International
Monetary Fund
Hardeepika Singh Ahluwalia
International monetary Fund
Apex Body For IMS
Established In 1945
International Organization of 188
Member countries
Promote
International Monetary Co-operation
Exchange Stability
Orderly Exchange Arrangement
Objectives of IMF
promote international monetary cooperation;
facilitate the expansion and balanced growth of
international trade;
promote exchange stability;
assist in the establishment of a multilateral system of
payments; and
make resources available (with adequate safeguards)
to members experiencing balance of payments
difficulties.
Sources of Funds
Quota: Each member country of the IMF is assigned a quota,
based broadly on its relative position in the world economy.
When a country joins the IMF, it is assigned an initial quota in
the same range as the quotas of existing members of broadly
comparable economic size and characteristics.
Current quota
GDP (weight of 50 percent),
economic variability (15 percent),
openness (30 percent),
and international reserves (5 percent).
Key Roles of Quota
Subscriptions.
A member's quota subscription determines the
maximum amount of financial resources the
member is obliged to provide to the IMF.
A member must pay its subscription in full upon
joining the Fund: up to 25 percent must be paid in
SDRs or widely accepted currencies (such as the
U.S. dollar, the euro, the yen, or the pound sterling),
while the rest is paid in the member's own currency
Key Roles of Quota
Voting power. The quota largely determines a
member's voting power in IMF decisions.
Access to financing. The amount of financing a
member can obtain from the IMF (its access limit) is
based on its quota.
Example: Under Stand by arrangements/ credit tranche
members can borrow upto 100% of its quota
annually and 300% cumulatively.
Changes in Quota
General Quota Review: IMF Board of Governors
Interval for review: 5 years
Approval for change: Changes in Quota must be
approved by 85% majority of total voting power.
Members quota cannot be changed without consent
IMF and Bretton woods system
Bretton Woods exchange rate system: Fixed exchange rate system
with adjustable peg.
What Government/ Central bank had to maintain: reserves in form of
Gold and US $
How Govt. Maintained parity levels/ Stability in exchange rate:
Purchasing or selling foreign currency or domestic currency.
Inadequate supply of Gold and U.S. Dollar and Gold reserves provided
inadequate support for expansion of world trade and financial
development
Special Drawing rights was created in 1969 to Address the
problem of shortage of supply of Gold and US $
Special Drawing Rights
Created by IMF in 1969
SDR is regarded as a 'basket of national currencies' comprising
four major currencies of the world - US dollar, Euro, British
Pound and Yen (Japan).
Holder of SDRs can obtain these currencies in exchange for
their SDR’s in two ways:
1. Voluntary exchange between members
2. IMF members with strong external position can purchase SDR
with weak external position
Valuation of SDR
Basket of Currencies: US Dollar, Euro, Pound and Japanese yen
Value: are based on average exchange rates for a period from October 1
to December 30, 2010.
The initial weights assigned to each currency in the SDR basket have
been adjusted to take account of changes in the share of each currency in
world exports of goods and services and international reserves.
Determination of Weights
Export Criteria:
Value of exports of goods and services
Replacement of basket currencies: Value of export is greater than
1%.
Determination of weights
Freely Usable
Widely used to make payment for international transactions
Widely traded in international exchange markets.
Amount of reserves denominated in the respective currencies that
are held by IMF and other members of IMF.
Currency amounts are based on average exchange rates for a period from October 1
to December 30, 2010.
Exchange rate:
• Each U.S. dollar equivalent is calculated on the basis of the middle rate between the
buying and selling exchange rates at noon in the London market.
• the exchange rate for any currency cannot be obtained from the London Market, the
rate shall be the middle rate between the buying and selling exchange rates at noon
in the New York market
• the rate shall be determined on the basis of euro reference rates published by the
European Central Bank.
SDR to US $
Depreciation of currencies have lead to increase in proportionate $ that
can be borrowed for SDR
The exchange rate for the Japanese yen is expressed in terms of currency
units per U.S. dollar; other rates are expressed as U.S. dollars per currency
unit.
SDR Interest rate
SDR interest rates are determined weekly
Basis of Determination: Weighted average of
representative interest rate on short term money
market instrument denominated in SDR basket
currencies.
SDR Interest rate
Interest rate on the financial instrument of each component currency in the SDR
basket, expressed as an equivalent annual bond yield: three-month spot rate for
euro area central government bonds with a rating of AA and above published by
the European Central Bank; three-month Japanese Treasury Discount bills;
three-month UK Treasury bills; and three-month US Treasury bills.
Rule for Interest rate
According to Rule of IMF, SDR interest rate for each
weekly period commencing Monday shall be higher
of:
1) Combined market interest rate
2) 0.050 percent
IMF Funding facilities
Permanent facilities for general balance of payment
support
(a) Reserve tranche
(b) Stand-by credits/ Credit tranche facility
(c) Extended funds facility
Reserve Tranche facility
Unconditional borrowing of a part or full of the quota
held by a particular member.
This is not considered to be a part of IMF credit since
it is the amount deposited by the borrower.
Credit Tranche facility
Medium Term assistance with short BOP problem
IMF’s basic financing facility for addressing the short
to medium term balance of payment problem.
Availability of Credit: Four equal installments
Condition: Borrower will follow the policy
recommended by IMF to overcome balance of
payment difficulties within a reasonable time period.
Borrowing is repaid within 3 1/4 to 5 years
Conditions
Achievement of realistic exchange rate
Elimination of subsidiaries and control to ensure efficient
allocation of resources
Reduction of trade and investment barriers
squeeze of govt spending so as to eliminate excess demand
Main reason for imposing conditions is it helps in proper
utilization of IMF Funds so that economic condition in the
country improves and country finds itself in a position to repay
loan
Extended fund Facility
Long term assistance for long term BOP problem
Set up in 1974
Address balance of payment problem caused by long
term structural problems.
This support is provided when credit tranche support
is not sufficient to meet balance of payment problem.
Annual limit is 100% of quota and cumulative limit to
assistance is 300% of quota.
Adopt three year programme with structural agenda
Borrowing repaid: 10 years
Special Facilities
Supplementary Term : Short Term
reserve facility Problem: BOP difficulties due to loss in market
confidence
Support: Stand-by arrangements/ Extended
arrangements
Term of support: One year
Access Limit: Not defined
(Access only when the limit exceeds Annual or
cumulative limit)
Repayment: 2 years
Compensatory Term: Medium term
Financing facility Problem: Export shortfalls/ cereal import excess
Access limit: 45% of quota for cereal/ export
component
Emergency assistance
Natural Disaster Political unrest/ conflict
Access limit: 25% of quota, larger amounts can be made available in
exceptional cases.
Term: Short term and medium term
Poverty reduction and growth facility (1999)
Assistance Long term assistance for deep rooted BOP difficulties
aim in reducing poverty and enhancing growth.
Credit access 140% of quota, 185% of quota in exceptional cases