What Is the International Monetary Fund - Case Study Example

INTERNATIONAL MONETARY FUND An international monetary organisation of 184 countries, the International Monetary Fund (IMF) has been working since 1946 to “foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty” (Clift, 2004). Initially conceived to deal with foreign exchange systems and working for the stability of foreign exchange markets, it extended its functions to preventing crises in member countries by adopting sound economic policies and guiding them towards the path of economic development. History of the IMF – Its Origins The Great Depression and the two World Wars gave a great setback to the greatest nations of the world. Shook by these disasters, delegates from 44 countries met in July 1944 at Bretton Woods, New Hampshire in U.S.A. and agreed on a framework for “economic cooperation party” (Clift, 2004). The IMF was conceived in that meeting, whose primary agenda was to avoid those inconsistent economic policies that led to the Great Depression of 1930s. It background was the pursuit of flawed economic policies, like increased restriction on imports and freedom to buy in other countries, dwindling gold and foreign exchange reserves and even devaluation of currencies, which together contributed to worsening the downward spiral in output, world trade and the overall employment rate. All these steps devastated the international economy, leading to a sharp decline in trade, world output, employment and living standards (Dicken, 1986). Hence in order to restore the international monetary relations, the IMF emerged after the constitution of a charter (Articles of Agreement) by the country representatives. Its purpose was the establishment of an international institution, which could overlook the international monetary system and guide the member countries to pursue appropriate economic policies. It officially came into existence in December 1945, when 29 countries signed the Articles of Agreement (IMF). Since then, IMF has strictly pursued its original purposes, which became more important with the expansion of more countries. Joining IMF? Any country, regardless of being a member of UN or not, is eligible for membership of the IMF. The membership largely depends on the terms prescribed by the Board of Directors of IMF. However, a country has to agree to financial policies economic growth and reasonable price stability. Furthermore, the country has to provide the IMF with economic data, which it will regularly analyse. IMF serving the Member Countries – ways and means The IMF serves its member countries in three ways (Clift, 2004): After reviewing and monitoring the national and international economic and financial developments, it advises the members on pursuing appropriate economic policies. The IMF surveillance allows the members to stay alert of any upcoming troubles resulting in a set of economic policies and gives them information in time to act appropriately. It conducts this oversight in three ways: Country surveillance: This is usually a yearly set of consultations with the member countries regarding their economic policies. This is in connection with Article IV of IMF’s constitution which gives them the surveillance right. During an Article IV consultation, the IMF sends its team of economists to collect economic and financial date. They also discuss the country’s economic policies with the government and the respective central bank’s officials. However, it is not just the government where the IMF staff missions restrict to. They reach out for discussions with unofficial sources, mainly related to the economic business of the country, which include parliamentarians and representatives of business, labour unions, and civil society. The findings are then reported to IMF management which further presents it to IMF’s Executive Board consideration. Global surveillance: It consists of the reviews by IMF’s Executive Board, based on the reports prepared by IMF staff, normally twice a year. It is based on the global economic trends and developments and is issued before the semi-annual meetings of International Monetary and Financial Committee. Regional surveillance: It examines policies pursued and developments in the different regions and also includes board discussions for those regions, for example in the European Union, the West African Economic and Monetary Union etc. It also lends hard currencies to the members in order to adjust and reform their policies to correct the balance of payments to promote sustainable economic growth. It offers a wide range of technical assistance to the member nations in its area of expertise to governmental and non-government sectors. Crisis prevention The economic crises of Mexico (1994-95) and Asia (1997-98) have been a great set-back for these regions as well as the IMF. Since then, it has intensified its efforts (in collaboration with the World Bank) to assist the countries to prevent financial crises. For this purpose, there has been an emphasis on incorporating “shock absorbers” in the policies as reforms like adequate foreign exchange reserves, social safety nets etc., making the countries less vulnerable to crises. It has also taken the following steps (IMF, Crisis Prevention): An in-depth assessment of member countries’ financial sectors, in collaboration with the World Bank. Development of standards and codes in economic policy-making, financial sector regulation and other areas in cooperation with other organisations. It encourages transparency and timely availability of data to the members to ensure the investors and other economic agents to make well-informed and up-to-date decisions in accordance with the economic situation of the country. In order to make its members more risk averse, it has “developed vulnerability indicators and early warning system models”. It has increased efforts to encourage good governance in all sectors, especially economic and financial sectors. Efforts to combat financing of terrorism have been beefed up. IMF lending facilities The IMF’s notion of lending money differs from the conventional concept of a “loan” (Stiles, 1991). Rather than only providing money, it also arranges for its members hard currencies through varied transactions. IMF’s lending facilities are usually in the form of: Stand-By Arrangements (short term balance of payment problems): It involves temporary use of resources from IMF in exchange of the principal amount in domestic currency as well as the interest. The members are also invited to at least maintain adjustment policies. It involves five stages through which the conditions of arrangements are decided upon: initiation, internal preparation, negotiations in the field, internal review of intent letter and disbursement and monitoring. Extended Fund Facility (long term): It is a long term credit facility by the IMF which allows the members to repay the credit money within eight years of time (BNet, 2010). Cheap loans interest rates for poor countries: Under this program, the cost to borrowers is reduced by subsidising through the past sale and transactions of IMF assets, in combination with loans and donations that IMF reserves for its members. Emergency assistance (natural disasters or military conflicts): It is intended to help the members to cope with balance of payments deficit arising from a sudden calamity or militay mishap (like wars). The key features of IMF lending are very simple. First, it should be noted that IMF is not an aid agency, rather it lends to its member to tackle emergency situations in order to set themselves on the path of sustained economic growth. Hence the money is not lent to finance particular projects. Secondly, IMF lending is contingent on adopting the policies that are agreed upon in the contract. It helps to ensure a correct usage of IMF funds to strengthen the economy and repay the loan. Thirdly, IMF lending is temporary, depending on the period that is decided upon at the time of transaction. Lastly, after setting on the path of economic prosperity, the IMF expects the borrowers to prioritise the repayment of loan. IMF and Asian financial crisis Asian financial crises in 1997 lead to a sharp declines in the currencies stock markets and other assets. It originated against the backdrop of an outstanding performance for several years, when the Annual Growth in ASEA-5 (Indonesia, Malaysia, the Philippines, Singapore and Thailand) neared 8 percent for a whole decade. Per capita incomes had increased tenfold during the thirty years preceding the crisis and the income levels in Hong Kong and Singapore even exceeded some of the Western industrial ones. However, problems such as signs of overheating, continued pegged exchange rate regimes, heavy internal borrowing, and lax prudential rules prevailed. Parallel to this, developments in the advanced economies and global financial markets constantly contributed to the build-up of this crisis. The wide swings in the yen/dollar exchange rates due to shortage of investment opportunities in the weak growing economies of England and Japan also contributed to the crises. IMF showed an immediate response to the crises. Its steps included helping the most affected countries: Indonesia, Korea and Thailand with 35 billion US dollar of financial support. It also provided macroeconomic structural support to the affected countries along with supervision of its programs. The Fund was also charged of many allegations during this crises. It has been said that the Fund was initially conceived to manage the system of fixed foreign exchange. However, since the breakdown of that system, it has been looking for a rationale in order to sustain. Nonetheless, its economic activities are still closely related to its initial purposes. It was charged in Asia of excessive intervention in the economies of affected and borrowing countries, making them largely dependent on financial assistance (Fischer, 2004). The IMF today In 2008, the IMF faced a shortfall in revenue. Hence, the Executive Board decided to see a part of the Fund’s gold reserves. Right after then in April, the board decided upon the proposed new budget framework for the fund “to close a projected $400 million budget deficit over the next few years” (IMF, 2010). It included spending cuts of $100 million until 2011 which included up to 380 staff dismissals. At the 2009 G-20 London summit, it was observed that the Fund requires additional financial resources to meet the needs of its members due to the global financial crunch. Therefore, the G-20 leaders pledged to increase the IMFs supplemental cash tenfold. Also, allocation of another $250 billion to member countries via Special Drawing Rights (SDRs) was decided (IMF, 2010). In the latest developments, Greece has asked the EU-IMF division to help the country get rid of its debt and to remove its economy from crisis. Its loans-package has been approved, along with an emphasis on spending cutbacks policy (BBC News, 2010). Who runs the IMF – Structure of the IMF? As Stiles (1991) notes, the structure of IMF has been relatively stable since its inception with a reasonably fair rate of expansion. It is accountable to its member countries, which ensures effectiveness in its working. The Executive Board represents all its members and is responsible in carrying out day-to-day working of the Fund. With the Executive Board, there is an internationally recruited staff which works in regional teams under the leadership of a Managing Director and three Deputy Managing Directors. The authority of Executive Board is delegated by the Board of Governors, composed of member countries’ representatives, which is the highest authority in the IMF. The key policy issues regarding the international monetary system are discussed semi-annually in a committee of Governors called International Monetary and Financial Committee (IMFC). A Development Committee, which gives surveillance reports and advises the Governors on development and other policy matters relating to developing countries, is a joint committee of Boards of Governors of IMF and World Bank. The Executive Board usually meets thrice a week (or more, depending on the need), in the Fund’s head office in Washington, D.C. The five largest shareholders of IMF, the United States, Japan, Germany, France and the United Kingdom, are also a part of the Executive Board along with China, Russia, Saudi Arabia. Rest of the 16 Board members are elected for two-year terms by groups of countries, which are called as constituencies. The Board also selects a Managing Director for a renewable five-year term, who also serves as chief of the IMF staff and conducts business of the IMF under the Board’s directions. The figure below shows a complete structure of IMF: Figure 1. Source: IMF website Bibliography BNet. (2010). BNET Business Dictionary. Retrieved April 28, 2010, from Business Definition for: Extended Fund Facility: http://dictionary.bnet.com/definition/extended+fund+facility.html Clift, E. b. (2004). What Is the International Monetary Fund? Washington, D.C.: IMF Publications. Dicken, P. (1986.). Global Shift: Industrial Change in a Turbulent World. London ; New York: Harper & Row. Fischer, S. (2004). IMF Essays from A Time of Crisis: The International Financial System, Stabilization and Development. Delhi: Baba Barkha Nath Printers. IMF. (n.d.). About the IMF: History. Retrieved April 30, 2010, from International Monetary Fund: http://www.imf.org/external/about/history.htm IMF. (n.d.). Crisis Prevention. Retrieved April 2010, 29, from International Monetary Fund: http://www.imf.org/external/pubs/ft/exrp/what.htm IMF. (2010, April). International Monetary Fund. Retrieved April 2010, from www.imf.org news, B. (2010, April 23). Greece calls on EU-IMF rescue loans. Retrieved April 29, 2010, from BBC: http://news.bbc.co.uk/2/hi/8639440.stm Stiles, K. W. (1991). Negotiating Debt: The IMF Lending Process. San Francisco: Westview Press. Read More