Assignment Submitted By:: Zunaira Amin Submitted To: Prof. Muhammad Ashraf Ali

Assignment
Submitted By:
Zunaira Amin
Submitted To:
Prof. Muhammad Ashraf Ali
Roll No. : MS-BFE-1124

Subject: International Banking and Trade
Semester: 1st
How and why was the International Monetary fund formed. Breif history
and current role of IMF?
History of IMF:
After the world war when there was a high fluctuating situation was prevailing
in the world.it was the time when some countries was agree to adopt the gold
and silver standards and some countries want to use paper money. It was the
time when the countries was facing the economic and physical destructions.
Because during the world war countries have lost almost all their reserves and
these countries was facing difficulty in maintain their operations. It was the
declining era for all the nations.
At that time there was conference held in 1944, which is the Britten wood
conference. In this conference it was decided that there the international
monetary fund should be establish to help the countries by providing loans and
to establish stability in the currency of the world. So that the international
monetary fund helps to encourage the international financial stability. It was
decided in this conference that the IMDF will promote the international trade by
reducing the trade restrictions and to help the countries by providing loan so
these countries can establish economic growth which will create the
employment opportunity in their countries and the living standards of the people
will be high and the international monetary funds have to supervise the new
international monetary system.
Now the question is from where the international monetary funds will get the
money to help the other countries?
The countries who want to become the member of international monetary funds,
these countries have to pay some amount which will be the registration amount
and the international monetary fund have settled some quota and this quota is
revised after every five years. In this way International monetary funds will get
the amount which will be used to help other countries. The member countries
of international monetary funds are about 188.
The main objective of IMF encourages monetary engagement and financial
protection. IMF assist in international trade, provide employment opportunities
and long term economic growth. One of the most important objective of IMF is
reduce poverty around the world. IMF headquarter is in Washington, D.C
consisting 188 countries. Lord Keynes suggested the idea of establishment of
clearing union to generate foreign liquidity using a new unit of account called
“Bancor”. Dr. Harry white suggested the establishment of International
Stabilization Fund to which each participating country will contribute a quota of
its own currency, USD and gold. The conference of “Joint Statement by Experts
on the Establishment of an IMF’’ scrutinized both proposals. Agreement on
IMF were signed on December 27, 1945. The fund’s door officially opened in
March 1, 1947.
Members of IMF:
The IMF consists of two types of membership
1. Original Membership:
All those countries whose representatives took part in Bretton Wood conference
and all those member who agreed to be the member of fund prior to 31st
December 1945 part of the original membership.
2. Ordinary Membership:
Ordinary membership included
All those who become its member subsequently. In ordinary membership bank
has the authority to suspend any member and similarly every member is free to
resign.
Objectives of IMF
Article 1 of Articles of Agreement of International Monetary fund consist of six
objectives:
1. Promotion of international monetary cooperation
2. To facilitate the growth in international trade that is both broad and balanced.
To contribute in the promotion of high level of employment of member
countries.
3. To assist in achieving exchange stability and as well as the prevention of
sustainable currency depreciation.
4. Establishment of multilateral system of
payments
5. To make the fund's general capital temporarily available to members under
appropriate safeguards, in order to correct the maladjustments in their balance
of payments.
6. To reduce the degree of disequilibrium in international balance of payments.
IMF has to perform regulatory, financial, and consultative and exchange
stability functions.
Functions of IMF
1. Regulatory Function
2. Financial Function
3. Consultative Function
4. Exchange stability Function
IMF key Activities:
IMF supports it membership by providing:
1. Policy advice to the governments and central bank based on analysis of
economic trends and cross country experiences.
2. Research, statistics, analysis and forecast based on tracking global, regional
and individual economies and markets.
3. Provide loans to help countries to overcome economic difficulties.
4. Provide concessional loans to help fight poverty in developing countries
5. Provide technical assistance and training to help countries improve the
management of economies.
Exchange Rate Fixation:
When IMF was created, par value of currency of each member country
determine through gold and USD. IMF allowed member countries to change the
par value of currency only at a limit of 10 percent. For more than 10% change
IMF approval is required. Before 1973 member countries tied with a fixed
exchange rate system. After 1973 when Bretton Woof System failed countries
tied with a floating exchange rate system. However IMF has participated its role
in giving advice and finance to meet the unfavorable balance of payments of
member countries.
Sources of Financing of IMF
the sources of IMF mainly come from usable currencies and SDRs held in
General reserve account. General reserve account include currencies of member
countries, SDR and gold. IME received these resources in form of quota
subscription, borrowing by IMF, Charge on use of fund resources income from
investment and interest on holding on funds holding of SDRs.
The subscription and SDR quota are sources of funds for IMF. Every member
country participate in subscription quota according to their country’s economic
size. Each member nation is required to contribute funds according to its
economic size and strength. 25 percent subscription quota is to pay in form of
gold, USD and hard currencies by each member country and remaining in form
of their own national currency.
In past SDR was tied with the value of gold but later on its value was equal to
the value of four currencies US Dollar, Euro, Pound Sterling and Japanese Yen.
This position was changed several times and now the value of SDR modified,
includes the five currencies with following ratios:
1. US Dollar (41.73%)
2. Euro (30.93%)
3. Chinese Renminbi (10.92%)
4. Japanese Yen (8.33%)
5. Pound Sterling (8.09%)
According to the rule of IMF, any member country can borrow not above the
limit of 25% of its quota in any one year, up to a total of 125 % of its quota over
a period of five years. IMF lend to its member countries ensuring that, members
are pursuing policies that will improve external payment problems and member
countries repay the amount in timely manner.
IMF current role in Financing:
IMF provide financing facilities to its members of a special nature. IMF provide
financial facilities to its members on cooperative basis to reduce the problem of
unfavorable balance of payment of member countries. These forms differ in
types of need and the length of conditions attached to the financing:
1. The Compensatory and Contingency Financing Facility (CCFF):
This facility provided to the member countries to draw from the fund up to 100
% to meet their unfavorable balance of payment conditions.
2. The Buffer Stock Financing Facilities (BSFF):
it was established in June 1969, allow the member countries to draw up to 45 %
of their quota to fiancé the primary products of international buffer stock.
3. The Extended Fund Facility (EFF) :
It was established in September 1974, allow the member countries to draw up to
140 % of their quota to meet the difficulties of imbalance payments arises due
to production imbalance, trade or prices. This financing facility is also available
to the member countries for different development projects.
4. The Supplement reserve Facility (SRF) :
It is a temporary financing facility that provides the member nations finance for
longer time period under the regular and standby arrangements.
5. Poverty Reduction and Growth Facility (PRGF) :
This financing facility is provided to the developing countries for such
programs and projects which would ultimately help in reduction of poverty and
boost their economic growth.
6. Emergency Assistance:
This financing facility is provided to member countries which are suffer from
natural disasters, earth quakes and militancy.
These loans are to be recovered within three to five years and the member
countries repurchase their currency from their own fund with other convertible
currencies which are approved by IMF, Until the IMF hold not more than 75 %
of member countries quota in their nation’s own currency.
Conclusion
In short IMF works to encourage the global growth and economic stability. It
offers policy advice and financing to the members who are experiencing
financial difficulties, and it also work with developing countries to help them
achieve macroeconomic stability and reduce poverty. IMF also have some
disadvantages foreign bodies have great influence over key economic issues and
resource management and investment in IMF debt countries. For example,
Jamaica argues that takes away the abilities for the countries to decide national
policy.

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