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International Trade Theory & Policy

Role Of International Monetary Fund (IMF) In Developing Countries

International Monetary Fund

IMF came into being on 27th December 1945 when 29 countries of the world signed on “Articles of agreement”. IMF started its functioning in March 1947.

Objectives of the Fund

In the first article of the Fund’s Charter, there have been described the six objectives of IMF. They are as:

  1. To increase international cooperation by providing consultancy services regarding international monetary issues.
  2. To assist in the balanced growth of world trade, which will be helpful in raising the efficiency, employment and income of the world.
  3. To stabilize the exchange rates and discourage the tendency of competitive devaluation
  4. To abolish those restrictions which are obstacles in the way of world trade and create a multilateral system of payments.
  5. The countries facing deficit in their BOPS can borrow from IMF to finance temporarily.
  6. To reduce the volume and time period of disequilibrium (deficit) in BOP.

Role Of IMF In Developing Countries

Determination of exchange rate

IMF has been of much more value for Developing Countries. It not only plays an important role in the determination of the exchange rate, but IMF arrangements provided opportunities to European industrial countries to follow the macro-economic management policies in a better way. They followed the realistic exchange rates.

Countries reduced the restrictions over world trade and foreign exchange and depended upon monetary policy for economic stability. As a result, not only their deficits decreased, but inflation was also controlled. All this means that IMF helped in attaining both internal and external balances.

Removal of deficit in BOP

To increase its resources to finance the deficit countries it introduced GAB whereby the IMF could be able to borrow from 11 big industrial countries and banks. Secondly because of shortage of world’s liquidity it was authorized to issue SDRS. It is reminded that SDR is a reserve asset which will be deposited in the accounts of IMF, and on its basis a country will be able to borrow from IMF. In addition to GAB, IMF is engaged in raising its resources through New Arrangements to Borrow (NAB) from 39 rich countries and Banks.

Export Earning

During 1960’s, IMF paid special attention on the UDCS. It introduced two facilities like CFF and BSF with the aim of assisting those poor countries which faced fall in their export earnings.

Flexible Exchange Rate System

In the beginning of the 1970’s, the fixed exchange rate system came to an end. In this way, when the managed flexible system was being inducted, IMF brought amendments in its Articles of Agreement. As a result, IMF will not only keep an eye on the exchange rates of its member countries, but it will also be able to analyze the economic policies of its member countries.

Meanwhile, two policy institutions like the interim committee and development committee were set-up. These ministerial bodies will hold their meetings earlier than the Board of Governors of IMF and IBRD. Moreover, a new facility has been introduced known as EFF to provide assistance for medium-term to UDCS.

Compensate the Oil Affected Countries

During 1970’s, because of oil price hike, the UDCS had to face soaring deficits. Moreover, the world had to see the melodrama of inflation and unemployment. In such circumstances, there was a fear that the rate of exchange will face big fluctuations and there will be big devaluations like 1930’s. In order to compensate the oil affected countries, IMF introduced 1st  Oil Facility and 2nd Oil Facility. In 1976, IMF set-up TF, while in 1977, it formed SFF.

Structural Adjustment Facility

In 1986 and 1987, the Structural Adjustment Facility (SAF) and Enhanced Structural Adjustment Facility (ESAF) were introduced. Under these facilities, IMF helps those countries which are engaged in removing price distortions, maintaining real exchange rate and enhancing productive capacity. The purpose of such all reforms are to create a suitable environment for economic development.

Concessionary Loans

The above facilities were renewed in 1994 with the aim of providing loans to UDCS at the concessionary rates so that they could initiate medium-term programmes of macroeconomic stability.

Assist Countries in Debt Crises

In 1970’s, because of the rise in oil prices, the UDCS had to borrow, but this situation created the Debt Crisis in 1980’s. In 1982, so many poor countries realized that they are unable to pay even the service charges of such loans. Such a situation may lead to distorting international banking and finance. Accordingly, IMF came forward to assist.

The IMF, DCs and UDCS came to this conclusion that such crises are of temporary nature. Moreover, the international recession which has led to reduce the export incomes of poor countries will not remain forever. Therefore, IMF proposed that if UDCS control their budget deficits, follow the easy monetary policies and improve their exchange rate positions, the process of economic development will set in. Moreover, when domestic investment increases, the repayment of loans would also become possible. Again, due to improvement in economic conditions, the international commercial banks would also advance to the poor countries. In such circumstances, IMF contacted debtors, DCs, official and unofficial creditor to find the solution to this problem.

Rescheduling of Loans

IMF sorted out the ways and means to solve the problem of each individual country. It arranged talks between the debtors and creditors regarding “Rescheduling’. With this, Debt Crisis came to an end even in the period of less than 10 years. But the debtor countries had to follow the Structural Adjustment Programmes as suggested by IMF. In such circumstances, the opposition parties in so many countries excited the people by saying that IMF is interfering in the independence of their countries.

The IMF conditionalities became much more powerful. It means that IMF authorities clearly told the countries that it would provide loans if the countries bring a change in their economic policies, abolish subsidies, increase the prices of public utilities and follow the policy of privatization and deregulation.

Temporary Systematic Transformation Facility

In 1993, IMF initiated Temporary Systematic Transformation Facility’ for the assistance of former states of the USSR. As a result of such facility, the Central Asian States were assisted which were transforming themselves from the command economies to market economies.

Training Facilities

Moreover, IMF is providing training facilities to the staff of these states so that they could train themselves for a better macro-economic management. They could improve their budgeting system; they could run their financial institutions in a better way; and they could make the role of their central banks more effective. In this respect, IMF has set-up an Institute at Vienna (Austria). Again it owns Singapore Training Institute and Middle East

Asian Financial Crisis

During 1997 – 98, Asian Financial Crisis; Fund pledged $21 bn. to assist Korea to reform its economy, restructure its financial and corporate sectors, and recover from recession. center for Economics and Finance in Kuwait. In the year 2000, IMF approved an additional sum of $52 million loan for Kenya to cope with severe effects of drought under PRGF.

Historic reform of governance

The IMF’s member countries also agreed to a significant increase in the voice of dynamic emerging and developing economies in the decision making of the institution, while preserving the voice of the low-income members.

Negative Role of IMF

As we told above the positive role of IMF, but there are a lot of complaints regarding IMF on the part of UDCS. They are as :

Anti-Developmental Adjustment Program

If we analyze the prescriptions made by IMF we find that they are the sum of Finance and Adjustment’. As far as finance is concerned, it is not controversial. But the Adjustment is criticized. It is said that the process of adjustment as suggested by IMF is anti-developmental. For the sake of adjustment, the Fund imposes strict conditions which affect the income and employment levels of the countries. Moreover, the conditions influence the sovereignty of a country.

Devaluation to reduce Aggregate Demand

The Fund believes in the free enterprise economy; it prefers private investment over official investment; it prefers free trade over restricted trade. The Fund is of the opinion that deficit rises because of un-competitiveness regarding prices in a country. Moreover, deficit is also attributed to unhealthy growth of AD. Accordingly, the Fund stresses upon Devaluation and controlling of AD so that the deficit in BOP could be removed.

Abolition of Subsidies

Moreover, the Fund is always found talking of abolition of subsidies, liberalization of world trade and international payments and exchange. But following such all, the deficits of UDCS will not fall when DCs are depending upon quotas and heavy tariffs in their markets. Again, if they reduce AD, the speed of economic development will be slowed down leading to enhance employment. Therefore, the critics say that IMF should suggest such adjustment programmes which could remove deficit but they should not obstruct development.

Higher Interest Rate

IMF is also objected of charging higher interest rate and imposition of strict conditions. As a country gets more and more loans, the conditions become strict and strict. The country having deficit has to pay the interest and borrow money in scarce currencies. In this way, the deficit in BOP will increase.

Conditional Loans

The loans provided by the Fund under SAP (Structural Adjustment Program) are highly conditional. They often ask for changes in taxes, cut in govt. expenditures, the abolition of subsidies on fertilizers, edible oil, education, health facilities and public transportation. They also stress upon privatization of state-owned enterprises. All they are leading to create monopoly in capitalist countries like Pakistan, with the result of rising prices, social unrest and unequal income distribution.

Too Much or Too Little Intervention

The IMF has been criticized for not doing much and for overreaching. It has been criticized for being too slow or too eager to assist failing national policies. Since the United States, Japan, and Great Britain feature prominently in IMF policies, it has been accused of being a tool for free-market countries only. Simultaneously, free-market supporters criticize the IMF for being too interventionist.

Creates Moral Hazard

Some member nations, such as Italy and Greece, have been accused of pursuing unsustainable budgets because they believed the world community, led by the IMF, would come to their rescue. This is no different than the moral hazard created by government bailouts of major banks.

Lack of transparency and involvement

The IMF has been criticized for imposing policy with little or no consultation with the affected countries.

Supporting military dictatorships

The IMF has been criticized for supporting military dictatorships in Brazil and Argentina, such as Castello Branco in 1960s received IMF funds denied to other countries.


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