IMF, International Monetary Fund

By: EconomyWatch   Date: 29 June 2010

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The International Monetary Fund or IMF came into existence in 1945, after the end of World War II and at the beginning of the Cold War. Currently, the IMF has its headquarters in Washington, D.C. and comprises 185 member nations. Considering its growing relevance as an international lender that offers financial and technical aid to its member nations, understanding the IMF is key understanding modern global economics.

Reasons for Founding the IMF

In an American town called Bretton Woods in New Hampshire, representatives of 45 western countries, led by the US and UK, and not including the Soviet Union and communist bloc countries, agreed to establish a global economic institution. Of these, 29 countries signed the Articles of Agreement that included the following objectives:

  • Eliminate any disastrous repetitions of the Great Depression.

  • Facilitate global financial stability by stabilizing prevailing exchange rates.

    • Reduce poverty so that economic growth is triggered.

    • Increase international trade and employment.

    Main Countries In the IMF

    The main member of the IMF is the US, which also enjoys exclusive veto power. Other countries that enjoy voting rights are Japan, Germany, France, China and the UK as its main member. Based on the quota system, the IMF assigns each member country with voting power, subscriptions and special drawing rights (SDRs).

    Presently there are memberships of 184 countries over the world and a staff of approximately 2,680 from 139 countries. Total Quotas to the extent of $312 billion (as of 8/31/05). Loans outstanding $71 billion to 82 countries, of which $10 billion to 59 on concessional terms (as of 8/31/05) and technical Assistance provided 381 person years during FY2005.Surveillance consultations concluded 129 countries during FY2005, of which 118 voluntarily published information on their consultation.

    Responsibilities of IMF:-

    Article 1 sets out main responsibilities of IMF which are asfollows,

    1) Promotinginternational monetary cooperation.

    2) Facilitating the expansion and balanced growth ofinternational trade.

    3) Promoting exchange stability.

    4) Assisting in the establishment of a multilateral systemof payments and

    5) Making its resources available (under adequatesafeguards) to members experiencing balance of payments difficulties.

     

    Generally, the IMF is responsible for ensuring the stabilityof the international monetary and financial system - the system of internationalpayments and exchange rates among national currencies that enables trade totake place between countries. The Fund seeks to promote economic stability andprevent crises; to help resolve crises when they do occur; and to promotegrowth and alleviate poverty. It employs three main functions:

    surveillance

    technical assistance

    lending to meet these objectives.

    How the IMF Works

    The main functions of IMF can be divided into three categories:

      Surveillance: This involves collaboration between the IMF and its member nations. The IMF continues to assess the economic conditions of its members and offers in-depth advice to help them formulate sound economic policies.

      Lending: Financial aid is provided to member countries who are struggling with balance of payment problems. Through Exogenous Shocks Facility (ESF) and the Poverty Reduction and Growth Facility (PRGF), the IMF helps its members and even collaborates with the World Bank to lend money to them.

      Technical Assistance: The IMF offers technical assistance in areas such as banking, fiscal and economic policies as well as exchange rate policies. It also helps its member nations to fight threats such as terrorism and money-laundering.

    Achievements and Challenges of the IMF

    It would take an entire book to cover all the achievements of the IMF but here are some that are worth recollecting:

    • The IMF triggered Poland’s economic transition. The transition included institution building, liberalization, and macro-economic management.

    • Initiatives by the IMF initiatives triggered economic growth, liberalized prices and the spread of democratic institutions in countries like the Czech Republic, the Slovak Republic the Baltics and Hungary.

    • In 2008, the Asia Pacific region made considerable progress in addressing downside risks to economic growth.

    Gaining sufficient political muscle to grapple with issues that affect economic prosperity, offering speedy solutions to crises and ensuring economic transition for developing nations are some of the challenges ahead for the IMF.

    Critics of the IMF say that its policies often make economic crises worse because of the severity of some of the austerity measures it imposes. As the global lender of last resort, sovereign nations will normally try to find any other means they can of solving their own problems before turning to the IMF. Whichever way you look at it, with the growing risks in the global financial system, the Fund is going to be busy in the coming years, and will continue its supporting role to help countries stabilize their commodity and oil prices, pursue expansionary policies and reduce inflation.

    IMF Activities - Highlights: -

    * The IMF works to promote global growth andeconomic stability and there by prevent economic crisis - by encouraging countries to adopt sound economicpolicies.

    Act ofbeing vigilant is the regular dialogue and policy advice that the IMF offers toeach of its members. Generally once a year, the Fund conducts in-depthappraisals of each member country's economic situation. It discusses with thecountry's authorities the policies that are most conducive to stable exchangerates and a growing and prosperous economy. Members have the option to publishthe Fund's assessment, and the overwhelming majority of countries opt for transparency,making extensive information on bilateral surveillance available to the public.The IMF also combines information from individual consultations to formassessments of global and regional developments and prospects. These views onthe IMF's multilateral surveillance are published twice each year in the worldeconomic outlook and the global financial stability report.

    Technicalassistance and training are offered - mostly free of charge - to help membercountries strengthen their capacity to design and implement effective policies.Technical assistance is offered in several areas, including fiscal policy,monetary and exchange rate policies, banking and financial system supervisionand regulation, and statistics.

    * Inthe event that member countries do experience difficulties financing their balance of payments, the IMF is also afund that can be tapped to help in recovery.

    Financial stabilityis available to give member countries the breathing room they need to correctbalance of payments problems. A policy program supported by IMF financing isdesigned by the national authorities in close cooperation with the IMF, andcontinued financial support is conditional on effective implementation of thisprogram.


    *The IMF is also actively working to reduce poverty in countries around the globe,independently and in collaboration with the World Bank and other organizations.

    The IMFprovides financial support through its concessional lending facility - thepoverty reduction and growth facility (PRGF) - and through debt relief under theHeavily indebted poor countries (HIPC).


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