International Financial Institutions Functions

13/03/2020 0 By indiafreenotes

Some of its major functions and activities are:

(a) Exchange Stability

The Fund is required to promote stability in the foreign exchange rates of its member countries. The Fund Agreement seeks to attain the exchange stability by requiring members to agree with the Fund suitable gold or dollar (U.S.) par values (connection with gold severed in January 1976) for their respective currencies, so as to create a system of stable exchange rates.

Each member of the Fund undertakes to establish and maintain the agreed par value for its currency, and to consult the Fund on any change in excess of 10% of the initial party. The Fund allows such alterations in exchange rates only for correcting fundamental disequili­brium in the balance of payments of the country concerned. But, now exchange values are no longer (since January 1976) determined in terms of gold, and so the IMF has ceased to have any direct impact on exchange values.

(b) Multinational Convertibility of Currencies

The Fund makes arrangement for the multinational convertibility of the currencies of the member coun­tries within the prescribed limits of the quota of each member. Since the Fund contains the currencies of all member countries, a member is entitled to purchase whichever currency it needs.

A member country can purchase foreign currencies every year up to 25% of its quota subject to the maximum limit of 200% of its quota. Thus, the Fund offers facilities to its members for additional liquidity.

(c) Assistance for Short-Term Payments Difficulties

The Fund makes its for­eign exchange resources available, under proper safeguards, to its members to meet short-term or medium-term payments difficulties.

(d) Promotion of International Trade

The Fund seeks to promote interna­tional trade by inducing member nations to avoid restrictive currency practices and barriers to trade, such as multiple exchange rates, exchange control, etc. The countries retaining exchange controls are required to justify them.

(e) Allocation of Special Drawing Rights

The Fund also supplements, as and when needed, the existing reserve assets of the participants in the Special Drawing Account. It also makes allocation from the Account to the member countries.

(f) Other Functions

Its other functions include international monetary reform, recycling of petro-dollars to the oil-importing countries, etc. Re­cently, the Fund has to introduce a series of measures like the sale of its gold reserve delinking of the par values of currency from gold, etc. for increasing the supply of international liquidity and promoting greater monetary co­operation among member countries.

Major Objectives of International Financial Institutions

The Fund has been established to achieve the following major objectives:

(a) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income;

(b) To promote exchange stability, to maintain orderly exchange arrange­ments among members, and to avoid competitive exchange depre­ciation;

(c) To assist in the establishment of multilateral system of payments in respect of current transactions between members and in the elimina­tion of foreign exchange restrictions which hamper the growth of world trade?

(d) To shorten the duration and lessen the degree of disequilibrium in the balance of payments of members; and

(e) To promote international monetary co-operation through a perma­nent institution.