International Financial Management

International Financial Management
Unit 9
International Monetary Fund
Table of contents
9.1. Introduction
Learning Objectives
9.2. Concept of International Monetary Fund
9.2.1. Origin of International Monetary Fund
9.2.2. Present Members of International Monetary Fund
Self Assessment Questions
9.3. Primary responsibility of IMF
9.4. Exchange rates and International payments
9.5. Special rights of IMF
9.5.1. Resources of IMF
9.5.2. Operations of IMF
9.5.3. Current challenges of IMF
9.6. Impact of IMF on globalization
9.7. Summary
9.8. Glossary
9.9. Case Study
9.10. Terminal Questions
Answer Keys
A. Self Assessments Questions
B. Terminal Questions
9.11. Suggested Books and e-References
Conceptual Map
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International Financial Management Unit 9
9.1. INTRODUCTION
International financial management can be defined as the process where financial aspects
such as fund management, trading, exchange of currencies, etc. are managed across the
world. In other words, the process where actions are taken to manage flow of capital across
the globe is called as internal financial management.
In the previous chapter, World Bank along with its roles and importance has been
discussed. An international organization which is comprised of 189 members who looks
after the financial requirement of its member along with advisory assistance throughout
the world is referred as World Bank.
STUDY NOTE: There are five organizations that collaborate to form

World Bank group such as:
IMF is an abbreviation used for  International Bank for Reconstruction and
International Monetary Fund Development. (IBRD)
which has 190 countries as its
member. The organization  International Development Association (IDA)
operates across the globe and tries  International Finance Corporation (IFC)
to ensure stable financial  Multilateral investment Guarantee agency
condition across the world. (MIGA)
 International Centre for Settlement of
Investment Disputes (ICSID)
In this chapter, International Monetary fund along with its roles, importance, challenges,
resources and special rights will be discussed in details. International Monetary Fund is an
international organization which was formed with the purpose of promoting employment,
economic growth, self reliance, etc.
In this chapter, detailed discussion of primary roles of the International Monetary Fund will
be done which in short it may include promotion of monetary cooperation, stability in
financial terms, to remove poverty, ensure sustainability in economic upliftment, financial
support through lending to its member countries, etc.
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LEARNING OBJECTIVES
After studying this chapter, you will be able to:
 Explain the history and origin of IMF

 Explain the primary role of IMF
 Determine the benefits of International Monetary Fund
 Determine the exchange rates and international payments
 Determine the Special rights of IMF
 Determine the challenges faced by IMF
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9.2 CONCEPT OF INTERNATIONAL MONETARY FUND
IMF or International Monetary Fund is an international organization which presently has

one hundred and ninety countries as its members. The formation of International Monetary
Fund took place in the year 1944 after the great economic depression which was noticed in
the year 1930s.
IMF or International Monetary Fund is one of the United Nations Specialized Agency which
was formed with the purpose of promoting financial stability among its member countries.
Initially when it was formed there were only 29 countries that were the part of IMF as its
members. Later on various other countries joined and the number of member countries
reaches to 190.
9.2.1. ORIGIN OF INTERNATIONAL MONETARY FUND
IMF is an abbreviation that is used for International Financial Management which came
into existence around 75 years ago in the year 1945 on STUDY NOTE:
27th December. IMF was established in the Bretton
Woods conference which was held in the year 1944 Key Facts:
due to the consequences of great economic depression  Establishment year: 1944
experienced at 1930s. Due to great economic  Present member countries:
depression, the countries imposed strict trade barriers 190
to their declining economies which later results into  Total lending amount: $1
less world trade and devaluation of national trillion
currencies.  Executive director: 24
 Number countries received
Bretton Wood Conference was held in Bretton Woods, emergency fund till 2021: 80
 Nationalities represented by
New Hampshire in USA with government of around
staff: 150
forty five countries to resolve the issue of economic
 0% interest on loan for
crisis by economic cooperation among various underdeveloped countries.
countries and to discuss the way which Europe can be
rebuild.
There were around 29 countries who signed the Article of Association when IMF was
formally come into force on 27 th of December in the year 1945. The members were
increased to 39 countries till the end of 1946. The first country who borrowed the
amount on 8th May 1947 from IMF was France.
IMF is one of the most important economic systems that have been developed
internationally to keep balance between international capitalism and the economic
sovereignty and human welfare. The importance of IMF has increased when many
countries joined IMF after 1991. As after 1991, Soviet Union was dissolved which allows
many countries to join IMF freely.
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9.2.2. MEMBERS OF INTERNATIONAL MONETARY FUND
There are around 29 founder members who signed Article of Agreements with IMF at the
time of formation. All the member countries of IMF are also members of International
Bank for Reconstruction and Development (IBRD). Following is the list of members who
signed AOA during its formation:
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Source: https://www.imf.org/external/np/sec/memdir/memdate.htm
Figure 1: Founder Members of IMF
Note: There were some countries that signed Article of Association on 31 st December
1947 but got membership later.
Member countries of IMF have following benefits:
 The countries who are the members of IMF have a right to get economic
information of all other member countries.
 The member countries of IMF may influence to change economic policies of other
member countries to some limit.
 They may ask other countries to provide essential support (financial and
technical) at the time of contingencies.
 Technical assistance in banking, exchange related matters, fiscal affairs, etc. can be
asked by member countries from IMF.
 IMF provides various trade and investment related opportunities.
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SELF ASSESSMENT QUESTIONS
1. The origin of IMF took due to ________.
A. Trade barrier applied by countries after great economic depression in 1930s.

B. Technological barrier applied after great economic depression in 1990s
C. Increasing fraudulent activities among the countries
D. None of the above
2. Which was the first country to make borrowings from IMF?
A. India
B. Canada
C. France
D. China
3. When IMF came into force?

A. On 27th December 1944
B. On 31st December 1945
C. On 27th December 1945
D. On 31st December 1944
4. Which of the following benefits a member of IMF may avail?

A. Member country may ask for change in economic policy of other member
B. Member countries may ask for economic information of other member
C. Both A and B
5. Government of how many countries’s government was the part of Bretton Woods
Conference which was held in 1944?
A. 29
B. 35
C. 40
D. 45
ACTIVITY:
IMF is an international organization that provides financial and technical support to

its member countries. You are required to find out the criteria based on which one
can take loan from IMF. Also discuss the limit set by IMF while providing loans to its
members.
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9.3. PRIMARY RESPONSIBILITIES OF INTERNATIONAL MONETARY FUND
The motive of joining International Monetary Fund (IMF) by any country is to resolve
international monetary problems which are faced by them across the world. The member
countries jointly take pledge to cooperatively solve the international monetary problems.
STUDY NOTE:
IMF was established with the purpose of ensuring
economic stability across the world. This The main purpose of IMF was to
organization came into force after great economic remove trade barriers for member
depression when decisions were discussed in countries so that their economy may
Bretton Wood conference which was held in 1944 flourish and may overcome the bad
at Bretton Wood, USA. IMF rules are based on the impact of great economic depression
instructions that are provided by the government of of 1930s.
member countries.
Board of Governors: Board of governors of IMF mainly comprised of the central bank
head or finance ministers from each country who meet annually on formal basis.
Executive Directors: These are 24 in number to whom the board of governors

communicate their issues. These executive directors meet at least thrice in a week. Out of
24 executive directors, 8 executive directors represents following countries:
 United Kingdom
 China
 France
 Russia
 Japan
 Germany
 United States
 Saudi Arabia
The remaining 16 represents the groups of other member countries.
IMF department is headed by a managing director who also represents as the chairman of
executive board. There are 2600 employees who comprises the IMF staff which includes
economists, research scholars, experts in taxation and public finance, statisticians, etc.
Following are requirements that member countries need to fulfil to become IMF member:
 Members need to pay quota subscription.

 Members must agree the code of conduct as mentioned in the article of
association.
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 Members need to allow free exchange of foreign currencies without any

restrictions.
 Members should accept openness in economic policies which may affect other
member countries.
Following are the responsibilities that IMF has towards its members:
 It is IMF’s responsibility to provide free access to economic policies information to

all member countries.
 IMF provides financial support when any of the member countries is unable to
make payments on timely basis.
 IMF provides opportunity to persuade other member to change their economic
policies if does not seems favourable.
 Technical assistance is also provided by IMF whenever member countries
required them.
 Another primary responsibility of the IMF is to increase trade and investment
opportunities for its members.
6. Which of the following is/are the requirements to become IMF member?
A. Follow the code of conduct mentioned in AOA

B. Quota subscription is to be paid
C. Allow other members to freely exchange foreign currencies
D. All of the above
7. Who is the head of IMF?
A. USA government
B. Managing director
C. Chairman of executive board
D. Both A and B
8. How many executive directors are there in IMF?
A. 16
B. 24
C. 8
D. 3
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9.4. EXCHANGE RATES AND INTERNATIONAL PAYMENTS
The exchange rates regimes which were established in Bretton Wood system are
different from current exchange rates regimes. Following were exchange rate regimes
which were decided in Bretton Wood conference:
 As per the Bretton Woof system, exchange rates were fixed but adjustable at the
time of disequilibrium under international supervision. Fixed rates ensure that
undue volatility can be avoided.
 Private capital flow was allowed so that imbalances in the payments can be
ensured to limited extend.
STUDY NOTE: An IMF part country that requires real unfamiliar

money may offer its SDRs to another part country
Exchange rate system is the system in return for the cash. To sell a section or all its
developed by IMF to exchange SDRs, the nation should track down an agreeable
foreign currencies and to facilitate partaker with purchase them. The IMF goes about
foreign trade. as a delegate in this wilful trade.
Currently exchange rate regimes are based on

market forces, for instance the exchange rates of major currencies such as Euro, dollars,
Japanese yen, etc. are fluctuated on the basis of market forces. Some of the medium sized
countries have adopted peg exchange rates whereas some of them use floating exchange
rates. Following are the characteristics of existing exchange rate regimes on
environment:
 The transaction cost in financial market has been reduced to rapid growth in
international capital flows along with globalization. Though the revolution
technology has stimulated the globalization and the growth in capital flows.
 Integration among the world economy resulted into developing and transition
countries.
 The current account imbalances is the consequences of international private

capital flows but other following reasons also sometimes resulted into such
consequences:
o Changes in the flows

o Economic disturbances
o Changes in important channels that transmit the international systems.
On providing exchange rates related advise, the IMF suggest their members to chose
exchange rates regimes wisely as each exchange rate regimes have their positive and
negative implications. Exchange rates regimes may vary for different types of currencies.
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 Exchange rate regimes for major currencies such as Yen, dollar, euro, etc. uses
floating rates where floating rates increases the volatility and strict monetary
policy needs to be framed so that stability among the rates can be ensured.
 An exchange rates regime for medium sized industrial countries is pegged rates
which are also referred as fixed rates. This was most commonly used among
medium sized industrial countries which were a system of European Monetary
System.
 Diversity in exchange rate regimes can be seen from extremely pegged rates to
free float rates when exchange rates regime for developing and transition country
is observed.
9. Which of the following is/are the reasons for current account imbalances?
A. Variations in flows
B. Economic disturbances
C. Changes in important channels that transmit the international systems.
D. All of the above
10. Which of the following exchange rate regimes is used in major countries currencies?
A. Pegged exchange rates

B. Floating exchange rate
C. Both A and B
11. Which of the following exchange rate regimes is used in medium sized industrial
countries?
A. Pegged exchange rates

B. Floating exchange rate
C. Both A and B
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9.5. SPECIAL DRAWING RIGHTS OF IMF
One of the main purposes of IMF is to provide loans to its member countries so that stable
economic development can be ensured. As per ISO 4217 code, XDR or SDR is an
abbreviation used for the special drawing rights. In 1969, IMF introduced SDR system
when fixed exchange rate system was followed as per Bretton Wood system.
XDR or SDR was at first characterized as US$1, equivalent to 0.888671 g of gold. The role of
SDR became less important when the system collapsed in 1970s. The role of SDR was
considered by IMF as insignificant as the developed countries will require less loan rather
than developing countries.
STUDY NOTE: In 2001, UN provided suggestion to allocate SDR to

developing nations so that they may create foreign
SDRs or XDRs are allocated by IMF exchange reserves and run current account surplus
to member countries based on quota. through cost free borrowings.
This quota is also subjected to vary
depending upon their position in
world economy.
In 2009, a XDR portion was made to nations that had
joined the IMF after the 1979–1981 round of
designations was finished (thus had never been
apportioned any).
IMF allocates SDRs to the member countries on the basis of IMF quota that the member
country is obligated to contribute IMF funds. If any new allocation of SDR is required then
that country should pass with majority of 85% in SDR department on the basis of voting.
Voting power is also decided based on the IMF quota. For instance USA has 16.7% voting
power as of 2011 data.
The allocations were made so that global economic system may obtain liquidity though the
SDRs are not allocated on regular basis. Following are the allocations made by IMF to less
earning countries:
Source: https://en.wikipedia.org/wiki/Special_drawing_rights
Figure 2: Allocation by IMF to low earning countries
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9.5.1. RESOURCES OF IMF
The primary source of IMF financing is quotas which are allocated to the member countries
on the basis of their position in the whole economy. There are basically three line of
defence such as quotas, New Arrangement of Borrowings (NAB), and Bilateral Borrowing
Agreements (BBAs).
Quotas: These quotas are periodically reviewed by IMF where it is assessed whether the
allocated quotas are adequately done and also their distribution among their members. The
IMF has the right to increase or decrease the quota of their member country based on the
change in the economic position.
New Arrangement of Borrowings (NAB): This is second line of defence where members
are ready to provide finance to the IMF whenever there is an additional requirement of
funds. NAB majorly contributed to IMF in 2021 due to which IMF’s SDR become doubled i.e.
SDR 361 billion now.
Source: https://www.imf.org/en/About/Factsheets/Where-the-IMF-Gets-Its-Money
Figure 3: Resources of IMF
Bilateral Borrowing Agreements: This is the third line of defence from where IMF
procures funds. There are around 40 effective creditors who contribute about SDR 135
billion.
9.5.2. OPERATIONS OF IMF
Since IMF was established, the principal activities of IMF may include providing technical
and financial support to the member countries, to stabilize currency exchange rates, and to
finance the short-term balance-of-payments deficits of member countries.
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9.5.3. CHALLENGES OF IMF
Following are the major challenges faced by International Monetary Fund:
 Governance structure:
The IMF is controlled by various governments as different government comprises the IMF
board of governor. Conflicts among the government of different countries are one of the
major issues faced by IMF. Disagreement among the government while making decisions
lead to failure in achieving organizations objectives.
 Increased level of Politicisation:
Another challenge faced by IMF is the politicisation where it obstructs the organization in
achieving its aims and objectives. The largest stakeholders influence the IMF lending
decision rather than IMF lending being a technocrat process.
 Leadership challenges:
To achieve IMF’s objective it is necessary for the leader or the managing director to be
courageous enough to make tough decision. If the leader is strong then objectives can be
achieved but if the leader is biased then the decisions made will impact various member
countries adversely.
 Difficulties in Performance assessment:
It is IMF’s purpose to ensure monetary cooperation among member countries, exchange

stability, to maintain balance growth among international trade, etc. IMF is also responsible
for measuring its performance in terms of achieving its aim in providing its contribution to
the country’s growth and economic stability.
But this is one of the major challenges for IMF as there are no fixed sets of criteria on the
basis of which performance can be measured.
 Social Instability:
Increased level of politicisation is also responsible for social instability due to which IMF
faces challenges in achieving its objectives more effectively. This social instability leads to
imbalanced social growth across the world.
Due to above mentioned reasons the IMF faces following hardship such as:
 Financial instability amongst countries
 Unsustainable economic growth
 Uncertainties and harsh economic realities.
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 Low employment promotion
12. Which of the following is not a challenge faced by IMF?
A. Governance structure
B. Sources of Finance
C. Social instability
D. Both B and C
13. Which of the following is/are the consequences of increased level of politicisation?
A. Social instability
B. Non-achievement of IMF’s goal
C. Both A and B
14. Which of the following is/are the challenges faced by IMF?
A. Difficulty in performance assessment

B. Social instability
C. Leadership challenges
D. All of the above
15. Which of the following can be the way of dealing with IMF challenges?
A. Reform governance structure

B. Improvement in lending policy
C. Both A and B
D. None
ACTIVITY:
There are various challenges faced by IMF while operating across the world. Some of
which may includes financial instability, unsustainable growth, harsh economic
realities, etc. You are required to provide the ways by which IMF may resolve their
issues and may achieve its aims and objectives more effectively.
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9.6. IMPACT OF IMF ON GLOBALIZATION
IMF is one of the globalised economic institutions which aim to promote economic
cooperation and stability among its member countries. The formation of such economic
institutions is the result of globalization and it is also the stimulus for globalization.
When we talk about globalization, three institutions are considered such as transnational
companies, global financial markets, and linkage between various national governments.
There are three organizations which contributes a lot in globalization to be successful. They
are:
 World Trade Organization

 World Bank
 International Monetary Funds
The IMF is one of the organizations that stimulate globalization across the world.
Globalization has various positive impacts on the world economy as it helps in:
 Ensuring gender equality

 Economic coordination and cooperation
 Large market to trade
 Growth opportunity to less developed countries
16. Which of the following institutions encompasses globalization?
A. Global financial markets

B. Transnational companies
C. National government alliance
D. All of the above
17. Which of the following organization helped in globalization?
A. WTO
B. IMF
C. Both A and B
D. None
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9.7. SUMMARY
 International Monetary Fund is one of the United Nations Specialized Agency which
was formed with the purpose of promoting financial stability among its member
countries.
 IMF was established in the Bretton Woods conference which was held in the year
1944 due to the consequences of great economic depression experienced at 1930s.
 Due to great economic depression, the countries imposed strict trade barriers to
their declining economies which later results into less world trade and
devaluation of national currencies.
 IMF is one of the most important economic systems that have been developed
internationally to keep balance between international capitalism and the
economic sovereignty and human welfare.
 The importance of IMF has increased when many countries joined IMF after 1991.
As after 1991, Soviet Union was dissolved which allows many countries to join
IMF freely.
 Board of governors of IMF mainly comprised of the central bank head or finance
ministers from each country who meet annually on formal basis.
 These are 24 in number to whom the board of governors communicate their
issues. These executive directors meet at least thrice in a week.
 Exchange rate system is the system developed by IMF to exchange foreign currencies and to
facilitate foreign trade.
 As per ISO 4217 code, XDR or SDR is an abbreviation used for the special drawing
rights. In 1969, IMF introduced SDR system when fixed exchange rate system was
followed as per Bretton Wood system.
 There are basically three line of defence such as quotas, New Arrangement of
Borrowings (NAB), and Bilateral Borrowing Agreements (BBAs).
 Challenges of IMF may include high level of politicization, leadership challenges,
governance structure, difficulty in performance appraisal, and social instability.
 The IMF is one of the organizations that stimulate globalization across the world.
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9.8. GLOSSARY
Transnational: Transnational company can be defined as an economy where people of

more than one nation exist.
Monetary policy: Monetary policy refers to the policy where central bank control the
supply of money in the economy for maintaining its growth.
Financial markets: The place where financial transactions may take place is termed as
financial market.
Globalization: This refers to the process where integration of more than one country takes
place.
Exchange rates: The rates at which foreign currencies are exchanged is termed as
exchange rates.
Trade barriers: Any obstructions or hindrances which may occur while purchasing or
selling any item across the world are referred as trade barriers.
Economic growth: This refers to the increase in the per capita income of people living in a
country. In other words, when economies of a country flourish year after year then it is
called as economic growth.
Sustainability: It refers to the process where activities are involved in delivering material
from supplier to the manufacturer then to the end users of the finished products.
Quotas: Quotas are the maximum amount that a member country should provide to IMF as a
financial resource.
Mobilization: It refers to the movement of any item or capital from one country to another
country.
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9.9. CASE STUDY
CASE STUDY:
IMF Lending-Iceland
Iceland is one of the member country of IMF which became the member of IMF on 27th of
December 1945. This was also the first country who has been affected by financial tsunami
which resulted into financial crisis. The country seek support of $2.1 billion which is about
1190% of its quota value or 18% of its GDP. This set an example for other countries as it shows
how IMF supported the country to overcome financial crisis.
Following were the other measures taken by Iceland for overcoming the crisis:
 The country rebuilds the banking system by splitting the banks which were big so that money
can be out where it is required. The splitting of bank will provide shield to the domestic
economy through maximisation of asset recovery.
 Capital control is another measure taken by Iceland for overcoming financial crisis. Capital
control will help in restoring the monetary stability which may leads to higher economic
growth.
 By protecting the social welfare system of Iceland by providing safeguard to the vulnerable
groups and the by ensuring equality in the society.
 Fiscal consolidation is another measure that helps the country to overcome the consequences of
financial crisis.
Iceland experienced a growth of approximately 4% after around 10 years from when the crisis
breakout. The capital control contributed in lifting up its economy. The country’s current
account was in surplus after a decade and its public debt has been decreased. The country also
experienced hike in GDP as its GDP reaches to 35% in 2018. Another positive consequences of
IMF lending includes high level of reserves, more assets than debt, well capitalized banks, etc.
Source: https://www.imf.org/en/Countries/ISL/iceland-lending-case-study
1. IMF took unorthodox measure after crisis broke out. As per your opinion, how well those
measures were in overcoming the financial crisis.
2. IMF provided loan to the Iceland of about $2.1 billion for supporting the program. Throw some
light on the consequences after taking loans from IMF.
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9.10. TERMINAL QUESTIONS
SHORT ANSWER QUESTIONS
Q1. When and why IMF was established?

Q2. What are the roles of IMF?
Q3. Write some facts related to IMF.
Q4. What are requirements that member countries need to fulfil to become IMF member?
Q5. Mention some benefits that member countries may avail being IMF member.
Q6. What is the impact of IMF on globalization?
LONG ANSWER QUESTIONS
Q1.Briefly, explain the origin of IMF.

Q2.What is the resources from which IMF is being financed?
Q3. Explain the challenges faced by IMF.
Q4. Write a note on SDRs of IMF.
ANSWERS
SELF-ASSESSMENT QUESTIONS
1. A Trade barrier applied by countries after great economic depression in 1930s

2. C. France
3. C On 27th December 1945
4. C Both A and B
5. D 45
6. D All of the above
7. C Chairman of executive director
8. B 24
10. B Floating exchange rates
11. A Pegged exchange rates
12. B Sources of Finance
13. C Both A and B
15. C Both A and B
17. C Both A and B
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TERMINAL QUESTIONS
SHORT ANSWER QUESTIONS
Answer 1: IMF is an abbreviation that is used for International Financial Management

which came into existence around 75 years ago in the year 1945 on 27 th December. IMF
was established in the Bretton Woods conference which was held in the year 1944 due to
the consequences of great economic depression experienced at 1930s.
Answer 2: Following are the roles and responsibilities that IMF has towards its
members:
 It is IMF’s responsibility to provide free access to economic policies information to

all member countries.
 IMF provides financial support when any of the member countries is unable to
make payments on timely basis.
 IMF provides opportunity to persuade other member to change their economic
policies if does not seems favourable.
 Technical assistance is also provided by IMF whenever member countries
required them.
 Another primary responsibility of the IMF is to increase trade and investment
opportunities for its members.
Answer 3: Following are the key facts related to IMF:
 Establishment year: 1944

 Present member countries: 190
 Total lending amount: $1 trillion
 Executive director: 24
 Number countries received emergency fund till 2021: 80
 Nationalities represented by staff: 150
 0% interest on loan for underdeveloped countries.
Answer 4: Following are requirements that member countries need to fulfil to become
IMF member:
 Members need to pay quota subscription.

 Members must agree the code of conduct as mentioned in the article of
association.
 Members need to allow free exchange of foreign currencies without any
restrictions.
 Members should accept openness in economic policies which may affect other
member countries.
Page | 21
Answer 5: Member countries of IMF have following benefits:
 The countries who are the members of IMF have a right to get economic
information of all other member countries.
 The member countries of IMF may influence to change economic policies of other
member countries to some limit.
 They may ask other countries to provide essential support (financial and
technical) at the time of contingencies.
 Technical assistance in banking, exchange related matters, fiscal affairs, etc. can be
asked by member countries from IMF.
 IMF provides various trade and investment related opportunities.
Answer 6: The IMF is one of the organizations that stimulate globalization across the world.
Globalization has various positive impacts on the world economy as it helps in:
 Ensuring gender equality

 Economic coordination and cooperation
 Large market to trade
 Growth opportunity to less developed countries
LONG ANSWER QUESTIONS
Answer 1: International Financial Management which came into existence around 75

years ago in the year 1945 on 27 th December which was established in the Bretton Woods
conference which was held in the year 1944 due to the consequences of great economic
depression experienced at 1930s. Due to great economic depression, the countries
imposed strict trade barriers to their declining economies which later results into less
world trade and devaluation of national currencies.
Bretton Wood Conference was held in Bretton Woods, New Hampshire in USA with
government of around forty five countries to resolve the issue of economic crisis by
economic cooperation among various countries and to discuss the way which Europe can
be rebuild.
There were around 29 countries who signed the Article of Association when IMF was
formally come into force on 27 th of December in the year 1945. The members were
increased to 39 countries till the end of 1946. The first country who borrowed the
amount on 8th May 1947 from IMF was France.
IMF is one of the most important economic systems that have been developed
internationally to keep balance between international capitalism and the economic
sovereignty and human welfare. The importance of IMF has increased when many
countries joined IMF after 1991. As after 1991, Soviet Union was dissolved which allows
many countries to join IMF freely.
Page | 22
Answer 2: The primary source of IMF financing is quotas which are allocated to the
member countries on the basis of their position in the whole economy. There are basically
three line of defence such as quotas, New Arrangement of Borrowings (NAB), and Bilateral
Borrowing Agreements (BBAs).
 Quotas: These quotas are periodically reviewed by IMF where it is assessed

whether the allocated quotas are adequately done and also their distribution among
their members. The IMF has the right to increase or decrease the quota of their
member country based on the change in the economic position.
 New Arrangement of Borrowings (NAB): This is second line of defence where

members are ready to provide finance to the IMF whenever there is an additional
requirement of funds. NAB majorly contributed to IMF in 2021 due to which IMF’s
SDR become doubled i.e. SDR 361 billion now.
 Bilateral Borrowing Agreements: This is the third line of defence from where IMF
procures funds. There are around 40 effective creditors who contribute about SDR
135 billion.
Answer 3: Following are the major challenges faced by International Monetary Fund:
 Governance structure: The IMF is controlled by various governments as different

government comprises the IMF board of governor. Conflicts among the government
of different countries are one of the major issues faced by IMF. Disagreement among
the government while making decisions lead to failure in achieving organizations
objectives.
 Increased level of Politicisation: Another challenge faced by IMF is the

politicisation where it obstructs the organization in achieving its aims and
objectives. The largest stakeholders influence the IMF lending decision rather than
IMF lending being a technocrat process.
 Leadership challenges: To achieve IMF’s objective it is necessary for the leader or

the managing director to be courageous enough to make tough decision. If the
leader is strong then objectives can be achieved but if the leader is biased then the
decisions made will impact various member countries adversely.
 Difficulties in Performance assessment: It is IMF’s purpose to ensure monetary

cooperation among member countries, exchange stability, to maintain balance
growth among international trade, etc. IMF is also responsible for measuring its
performance in terms of achieving its aim in providing its contribution to the
country’s growth and economic stability. But this is one of the major challenges for
IMF as there are no fixed sets of criteria on the basis of which performance can be
measured.
Page | 23
 Social Instability: Increased level of politicisation is also responsible for social

instability due to which IMF faces challenges in achieving its objectives more
effectively. This social instability leads to imbalanced social growth across the
world.
Answer 4:
As per ISO 4217 code, XDR or SDR is an abbreviation used for the special drawing rights. In
1969, IMF introduced SDR system when fixed exchange rate system was followed as per
Bretton Wood system. XDR or SDR was at first characterized as US$1, equivalent to
0.888671 g of gold. The role of SDR became less important when the system collapsed in
1970s. The role of SDR was considered by IMF as insignificant as the developed countries
will require less loan rather than developing countries.
Page | 24
9.11. SUGGESTED BOOKS AND E-REFERENCES
BOOKS:
 Jeff Madura, Roland Fox, 2016, International Financial Management, 9 th edition,

South-Western.
 Geert Bekaert, Robert J. Hodrick, 2009, International Financial Management, 3 rd
edition, Cambridge University.
 S.Kevin, Fundamentals of International Financial Management, PHP publisher.
E- REFERENCES:
 Introduction to IMF viewed on

19/05/2021,<https://www.investopedia.com/terms/i/imf.asp>
 Origin of IMF, viewed on 19/05/2021,
<https://en.wikipedia.org/wiki/International_Monetary_Fund#:~:text=The
%20International%20Monetary%20Fund%20(IMF,sustainable%20economic
%20growth%2C%20and%20reduce>
 Facts of IMF, viewed on 19/05/2021,
<https://www.imf.org/en/About/Factsheets/IMF-at-a-Glance>
 Resources of IMF, viewed on 20/05/2021,
https://www.imf.org/en/About/Factsheets/Where-the-IMF-Gets-Its-Money
 Roles and functions of IMF, viewed on 20/05/2021,
<https://www.thebalance.com/what-is-the-imf-its-role-and-functions-3306115>
 Exchange rates of IMF, viewed on 20/05/2021,
<https://www.imf.org/external/np/exr/ib/2000/062600.htm>
 Challenges of IMF, viewed on 21/05/2021,
<https://www.britannica.com/topic/International-Monetary-Fund/Criticism-and-debate>
Page | 25
Concept of International
International Monetary Fund
SDRs of IMF
Monetary Fund
Origin and
History of IMF
IMF and
Primary
globalization
responsibility of
IMF
Resources of
Members of
IMF
International Challenges of IMF
Monetary Fund
Exchange rates and
international
payments
Operations of
International
Financial
Management
Figure 4: Conceptual Map
Page | 26

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STUDY NOTE: There are five organizations that collaborate to form

 Explain the history and origin of IMF

9.2 CONCEPT OF INTERNATIONAL MONETARY FUND

IMF or International Monetary Fund is an international organization which presently has

9.2.1. ORIGIN OF INTERNATIONAL MONETARY FUND

9.2.2. MEMBERS OF INTERNATIONAL MONETARY FUND

Figure 1: Founder Members of IMF

Member countries of IMF have following benefits:

 IMF provides various trade and investment related opportunities.

SELF ASSESSMENT QUESTIONS

1. The origin of IMF took due to ________.

A. Trade barrier applied by countries after great economic depression in 1930s.

2. Which was the first country to make borrowings from IMF?

3. When IMF came into force?

4. Which of the following benefits a member of IMF may avail?

IMF is an international organization that provides financial and technical support to

9.3. PRIMARY RESPONSIBILITIES OF INTERNATIONAL MONETARY FUND

Executive Directors: These are 24 in number to whom the board of governors

The remaining 16 represents the groups of other member countries.

 Members need to pay quota subscription.

 Members need to allow free exchange of foreign currencies without any

 It is IMF’s responsibility to provide free access to economic policies information to

SELF ASSESSMENT QUESTIONS

6. Which of the following is/are the requirements to become IMF member?

A. Follow the code of conduct mentioned in AOA

7. Who is the head of IMF?

8. How many executive directors are there in IMF?

9.4. EXCHANGE RATES AND INTERNATIONAL PAYMENTS

STUDY NOTE: An IMF part country that requires real unfamiliar

Currently exchange rate regimes are based on

 The current account imbalances is the consequences of international private

o Changes in the flows

SELF ASSESSMENT QUESTIONS

A. Pegged exchange rates

A. Pegged exchange rates

9.5. SPECIAL DRAWING RIGHTS OF IMF

STUDY NOTE: In 2001, UN provided suggestion to allocate SDR to

Figure 2: Allocation by IMF to low earning countries

9.5.1. RESOURCES OF IMF

Figure 3: Resources of IMF

9.5.2. OPERATIONS OF IMF

9.5.3. CHALLENGES OF IMF

Following are the major challenges faced by International Monetary Fund:

 Increased level of Politicisation:

 Difficulties in Performance assessment:

It is IMF’s purpose to ensure monetary cooperation among member countries, exchange

 Low employment promotion

SELF ASSESSMENT QUESTIONS

12. Which of the following is not a challenge faced by IMF?

14. Which of the following is/are the challenges faced by IMF?

A. Difficulty in performance assessment

A. Reform governance structure

9.6. IMPACT OF IMF ON GLOBALIZATION

 World Trade Organization

 Ensuring gender equality

SELF ASSESSMENT QUESTIONS