International Monitory Fund-IMF

International Monitory Fund

The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. With its near-global membership of 188 countries, the IMF is uniquely placed to help member governments take advantage of the opportunities—and manage the challenges—posed by globalization and economic development more generally. The IMF tracks global economic trends and performance, alerts its member countries when it sees problems on the horizon, provides a forum for policy dialogue, and passes on know-how to governments on how to tackle economic difficulties.

The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty.

Marked by massive movements of capital and abrupt shifts in comparative advantage, globalization affects countries’ policy choices in many areas, including labor, trade, and tax policies. Helping a country, benefit from globalization while avoiding potential downsides is an important task for the IMF. The global economic crisis has highlighted just how interconnected countries have become in today’s world economy.

Key IMF Activities

The IMF supports its membership by providing

Policy advice to governments and central banks based on analysis of economic trends and cross-country experiences;

Research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets;

Loans to help countries overcome economic difficulties;

Concessional loans to help fight poverty in developing countries; and

Technical assistance and training to help countries improve the management of their economies.

Original Aims

The IMF was founded more than 60 years ago toward the end of World War II (see History). The founders aimed to build a framework for economic cooperation that would avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s and the global conflict that followed.

Since then the world has changed dramatically, bringing extensive prosperity and lifting millions out of poverty, especially in Asia. In many ways the IMF’s main purpose—to provide the global public good of financial stability—is the same today as it was when the organization was established. More specifically, the IMF continues to

Provide a forum for cooperation on international monetary problems

Facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction;

Promote exchange rate stability and an open system of international payments; and

Lend countries foreign exchange when needed, on a temporary basis and under adequate safeguards, to help them address balance of payments problems.

An Adapting IMF

The IMF has evolved along with the global economy throughout its 65-year history, allowing the organization to retain its central role within the international financial architecture

As the world economy struggles to restore growth and jobs after the worst crisis since the Great Depression, the IMF has emerged as a very different institution. During the crisis, it mobilized on many fronts to support its member countries. It increased its lending, used its cross-country experience to advice on policy solutions, supported global policy coordination, and reformed the way it makes decisions.

The result is an institution that is more in tune with the needs of its 188 member countries.

Stepping up crisis lending. The IMF responded quickly to the global economic crisis, with lending commitments reaching a record level of more than US$250 billion in 2010. This figure includes a sharp increase in concessional lending (that’s to say, subsidized lending at rates below those being charged by the market) to the world’s poorest nations.

Greater lending flexibility. The IMF has overhauled its lending framework to make it better suited to countries’ individual needs. It is also working with other regional institutions to create a broader financial safety net, which could help prevent new crises.

Providing analysis and advice. The IMF’s monitoring, forecasts, and policy advice, informed by a global perspective and by experience from previous crises, have been in high demand and have been used by the G-20.

Drawing lessons from the crisis. The IMF is contributing to the ongoing effort to draw lessons from the crisis for policy, regulation, and reform of the global financial architecture.

Historic reform of governance. The IMF’s member countries also agreed to a significant increase in the voice of dynamic emerging and developing economies in the decision making of the institution, while preserving the voice of the low-income members.

The IMF’s main goal is to ensure the stability of the international monetary and financial system. It helps resolve crises, and works with its member countries to promote growth and alleviate poverty. It has three main tools at its disposal to carry out its mandate: surveillance, technical assistance and training, and lending. These functions are underpinned by the IMF’s research and statistics.

Surveillance

The IMF promotes economic stability and global growth by encouraging countries to adopt sound economic and financial policies. To do this, it regularly monitors global, regional, and national economic developments. It also seeks to assess the impact of the policies of individual countries on other economies.

This process of monitoring and discussing countries’ economic and financial policies is known as bilateral surveillance. On a regular basis—usually once each year—the IMF conducts in depth appraisals of each member country’s economic situation. It discusses with the country’s authorities the policies that are most conducive to a stable and prosperous economy, drawing on experience across its membership. Member countries may agree to publish the IMF’s assessment of their economies, with the vast majority of countries opting to do so.

The IMF also carries out extensive analysis of global and regional economic trends, known as multilateral surveillance. Its key outputs are three semiannual publications, the World Economic Outlook, the Global Financial Stability Report, and the Fiscal Monitor. The IMF also publishes a series of regional economic outlooks.

The IMF recently agreed on a series of actions to enhance multilateral, financial, and bilateral surveillance, including to better integrate the three; improve our understanding of spillovers and the assessment of emerging and potential risks; and strengthen IMF policy advice.

For more information on how the IMF monitors economies, go to Surveillance in the Our Work section.

Technical Assistance and Training

IMF offers technical assistance and training to help member countries 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 supervision and regulation, and statistics.

The IMF provides technical assistance and training mainly in four areas:

Monetary and financial policies (monetary policy instruments, banking system supervision and restructuring, foreign management and operations, clearing settlement systems for payments, and structural development of central banks);

Fiscal policy and management (tax and customs policies and administration, budget formulation, expenditure management, design of social safety nets, and management of domestic and foreign debt);

Compilation, management, dissemination, and improvement of statistical data; and

Economic and financial legislation

For more on technical assistance, go to Technical Assistance in the Our Work section.

Lending

IMF financing provides member countries the breathing room they need to correct balance of payments problems. A policy program supported by financing is designed by the national authorities in close cooperation with the IMF. Continued financial support is conditional on the effective implementation of this program.

In the most recent reforms, IMF lending instruments were improved further to provide flexible crisis prevention tools to a broad range of members with sound fundamentals, policies, and institutional policy frameworks.

In low-income countries, the IMF has doubled loan access limits and is boosting its lending to the world’s poorer countries, with loans at a concessional interest rate.

Collaborating with Others

The IMF collaborates with the World Bank, regional development banks, the World Trade Organization (WTO), UN agencies, and other international bodies. While all of these organizations are involved in global economic issues, each has its own unique areas of responsibility and specialization.

The IMF also works closely with the Group of Twenty (G-20) industrialized and emerging market economies and interacts with think tanks, civil society, and the media on a daily basis.

History

The IMF has played a part in shaping the global economy since the end of World War II.

Cooperation and Reconstruction (1944–71)

As the Second World War ends, the job of rebuilding national economies begins. The IMF is charged with overseeing the international monetary system to ensure exchange rate stability and encouraging members to eliminate exchange restrictions that hinder trade.

The End of the Bretton Woods System (1972–81)

After the system of fixed exchange rates collapses in 1971, countries are free to choose their exchange arrangement. Oil shocks occur in 1973–74 and 1979, and the IMF steps in to help countries deal with the consequences.

Debt and Painful Reforms (1982–89)

The oil shocks of the 1970s, which forced many oil-importing countries to borrow from commercial banks, and the interest rate increases in industrial countries trying to control inflation led to an international debt crisis. When a crisis broke out in Mexico in 1982, the IMF coordinated the global response, even engaging the commercial banks. It realized that nobody would benefit if country after country failed to repay its debts.

The IMF’s initiatives calmed the initial panic and defused its explosive potential. But a long road of painful reform in the debtor countries, and additional cooperative global measures, would be necessary to eliminate the problem.

Societal Change for Eastern Europe and Asian Upheaval (1990–2004)

The IMF plays a central role in helping the countries of the former Soviet bloc transition from central planning to market-driven economies.

Globalization and the Crisis (2005 - Present)

The implications of the continued rise of capital flows for economic policy and the stability of the international financial system are still not entirely clear. The current credit crisis and the food and oil price shock are clear signs that new challenges for the IMF are waiting just around the corner.

The Governance of the IMF

The IMF is accountable to the governments of its member countries. The fund Governance has been a contentious issue between the developing and developed countries since the mid of 1950’s. The familiar argument of the former is that the quota system is not fair as a key for decision – making and access to resources. The response of the latter is that it is only normal and fair that each country share in the decision making be commensurate with its contribution to the fund resources.

The economic system is one which states are not equal, some are certainly more economically important than others even though they all have “equal” political sovereignty. This holds in fact when it comes to the contribution of member of states to the system. It also holds in economic theory in analyzing big economy influence over international adjustment. The economic conditions and policies of the major countries fundamentally affect the international economy. Similarly, the effects of global economic changes are more important for the big economies. It is controversial to assert that a decision by the IMF requires more than the assent and active cooperation of the large economy countries than the small ones. Economic analysis explicitly distinguishes between large and small economies when it comes to the international influence of their macroeconomic policies.

IMF Members’ Quotas and Voting Power, and IMF Board of Governors

The Board of Governors, the highest decision-making body of the IMF, consists of one governor and one alternate governor for each member country. The governor is appointed by the member country and is usually the minister of finance or the governor of the central bank. All powers of the IMF are vested in the Board of Governors. The Board of Governors may delegate to the Executive Board all except certain reserved powers. The Board of Governors normally meets once a year.

The table below shows quota and voting shares for IMF members. Following the entry into effect of the 2008 Amendment on Voice and Participation on March 3, 2011, quota and voting shares will change as eligible members pay their quota increases.

During this process, this table will be updated regularly. Click here for a table illustrating percentage quota and voting shares before and after implementation of the 2008 Amendment on Voice and Participation, and of subsequent reforms of quotas and governance which were agreed in 2010 but are not yet in effect.

General Department and Special Drawing Rights Department.

The Reform of the IMF

Unlike the General Assembly of the United Nations, where each country has one vote, decision making at the IMF was designed to reflect the position of each member country in the global economy. Each IMF member country is assigned a quota that determines its financial commitment to the IMF, as well as its voting power. To be effective, the IMF must be seen as representing the interests of all of its 188 member countries, from its smallest shareholder Tuvalu, to its largest, the United States.

There are three main issues in this area: the governance of the IMF, the surveillance and conditionality and the reserve system together with the function of the bank of last resort. This lesson has already dealt with the last topic above.

The developing countries have created two institutional modalities to strengthen their influence of the IMF: the group of twenty four and the development committee. The G24 was established more than three decades ago by the group of seventy seven, which founded UNCTAD. It has had a good working program supported by UNCTAD and other international secretariats as well as by the service of independent experts of distinction.

It is fair to say that it has had beneficial influence on the IMF and has, to certain extend, served the interests of developing countries. In November 2010, the IMF agreed on reform of its framework for making decisions to reflect the increasing importance of emerging market and developing economies.

Giving more say to Emerging Markets

In recent years, emerging market countries have experienced strong growth and now play a much larger role in the world economy.

The reforms will produce a shift of 6 percent of quota shares to dynamic emerging market and developing countries. This realignment will give more say to a group of countries known as the BRICS: Brazil, Russia, India, and China.

Protecting the Voice of Low-Income Countries

The reform package also contains measures to protect the voice of the poorest countries in the IMF. Without these measures, this group of countries would have seen its voting shares decline.

Timeline for Implementing the Reform

The Board of Governors, the IMF’s highest decision-making body, must ratify the new agreement by an 85 percent majority before it comes into effect.

Accountability

The IMF is accountable to its 188 member governments, and is also scrutinized by multiple stakeholders, from political leaders and officials to, the media, civil society, academia, and its own internal watchdog. The IMF, in turn, encourages its own members to be as open as possible about their economic policies to encourage their accountability and transparency.

Country Representation

Unlike the General Assembly of the United Nations, where each country has one vote, decision making at the IMF was designed to reflect the position of each member country in the global economy. Each IMF member country is assigned a quota that determines its financial commitment to the IMF, as well as its voting power.

The Surveillance Function and Conditionality

Conditionality was developed by the IMF in the early 1950’s to ensure the paying back of members purchases, thereby preserving the revolving character of its resources. Sometime later, in the 1960’s and 1970’s, a paternalistic aspect to conditionality came into evidence as the IMF meant to guide the countries under its adjustment programs towards what it regarded the correct path to equilibrium using the correct model 40. In the 1980’s as the debt crisis erupted in Mexico and later on in order indebted countries, conditionally expanded beyond current accounts problems to cover many aspects of financial accounts and to bear on disparate aspects of domestic economic policies. The debt crisis brought domestic financial systems and policies under the purview of conditionality. At the best of dominant members, policy reform emerged into the forefront at the close of the eighties and the beginning of the nineties. The fund acting in coordination with the World Bank began to lay restrictions and performance clauses on macro and micro economic policies and the two institutions divided the enforcement work among themselves. By the 1990’s, the avowed intent and priority of conditionality was placed on policy and structural reforms and new facilities were created to finance such programs.

IMF: the Bank of Last Resort

The IMF has the capacity, like any national monetary authority, to initiate action on its own with its own resources as the custodian of the International Monetary and financial systems. For this reason, the first amendment to the articles of agreement in 1968, introduced the SDRs as the base of the system. However, after much improvement in their characteristics and much extension in their use within the fund, the SDRs have remained a mere 2% fraction of international reserves.

From inception, the IMF was created without resources of its own. Even before Bretton Woods, the vision of Keynes of an autonomously financed union with flexible and discretionary resource base was abandoned in view of the opposition of the US. In its place, the US concept, articulated by Under Secretary Harry Dexter White, was to enshrine an institution based on a resource pool contributed and controlled by the countries with majority quotas. Thus, the new global countries in financial and currency markets have thrust the institution into areas for which it has no adequate resource base independent of the political decisions of its major members.

In recent years, several proposals have been formulated to deal with this lacuna, the most ambitious of which it is the proposal of the Meltzer Commission set up by the US Congress. There are a number of issues to be pointed out in this context, some political, some institutional and some technical. The lender of last resort role requires not only resources, but as well enforceable control on all countries.

The financial crises in both Asia and Latin America have some common features and similar sequences. They were predominantly crisis in the financial system. In the majority of cases in Asia, there was no macroeconomic policy mismanagement signaled by the fund in its prior surveillance consultations with the members. Typically, there was a mal-functioning domestic financial system interacting with the typical behavior of the open international financial system. Usually, the start is ignited by banks carrying on their books a great deal of large assets that are non-performing. This leads in short order to failure of the banks to cope with servicing liabilities dominated in foreign exchange. Swiftly, a currency crisis explodes and the balance sheet of the banks and other institutions suffer serve deterioration in their domestic currency net worth. The swift and simultaneous reaction of creditors to these developments ushers in a country balance of payments crisis and requires usually severe adjustment. The crisis soon propagates into all sectors of the economy and spills over into other countries by, inter alia, altering the risk perception of international investors. The international official system then becomes involved to stem possible systematic risk. As a result, rescue packages would be negotiated with the stricken countries.

These seem to have some important common features. Dramatic increases in interest rates, damaging to the macro economic performance in the first place, increase greatly the interest rate risk of debt and other fixed income securities and inflicts large capital losses on the balance sheet of banks and other financial institutions of the debtors. The hiking of interest rates inflicts a net capital loss on the asset side. The result is serve deterioration in the bank balance sheet that might wipe out their net worth.