What is the IMF?
The International Monetary Fund (IMF) was another component agency formed from the Bretton Woods Conference in 1944. The IMF’s purpose was to stabilize the global monetary system. Like the World Bank, the IMF’s mission has evolved. It is now primarily focused on alleviating poverty and the support of the UN Millennium Development goals agreed to in 2000.
According to Article 1 of its Articles of Agreement, the IMF was established to:
• promote international monetary cooperation
• facilitate the expansion and balanced growth of international trade
• promote exchange stability
• assist in the establishment of a multilateral system of payments
• make its resources available (under adequate safeguards) to members experiencing balance of payments difficulties.
Ultimately, the goal is to promote economic stability, limit the impact and frequency of crises, help resolve crises when they occur, promote economic growth, and alleviate poverty.
How Does the IMF Work?
Like the World Bank, the IMF works with member states to meet its mission. More than the World Bank, the IMF holds significant influence over the policies of the member states, as outlined in Article IV of the IMF Articles of Agreement. Article IV provides for significant involvement by the IMF in the activities and policies of member states. Often referred to as “consultations,” these sessions are designed to ensure that member state policies are aligned globally.
The IMF engages in several ways with member states. Some examples are:
Not what you might think, surveillance is the regular ongoing interaction between the IMF staff and member states. The IMF conducts an in-depth analysis of member states’ economies and economic trends and works with the member state to craft policies and approaches to ensure sustainable and prosperous economic growth. Elements of this analysis are in monetary policy areas – including exchange rate, money supply, interest rates, and other monetary levers.
Given the substantial technical resources of the IMF, the organization provides significant technical assistance to member states in need. This assistance can range from consultation on fiscal and monetary policy to banking system structure, regulation, and statistical analysis. The IMF can serve as a virtual “central bank” for those states that do not have adequate resources or need additional assistance.
Of late, the IMF has assumed some of the traditionally considered banking roles – blurring the roles between the IMF and the World Bank. Relying on Article, I mandate to address the balance of payments issues; the IMF provides short- and medium-term loans to address the balance of payments deficits or address more structural issues for some of the poorest members. The IMF loans, unlike World Bank loans, are not project-oriented. They are general funds. However, they come with the provision that the IMF can set significant conditions on the loans – incurring criticism of infringing on sovereignty. Generally, these loans are from 3-10 years in term versus the 30+ year loans obtained through the World Bank.
The governance structure of the IMF is similar to the World Bank. There is a Board of Governors with representatives from all member countries and a 24-person executive committee. Each state has assessed a quota based on the size of its economy, and a portion of the amount is maintained in the form of SDRs or Special Drawing Rights, where they maintain 25% of their quota in a reserve currency. The amount of the quota determines the voting rights, with the USA having the largest share.
What’s Next for the IMF
As the monetary system became more stable, the IMF shifted its focus to poverty alleviation in line with the UN Millennium Developmental Goals. The IMF does this by promoting solid economic policies and helping prevent elements that may cause financial instability globally. As globalization has increased, the IMF has responded by helping the poorest members and more fully embracing the broad mandate of Article I. In 1996, the IMF launched a Highly Indebted Poor Countries initiative to help provide debt relief to some of the most impacted members.
In 2006, the IMF moved to initiate a significant reform program. The reforms include a broad quota system reform to bring control and economic contribution to several rapidly growing economies, such as China’s. The quota reform was designed to maintain voting power for poorer members while recognizing that the economic structure of the global economy had changed.
The IMF also served as a backstop for emerging nations during the 2008 financial crisis and supported Greece in 2010 and Portugal in 2011 as those nations suffered near defaults on their debt. The IMF will continue to significantly impact policy and politics in emerging and developed nations.