Experts call for review of IMF role

Context:

Leading experts have suggested the need to review the role of IMF due to changing economic weight of emerging countries, stressing on completing quota reforms and maintaining data integrity amid the World Bank discontinuing its Ease of Doing Business reports.

Relevance:

GS-III: Indian Economy (International Organizations)

Dimensions of the Article:

1. International Monetary Fund (IMF)
2. Functions of the IMF
3. About the current Need for IMF Reforms
4. Proposed Reforms

International Monetary Fund (IMF)

• The International Monetary Fund (IMF) is an international organization headquartered in Washington, D.C.
• It consists of 189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
• It periodically depends on the World Bank for its resources.
• Through the fund and other activities such as the gathering of statistics and analysis, surveillance of its members’ economies, and the demand for particular policies, the IMF works to improve the economies of its member countries.

Functions of the IMF

• To provide financial assistance to member countries with balance of payments problems, the IMF lends money to replenish international reserves, stabilize currencies and strengthen conditions for economic growth. Countries must embark on structural adjustment policies monitored by the IMF.
• It oversees the international monetary system and monitors the economic and financial policies of its 189 member countries. As part of this process, which takes place both at the global level and in individual countries, the IMF highlights possible risks to stability and advises on needed policy adjustments.
• It provides technical assistance and training to central banks, finance ministries, tax authorities, and other economic institutions. This helps countries raise public revenues, modernize banking systems, develop strong legal frameworks, improve governance, and enhance the reporting of macroeconomic and financial data. It also helps countries to make progress towards the Sustainable Development Goals (SDGs).

About the current Need for IMF Reforms

• The IMF’s quota system was created to raise funds for loans and each IMF member country is assigned a quota, or contribution, that reflects the country’s relative size in the global economy.
• Since each member’s quota also determines its relative voting power as well as its borrowing capacity – this makes wealthy countries have more say in the making and revision of rules.
• This leads to the problem where countries that grow economically have tended to become under-represented as their voting power lags behind. For eg: BRICS countries.

Proposed Reforms

• The quota reform would reflect the changed economic realities, especially with regard to the increasing capabilities of the developing nations. For example, the quota of BRICS countries should increase and that of European Union Countries should decrease. Also, it is important that the new quota formula give more weight to PPP GDP to better reflect the true economic strength of emerging markets and developing economies.
• The IMF should focus on lower income countries and support other developing countries’ market funds raising activities, as its Article IV consultation reports are utilised by credit rating agencies, impacting the fund raising capacity of countries like India. Most of the Asian countries including India can now raise funds on their own on the basis of strength of their forex reserves, and do not have to necessarily go to the IMF like in the past to tide of crisis.
• The management system in the IMF should be modified. In the IMF and World Bank group, there is an informal arrangement, that the head of the IMF should be a European and the head of the World Bank should be an American. The time has come to reconsider this, and the IMF probably should really rethink it.

-Source: Indian Express