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The International Monetary Fund (IMF) came up in 1944 whose Articles came into force on the 27 December, 1945 with the main functions as exchange rate regulation, purchasing short-term foreign currency liabilities of the member nations from around the world, allotting special drawing rights (SDRs) to the member nations and the most important one as the bailor to the member economies in the situation of any BoP crisis.
The main functions4 of the IMF are as given below:
(i) to facilitate international monetary cooperation;
(ii) to promote exchange rate stability and orderly exchange arrangements;
(iii) to assist in the establishment of a multilateral system of payments and the elimination of foreign exchange restrictions; and
(iv) to assist member countries by temporarily providing financial resources to correct mal-adjustment in their balance of payments (BoPs).
The Board of Governors of the IMF consists of one Governor and one Alternate Governor from each member country. For India, Finance Minister is the Ex-officio Governor while the
RBI Governor is the Alternate Governor on the Board.
The day-to-day management of the IMF is carried out by the Managing Director who is Chairman (currently, Ms Christine Lagarde) of the Board of Executive Directors. Board of Executive Directors consists of 24 directors appointed/elected by member countries/group of countries —is the executive
body of the IMF. India is represented at the IMF by an Executive Director (currently Arvind Virmani), who also represents three other countries in India’s constituency, viz., Bangladesh, Sri Lanka and Bhutan.
IMF reviews members’ quotas once in every five years—last done in December 2010—here, India consented for its quota increase. After this India’s quota (together with its 3 constituency countries) has increased to
2.75 per cent (from 2.44 per cent) and it has become the 8th (from 11th) largest quota holding country among the 24 constituencies. In absolute terms, India’s quota has increased to SDR 13,114.4 million (from SDR 5,821.5 million) which is an increase of approximately US $ 11.5 billion or Rs. 56,000 crore). While 25 per cent of the quota is to be paid in cash (i.e., in ‘Reserve’ currency), the balance 75 per cent can be paid in securities.5
Once a member nation has signed the EFF (Extended Fund Facility) agreement with the IMF, borrowing6 can be done by the member nation— India signed this agreement in the fiscal 1981–82. India has been borrowing from the IMF due to critical balance of payment (BoP) situations—once between 1981–84 (SDR 3.9 billion) and next during 1991 (SDR 3.56 billion). All the loans taken from the IMF have been repaid. India is now a contributor to the IMF as it participates in the Financial Transactions Plan (FTP)7 of the IMF since September 2002—at this time India was in strong balance of payment situation and in a comfortable forex reserves position.
Current US/EU Financial Crises: Challenges Regarding International Payments
The recent financial crises of the US and the EU nations have raised the questions of the challenges of international payments once again. At this crucial juncture, the world seems tossing the idea of a reserved currency for all international payments—as if the famous Keynesian idea of such a currency (Bancor) is going for a kind of revival. The Bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher8
conceptualised in the years 1940–42 which the United Kingdom proposed to introduce after the Second World War. The proposed currency was, viz., be used in international trade as a unit of account within a multilateral barter clearing system, the International Clearing Union, which would also have to be founded. The Bancor was to be backed by barter and its value expressed in weight of gold. However, this British proposal could not prevail against the interests of the United States, which at the Bretton Woods conference established the US Dollar as the world key currency. Milton Friedman9, the famous US economist insisted that Keynes’ theories were incorrect who believed that, ‘inflation was highly destructive and that only monetary policy could control it and that monetary policy is a heavyweight instrument and cannot be used for short-term economic management.’
Since the outbreak of the financial crisis in 2008 Keynes’s proposal has been revived—in a speech delivered in March 2009 entitled Reform the International Monetary System, Zhou Xiaochuan, the Governor of the People’s Bank of China called Keynes’s bancor approach farsighted and proposed the adoption of International Monetary Fund (IMF) special drawing rights (SDRs) as a global reserve currency as a response to the financial crisis of 2007–2010. He argued that a national currency was unsuitable as a global reserve currency because of the Triffin dilemma10 —the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries’ demand for reserve currency.11 A similar analysis was articulated in the Report of the United Nation’s Experts on Reforms of the International Monetary and Financial System12 as well as in a recent IMF’s study.13