Use of resources - international monetary fund, Microeconomics

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Use of Resources - INTERNATIONAL MONETARY FUND:

IMF provides temporary assistance to member-countries to tide over balance of payments deficits. When the country requires foreign exchange, it tenders its own currency to the IMF and gets the foreign exchange. This is known as 'drawing' from the Fund. When the BOP situation of the country improves, it should 'repurchase' its currency from the IMF and repay the foreign exchange. Ordinarily, for a member-country, a first borrowing or drawing is virtually automatic and without strings. A country simply calls for the return of its original 25 per cent share (called the "reserve tranche") paid in hard currency.  

After that, it may borrow the "first credit tranche", another 25 per cent with virtually no strings. Three further credit tranches may be borrowed in each of three subsequent years, and each amounting to 25 per cent of the original quota. At the end of the 5 years, the upper limit of 125 per cent is reached. In addition, a member can borrow a further 90 per cent of quota annually for three years under the "enlarged access" policy. With the enlarged access policy, further loans from 270 to 330 per cent of quota can be obtained in a three-year period, in addition to the normal lending. But all this is subject to a cumulative upper limit of 400 to 440 per cent of quota. While borrowing under earlier credit tranches does not involve any obligation to adopt IMF directed policy changes, borrowing under higher tranches and extended access facility does involve such obligations. Typically, the IMF will require as prerequisites for borrowing cutbacks 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 turn towards the encouragement of exports. These are known as conditionalities that are imposed on the borrowers who want to make use of IMF facilities. 


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