What is the International Monetary Fund?
The International Monetary Fund (IMF) is a multilateral financial institution, established in 1945 as a specialised agency of the United Nations.
The statutory purposes of the IMF include promoting the balanced expansion of world trade, the stability of exchange rates, the avoidance of competitive currency devaluations, and the orderly correction of a country's balance of payments problems. In this way, it acts as the regulator and central institution of the international monetary system.
The IMF aims to prevent financial crises, by encouraging the adoption of sound economic policies by member states and monitoring their financial sectors and macroeconomic performance, and the state of the world economy more widely. It also provides technical assistance for member governments and central banks: for example, the IMF assisted the former Soviet republics to reconstruct their treasury systems during the transition to market economies.
Furthermore, the IMF – as its name suggests – provides a fund from which member countries can borrow to address balance of payments problems and to assist structural and policy reform. Unlike the World Bank, which provides development loans for specific projects, the IMF ties its loans to specific policy objectives.
The provision of an IMF loan to a country seeking financial assistance can be important not simply for the financial relief provided by the loan itself, but also due to the vote of financial confidence this approval represents, acting as a mechanism for attracting other loans.
The International Monetary Fund was first proposed at a 1944 meeting of 45 countries at Bretton Woods in the USA, with the intention of restoring international monetary relations at the end of the Second World War and encouraging the sort of economic co-operation that would prevent a recurrence of the crises that led to the Great Depression of the 1930s.
That decade had seen governments responding to the economic downturn by restricting imports, devaluing their currencies and restricting rights to hold foreign exchange – exacerbating the worsening situation through a "beggar thy neighbour" approach.
The IMF was formally founded a year later in 1945 at the Bretton Woods conference (which also established the "Bretton Woods" exchange rate system), with 29 members, under the auspices of the United Nations. Membership required "quota subscriptions" of funds to be passed to the Fund, with voting power within the IMF proportional to subscriptions. In addition, from 1945 until the collapse of Bretton Woods in 1971, membership of the IMF required members to sign up to pegged exchange rates.
The IMF began operation on March 1, 1947, headquartered in Washington, DC. The former Axis powers of West Germany and Japan joined in 1951. Belgium was the first country to borrow from the IMF, when in 1952 it took advantage of the new Stand By Arrangements to bolster its currency reserves.
Since 1969, the IMF has used a reserve asset known as Special Drawing Rights as its accounting unit. The value of SDR was originally calculated on the basis of a formula reflecting the value of currencies of the 16 leading trading nations: today, it is based on the US dollar, the Japanese Yen, Pounds Sterling and the Euro.
The IMF played a key role in sustaining international economic stability during the energy crisis of the early 1970s and the Latin American debt crises of the 1980s. During this period, the IMF was often criticised as an instrument of Western big business and political interests. Following the collapse of the Soviet Union, the IMF assisted the new republics to convert to market economies, and admitted them as members in 1992.
In 1998, the IMF came in for considerable criticism when it was accused of exacerbating the Asia-Pacific economic crisis, by demanding that the troubled former "Asian tiger" economies raise their interest rates to record levels as a precondition of support.
World leaders meeting at the G8 summit in Gleneagles 2005 proposed that all debts owed by eligible heavily indebted poor countries to the International Monetary Fund, the African Development Fund and IDA should be cancelled. Consequently in November 2005 the IMF launched the Multilateral Debt Relief Initiative (MDRI) to implement the proposal.
In October 2008, International Monetary Fund managing director Dominique Strauss-Kahn stated that the IMF was ready to provide "rapid approval" of lending via its emergency financing procedures, in order to help its member countries during the present financial crisis. The IMF has more than $200 billion of loanable funds and can draw on additional resources through two standing borrowing arrangements.
The New Arrangements to Borrow (NAB) and the General Arrangements to Borrow (GAB) are credit arrangements between the IMF and a number of member countries and institutions who stand ready to provide supplementary resources to the IMF to deal with exceptional situations.
The Group of Twenty industrialised and emerging market economies agreed in April 2009 to triple the Fund's lending capacity to $750 billion, enabling it to inject extra liquidity into the world economy during this time of crisis.
In June 2011, French finance minister Christine Lagarde became the new managing director of the IMF. Ms Lagarde, who will serve for a five year term, is the first woman to head the organisation since its inception in 1944.
Towards the end of 2011 the IMF announced a set of reforms designed to increase the flexibility and scope of its lending toolkit. The reforms should enable the IMF to provide liquidity and emergency assistance to its members more rapidly and more effectively in times of crisis.
The reforms include replacing the Precautionary Credit Line (PCL) with the more flexible Precautionary and Liquidity Line (PLL) and consolidating the Emergency Natural Disaster Assistance and the Emergency Post-Conflict Assistance instruments under the new Rapid Financing Instrument (RFI), which may be used to support a full range of urgent balance of payments needs.
Ms Lagarde described the reforms as "another step toward creating an effective global financial safety net to deal with increased global interconnectedness."
The provision of policy advice by the International Monetary Fund has long been criticised by development economists for attempting to place a "one-size-fits-all" macroeconomic model on to any member state that seeks its help. The "conditionalities" attached to financial aid have often demanded austerity – high taxation and low public spending – and economic liberalisation, both internal and external.
Supporters of supply-side economics object to this focus on fiscal measures as the principal instruments of reform. At the same time, many development economists argue that the conditionalities frequently damage social stability and prevent the fostering of infrastructure, actually hindering economic development.
In this way, the IMF has been accused of ignoring human rights, democracy and labour rights. Its more extreme critics paint the IMF as a tool of multinational (and particularly American) corporations, insofar as its policies have been interpreted as keeping the developing world as a poor source of raw materials and markets for the West. The domination of the IMF by the USA (which provides 17.6 per cent of all quotas) also makes it appear to some as an instrument of politico-economic imperialism.
For these reasons, opposition to the IMF has been at the heart of the growth of the anti-globalisation movement since the late 1990s. In September 2002, 600 people were arrested in disturbances following protests at IMF and World Bank meetings in Washington.
Also, on occasion, adhering to the IMF's advice has led to economic disaster. Argentina, held up as a model economy by the IMF, experienced a major financial crisis in 2001. Argentina and its neighbour Brazil have been particularly critical of the IMF's solution of loans, and its opposition to higher spending on increasing productive capacity.
More recently the IMF was affected by a different kind of controversy when the former managing director, Dominique Strauss-Kahn, resigned in May 2011 following his arrest in New York on sexual assault charges, which he denied.
A ten-fold expansion of the International Monetary Fund’s New Arrangements to Borrow (NAB) took effect today.
The reforms increase the NAB from SDR 34 billion (about US$ billion]) to SDR 367.5 billion (about US$ billion) once all new participants have adhered to the expanded NAB, giving a major boost to the resources available for the International Monetary Fund (IMF) to lend to its members.
Source: IMF – 11 March 2011
“The IMF has served its 187 member countries well during the global economic and financial crisis, transforming itself in many positive ways. I will make it my overriding goal that our institution continues to serve its entire membership with the same focus and the same spirit…….
"The IMF must be relevant, responsive, effective, and legitimate, to achieve stronger and sustainable growth, macroeconomic stability, and a better future for all.”
Statement by Christine Lagarde on her selection as IMF Managing Director – June 2011