INTERNATIONAL MONETARY FUND (IMF)

INTERNATIONAL MONETARY FUND (IMF)

TOPIC: IR

Context- Sri Lankan government is divided on seeking support from the International Monetary Fund (IMF) to address its economic crisis due to its stringent conditions which may further erode social welfare schemes that are crucial to prevent starvation at such a critical time.

Concept-

IMF Lending:

• The IMF assists countries hit by crises by providing them financial support to create breathing room as they implement adjustment policies to restore economic stability and growth.
• It also provides precautionary financing to help prevent and insure against crises.
• The causes of crises are varied and complex, and can be domestic, external, or both.
  • Domestic factors include inappropriate fiscal and monetary policies, which can lead to large economic imbalances such as CAD & Fiscal Deficit; an exchange rate fixed at an inappropriate level, a weak financial system, Political instability and/or weak institutions.
  • External factors include shocks ranging from natural disasters to large swings in commodity prices, sudden changes in market sentiment. The COVID-19 pandemic is another example of external shock affecting countries across the globe.

IMF:

• The International Monetary Fund (IMF) is an organization of 189 member countries, each of which has representation on the IMF’s executive board in proportion to its financial importance, so that the most powerful countries in the global economy have the most voting power.
• Membership in the IMF is a prerequisite to membership in the IBRD.
• Quota subscription: On joining the IMF, each member country contributes a certain sum of money, called a quota subscription, which is based on the country’s wealth and economic performance (Quota Formula). Quotas are denominated (expressed) in SDRs.
  • It is a weighted average of GDP (weight of 50 percent)
  • Openness (30 percent),
  • Economic variability (15 percent),
  • International reserves (5 percent).
• Special Drawing Rights (SDRs) is the IMF’s unit of account and not a currency.
  • The currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange rates, of a SDR basket of currencies including the S. dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi (included in 2016).
• Members’ voting power is related directly to their quotas.