HPAS/Allied Mains 2022 Answer Writing Challenge Day 28: Model Answer

Question: What are the objectives and functions of the International Monetary Fund (IMF)? (8 marks, 120 words)

Answer: 

INTRO

• The Bretton woods Conference proposed IMF, World Bank and International Trade Organisation (ITO) in 1944. The IMF and World Bank were started in 1945.
• The purpose of International Monetary Fund is to secure and promote economic and financial cooperation among member countries.
• The IMF was established to assist the member nations to tide over the Balance of Payments disequilibrium in the short term.
• At present, the IMF has 189 member countries with Republic of Nauru joined in 2016

BODY

Objectives of IMF

i) To promote international monetary cooperation among the member nations.

ii) To facilitate faster and balanced growth of international trade.

iii) To ensure exchange rate stability by curbing competitive exchange depreciations.

iv) To eliminate or reduce exchange controls imposed by member nations.

v) To establish multilateral trade and payment system in respect of current transactions instead of bilateral trade agreements.

vi) To promote the flow of capital from developed to developing nations.

vii) To solve the problem of international liquidity.

Functions of IMF

1. i) Bringing stability in exchange rate

The IMF is maintaining exchange rate stability and emphasising devaluation criteria, restricting members to go in for multiple exchange rates and also to buy or sell gold at prices other than declared par value.

1. ii) Correcting BOP Disequilibrium

The IMF is helping the member countries in eliminating or minimizing the short-period disequilibrium in their balance of payments either by selling or lending foreign currencies to the member nation.

iii) Determining par values

IMF enforces the system of determination of par values of the currencies of the member countries. According to the Articles of Agreement of the IMF, every member nation should declare the par value of its currency in terms of gold or US dollars. Under this article, IMF ensures smooth working of the international monetary system, in favour of some developed countries.

1. iv) Balancing demand and supply of currencies

IMF is entrusted with the important function of maintaining balance between demand and supply of various currencies. The Fund (IMF) can declare a currency as scarce currency which is in great demand and can increase its supply by borrowing it from the country concerned or by purchasing the same currency in exchange of gold.

1. v) Reducing trade restrictions

The Fund also aims at reducing tariffs and other trade barriers imposed by the member countries with the purpose of removing restrictions on remittance of funds or to avoid discriminating practices.

1. vi) Providing credit facilities

IMF is providing different borrowing and credit facilities with the objective of helping the member countries. These credit facilities offered by it include basic credit facility, extended fund facility for a period of three years, compensatory financing facility and structural adjustment facility