International Monetary Fund
(IMF) was created after
World War II, following the Bretton Woods agreement in
1945. The primary function of the IMF was to monitor the exchange
rates of the different countries and assist those economies which
faced Balance of Payment (BoP) crises. Initially, the IMF operated a
fixed exchange rate system in which all currencies were pegged to the
dollar. The dollar was, later, converted to gold. Though, at the
beginning, the system was successful, eventually the differing
inflation rates between the economies made it difficult to have a
fixed exchange rate regime. In 1971, the fixed exchange rate collapsed.
The IMF then concentrated on managing the BoP crisis of
countries. During the 1980s, deteriorating economic conditions in
Mexico and Latin America made the countries declare that they were
unable to repay the principal and the interest on loans taken.
Such huge default would have created a banking crisis in US,
Europe and Japan.
The IMF came in with a rescue package and,
thereafter, assistance from the IMF became the reason for the institutions'
existence. This rescue package came in with stringent conditions,
especially on fiscal deficits which tried to assure the lenders that
the macroeconomic health of the troubled economy was
being closely monitored. In fact, the conditional assistance by IMF
was referred to as `tough love' by many economies. However, IMF
gradually lost its significance as the aid given was conditional upon
the fiscal prudence in the receiving economies. During the crises
in Argentina, Mexico and later the Asian crisis, the IMF was
strongly criticized for its views on capital convertibility. IMF became
partly redundant due to the free flow of capital between economies.
Private flows of funds between the developed economies in the west
and the developing economies, such as India and China, in the form
of FDI and FII, made the IMF lose its significance. Increase in
the price of oil made the oil exporting countries, such as Saudi
Arabia and Russia, to have surplus in their BoPs which could be
invested globally. To cope with the situation, the Fund declared,
in 2008, that it would sell 400 tons of gold. It also declared a $140
mn budget shortfall in April 2008.
During the global boom following 1997, the demand for IMF
funds reduced significantly. It appeared to many that the IMF had
marginal significance in global finances. In August 2008, the
total financial resources of the IMF were $352 bn. At the peak of
the Asian crisis, the IMF had lent only $30 bn. By September 2008,
the outstanding loans by IMF had fallen by $92.6 bn. The fall in
interest earned on loans given, in fact, resulted in a shortfall in
the budget in 2007. The US subprime crisis, however, reasserted the
role of the Fund. The acute shortage of liquidity, following the
collapse of the investment banks, created a new demand for this Fund. As
the financial contagion spread, most lending institutions were
reluctant to lend. The G-20 session which concluded recently gave a new
lease of life to the IMF. A decision was taken to allow the IMF to
issue Special Drawing Rights (SDR) worth $250 bn. The fund was
also authorized to borrow additional resources from the
international capital market. Financial stability board has been established,
which now assigns regulatory and surveillance powers to the IMF. |
