International Monetary Fund (IMF) Part II

The International Monetary Fund (IMF) is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. 

The last blog was all about IMF origin, objectives, its functions, IMF organisational structure and more. In this we will further discuss its governing body, IMF and India connection, IMF criticism and reform initiatives.


  • Board of Governors: It consists of one governor and one alternate governor for each member country. Each member country appoints its two governors.  

o It is responsible for electing or appointing executive directors to the Executive  Board. 

o Approving quota increases, Special Drawing Right allocations, 

o Admittance of new members, compulsory withdrawal of a member, 

o Amendments to the Articles of Agreement and By-Laws. 

o Board of Governors is advised by two ministerial committees, the International  Monetary and Financial Committee (IMFC) and the Development Committee. 

o Boards of Governors of the IMF and the World Bank Group normally meet once a  year, during the IMF–World Bank Annual Meetings, to discuss the work of their respective institutions. 

  • Ministerial Committees: The Board of Governors is advised by two ministerial  committees,  

o International Monetary and Financial Committee (IMFC): IMFC has 24 members, drawn from the pool of 189 governors, and represents all member countries.  

∙ It discusses the management of the international monetary and financial system. 

∙ It also discusses proposals by the Executive Board to amend the Articles of Agreement. 

∙ And any other matters of common concern affecting the global economy.

o Development Committee: is a joint committee(25 members from Board of  Governors of IMF & World Bank), tasked with advising the Boards of Governors of the IMF and the World Bank on issues related to economic development in emerging markets and developing countries.  

▪ It serves as a forum for building intergovernmental consensus on critical development issues. 

  • Executive Board: It is a 24-member Executive Board elected by the Board of Governors.  o It conducts the daily business of the IMF and exercises the powers delegated to it by the Board of Governors & powers conferred on it by the Articles of  Agreement. 

o It discusses all aspects of the Fund’s work, from the IMF staff's annual health checks of member countries' economies to policy issues relevant to the global  economy. 

o The Board normally makes decisions based on consensus, but sometimes formal votes are taken. 

o Votes of each member equal the sum of its basic votes (equally distributed among all members) and quota-based votes. A member’s quota determines its voting power. 

  • IMF Management: IMF’s Managing Director is both 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. 
  • IMF Members: Any other state, whether or not a member of the UN, may become a  member of the IMF in accordance with IMF Articles of Agreement and terms prescribed by the Board of Governors.  

o Membership in the IMF is a prerequisite to membership in the IBRD

o Pay a quota subscription: On joining the IMF, each member country contributes a certain sum of money, called a quota subscription, which is based on the country’s wealth and economic performance (Quota Formula).  

  • It is a weighted average of GDP (weight of 50 per cent) 
  • Openness (30 per cent), 
  • Economic variability (15 per cent), 
  • International reserves (5 per cent). 
  • GDP of a member country is measured through a blend of GDP—based on market exchange rates (weight of 60 per cent) and on PPP exchange rates  (40 per cent). 
  • Special Drawing Rights (SDRs) is the IMF’s unit of account and not a currency.  

i. The currency value of the SDR is determined by summing the  

values in U.S. dollars, based on market exchange rates, of an SDR  basket of currencies 

ii. The SDR basket of currencies includes the U.S. dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi (included in 2016).

iii. The SDR currency value is calculated daily (except on IMF holidays or whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five years. 

  • Quotas are denominated (expressed) in SDRs. 
  • SDRs represent a claim to currency held by IMF member countries for which they may be exchanged. 

o Members’ voting power is related directly to their quotas (the amount of money they contribute to the institution). 

o IMF allows each member country to choose its own method of determining the exchange value of its money. The only requirements are that the member no longer bases the value of its currency on gold (which has proved to be too inflexible) and inform other members about precisely how it is determining the currency’s value. 

IMF and India 

  • International regulation by the IMF in the field of money has certainly contributed towards the expansion of international trade. India has, to that extent, benefitted from these fruitful results. 
  • Post-partition period, India had a serious balance of payments deficits, particularly with the dollar and other hard currency countries. It was the IMF that came to her rescue. 
  • The Fund granted India loans to meet the financial difficulties arising out of the Indo– Pak conflict of 1965 and 1971. 
  • From the inception of the IMF up to March 31, 1971, India purchased foreign currencies of the value of Rs. 817.5 crores from the IMF and the same have been fully repaid. 
  • Since 1970, the assistance that India, like other member countries of the IMF, can obtain from it has been increased through the setting up of the Special Drawing Rights (SDRs created in 1969)
  • India had to borrow from the Fund in the wake of the steep rise in the prices of its imports, food, fuel and fertilizers.
  • In 1981, India was given a massive loan of about Rs. 5,000 crores to overcome foreign exchange crisis resulting from a persistent deficit in the balance of payments on the current account. 
  • India wanted large foreign capital for her various river projects, land reclamation schemes and for the development of communications. Since private foreign capital was not forthcoming, the only practicable method of obtaining the necessary capital was to borrow from the International Bank for Reconstruction and Development (i.e. World  Bank). 
  • India has availed of the services of specialists of the IMF for the purpose of assessing the state of the Indian economy. In this way, India has had the benefit of independent scrutiny and advice. 
  • The balance of payments position of India having gone utterly out of gear on account of the oil price escalation since October 1973, the IMF has started making available oil facilities by setting up a special fund for the purpose. 
  • Early 1990s when foreign exchange reserves – for two weeks’ imports as against the generally accepted 'safe minimum reserves' of three-month equivalent — position were terribly unsatisfactory. Government of India's immediate response was to secure an emergency loan of $2.2 billion from the International Monetary Fund by pledging 67  tons of India's gold reserves as collateral security. India promised IMF to launch several structural reforms (like devaluation of Indian currency, reduction in the budgetary and fiscal deficit, cut in government expenditure and subsidy, import liberalisation, industrial policy reforms, trade policy reforms, banking reforms, financial sector reforms,  privatization of public sector enterprises, etc.) in the coming years. 
  • The foreign reserves started picking up with the onset of the liberalisation policies. 
  • India has occupied a special place in the Board of Directors of the Fund. Thus, India had played a creditable role in determining the policies of the Fund. This has increased India’s prestige in the international circles

IMF‘s Criticism 

  • The IMF's governance is an area of contention. For decades, Europe and the United States have guaranteed the helm of the IMF to a European and that of the World Bank to an  American. The situation leaves little hope for ascendant emerging economies that,  despite modest changes in 2015, do not have as large an IMF voting share as the United  States and Europe. 
  • Conditions placed on loans are too intrusive and compromise the economic and political sovereignty of the receiving countries. 'Conditionality' refers to more forceful conditions, ones that often turn the loan into a policy tool. These include fiscal and monetary policies, including such issues as banking regulations, government deficits,  and pension policy. Many of these changes are simply politically impossible to achieve because they would cause too much domestic opposition. 
  • The IMF imposed the policies on countries without understanding the distinct characteristics of the countries that made those policies difficult to carry out, unnecessary, or even counter-productive.
  • Policies were imposed all at once, rather than in an appropriate sequence. The IMF  demands that countries it lends to privatize government services rapidly. It results in blind faith in the free market that ignores the fact that the ground must be prepared for privatization. 

IMF Reforms 

  • IMF Quota: a member can borrow up to 200 per cent of its quota annually and 600 per cent cumulatively. However, access may be higher in exceptional circumstances. 
  • IMF quota simply means more voting rights and borrowing permissions under the IMF. But it is unfortunate that IMF Quota’s formula is designed in such a way that the USA itself has a 17.7% quota which is higher than the cumulative of several countries. The G7 group contains more than 40% quota whereas countries like India & Russia have only 2.5%  quota in IMF. 
  • Due to discontent with the IMF, BRICS countries established a new organization called  BRICS bank to reduce the dominance of IMF or World Bank and to consolidate their position in the world as BRICS countries accounts for 1/5th of WORLD GDP and 2/5th of the world population. 
  • It is almost impossible to make any reform in the current quota system as more than  85% of total votes are required to make it happen. The 85% votes do not cover 85%  countries but countries which have 85% of voting power and the only USA has a voting share of around 17% which makes it impossible to reform quota without consent of developed countries. 
  • 2010 Quota Reforms approved by the Board of Governors were implemented in 2016 with the delay because of reluctance from the US Congress as it was affecting its share. 
  • Combined quotas (or the capital that the countries contribute) of the IMF increased to a  combined SDR 477 billion (about $659 billion) from about SDR 238.5 billion (about $329  billion). It increased 6% quota share for developing countries and reduced the same share of developed or over-represented countries. 
  • More representative Executive Board: 2010 reforms also included an amendment to the Articles of Agreement established an all-elected Executive Board, which facilitates a  move to a more representative Executive Board. 
  • The 15th General Quota Review (in the process) provides an opportunity to assess the appropriate size and composition of the Fund’s resources and to continue the process of governance reforms.

This blog pertains to UPSC papers on GS 2, International Organisation, Political Science optional paper 2 and Essay Type Question. Also, do check our previous blogs on various topics. Subscribe today so that you don’t miss out on any important topics.

Blog Post written by:
Anurag Trivedi
UPSC Mentor