imf-likely-to-offer-4-bn-loan-to-aid-indias-covid-response

Context: 

India could be offered $4 billion or more by the International Monetary Fund (IMF) to combat the covid-19 pandemic and partly cushion the impact on the country’s economic growth.

More on News:

  • The board of the multilateral funding agency recently approved doubling of its emergency financing capacity to $100 billion, and a part of that could come India’s way.
  • Although $4 billion will be an emergency financing requirement that IMF will offer India, it is different from India’s quota of $13 billion in special drawing rights (SDR) at IMF.
  • The IMF has received over 90 emergency financing requests or expressions of interest as of 9 April. 
  • Roughly 60% of them are from low-income countries and the rest from emerging markets.

Need of Loan:

  • The country’s economic growth is likely to range between 1.5% and 4% in FY21 depending on the severity of the spread of covid-19 and the duration of the ongoing nationwide lockdown.  
  • These financial constraints, dwindling growth forecasts, shortages in the health care system and 1.3 billion population calls for taking big loans at minimum interest rates. 

Different Supports from IMF:

  • The IMF now has $100 billion available through its emergency financing facilities—the Rapid Credit Facility and Rapid Financing Instrument—that provide emergency assistance without the need to have a full-fledged programme in place. 
    • These loans can be disbursed very quickly to assist member countries implement policies to address emergencies such as the coronavirus.
  • The Fund also has a Catastrophe Containment and Relief Trust (CCRT), which provides eligible countries with upfront grants for relief on IMF debt service
    • This facility was used to support Guinea, Liberia and Sierra Leone during the 2014 Ebola outbreak.
  • Using one’s Special Drawing rights to obtain funds.
  • IMF member countries can also draw on the Fund’s overall firepower of $1 trillion by requesting new financing arrangements or augmenting existing lending arrangements.

International Monetary Fund 

Established

  • It was conceived in July 1944 at the United Nations Bretton Woods Conference in New Hampshire, United States. 
  • The 44 countries in attendance sought to build a framework for international economic cooperation and avoid repeating the competitive currency devaluations that contributed to the Great Depression of the 1930s.
  • Headquartered in Washington D.C and has 189 members. 

Mission

The IMF's primary mission is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries and their citizens to transact with each other.

Surveillance 

  • In order to maintain stability and prevent crises in the international monetary system, the IMF monitors member country policies as well as national, regional, and global economic and financial developments through a formal system known as surveillance .
  • The IMF provides advice to member countries and promotes policies designed to foster economic stability, reduce vulnerability to economic and financial crises, and raise living standards. 

Financial Assistance

  • Providing loans to member countries that are experiencing actual or potential balance-of-payments problems is a core responsibility of the IMF. 
  • Individual country adjustment programs are designed in close cooperation with the IMF and are supported by IMF financing, and ongoing financial support is dependent on effective implementation of these adjustments.

Capacity Development

  • The IMF provides technical assistance and training to help member countries build better economic institutions and strengthen related human capacities. 
  • This includes, for example, designing and implementing more effective policies for taxation and administration, expenditure management, monetary and exchange rate policies etc.

SDRs

  • The IMF issues an international reserve asset known as Special Drawing Rights , or SDRs, that can supplement the official reserves of member countries. 
  • Total global allocations are currently about SDR 204 billion (some $283 billion). 
  • IMF members can voluntarily exchange SDRs for currencies among themselves.
  • The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling

Resources

  • Member quotas are the primary source of IMF financial resources. 
    • A member’s quota broadly reflects its size and position in the world economy. 
    • The IMF regularly conducts general reviews of quotas. 
    • Latest review doubled quota resources to SDR 477 billion (about US$661 billion). 
  • In addition, credit arrangements between the IMF and a group of members and institutions provide supplementary resources of up to about SDR 182 billion ($253 billion), and are the main backstop to quotas. 
  • As a third line of defense, member countries have also committed resources to the IMF through bilateral borrowing agreements, totaling about SDR 317 billion ($440 billion).

Governance and Organisation 

  • At the top of its organizational structure is the Board of Governors , consisting of one governor and one alternate governor from each member country, usually the top officials from the central bank or finance ministry. 
    • The Board of Governors meets once a year at the IMF–World Bank Annual Meetings . 
  • Twenty-four of the governors serve on the International Monetary and Financial Committee, or IMFC, which advises the IMF's Executive Board on the supervision and management of the international monetary and financial system. 
  • The day-to-day work of the IMF is overseen by its 24-member Executive Board , which represents the entire membership and supported by IMF staff. 
  • The Managing Director is the head of the IMF staff and Chair of the Executive Board and is assisted by four Deputy Managing Directors.

Key Reports

It also provides periodic assessments -

  • Of global prospects in its World Economic Outlook
  • Of financial markets in its Global Financial Stability Report
  • Of public finance developments in its Fiscal Monitor
  • Of external positions of the largest economies in its External Sector Report

Source:

https://www.livemint.com/news/india/as-imf-sits-for-its-spring-meet-4-billion-could-be-offered-to-india-to-combat-covid-19-11586691972914.html

Image Source: Bloomberg