The Structure And Functions Of The International Monetary Fund (IMF) And The Role Of SDR In The International Financial/Currency Market
The Board of Governors is the highest decision-making body of the IMF. It
consists of one governor and one alternate governor for each member country. The
governor is appointed by the member country and is usually the minister of
finance or the head of the central bank.
The International Monetary Fund (IMF) was established at a United Nations
Monetary and Financial Conference, also known as Bretton Woods Conference, on 22
July 1944 as an organ under the UN System. The IMF headquarters is located in
Washington D.C., U.S.A.
Under its Articles of Agreement (http://www.imf.org/external/pubs/ft/aa/index.htm),
the IMF is responsible for promoting international monetary cooperation;
facilitating the expansion and balanced growth of international trade; promoting
exchange stability; assisting in the establishment of a multilateral system of
payments; and providing resources available to members experiencing balance of
The IMF employs three main functions - surveillance, financial assistance, and
technical assistance – to promote the stability of the international monetary
and financial system.
The IMF closely monitors each member country's economic and financial
developments and regularly holds a policy dialogue with a member country (also
known as Article IV Consultation), usually once each year, to assess its
economic conditions and provide policy recommendations.
The IMF also reviews global and regional developments and outlooks based on
information from individual consultations. The IMF semi-annually publishes such
assessments on multilateral surveillance through the World Economic Outlook and
the Global Financial Stability Report.
The IMF lends to its member countries facing balance of payments problems in
order to facilitate the adjustment process and restore member countries'
economic growth and stability through various loan instruments or "facilities".
An IMF loan is usually provided under an "arrangement," requiring a borrowing
country to undertake the specific policies and measures to resolve its balance
of payments problem as specified in a "Letter of Intent." Its member countries
primarily finance most IMF loans through payments of quotas.
Thus, the IMF's lending capacity is mainly determined by the total amount of
quotas. Nevertheless, if necessary, the IMF may borrow from a number of its
financially most robust member countries through the New Arrangements to Borrow
(NAB) or the General Arrangements to Borrow (GAB) (http://www.imf.org/external/np/exr/facts/gabnab.htm)
to supplement the resources from its quotas.
The IMF provides technical assistance to help member countries strengthen their
capacity to design and implement effective policies in four areas, namely, 1)
monetary and financial policies, 2) fiscal policy and management, 3) statistics
and 4) economic and financial legislation. In addition to technical assistance,
the IMF also offers training courses and seminars to member countries at the IMF
Institute in Washington D.C. and other regional training institutes (Austria,
Brazil, China, India, Singapore, Tunisia and the United Arab Emirates).
The Board of Governors, comprising one governor from each member country(http://www.imf.org/external/np/sec/memdir/members.htm),
is the highest decision-making body of the IMF. The Board of Governors usually
meets once each year at the IMF/World Bank Annual Meetings. The International
Monetary and Financial Committee (IMFC), consisting of 24 members, which
reflects the composition of the IMF's Executive Board, acts as the advisor to
the Board of Governors.
It meets twice each year to review issues relating to the Board of Governors'
functions in supervising the management of the international monetary and
financial system and make recommendations to the Board of Governors. The
day-to-day work of the IMF, as guided by the IMFC, is carried out by the
Executive Board (http://www.imf.org/external/np/sec/memdir/eds.htm) and IMF
staff. The Managing Director is the Chairman of the Executive Board and Head of
Membership: IMF's members have grown from 29 at its inception in 1945 to 185.
The latest member country is Montenegro, who joined the IMF in January 2007.
Countries must first join the United Nations to be eligible for IMF membership.
Quotas: Upon joining the IMF, each member country is assigned an initial quota
comparable to its relative economic size to the global economy and those of
existing member countries (http://www.imf.org/external/np/sec/memdir/members.htm).
Quotas are denominated in Special Drawing Rights (SDRs) 1/ General quota reviews
are conducted at regular intervals – usually every five years, allowing the IMF
to assess the adequacy of quotas in terms of members' needs for liquidity and
its ability to finance those needs.
A member's quota determines its voting power and access to IMF financing. The
quota largely determines a member's voting power in IMF decisions. Each IMF
member has 250 basic votes plus one additional vote for each SDR 100,000 of
quota. In general, a member can borrow up to 100 percent of its quota annually
and 300 percent cumulatively.
The SDR was created as a supplementary international reserve asset in the
Bretton Woods fixed exchange rate system context. The collapse of the Bretton
Woods system in 1973 and the shift of major currencies to floating exchange rate
regimes lessened the reliance on the SDR as a global reserve asset. Nonetheless,
SDR allocations can play a role in providing liquidity and supplementing member
countries' official reserves, as was the case amid the global financial crisis.
The SDR serves as the unit of account of the IMF and other international
The SDR is neither a currency nor a claim on the IMF. Instead, it is a potential
claim on the freely usable currencies of IMF members. SDRs can be exchanged for
A basket of currencies determines the value of the SDR.
The SDR value in terms of the U.S. dollar is determined daily based on the spot
exchange rates observed at around noon London time, and is posted on the IMF
The SDR was initially defined as equivalent to 0.888671 grams of fine
gold-which, at the time, was also equivalent to one U.S. dollar. After the
collapse of the Bretton Woods system, the SDR was redefined as a basket of
Currencies included in the SDR basket have to meet two criteria: the export
criterion and the freely usable criterion. A currency meets the export criterion
if its issuer is an IMF member or a monetary union that includes IMF members and
is also one of the top five world exporters. For a currency to be determined
"freely usable" by the IMF, it has to be widely used to make payments for
international transactions and widely traded in the principal exchange markets.
Freely usable currencies can be used in Fund financial transactions.
The SDR basket is reviewed every five years, or earlier if warranted, to ensure
that the basket reflects the relative importance of currencies in the world's
trading and financial systems. The reviews cover the critical elements of the
SDR valuation method, including criteria and indicators used in selecting SDR
basket currencies and the initial currency weights used in determining the
amounts (number of units) of each currency in the SDR basket.
The reviews are also used to assess the appropriateness of the financial
instruments comprising the SDR interest rate (SDRi) basket (see below). The
value of the SDR is determined daily based on market exchange rates. These
currency amounts remain fixed over the five-year SDR valuation period, but the
actual weights of currencies in the basket fluctuate as cross-exchange rates
among the basket currencies move.
Concluded in November 2015, the Board decided that the Chinese renminbi (RMB)
met the criteria for SDR basket inclusion. Following this decision, the Chinese
RMB joined the US dollar, euro, Japanese yen, and British pound sterling in the
SDR basket, effective October 1, 2016 and the three-month benchmark yield for
China Treasury bonds was included in the SDRI basket.
During the 2015 review, the Board also approved a new formula-assigning equal
shares to the currency issuer's exports and a composite financial indicator-to
determine the weights of currencies in the SDR basket.
In March 2021, the Executive Board delayed the next review of the SDR valuation
basket to July 31, 2022 effectively resetting the five-year cycle of SDR
valuation reviews. With the next review to be completed by mid-2022, the new
basket will become effective on August 1, 2022
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