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Loan Granting Procedure of IMF
Jul 08, 2015

  • The International Monetary Fund (IMF) came into existence after the July 1944 UN Monetary and Financial Conference at Bretton Woods, USA. 

  • It was formed as an international organisation to facilitate economic cooperation by regulating international payments and exchange rates. 

  • In the early days after its formation, it was the IMF's responsibility to supervise international exchange rates in the Bretton Woods system of exchange rates. 

  • Each IMF member had to agree to assign values to its currency relative to the US dollar. In return, the US treasury tied the dollar to gold by agreeing to buy and sell gold to other governments at $35 per ounce.

  • In 1971, after a significant decline in its gold reserves, the US government refused to honour this commitment, which ended IMF's role in supervising international exchange rates.

Main Objective: The IMF's main objective is to promote international monetary cooperation and facilitate the expansion and balanced growth of international trade.

  • It is also responsible for promotion of economic stability, prevention of crises, and help in resolving them when they occur. This is done through surveillance (monitoring the fiscal and monetary conditions of member states), technical assistance and lending. 

  • It also provides financial assistance to member countries for correcting their balance of payments problems.

Sources of Funds: There is a membership fee for joining the IMF, called a quota, that each country has to deposit when it joins. 

  • Quotas are based on the size of the economy. 

  • Quotas determine the amount of money a country can borrow from the IMF and their share in the allocation of Special Drawing Rights (SDR). 

  • The SDR is 25% of a country's quota subscription that is deposited at the IMF in widely accepted currencies—dollar, euro, yen and pound sterling. 

  • The SDR so formed is an international reserve asset belonging to the depositing countries, and member countries can add it to their foreign currency and gold reserves. 

  • A country's voting rights are also determined by the quota. 

  • At present, G7 countries have 43.08% votes in the IMF, which makes it heavily skewed in favour of the seven industrialised economies. 

  • IMF can also borrow from members and international financial institutions in case of shortage.

Conditions for Loan Grant: A borrowing country's government has to agree to implement certain policy measures set by the IMF. 

  • The structural adjustments typically recommended by IMF are in line with what is called the Washington Consensus—a set of market-oriented policy prescriptions. 

  • Countries are required to liberalize their economies, which broadly meanssocial security expenditure and so on. 

  • The thrust essentially is that markets, rather than governments, should be deciding the determining economic agents.


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