International Monetary Fund and Bangladesh

Jamshed uz Zaman

Following the Second World War the reconstruction and rehabilitation problems
of the world economy became acute. Protectionism, restrictive foreign exchange policy,
dumping, bilateral trade regime and other conservative trade policy led to a grave decline
in world trade. In this backdrop, an international meeting was convened in the USA in
June 1944 termed as Bretton Woods Conference. Result of this meeting was creation of
World Bank, International Monetary Fund and the World Trade Organization (that
become operational only recently). The capital of the IMF was $ 9 billion, of which $ 1.7
million was in gold, paid by the member countries. Present members are 190 countries.
Kristalina Georgieva from Bulgaria, is Managing Director. The IMF has 2800 staff. A
Board of Governors consists of Governors from all the member countries, is the apex
body. It meets once a year. A 24-member Executive Board deals with day-to-day issues.
Bangladesh joined the IMF on August 17, 1972.

The IMF is a cooperative intergovernmental monetary and financial institutions.

Its policies and activities are guided by its charter, known as the Articles of Agreement.
Its functions are to:
● Promote international monetary cooperation
● Facilitate the balanced growth of international trade
● Promote exchange rate stability
● Assist in the establishment of a multilateral system of payments in respect of
current transactions between members and in the elimination of foreign
exchange restrictions that hamper the growth of world trade
● Provide financial resources to enable its members to correct payments
imbalances without restoring to trade and payments restriction, and
● Provide a forum for consultations and collaboration on international
monetary problems.

More generally, the IMF is responsible for ensuring the stability of the international
monetary and financial system—the system of international payments and exchange rates
among national currencies that enables trade to take place between countries. It employs
three main functions—surveillance, technical assistance, and lending.

Surveillance is the regular dialogue and policy advice that the IMF offers to each of
its members. Generally once a year, the Fund conducts in-depth appraisals of each
member country’s economic situation.

Technical assistance and training are offered—mostly free of charge—in the areas
like fiscal policy, monetary and exchange rate policies, banking and financial
system supervision and regulation, and statistics.

Financial assistance is available to give member countries the breathing room they
need to correct balance of payments problems. A policy program supported by IMF
financing is designed by the national authorities in close cooperation with the IMF,
 and continued financial support is conditional on effective implementation of this
program.

The IMF is also actively working to reduce poverty in countries around the globe,
independently and in collaboration with the World Bank and other organizations.

The main IMF Facilities are as follows:

The Extended Credit Facility (ECF) provides financial assistance to countries with
protracted balance of payments problems. The ECF was created under the newly
established Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to
make the Fund’s financial support more flexible and better tailored to the diverse needs of
Low-Income Countries (LICs), including in times of crisis. The ECF succeeds the
Poverty Reduction and Growth Facility (PRGF) as the Fund’s main tool for providing
medium-term support to LICs, with higher levels of access to financial resources, more
concessional financing terms, more flexible program design features, as well as
streamlined and more focused conditionality.

Poverty Reduction and Growth Facility (PRGF). The IMF for many years provided
assistance to low-income countries through the Enhanced Structural Adjustment Facility
(ESAF). In 1999, however, a decision was made to strengthen the focus on poverty, and
the ESAF was replaced by the PRGF. Loans under the PRGF are based on a Poverty
Reduction Strategy Paper (PRSP), which is prepared by the country in cooperation with
civil society and other development partners, in particular the World Bank. The interest
rate levied on PRGF loans is only 0.5 percent, and loans are to be repaid over a period of
5½-10 years.

Stand-By Arrangements (SBA). The SBA is designed to address short-term

balance-of-payments problems and is the most widely used facility of the IMF. The
length of a SBA is typically 12-18 months. Repayment is expected within 2¼-4 years
unless an extension is approved. Surcharges apply to high levels of access.

Extended Fund Facility (EFF). This facility was established in 1974 to help countries
address more protracted balance-of-payments problems with roots in the structure of the
economy. Arrangements under the EFF are thus longer (3 years). Repayment is expected
within 4½-7 years unless an extension is approved. Surcharges apply to high levels of
access.

Supplemental Reserve Facility (SRF). The SRF was introduced in 1997 to meet a need
for very short-term financing on a large scale. The sudden loss of market confidence
experienced by emerging market economies in the 1990s led to massive outflows of
capital, which required loans on a much larger scale. Countries are expected to repay
loans within 2-2½ years. All SRF loans carry a substantial surcharge of 3-5 percentage
points.
Contingent Credit Lines (CCL). The CCL differs from other IMF facilities in that it aims
to help members prevent crises. Established in 1999, it is designed for countries
implementing sound economic policies, which may find themselves threatened by a crisis
elsewhere in the world economy—a phenomenon known as “financial contagion.” The
CCL is subject to shorter repayment terms than the SRF, and carries a smaller surcharge
of 1½-3½ percentage points.

Compensatory Financing Facility (CFF). The CFF was established in the 1960s to assist
countries experiencing either a sudden shortfall in export earnings or an increase in the
cost of cereal imports caused by fluctuating world commodity prices. The financial terms
are the same as those applying to the SBA, except that CFF loans carry no surcharge.

Emergency assistance. The IMF provides emergency assistance to countries that have
experienced a natural disaster or are emerging from conflict. Emergency loans are subject
to the basic rate of charge and must be repaid within 3¼-5 years. They do not carry an
expectation of early prepayment.

Facility SDR Million Facility SDR Million

Stand by:1974 31.25 CFF: 1972 62.50
1975 62.50 1982 60.00
1976 39.06 1982 71.20
1979 85.00 1985 54.95
1983 68.40 1987 88.90
Oil Facility, 1974-75 91.97 Trust Fund 1977-81 122.16
EFF 1980 220.00 SAF 1987 201.25
Emergency 1988, 71.87 ESAF 1990 345.00
1998 98.13
PRGF 2002 347.00 Total: SDR 2121 million, exclude TA and
training

Quota: Each IMF member is assigned a quota, which determines its financial and
organizational relations with the institution. Quotas determine members’ subscriptions to
the IMF, their relative voting power, their maximum access to financing from the IMF,
and their shares in SDR allocations. Total quotas in 2003 were SDR 213 billion ($ 296
billion.

Quotas are denominated in Special Drawing Rights. The largest member of the IMF is
the United States, with a quota of SDR 37.1 billion ($ 51.2 billion) and a voting power 17
percent of total. (USA 16.8, UK 4.9, Jap 6, Ger 5.9, Fran 4.9, Ital 3.2 = 41.7). The
smallest member is Palau, with a quota of SDR 3.1 million ($ 4.3 million) (share 0.001)
and voting power 0.01 percent. Bangladesh quota is equal to: SDR 533.3 million. Present
quota share is 0.25 percent and voting power is 0.25 percent of the total. (Voting power
of Afghanistan (0.08), Bangladesh (0.25), Bhutan (0.01), India (1.89), Nepal (0.07),
Pakistan (0.48), Maldives (0.01) taken together is 2.76).

The Board of Governors conducts a general review at around five years intervals and if it
deems it appropriate, propose an adjustment of quotas. Approval needs 85 percent
majority. The review addresses two main issues: the size of an overall increase and the
distribution of the increase among members. So far the fund has concluded 12 General
Reviews. 11th review (1998) raised quota by 45 percent, and the 12th review proposed no
increase.

The Special Drawing Rights (SDR) was created in 1969 as an international currency,
but its role as an international reserve asset is much more important. The SDR is the first
interest-bearing reserve asset created by international decision. It was created as a
supplement to existing reserves to make SDR the principal asset in the international
monetary system, and is allocated by the IMF to members. Participants’ holding of SDRs
constitute an integral part of their international reserves, together with their holdings of
gold, foreign exchange, and reserve tranche position in the IMF. It is a purely official
asset that can only be held and used by member countries, IMF and prescribed official
entities. It serves as the unit of account of the IMF and some other international
organizations.

The IMF has the authority to create unconditional liquidity through allocations of SDRs
to members, in proportion to their quotas in the IMF. As of June 30, 1991, the IMF has
allocated a total of SDR 21.4 billion.

Valuation of SDR: Since 1981 the IMF has decided to value the SDR in terms of a
“basket” of five major currencies, the US Dollar, the French Franc, the Deutsche Mark,
the Pound Sterling and the Japanese Yen. The value of the SDR is calculated daily by the
IMF on the basis of exchange rate of these currencies and their respective weights:

Currency Weight (Percent)

Jan 1996 Jan 2001 Oct 2016

US Dollar 39 45 41.73
Euro 29 30.93
Deutsche Mark 21
French Franc 11
Chinese Yuan 10.92
Japanese Yen 18 15 8.33
Pound Sterling 11 11 8.09
 Tuesday, November 29, 2016
Percent change in exchange
Currency amount
Currency Exchange rate U.S. dollar equivalent rate against U.S. dollar from
under Rule O-1
previous calculation
Chinese Yuan 1.0174 0.14410 0.147002 0.259
Euro 0.38671 1.05955 0.409739 -0.085
Japanese Yen 11.900 0.008997 0.105623 -0.302
U.K. Pound Sterling 0.085946 1.24750 0.107218 0.581
U.S. Dollar 0.58252 1.00000 0.582520
1.352102
U.S.$1.00 = SDR 0.739589 -0.024
SDR1 = US$ 1.352100

SDR allocations: The IMF may allocate SDRs to members in proportion to their
IMF quotas. Such an allocation provides each member with a costless asset on
which interest is neither earned nor paid. However, if a member's SDR holdings
rise above its allocation, it earns interest on the excess; conversely, if it holds fewer
SDRs than allocated, it pays interest on the shortfall. There are two kinds of
allocations: General allocations of SDRs have to be based on a long-term global
need to supplement existing reserve assets. General allocations are considered
every five years, although decisions to allocate SDRs have been made only twice.
The first allocation was for a total amount of SDR 9.3 billion, distributed in
1970-72. The second allocation was distributed in 1979-81 and brought the
cumulative total of SDR allocations to SDR 21.4 billion. A proposal for a special
one-time allocation of SDRs was approved by the IMF's Board of Governors in
September 1997. This allocation would double cumulative SDR allocations to SDR
42.9 billion.

Decisions to allocate SDRs have been made three times: in 1970-72, for SDR 9.3
billion; in 1979–81, for SDR 12.1 billion; and in August 2009, for an amount of
SDR 161.2 billion. With the general SDR allocation of August 2009 and the special
allocation of September 2009, the amount of SDRs increased from SDR 21.4
billion to SDR 204.1 billion (currently equivalent to about $317 billion).

Concern of the Developing Countries: The sharply reduced flow of resources from the
private capital markets to the developing countries, the unsatisfactory export prospects of
these countries, the deterioration in their terms of trade, the slowdown in economic
activity in the industrial countries and the marked fall in official aid flows in real terms
point to a strong case for a fresh allocation of SDRs. In the context of adjustment with
growth an allocation of SDRs assumes considerable significance, since SDRs provide
unconditional liquidity, with the help of which growth-inhibiting import compression
could be mitigated. Allocation of SDRs is also necessary to achieve the objective of
making the SDR the principal reserve assets in the international monetary system as
required by the IMF.
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