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Essay on India and International Monetary Fund (IMF)

December 18, 2018 0 Comment

(iii) Following the gulf crisis in 1990-91 and a sever balance of payment crisis, India borrowed $0.79 billion as first credit branch. Government of India approached IMF for Compensatory and Contingency Financing Facility (CCFF). This loan is given to members for the BOP crisis for the situation beyond its control.

The amount of this loan was $1.09 billion. IMF also approved $2.2 billion a standby credit arrangement. After this loans India had to go for a massive economy reforms. The organization was get up by the Bretton Woods Agreement of 1944, which came into operation in March 1947.

The fund was established to promote international cooperation in monetary sector, help to resolve balance of payment crisis of nations, and to facilitate a multilateral (multilaterism) payment system among member countries.

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In 1995 the fund had 181 members. Under the IMF’s articles of agreement, member countries were required to observe an exchange rate, fluctuations in which should be confined to 1 per cent around its par value.

This par value was quoted in terms of the US dollar, which as in turn linked to gold. In December 1971 the ‘Group of Ten’, meeting at the Smithsonian Institute, Washington, agree on new ‘central values’ of currencies in order to achieve a dollar devaluation of 10 per cent with a permissible margin of± 2.25 per cent.

Member countries finance the IMF through quotas depending on their economic standing. In 1994 quotas were increased and totaled SDR 145.3 billion. This fund is used to tide members over temporary balance of payment difficulties and thus to help stabilise exchange rates.

This quota determines borrowing ability and voting rights. A member in temporary balance of payments deficit obtains foreign exchange from the fund in exchange of its own currency, which is required to repurchase within three to five years. Members in deficit with the fund are obliged by the terms of agreement to consult with the IMF on the procedures being taken to improve their balance of payments.

During the early 1960’s its became evident that there was a strong case for increasing the size of the fund, and in 1962 the General Arrangements to Borrow was signed by text countries, namely the United States, the United Kingdom, West Germany, France, Belgium, the Netherlands, Italy, Sweden, Canada and Japan – called the ‘Group of Ten’ or the ‘ Paris Club’ – Switzerland and Saudi Arabia, under which SDR 6, 7 billion credit was made available to the IMF should it be required.

This agreement has been regularly renewed and in 1993 the credit limit was raised to SDR 18.5 billion. Countries in difficulty can also negotiate standby credit on which they can draw as necessary.

The IMF cannot, however, make use of any of the currency in this scheme without prior consent of the lending country. In September 1967, at the IMF meeting in Rio de Janeiro, the creation of an international unit of account was agreed in principle, and ratified in July 1969. The system proposed was that annual increases in international credit would be distributed to IMF members by means of special drawing rights (SDRs).

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