INTERNATIONAL MONETARY FUND:

The roots of the International Monetary Fund (IMF) can be traced back to the global economic instability of
the 1930s. During World War II, restrictions on international trade and payments grew, prompting concern
over future global economic cooperation. In response, British economist John Maynard Keynes developed a
comprehensive plan for post-war international monetary collaboration, known as the "Keynes Plan."
Simultaneously, an American economist, Harry D. White, formulated a separate proposal called the "White
Plan." Elements from both plans were combined to form a unified proposal, which was discussed and
finalized during the United Nations Monetary and Financial Conference. This meeting, held in Bretton
Woods, New Hampshire, USA, in July 1944, brought together representatives from 44 non-communist
nations to design the framework for a new international monetary system. The conference led to the proposal
of three major institutions:
1. The International Monetary Fund (IMF)
2. The International Bank for Reconstruction and Development (IBRD)
3. The International Trade Organization (ITO)
While the IMF and IBRD were successfully established, the ITO never came into existence. Instead, the
General Agreement on Tariffs and Trade (GATT) was introduced as a temporary solution for international
trade matters.
The IMF was officially created when 29 countries signed its Articles of Agreement (its founding charter) on
December 27, 1945. It began its financial operations on March 1, 1947. As of May 2012, the IMF included
188 member countries, making it nearly universal in its membership. India was among the founding
members.
The primary goals of the IMF are to maintain stability in exchange rates, provide temporary financial
support to countries experiencing shortages in foreign currency, and promote global efforts to address
persistent imbalances in countries’ balance of payments.
Objectives of IMF:
The IMF aims to replicate the international stability benefits of the gold standard system—such as fixed
exchange rates—without its domestic limitations. At the same time, it seeks to preserve the internal
economic flexibility of paper currency systems, while avoiding their drawbacks in global trade and finance.
The three broader goals of the IMF are:
(i) To reduce or eliminate existing restrictions on foreign exchange: The IMF encourages countries
to remove restrictive measures on the buying and selling of foreign currencies. Such controls
often hinder trade and investment. By reducing these barriers, the IMF promotes a freer flow of
capital and goods, which enhances global economic efficiency and competitiveness.
(ii) To establish and sustain currency convertibility and stable exchange rates: The IMF supports
policies that allow currencies to be freely exchanged at predictable rates. Currency convertibility
ensures that individuals and businesses can engage in international trade without facing artificial
barriers. Stable exchange rates reduce uncertainty and are critical for long-term investment and
economic planning.
(iii) To expand the scope of multilateral trade and international payments: The IMF promotes an
international system where trade and payments occur among many nations, not just bilateral
agreements. This multilateral framework leads to more opportunities, reduces dependency on
specific partners, and encourages competitive pricing. It also fosters a more resilient and
interconnected global economy.
But the main objectives of the International Monetary Fund are as follows:
 1. To promote international monetary cooperation: The IMF was created to serve as a permanent
international forum where member countries could consult and collaborate on global monetary
matters. By facilitating dialogue and coordination, it helps prevent misunderstandings and promotes
stability in the international monetary system. This cooperation becomes especially vital during
financial crises or periods of economic instability.
2. To support the expansion and balanced growth of international trade: The IMF aims to foster global
trade that grows steadily and fairly, ensuring that all countries benefit. Trade expansion contributes to
higher employment, improved living standards, and optimal use of productive resources. By
encouraging balanced trade policies, the IMF helps countries achieve sustainable economic
development and inclusive growth.
3. To promote exchange rate stability and orderly exchange arrangements: One of the IMF’s core roles
is to ensure that exchange rates between national currencies remain stable and predictable. This
stability discourages harmful practices such as competitive devaluations, where countries lower their
currency values to gain trade advantages. Stable exchange rates build investor confidence and
support smoother international transactions.
4. To establish a multilateral payment system and eliminate foreign exchange restrictions: The IMF
seeks to enable a system where countries can conduct payments for trade and services freely and
efficiently. It works to remove barriers like currency controls and trade restrictions that hinder
international payments. A multilateral payment system promotes global economic integration and
facilitates smoother trade relationships.
5. To give confidence to members by providing temporary financial assistance: When countries face
short-term balance of payments problems (i.e., when they cannot pay for imports or service their
debts), the IMF offers temporary financial support. This funding helps countries avoid drastic
economic measures such as cutting imports or devaluing their currencies. Such assistance comes
with conditions to ensure proper use and recovery.
6. To reduce the duration and intensity of balance of payments problems: The IMF helps countries
resolve their international payment imbalances more quickly and with less economic disruption. By
providing policy advice, financial support, and technical assistance, the Fund helps countries address
the root causes of their external imbalances. The goal is to restore economic stability while
minimizing long-term damage.
Major Functions and Roles of IMF:
1. Acts as a short-term credit provider to member countries: The IMF offers short-term financial
assistance to countries facing temporary balance of payments problems—when a country doesn't
have enough foreign currency to pay for its imports or settle international obligations. These loans
help countries avoid drastic policy actions like currency devaluation or trade restrictions. The credit
support is typically conditional, ensuring that borrowing countries adopt policies to restore economic
stability.
2. Facilitates stable and orderly adjustment of exchange rates: One of the IMF’s key roles is to promote
exchange rate stability by helping countries manage fluctuations in their currency values. It provides
guidance and mechanisms to ensure that any changes to exchange rates happen in an orderly and
predictable manner. This helps maintain confidence in the international monetary system and reduces
uncertainty in global trade and investment.
3. Maintains a pool of member countries' currencies for international borrowing: The IMF serves as a
central repository for the currencies of its member nations. This pool of international reserves
enables the Fund to lend a country the foreign currency it needs during times of crisis. For example,
if India needs U.S. dollars to stabilize its exchange rate, it can borrow from the IMF’s pool using its
own currency as a deposit.
4. Functions as a lender in foreign exchange for current account needs: While the IMF does provide
financial assistance, it specifically lends for current account purposes—such as trade imbalances or
shortfalls in foreign reserves—not for long-term investments or capital projects. This ensures that
 loans address immediate financial imbalances and support everyday transactions like imports and
interest payments on foreign debt.
5. Offers mechanisms to revise the official exchange rate of a member's currency: If a member
country’s official exchange rate (par value) becomes unsustainable due to economic changes, the
IMF provides a formal process to adjust it. This prevents chaotic devaluations or revaluations and
helps the country gradually correct its balance of payments issues. The aim is to align the exchange
rate with the country's economic fundamentals in a way that maintains global monetary stability.
6. Provides a forum for international economic dialogue and consultation: The IMF facilitates regular
meetings, consultations, and policy discussions among member countries. This forum allows nations
to share concerns, receive expert advice, and coordinate policies. These international consultations
help prevent conflicts, ensure policy transparency, and promote cooperative solutions to global
economic problems.
7. Supervising the International Monetary System: The overarching responsibility of the IMF is to
oversee the global monetary and financial system. This includes:
 Monitoring exchange rate and monetary policies of member countries (called surveillance),
 Providing credit and financial support during crises (the financial role),
 Offering economic policy advice and technical assistance (the consultative role).
All the IMF's activities can be grouped under three broad categories:
 Regulatory: Ensuring countries follow rules for monetary and financial stability.
 Financial: Providing loans and financial support during economic crises.
 Consultative: Offering a platform for discussion, advice, and coordination of global economic
policies.
Organization and Structure of the International Monetary Fund (IMF):
The organizational framework of the IMF is outlined in Article XII of its Articles of Agreement. The
institution is composed of several key bodies: the Board of Governors, the Executive Board, the Managing
Director, and the IMF staff. These components work together to oversee the Fund’s activities and decision-
making processes.
1. Board of Governors: This is the highest decision-making body within the IMF. Each member country
appoints a representative—typically the finance minister or the head of the central bank. The Board
meets once a year to make critical decisions such as approving new members, revising quotas, or
setting strategic direction. Although it holds the top authority, it delegates routine decision-making to
the Executive Board.
2. Executive Board: The day-to-day management of the IMF is handled by the Executive Board, which
consists of 24 Executive Directors. These directors oversee the implementation of policies set by the
Board of Governors and handle operational matters, including policy reviews, loan approvals, and
economic surveillance.
3. Managing Director: The IMF is led by a Managing Director, who is elected by the Executive Board
for a five-year term. The Managing Director acts as the chief of the organization, supervising staff
operations and serving as the public face of the IMF.
4. Quotas and Voting Rights: Each member country’s influence within the IMF is based on a quota
system, which reflects its relative position in the global economy. Quotas determine a member's
financial contribution to the IMF, access to IMF resources (borrowing limits), and voting power.
These quotas are decided by the Board of Governors and periodically reviewed.
5. Global Context Monitoring: Beyond national reviews, the IMF also watches worldwide economic
trends, the interconnectedness of national policies, and shifts in international capital markets to
maintain global financial stability.
IMF Surveillance and Consultations:
The IMF monitors the economic and financial policies of its members to ensure global monetary stability.
This is done through regular consultations known as Article IV Consultations, which are held with each
member country. Article IV Consultations: These are annual reviews where the IMF holds discussions with
each member country to assess its economic health and provide policy advice. During these reviews, the
IMF evaluates:
1. Exchange Rate Policies: The IMF checks whether a country's exchange rate system is stable and
consistent with global economic stability. It looks for unfair practices like artificial currency
manipulation.
2. Fiscal and Monetary Strategies: The IMF reviews government spending, taxation (fiscal policy), and
money supply and interest rate policies (monetary policy) to ensure economic balance and inflation
control.
3. Balance of Payments and Debt Management: It assesses how well a country manages its foreign
payments and borrowing, ensuring that it can meet international obligations without falling into a
debt crisis.
4. Economic Risks and Vulnerabilities: The IMF identifies potential threats to a country's economy—
such as inflation, unemployment, or external shocks—that could harm financial stability.
IMF examines the following issues in a broader sense and well:
5. Structural Reforms: It looks at reforms aimed at improving productivity and efficiency in key sectors
like banking, labour, or public administration.
6. Good Governance: The IMF encourages transparent, accountable governance, which helps ensure
public resources are used effectively and corruption is minimized.
7. Environmental and Sustainability Policies: The IMF assesses how countries are integrating
environmental protection and sustainability into their economic planning.
Working of the IMF – Quota System:
The IMF’s financial operations are primarily based on the quota system, which represents each member
country’s financial stake in the Fund. Quotas are assigned according to a country’s relative size and role in
the global economy.
Role of Quotas:
1. Determining Financial Contribution: When a country joins the IMF, it is allocated an initial quota
similar to those of other countries with comparable economic size and structure. This quota sets the
maximum financial resources a country is expected to contribute to the IMF. A member pays its
quota fully upon joining—25% in Special Drawing Rights (SDRs) or accepted foreign currencies
(like USD, EUR, JPY, etc.), and the rest in its own national currency.
2. Voting Power: A member’s voting strength in the IMF is directly linked to its quota. Each member
receives a fixed number of basic votes, plus one additional vote for every SDR 100,000 of its quota.
After reforms in 2008, basic votes now make up about 5.5% of total votes, significantly increasing
the voice of smaller nations.
3. Access to IMF Loans: The amount a country can borrow from the IMF is also determined by its
quota. Under regular lending arrangements like Stand-By and Extended Fund Facilities, a member
can typically borrow up to 145% of its quota annually and up to 435% cumulatively, with exceptions
made during crises.
Key Quota Figures (as of 2025):
1. United States of America: Quota: Approximately SDR 117.6 billion (about US$160 billion); and
voting Share: Approximately 16.54%, maintaining its position as the largest single shareholder.
 2. India: Quota: Approximately SDR 19.8 billion (about US$26.5 billion); and Voting Share:
Approximately 2.76%, reflecting its growing influence in the global economy.
3. Tuvalu: Quota: Approximately SDR 3.75 million (about US$5 million), maintaining its status as the
smallest quota holder.
Quota Reforms – 14th General Review (Effective January 26, 2016):
 Total quotas were doubled, from SDR 238.5 billion to SDR 477 billion (approx. US$677 billion).
 Over 6% of quota shares were reallocated from over-represented to under-represented countries.
 More than 6% of shares were transferred to emerging markets and developing countries (EMDCs),
recognizing their growing influence.
 Quota shares were significantly realigned, boosting representation for major emerging economies.
 China rose to become the third-largest IMF member, joining Brazil, India, and Russia in the top 10
largest shareholders.
 The quota and voting share of the poorest countries were protected. These were defined as nations
eligible for IMF’s Poverty Reduction and Growth Trust (PRGT), with a per capita income under
$1,135 (or twice that for small states).
Voting Thresholds and Veto Power: Important IMF decisions require at least 85% of the total votes to pass.
Given the U.S. holds 16.54% of voting power, it effectively has veto power, allowing it to block major
decisions.
Quota Allocation and Reform Highlights (2025):
 Quota Increase: The 50% increase in quotas was approved by the IMF Board of Governors on
December 15, 2023, with 92.86% of the total voting power in favor, surpassing the 85% threshold
required.
 Quota Share Realignment: The reform aims to better reflect members' relative positions in the world
economy, with a focus on shifting quota shares to under-represented emerging market and
developing countries (EMDCs).
 Implementation Timeline: The quota increases are set to become effective once members with at
least 85% of the total voting power have consented in writing, with a deadline for consent by
November 15, 2024
Implications of the 2025 Quota Reforms:
 Enhanced Lending Capacity: The increase in quotas strengthens the IMF's financial resources,
enhancing its ability to provide financial assistance to member countries in times of need.
 Improved Representation: The realignment of quota shares ensures that the IMF's governance
structure more accurately reflects the economic weight of its member countries, particularly
benefiting EMDCs.
 Preserved Support for Low-Income Countries: The reforms include measures to protect the quota
and voting shares of the poorest member countries, ensuring continued support for their development
needs.
Explanation of the Lending Function of IMF:
According to the IMF Articles of Agreement, the Fund’s resources are intended to offer temporary financial
support to member countries experiencing balance of payments (BOP) deficits on their current account. This
assistance takes the form of short-term loans.
Rather than traditional lending, the IMF uses a unique method: when a country requires help, it essentially
purchases foreign currency from the IMF in exchange for its own national currency. This process is referred
to as “drawing” from the Fund.
This mechanism implies that the IMF doesn't lend in the conventional sense, but rather sells usable
currencies under specified conditions. The goal is not to provide long-term financial support, but to bridge
short-term balance of payments gaps.
Limits and Structure of Drawings: A country's quota determines how much it can draw from the IMF.
 Up to 25% of the quota can be accessed freely. This portion is known as the “gold tranche” or
“reserve tranche.”
o It represents a country's own reserves held with the IMF, so no conditions are imposed on this
drawing. The IMF cannot deny access to this portion, making it automatically available to the
member.
 Beyond this, countries may access additional amounts in “credit tranches.”
o Each credit tranche is equal to 25% of the member’s quota, and up to 100% of the quota can
be drawn in total under these tranches. These drawings are subject to IMF approval and
conditions, meaning countries must meet specific policy requirements to access this
assistance.
Borrowing Methods Used by IMF:
The IMF offers a range of borrowing facilities to assist member countries in managing balance of payments
(BOP) problems. These mechanisms differ based on the duration, amount, and conditions attached to the
loans.
1. Stand-by Arrangements (SBA): This is the most common form of IMF support. Under SBAs, a
member country is given prior approval to access foreign exchange from the IMF up to a specified
limit over 12 to 18 months. These arrangements can be extended up to 3 years, with repayments
expected within 3 to 5 years after each withdrawal. The term "stand-by" indicates that the funds are
available when needed, provided the country meets agreed policy conditions.
2. Extended Fund Facility (EFF): EFF is designed for countries, especially developing ones, that have
long-term or structural balance of payments issues. These problems often stem from deep-rooted
weaknesses in trade or production.
o EFF offers larger loans than SBAs.
o Support is extended for 3 to 4 years, with repayments over 4 to 10 years.
o This facility gives countries more time and flexibility to implement structural reforms.
3. Compensatory Financing Facility (CFF): This facility helps countries, particularly those reliant on
primary commodity exports, deal with temporary shortfalls in export earnings.
o A country can borrow up to 100% of its quota.
o It aims to cushion the impact of volatile global prices on national income.
4. Oil Facility: This was a special facility created to assist member countries experiencing BOP
difficulties due to rising global oil prices. It helped offset the economic shock from energy import
costs.
5. Enlarged Access Policy (EAP): This program allows countries to borrow more than their standard
limits. This policy was created to provide more substantial support during severe economic crises:
o 150% of their quota per year
o 450% over three years
o With a cumulative borrowing limit of 600% of their quota.
6. Structural Adjustment Facility (SAF) & Enhanced SAF (ESAF): Launched in 1986, SAF was
intended for low-income countries facing long-term economic and debt issues. These nations
required more flexible financial terms.
 o Offered low-interest loans (0.5%) with 10-year terms and a 5.5-year grace period.
o In 1987, ESAF expanded SAF’s scope for deeper structural reform.
o Countries had to adopt medium-term reform programs to qualify.
7. Poverty Reduction and Growth Facility (PRGF): Replaced ESAF in 1999, with a focus on poverty
reduction and sustainable growth as central goals.
o Available to low-income countries
o Up to 140% of a country’s quota could be borrowed over 3 years
o Interest rate is only 0.5%
o Repayment period: 5.5 to 10 years
o Like other facilities, PRGF is conditional on meeting reform targets
8. Supplemental Reserve Facility (SRF): This facility helps countries stabilize quickly during a
financial panic. Created in 1997 in response to the East Asian financial crisis, the SRF provides
emergency short-term financing to countries experiencing:
o Sudden capital outflows
o Loss of investor confidence
9. Additional Programs:
o Multilateral Debt Relief Initiative (2006): Aimed to cancel the debt of the poorest countries.
o Heavily Indebted Poor Countries Initiative (HIPC): Offered deeper debt relief to help
countries reduce poverty.
o Exogenous Shocks Facility (2005): Assisted countries facing unexpected external shocks
(e.g., natural disasters, global price changes).
o Emergency Assistance: Offers immediate support during natural disasters or post-conflict
recovery.
IMF Technical Assistance:
This assistance is provided via expert missions, short- and long-term assignments, and through regional
technical assistance centers. Since 1964, the International Monetary Fund (IMF) has been offering technical
support in several areas, including:
o Formulating and implementing fiscal and monetary policies,
o Drafting, reviewing, and updating economic and financial laws, regulations, and procedures,
o Strengthening institutions such as central banks, treasuries, tax and customs departments, and
statistical agencies.

Scope and Operations of the IMF:

1. Facilitating Global Trade: The IMF works to promote international trade by ensuring global
economic stability. Stable exchange rates and access to international liquidity help countries trade
goods and services more freely and fairly, boosting global economic growth.
2. Promoting Exchange Rate Stability: The IMF encourages countries to maintain stable currency
exchange rates. This reduces uncertainty in international trade and investment, as businesses and
governments can plan without worrying about sudden fluctuations in currency values.
3. Preventing Competitive Currency Devaluations: The IMF discourages countries from intentionally
lowering the value of their currencies to make exports cheaper and gain an unfair trade advantage.
Such practices can lead to currency wars and disrupt the global economy.
4. Supporting Orderly Resolution of Balance of Payments (BOP) Issues: When countries face balance
of payments problems (i.e., when they can’t pay for their imports or service their external debt), the
IMF provides short-term financial assistance and policy advice. This helps countries restore
economic stability without resorting to drastic measures.
Restrictions on Member Nations:

1. IMF resources must be used solely for approved purposes: Countries can only use the loans or
financial aid provided by the IMF for specific, pre-agreed purposes—such as stabilizing the economy
or resolving balance of payments issues. They cannot divert the funds for unrelated activities.
2. Monetary policies cannot be altered without IMF approval: Member countries are required to consult
the IMF before making significant changes to their monetary policies (e.g., changing interest rates or
money supply), especially if they have borrowed from the Fund. This ensures that policy changes
align with economic stability goals.
3. All gold transactions must occur at prices set by the Fund: Member nations must buy and sell gold at
the official price determined by the IMF, helping to maintain consistency and stability in gold-related
transactions across countries.
4. Restrictions on international current payments require IMF permission: Countries are not allowed to
impose barriers (like limits or bans) on payments for imports, exports, and services unless they
receive prior approval from the IMF. This rule ensures the smooth flow of trade and capital.
5. Foreign currencies must be bought and sold at IMF-approved rates: Members must use exchange
rates that are consistent with the IMF’s guidelines. This helps prevent manipulation and keeps the
international monetary system stable and predictable.

India and IMF:

India is a founding member of the IMF and initially held the 5th largest quota, which gave it a permanent
seat on the Executive Board. Despite other countries like Japan and Italy later increasing their quotas, India
retained its executive position. Currently, India holds a quota of SDR 4,158 million, ranking 13th globally.
The Reserve Bank of India (RBI) can hold other member currencies in its reserves alongside the pound
sterling.

1. Trade Expansion: IMF’s global regulation of monetary policies has helped stabilize exchange rates
and remove trade barriers. This has led to an expansion of international trade. As a member, India
has benefited from the resulting economic growth and increased exports.
2. Financial Assistance: India has received timely loans from the IMF during periods of crisis, such as
rising import costs and balance of payments deficits. Major borrowings occurred between 1970–
1981, including a significant loan of ₹5,000 crores in 1981. These funds helped stabilize India’s
economy during difficult times.
3. Access to World Bank: Being an IMF member is necessary to join the World Bank and its affiliates
like the IFC and IDA. This has allowed India to access funding for key infrastructure and
development projects such as irrigation, transportation, and land development.
4. Global Influence: India enjoys a permanent seat on the IMF’s Executive Board. This position enables
India to participate in decision-making processes and influence international financial policies,
strengthening its role on the global economic stage.
5. Expert Guidance: IMF provides technical advice and policy recommendations to member countries.
India has received valuable economic guidance from the IMF in areas like fiscal policy, monetary
reforms, and external debt management, especially during times of economic instability.
6. Increased Quota: Over time, India’s financial contribution (quota) to the IMF has increased, raising
its borrowing capacity. A higher quota also means greater voting power and influence in IMF
decisions, giving India a stronger voice in international financial matters.

SPECIAL DRAWING RIGHTS (SDR)

SDRs, often referred to as "paper gold," are international reserve assets introduced by the IMF in 1969 to
bolster member countries’ reserves. Though not physical currency, SDRs serve as a form of international
monetary exchange among governments and the IMF.
Initially pegged to gold (one SDR equaling the value of one U.S. dollar in gold), SDRs are now valued
based on a basket of five major currencies: the US dollar, euro (previously deutsche mark and franc),
Japanese yen, and British pound.

SDRs are allocated to member countries based on their quotas. The SDR mechanism is self-sustaining:
interest is paid on allocations and received on holdings. Members can trade SDRs voluntarily or via IMF
designation.

Historical Allocation of SDRs:

1. First Allocation (1970–72): SDR 9.3 billion:- The IMF made the first allocation of SDRs shortly
after their creation to supplement members’ official reserves. This initial distribution was aimed at
increasing international liquidity and helping countries manage balance of payments problems
without relying solely on gold or the US dollar. SDRs were allocated to member countries in
proportion to their quotas, which meant richer countries received more SDRs. This first allocation
marked the beginning of the use of SDRs as an international reserve asset.
2. Second Allocation (1979–81): SDR 12.1 billion:- The second general allocation was done to further
support the global economy during a period of increased demand for international liquidity. The late
1970s and early 1980s were marked by economic turbulence, including oil price shocks and inflation
in many countries. By distributing additional SDRs, the IMF aimed to ease liquidity constraints,
especially for developing countries facing economic difficulties. Again, allocations were quota-
based, which limited the share of developing countries but helped stabilize the global monetary
system.
3. Third Allocation (2009): SDR 161.2 billion (general) + SDR 21.5 billion (special one-time
allocation):- This was by far the largest allocation in IMF history and came in response to the global
financial crisis of 2007-2008. The crisis caused severe liquidity shortages worldwide, threatening the
stability of many economies. To help countries replenish their reserves and restore confidence, the
IMF allocated a massive SDR 161.2 billion generally, distributed according to quotas. Additionally,
a special one-time SDR allocation of 21.5 billion was made to allow countries that had joined the
IMF after 1981 (when the previous allocations were made) to participate equitably in the SDR
system. This historic move helped inject much-needed liquidity into the global financial system
during a time of crisis.

Uses of SDR:

1. Transactions by designation: The IMF asks members with strong reserves to exchange currencies for
SDRs with members in need.
2. Transactions with the general account: Members use SDRs for payments to the IMF or to buy their
own currencies.
3. Transactions by agreement: Countries voluntarily trade SDRs among themselves.

Advantages of SDRs:
 They reduce dependency on the US dollar and gold.
 Provide cost-effective reserve assets.
 Cannot be demonetized or subjected to supply limitations.
 Enhance international liquidity without requiring domestic policy changes.
 Serve as both a unit of account and a means of payment in international transactions.
Criticisms of SDRs:
1. Unequal Allocation: SDRs are distributed based on quotas, favouring developed countries and
limiting developing nations’ access to liquidity.
2. Not Aligned with Development Needs: The system does not consider the financing needs of
developing nations, making it inadequate for supporting development goals.
3. High Interest Rates: Interest is calculated using market rates from developed nations, making SDR
borrowing expensive for poorer countries.
4. Lack of Redistribution: SDR allocation does not help transfer resources from wealthier to poorer
countries, failing to address equity.
5. Failure to Meet Liquidity Demands: Developed nations’ reluctance to approve new allocations has
hindered the SDR system’s ability to meet global liquidity needs, especially since 1982.