Essay on the Policies of IMF Regarding International Liquidity

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The IMF duly recognised that the international monetary system cannot consist of fixed arrangements expected to be suitable for ever. Accordingly, suitable changes in the policies and operation of the Fund are directed towards meeting the financial requirements of the dynamic world economy.

1. The IMF provides short-term financial assistance to its members to meet seasonal balance of payments deficits, as well as emergency situations.

With a view to enable the Fund to promote more effectively its objectives, the Executive Directors of the IMF recommended in 1958 an increase of 50 per cent in the quotas of the members, with additional increases for certain members. As a result of the increase in the quotas of the member countries, the resources of the Fund were increased considerably. Thus, the ability of the Fund to meet the increasing liquidity requirements of its me»nbers was enhanced. Hence, at present there seems to be no 'inadequacy' problem as such.

2. In order to make the Fund resources readily available to its members, the following important changes have been made in its procedures for giving accommodation to member countries.

(i) Gold Tranche Policy:

In 1952 the Fund laid down this policy under which a member could draw on the Fund virtually at will to the extent of the gold tranche position with the Fund.

(ii) Waivers:

Since 1952 again in order to promote greater use of its facilities, the Fund has in practice increasingly waived the limitation of drawings in excess of 25 per cent of a member's quota in any 12 months' duration.

(iii) Standby Agreements:

Since 1952, a new procedure of drawings, called the standby agreements, was devised by the Fund. Under this scheme, once the request for assistance has been approved, a member is authorised to draw the specified limit of foreign exchange from the Fund within the specified period without further application.

(iv) Liberal Credit Policy:

In its credit policy also the Fund showed a liberal attitude to members' requests for transactions within the first credit tranche if they made reasonable efforts to; solve their problems. However, requests for drawings beyond the first credit tranche required substantial justification.

3. In December 1961, the Fund took decision on a General Arrangement to Borrow (G.A.B.), according to which the Fund was authorised to borrow supplementary resources under Article VII of the Agreement.

The object of the Agreement is to "enable the IMF to fulfil more effectively its role in the international monetary system in the new conditions of widespread convertibility, including greater freedom for short-term capital movement." The total amount of such supplementary resources I is equivalent of $6.2 billion.

The agreement provides that the request for drawing by participant countries for which supplementary resources are required, will be dealt with according to the Fund's established policies and operational practices with respect to the use of its resources.

In short, the Agreement enables the Fund to mobilise quickly large additional resources in defence of the international monetary system. It has increased both international liquidity and the resiliency of the monetary system for the benefit of all.

All these changes were made in order to increase the ability of the Fund to meet the increasing need of international reserves requirements of the world. No doubt, because of these changes in the policies and procedure of the Fund's working the 'adequacy' of international liquidity has been maintained satisfactorily in the present period. The IMF has tried its best to adapt itself to the dynamic requirements of world economy.

However, on a long-term perspective view, and with the growing needs of the newly developing countries for long-term foreign capital for development purposes, many have opined that the present international monetary system would not provide adequate liquidity in the future, and that it needs substantial reform and reorganisation in this respect.


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