- The International Monetary Fund (IMF) is an organization 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.
- Created in 1945, the IMF is governed by and accountable to the 189 countries that make up its near-global membership.
- Formed in 1944 at the Bretton Woods Conference primarily by the ideas of Harry Dexter White and John Maynard Keynes,
- It now plays a central role in the management of balance of payments difficulties and international financial crises.
- The IMF’s primary purpose 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 Fund’s mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.
Working with Quotas
- 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, the IMF works to improve the economies of its member countries.
- The organization’s objectives stated in the Articles of Agreement are: 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.
- IMF funds come from two major sources: quotas and loans. Quotas, which are pooled funds of member nations, generate most IMF funds.
- The size of a member’s quota depends on its economic and financial importance in the world.
- Nations with larger economic importance have larger quotas.
- The quotas are increased periodically as a means of boosting the IMF’s resources in the form of special drawing rights.
Special Drawing Rights (SDR)
- Special drawing rights (SDRs) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF)
- SDR is not a currency, instead represents a claim to currency held by IMF member countries for which they may be exchanged.
- The value of an SDR is defined by a weighted currency basket of four major currencies: the US dollar, the euro, the British pound, the Chinese Yuan and the Japanese yen
- Central bank of member countries held SDR with IMF which can be used by them to access funds from IMF in case of financial crises in their domestic market
- Gold remains an important asset in the reserve holdings of several countries, and the IMF is still one of the world’s largest official holders of gold.
- While quota subscriptions of member countries are the IMF’s main source of financing, the Fund can supplement its quota resources through borrowing if it believes that they might fall short of members’ needs.
Conditionality of loans
- IMF conditionality is a set of policies or conditions that the IMF requires in exchange for financial resources.
- 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.
- If the conditions are not met, the funds are withheld. 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.
Some of the conditions for structural adjustment can include:
- Cutting expenditures or raising revenues, 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.
- 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.
- 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.
- All members of the IMF are also International Bank for Reconstruction and Development (IBRD) members and vice versa.
- Apart from Cuba, the other UN states that do not belong to the IMF are Andorra, Liechtenstein, Monaco and North Korea.
- 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.
- Voting power in the IMF is based on a quota system. Each member has a number of basic votes (each member’s number of basic votes equals 5.502% of the total votes), plus one additional vote for each special drawing right (SDR) of 100,000 of a member country’s quota.
- The special drawing right is the unit of account of the IMF and represents a claim to currency.
- It is based on a basket of key international currencies.
- The basic votes generate a slight bias in favour of small countries, but the additional votes determined by SDR outweigh this bias.
- Changes in the voting shares require approval by a super-majority of 85% of voting power.
- IMF’s governance is an area of contention. For decades, Europe and the United States have guaranteed the helm of the IMF to a European and that of the World Bank to an American. The situation leaves little hope for ascendant emerging economies that, despite modest changes in 2015, do not have as large an IMF voting share as the United States and Europe.
- Conditions placed on loans are too intrusive and compromise the economic and political sovereignty of the receiving countries. ‘Conditionality’ refers to more forceful conditions, ones that often turn the loan into a policy tool. These include fiscal and monetary policies, including such issues as banking regulations, government deficits, and pension policy. Many of these changes are simply politically impossible to achieve because they would cause too much domestic opposition.
- IMF imposed the policies on countries without understanding the distinct characteristics of the countries that made those policies difficult to carry out, unnecessary, or even counter-productive.
- Policies were imposed all at once, rather than in an appropriate sequence. IMF demands that countries it lends to privatize government services rapidly. It results in a blind faith in the free market that ignores the fact that the ground must be prepared for privatization.
- 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 countries are 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).
- 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.
- IMF loan conditions cannot stand alone and produce change; they need to be partnered with other reforms or other conditions as applicable.
- The criticism of the US-and-Europe-dominated IMF has led to what some consider ‘disenfranchising the world’ from the governance of the IMF.