Learning objectives
It is an international organization that promotes international financial stability and monetary cooperation.
It provides financial assistance and advice to its member countries.
It facilitates international trade, promotes employment, and sustainable economic growth.
It helps to reduce global poverty.
The IMF is governed by and accountable to its member countries.
Being established in 1944 in the aftermath of the Great Depression of the 1930s, the IMF has played a part in shaping the global economy since the end of World War II. The IMF was established at the United Nations Bretton Woods Conference in New Hampshire, United States. The representatives from 44 countries were present in this conference and they decided to build a framework for international economic cooperation. They wanted to avoid repeating the competitive currency devaluations that contributed to the Great Depression of the 1930s.
The primary mission of the IMF is to ensure the stability of the international monetary system - the system of exchange rates and international payments that enables countries and their citizens to transact with each other.
The IMF is funded by quota subscriptions paid by member states. Depending on each member's economy, the size of their quota is determined. The larger the economy of the country, the larger its contribution. For example, the US contributes more than the Seychelles islands.
The quota determines the weight/influence each country has within the IMF including its voting rights and amount of financing it can receive from the IMF.
25% of each country's quota is paid in the form of Special Drawing Rights or SDRs which are a claim on the freely usable currencies of IMF members. If called upon by the IMF, a country can pay the rest of its quota in its local currency.
The Special Drawing Right (SDR) is an international reserve asset created by the IMF to supplement the official reserves of its member countries. Each member country is assigned a certain amount of SDRs based on how much the country contributes to the IMF. The SDR is not a currency. It is a potential claim on the freely usable currencies of IMF members. As such, SDR can provide a country with liquidity. It is a unit of account by which member states can exchange with one another in order to settle international accounts. The SDR can also be used in exchange for other freely traded currencies of IMF members. A country may do this when it has a deficit and needs more foreign currency to pay its international obligations. A basket of currencies define the SDR: the US dollar, Euro, Chinese Yuan, Japanese Yen, and the British Pound. The value of the SDR is adjusted daily against these currencies. The value of SDRs lies in the fact that member states commit to honor their obligations to use and accept SDRs. |
Before SDRs, the Bretton Woods system had been based on a fixed exchange rate and it was feared that there would not be enough reserves to finance global economic growth. Therefore, in 1969, the IMF created the SDRs to supplement the international reserves of the time, which were gold and the US dollar.
All of the accounting in the IMF is done in SDRs. Commercial banks accept SDR-denominated accounts.
The IMF is accountable to its member country governments.
At the top of its organizational structure is the Board of Governors, consisting of one governor and one alternate governor from each member country, usually the top officials from the central bank or finance ministry. The Board of Governors meets once a year at the IMF-World Bank Annual Meetings. Some of the governors serve on the International Monetary and Financial Committee (IMFC), which advises the IMF's Executive Board on the supervision and management of the international monetary and financial system.
The day-to-day work of the IMF is overseen by the members of its Executive Board and is supported by the IMF staff. The Managing Director is the head of the IMF staff and Chair of the Executive Board and is assisted by Deputy Managing Directors.
When a country applies to become a member of the IMF, the application is first assessed by the IMF's Executive Board who then submit a report to the Board of Governors of the IMF. This report includes recommendations in the form of a "membership resolution". These recommendations cover the amount of quota in the IMF, the form of payment of the subscription, and other customary terms and conditions of membership. After the Board of Governors has adopted the "membership resolution", the applicant state needs to take the legal steps required under its own law to enable it to sign the IMF's Articles of Agreement and to fulfill the obligations of IMF membership.
A member's quota in the IMF determines the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.
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.
It is a formal system used by the IMF to monitor member country policies as well as national, regional, and global economic and financial developments. This is done in order to maintain stability and prevent crises in the international monetary system. The IMF provides advice to member countries and promotes policies designed to foster economic stability, reduce vulnerability to economic and financial crises, and raise living standards.
One of the core responsibilities of the IMF is to provide loans to members countries experiencing actual or potential balance of payments problems. In close cooperation with the IMF, individual countries design their adjustment programs which are supported by IMF financing. The ongoing financial support from the IMF is dependent on effective implementation of these adjustments.
Through technical assistance and training, the IMF help member countries build better economic institutions and strengthen related human capacities. This includes, for example, designing and implementing more effective policies for taxation and administration, expenditure management, monetary and exchange rate policies, banking and financial system supervision and regulation, legislative frameworks, and economic statistics.
IMF lends money in form of three types of loans
1. Stand-by-Arrangement (SBA) - This loan finances a short-term balance of payments, usually between 12 to 24 months, but no more than 36 months.
2. Extended Fund Facility (EFF) - It is a medium-term arrangement by which countries can borrow a certain amount of money, typically over 4 to 10 years. It aims to address structural problems within the macroeconomy that are causing the chronic balance of payment inequities. The structural problems are addressed through financial and tax sector reform and the privatization of public enterprises.
3. Poverty Reduction and Growth Facility (PRGF) - It lays the foundations for economic development in the poorest of member countries to reduce poverty. Loans are administered with especially low-interest rates.
