International Monetary Fund - Explained
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What is the International Monetary Fund (IMF)?
The International Monetary Fund (IMF) is similar to an international bank with the underlying purpose of fostering global monetary policy, commerce, and trade. The intended result is to increase employment levels, drive economic growth, and reduce poverty. The mission of IMF according to its website is "to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world."
The IMF makes loans to developing countries, provides stable exchange rates between currencies, establishes policies for currency exchange among commercial banks, conducts statistical and economic analysis of economies, and monitors economies while encouraging sound economic policies. Notably, the IMF makes loans to developing countries under the condition that borrowing countries make efforts to improve or correct internal systems causing economic imbalances. Structural and policy improvements may include: reduced governmental spending, import and export policy (such as tariffs), currency valuation, security market regulation, price controls, privatization, foreign investment provisions, and anti-corruption measures.
Based in Washington, D.C., the IMF has at present 189 member countries. Each country has representatives on the IMFs executive board. The number of representatives is base upon the countrys economic influence. Countries that are more powerful in global economy have most voting power, as their representation is more on the IMFs board.
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A Little More on the International Monetary Fund
The IMF achieves its goals by the following primary methods.
- Surveillance or monitoring: A vast amount of data is collected by the IMF. This includes information about the national economies, international trade, and the global economy in total. It also provides forecasts at the national and international level that are updated regularly. These are published in the World Economic Outlook. The effect of fiscal, monetary, and trade policies on growth scenarios and financial stability are also discussed at length along with these forecasts.
- Capacity building: Through its capacity building programs for its member countries, the IMF provides technical assistance, training and policy advice. The training focuses on data collection and analysis. This in turn helps IMF in its monitoring of national and global economies as discussed above.
- Lending: The IMF also lends money as loans to countries that are under economic distress so as to avoid or soften the financial crisis faced by the country. This lending is made possible by the contribution of member countries that is based on a quota system. As on September 2017, the IMF funds in this lending pool amount to a total of SDR 475 billion or $645 billion. The IMF has a separate denomination system that is comprised of set proportions of global reserve currencies. It is a quasi-currency system. The loan of IMF funds is most of the time conditional as the organization wants that the funds should only be used in making reforms which help in increasing the growth potential and financial stability of the recipient country. These conditional loans, or structural adjustment programs, are criticized widely for aggravating the situation of poverty and generating colonialism structures.
History of the IMF
As a part of the Bretton Woods agreement, IMF came into establishment in 1945. This agreement focussed on encouraging international financial cooperation. This was done by introducing convertible currencies at fixed rates. The dollar was redeemable for gold at a fixed rate of $35 per ounce of gold. This system was overseen by the IMF. A country was allowed to readjust its exchange rate by up to 10% in either direction. Any larger change than this required permission from the IMF.
It also behaved as a gatekeeper between the International Bank for Reconstruction and Development (IBRD) and the countries who wanted a membership here. This bank was a World Bank forerunner that was created by the Bretton Woods agreement. Its main purpose was to fund reconstruction in Europe after World War II. Unless the countries were a member of IMF, they were not eligible for IBRD membership.
After the collapse of Bretton Wood system in 1970s, the IMF endorsed the system of floating exchange rates. This means that the market forces determine the currency value relative to one another. This same system is used even now.