https://en.wikipedia.

org/wiki/International_Monetary_Fund

International Monetary Fund

From Wikipedia, the free encyclopedia
Jump to navigationJump to search
See also: Notable Current and Former IMF Employees
"IMF" redirects here. For other uses, see IMF (disambiguation).
The International Monetary Fund (IMF) is an international organization headquartered
in Washington, D.C., consisting of "189 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."[1] Formed in 1945 at the Bretton
Woods Conference primarily by the ideas of Harry Dexter White and John Maynard Keynes,[5] it
came into formal existence in 1944 with 29 member countries and the goal of reconstructing
the international payment system. It now plays a central role in the management of balance of
payments difficulties and international financial crises.[6] Countries contribute funds to a pool
through a quota system from which countries experiencing balance of payments problems can
borrow money. As of 2016, the fund had SDR477 billion (about $666 billion).[7]
Through the fund, and other activities such as the gathering of statistics and analysis,
surveillance of its members' economies and the demand for particular policies,[8] the IMF works
to improve the economies of its member countries.[9] The organisation's objectives stated in the
Articles of Agreement are:[10] to promote international monetary co-operation, international trade,
high employment, exchange-rate stability, sustainable economic growth, and making resources
available to member countries in financial difficulty.[11]
The current Managing Director (MD) and Chairman of the International Monetary Fund is noted
French lawyer and former politician, Christine Lagarde, who has held the post since 5 July
2011.

Functions[edit]
According to the IMF itself, it works to foster global growth and economic stability by providing
policy, advice and financing the members, by working with developing nations to help them
achieve macroeconomic stability and reduce poverty.[12] The rationale for this is that private
international capital markets function imperfectly and many countries have limited access to
financial markets. Such market imperfections, together with balance-of-payments financing,
provide the justification for official financing, without which many countries could only correct
large external payment imbalances through measures with adverse economic
consequences.[13] The IMF provides alternate sources of financing.
Upon the founding of the IMF, its three primary functions were: to oversee the fixed exchange
rate arrangements between countries,[14] thus helping national governments manage
their exchange rates and allowing these governments to prioritise economic growth,[15] and to
provide short-term capital to aid the balance of payments.[14] This assistance was meant to
prevent the spread of international economic crises. The IMF was also intended to help mend
the pieces of the international economy after the Great Depression and World War II.[15] As well,
to provide capital investments for economic growth and projects such as infrastructure.
The IMF's role was fundamentally altered by the floating exchange rates post-1971. It shifted to
examining the economic policies of countries with IMF loan agreements to determine if a
shortage of capital was due to economic fluctuations or economic policy. The IMF also
researched what types of government policy would ensure economic recovery.[16] A particular
concern of the IMF was to prevent financial crisis, such as those in Mexico 1982, Brazil in 1987,
East Asia in 1997–98 and Russia in 1998, from spreading and threatening the entire global
financial and currency system. The challenge was to promote and implement policy that
reduced the frequency of crises among the emerging market countries, especially the middle-
income countries which are vulnerable to massive capital outflows.[17] Rather than maintaining a
position of oversight of only exchange rates, their function became one of surveillance of the
overall macroeconomic performance of member countries. Their role became a lot more active
because the IMF now manages economic policy rather than just exchange rates.
In addition, the IMF negotiates conditions on lending and loans under their policy
of conditionality,[14] which was established in the 1950s.[15] Low-income countries can borrow
on concessional terms, which means there is a period of time with no interest rates, through the
Extended Credit Facility (ECF), the Standby Credit Facility (SCF) and the Rapid Credit Facility
(RCF). Nonconcessional loans, which include interest rates, are provided mainly through Stand-
By Arrangements (SBA), the Flexible Credit Line (FCL), the Precautionary and Liquidity Line
(PLL), and the Extended Fund Facility. The IMF provides emergency assistance via the Rapid
Financing Instrument (RFI) to members facing urgent balance-of-payments needs.[18]
Surveillance of the global economy[edit]
The IMF is mandated to oversee the international monetary and financial system and monitor
the economic and financial policies of its member countries.[19] This activity is known as
surveillance and facilitates international co-operation.[20] Since the demise of the Bretton Woods
system of fixed exchange rates in the early 1970s, surveillance has evolved largely by way of
changes in procedures rather than through the adoption of new obligations.[19] The
responsibilities changed from those of guardian to those of overseer of members’ policies.
The Fund typically analyses the appropriateness of each member country’s economic and
financial policies for achieving orderly economic growth, and assesses the consequences of
these policies for other countries and for the global economy.[19]

IMF Data Dissemination Systems participants:

IMF member using SDDS

IMF member using GDDS

IMF member, not using any of the DDSystems

 non-IMF entity using SDDS

non-IMF entity using GDDS

no interaction with the IMF

In 1995 the International Monetary Fund began work on data dissemination standards with the
view of guiding IMF member countries to disseminate their economic and financial data to the
public. The International Monetary and Financial Committee (IMFC) endorsed the guidelines for
the dissemination standards and they were split into two tiers: The General Data Dissemination
System (GDDS) and the Special Data Dissemination Standard (SDDS).
The executive board approved the SDDS and GDDS in 1996 and 1997 respectively, and
subsequent amendments were published in a revised Guide to the General Data Dissemination
System. The system is aimed primarily at statisticians and aims to improve many aspects of
statistical systems in a country. It is also part of the World Bank Millennium Development
Goals and Poverty Reduction Strategic Papers.
The primary objective of the GDDS is to encourage member countries to build a framework to
improve data quality and statistical capacity building to evaluate statistical needs, set priorities in
improving the timeliness, transparency, reliability and accessibility of financial and economic
data. Some countries initially used the GDDS, but later upgraded to SDDS.
Some entities that are not themselves IMF members also contribute statistical data to the
systems:

 Palestinian Authority – GDDS

 Hong Kong – SDDS
 Macau – GDDS[21]
 EU institutions:
 the European Central Bank for the Eurozone – SDDS
 Eurostat for the whole EU – SDDS, thus providing data from Cyprus (not using any
DDSystem on its own) and Malta (using only GDDS on its own)
Conditionality of loans[edit]
IMF conditionality is a set of policies or conditions that the IMF requires in exchange for financial
resources.[14] The IMF does require collateral from countries for loans but also requires the
government seeking assistance to correct its macroeconomic imbalances in the form of policy
reform.[22] If the conditions are not met, the funds are withheld.[14][23] The concept of conditionality
was introduced in a 1952 Executive Board decision and later incorporated into the Articles of
Agreement.
Conditionality is associated with economic theory as well as an enforcement mechanism for
repayment. Stemming primarily from the work of Jacques Polak, the theoretical underpinning of
conditionality was the "monetary approach to the balance of payments".[15]
Structural adjustment[edit]
Further information: Structural adjustment

Some of the conditions for structural adjustment can include:

 Cutting expenditures, also known as austerity.

 Focusing economic output on direct export and resource extraction,
 Devaluation of currencies,
 Trade liberalisation, or lifting import and export restrictions,
 Increasing the stability of investment (by supplementing foreign direct investment with the
opening of domestic stock markets),
 Balancing budgets and not overspending,
 Removing price controls and state subsidies,
 Privatization, or divestiture of all or part of state-owned enterprises,
 Enhancing the rights of foreign investors vis-a-vis national laws,
 Improving governance and fighting corruption.
These conditions are known as the Washington Consensus.
Benefits[edit]
These loan conditions ensure that the borrowing country will be able to repay the IMF and that
the country will not attempt to solve their balance-of-payment problems in a way that would
negatively impact the international economy.[24][25] The incentive problem of moral hazard—
when economic agents maximise their own utility to the detriment of others because they do not
bear the full consequences of their actions—is mitigated through conditions rather than
providing collateral; countries in need of IMF loans do not generally possess internationally
valuable collateral anyway.[25]
Conditionality also reassures the IMF that the funds lent to them will be used for the purposes
defined by the Articles of Agreement and provides safeguards that country will be able to rectify
its macroeconomic and structural imbalances.[25] In the judgment of the IMF, the adoption by the
member of certain corrective measures or policies will allow it to repay the IMF, thereby
ensuring that the resources will be available to support other members.[23]
As of 2004, borrowing countries have had a very good track record for repaying credit extended
under the IMF's regular lending facilities with full interest over the duration of the loan. This
indicates that IMF lending does not impose a burden on creditor countries, as lending countries
receive market-rate interest on most of their quota subscription, plus any of their own-currency
subscriptions that are loaned out by the IMF, plus all of the reserve assets that they provide the
IMF.[13]

History[edit]
The IMF was originally laid out as a part of the Bretton Woods system exchange agreement in
1944.[26] During the Great Depression, countries sharply raised barriers to trade in an attempt to
improve their failing economies. This led to the devaluation of national currencies and a decline
in world trade.[27]
This breakdown in international monetary co-operation created a need for oversight. The
representatives of 45 governments met at the Bretton Woods Conference in the Mount
Washington Hotel in Bretton Woods, New Hampshire, in the United States, to discuss a
framework for postwar international economic co-operation and how to rebuild Europe.
There were two views on the role the IMF should assume as a global economic institution.
American delegate Harry Dexter White foresaw an IMF that functioned more like a bank, making
sure that borrowing states could repay their debts on time.[28] Most of White's plan was
incorporated into the final acts adopted at Bretton Woods. British economist John Maynard
Keynes imagined that the IMF would be a cooperative fund upon which member states could
draw to maintain economic activity and employment through periodic crises. This view
suggested an IMF that helped governments and to act as the United States government had
during the New Deal in response to World War II.
The IMF formally came into existence on 27 December 1945, when the first 29
countries ratified its Articles of Agreement.[29] By the end of 1946 the IMF had grown to 39
members.[30] On 1 March 1947, the IMF began its financial operations,[31] and on 8 May France
became the first country to borrow from it.[30]
The IMF was one of the key organisations of the international economic system; its design
allowed the system to balance the rebuilding of international capitalism with the maximisation of
national economic sovereignty and human welfare, also known as embedded liberalism.[15]The
IMF's influence in the global economy steadily increased as it accumulated more members. The
increase reflected in particular the attainment of political independence by many African
countries and more recently the 1991 dissolution of the Soviet Union because most countries in
the Soviet sphere of influence did not join the IMF.[27]
The Bretton Woods system prevailed until 1971, when the United States government
suspended the convertibility of the US$ (and dollar reserves held by other governments) into
gold. This is known as the Nixon Shock.[27] The changes to the IMF articles of agreement
reflecting these changes were ratified by the 1976 Jamaica Accords.
Since 2000[edit]
The IMF provided two major lending packages in the early 2000s to Argentina (during the 1998–
2002 Argentine great depression) and Uruguay (after the 2002 Uruguay banking
crisis).[32] However, by the mid-2000s, IMF lending was at its lowest share of world GDP since
the 1970s.[33]
In May 2010, the IMF participated, in 3:11 proportion, in the first Greek bailout that totalled
€110 billion, to address the great accumulation of public debt, caused by continuing large public
sector deficits. As part of the bailout, the Greek government agreed to adopt austerity measures
that would reduce the deficit from 11% in 2009 to "well below 3%" in 2014.[34] The bailout did not
include debt restructuring measures such as a haircut, to the chagrin of the Swiss, Brazilian,
Indian, Russian, and Argentinian Directors of the IMF, with the Greek authorities themselves (at
the time, PM George Papandreou and Finance Minister Giorgos Papakonstantinou) ruling out a
haircut.[35]
A second bailout package of more than €100 billion was agreed over the course of a few
months from October 2011, during which time Papandreou was forced from office. The so-
called Troika, of which the IMF is part, are joint managers of this programme, which was
approved by the Executive Directors of the IMF on 15 March 2012 for SDR23.8 billion,[36] and
which saw private bondholders take a haircutof upwards of 50%. In the interval between May
2010 and February 2012 the private banks of Holland, France and Germany reduced exposure
to Greek debt from €122 billion to €66 billion.[35][37]
As of January 2012, the largest borrowers from the IMF in order were Greece, Portugal, Ireland,
Romania, and Ukraine.[38]
On 25 March 2013, a €10 billion international bailout of Cyprus was agreed by the Troika, at the
cost to the Cypriots of its agreement: to close the country's second-largest bank; to impose a
one-time bank deposit levy on Bank of Cyprus uninsured deposits.[39][40] No insured deposit of
€100k or less were to be affected under the terms of a novel bail-in scheme.[41][42]
The topic of sovereign debt restructuring was taken up by the IMF in April 2013 for the first time
since 2005, in a report entitled "Sovereign Debt Restructuring: Recent Developments and
Implications for the Fund’s Legal and Policy Framework".[43] The paper, which was discussed by
the board on 20 May,[44] summarised the recent experiences in Greece, St Kitts and Nevis,
Belize, and Jamaica. An explanatory interview with Deputy Director Hugh Bredenkamp was
published a few days later,[45] as was a deconstruction by Matina Stevis of the Wall Street
Journal.[46]
In the October 2013 Fiscal Monitor publication, the IMF suggested that a capital levy capable
of reducing Euro-area government debt ratios to "end-2007 levels" would require a very high tax
rate of about 10%.[47]
The Fiscal Affairs department of the IMF, headed at the time by Acting Director Sanjeev
Gupta, produced a January 2014 report entitled "Fiscal Policy and Income Inequality" that
stated that "Some taxes levied on wealth, especially on immovable property, are also an option
for economies seeking more progressive taxation ... Property taxes are equitable and efficient,
but underutilized in many economies ... There is considerable scope to exploit this tax more
fully, both as a revenue source and as a redistributive instrument."[48]
At the end of March 2014, the IMF secured an $18 billion bailout fund for the provisional
government of Ukraine in the aftermath of the 2014 Ukrainian revolution.[49][50]

Member countries[edit]

IMF member states

IMF member states not accepting the obligations of Article VIII, Sections 2, 3, and 4[51]

Not all member countries of the IMF are sovereign states, and therefore not all "member
countries" of the IMF are members of the United Nations.[52] Amidst "member countries" of the
IMF that are not member states of the UN are non-sovereign areas with special jurisdictions that
are officially under the sovereignty of full UN member states, such as Aruba, Curaçao, Hong
Kong, and Macau, as well as Kosovo.[53][54] The corporate members appoint ex-officio voting
members, who are listed below. All members of the IMF are also International Bank for
Reconstruction and Development (IBRD) members and vice versa.[citation needed]
Former members are Cuba (which left in 1964),[55] and the Republic of China (Taiwan), which
was ejected from the UN in 1980 after losing the support of then United States President Jimmy
Carter and was replaced by the People's Republic of China.[56] However, "Taiwan Province of
China" is still listed in the official IMF indices.[57]
Apart from Cuba, the other UN states that do not belong to the IMF are Andorra, Liechtenstein,
Monaco and North Korea.
The former Czechoslovakia was expelled in 1954 for "failing to provide required data" and was
readmitted in 1990, after the Velvet Revolution. Poland withdrew in 1950—allegedly pressured
by the Soviet Union—but returned in 1986.[58]
Qualifications[edit]
Any country may apply to be a part of the IMF. Post-IMF formation, in the early postwar period,
rules for IMF membership were left relatively loose. Members needed to make periodic
membership payments towards their quota, to refrain from currency restrictions unless granted
IMF permission, to abide by the Code of Conduct in the IMF Articles of Agreement, and to
provide national economic information. However, stricter rules were imposed on governments
that applied to the IMF for funding.[15]
The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates
secured at rates that could be adjusted only to correct a "fundamental disequilibrium" in the
balance of payments, and only with the IMF's agreement.[59]
Some members have a very difficult relationship with the IMF and even when they are still
members they do not allow themselves to be monitored.[citation needed]
Benefits[edit]
Member countries of the IMF have access to information on the economic policies of all member
countries, the opportunity to influence other members’ economic policies, technical
assistance in banking, fiscal affairs, and exchange matters, financial support in times of
payment difficulties, and increased opportunities for trade and investment.[60]

IMF and globalization[edit]

Globalization encompasses three institutions: global financial markets and transnational
companies, national governments linked to each other in economic and military alliances led by
the United States, and rising "global governments" such as World Trade Organization (WTO),
IMF, and World Bank.[85] Charles Derber argues in his book People Before Profit,"These
interacting institutions create a new global power system where sovereignty is globalized, taking
power and constitutional authority away from nations and giving it to global markets and
international bodies".[85] Titus Alexander argues that this system institutionalises global
inequality between western countries and the Majority World in a form of global apartheid, in
which the IMF is a key pillar.[86]
The establishment of globalised economic institutions has been both a symptom of and a
stimulus for globalisation. The development of the World Bank, the IMF regional development
banks such as the European Bank for Reconstruction and Development (EBRD), and
multilateral trade institutions such as the WTO signals a move away from the dominance of the
state as the exclusive unit of analysis in international affairs. Globalization has thus been
transformative in terms of a reconceptualising of state sovereignty.[87]
Following United States President Bill Clinton's administration's aggressive
financial deregulation campaign in the 1990s, globalisation leaders overturned longstanding
restrictions by governments that limited foreign ownership of their banks, deregulated currency
exchange, and eliminated restrictions on how quickly money could be withdrawn by foreign
investors.[85]
Fund report in May 2015, the world's governments indirectly subsidise fossil fuel companies with
$5.3tn (£3.4tn) a year. Most this is due to polluters not paying the costs imposed on
governments by the burning of coal, oil and gas: air pollution, health problems, the floods,
droughts and storms driven by climate change.[88]
Function and policies[edit]
The IMF is only one of many international organisations, and it is a generalist institution that
deals only with macroeconomic issues; its core areas of concern in developing countriesare
very narrow. One proposed reform is a movement towards close partnership with other
specialist agencies such as UNICEF, the Food and Agriculture Organization (FAO), and the
United Nations Development Program (UNDP).[102]
Jeffrey Sachs argues in The End of Poverty that the IMF and the World Bank have "the brightest
economists and the lead in advising poor countries on how to break out of poverty, but the
problem is development economics".[102] Development economics needs the reform, not the
IMF. He also notes that IMF loan conditions should be paired with other reforms—e.g., trade
reform in developed nations, debt cancellation, and increased financial assistance for
investments in basic infrastructure.[102] IMF loan conditions cannot stand alone and produce
change; they need to be partnered with other reforms or other conditions as applicable.
Impact on access to food[edit]
A number of civil society organisations[124] have criticised the IMF's policies for their impact on
access to food, particularly in developing countries. In October 2008, former United States
president Bill Clinton delivered a speech to the United Nations on World Food Day, criticising
the World Bank and IMF for their policies on food and agriculture:
We need the World Bank, the IMF, all the big foundations, and all the governments to admit
that, for 30 years, we all blew it, including me when I was president. We were wrong to believe
that food was like some other product in international trade, and we all have to go back to a
more responsible and sustainable form of agriculture.

— Former U.S. president Bill Clinton, Speech at United Nations World Food Day, October 16,
2008[125]

The FPIF remarked that there is a recurring pattern: "the destabilization of peasant producers by
a one-two punch of IMF-World Bank structural adjustment programs that gutted government
investment in the countryside followed by the massive influx of subsidized U.S. and European
Union agricultural imports after the WTO’s Agreement on Agriculture pried open markets."[126]
Impact on public health[edit]
A 2009 study concluded that the strict conditions resulted in thousands of deaths in Eastern
Europe by tuberculosis as public health care had to be weakened. In the 21 countries to which
the IMF had given loans, tuberculosis deaths rose by 16.6%.[127]
In 2009, a book by Rick Rowden titled The Deadly Ideas of Neoliberalism: How the IMF has
Undermined Public Health and the Fight Against AIDS, claimed that the IMF's monetarist
approach towards prioritising price stability (low inflation) and fiscal restraint (low budget
deficits) was unnecessarily restrictive and has prevented developing countries from scaling up
long-term investment in public health infrastructure. The book claimed the consequences have
been chronically underfunded public health systems, leading to demoralising working conditions
that have fuelled a "brain drain" of medical personnel, all of which has undermined public health
and the fight against HIV/AIDS in developing countries.[128]
In 2016, the IMF's research department published a report titled "Neoliberalism: Oversold?"
which, while praising some aspects of the "neoliberal agenda," claims that the organisation has
been "overselling" fiscal austerity policies and financial deregulation, which they claim has
exacerbated both financial crises and economic inequality around the world.[129][130][131]
Impact on environment[edit]
IMF policies have been repeatedly criticised for making it difficult for indebted countries to say
no to environmentally harmful projects that nevertheless generate revenues such as oil, coal,
and forest-destroying lumber and agriculture projects. Ecuador, for example, had to defy IMF
advice repeatedly to pursue the protection of its rainforests, though paradoxically this need was
cited in the IMF argument to provide support to Ecuador. The IMF acknowledged this paradox in
the 2010 report that proposed the IMF Green Fund, a mechanism to issue special drawing
rights directly to pay for climate harm prevention and potentially other ecological protection as
pursued generally by other environmental finance.[132]
While the response to these moves was generally positive[133] possibly because ecological
protection and energy and infrastructure transformation are more politically neutral than
pressures to change social policy. Some experts voiced concern that the IMF was not
representative, and that the IMF proposals to generate only US$200 billion a year by 2020 with
the SDRs as seed funds, did not go far enough to undo the general incentive to pursue
destructive projects inherent in the world commodity trading and banking systems—criticisms
often levelled at the World Trade Organization and large global banking institutions.
In the context of the European debt crisis, some observers noted that Spain and California, two
troubled economies within Europe and the United States, and also Germany, the primary and
politically most fragile supporter of a euro currency bailout would benefit from IMF recognition of
their leadership in green technology, and directly from Green Fund–generated demand for their
exports, which could also improve their credit ratings.

https://www.investopedia.com/terms/i/imf.asp

What is the 'International Monetary Fund - IMF'

The International Monetary Fund is an international organization that aims to promote global
economic growth and financial stability, to encourage international trade, and to reduce poverty.

BREAKING DOWN 'International Monetary Fund - IMF'

The International Monetary Fund (IMF) is based in Washington, D.C. and currently consists of
189 member countries, each of which has representation on the IMF's executive board in
proportion to its financial importance, so that the most powerful countries in the global economy
have the most voting power.

The IMF's website describes its mission as "to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote high employment and sustainable
economic growth, and reduce poverty around the world."

IMF Activities

The IMF's primary methods for achieving these goals are monitoring, capacity building, and
lending.

Surveillance
The IMF collects massive amounts of data on national economies, international trade, and the
global economy in aggregate, as well as providing regularly updated economic forecasts at the
national and international level. These forecasts, published in the World Economic Outlook, are
accompanied by lengthy discussions of the effect of fiscal, monetary and trade policies on
growth prospects and financial stability.

Capacity Building

The IMF provides technical assitance, training and policy advice to member countries through
its capacity building programs. These programs include training in data collection and analysis,
which feed into the IMF's project of monitoring national and global economies.

Lending

The IMF makes loans to countries that are experiencing economic distress in order to prevent or
mitigate financial crises. Members contribute the funds for this lending to a pool based on a
quota system. These funds total around SDR 475 billion ($645 billion) as of Sept. 2017 (IMF
assets are denominated in special drawing rights, a kind of quasi-currency that is comprised of
set proportions of the world's reserve currencies).

IMF funds are often conditional on recipients making reforms to increase their growth potential
and financial stability. Structural adjustement programs, as these conditional loans are known,
have attracted criticism for exacerbating poverty and reproducing the structures of colonialism.

History of the IMF

The IMF was originally created in 1945 as part of the Bretton Woods agreement, which
attempted to encourage international financial cooperation by introducing a system of
convertible currencies at fixed exchange rates, with the dollar redeemable for gold at $35 per
ounce. The IMF oversaw this system: for example, a country was free to readjust its exchange
rate by up to 10% in either direction, but larger changes required the IMF's permission.

The IMF also acted as a gatekeeper: countries were not eligible for membership in the
International Bank for Reconstruction and Development (IBRD) – a World Bank forerunner that
the Bretton Woods agreement created in order to fund the reconstruction of Europe after World
War II – unless they were members of the IMF.

Since the Bretton Woods system collapsed in the 1970s, the IMF has promoted the system
of floating exchange rates, meaning that market forces determine the value of currencies
relative to one another. This system continues to be in place today.

https://www.economicshelp.org/blog/glossary/imf/

Role of IMF
Tejvan Pettinger November 28, 2016

The International Monetary Fund is a global organisation founded in 1944 in the post-war
economic settlement which included the Bretton-Woods system of managed exchange rates.
J.M.Keynes and Harry Dexter White both played an important role in its development.
 Its primary aim is to help stabilise exchange rates and provide loans to countries in need. Nearly
all members of the United Nations are members of the IMF with a few exceptions such as Cuba,
Lichtenstein and Andorra.

 The IMF is independent of the World Bank although both are United Nations agencies and both
are aiming to increase living standards. The World Bank concentrates on long-term loans to
developing countries.

Functions of IMF

1. International monetary cooperation.

2. Promote exchange rate stability.
3. To help deal with balance of payments adjustment
4. Help deal with economic crisis by providing international coordination – loans, plus advice.

What the IMF does in practice

1. Economic surveillance and monitoring. IMF produces reports on member countries

economies and suggests areas of weakness / possible danger (e.g. unbalanced economies with
large current account deficit/excess debt levels.. The idea is to work on crisis prevention by
highlighting areas of economic imbalance. A list of IMF reports on member countries are
available at IMF Countries

2. Loans to countries with a financial crisis. The IMF has $300 billion of loanable funds. This
comes from member countries who deposit a certain amount on joining. In times of
financial/economic crisis, the IMF may be willing to make available loans as part of a financial
readjustment.

 The IMF has arranged more than $180 billion in bailout packages since 1997.
 In 1976, the IMF gave a loan to the UK as the Pound Sterling was coming under pressure. The
loan came with conditions to reduce the budget deficit and raise interest rates to defend the
value of the Pound. See: IMF Loan to UK 1976.
 In 2010/11 the IMF played a major role in the bailout to the Greek economy, which involved a
total loan of up to $110 billion.

3. Conditional loans/structural adjustment. When giving loans, the IMF usually insist on
certain criteria being met. These can include policies to reduce inflation (tightening of monetary
policy)

 Reduce inflation (tightening of monetary policy)

 Deficit-reducing policies (higher tax)
 Supply-side policies, such as privatisation, deregulation and improved tax collection.
 Removing price controls
 Free trade – removing tariff barriers
 Devaluation of currency to reduce current account deficit.
 See also: Washington Consensus

4. Technical assistance and economic training. The IMF produce many reports and
publications. They can also offer support for local economies. More on technical assistance of
IM
How is the IMF Financed?

The IMF is financed by member countries who contribute funds on joining. They can also
increase this throughout their membership. The IMF can also ask its member countries for more
money. IMF financial resources have risen from about $50 billion in 1950 to nearly $300 billion
last year, sourced from contributions from its 183 members.This initial amount depends on the
size of the countries economy. E.g. the US deposited the largest amount with the IMF. The US
currently has 16% of voting rights at the IMF, a reflection of its quotas deposited with IMF. The
UK has 4% of IMF Voting rights. Loans at a discounted rate are also available to developing
countries to ‘deal with poverty reduction.’

Special Drawing Rights SDR

The IMF uses Special drawing rights to provide a unit for the amount of foreign currency
member states can draw on. SDRs are defined in terms of a basket of major currencies
including Euro, Pound Sterling, Japanese yen and US Dollar.

https://accountlearning.com/important-roles-of-international-monetary-fund/

Important Roles of International Monetary

International Monetary Fund (IMF) played a significant role in stabilizing the exchange rates
thereby facilitating international payment adjustments. Economists across the world have
commended its role in enforcing monetary discipline among its members.

IMF brings Stability in Exchange rate:

The IMF has laid down a clear guidance of exchange rate policies. Its policies prevent the
member countries from making competitive devaluation to boost up exports. As a result of all
these, the system of exchange under the IMF is stable.

IMF role in development of international trade:

The IMF has been instrumental to the growth of international trade. It acts as the reservoir of the
currencies of all the member countries. A borrowing country can borrow the currency of another
country out of this reservoir. It extends loans in foreign exchange to the member countries for
financing the current transactions. It also provides technical advice on monetary and fiscal
matters. It conducts research studies and publishes them. This multilateral assistance helps
members in solving their problems in trade, thereby promoting international trade.

IMF is strict on multiple exchange rates:

The IMF does not permit the member countries to adopt multiple exchange rates leading to
restrictive practices. The system of exchange rate combines the element of stability with
flexibility. It maintains stability in exchange rates.

IMF’s Elaborate lending operations:

The main operation of the fund is lending to member countries. It has introduced a variety of
loan facilities to its members. Initially, the lending operations were confined only for solving the
problems of deficit payments. But now they have been remarkably extended. Member countries
can have regular facilities, concessional facilities and special facilities. Credit Tranches and
extended fund facility are some of the regular facilities. Structural adjustment facility and
enhanced structural adjustment facility are some concessional schemes offered to the member
countries. The special facilities offered by the IMF fund include compensatory and contingency
financing facility, systematic transformation facility and contingency credit line.
IMF role in Currency convertibility:
With the charges introduced after 1973 in the international monetary system, a member can peg
its currency to

 either a single major currency or

 a basket of currencies or
 allow it to float independently.
A currency is said to be floating when its is left free to find its own parity in the international
market. The IMF is the catalyst in the convertibility of currencies. It endeavors to achieve full
global convertibility of currencies in the next decade. All developing countries will achieve full
convertibility.

IMF role in Consultation and guidance:

The IMF provides the necessary machinery for consultation and collaboration on international
monetary problems. Monetary, fiscal and financial problems and also matters relating to
exchange and trade affecting international payments are clearly studied. It deputes experts to
member countries to deal with the balance of payments problems. It also conducts short term
training courses on fiscal, monetary and balance of payments for personnel from member
nations.
IMF is a Boon to developing countries:
The IMF is a boon to developing countries. Less developed countries get enormous assistance
from IMF like

 Financial assistance to get rid of balance of payment deficits

 concessional financial assistance for promotion of exports
 suggestions for overcoming constraints in the development process
 Assistance in the formulation of development oriented monetary, fiscal, exchange and
trade policies
 extension of central banking advisory services to less developed countries towards the
improvement of functioning of their central banks
 institutional training for the personnel in member countries; and
  Special Drawing Rights (SDRs) to resolve the problem of international liquidity.

http://www.economicsdiscussion.net/international-monetary-fund/functions-international-
monetary-fund/12-major-functions-of-international-monetary-fund/13187

Function # 1. Fixation of Par Value of Currencies in terms of Gold or Dollar:

Every member country has to declare the par value of her currency in terms of US Dollars or in
gold.

The main objective of IMF is to maintain stability in exchange rates of the member countries.

In fact, the IMF fixes the maximum or minimum limit of the par values of various countries.

Function # 2. Alternation of Limit within Par Value:

There is over rigidity in the par values of the currencies of different countries. If Fund finds that
there is fundamental disequilibrium in the balance of payments of a country, it can change the
par values of its currency, A country is allowed to alter its basic par value within well defined
limits i.e. upto 10 per cent after making her intention known to the Fund.

Under certain circumstances, the Fund itself can make proportionate alterations in par values of
all the member countries.

Function # 3. Loans of Foreign Currency:

ADVERTISEMENTS:

The Fund realises that a stable exchange is very essential for the proper growth and expansion
of the free world trade. Therefore, it take-s steps to check the fluctuations in the par values by
eliminating the disequilibrium in the balance of payment of the member countries.

A member country can buy foreign currency from the Fund to tide over her temporary balance of
payments deficit. The Fund sells currencies to members against their subscriptions for short
period to enable them to remove the difficulties of the balance of payment.

Function # 4. Drawing Rights:

A member country during hardships of the balance of payments can buy the required foreign
currency from the Fund by offering more of its own currency over and above its original
subscription. The Fund provides both maximum and normal limits of financial assistance for a
short period. A member country can request for any currency under the credit line of 25 per cent
of its quota in one year.

This is known as gold tranche or reserve tranche drawing. But the full amount drawn under
these drawings should not exceed by 200 per cent of the Fund’s holdings of a country’s
currency quota. The member countries do not borrow more than 150 per cent of quota, because
any further borrowing in subject to increasing interference by the Fund.

Function # 4. Drawing Rights:

A member country during hardships of the balance of payments can buy the required foreign
currency from the Fund by offering more of its own currency over and above its original
subscription. The Fund provides both maximum and normal limits of financial assistance for a
short period. A member country can request for any currency under the credit line of 25 per cent
of its quota in one year.

This is known as gold tranche or reserve tranche drawing. But the full amount drawn under
these drawings should not exceed by 200 per cent of the Fund’s holdings of a country’s
currency quota. The member countries do not borrow more than 150 per cent of quota, because
any further borrowing in subject to increasing interference by the Fund.

Function # 5. Stand by Arrangements:

Under the agreement of the Fund guarantee is given to provide a specific sum of money for a
given period of time to a member country. Normally, the satisfaction as to the legitimacy and
purpose of drawing is considered before a standby is granted. Since the standby is a part of the
quota, it forms a part of the total drawing power.

Function # 6. Liquidity of Fund’s Resources:

If the borrowing countries are buying the currency of other countries, the Fund may
accommodate such currencies as are not demanded. In fact, the Fund will not be able to act as
a reserve Fund. Thus, it becomes necessary that the Fund should keep its resources in a liquid
form so that the borrowing country may repurchasing of domestic currency.

There are certain rules to maintain the liquidity of resources such as:
(i) Any member country can buy the currency of any other member country by depositing gold in
the Fund.
(ii) If the currency of a country with the Fund exceeds its quota, then that country can purchase
its own currency in exchange for gold.

ADVERTISEMENTS:

(iii) Every country, under special circumstances, can buy a part of its own currency from the
Fund in exchange for gold or other currency.

Function # 7. Currency in Short Supply:

It is possible that a country’s currency may be in short supply. Short supply of a currency in
foreign exchange market indicates a favourable balance of payment. If the Fund finds that a
particular member country is having a surplus in its balance of payment and its supply of
currency is inadequate relative to demand, the Fund may ask the surplus country to revalue its
currency.

On the contrary when the Fund declares a particular currency as scarce, the member country
revalues the currency, thus, raising costs and prices. This would increase its imports and the
Fund can operate its operations more effectively.

Function # 8. Position of Gold in Fund’s Scheme:

Under the Fund’s scheme, status was given to gold as every member country has to deposit in
gold the Fund upto 25 percent of its quota or 10 per cent of its gold holdings. Under the
agreement of the Fund, the par values of currencies of members are expressed in terms of gold,
SDR and the US Dollars. In Fund’s scheme, gold had been retained as a basis of determination
of the par values of member’s currencies.

A member can deal with the Fund “only through its treasury, central bank, stabilisation fund or
other similar agency”. An alteration in par value is permitted only within limits. If the fund is short
of any particular currency, it can purchase the same for gold. The value of gold has been fixed
by the Fund at 35 dollars per five ounce.

According to Prof. Williams, Fund’s Planning is akin to gold standard. But according to Lord
Keynes, Under Fund’s planning, a system has been created, by means of international
agreement, that is far removed from the old political gold standard system.

It is so because:
(a) It is not based on gold currency as was gold standard.
(b) Under Fund’s planning, value of the currency is not fixed in terms of gold forever.

(c) Under gold standard, gold occupied the position of a master but under Fund’s planning it is
given the place of a servant. By virtue of the amendments made in the regulations of the Fund,
since 1976 gold has no place in Fund’s planning.

Function # 9. A Central Bank’s Bank:

IMF may be described as a bank of Central Banks of different countries. It collects the
resources of the various Central Banks in the same way in which a country’s Central Bank
collects cash reserves of all commercial banks in a country.

Function # 10. Facilities during the Transition Period:

The Fund gets all the exchange control removed so that the world trade may flourish smoothly.
During the transitional period, the Fund has empowered the member countries to impose such
restrictions on imports and foreign exchanges according to its necessity.

As the transitional period is over, member countries are supposed to remove the restrictions
imposed on international trade and foreign exchanges. Therefore, the member countries can
continue with their control to the desirability of the Fund.

Function # 11. Training:

The Fund also imparts training to the representatives of member-countries. This training is
imported to the senior officers of the central banks and Finance Departments.

Function # 12. Facilities during Emergency:

Although IMF is opposed to any sort of controls either on foreign exchange or foreign trade. Still
member-countries have been given the right to resort to these controls during emergency in the
hope that they will lift it as early as the situation warranted.