IMF: Still Required or an Old Story
The role of IMF in the development of the monetary system of a country can not be negated, but during the course of time the role of IMF has been questioned frequently.
In the World War (second), John Keynes, developed a monetary system involving pegged exchange rate. But such a system was not sustainable in the time of financial crisis. This spurred the evolution of IMF, whenever a member country used to go out of reserves, IMF used to lend loans to adjust their exchange rates, and the monetary wheel used to roll over again.
But then came the era of Current Account Convertibility, capital account Convertibility and floating exchange rate system in 1970s onwards, when countries no longer needed loans from IMF to adjust their reserves because the reserves were already fully mobilized.
But still there are some developing countries where Capital controls, and central bank’s intervention in exchange rate exists, during the course of time it will be tough for such countries to have capital controls. The rational is simple as the foreign trade of such countries increases their corporate dependency will also rise whether to issue cheaper debt capital or equity capital from foreign countries or to make global Investments. It will increase the value to the shareholder by reducing the cost of capital.
In the World War (second), John Keynes, developed a monetary system involving pegged exchange rate. But such a system was not sustainable in the time of financial crisis. This spurred the evolution of IMF, whenever a member country used to go out of reserves, IMF used to lend loans to adjust their exchange rates, and the monetary wheel used to roll over again.
But then came the era of Current Account Convertibility, capital account Convertibility and floating exchange rate system in 1970s onwards, when countries no longer needed loans from IMF to adjust their reserves because the reserves were already fully mobilized.
But still there are some developing countries where Capital controls, and central bank’s intervention in exchange rate exists, during the course of time it will be tough for such countries to have capital controls. The rational is simple as the foreign trade of such countries increases their corporate dependency will also rise whether to issue cheaper debt capital or equity capital from foreign countries or to make global Investments. It will increase the value to the shareholder by reducing the cost of capital.
If we take the case of India, we have capital controls, partial capital account convertibility, and partial central bank’s intervention in exchange rate, and higher inflation rates. All these facts justifies that we still need the help of IMF, but what if we abolish capital controls, central bank’s intervention in exchange rate system and controll inflation, we then, no longer need IMF help, we can rely on our own monetary system, and it will add one more star to our eligibility to be world’s no. one economy
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