International Monetary Fund (IMF) UPSC Notes: History, Objectives, Functions & SDR

The International Monetary Fund (IMF) is an international financial institution and a specialised agency of the United Nations established on December 27, 1945. IMF works to achieve sustainable growth and prosperity by supporting economic policies that promote financial stability and monetary cooperation among nations.

• Founding Date: July 22, 1944 (signed at Bretton Woods Conference, formally established in 1945).
• Headquarters: Washington, DC, United States.
• Members: 191 nations participate in the IMF.
• Core Responsibility: Providing loans and technical assistance to member countries facing balance-of-payments problems.

Must cover: World Bank UPSC Notes: History, Objectives, Functions & Reforms

The IMF was established with a clear mission reflected in its Articles of Agreement. These objectives guide all operations and policy recommendations.

• Promote international monetary cooperation among member nations to prevent currency crises and exchange rate instability.
• Secure financial stability in the global monetary system and prevent contagion of financial crises.
• Facilitate the expansion and balanced growth of international trade, enabling countries to engage in commerce without exchange restrictions.
• Promote exchange rate stability and orderly exchange arrangements among member countries, allowing predictable economic relationships.
• Provide temporary financial assistance to member countries facing balance of payments difficulties while avoiding harmful economic measures.
• Support the establishment of a multilateral payments system and eliminate restrictions on foreign exchange transactions.
• Reduce poverty around the world by promoting sustainable economic growth and high employment.

Also read: UN Framework Convention on Climate Change (UNFCCC): UPSC Notes

The IMF operates through three interconnected pillars to maintain global financial stability and support sustainable economic growth.

1. Policy Advice (Surveillance)

• Conducts regular monitoring of member countries' economic and financial policies.
• Provides policy recommendations through Article IV consultations.
• Conducts financial sector assessments (FSAP).

2. Lending Support (Financial Assistance)

• Provides temporary financial assistance to countries facing balance of payments crises.
• Offers short-term and medium-term lending facilities to meet external financing needs.
• Provides precautionary credit lines to prevent potential economic shocks.

3. Capacity Development (Technical Assistance)

• Strengthens national institutions, including central banks, finance ministries, and tax authorities.
• Provides training to government officials in key policy areas.
• Offers technical support in tax policy, legal frameworks, monetary policy, and data management.

Also read: FATF (Financial Action Task Force): Definition, Objectives, Functions & Key Facts for UPSC

The International Monetary Fund emerged from the ashes of World War II as a response to economic chaos and the need for international cooperation.

1. Pre-IMF Era (1930s-1944):

• The Great Depression (1929-1939) brought about economic chaos marked by widespread unemployment and deflation.
• Countries engaged in competitive currency devaluations to gain trade advantages, worsening the global economic collapse​.
• The Tripartite Agreement of 1936 (France, Great Britain, US) marked early attempts at exchange rate coordination.

2. Bretton Woods Conference (July 1-22, 1944):

• 44 countries met in Bretton Woods, New Hampshire, during World War II to establish a new economic order​.
• Key architects were John Maynard Keynes (British delegation) and Harry Dexter White (US Treasury, chief drafter).
• The Articles of Agreement were adopted with the explicit purpose of avoiding "competitive exchange depreciation"​.
• India signed the Articles of Agreement on December 27, 1945, becoming an original founding member.
• Twin institutions were established - the IMF (monetary cooperation) and the World Bank (economic reconstruction).

3. Post-WWII Period (1945-1971):

• IMF formally began operations in 1946 with 40 original member countries​.
• A fixed exchange rate system was maintained, with rates adjustable only for "fundamental disequilibrium" with IMF approval​.
• Only three African countries (Egypt, Ethiopia, and South Africa) were founding members due to colonial rule.

4. Post-Bretton Woods Era (1973 onwards):

• The fixed exchange rate system collapsed when the US ended the Bretton Woods peg in 1971​.
• IMF's role shifted from maintaining fixed rates to macroeconomic surveillance​.

5. Cold War End and Globalisation (1989-1991):

• Fall of the Berlin Wall (1989) and the Soviet Union's dissolution (1991) enabled rapid expansion​.
• Membership increased from 152 countries (1989) to 172 countries (1992) in three years, the fastest growth since African independence.

6. Recent Developments (2008 onwards):

• The Global Financial Crisis (2008) prompted major IMF reforms to strengthen surveillance and respond to interconnected economies​.
• The 60th anniversary of Bretton Woods (2004) led to strategic reviews for modern challenges.
• In the 16th General Review, of Quotas increased member quotas by 50% in 2023.

Also read: List of International Organisations and Their Headquarters for UPSC

The IMF operates through a multi-layered governance structure designed to balance democratic representation with efficient operations.

1. Board of Governors:

• Composition: One representative from each of the 191 member countries​.
• Highest authority: Retains final decision-making power on major issues​.

Powers retained by Board of Governors:

• Admission and suspension of member countries​.
• Increase or decrease of authorised quotas or shareholdings​.
• Amendment of the Articles of Agreement​.
• Endorsement of the IMF budget and financial statements​.
• Meets: Typically at the Annual Meetings (usually September/October)​

2. International Monetary and Financial Committee (IMFC):

• 24 member representatives appointed by the Board of Governors​.
• Acts as an advisory body linking the Board of Governors and the Executive Board.

3. Executive Board:

• Composition: 25 Directors elected by member countries or groups of countries, plus the Managing Director as Chairman​.
• Meets: Several times each week​.
• Responsibilities: Conducts day-to-day IMF business through delegated authority from the Board of Governors​.

Decision-making:

• Works primarily through consensus rather than formal voting​.
• Formal votes are rare due to the cooperative nature of the organisation​.
• Responsible for the approval of all IMF lending operations​.

4. Managing Director:

• He chairs the Executive Board and heads the IMF management​.
• The role is supported by three Deputy Managing Directors.

Also read: Shanghai Cooperation Organisation

Voting power determines each country's influence in IMF decisions and reflects the organisation's approach to democratic governance.

• Weighted Voting: Voting power is based on each country's quota contribution.
• Formula: Each member receives 250 basic votes plus one additional vote for every SDR 100,000 of quota.
• Equalising Effect: The basic votes (250 to each member) provide a small equalising effect, offsetting the impact of quota-based differences.
• Declining Share: As quotas have increased over time, basic votes represent a smaller share of total votes.

The current voting structure gives the United States alone a veto power on 85% majority decisions (the US holds approximately 16.5% of total voting power).

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The IMF releases several critical publications that provide comprehensive economic analysis and serve as an essential source of information for UPSC aspirants.

Also read: UPSC Notes on CITES: Convention on International Trade in Endangered Species

The IMF provides financial assistance through multiple instruments, each designed for specific types of balance of payments problems and borrowing countries.

A. General Resources Account (GRA) Financing: Non-Concessional Loans

1. Stand-By Arrangements (SBAs):

• Purpose: Provide short-term financial support for balance-of-payments problems.
• Duration: Typically 1-2 years.
• Repayment: Generally 3-5 years after loan receipt.
• Interest rate: Market-related (average of main currency rates plus markup).

2. Extended Arrangements (EAs):

• Purpose: Support medium-term adjustment programs addressing structural issues.
• Duration: 3-4 years typically.
• Repayment: Up to 10 years (longer than stand-by arrangements)​.
• Interest rate: Market-related charges.

3. Flexible Credit Line (FCL):

• Purpose: Precautionary financing for countries with strong policies and external positions.
• Conditions: Can be activated immediately without new conditions if a crisis occurs.
• Target: Prevention-oriented for countries facing tail risks.

B. Concessional Facilities: Low-Income Country Support

1. Poverty Reduction and Growth Trust (PRGT) Facilities:

• Beneficiaries: Low-income countries facing persistent balance-of-payments problems.
• Financial Terms: Highly concessional (zero interest for the poorest LICs; positive but below-market rates for others)​.
• Duration: Typically 3 years (can extend to 4 years)​.
• Repayment Period: Up to 10 years

2. Poverty Reduction and Growth Facility (PRGF):

• Umbrella Facility: It integrates support for both macroeconomic stability and poverty-reduction programs under one coordinated framework.
• Coordination with World Bank Strategies: It functions in close alignment with overall World Bank development strategies to ensure consistency and effective results.

3. Rapid Financing Instrument (RFI):

• Emergency Support: Provides rapid assistance to countries facing urgent balance-of-payments pressures.
• Minimal Policy Conditions: Requires only essential measures focused on closing immediate financing gaps.
• Faster Approval Process: Offers quicker approval compared to traditional financial facilities, enabling timely intervention.

3. Resilience and Sustainability Facility (RSF):

• Purpose: Longer-term support for structural challenges, including climate change and pandemics​.
• Tenure: 20-year maturity with 10.5-year grace period.
• Coverage: About 75% of IMF membership is eligible (low-income countries and vulnerable middle-income countries).

The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member countries.

• Created in 1969 to address reserve asset shortages in the international monetary system.
• The SDR is not a currency.
• A basket of currencies defines the SDR - the US dollar, the Euro, the Chinese Yuan, the Japanese Yen, and the British Pound.
• Cannot be held by private entities, corporations, or individuals.

Both institutions were born from the Bretton Woods Conference but have distinct mandates and operational focuses.

Also read: COP 30 2025: UNFCCC Climate Summit in Belem, Brazil

India has maintained a complex and evolving relationship with the IMF, from seeking financial support to emerging as a creditor nation.

• India remains the fastest-growing economy with GDP growth of 6% in the first half of 2024/25.
• Inflation has broadly declined within the tolerance band, though food price volatility creates fluctuations.
• Current account deficit remains well-contained, supported by strong service exports.
• Regular Article IV consultations monitor India's economic developments and policy.
• India benefits from IMF surveillance and policy recommendations without recent heavy loan dependence.

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The IMF has played an important role in managing international financial stability over the past 80 years.

• Successfully managed multiple international financial crises, including the 1997-98 Asian financial crisis,
• Brazilian crisis (2002), and the 2008 global financial crisis.
• Established specialised lending facilities (RFI, RCF, SCF, ECF) to meet diverse borrowing needs.
• Provided training to central bank officials, finance ministry staff, and tax authorities in 150+ countries.
• Extended zero-interest rates on concessional loans to the poorest countries.
• Publishes influential reports (WEO, GFSR) that shape global economic policy.
• Conducts comprehensive monitoring of member economies through Article IV consultations.

Despite its achievements, the IMF faces substantial criticism from developing countries, civil society, and economists regarding its policies and governance.

• Structural Adjustment Program (SAP) is criticised for being too short-term oriented, emphasising immediate balance-of-payments adjustment rather than long-term growth.
• Inconsistent application of conditionality across different countries and time periods.
• The US and European voting majority (>50%) overrepresents developed nations' interests.
• Despite economic growth, developing and emerging markets have limited voting shares relative to economic weight.
• Research using Gini coefficients shows countries with IMF programs often experience increased income inequality.
• Limited oversight of how major economies' policies affect smaller member countries.

The IMF faces the challenge of remaining relevant while addressing legitimate criticisms and adapting to emerging global challenges.

• Accelerate quota reforms to increase emerging market and developing country representation.
• Assess macroeconomic impacts on poverty, inequality, and employment before implementing policies.
• Integrate climate change and sustainability into core surveillance and lending frameworks.
• Expand concessional lending facility capacity for low-income countries.

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