The International Monetary Fund (IMF) is an international financial institution founded by 190 member countries in 1944. It formally came into existence in 1945, with its headquarters in Washington, D.C. It is regarded as the global lender of last resort to national governments and a major supporter of exchange-rate stability.

Mission of IMF

The IMF has three critical missions as follows:

1. It aims to further international monetary cooperation.
2. It encourages the expansion of trade and economic growth, and
3. It discourages policies that would harm prosperity.

To fulfil these missions, IMF member countries collaborate with each other and with other international bodies.

Function of the IMF

Since the 1970s, the IMF’s mandate of promoting international monetary stability has translated into three main functions:

Surveillance

• The IMF regularly monitors the economic and financial policies of its member countries. Through surveillance at the global level and in individual countries, the IMF flags possible risks to domestic and external stability. Further, it advises measures to be adopted for global economic stability.
• The effectiveness of IMF surveillance is majorly dependent on the peer pressure exercised by other IMF member countries, and the global financial sector, as most IMF analyses of global economic risks are publicly available.

Loans

• The IMF makes loans to countries experiencing balance-of-payments difficulties, which generally means they are facing problems paying for necessary imports or servicing their debt payments.
  • The temporary financial assistance enables countries to stabilize their economies while implementing economic reforms. The IMF disburses its loans in phases (“tranches”) after verifying that specified economic conditions and reforms have been met (“conditionality”).

Capacity Development

The IMF provides technical assistance and training to enable member countries to strengthen their capacity to design and implement effective policies. The IMF provides technical assistance in monetary and financial policies, fiscal policy and management, statistical data complications, and economic and financial legislation.

Structure of the IMF

IMF’s governing document, the Articles of Agreement, provides for a three-tiered governance structure that comprises a board of governors, an executive board, and a managing director.

Board of Governors

The Board of Governors is the highest decision-making body of the IMF, and it consists of one governor and one alternate governor for each member country. The governor is appointed by the member country and is usually the minister of finance or the head of the central bank. It performs the following functions:

• It admits new members in the IMF and compulsory withdrawal of members.
• It is responsible for electing executive directors to the Executive Board.
• It approves quota increases, Special Drawing Rights allocations,
• Amendments to the Articles of Agreement and By-Laws.

The executive board

• The IMF’s 24-member Executive Board conducts the daily business of the IMF. It exercises the powers delegated to it by the Board of Governors and powers conferred on it by the Articles of Agreement.
• The IMF’s 24-member Executive Board is composed of representatives from member countries, with a mix of elected and appointed directors. Five directors are appointed by the largest economies with the highest quotas (e.g., the U.S., Japan, Germany, France, and the U.K.). The remaining 19 directors are elected by groups of countries (constituencies) representing the other members.
• Each director serves a two-year term, and voting power is based on the financial contributions (quotas) of the countries within each constituency.
• It regularly meets three or more times a week to supervise and oversee the activities of the IMF. As the largest shareholder, the United States has its own seat on the executive board.

IMF’s Managing Director

The Managing Director(MD) is the chairman of the IMF’s Executive Board and head of IMF staff. The Managing Director is appointed by the Executive Board by voting or consensus.

Decision in IMF

The board of governors or executive board of the IMF can approve policy decisions, loans and many other matters by a simple majority vote; however, major IMF decisions are approved by the supermajority vote. It may require a 70% or 85% vote, depending on the issue. At 16.52% of total voting power, the United States has unique veto power over major policy decisions.

Membership of IMF

A prospective member may become a member of the IMF if it is willing and able to fulfil the obligations of membership contained in the IMF’s Articles of Agreement—its charter. Under those obligations, a member must conduct its exchange rate policy and related economic and financial policies in accordance with the Articles and provide requested economic and financial information.

Consistent with its purposes, the IMF helps members find a solution to the country’s balance of payments problems. A member must also pay a subscription—financial reserves that can be made available for use by the IMF’s members.

Note: Membership in the IMF is a prerequisite to membership in the IBRD.

Reform in the IMF:

As a global institution, the IMF must represent the interests of 190 member countries so that it remains effective.  Its governance structure must reflect today’s world economy and must ensure that smaller developing countries have some say in the IMF. Currently, the amount of influence in the IMF is proportional to voting rights.

In 2010, the IMF agreed to much-needed governance reforms so that it reflects the increasing importance of emerging market countries like India and China.

The sets of reforms are needed in the IMF to deal with the following issues:

1. Issues in IMF Quotas: Restructuring of the IMF Quotas is required to reflect the changed economic strength of countries in an evolving world order.
2. Debt distress: A new cooperative framework is needed to address debt distress in a wide range of developing countries. For example, Sri Lanka was struggling to cope with both the economic crisis in the country and the loan conditions attached to a $3 billion bailout from the IMF that increased the cost of fuel and electricity and doubled value-added taxes, eventually, it had to default on its debt in 2022. Dozens of governments are in a similar situation.
3. Issue in its lending program: Europe’s borrowing from the IMF has declined in recent years yet continues to make up a large share of outstanding IMF loans. IMF is less equipped with lending programs that can help developing countries.
4. Change in the conditions: Conditions are set by the IMF when lending to poor countries so as to ensure that borrowing from them does not severely limit the fiscal space that the countries need to grow as well as realise sustainable development goals.

In order for the proposed amendment on reform to enter into force, assent by three-fifths of the Fund’s 189 members, having 85 % of the Fund’s total voting power, is required.

India’s Interest in IMF

India is a founder member of the IMF. IMF played an important role in the economic crisis of 1991. However, it has not taken any financial assistance from the IMF since 1993. India had repaid all the loans taken from the IMF by May 31, 2000.

The Finance Minister is the ex-officio Governor on the Board of Governors of the IMF. RBI Governor is the Alternate Governor at the IMF. India is represented at the IMF by an Executive Director.

India has 13,114.4 SDR, which is 2.75% of the total. Further, it has 2.75% of the total vote share.

What is the IMF’s Quota

Quotas are the building blocks of the IMF’s governance and financial structure. The quota of an individual member country broadly reflects its relative position in the global economy. It is denominated in Special Drawing Rights (SDRs), the IMF’s unit of account. How quota is used in IMF: Quotas of a country determine the maximum amount of financial resources a member is mandated to provide to the IMF. Quotas are also a key determinant of voting power in IMF decisions. Members get one vote per SDR 100,000 of quota plus basic votes, which are the same for all members. Quotas determine the maximum amount of loans a member can get from the IMF under normal access. Quotas determine a country’s share in a general allocation of SDRs. Calculation of Quota: The current quota formula is a weighted average of GDP (weight of 50 per cent), openness to the global economy (weight of 30 per cent), economic variability (weight of 15 per cent), and international reserves (weight of 5 per cent). For this purpose, GDP is obtained through a combination of GDP based on market exchange rates (weight of 60 per cent) and on purchasing-power-parity exchange rates (40 per cent). What is SDR and its use example? IMF  has defined the SDR as equivalent to the value of a basket of some world currencies. The SDR is not a currency but an asset that holders can exchange for currency when needed. Thus, it can help in the Balance of Payment(BoP) crisis. The IMF reviews the SDR basket every five years, or earlier if warranted, to ensure that it reflects the relative significance of currencies in the world’s trading and financial systems. Board–approved SDR Basket currency Weights at Past Quinquennial Reviews. Year USD Euro Yen Pound Sterling Chinese Renminbi Sum 2000 44.20 29.40 14.80 11.60 – 100 2005 42.92 34.14 11.48 11.46 – 100 2010 41.94 37.36 11.26 9.44 – 100 2015 41.73 30.93 8.33 8.09 10.92 100 2022 43.38 29.31 7.59 7.44 12.28 100

On December 15, 2023, the Board of Governors of the IMF concluded the 16^th General Review of Quotas. It approved an increase of IMF member quotas by 50 % (SDR 238.6 billion, or US$320 billion), which will bring total quotas to SDR 715.7 billion (US$960 billion). This increase in quota will increase global financial stability by enhancing the IMF’s permanent resources and reducing reliance on borrowed resources.

Now, the next step is for member countries to give consent to their respective quota increases. Members of the IMF have committed to complete this step by the November 15, 2024, deadline. In many cases, this involves legislative approval.

Reports published by the IMF

1. Fiscal Monitor: The global financial crisis increases the fiscal challenges. Thus, multilateral surveillance of fiscal developments has been gained. In response to the global financial crisis, Fiscal Monitor was launched in 2009. This analyses the updated public financial developments, updates fiscal and financial implications of the crisis and assesses policies to put public finances on a sustainable footing.
2. Global Financial Stability Report: This is a semi-annual report by the IMF that assesses the stability of emerging-market financing and global financial markets. It is released twice a year, in April and October.
3. World Economic Outlook:  It projects the global growth of the economy. The recent World Economic Outlook 2023, titled- Navigating Global Divergence, stated that the Indian Economy will grow faster than previously estimated.

Related FAQs of International Monetary Fund

1. What is the main purpose of the IMF?

The IMF helps maintain global economic stability by supporting exchange rate stability, offering financial assistance to countries in crisis, promoting international trade, and encouraging economic growth and cooperation.

2. What are IMF quotas and why do they matter?

Quotas determine how much a country contributes to the IMF, its voting power, access to loans, and share in SDR allocations. They reflect the size and strength of a country’s economy in the global order.

3. How does the IMF help countries in financial trouble?

The IMF provides short-term financial assistance to countries facing balance-of-payments crises. Loans are given in tranches based on conditions (“conditionality”) that require economic reforms.

4. What is an SDR, and how is it useful?

Special Drawing Rights (SDRs) are an international reserve asset created by the IMF. They aren’t currency but can be exchanged for hard currency to support countries during BoP crises or liquidity shortages.

5. Why is India pushing for IMF reforms?

India seeks greater representation in IMF governance to reflect its growing economic status. Reforms like updated quotas and voting rights would empower emerging economies and make IMF more equitable and democratic.