India’s $10 billion pledge to IMF: Facts and Fiction

by Manshu on June 20, 2012

in Economy, Featured

It’s not often that I discover breaking news through my Facebook feed, but that happened today with the news of India’s $10 billion pledge to IMF going viral and people taking some pretty extreme positions in the comments to each other’s posts.

The press release from IMF about this is fairly detailed and let me present two quotes from Ms. Lagarde  that I think are the most important to consider when you’re trying to figure out what to make of this news.

Here is the first quote (emphasis mine):

“We warmly welcome pledges by our members to increase IMF resources by over $430 billion, almost doubling our lending capacity. This signals the strong resolve of the international community to secure global financial stability and put the world economic recovery on a sounder footing. These resources are being made available for crisis prevention and resolution and to meet the potential financing needs of all IMF members. They will be drawn only if they are needed, and if drawn, will be refunded with interest.

So, you see, the impression that some people have got (and I was part of this group initially) that India is just giving away $10 billion is wrong. It is an interest bearing loan, and is not a donation at all.

I think the problem is that most newspapers reported this as “aid” and that word usually connotes some kind of donation or charity, but as you can see this is not aid in the same sense that most people think about it. You don’t expect to be paid back with interest if you donate money to charity.

Now, to the second quote (emphasis mine).

“These resources are being made available for crisis prevention and resolution and to meet the potential financing needs of all IMF members. They will be drawn only if they are needed as a second line of defense after resources already available from quota and the existing New Arrangements to Borrow are substantially used. If drawn, they will be repaid with interest. The IMF is committed to assuring our members’ interests and resources are safeguarded.”

This means that they have to first use up money from the quota and something called the “New Arrangement to Borrow” and only then can they go to this additional funding.

India is part of the quota but is it part of the new arrangement to borrow? Those details are present in this page, and you will be surprised to learn that India’s name figures there and the number is not small either at $8.74 billion. If you’re worried about the $10 billion, you should be more worried about this $8.74 billion because this will get used up prior to the 10 billion.

I think looking at these two quotes help a great deal in getting a clear picture on the announcement that’s made today.

Almost 3 years ago, Dr. Manmohan Singh had said that India is ready to contribute to IMF based on its quota (I had blogged about it then) and this is an extension of that to the extent that India wants to have a greater say in the workings of the IMF along with other emerging economies and these type of steps will help it get that larger say. India’s current voting right is 2.34% and that’s up from the 1.89% that it had 3 years ago.

It is also notable that India is not alone in pledging this money, and here is a chart that shows other countries who have pledged as much or more than India in order to boost IMF’s resources. (Data Source)

Countries that have pledged USD 10 billion or more to IMF

Countries that have pledged USD 10 billion or more to IMF

India was lucky to get IMF support in 1991, not only because of the money that came from IMF but also because of the conditions that came with it as they truly helped usher in the first round of liberalization, and the present generation owes their higher standard of living in a large part to that first wave of liberalization.

It’s only natural then that India plays its part to support the IMF today when the world is even more inter-connected, especially when it is in the form of loans that will eventually be repaid along with interest.

{ 15 comments… read them below or add one }

ankurm June 20, 2012 at 10:05 AM

Manshu, excellent post. I think most issues are clearer now. Its not so bad to fund in the nature of “lending”. I was wondering, if we could do a post on various sources of funding (IMF, World Bank etc), how much India receives from and how much it lends, to see India’s net position. This will be useful to those who criticise these aids.


Ashok June 20, 2012 at 1:52 PM

Great post!!


Rakesh June 20, 2012 at 11:12 PM

Why is US not in the list?


DJ June 21, 2012 at 4:10 AM

Its the biggest donor in the pre-existing fund: (about 20%)

which as Manshu mentions will be used prior to these funds.

Secondly, US Federal Reserve has direct swap lines with European Central Bank and a few other central banks. Since 2008, it has been under fire in their own Congress for lending huge amounts directly to other regions during times of crisis, without Congress approval. Because of this, funding via IMF is not necessary for them:

For more background on this:

Its messy business, for sure! 🙂


bemoneyaware June 21, 2012 at 6:03 AM

Came across this in epaper of economictimes (Can’t find the link to the article). Quoting it for the readers.

India’s IMF Contribution is Not Aid

The government has pledged $10 billion as its contribution towards a planned International Monetary Fund’s cash chest to tackle the European crisis. So does that mean that Indians will pay for the rescue of the troubled European countries? Or does this amount to giving away precious dollars at a time when foreign inflows are slowing? No, the pledged amount will remain part of India’s reserves. Rishi Shah explains:
No, it is not a giveaway. India is simply buying bonds from the IMF. These bonds are not free aid to the ailing European economies but financial instruments that guarantee safe and reasonable returns. The notes would provide a return of average interest rate of SDR’s over the past three months. SDR, or special drawing right, is a reserve currency created by the IMF to supplement the existing reserves of member countries.

After the global financial crisis of 2008, the Group of Twenty industrialized and emerging market economies agreed on April 2, 2009, to triple the International Monetary Fund’s lending capacity to $750 billion, enabling it to inject extra liquidity into the world economy during times of crisis. India had then agreed in principle to inject $10 billion to the IMF war chest.

This decision was taken on March 10, 2010. The Reserve Bank of India and IMF signed an agreement delineating the conditions under which India would purchase up to $10 billion in IMF notes. The fund said at that time that the agreement offered India a safe investment instrument as well as boost the Fund’s capacity to help members to weather the global financial crisis.

Yes, Brazil and Russia have agreed to buy $10 billion worth of bonds each while China has committed $43 billion to bolster IMF’s resources. South Africa has said it will provide $2 billion. This additional contribution by BRICS and other countries, including Mexico and Turkey, has increased the bailout fund size to $456 billion.


ankurm June 21, 2012 at 9:42 AM

What is SDR? Any idea about maturity & interest rate of these bonds? Surely there will be an net interest loss over GoI’s INR or USD borrowings. And can India borrow against these bond holdings as it would be a high quality collateral?


bemoneyaware June 21, 2012 at 10:09 AM

Quoting from SDR on wikipedia
Special drawing rights (SDRs) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). Not a currency, SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged.
SDRs are allocated to countries by the IMF. Private parties do not hold or use them.As of March 2011, the amount of SDRs in existence is around XDR 238.3 billion, but this figure is expected to rise to XDR 476.8 billion by 2013.

The value of the SDR is determined by the value of several currencies important to the world’s trading and financial systems. Initially its value was fixed, so that 1 SDR = 1 US dollar, but this was abandoned in favor of a currency basket after the 1973 collapse of the Bretton Woods system of fixed exchange rates.Composed of the Japanese yen, the US dollar, the British pound and the Euro,the basket of currencies used to value the SDR is “weighted” meaning that the more important currencies have a larger impact on the SDR’s value. Currently, the value of one SDR is equal to the sum of 0.423 Euros, 12.1 Yen, 0.111 pounds, and 0.66 US Dollars.
This basket is re-evaluated every five years, and the currencies included as well as the weights given to them can then change. A currency’s importance is currently measured by the degree to which it is used as a foreign exchange reserve asset and the amount of exports sold in that currency

Interest rate: Special drawing rights carry a weekly determined interest rate, but no party pays interest if an IMF member country maintains the amount of SDRs allocated to it. Based on “a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies”, interest is paid by an IMF member country if it holds less SDRs than it was allocated, and interest is paid to a member country if it holds more SDRs than the amount it was allocated


ankurm June 21, 2012 at 10:14 AM

Wow. thats quite exhaustive. Thanks


bemoneyaware June 21, 2012 at 12:34 PM

Thanks to you for asking for I wouldn’t have googled on my own ..! Onemint and ET would have been sufficient.


bemoneyaware June 21, 2012 at 10:13 AM

Found interesting link on IMF websites Frequently Asked Questions SDR Basics .
Hope it answers your questions!


bemoneyaware June 21, 2012 at 10:10 AM
Amrit June 22, 2012 at 9:06 AM

Hi Manshu, this is a great article….it cleared my misconception about the currently running popular topic in India.


Rohit June 22, 2012 at 8:35 PM

Hi there,

I’m not entirely with you with this. To start with, nobody ever mentioned a $10 Billion donation. At least not in this part of the World. It is indeed a loan, but tell me, when you need to buy yourself an appartment worth A crore or 2, you don’t just magically present it do you? You use a bank to fulfill the requirement, and they also charge interest. All thought its more expensive, but at that point in time, you’re being helped to fulfill your needs. Same situation with this. I think as an Indian, what makes me feel good is that in the western world, there are still plenty of people who think bad of India and utilise every chance to look down on India. This is plain and simple a sweet answer, that India is also a helping hand to assist in restabilizing these shaky economies. That’s by record, a THIRD WORLD country, that’s been invaded by the mughals, french, portugese, british, danish, even the dutch tried but were sent further, and yet INDIA is coming with a helping hand to help get these economies back on track.

I guess that’s enough said… JAI HIND!


mahem August 3, 2012 at 4:26 PM

Nice, its one large kitty which is supposed to be used by its members alone.


Amit June 16, 2015 at 3:23 AM

Its now mid 2015 and all of you were wrong.

Greece will default on IMF “loans” which are currently being funneled to European banks as Greek debt repayment. The result is the default loss will be born by the rest of the world – which is exactly why European countries put their stooge as head of the IMF (Lagarde).

100% scam of transferring bad European bank loans to others.


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