International Monetary Fund: Need for Revamp            International Monetary Fund (IMF) was established along with the International Bank for Reconstruction and Development at the Conference of 44 nations held at Bretton Woods, New Hampshire, USA in July 1944. At present, 187 nations are members of IMF. The objectives of IMF is macro-economic growth, strengthening of international fiscal system, assisting international trade, endorsing  greater employment, maintaining fiscal growth, alleviation of poverty and economic stability, policy advice and financing of developing countries, forum for cooperation in monetary system, promotion of exchange rate stability and international payment system. The organization maintains its association by facilitating: 1.     Policy guidance to administrations and nationalized financial institutions on the basis of the assessment of fiscal trends across he globe; 2.     Providing study data, statistics, predictions and assessments based on the survey of international, local and respective financial systems and markets; 3.     Providing loans to assist nations to surmount financial difficulties; 4.     Providing provisional finances to help evade poverty in developing nations; and 5.     Providing technological support and training to aid nations enhance the administration of their financial systems.

IMF and its Membership:

            The funds of the IMF consist of the subscription from the members, who have been assigned their respective subscription quotas. Twenty-five per cent of the quota or 10 per cent of the official gold holdings of the member country, whichever is less, is payable in gold—the rest of the quota is to be paid in terms of the member’s national currency. The requirement of gold payment has long been done away with.

          Under the IMF rules, a member country can purchase foreign currency not exceeding one-fourth of its quota in any 12-month period. The total holdings of foreign currencies by a member country must not, however, exceed 200 per cent of its quota, which means in effect that the upper limit for IMF’s short-term assistance is equivalent to the country’s quota plus its gold contribution. With effect from January, 1970 a system of Special Drawing Rights (SDRs) has been set up. The SDRs are designed to supplement the gold and the reserve currencies, viz., the pound and the dollar. The SDRs represent entirely a new form of paper money which serve like gold or US dollar, and hence are called Paper Gold.

The main functions of the International Monetary Fund are:

Regulating Rate of Exchange: Each member-country on joining the Fund has to declare the par value of its currency in terms of gold or US dollars (now in terms of SDRs) is required to maintain this parity. It can, however, change it up to 10 per cent without IMF’s permission. For further changes beyond 10 per cent, the IMF will have to be consulted which will have to give the acceptance or refusal to the proposed change within 72 hours. Changes beyond 20 per cent can be effected, but only with the concurrence of the IMF and only to correct a “fundamental disequilibrium” in the balance of payments. The internal policies of the member-countries to restore equilibrium are not to be interfered with by the IMF.

Assistance for Meeting Balance of Payments Deficit: When a country suffers from a deficit in its balance of payments on current account, it can obtain from the IMF, in exchange for its own currency, the currency which it needs to pay off its deficit. There is, however, a limit to the amount which it can thus obtain.

Rationing out Scarce Currencies: Currencies which are in great demand by the member- countries and IMF cannot meet all demands for them are declared as scarce currencies and are rationed by IMF among the countries needing them. The IMF can also increase the supply of such ‘scarce’ currencies by borrowing or by purchasing them against gold. The member-countries are permitted to impose exchange restrictions in cash of such ‘scarce’ currencies.

Elimination of Exchange Restrictions: IMF has to see that the member-countries do not impose exchange restrictions on current transactions. In view of the abnormal conditions existing after the war, IMF allowed a period of transition extending over 3 years during which the members could retain such restrictions. The period is over and many countries have relaxed their exchange restrictions.

The IMF helps its member countries under a number of programmes:

Stand-by Arrangements: The most widely used way to lend by IMF is stand-by arrangements. Under this arrangement, a credit tranche which is equal to 100 per cent of member country’s quota is available for lending to it. A member country can borrow from IMF from this credit tranche to meet its balance of payments difficulties. A certain norms regarding government expenditure and money supply targets have to be fulfilled before resources are released, especially in higher credit tranches. It is expected that government of a country borrowing under this arrangement will adopt measures to rectify the balance of payments disequilibrium. Typically, stand-by arrangements last for 12-18 months period. Repayments of loans under this arrangement are made within 3-5 years of each drawing the money from IMF.

Extended Fund Facility (EFF): The Extended Fund Facility was created in 1974 to help the developing countries over longer periods (up to 3 years) than stand-by arrangements (12-18 months). Further, in this facility developing countries can borrow more than their quota. The loans taken under this facility can be paid back over a period of 4-10 years. Under the extended fund facility, since developing countries can borrow to meet for long-term balance of payments difficulties, stringent conditions are to be fulfilled for availing borrowing facility under this scheme.

          A country borrowing under this programme has to provide every year a detailed statement of measures and policies it has adopted to solve its balance of payments problems. IMF releases resources in instalments with conditionalities regarding the particular steps to be taken by the borrowing country.

          Stand-by arrangement and extended fund facility (EFI) are very important methods of finance support by IMF for meeting balance of payments difficulties of developing countries. However, in recent years other special facilities provided by IMF are being extensively used by the developing countries to tackle their problem arising from balance of payments. These special facilities include Poverty Reduction and Growth Facility (PRGF), Supplemental Reserve Facility (SRF), and Contingent Credit Line (CCL).

Poverty Reduction and Growth Facility (PRGF): This was set up in 1999 to provide financial assistance to low income (i.e., developing) countries for reduction of poverty. Prior to this, IMF provided financial assistance to the poor developing countries under a programme known as Enhanced Structural Adjustment Facility (ESAF) so that they can undertake structural adjustment reforms. In 1999 it was felt to focus more on poverty reduction in the developing countries. Therefore, in 1999 Enhanced Structural Adjustment Facility was replaced by Poverty Reduction and Growth Facility (PRGF).

          Assistance under this programme is given by IMF on the basis of Poverty Reduction Strategy Paper prepared by a poor country in cooperation with World Bank and other experts. Interest charged on the loans given by IMF under this programme is only 0.5 per cent per annum. Moreover, the borrowing country can repay the loans taken under this programme in a long period of 10 years.

Supplemental Reserve Facility (SRF): This was set up in 1997 in response to Financial Crisis in East Asia and other developing countries. Under this facility, IMF provides financial assistance to the member countries who are experiencing exceptional balance of payments problems arising from a sudden loss of market confidence in their currencies. Assistance under SRF is not subject to usual quota limits but instead depends on the country’s requirements; its ability to repay the loan and policies it adopts to restore confidence. The repayments have to be made within 2.5 years of taking the loan.

Contingent Credit Line (CCL): This facility was established in 1999 to deal with the problem of countries who are anticipating a financial crisis that can well cause capital outflow on capital account of balance of payments. It was a precautionary measure to provide assistance to a country to overcome the impending crises on capital account. It may be noted that financial assistance under this facility was availed only when crises actually occurred. The repayment period for the loan taken is also 2.5 years.

Special Oil Facility: The oil crises of 1973 touched off by the Arab oil producing countries created a most serious balance of payments problem for the developed as well as developing countries. Among the developing countries, India was the most severely hit. To aid member-countries, the IMF started a special fund, from which the member-countries in acute difficulties are helped out. This is called the special oil facility.

          The IMF has recently been called upon to bail out several European countries such as Greece, Spain, Italy and Portugal which are faced with severe sovereign debt crisis. The IMF has $ 384 billion in its lending funds which are quite insufficient and limited to finance the needs of European countries’ needs. At the same time, current economic and political climate in the advanced economies such as the US and Germany makes it highly unlikely that they are in a position to provide additional resources to the IMF.

          Tripling IMF resources was part of the G20 leaders’ response to the recent global recession. As the European debt crisis buffeted by Britain’s supposed exit from the European Union threatens to spread and further damp the global recovery, the IMF was asked by its steering committee recently to review whether its resources are sufficient. IMF’s credibility and its effectiveness rest on its perceived capacity to cope with worst-case scenarios. Even though, its lending capacity looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis in the debt-ridden European Countries.

A Critique of the Role of IMF:

          The role of IMF in providing financial assistance to developing countries for overcoming balance of payments problem and undertaking structural adjustment for promoting economic development has been severely criticised. Besides, the manner in which IMF dealt with financial crisis in East Asian countries in the late nineties also came under severe attack. In its structural adjustment policies, IMF has been guided by the supremacy of the free market in promoting economic growth.

          According to Joseph Stiglitz, “Over the years since its inception IMF has changed markedly. Founded on the belief that markets often worked badly, it now champions market supremacy with ideological fervour. Founded on the belief that there is a need for international pressure on countries to have more expansionary economic policies such as increasing expenditures, reducing taxes or lowering interest rates to stimulate economy, today the IMF typically provides funds only if countries engage in policies like cutting deficits or raising interest rates that lead to a contraction of the economy”.

          The same policy approach has been applied to the vast majority of developing countries as if they all were one homogeneous mass and could be properly treated in the same way. Joseph Stiglitz has severely criticised the functioning of IMF for serving the needs of G-7 (the group of seven developed countries) and has failed to promote global economic stability for which it was set up.

          He writes, “A half century after its founding, it is clear that IMF has failed in its mission. It has not done what it was supposed to do… provide funds for countries facing an economic downturn, and in spite of IMF efforts during the past quarter century, crisis around the world have been more frequent (and with the exception of the Great Depression, deeper…..Worse, many of the policies that the IMF pushed, in particular premature capital market liberalisation have contributed to global instability.”

          IMF policy of providing financial assistance to the poor developing countries subject to the fulfilment of certain conditions by the latter has come in for severe criticism. These conditionalities refer to the structural adjustment policies including privatisation of public enterprises, capital market liberalisation, market-based pricing (that is, withdrawal of subsidies granted by the government), and liberalisation of foreign trade and investment.

          If commitments regarding fulfilment of these conditionalities by the developing countries in need of finance were not forthcoming, no financial assistance was provided. In fact, capital market liberalisation proved to be disastrous for many countries because they were not ready and able to deal with the great volatility of capital inflows and outflows. This policy of premature capital-market liberalisation actually resulted in severe East Asian crisis in the late nineties. The Fund was undoubtedly shaken by the 1997 East Asian crisis which it did not foresee even though there was a massive build-up of current account deficits and capital had started to flow out of South-East Asia long before the crises hit. The IMF now concedes that liberalising capital and financial markets contributed to the East Asia’s crisis of 1990.

          As regards market-based pricing which involves elimination of food and fuel subsidies also landed the poor developing countries into trouble. Elimination of subsidies has been resisted by the people in developing countries. So far, even in India government has not succeeded very much in this regard. The riots broke out in Indonesia in 1998 when food and fuel subsidies were withdrawn at the instance of the IMF.

          Even policy of trade liberalisation has not been entirely successful in attaining its objective of reduction of poverty and unemployment. The issue of trade liberalisation is being hotly debated at WTO sponsored Ministerial Conferences where developed countries of EU (European Union) and the United States are reluctant to eliminate subsidies and reduce tariffs sufficiently which they are providing to protect their agriculture and manufacturing industries. The market access for the products of developing countries in the developed countries has always been quite limited.

          Besides, the result of liberalisation of trade (i.e., heavy reduction of tariffs and removal of quantitative restrictions) by the developing countries resulted in increase in unemployment in their economies. Commenting on this, Stiglitz writes, “It is easy to destroy jobs and this is often the immediate impact of trade liberalisation as inefficient industries close down under pressures from international competition. IMF ideology holds that new, more productive jobs will be created as the old, inefficient jobs that have been created behind protectionist walls are eliminated. But this is simply not the case”

          It takes capital and entrepreneurship to create new jobs and in developing countries, the same is often in short supply. The IMF in many countries has made matters worse because its austerity programmes often entailed high interest rates exceeding 20 per cent, thereby making many economic activities unviable. The small-scale and medium enterprises in India which employ a large number of workers could not complete with the imported products and also multinational corporations. As a result, many small firms in India closed down. Of course, there is higher economic growth due to the use of highly capital-intensive technologies, but unemployment rate has increased in the post-reform period as a result of structural adjustment policies.

          To conclude, IMF policy of laying emphasis on elimination of subsidies, liberalisation of trade and capital market privatisation as conditions for providing financial assistance to the developing countries has not led to the solution of the twin problems of poverty and unemployment in these countries. In case of many developing countries, IMF policies have led to economic crises. In recent years, there has been realisation on part of the IMF of the improper nature of its policies and therefore some corrections are being made to achieve the goals of rapid global growth, global economic stability and the solutions of the problems of poverty and unemployment in the poor developing countries.

Benefits to India from International Monetary Fund’s Membership:

          India’s Finance Minister is the ex-officio Governor on the Board of Governors of the IMF. RBI Governor is the Alternate Governor at the IMF. India is represented at the IMF by an Executive Director, who also represents three other countries as well, viz. Bangladesh, Sri Lanka and Bhutan. India’s current quota in the IMF is SDR (Special Drawing Rights) 13,114.4 million, making it the 8th largest quota holding country at IMF and giving it shareholdings of 2.75%.    However, based on voting share, India (together with its constituency countries Viz. Bangladesh, Bhutan and Sri Lanka) is ranked 17th in the list of 24 constituencies in the Executive Board.

          India as a founder member of the IMF, is among one of the developing economies that effectively employed the various IMF programmes to fortify its fiscal structure. Through productive engagement with the IMF, India formulated a consistent approach to expand domestic and global assistance for economic reforms. Whenever India underwent balance of payments crises, it sought the help of IMF and in turn the internationally recognized reserve willingly helped India to overcome the difficulties. Recently, India purchased IMF gold to lend money to developing countries.

          This proves that the fiscal reforms set in motion by India over the years have finally started gaining momentum, transforming India from fiscal borrower to major lender. Some analysts, however, suggested that India purchased gold to move forward for higher voting share in the IMF. It is notable that India has not taken any financial assistance from the IMF since 1993. Repayments of all the loans taken from International Monetary Fund have been completed by 31 May, 2000.   

          India has been seeking a considerable say in global fiscal affairs and a more pronounced role in the IMF. The history of India's engagement with IMF illustrates that with premeditated planning, it is possible to alleviate a macroeconomic calamity and sustain the rights of reform package without negotiating on democratic organizations or international policy autonomy.

          International regulation by IMF in the field of money has certainly contributed towards expansion of international trade and thus prosperity. India has, to that extent, benefitted from these fruitful results. Not only indirectly but directly also, her membership has been of great advantage. We know how, in the post-partition period, India had serious balance of payments deficits, particularly with the dollar and other hard currency countries.

          She could not possibly reduce her imports, since these consisted of essential hydrocarbons, capital equipment and industrial raw materials. Her exports, on the other hand, could not be immediately expanded since under conditions of limited production in the country, increased exports were sure to create serious internal shortages. Under such difficult circumstance, it was the IMF that came to her rescue.

          At one point, particularly during 1970s, 80s and 90s, India was one of the most frequent borrowers from the IMF. The total figures of borrowings by India from the IMF do not, however, convey the extent of the support that it extended to her. What are of greater significance are the crucial timings of and special circumstances under which such assistance was availed of. Such help was forthcoming when the country was faced with critical foreign exchange situations.

          While India has not been a frequent user of IMF resources, IMF credit has been instrumental in helping India respond to emerging balance of payments problems on two occasions. In 1981-82, India borrowed SDR 3.9 billion under an Extended Fund Facility, the largest arrangement in IMF history at the time. In 1991-93, India borrowed a total of SDR 2.2 billion under two standby arrangements, and in 1991 it borrowed SDR 1.4 billion under the Compensatory Financing Facility.

          The membership of IMF has benefited India in yet another important way. India wanted large foreign capital for her various developmental projects. Since private foreign capital was not forthcoming, the only practicable method of obtaining the necessary capital was to borrow from the International Bank for Reconstruction and Development (i.e. World Bank). The membership of IMF is a necessary precondition to the membership of the World Bank.

          Thus, India’s membership of IMF has entitled her to be a member of the World Bank and its affiliates viz., International Finance Corporation (IFC) and International Development Association (IDA). In fact, in absolute figures though not on per capita basis, India has been one of the largest borrowers from the World Bank group. The International Finance Corporation (IFC) has made substantial investment in Indian companies. A large bulk of the financial assistance obtained by India from World Bank is from the Soft-loan Affiliate, the IDA—loans from it are payable over 50 years, are interest-free; bear only a service-charge of 0.75 per cent per annum.

           In recent years, the Fund has provided India with technical assistance in a number of areas, including the development of the government securities market, foreign exchange market reform, public expenditure management, tax and customs administration, and strengthening statistical systems in connection with the Special Data Dissemination Standards. India subscribes to the IMF's Special Data Dissemination Standard. Countries belonging to this group make a commitment to observe the standard and to provide information about their data and data dissemination practices. Since 1981 the IMF Institute has provided training to Indian officials in national accounts, tax administration, balance of payments compilation, monetary policy, and other areas.

          India is currently the world’s fastest-growing major economy, but the concerns pointed out by the IMF could be a drag on the GDP. The Indian economy is currently facing “decelerating pace of reforms” as some of the most important legislations have been in limbo for years though the recent passage of the goods and services tax (GST) bill, GST is likely to help companies and investors alike as it will streamline the current web of taxes and attract foreign investments.

          The IMF still believes that “the quality of fiscal consolidation in India should be improved through a comprehensive tax reform and measures to further reduce subsidies. Stressed balance sheets of Indian firms and banks must be fixed. Indian companies are saddled with huge amounts of debt and banks are tackling massive non-performing assets (NPA        ). These could pull down GDP.           Corporate leverage has increased significantly in emerging economies—e.g., Brazil, India, and Turkey—in domestic and foreign currency, against the background of ample global liquidity. A strong pullback of capital flows to emerging economies could tighten financial conditions and weaken their currencies, with the possibility of significant adverse corporate balance sheet effects and funding challenges, and significant repercussions for banking systems.

          India’s sluggish export growth is worrying, according to the IMF. An important source of foreign exchange, export has been battered over the last year due to a fall in oil prices and weak global demand. India has set an ambitious target of doubling exports to $900 billion by 2020. After 18 consecutive months of decline, exports rose 1.27% in June 2016. This must sustain and accelerate otherwise the target would be hard to meet.

          Labour market reforms will not only help the economy but will also attract foreign investment. Though Indian states like Rajasthan have embarked on a course to make changes in labour laws, there’s been no move at the national level. Increasing public investment and social spending are necessary, the IMF said. This will help in “achieving faster and more inclusive growth.”

          An increase in public spending boosts demand, and creates jobs, thereby aiding economic growth. An India backed by its strong macro-economic structure and strong economic growth has been able to build constructive partnerships with the Bretton Woods institutions including IMF to consolidate on its strengths to realise its true economic potential to ensure a sustainable and equitable development for all its people.