PROJECT ON The IMF: A Birds Eye View of its Role and OperationsMaster of CommerceSemester -I(2014 2015)

Submitted In Partial Fulfillment of the requirementsFor the award of degree of M.ComByKothapalli Balakrishna V.Seat No. _79_Tolani College of CommerceSher E Punjab society,Andheri (East),Mumbai 400 093.

PROJECT ON The IMF: A Birds Eye View of its Role and OperationsMaster of CommerceSemester -I(2014 2015)

Submitted In Partial Fulfillment of the requirementsFor the award of degree of M.ComByKothapalli Balakrishna V.

Seat No. _79_

Tolani College of CommerceSher E Punjab society,Andheri (East), Mumbai 400 093.

CERTIFICATE

This is to certify that Kothapalli Balakrishna V. of M.Com. Semester I (2014 2015) has successfully completed the project on The IMF: A Birds Eye View of its Role and Operations under the guidance of Prof. Vasudev Iyer.

Project Guide: - _____________

Course Co-Ordinator: - _____________

External Examiner: - _____________

Principal: - _____________

DECLARATION

I, Kothapalli Balakrishna V. the student of M.Com. Semester I (2014 2015) hereby declare that I have completed the project on The IMF: A Birds Eye View of its Role and Operations in the course International Economics.

The information submitted is true and original to the best of my knowledge. References have been cited wherever necessary.

Date: - _________Place: - Mumbai

Signature of Student(Kothapalli Balakrishna V.)

ACKNOWLEDGEMENT

Preparing the project on The IMF: A Birds Eye View of its Role and Operations has given me extensive practical knowledge related to the course.

I would like to first thank our Principal Dr. A. A. Rashid, for his valuable support in preparing this project.

I express my deep sense of Gratitude to the Course Co-ordinator, Ms.Sadhana Venkatesh for the valuable guidance and support during my project work.

I am thankful to my guide Prof. Vasudev Iyer for providing me the guidance throughout the course of this project. I am also thankful to him/her for patiently and critically evaluating the content of this project.

I would like to take this opportunity to express my gratitude to all the staff of the Library and the Computer Lab for their support.

Meaning of IMF: The International Monetary Fund (IMF) is the central institution embodying the international monetary system and promotes balanced expansion of world trade, reduced trade restrictions, stable exchange rates, minimal trade imbalances, avoidance of currency devaluations, and the correction of balance-of-payment problems. The IMF's goal is to prevent and remedy international financial crises by encouraging countries to maintain sound economic policies. Because of its size, the IMF is also a forum for discussion of global economic policies. The IMF, also known as the Fund, was conceived at a United Nations conference convened in Bretton Woods, New Hampshire, United States, in July 1944. The 44 governments represented at that conference sought to build a framework for economic cooperation that would avoid a repetition of the vicious circle of competitive devaluations that had contributed to the Great Depression of the 1930s.

About the IMF

The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.Overview The IMF works to foster global growth and economic stability. It provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty.What we do With its near global membership of 188 countries, the IMF is uniquely placed to help membergovernments take advantage of the opportunities and manage the challenges posed by Globalization and economic development more generally. The IMF tracks global economic trends and performance, alerts its member countries when it sees problems on the horizon, provides a forum for policy dialogue, and passes on knowhow to governments on how to tackle economic difficulties.

The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty.

Marked by massive movements of capital and abrupt shifts in comparative advantage, globalization affects countries' policy choices in many areas, including labor, trade, and tax policies. Helping a country benefit from globalization while avoiding potential downsides is an important task for the IMF. The global economic crisis has highlighted just how inter-connected countries have become in todays world economy.

Key IMF activities The IMF supports its membership by providing policy advice to governments and central banks based on analysis of economic trends and cross country experiences. Research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets. Loans to help countries overcome economic difficulties. Concessional loans to help fight poverty in developing countries, and Technical assistance and training to help countries improve the management of their economies.

Original AimsThe IMF was founded more than 60 years ago toward the end of World War II (see History). The founders aimed to build a framework for economic cooperation that would avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s and the global conflict that followed. Since then the world has changed dramatically, bringing extensive prosperity and lifting millions out of poverty, especially in Asia. In many ways the IMF's main purpose to provide the global public good of financial stability is the same today as it was when the organization was established. More specifically, the IMF continues to; Provide a forum for cooperation on international monetary problems, Facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction, Promote exchange rate stability and an open system of international payments and Lend countries foreign exchange when needed, on a temporary basis and under adequate Safeguards, to help them address balance of payments problems.

An adapting IMF The IMF has evolved along with the global economy throughout its 65year history, allowing the organization to retain its central role within the international financial architecture As the world economy struggles to restore growth and jobs after the worst crisis since the Great Depression, the IMF has emerged as a very different institution. During the crisis, it mobilized on many fronts to support its member countries. It increased its lending, used its cross country experience to advise on policy solutions, supported global policy coordination, and reformed the way it makes decisions. The result is an institution that is more in tune with the needs of its 188 member countries. Stepping up crisis lending: The IMF responded quickly to the global economic crisis, with lending commitments reaching a record level of more than US$250 billion in 2010. This figure includes a sharp increase in concessional lending (thats to say, subsidized lending at rates below those being charged by the market) to the worlds poorest nations. Greater lending flexibility: The IMF has overhauled its lending framework to make it better suited to countries individual needs. It is also working with other regional institutions to create a broader financial safety net, which could help prevent new crises.

Providing analysis and advice: The IMFs monitoring, forecasts, and policy advice, informed by a global perspective and by experience from previous crises, have been in high demand and have been used by the G20.

Drawing lessons from the crisis: The IMF is contributing to the ongoing effort to draw lessons from the crisis for policy, regulation, and reform of the global financial architecture.

Historic reform of governance: The IMFs member countries also agreed to a significant increase in the voice of dynamic emerging and developing economies in the decision making of the institution, while preserving the voice of the low-income members.

Membership

The IMF currently has a near global membership of 188 countries. To become a member, a country must apply and then be accepted by a majority of the existing members. In April 2012, Republic of South Sudan joined the IMF, becoming the institution's 188th member. Upon joining, each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy. The IMF's membership agreed in November 2010 on a major overhaul of its quota system to reflect the changing global economic realities, especially the increased weight of major emerging markets in the global economy. A member country's quota defines its financial and organizational relationship with the IMF, including:

Subscriptions:A member country's quota subscription determines the maximum amount of financial resources the country is obliged to provide to the IMF. A country must pay its subscription in full upon joining the IMF: up to 25 percent must be paid in the IMF's own currency, called Special Drawing Rights (SDRs) or widely accepted currencies (such as the dollar, the euro, the yen, or pound sterling), while the rest is paid in the member's own currency.

Voting power:The quota largely determines a member's voting power in IMF decisions. Each IMF member's votes are comprised of basic votes plus one additional vote for each SDR 100,000 of quota. The number of basic votes attributed to each member is calculated as 5.502 percent of total votes. Accordingly, the United States has 421,965 votes (16.76 percent of the total), and Tuvalu has 759 votes (0.03 percent of the total).

Access to financing:The amount of financing a member country can obtain from the IMF is based on its quota. For instance, under Stand By and Extended Arrangements, which are types of loans, a member country can borrow up to 200 percent of its quota annually and 600 percent cumulatively.

SDR allocations:SDRs are used as an international reserve asset. A member's share of general SDR allocations is established in proportion to its quota. The most recent general allocation of SDRs took place in 2009.

Evolution of IMF:

Cooperation and reconstruction (1944 - 71) :During the Great Depression of the 1930s, countries attempted to shore up their failing economies by sharply raising barriers to foreign trade, devaluing their currencies to compete against each other for export markets, and curtailing their citizens' freedom to hold foreign exchange. These attempts proved to be self defeating. World trade declined sharply (see chart below), and employment and living standards plummeted in many countries.

This breakdown in international monetary cooperation led the IMF's founders to plan an institution charged with overseeing the international monetary system-the system of exchange rates and international payments that enables countries and their citizens to buy goods and services from each other. The new global entity would ensure exchange rate stability and encourage its member countries to eliminate exchange restrictions that hindered trade.

The Bretton Woods agreement The IMF was conceived in July 1944, when representatives of 45 countries meeting in the town of Bretton Woods, New Hampshire, in the northeastern United States, agreed on a framework for international economic cooperation, to be established after the Second World War. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression. The IMF came into formal existence in December 1945, when its first 29 member countries signed its Articles of Agreement. It began operations on March 1, 1947. Later that year, France became the first country to borrow from the IMF. The IMF's membership began to expand in the late 1950s and during the 1960s as many African countries became independent and applied for membership. But the Cold War limited the Fund's membership, with most countries in the Soviet sphere of influence not joining.Par value systemThe countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates (the value of their currencies in terms of the U.S. dollar and, in the case of the United States, the value of the dollar in terms of gold) pegged at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement. This par value system also known as the Bretton Woods systemprevailed until 1971, when the U.S. government suspended the convertibility of the dollar (and dollar reserves held by other governments) into gold.

The end of the Bretton Woods System (1972 - 81) : By the early 1960s, the U.S. dollar's fixed value against gold, under the Bretton Woods system of fixed exchange rates, was seen as overvalued. A sizable increase in domestic spending on President Lyndon Johnson's Great Society programs and a rise in military spending caused by the Vietnam War gradually worsened the overvaluation of the dollar.

End of Bretton Woods system The system dissolved between 1968 and 1973. In August 1971, U.S. President Richard Nixon announced the "temporary" suspension of the dollar's convertibility into gold. While the dollar had struggled throughout most of the 1960s within the parity established at Bretton Woods, this crisis marked the breakdown of the system. An attempt to revive the fixed exchange rates failed, and by March 1973 the major currencies began to float against each other. Since the collapse of the Bretton Woods system, IMF members have been free to choose any form of exchange arrangement they wish (except pegging their currency to gold): allowing the currency to float freely, pegging it to another currency or a basket of currencies, adopting the currency of another country, participating in a currency bloc, or forming part of a monetary union.

Oil shocks Many feared that the collapse of the Bretton Woods system would bring the period of rapid growth to an end. In fact, the transition to floating exchange rates was relatively smooth, and it was certainly timely: flexible exchange rates made it easier for economies to adjust to more expensive oil, when the price suddenly started going up in October 1973. Floating rates have facilitated adjustments to external shocks ever since. The IMF responded to the challenges created by the oil price shocks of the 1970s by adapting its lending instruments. To help oil importers deal with anticipated current account deficits and inflation in the face of higher oil prices, it set up the first of two oil facilities.Helping poor countries From the mid1970s, the IMF sought to respond to the balance of payments difficulties confronting many of the world's poorest countries by providing concessional financing through what was known as the Trust Fund. In March 1986, the IMF created a new concessional loan program called the Structural Adjustment Facility. The SAF was succeeded by the Enhanced Structural Adjustment Facility in December 1987.

Debt and painful reforms (1982 - 89) :The oil shocks of the 1970s, which forced many oil importing countries to borrow from commercial banks, and the interest rate increases in industrial countries trying to control inflation led to an international debt crisis.

During the 1970s, Western commercial banks lent billions of "recycled" petrodollars, getting deposits from oil exporters and lending those resources to oil importing and developing countries, usually at variable, or floating, interest rates. So when interest rates began to soar in 1979, the floating rates on developing countries' loans also shot up. Higher interest payments are estimated to have cost the non oil producing developing countries at least $22 billion during 197881. At the same time, the price of commodities from developing countries slumped because of the recession brought about by monetary policies. Many times, the response by developing countries to those shocks included expansionary fiscal policies and overvalued exchange rates, sustained by further massive borrowings. When a crisis broke out in Mexico in 1982, the IMF coordinated the global response, even engaging the commercial banks. It realized that nobody would benefit if country after country failed to repay its debts.

The IMF's initiatives calmed the initial panic and defused its explosive potential. But a long road of painful reform in the debtor countries, and additional cooperative global measures, would be necessary to eliminate the problem.

Societal Change for Eastern Europe (1990 - 2004) :The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union in 1991 enabled the IMF to become a (nearly) universal institution. In three years, membership increased from 152 countries to 172, the most rapid increase since the influx of African members in the 1960s. In order to fulfill its new responsibilities, the IMF's staff expanded by nearly 30 percent in six years. The Executive Board increased from 22 seats to 24 to accommodate Directors from Russia and Switzerland, and some existing Directors saw their constituencies expand by several countries.The IMF played a central role in helping the countries of the former Soviet bloc transition from central planning to market driven economies. This kind of economic transformation had never before been attempted, and sometimes the process was less than smooth. For most of the 1990s, these countries worked closely with the IMF, benefiting from its policy advice, technical assistance, and financial support.By the end of the decade, most economies in transition had successfully graduated to market economy status after several years of intense reforms, with many joining the European Union in 2004.

Asian Financial CrisisIn 1997, a wave of financial crises swept over East Asia, from Thailand to Indonesia to Korea and beyond. Almost every affected country asked the IMF for both financial assistance and for help in reforming economic policies. Conflicts arose on how best to cope with the crisis, and the IMF came under criticism that was more intense and widespread than at any other time in its history.From this experience, the IMF drew several lessons that would alter its responses to future events. First, it realized that it would have to pay much more attention to weaknesses in countries banking sectors and to the effects of those weaknesses on macroeconomic stability. In 1999, the IMF together with the World Bank-launched the Financial Sector Assessment Program and began conducting national assessments on a voluntary basis. Second, the Fund realized that the institutional prerequisites for successful liberalization of international capital flows were more daunting than it had previously thought. Along with the economics profession generally, the IMF dampened its enthusiasm for capital account liberalization. Third, the severity of the contraction in economic activity that accompanied the Asian crisis necessitated a reevaluation of how fiscal policy should be adjusted when a crisis was precipitated by a sudden stop in financial inflows.

Debt relief for poor countriesDuring the 1990s, the IMF worked closely with the World Bank to alleviate the debt burdens of poor countries. The Initiative for Heavily Indebted Poor Countries was launched in 1996, with the aim of ensuring that no poor country faces a debt burden it cannot manage. In 2005, to help accelerate progress toward the United Nations Millennium Development Goals (MDGs), the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI).

Globalization and the Crisis (2005 present) :The IMF has been on the front lines of lending to countries to help boost the global economy as it suffers from a deep crisis not seen since the Great Depression.For most of the first decade of the 21st century, international capital flows fueled a global expansion that enabled many countries to repay money they had borrowed from the IMF and other official creditors and to accumulate foreign exchange reserves.The global economic crisis that began with the collapse of mortgage lending in the United States in 2007, and spread around the world in 2008 was preceded by large imbalances in global capital flows.Global capital flows fluctuated between 2 and 6 percent of world GDP during 198095, but since then they have risen to 15 percent of GDP. In 2006, they totaled $7.2 trillion- more than a tripling since 1995. The most rapid increase has been experienced by advanced economies, but emerging markets and developing countries have also become more financially integrated.

The founders of the Bretton Woods system had taken it for granted that private capital flows would never again resume the prominent role they had in the nineteenth and early twentieth centuries, and the IMF had traditionally lent to members facing current account difficulties.The latest global crisis uncovered a fragility in the advanced financial markets that soon led to the worst global downturn since the Great Depression. Suddenly, the IMF was inundated with requests for standby arrangements and other forms of financial and policy support.

The international community recognized that the IMFs financial resources were as important as ever and were likely to be stretched thin before the crisis was over. With broad support from creditor countries, the Funds lending capacity was tripled to around $750 billion. To use those funds effectively, the IMF overhauled its lending policies, including by creating a flexible credit line for countries with strong economic fundamentals and a track record of successful policy implementation. Other reforms, including ones tailored to help low income countries, enabled the IMF to disburse very large sums quickly, based on the needs of borrowing countries and not tightly constrained by quotas, as in the past.

For more on the ideas that have shaped the IMF from its inception until the late 1990s, take a look at James Boughton's "The IMF and the Force of History: Ten Events and Ten Ideas that Have Shaped the Institution."

FUNCTIONS OF THE IMFThe IMF performs the following functions :1. The IMF operates in such a way as to fulfill its objectives as laid down in the Bretton Woods Articles of Agreements. It is the Funds duty to see that these provisions are observed by member countries. Some of the provisions of the original Articles such as relating to exchange rates have become obsolete due to international monetary events. Accordingly the Fund has amended its Articles of Agreement to make appropriate adjustments.

2. The fund gives short-term loans to its members so that they may correct their temporary balance of payments disequilibrium.

3. The Fund is regarded as the guardian of good conduct in the sphere of balance of payments. It aim at reducing tariffs and other trade restriction by the member countries. Articles VII of the Charter provides that no member shall, without the approval of the fund, impose restrictions on the making of payment or engage in discriminatory currency arrangements or multiple currency practices. It is the functions of the Fund to have a surveillance of the policies being adopted by the member countries.

4. The fund also renders technical advice to its members on monetary and fiscal policies.

5. It conduct research studies and publishes them in IMF staff papers, Finance and development, etc.

6. It provides technical experts to member countries having BOP difficulties and other problems. 7. It also conduct short training courses on fiscal, monetary and balance of payments for personnel for member nations through its Central Banking Service development, the Fiscal Affairs Department, the Bureau of Statistics and the IMF Institute.Thus the Fund Performs financial, supervisory and controlling functions.