What is the International Monetary Fund?
The International Monetary Fund (IMF) was one of the institutions to emerge as a result of the United Nations Monetary and Financial Conference held at Bretton Woods, United States in July 1944.The widespread devastation of the Second World War had made the need felt for an international organization that could regulate international payments and exchange rates. The Fund today has 185 member countries.
Does it control international exchange rates?
Not any longer. Member countries that joined the Fund between 1945 and 1971 agreed to maintain fixed exchange rates between their currencies and the US dollar. This Bretton Woods system fell apart when a high inflation rate in the US and the growing trade deficit prompted the Americans to allow the dollar to float. Since then, 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; or participating in a currency bloc.
What exactly does it do?
Its three main activities are surveillance, technical assistance, and lending. As part of surveillance role, IMF provides periodic assessments of global and regional developments as well as policy advice to members. It provides technical assistance to member countries in fiscal policy,monetary and exchange rate policies,banking and financial system supervision, and statistics. Its financial assistance, unlike that of the World Bank, is provided not for specific projects but to help countries tide over balance of payments problems or for structural adjustments to their economies.It also gives concessional loans to the low income countries.
Where does the IMF get its money?
The IMF’s resources come mainly from quotas that countries deposit when they join the IMF. Quotas reflect size of each member’s economy. Larger economies have larger quotas, while smaller economies have smaller ones. Quotas are reviewed every five years. Quotas, together with equal number of basic votes each member has, determines a country’s voting power. In that sense, they are akin to the shareholding in a company. Quotas also help to determine the amount countries can borrow from the IMF, and their share in allocations of special drawing rights (SDR). Most IMF loans are financed out of members’ quotas. The exceptions are loans under the Poverty Reduction and Growth Facility, which are paid out of trust funds administered by the IMF and financed by contributions from the IMF itself and member countries.
What are SDRs?
Countries deposit 25% of their quota subscriptions in major currencies, such as US dollars or Japanese yen, or in Special Drawing Rights, which were created as an international unit in 1969 to support fixed exchange rate system. IMF can call on the remainder, payable in member’s own currency. The SDRs so formed are an international reserve, but since they belong to depositing countries, they can account for it in their external reserves along with foreign currency and gold reserves. The value of an SDR is set daily using a basket of four major currencies — the Euro, Japanese yen, pound sterling, and US dollar. The SDR also serves as the unit of account of the IMF and some other international organizations.
Source: ToI, 6th April 2009
I just have a strong opinion that the IMF should play a larger role in the international currency markets. In the wake of the very lucid trouble that the US dollar is bound to be in because of the Fed's incessant dollar-printing practices to compensate for the vast American public debt, it is imperative that the world should be ready for a new common currency. This would be a sovereign currency, independent of any particular country's economic condition, perhaps based on SDR or some similar parameter (involving all countries). I realise that 2/3s of the world's reserves are in US Treasury, and it would be destructive for most of these saving countries. However, I believe that sooner rather than later everyone will understand the importance of this concept which would also help discipline the American way of life indirectly. China has already started dumping the US dollar for other currencies (its investment in US treasury bills had come down from about $1.7 trillion to about $1 trillion in 6 months as per some article I read in DNA Money around January 2009, however today's Economic Times claims it to be $1.4 trillion currently). Some of the OECD countries are already rumoured to have started trading oil in other currencies which could be considered as a leading indicator of the dollar's future.
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