B.Com Ist Year International Monetary Fund Question Answer Notes

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International Monetary Fund.

Q.40. Discuss the objectives and organisation of International Monetary Fund. Critically evaluate the functions of the I.M.F. (Meerut, 2012)

Or

Discuss the objectives of International Monetam Fund. What benefits India has derived from the monetary fund ? Explain. (Meerut, 2014)

Ans. The establishment of an International Monetary Fund was the outcome of a conference held at Bretton Woods, New Hampshire, in 1944. The main aim for which the I.M.F. was set up were to provide exchange stability, temporary assistance to countries falling short of foreign exchange and international sponsoring of measures for curing fundamental causes of disequilibrium in balance of payments. The I.M.F. is a pool of central bank reserves and national currencies which are available to its members under certain conditions.

OBJECTIVES OF THE INTERNATIONAL MONETARY FUND STUDY NOTES

According to Article (1) of the Fund, the main objectives of the Fund are:

(1) To Promote International Monetary Co-operation : One of the main aim of the Fund are to promote international monetary co-operation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

(2) Expansion and Balanced Growth of International Trade: I.M.F. was to facilitate the expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of high levels of employment of the member-countries.

(3) To Establish a System of Multilateral Trade and Payment System : I.M.F. aim is to establish a multilateral trade and payment system in place of the traditional system to encourage the growth of world trade.

(4) To Promote Exchange Stability: I.M.F. aims to promote exchange stability, to maintain orderly exchange arrangements among members and to avoid competitive exchange depreciation.

(5) To Reduce the Disequilibrium in the Balance of Payment : Fund aims to help the member nations to reduce the disequilibrium in the balance of payment position. To achieve this obiective, fund sells or lends foreign currencies to the member nations.

(6) To Give Confidence to Member Nations : By making the Fund’s resources available to them under adequate safeguards, thus providing them with opportunity to correct mal-adjustment in their BOP without resorting to measures destructive or national or international prosperity.

ORGANISATION AND STRUCTURE STUDY MATERIAL NOTES

The I.M.F. is an autonomous organisation affiliated with the U.N.O. The head office of the I.M.F. is located in the United States at Washington. It has 40 members nations on March 1, 1947 but at present the number of member nations is 188.

The ruling body of the I.M.F. is a Board of Governors, consisting of one representative and one alternative representative appointed by each member nation. The Fund has delegated working authority to the Board of Executive Directors. It consists 24 executive directors of whom five are nominated, one each by the five largest quota holding countries. The chairman of the Board of executive directors is the Managing Director who is the head of the Fund.

FUNCTIONS AND ACHIEVEMENTS OF THE I.M.F. NOTES

 The important functions of I.M.F. are as follows:

(1) Fixation of Par Values : According to the provisions of Fund Charter, every member country should fix the par value of its currency. The par value cannot be changed unless it is necessary to correct a fundamental disequilibrium.

(2) Loan to Correct the Temporary Deficits in the Balance fo Payment: If any country is in a temporary difficulty in liquidating an adverse balance of payments, the fund will provide short-term loans to correct the deficit.

(3) Exchange Stability : It promotes orderly adjustment of exchange rates to promote exchange stability. Whenever a country feels that its rate of exchange is not of line with its economy, the rate can be altered but only after due deliberation between the country and the authorities of the Fund. There is thus provision for the careful determination of the initial rate and its orderly adjustment subsequently.

(4) Provides Machinery for International Consultations: The I.M.F. provides an excellent machinery for consultation in international monetary affairs. It serves as an excellent forum for discussions on the economic, fiscal and financial policies of member countries with particular reference to their balance of payments impact.

(5) Training and Technical Assistance : The I.M.F. provides training and technical assistance to its member nations in various forms. It established an Institute for providing training facilities to the officials of member governments. The activities relating to central training and technical assistance have undergone considerable expansion during recent years, mainly for the benefit of developing member nations.

(6) Structural Reforms: It has also helped many developing countries in the process of their structural reforms through its ‘surveillance and lending operations.

(7) Expansion of World Trade : The I.M.F. has also contributed in an important way in the expansion of world trade. It works for facilitating multi-lateral payments and trade, promoting thereby international trade as a whole.

(8) Setting up of Multilateral System of Payments : The fund has proved helpful in ensuring steady progress in the establishment of a multilateral system of payments in respect of current transactions.

(9) Creation of New Reserve Assets : The I.M.F. created a new reserve asset in the form of Special Drawing Right (SDRs). Possession of SDRs entitles a country to obtain a defined equivalent of currency from other participating countries and enables it to discharge certain obligations towards the General Account of the Fund.

EVALUATION OF THE FUND STUDY NOTES

It is clear, that Fund has played a vital role in achieving international economic stability and in promoting a healthy international monetary relations. However, the I.M.F. failed to achieve its objectives and criticised both theoretically and practically aspects. Main shortcomings of Fund are as follows:

• Lack of Scientific Base in Fixation of Quotas : The quotas of the member nations are fixed arbitrarily without having any scientific basis. The U.S.A. and the U.K. have larger quotas because of their greater political influence. In reality quotas would be decided on the basis of the requirements of the foreign exchange and the condition of the trade as developing countries could get benefitted more.

(2) Inadequacy of Funds : The Fund has suffered all along from inadequacy of funds. Funds of the I.M.F. may not be sufficient to cope with the sudden movements of hot money when there are no exchange control to stop them.