The History Of International Monetary Fund

Published Date: 02 Nov 2017

The International Monetary Fund (IMF) is an international organization that originated from the "Bretton Woods Conference in 1944, and officially formed in 1945" (Investing Answers 2010). Their mission is to ensure stability in the international system; this is achieved through: surveillance, technical assistance, training, lending, research and data. The Bretton woods conference changed the previous currency valuation system and countries had to peg their currencies to the U.S. Dollar or Gold.

To join the IMF, countries have to pay a quota based on their economy’s size. This quota determines their voting power, in addition to their access to financing which often have conditions attached (conditionality).

"During the 1960’s" (IMF n.d.), the dollar was struggling with the parity established in the Bretton woods conference and "President Richard Nixon announced a temporary suspension of the dollars convertibility to gold which led to a crisis" (Investing Answers 2010). By "Mid-1973" (IMF n.d.), the currencies started floating against each other, at this point they had to choose between allowing their currency float freely, peg it to another currency, or participate in a currency bloc. Nowadays, the IMF is an organization with 188 member countries with many global focus activities in order to support international economic sustainability such as the lending of 250 billion US Dollars to support countries during the 2010 financial crisis. (Economy Watch 2010)

IMF – ORGANIZATION

The highest authority of the IMF is the Board of Governor: Powers are delegated by the Executive board, they are also in charge of electing directors, setting conditions for admitting new numbers and adjusting quotas (August, Mayer and Bixby 2013). Additionally, the Managing Director who is appointed by the Executive Board serves as the IMF’s head of staff and is assisted by four deputy managing directors, (IMF n.d.). There are nine departments, five area/regional departments and three support departments (IMF n.d.).

FINANCE

IMF’s major lending resources come from the quota subscriptions, 25% of which are denominated in SDRs or major currencies and the remaining 75% in members’ own currencies, paid by the member countries when they acquire their memberships (IMF n.d.).

In some circumstances, the IMF may sell its gold or accept gold as payment from member countries (IMF n.d.). Supplementary resources can be obtained by borrowing, based on its current multilateral and bilateral borrowing arrangements (IMF n.d.).

When member countries seek financial aid from the IMF, they should meet the later loan’s conditions by adjusting their economic policies to overcome the payment problems. Conditionality is one of the most controversial aspects of the IMF policies, as the austerity measures imposed by the IMF as its loan conditions, which sometimes may worsen the problems of the recipient countries. The late 1990s Asian financial crisis is a typical example of the negative impact of the IMF conditionality (Essential Action n.d.).

OPERATIONS

Member states are obligated to abide by a code of conduct which requires open information in determining value of currency. No restrictions on the exchange of their money, and economic policies that promote national and collective benefit (Aufust 2004)

RESPONSIBILITIES

IMF Supervises a cooperative system of currency exchange, Lends money to members in order to support their currencies and their economies and assists with technical support

(Aufust 2004).

LENDING PROCESS

When requesting a loan, IMF draws an "agreement" which outlines economic policies expected to support the successful aim of the loan (Aufust 2004). The Petitioning country submits a letter of intent to the Fund’s Executive Board and if approved, the funds are often dispersed in instalments following reviews and progress of the initial agreement (Aufust 2004).

FACILITIES

In order to assist the need of the different members and based of each individual situation, IMF has different lending mechanisms such as:

Regular IMF Facilities

Reserve Tranche - Percentage of an IMF member’s quota that it may withdraw in order to stabilize their economy or solve debt issues (Aufust 2004)

Credit Tranche - Members are entitled to 4 credit equivalents to 25% of its quota (Aufust 2004)

Extended Fund Facility - Long term support for amounts larger than their quota up to 140% (Aufust 2004)

Standby Arrangements (Bridge Loans) - Support short term debt issues while nations wait for other loans to be issued and repayment is usually expected within 2 to 4 years (Aufust 2004)

Concessional IMF Facility

Available for low income members with debt problems at concessional interest rate of .05 (Aufust 2004)

Special IMF Facilities

Compensatory Financial Facility - supports countries experiencing temporary depletion of their currency as a result of natural disasters (Aufust 2004)

Supplemental Reserve Facility - short term financial assistance for countries experiencing debt as a result of loss of market confidence (Aufust 2004)

Contingent Credit Lines - Available for strong and steady economies threatened by crisis in other parts of the world (financial contagion) (Aufust 2004)

Debt Relief

Heavily Indebted Poor Countries (HIPC) - Creditors provide debt relief in order to restore low-income countries economy and debt payment

Multilateral Debt Relief Initiative (MDRI) - Agreement between IMF, the International Development Association (IDA) of the World Bank, and the African Development Fund to cancel debt for certain countries in order to help them move towards Millennium Development Goals

ENFORCEMENT AND REGULATIONS

Among many articles and regulations reviewed by the IMF the most notorious enforcements are:

Enforcement of Exchange Control Regulations of IMF Member States

Article VIII, Section 2(b), of the Articles of Agreement of the lMF provides guidelines and regulations to ensure that all member states adhere to ethical practices with regards to their currency exchange policies.

Enforcement of Exchange Control Laws in the Absence of IMF Membership

Currency exchange contracts are not enforceable abroad or on the non-member nations unless there is a separate agreement signed between the contracting countries.

(August , Mayer and Bixby, Money and Banking 2013)

According to the IMF website some of the General Obligations of Members in Article VII are:

Forbids members from discriminatory currency practices and imposing restrictions on transactions.

Consultation between members regarding existing international agreements

Obligation to collaborate regarding policies on reserve assets

GOVERNANCE

In the governance of IMF reflects the power distribution within the organization and its principle of accountability.

Voting Power:

The IMF voting power is proportional to the financial quota each member contributes to the IMF. Table 1 reflects the percentage in representation and voting power acquire by each country. In comparison, the voting power of developing countries is limited by other more powerful ones.

Table 1

Figure : Current Voting Power of IMF Members: (IMF voting - who has the power? 2011)

External Environment Governance:

This governance is done through country, regional and global surveillance. The first one, monitors individual countries and their national economic and financial policies data which should open for the international community scrutiny and review. The regional, overlooks currency unions such as the EU and issues Regional Economic outlook reports for other regions around the world. Lastly, IMF’s Executive board reviews the World’s economic outlook, global financial stability and issue fiscal monitor reports that show the current international economic, financial and policy development in the global arena.

(International Monetary Fund n.d.)

Internal Environment Governance: IMF internal activities are monitored by several stakeholders like politicians, bureaucrats, media, public, and its own in-house supervisory body. (Accountability n.d.)