Topic: Bretton Woods Institutions and Other Institutions and India

Q. What was Bretton Woods Conference?

Ans. The United Nations Monetary and Financial Conference, commonly known as Bretton Woods conference, was held in Bretton Woods, New Hampshire, USA to regulate the international monetary and financial order after the conclusion of World War l1.The conference resulted in the agreements to set up the International Bank for Reconstruction and Development (IBRD)- popularly known as World Bank and the International Monetary Fund (IMF).The IMF was set up to foster monetary stability at global level. The IBRD was created to speed up post-war reconstruction. The two institutions are known as the Bretton Woods twins.

Q. Give an account of IMF. Its objectives & modus operandi?

Ans. The International Monetary Fund, a UN specialised agency, was established under the Bretton Woods Agreement in 1944 along with the World Bank. It has 187 members (2011). It is headquartered in Washington and its Managing Director is Christine Lagarde. It started functioning in 1947.

Upon joining, each member of the IMF is assigned a quota, based broadly on its relative size in the world economy. A member’s quota guides:

• Subscriptions: the amount the member is obliged to provide to the IMF.

• Voting power

• Access to financing: The amount of financing a member can obtain from the IMF

India has a voting strength of 2.75% (2011)

IMF objectives are

• To promote international monetary cooperation

• To facilitate balanced growth of international trade for the economic growth of all member countries

• To promote exchange rate stability; maintain orderly exchange rate arrangements; and to avoid competitive exchange rate revaluation

• To help members in times of balance of payments crisis.

What the IMF Does

In order to achieve the above objectives, the following functions are performed.

The IMF monitors the world’s economies, lends to members in economic difficulty and provides technical assistance.

To elaborate, the work of the IMF is of three main types.

Surveillance involves the monitoring of economic and financial developments, and the provision of policy advice, aimed especially at crisis-prevention.

The IMF also lends to countries with balance of payments difficulties, to provide temporary financing and to support policies aimed at correcting the underlying problems; loans to low-income countries are also aimed especially at poverty reduction. Third, the IMF provides countries with technical assistance and training in its areas of expertise.

The IMF also plays an important role in the fight against money-laundering and terrorism.

Surveillance is the process of appraisal of the exchange rate policies of member countries. In the absence of surveillance, the financial volatility in the world today can become worse.

IMF Facilities

Over the years, the IMF has developed various loan instruments, or facilities, that are tailored to address the specific circumstances of its diverse membership.

Low-income countries may borrow at a concessional interest rate through the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF). The Exogenous Shocks Facility (ESF) provides policy support and financial assistance to low-income countries facing global shocks. For example, due to commodity prices falling etc.

Non-concessional loans are provided mainly through Stand-By Arrangements (SBA) for members with very strong policies and policy frameworks, and the Extended Fund Facility (which is useful primarily for low-income members).

The IMF also provides emergency assistance to support recovery from natural disasters and conflicts, in some cases at concessional interest rates.

Except for the PRGF and the ESF, all facilities are subject to the IMF’s market-related interest rate.

The amount that a country can borrow from the Fund—its access limit—varies depending on the type of loan, but is typically a multiple of the country’s IMF quota. This limit may be exceeded in exceptional circumstances.

Extended Fund Facility (EFF) is to help countries address longer-term balance of payments problems requiring fundamental economic reforms. Arrangements under the EFF are thus longer than SBAs.

The IMFs analysis of global economic developments, contained in its World Economic Outlook, provide finance ministers and central bank governors with a common framework for discussing the global economy. Twice a year, it publishes the Global Financial Stability Report. The IMFs performance is assessed on a regular basis by an Independent Evaluation Office.

Q. What do you understand by SDRs?

Ans. The SDR is an international reserve asset, created by the IMF in 1969 to For its member countries’ official reserves. Its value is based on a basket of four key international currencies- dollar, euro, yen and pound. SDRS can be exchanged for national currencies.

SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs.
The value of the SDR is set dynamically against a basket of currencies consisting of the euro, Japanese yen, pound sterling; and U.S. dollar. The basket composition is reviewed every five years to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems. China wants Yuan included.

Q. Write a short notes on IMF’s Borrowing Arrangements (In India context).

Ans. While donation of member countries are its main source of financing, the IMF can supplement its resources through borrowing if it believes that resources might fall short of members’ needs. Through the General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB), a number of member countries and institutions lend additional funds to the IMF.

The GAB and NAB are credit arrangements between the IMF and a group of members and institutions to provide supplementary resources to the IMF to prevent or cope with problems of the international monetary system or to deal with an exceptional situation that poses a threat to international monetary stability.

The GAB, established in 1962, enables the IMF to borrow specified amounts of currencies from 11 industrial countries at market-related rates of interest. It is used to lend to countries for stablilising their external account.
IMF set up NAB in 1998.

The NAB is a set of credit arrangements between the IMF and 39 member countries (2011). Commitments from individual participants are based predominantly on relative economic strength, as measured by IMF quotas. It has a corpus of US $ 580 billion which is equivalent to SDRs 367 billion (2011). The increase in the corpus is about 11 times from SDR 34 billion originally in NAB. The increase is rendered necessary to bail out the sick Eurozone economies like Greece and Portugal.

India is set to fund bailouts in financially-stricken Europe, marking a dramatic role reversal from 20 years ago when it went knocking on the doors of the International Monetary Fund (IMF) to avert a balance of payments crisis.

The government sought parliamentary approval to provide over Rs. 9,003 crore (over $2 billion) in loans to the multilateral agency’s New Arrangements to Borrow (NAB), a fund whose corpus was raised to $580 billion when the debt crisis iii Europe showed no signs of abating.

Over the past two years, amid increased stress in the global economy, the IMF has been pressed into service on several occasions and has financed bailouts in European countries facing a crisis due to high levels of debt
The 10-fold rise in the NAB corpus was the result of the new global financing order created by G20, a group of the world’s most powerful economies, in the post-financial crisis era. Along with the jump in corpus, membership to the elite club of NAB contributor was also expanded to include 13 emerging economies, which included India.

The NAB is the facility of first and principal recourse in circumstances in which the IMF needs to supplement its quota resources.

How the IMF Lends

A core responsibility of the IMF is to provide loans to member countries experiencing balance of payments problems. This financial assistance enables countries to rebuild their international reserves; stabilize their currencies; continue paying for imports; and restore conditions for strong economic growth while undertaking policies to correct the underlying problems. Unlike development banks, the IMF does not lend for specific projects.

IMF and the global financial crisis

As the world economy has become engulfed in the worst crisis since the Great Depression before the second world war, the IMF has mobilized on many fronts to support its member countries, increasing its lending, using its cross-country experience to advise on policy solutions, and introducing reforms to become more responsive to member countries’ needs.
Stepping up crisis lending, including a sharp increase in concessional lending to the world’s poorest nations.

Providing analysis and targeted advice.

Becoming more flexible. The IMF has overhauled its general lending framework to make it better suited to country needs.
Creating a financial safety net. The IMF created a broad financial safety net to limit the spread of the crisis.
Drawing lessons from the crisis. The IMF is contributing to the ongoing effort to draw lessons from the crisis for policy, regulation, and reform of the global financial architecture.

Q. What do you understand by IMFs Conditionalities?

Ans. There has been a controversy about the IMF loans that the debtor countries are suggested economic reforms that are socially and in human terms damaging in return. The conditionalities as they are called are justified by the IMF on grounds that they are the genuine reforms necessary for economic health to be restored. IMF further believes that if the recipient country follows the reforms it will be in a position to repay the loan. Debtor countries however hold that the reforms suggested are anti-poor and anti-development like cutting subsidies; scrapping priority sector lending; opening up the country at a fast pace etc.

Some of the conditionalities are

• reduce fiscal deficit

• follow privatisation

• deregulate the rupee in external transactions

• downsize the government

• enact flexible labour sector reforms

• reduce subsidies etc.

It is clear that most countries can not follow these policies with popular support. At the same time it must be understood that these policies should be selectively followed for the best results by avoiding populism and

adhering to genuine welfarism.

The Fund admitted that too many conditions were imposed on borrowers; it overstepped its mandate and expertise.

Another criticism about the conditionalities is that the reforms suggested are the same for dl countries irrespective of the causes of the crisis.

India suggested that the IMF conditionalities must be more sensitive to the domestic realities of the member countries.

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