidance Note reprinted in this pamphlet, adopted by the Board in July 1997, reflects the strong
consensus among Executive Directors on the significance of good governance for economic efficiency and
growth. The IMFs role in these issues has been evolving pragmatically as more was learned about the
contribution that greater attention to governance issues could make to macroeconomic stability and
sustainable growth. Executive Directors were strongly supportive of the role the IMF has been playing in
this area in recent years. They also emphasized that the IMFs involvement in governance should be limited
to its economic aspects.
Taking into account lessons from experience and the Executive Boards discussions, the guidelines seek to
promote greater attention by the IMF to governance issues, in particular through:

A more comprehensive treatment in the context of both Article IV consultations and IMF-supported
programs of those governance issues within the IMFs mandate and expertise;

A more proactive approach in advocating policies and the development of institutions and
administrative systems that eliminate the opportunity for bribery, corruption, and fraudulent activity
in the management of public resources;

An evenhanded treatment of governance issues in all member countries; and

43

ROLE OF IMF IN GOVERNMENT ISSUES

1. Reflecting the increased significance that member countries attach to the promotion of good governance,
on January 15, 1997, the Executive Board held a preliminary discussion on the role of the IMF in
governance issues, followed by a discussion on May 14, 1997, on guidance to the staff.1 The discussions
44

revealed a strong consensus among Executive Directors on the importance of good governance for economic
efficiency and growth. It was observed that the IMFs role in these issues had been evolving pragmatically as
more was learned about the contribution that greater attention to governance issues could make to
macroeconomic stability and sustainable growth in member countries. Directors were strongly supportive of
the role the IMF has been playing in this area in recent years through its policy advice and technical
assistance.
2. The IMF contributes to promoting good governance in member countries through different channels. First,
in its policy advice, the IMF has assisted its member countries in creating systems that limit the scope for ad
hoc decision making, for rent seeking, and for undesirable preferential treatment of individuals or
organizations. To this end, the IMF has encouraged, among other things, liberalization of the exchange,
trade, and price systems, and the elimination of direct credit allocation. Second, IMF technical assistance has
helped member countries in enhancing their capacity to design and implement economic policies, in building
effective policymaking institutions, and in improving public sector accountability.
Third, the IMF has promoted transparency in financial transactions in the government budget, central bank,
and the public sector more generally, and has provided assistance to improve accounting, auditing, and
statistical systems. In all these ways, the IMF has helped countries to improve governance, to limit the
opportunity for corruption, and to increase the likelihood of exposing instances of poor governance. In
addition, the IMF has addressed specific issues of poor governance, including corruption, when they have
been judged to have a significant macroeconomic impact.
3. Building on the IMFs past experience in dealing with governance issues and taking into account the two
Executive Board discussions, the following guidelines seek to provide greater attention to IMF involvement
in governance issues, in particular through:

a more comprehensive treatment in the context of both Article IV consultations and IMF-supported
programs of those governance issues that are within the IMFs mandate and expertise;

a more proactive approach in advocating policies and the development of institutions and
administrative systems that aim to eliminate the opportunity for rent seeking, corruption, and
fraudulent activity;
45

an evenhanded treatment of governance issues in all member countries; and

Enhanced collaboration with other multilateral institutions, in particular the World Bank, to make
better use of complementary areas of expertise.

INTERNATIONAL POLITICS AND IMF

46

It remains to examine a final, and controversial, area, in which the IMF has undoubtedly played a role
which has been useful for the general national interest of the United States, but which may on occasion lead
to conflict with the more narrowly conceived economic rationale for the IMF. What are the general political
and security implications of the existence of an institution such as the IMF?
The IMF was originally largely a creation of the United States, motivated by the belief that - as
Treasury Secretary Morgenthau put it when addressing the inaugural session of the Bretton Woods
conference - "Prosperity, like peace is indivisible. We cannot afford to have it scattered here or there among
the fortunate or to enjoy it at the expense of others."1 The institution was a way of projecting a particular
way of thinking about the world. Behind this thinking lay the calculation that a more prosperous world
would also be a safer world, and that the transition to such stability was well worth paying a limited financial
price.
Since the collapse of communism, the basic vision of Bretton Woods has become a matter of a global
consensus. In the 1990s, a widespread recognition developed that economic stability and political stability
go together.2 But this linkage is interpreted much more precisely than at the time of Bretton Woods: this
means a move toward the market and at the same time moves toward democracy and accountable
institutions. It is in the interest of the United States to promote this development
The collapse of the communist economies, or (in the case of China) their transformation into market
economies was the last stage in the creation of the new consensus. The consequence has been an increasing
homogeneity of political outlook, as well as of the economic order. Indeed, one key insight is that the two
are linked: that economic efficiency depends on a functioning civil society, on the rule of law, and on respect
for private property. Thus in the 1990s, the IMF (and the World Bank) have become intensely concerned
with problems of governance.
Such issues raise questions of political costs and limitations that may not always coincide with
economic rationality, however. There is a strategic or geo-political element to some of the work of the Fund.
Attacking excessive military expenditure, corruption, and undemocratic practices is easier for international
institutions in the cases of small countries, such as Croatia, Kenya or Romania, or even in isolated states
such as Pakistan or Nigeria. But it is likely to be hard and controversial in large states with substantial
military and economic potential, for instance, in say Russia or China. The public position is that expressed
1
2

47

by the IMFs Managing Director when he recalls telling President Yeltsin that the IMF would treat Russia in
exactly the same way it treated Burkina Faso. But Russia, and its strategic stability, is clearly of direct
concern to the United States, and to other major countries, in a way that Burkina Faso is not.
During the Cold War era, there was political pressure from the international community (i.e. the
West) to support financially particular states for foreign policy reasons, because they were essential to the
stability of a particular region (Egypt, or Zaire)

IMF-EVALUIATING THE PERFORMANCE OF INTERNATIONAL

ORGANISATON
48

An organizational assessment is a systematic process for obtaining valid information about the performance
of an organization and the factors that affect performance. It differs from other types of evaluations because
the assessment focuses on the organization as the primary unit of analysis.
Organizations are constantly trying to adapt, survive, perform and influence. However, they are not always
successful. To better understand what they can or should change to improve their ability to perform,
organizations can conduct organizational assessments. This diagnostic tool can help organizations obtain
useful data on their performance, identify important factors that aid or impede their achievement of results,
and situate themselves with respect to competitors. Interestingly, the demand for such evaluations is gaining
ground. Donors are increasingly trying to deepen their understanding of the performance of organizations
which they fund (e.g., government ministries, International Financial Institutions and other multilateral
organizations, NGOs, as well as research institutions) not only to determine the contributions of these
organizations to development results, but also to better grasp the capacities these organizations have in place
to support the achievement of results.

Opportunities and Future Outlook for the IMF

49

The international community recognized that the IMFs financial resources were as important as ever and
were likely to be stretched thin before the crisis was over. With broad support from creditor countries, the
IMFs lending capacity tripled to around $750 billion. To use those funds effectively, the IMF overhauled its
lending policies. It created a flexible credit line for countries with strong economic fundamentals and a track
record of successful policy implementation. Other reforms targeted low-income countries. These factors
enabled the IMF to disburse very large sums quickly; the disbursements were based on the needs of
borrowing countries and were not as tightly constrained by quotas as in the past.Globalization and the
Crisis (2005Present),International Monetary Fund, accessed July 26, 2010.
The founders of the Bretton Woods system had taken for granted that private capital flows would never again
resume the prominent role they had in the nineteenth and early twentieth centuries, and the IMF had
traditionally lent to members facing current account difficulties. The 2008 global crisis uncovered fragility in
the advanced financial markets that soon led to the worst global downturn since the Great Depression.
Suddenly, the IMF was inundated with requests for standby arrangements and other forms of financial and
policy support.
The IMFs requirements are not always popular but are usually effective, which has led to its expanding
influence. The IMF has sought to correct some of the criticisms; according to a Foreign Policy in Focus
essay designed to stimulate dialogue on the IMF, the funds strengths and opportunities include the
followingFlexibility and speed- In March 2009, the IMF created the Flexible Credit Line (FCL), which is a
fast-disbursing loan facility with low conditionality aimed at reassuring investors by injecting
liquidityTraditionally, IMF loan programs require the imposition of austerity measures such as
raising interest rates that can reduce foreign investmentIn the case of the FCL, countries qualify for
it not on the basis of their promises, but on the basis of their history. Just as individual borrowers
with good credit histories are eligible for loans at lower interest rates than their risky counterparts

Cheerleading- The Fund is positioning itself to be less of an adversary and more of a cheerleader to
member countries. For some countries that need loans more for reassurance than reform, these
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changes to the Fund toolkit are welcome.Martin S. Edwards, The IMFs New Toolkit: New
Opportunities, Old Challenges, Foreign Policy in Focus, September 17, 2009, accessed June 28,
2010, this enables more domestic political and economic stability.
Adaptability- Instead of providing the same medicine to all countries regardless of their particular
problems, the new loan facilities are intended to aid reform-minded governments by providing shortterm resources to reassure investors.
Transparency- The IMF has made efforts to improve its own transparency and continues to
encourage its member countries to do so. Supporters note that this creates a barrier to any one or
more countries that have more geopolitical influence in the organization. In reality, the major
economies continue to exert influence on policy and implementation.

Recommendations
51

The central bank needs to be proactive in dealing with economic and financial issues

The fiscal and monetary policy must be in line with each other.

Government should avoid excessive borrowing from the central bank.

To avoid conditionalitys the government should not borrow from IMF and other donor agencies.

Increase investor confidence, encourage overseas Pakistanis to send remittances through legal
channels.

Privatization process must be transparent and more organized.

Exports should be increased through value addition and quality.

Revival of major sectors such as cotton and textile

Imports should be curtailed.

Improve tax collection to increase government revenue

Above all, steps must be taken to put an end to corruption and VIP culture.

CONCLUSION
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The IMF also has an International Monetary and Financial Committee of 24 representatives of the membercountries that meets twice yearly to provide advice on the international monetary and financial system to the
IMFs staff.
In simpler terms, the goals are to:
1. Facilitate the cooperation of countries on monetary policy, including providing the necessary
resources for both consultation and the establishment of monetary policy in order to minimize the
effects of international financial crises.
2. Assist the liberalization of international trade by helping countries increase their real incomes while
lowering unemployment.
3. Help to stabilize exchange rates between countries. Especially after the global depression of the
1930s, it was considered vital to establish currencies that could hold their value, serve as mediums of
international exchange, and resist any speculative attacks.
4. Maintain a multilateral system of payments that eliminates foreign exchange restrictions. Countries
are thus free to trade with each other without worrying about the effects of interest rates and currency
depreciation on their payments.
5. Provide a safeguard to members of the IMF against balance of payments crises, i.e., when
governments cannot balance the money they have with the money they owe to other countries. IMF
members can have the confidence to adjust the imbalances in their national accounts without
resorting to painful measures that would hamper their prosperity, such as devaluing their currency in
relation to other countries.

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BIBLIOGRAPHY

WEBSITES REFERRED:

www.google.com
www.yahoo.com
www.Retailbanking.com
www.imf.org.

www.wikipedia.org

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