International Economic Institutions: Role in Global Financial Stability

Main Objectives of the IMF

1. Promote global monetary cooperation: Help countries work together on financial and currency-related issues.

2. Support growth in global trade and income: Encourage fair trade and better job opportunities across countries.

3. Maintain stable exchange rates: Prevent wild changes in currency values and discourage unfair practices.

4. Help countries make payments smoothly: Create systems for international payments and remove trade barriers.

5. Provide temporary financial help: Give short-term loans to countries facing balance of payment problems.

6. Reduce global financial imbalances: Help fix trade and currency-related problems faster and with less damage.

Structure of IMF

• Board of Governors: Top decision-making body; each member country sends one Governor and one Alternate Governor.

• Executive Board: Handles day-to-day work; selects the Managing Director.

• Managing Director: Runs the IMF with help from the Executive Board.

Quota System (Member Contributions)

Each country pays a “quota” to the IMF — this is its share of the IMF’s funds.
Quota depends on:

• National income

• Foreign reserves

• Export trends

• Size of the economy

Key points about quota:

• 25% is paid in foreign currency or SDRs (Special Drawing Rights)

• 75% is paid in the country’s own currency

• Quotas decide:

• How much money a country can borrow

• How much voting power it has

• Its share in SDR allocation

As of now quotas ranking contribution wise:

• United States

• Japan

• China 

• Germany

• France

• United Kingdom

• Italy

• India

• Russian Federation

• Brazil

• has the largest quota (17.5%)

• Palau has the smallest (0.001%)

Special Drawing Rights

Special Drawing Rights (SDRs) were created by the International Monetary Fund (IMF) in 1969 to reduce the global dependency on gold and US dollars for international reserves. SDRs are not actual currency, but a type of international reserve asset that countries can use to support their economies.

Key points:

• SDRs were introduced to increase global liquidity (i.e., money available for global trade and finance).

• Countries receive SDRs as part of their IMF membership — it’s not a loan and doesn’t come with conditions.

• SDRs can be exchanged for real currencies (like dollars, euros, etc.) among member countries.

• SDRs are considered part of a country's foreign reserves, just like gold or foreign currency.

• The value of an SDR was originally equal to 1 US dollar, but now it is based on a basket of major currencies (like the US dollar, euro, yuan, yen, and pound), which gets revised periodically.

Functions and Role of IMF 

IMF performs the following functions.
i) International monetary cooperation
ii) To promote exchange rate stability
iii) To help deal with balance of payments adjustment and
iv) To help deal with economic crisis by providing international coordination – loans, plus advice.
i) to formulate and administer a code of conduct regarding exchange rate policies and restrictions on payments for current account transactions;.
ii) to provide members with financial resources to enable them to observe the code of conduct while they were correcting or avoiding payment imbalances;
iii) to provide a forum in which the IMF could consult with one another and collaborate on international monetary matters. 

What is the World Bank?

• The World Bank is one of the two main institutions created at the Bretton Woods Conference in 1944 (the other being the IMF).

• Its main goal is to help rebuild war-torn economies and support economic development, especially in poor and developing countries.

• It began operations in 1946 and is headquartered in Washington, D.C.

• It is a specialized agency of the United Nations and provides financial help to countries through loans, grants, and guarantees.

• Membership in the IMF is necessary to become a member of the World Bank.

Important Points Regarding World Bank & Its Group:

• The World Bank helps countries build infrastructure, improve healthcare and education, reduce poverty, and promote sustainable growth.

• Countries subscribe capital based on their economic size and get voting rights accordingly.

• The World Bank’s President is the Chairman of the Board, and everyday decisions are made by Executive Directors.

• The IDA is focused on extremely poor countries, offering support on very easy terms (like 40-year loans with no interest).

• The IFC works more like a business and partners with private companies to encourage investment in developing regions.

• The MIGA builds trust by protecting investors from non-business risks.

• The ICSID creates a fair environment for investors and governments to settle legal disputes peacefully.

KEY WORDS:

• Buffer Stock Financing Facility: The facility under which the fund provides resources to help finance members contributions to approved buffer stocks.
• Floating Currency: A currency whose value responds to the supply of and demand for that Currency.
• Special Drawing Right (SDR): A unit of account issued to countries by the International
• Monetary fund to expand their officials reserves bases.
• Transactions of Funds: Exchanges of money assets for other assets.
• Tranche: Equals 25 per cent of the quota of a member in the IMF.