Financial relationship with the imf, Microeconomics

Financial relationship with the IMF:

IMF provides temporary assistance to member countries to tide over BOP deficits. When a country requires foreign exchange, its tenders its own currency to the IMF and gets the foreign exchange. This is known as drawing from the Fund. When the BOI condition of the country improved, it should repurchase its currency from the Fund and repay the foreign exchange. 

Ordinarily, for a member-country, a first borrowing or drawing is virtually automatic and within string. A country simply called for the return of its original 25 per cent share (called the ‘reserve tranche', tranche being French for ‘slice') paid in hard currency. After that it may borrow four more credit tranches (each 25 % of its quota) in each of the subsequent four years. Thus, a member can borrow, almost automatically, upto 125% of its quota in a period of five years. Beyond this, if the IMF approves a member's plan for economic reforms, the member can borrow a further 90 per cent of its quota annually for three years under the ‘enlarged access' policy. This limit can be raised to 100 per cent of the quota. All told, a member country can seek foreign exchange upto a cumulative upper limit of 400 to 440 per cent of its quota.

The purchase of the first or the reserve tranche is tree of any strings or conditions. But obtaining the second, third and fourth credit tranches and money from the extended access policy involves an ever grater degree of IMF supervisions, including substantial consultation with the officials of the Fund and a visit by the IMF financial teams. Typically, the IMF will require as prerequisites for borrowing cutback in budget deficit including subsidies to various sectors of the economy, reduction in the rate of monetary expansion, measures to restrain wages and prices, devaluation of an overvalued exchange rate, and some action to make the price system reflect costs more accurately and some steps to encourage exports. These are known as ‘conditionalties' attached to assistance from the IMF. The conditionalties have proved to be the most controversial aspect of IMF operation in recent years. The major complaints of the borrowers against the IMF conditionalities are that it has become tougher, with stiffer norms towards borrower's domestic policies and that low income groups within a country bear the burnt of the adjustment. 


Posted Date: 11/9/2012 6:22:34 AM | Location : United States

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