What is the IMF?

Introduction

The International Monetary Fund, or IMF, is an international organisation that encourages sustainable economic growth, financial stability, and prosperity for all of its 190 member countries. These member countries work together through the IMF to stabilise the world economy and achieve global economic growth. The IMF promotes international trade, and minimises poverty by promoting economic policies to increase job creation, productivity and economic well-being. It also encourages international monetary and economic cooperation among its members.

The IMF monitors the economic policies of its member countries and gives policy advice and financial assistance to stabilise their economies. 

The following diagram contains the key objectives of the IMF. 

Historical Background of the IMF

It all started in July 1944, when 44 countries gathered for the Bretton Woods Conference after World War II. The goal of the conference was to agree on a new framework for the international monetary system. The old monetary system, which was used before World War II, was considered a failure due to the Great Depression, unfair trade policies and unstable currencies.

After three weeks of heated debate at Bretton Woods, especially between John Maynard Keynes, a famous economist who was representing the United Kingdom, and Harry Dexter White, the U.S. Treasury representative, the IMF was founded along with the International Bank for Reconstruction and Development, now known as the World Bank, as part of the Bretton Woods agreement. John Maynard Keynes and Harry Dexter White are considered the founders of the IMF. Since 1944, the IMF membership has grown from 44 countries to 190 countries. These countries are represented on the IMF Executive Board. There are 24 governors who serve on the International Monetary and Financial Committee, or IMFC, and the Executive Board of the IMF.  The IMF headquarter is located in Washington, D.C., the US capital.

The IMF Membership

Any country can apply to become a member of the IMF, provided that the country can meet some requirements. These include the willingness to provide information to the IMF about its economy and the payment of capital subscription, called quota subscription, while joining. Moreover, the country should abide by the terms and conditions set by the IMF. When a country joins the IMF, the size of its initial quota is determined by the IMF Board of Governors by using a formula based on a weighted average of its GDP, economic openness, and international reserves. A member must pay its subscription quota in full while joining the IMF. A member country can borrow up to 145 percent of its quota annually and 435 percent cumulatively under normal access. However, these limits can be exceeded in special circumstances.

The IMF Quotas

The IMF is a quota-based organisation in which each member country is assigned an initial quota. The member country’s quota depends on how rich a country is and what is its relative position in the global economy. The rich countries, with strong economies, pay more quotas as compared to the poor ones with weak economies. These quotas are the main source of money for the IMF. The pool of these quotas is then used by IMF to extend loans to the member countries in need of financial assistance. These quotas also determine the voting power of the member countries, their access to IMF resources and the allocation of Special Drawing Rights (SDRs) among them. The United States is the largest member in terms of the size of quota.

Voting Power of the IMF Member Countries

The voting power of the member countries, in IMF decisions, is determined by their quotas. A member country’s total votes are equal to its basic votes, which are the same for all members, along with one additional vote per 100,000 SDR (Special Drawing Rights) of quota. The IMF's 10 largest members in terms of quota and voting power are, the United States, the United Kingdom, Japan, Italy, France, Germany, China, India, Russia, and Brazil. 

What are the Special Drawing Rights?

Special drawing rights (SDRs) are the monetary reserve currency, which is valid internationally and was created by the IMF as an addition to the existing money reserves of the IMF’s member countries. The SDR was created by the IMF in 1969 to supplement the official dollar reserves of its member countries.  The SDR is the unit of account of the IMF. The SDRs are allocated to member countries in proportion to their IMF quotas. 

The IMF Methods

The IMF uses some primary methods to achieve its goals through surveillance, capacity building, and lending. These methods are explained below:

Capacity Building

The IMF uses capacity-building programmes for its member countries by providing technical assistance, policy advice, and training to them. These programmes are also involved in providing training in data collection and analysis that is useful for the IMF’s project of monitoring international and national economies. 

Lending

The IMF provides loan payments to those countries that are facing financial problems or economic decline in their country due to political activities or fraudulent activities such as money laundering. They create a pool of money by using the quota system to aid the deserving country in terms of IMF lending. In 2019, an amount of SDR $11.4 billion was dedicated to loan resources to support those member countries or invest in the lending activities of the IMF into the next decade.

But critics argue that the IMF’s loans are given to the recipient country on the condition that they have to increase their financial stability and economic growth by hook or by crook. These conditional loans are known as structural adjustment programs, which worsen poverty and recreate colonist structures.

Surveillance

The IMF can monitor the efficiency of its member countries by collecting massive amounts of data on international trade, national economies, and the overall economy of the world in aggregate. The IMF also provides updated economic forecasts on a regular basis at both national and international levels. These updated forecasts were also published in the World Economic Outlook after lengthy discussions on the impact of monetary, fiscal, and other trade policies on the growth and financial stability of the world.

How does the IMF get Money?

Through quotas and subscriptions from its member countries, the IMF collects money. The contribution made by member countries in the form of quotas or subscriptions is based on the size of their economies. In this way, the United States, which has the largest economy in the world, is the biggest contributor to the IMF.

IMF Grants

The average grant size of the IMF is $15,000, which is given to charities in the member countries or in Washington, D.C. The purpose of these grants is to sustain economic independence through education and economic development.

Types of IMF Loans

There are many types of loans that the IMF provides to its members, and some of them are explained below:

The Stand-By Arrangement (SBA)

In this type of loan, the IMF provides a loan for a short period of time, probably 12-24 months, to the countries facing balance of payment problems, but this period can be extended to a maximum of 36 months. This type of IMF loan is conditional and the borrower countries must use economic policies to address the problems that led the country to seek help for their external financial needs.

THE EXTENDED CREDIT FACILITY (ECF)

This type of IMF loan is a medium term loan that is provided to low-income countries (LICs) facing balance of payments problems. This loan is provided for a period of 3–5 years. A grace period of five more years can be given for the repayment of this loan.

The Extended Fund Facility (EFF)

This type of IMF loan consists of medium-term arrangements, which provide loans for probably 4–10 years maximum. The purpose of EFF is to correct structural problems in the macroeconomy of a country that caused the balance of payments disequilibrium. This loan has to be repaid back in semiannual installment.

Poverty Reduction and Growth Facility (PRGF)

In this type, the loans are provided at low interest rates or zero interest rates. The purpose of these loans is to reduce poverty among poor members of the IMF, encouraging economic development.

The IMF also offers emergency funds (the Rapid Credit Facility and the Rapid Financing Instrument) to those whose economies collapse for various reasons. For example, the IMF provided emergency funds to South Korea during the big crisis in Asia in 1997. This fund saves this country from sovereign default. These emergency funds or loans were also provided to those countries whose economies collapsed due to natural disasters such as recession, earthquakes, etc.

Differences between the IMF and the World Bank

The IMF and World Bank are different, yet, closely linked. Their headquarters are across the same street in Washington, D.C. The IMF’s job is to fight financial crises around the world. The World Bank focuses its efforts on long-term economic development and reducing poverty.

The following table contains the main points of difference between the IMF and the World Bank.

Criticism 

The IMF faces criticism due to its structural adjustment activities. Critics argue that structural adjustment is not a democratic way to provide loans to those countries that are facing economic instability. Due to this, debtor countries had to put financial issues before social ones. Thus, they open up their economies to foreign investment, privatise their national organisations, and cut off government spending to satisfy the IMF in terms of structural adjustments. Hence, these countries neglect their educational and health sectors due to not properly funding them.

Conclusion

In conclusion, the main focus of the IMF is to reduce poverty, stimulate economic growth, encourage financial stability, achieve high employment, and promote global monetary cooperation. The IMF achieves its goals by providing loans, monitoring the economies, and through capacity building. The IMF is still working on these goals with its 190 member countries.