What is International Monetary Fund? its foundation and operation?

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International Monetary Fund (IMF).

founded at the Bretton Woods Conference in 1944 to secure international monetary cooperation to stabilize currency exchange rates, and expand international liquidity (access to hard currencies).

Origins.

The first half of the 20th century was marked by two world wars that caused enormous physical and economic destruction in Europe and an excellent Depression that wrought economic devastation in both Europe and therefore us. These events kindled a desire to make a replacement international medium of exchange that might stabilize currency exchange rates without backing currencies entirely with gold; to scale back the frequency and severity of balance-of-payments deficits (which occur when more foreign currency leaves a rustic than enters it); and to eliminate destructive mercantilist trade policies, like competitive devaluations and exchange restrictions of all while substantially preserving each country’s ability to pursue independent economic policies. Delegates representing 44 countries drafted the Articles of Agreement for a proposed International fund that might supervise the new international medium of exchange. The framers of the new Bretton Woods monetary regime hoped to market world trade, investment, and economic processes by maintaining convertible currencies at stable exchange rates. Countries with temporary, moderate balance-of-payments deficits were expected to finance their deficits by borrowing foreign currencies from the IMF instead of by imposing exchange controls, devaluations, or deflationary economic policies that would spread their economic problems to other countries. After ratification by 29 countries, the Articles of Agreement entered into force on 27TH December 1945. The fund’s board of governors convened the subsequent year in Savannah, Georgia, U.S., to adopt bylaws and to elect the IMF’s first executive directors. The governors decided to locate the permanent headquarters in Washington, D.C., where its 12 executive directors first met in May 1946. The IMF’s financial operations began the subsequent year.

Organization.

The IMF is headed by a board of governors, each of whom represents one among the organization’s approximately 180 member states. The governors, who are usually their countries’ finance ministers or financial institution directors, attend annual meetings on IMF issues. The fund’s day-to-day operations are administered by an executive board, which consists of 24 executive directors who meet a minimum of 3 times every week. Eight directors represent individual countries (China, France, Germany, Japan, Russia, Saudi Arabia, the UK, and therefore the United States), and therefore the other 16 represent the fund’s remaining members, grouped by world regions. Because it makes most decisions by consensus, the chief board rarely conducts formal voting. The board is chaired by a director, who is appointed by the board for a renewable five-year term and supervises the fund’s staff of about 2,700 employees from quite 140 countries. The director is typically a EU and—by tradition—not an American. the primary female director, Christine Lagarde of France, was appointed in June 2011. Each member contributes a sum of cash called a quota subscription. Quotas are reviewed every five years and are supported each country’s wealth and economic performance—the richer the country, the larger its quota. The quotas form a pool of loanable funds and determine what proportion money each member can borrow and the way much voting power it’ll have. for instance, the United States’ approximately $83 billion contributions is the most of any IMF member, accounting for about 17 percent of total quotas. Accordingly, the us receives about 17 percent of the entire votes on both the board of governors and therefore the executive board. The Group of Eight industrialized nations (Canada, France, Germany, Italy, Japan, Russia, the uk, and therefore the United States) controls nearly 50 percent of the fund’s total votes.

Operation

Since its creation, the IMF’s principal activities have included stabilizing currency exchange rates, financing the short-term balance-of-payments deficits of member countries, and providing advice and technical assistance to borrowing countries.

Stabilizing currency exchange rates

Under the first Articles of Agreement, the IMF supervised a modified gold standard system of pegged, or stable, currency exchange rates. Each member declared a worth for its currency relative to the U.S. dollar, and successively the U.S. Treasury tied the dollar to gold by agreeing to shop for and sell gold to other governments at $35 per ounce. A country’s rate of exchange could vary just one percent above or below its declared value. Seeking to eliminate competitive devaluations, the IMF permitted rate of exchange movements greater than 1 percent just for countries in “fundamental balance-of-payments disequilibrium” and only after consultation with, and approval by, the fund. In August 1971 U.S. President Nixon ended this technique of pegged exchange rates by refusing to sell gold to other governments at the stipulated price. Since then each member has been permitted to settle on the tactic it uses to work out its exchange rate: a free float, during which the rate of exchange for a country’s currency is decided by the availability and demand of that currency on the international currency markets; a managed float, during which a country’s monetary officials will occasionally intervene in international currency markets to shop for or sell its currency to influence short-term exchange rates; a pegged exchange arrangement, during which a country’s monetary officials pledge to tie their currency’s rate of exchange to a different currency or group of currencies; or a hard and fast exchange arrangement, during which a country’s currency rate of exchange is tied to a different currency and is unchanging. After losing its authority to manage currency exchange rates, the IMF shifted its focus to loaning money to developing countries.

Financing balance-of-payments deficits

Members with balance-of-payments deficits may borrow fund in foreign currencies. which they need to repay with interest, by purchasing with their own currencies the foreign currencies held by the IMF. Each member may immediately borrow up to 25 % of its quota during this way. The amounts available for purchase are denominated in Special Drawing Rights (SDRs), whose value is calculated daily as a weighted average of 4 currencies: the U.S. dollar, the euro, the Japanese yen, and therefore the British pound sterling. SDRs are a world reserve asset created by the IMF in 1969 to supplement members’ existing assets of foreign currencies and gold. Countries use the SDRs that are allocated to them by the IMF to settle international debts. SDRs aren’t a part of the quota subscriptions supplied by members, and thus they’re not a part of the overall asset pool available for loans to members. Drawing on the IMF by a rustic raises the holdings funds. The country’s currency but lowers its holdings of another country’s currency by an equal amount. Thus the composition of the fund’s resources changes, but the entire resources as measured in SDRs remain equivalent. The country repays the loan over a specified period (usually three to 5 years) by using member currencies acceptable to the IMF to repurchase its own national currency. Only about 20 currencies are borrowed during a typical year, with most borrowers exchanging their currency for the main convertible currencies: the U.S. dollar, the japanese yen, the euro, and therefore the British pound sterling. Countries whose currencies are borrowed by other member governments receive remuneration—about 4 percent of the quantity borrowed. Additional loans are available for members with financial difficulties that need them to borrow quite 25 % of their quotas. The IMF uses an analytic framework referred to as financial programming. which was first fully formulated by IMF staff economist Jacques Polak in 1957. work out the quantity of the loan and therefore the macroeconomic adjustments and structural reforms needed to reestablish the country’s balance-of-payments equilibrium

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