INTERNATIONAL MONETARY FUND

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INTERNATIONAL MONETARY FUND

• by Didem Kurt

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The Origins of IMF

• The IMF was conceived in July 1944 at an
  international conference held at Bretton Woods,
  New Hampshire, U.S.A.
• Delegates from 44 governments agreed on a
  framework for economic cooperation partly
  designed to avoid a repetition of the disastrous
  economic policies that had contributed to the
  Great Depression of the 1930s.

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The Origins of IMF (contd)

• The IMF came into existence in December 1945.
• The IMF Articles of Agreement were heavily
  influenced by interwar experience of financial
  and price level instability and unemployment.

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The Origins of IMF (contd)

• The intention was to provide a mixture of
  discipline and flexibility.
• Countries that joined the IMF between 1945 and
  1971 agreed to tie their exchange rates to USD
  (35 an ounce). (Bretton Woods System)
• IMF was setup to oversee the system and
  facilitate its functioning by lending to
  countries with temporary BOP problems.

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Breakdown of Bretton Woods System

• Increases in U.S monetary growth to finance
  fiscal expenditures after the mid 1960s
• Loss of confidence in dollar and the termination
  of the dollars convertibility into gold.
• System forced other counties to import
  inflation from U.S.

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Growth in IMF membership
Current Membership 184 countries
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IMF's main responsibilities

• promoting international monetary cooperation
• facilitating the expansion and balanced growth of
  international trade
• promoting exchange stability

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IMF's main responsibilities (contd)

• assisting in the establishment of a multilateral
  system of payments
• making its resources available (under adequate
  safeguards) to members experiencing balance of
  payments difficulties

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Functions of IMF

• Surveillance is the regular dialogue and policy
  advice that the IMF offers to each of its
  members.
• Technical assistance to help member countries
  strengthen their capacity to design and implement
  effective policies.
• Financial assistance is available to give member
  countries the breathing room they need to correct
  balance of payments problems.

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Technical Assistance
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Financial AssistanceInstruments of IMF lending

• Stand-By Arrangements
• usually over 12-18 months
• to deal with a short-term balance of payments
  problem.
• Extended Fund Facility
• usually over three to four years
• to help it tackle structural economic problems
  that are causing serious weaknesses in its
  balance of payments.

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Financial AssistanceInstruments of IMF lending

• Poverty Reduction and Growth Facility
• A low-interest facility to help the poorest
  member countries facing protracted balance of
  payments problems
• Supplemental Reserve Facility
• short-term financing to member countries
  experiencing exceptional balance of payments
  difficulty
• Emergency Assistance
• Cope with balance of payments problems arising
  from sudden natural disasters and military
  conflicts

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Financial Assistance
Loans outstanding 71 billion to 82 countries
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Where does IMF get its money?

• Quota subscriptions
• A member's quota determines its maximum financial
  commitment to the IMF and its voting power.
• Total quotas at end-August 2005 were SDR  213 
  billion (about 312  billion).

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Where does IMF get its money? (contd)
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Who makes decisions at IMF?

• Board of Governors
• The Executive Board
• Managing Director
• International Monetary and Financial Committee
• Development Committee

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Criticisms

• The IMF is dominated by the G-8 (especially the
  U.S. Treasury)
• The Group of Eight (G8) consists of Canada,
  France, Germany, Italy, Japan, United Kingdom,
  U.S., and Russia.
• U.S. has the largest quota (17.6)
• G8 account for approximately 50 of total quota.

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Criticisms (contd)

• IMF-supported programs impose austerity on
  countries in financial crisis
• Classical IMF recipe, with tight fiscal and
  monetary policies rather than customized
  technical assistance
• IMF is no more responsible for recent crises than
  is the fireman for the fire

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Criticisms (contd)

• The IMF encourages developing countries to reduce
  trade barriers when industrial countries don't.
• The availability of IMF lending encourages "moral
  hazard.

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Criticisms (contd)

• Programs supported by the IMF constrain spending
  on priority sectors, like education and health,
  by imposing fiscal deficit limits.