Question

What are the main objectives of IMF? What is IMF conditionality? How does IMF promote flexibility in external balance adjustment?

Answer 1

MAIN OBJECTIVES OF IMF-

The International Monetary Fund (IMF) is an organization that works to promote financial stability, encourage and facilitate trade among its member countries and help in economic growth on a global level. It also aims to reduce poverty. Currently, it has 189 member countries and its headquarters is in Washington DC.

The main objectives of the IMF are as follows-

1) Promotion of International Monetary Co-operation-

IMF promotes monetary co-operation among its member countries. It provides the administration for co-operation and consultation on international monetary issues.

2) Maintaining Exchange Stability-

IMF's objective is to promote stability in the exchange rates.

3) Removal of Influence Over Foreign Exchange-

Another objective of the IMF is to remove control over foreign exchange. Fixed exchange rate affects the trade among countries and so the organization focuses on removing control over exchange rates.

4) Assistance in Setting Up of Multilateral Trade-

IMF focused on the promotion of trade among various countries called the multilateral trade system by removing restrictions that hinder the growth of global trade.

5) Development of Confidence and Help in Case of an Emergency-

IMF help in boosting the confidence of member countries by helping them during situations of crisis and providing them financial aid.

6) Removal of Imbalance in the Balance of Payments-

IMF provides aid to its member countries when they have disequilibrium in the balance of payments by selling or lending them foreign currencies and help them correct the imbalance.

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IMF CONDITIONALITY-

When an organization provides financial aid, loan or monetary help to the recipient and puts conditions to the aid provided, it is called conditionality.

When the IMF agrees to bail out a country out of a financial crisis, it applies the condition that the economy should revise and change its economic policies which led to the crisis initially. The policy changes are the condition on which IMF lends to its member countries and which ensures that the country will be able to repay to the IMF. This is called 'IMF Conditionality.'

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IMF PROMOTES FLEXIBILITY IN EXTERNAL BALANCE ADJUSTMENT-

External balance adjustment in Balance of Payments means allowing the currency markets to achieve its new equilibrium on its own without any interference. For external balance adjustment, the balance of payments needs to be stable and in equilibrium.

IMF promotes flexibility in external balance adjustment by-

1) Helping the country achieve equilibrium in Balance of payments if its in disequilibrium.

2) Removing the control over foreign exchange so that the currency market can themselves adjust to the new equilibrium.

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