An Evaluation of the International Monetary Fund Loan Policy on Developing Economy

An Evaluation of the International Monetary Fund Loan Policy on Developing Economy

ORGANIZATION AND STRUCTURE OF THE FUND.

          At the apex of the chain of command is the decision making body of the fund known as the Board of Governors, one from each member and 151 alternate Governors. This body usually meets annually in order to delibrate on very crucial matters concerning the fund. There is also an Executive Board, which performs virtue control of the fund. They usually meet in Washington and are responsible for decision on members request for financial assistance and some other staff of policies of the fund. They are usually full time staff of the fund and are appointed by those countries with large quotas or at times elected by constituency of countries with smatter quotas. The board usually meets continuously in order to meet up with their task.

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The board normally appoints a managing Director who then becomes its chairman. The fund has over 1,500 (one thousand five hundred) staff in their branches like Paris, Geneva and at the United Nations in New York. There are also regional representatives in the large borrowing countries. The fund also has two special interest group that coordinates the policies matter that come before the fund. The special bodies consist of

  1. The group of ten comprising the representative of the major industrial countries. They usually donate the major international monetary decision.
  2. The group of 24 comprising all the less loped countries. Normally, decision on a wide range of issues especially those concerning the financial structure of the fund requires special majorities of 70 to 50% of total voting strength.

Though formal voting rate of the less developed countries some special power if they vote together or in alliance with themselves. The Executive Directors meet at least 3 times a week in a foemal session to supervise the implementation of policies by member governments. The Executive Board normally takes decision on consensus basis rather than formal voting so as to reduce confrontation as sensitive issues and to promote agreement on the decision arrived at.

By 1991, the IMF had a staff of about 1,700 headed by a managing Director, who is also Chairman of the Executive Board, which appoints him. Anayanwu (1993).

THE FUNDS ESTABLISHMENT OF A SYSTEM OF FREE MULTIPLICATION PAYMENT AND REDUCTION OF OTHER BARRIERS TO TRADE AND PAYMENT

          During the great depression, many countries adopted various types of exchanged restriction limitations on freedom to make payment to other countries. Many of these, limited not only the total amounts of payments tha could be made abroad but also the types of payment that could be made and the type of goods and services that could be made.

Some countries then tightened their exchange control during the world war II period. Other restrictions on trade were also widespread, not only tariffs but also various types of quantities controls. The purpose of the fund, therefore was to eliminate the exchange restriction as task possible except those on abnormal capital movement and to work towards lowering other exchange restrictions. Since 1958, a system of relatively free multilateral payment has prevailed which some of them are as follows.

 PROVISION OF AN ORDERLY SYSTEM FOR SETTING AND ALTERING EXCHANGE RATE.

During the great depression exchange rate fluctuated widely sometimes in a disorderly manner and some countries engaged in competitive exchange rate depreciation in effort to increase their export, decrease their import and achieve economic recovery at home. Many feared that exchange rate behavior in the post war period would gain be chaotic.

The fund rejected the principle of fitting of free flexible exchange rate and of requent changing pegged rate and adopted the principles stable exchange rate. They indeed have the more specific obligations to pursue economic and financial policies that promote orderly economic growth with reasonable price stability and to foster orderly underlying economic and financial conditions. Members are also advised to avoid exchange rate and other policies that prevent effective balance of payment adjustment or provide an unfair competitive advantages over other members. Over the years, some countries have pegged their currencies to the currency of a major trading and financial partners (e.g. US Dollars, French France etc.) while others had pegged their various composites of currencies such as SDR. Yet there are others who chose to peg. Some adjusting the exchange rate of their currency on that basis of a set of indicators, EMS members maintain the value of their currency in relation to the values of the other members in, but not members outside, the arrangement.

PROVISION OF FINANCIAL AID TO COUNTRIES IN BALANCE OF PAYMENT DEFICITS.

The fund provides financial aids to countries in balance of payment deficit through a means known as sales of currencies of “Drawing on the Fund”. The drawing country gets foreign money and gives in return an equal amount of claim on its own money.

Nevertheless, this is effect a loan transaction for the claims the fund receives against the country are the only debts. The IMF leaves three kinds of charges for the use of its resources.

  1. Services charge on all purchase transaction other than those in the reserve bench (0.5 percent which is payable at the time of transaction.
  2. Change on stand by and extended arrangement (or commitment fee) 0.25 percent per annum and payable at the beginning of each 12 months period on the un-drawn amount under the arrangement.
  3. Periodic charges on holding (Fixed at 7 percent a year as at 30 April, 1985).

This is also important to note that fund does not manufacture the memory that it needs to lend. It can only lend the gold and various national moneys that are contributed to it by its member countries each member country had its quote and these quotations are important for some reason which are as follows:

  1. A country’s quota indicates the amount of that country’s gold or money put at the disposal of the fund.
  2. It’s quota is a basis for determining the amount of money of the other countries that a country can draw from fund.
  3. According to the country’s quota, its voting power would be determined.

By the end of April, 1998 the membership of the fund remained unchanged at 152 with all members participating in the SDR Department (the people’s Republic of Angola with its application for membership during the year might have increased their membership) the fund had received from members about SDR 89.99 billion as total quota as of the year ended 30th April, 1998. the current statistics about the increment is not yet available.

THE RESOURCES OF THE FUNDS.

The financial resources of the fund consist of a pool of National currencies and gold contributed by the member countries who agree to participate in it.

          Every member has assigned to it what is known as its quota which gives the weight to important factors eg. Country’s holding of gold and free foreign exchange, the magnitude and fluctuations of its balance of internal payment, its national income etc. the quota can be seen as a sum of money which is to be paid by the members in full to the fund to be eligible to buy currencies from the fund. When a country becomes a member of the fund it has to pay in gold an amount equal to 150% of its net official holdings of gold or SDR or an amount in gold equal to 25% of it quota. The remainder of its quota is paid in domestic currency or by securities payable on demand in such currencies. This quota can be reviewed at the request of the members.

TRANSACTION WITH FUND

The principle operating functions of the fund is to provide financial assistance to the member countries to enable them to maintain the declared per values of their currencies without having to resort to excessive deflation restrictive trade barriers or exchanger controls. Assistance may take the form either or “drawing” repayable within three to five years which immediately supplies foreign exchange to a country or a standby arrangement assuming a member the right to draw a pre-determined amount of foreign exchange any time without a six to twelve months period. Some of these means of assistance by the fund are as follows.

  1. Drawing right established since the fund inception.
  2. Stand-by arrangement established in 1952
  3. Compensatory financing of export fluctuations in 1963.
  4. The Extended fund facility (EFF), introduced in 1974
  5. Supplementary financing, introduced in 1975
  6. Compensatory financing, facility 1974
  7. Facility for the contribution to buffer stocks 1979

All these mentioned transaction facilities as their names implies were introduced in order to help our nation that are experiencing balance of payment deficits depending on the caused of such deficits.

SPECIAL DRAWING RIGHT (SDR)

The fund realizing the need that the volume of international liquidity should not only be sufficient to permit the settlement of balance of payment deficits but should also show adequate growth to take care of potential growth of international payments, it become imminent that the existing sources of international liquidity may prove inadequate. Thus a need was felt to augment the sources of international liquidity. In 1967, the Board of Governors of the IMF agreed on a proposal to establish a new facility as a supplement of the existing reserve assets. The proposal provided a means for the creation of special drawing right (SDR) fund which members countries would accept to reserves and use in international settlements. The scheme came into operation in January 1970, to the quotas the participating countries so that a member whose quota was 1.5% of the total quotas of participant in the SDR scheme would receive 1.5% cash allocation. The time and amount of the allocation are based on the recommendation of the managing director and are to be approved by the Board of Governors, voting with an 85% majority.

Originally, the value of an SDR was expressed in gold, they were not redeemable, however in gold with the advent of generalized floating of major currencies in new basis for valuation was necessitated. The standard basket techniques was adopted in 1st July 1974 under which the value of SDR was related to basket of 16 major currencies of the world. It become effective from 1st January 1981, the IMF is using a simplified basket of currencies (viz U.S Dollar, Deutsche mark, Japanese Yen, French France and Pound Sterling) for determining the daily value of an SDR.

This ahs already reduced rate of gold in the international monetary system, that official prize has been abolished, the fund has also undergone the disposal of one third of its holding and the use of gold in find transactions has ceased. The fund articles of agreements as amended to date provide for both improvement in the characteristics of, and for the expansion of the use of the SDR with the objectives of making it the international monetary system’s principal reserve assets. The SDR has become a useful supplement to world currency arrangements, if only to modest extent so far.

THE FUND OPERATING PROCEDURE AND ITS LENDING CONDITIONS.

          For the fund to operate effectively it has to be financially up to date. The fund of the organization are usually contributed by members of the fund who are assigned quotas according to certain criteria. The quotas allocated to each nation determines the voting power and the amount of foreign exchange that such a nation can draw from the fund to meet foreign obligation.

The members nation makes use of fund resources during period of chronic deficit in its international balance of payment. For replacement members pay an amount at the time of borrowing in its own currency equivalent to an agreed per value to the amount of foreign exchange. However, eventually, the loan will be repaid in convertible currency acceptable to the fund or in special drawing right (SDR) with easier terms.

According to Ndioriu, as at the end of December 1993, Nigeria held SDR of 299ma as at August 1998 it stood at 13.2 billion as a member of the fund. Nigeria had the right to draw in fund to remedy her temporary balance of payment disequilibrium. But the help and assistance of the IMF funds is usually made condition on the country’s agreement to pursue economic policies acceptable to it. In 1979 Great Britain was saved from a serious financial crisis when the labor government agree that it would reduce government spending plans and would take certain other measures considered necessary by the IMF advisers.

This article was extracted from a Project Research Work Topic

AN EVALUATION OF THE INTERNATIONAL MONETARY FUND (I.M.T) LOAN POLICY ON DEVELOPING ECONOMY (A CASE STUDY OF NIGERIA) 1990 –1999

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