IMF & central organization
IMF is the central organization to the world which provides monetary cooperation. Almost all countries across the globe work together in the organization to achieve a common goal. IMF was envisioned in Bretton Woods, northeastern United States in the year 1994. The primary motive behind setting up the institution was to avert any disastrous economic mistakes in the future that could cause a crisis as big as the Great Depression again. Providing loans to member countries to rebuild reserves, stabilize currencies, continue trade and restore economic health are among the primary role for IMF.
The three main functions of IMF are: surveillance or monitoring economic development and provide advice on policies, lending money and providing technical assistance. A country can borrow from IMF if the balance of payment need arises. So the loan provides a cushion so that economic reforms and corrective measures can be taken and a growth oriented economy can be built. The IMF has 186 member countries which contribute operating funds. They get voting rights depending on the amount of international trade, global reserve holdings and national income.
IMF has no obligatory right over member countries, however if a country does not adhere with its policies, it may deny
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The 1970 oil shock, debt crisis of 1980 and the transition phase in Central and Eastern Europe of 1990s led to an increase in demand for loans. Latin America crises kept the volume high in the early 2000s but these loans were repaid when the economic condition improved. 2005 onwards again saw a rise in need for loans as the real estate bubble burst setting a ripple effect across the globe starting in the US. So a change in trend of the IMF has been monitored in the years that have passed. IMF History of establishment Cooperation and reconstruction (1944–71)
Countries in an attempt to revive their economies during the great depression, 1930, started heaving barriers to foreign trade and exchange; they devalued local currency to increase their participation in the export market. However these efforts showed a negative result rather than presenting positive outcomes. The world trade was found to decline, the employment levels also plunged down; this lead to the foundation of IMF to oversee international monetary system. The entity was formed to establish stability in the exchange rates and to encourage countries to participate in trade.
The Bretton Woods agreement July 1994 representatives of 45 countries met together conceived IMF in Bretton Woods, New Hampshire (United States). They agreed that a structure for economic cooperation between member(s) countries would be formulated post the Second World War. The framework was formed to help avoid reoccurrence of any economic disaster of the past. In December 1945, IMF came into existence when 29 countries signed the Article of Agreement. The operations began on March 1, 1947 and France was the first country to take IMF s help.
1950 to 1960 saw a large number of countries applying for membership however the Cold War put limits on membership issued. The countries that had joined the IMF from its inception to 1971, made an agreement to peg its exchange rates such that it can be adjusted. The measure ensured that any “fundamental disequilibrium” if created in the balance of payments could be adjusted by the IMF when required. This system also known as the Bretton Woods system existed till 1971, when finally the US system stopped the convertibility of dollar into gold. The end of the Bretton Woods System (1972–81) Fixing of U.
S. dollar value against gold, an rise in expenditure on President Lyndon Johnson’s Great Society programs and the increased spending on military expenses for the Vietnam War overvalued the dollar greatly; this lead to the end of the Bretton Woods System between 1968 and 1973 when major currencies started to float against one another. Post the fall of the Bretton Woods System, member countries could chose any exchange arrangements they wanted to. They could peg their currency to others or a bouquet of currencies, adopt someone’s currency, form monetary union or partake in a currency bloc.
With the fall of the Bretton Woods System many expected the high period growth to slow down, however, floating rates served to be beneficial as countries found it easier to adjust to the rise in oil prices in October 1973. The external shocks were dealt with more smoothly due to the change in system. IMF helped during the oil shock phase of 1970s by providing lending instruments. Mid 1970 onwards, IMF tried to help and solve balance of payment problems faced by many poor countries by financing them at concessional rates via a fund called Trust Fund.
A concessional loan program was set up by IMF in March 1986 which was later succeeded by Enhanced Structural Adjustment Facility (end 1987) Debt and painful reforms (1982–89) The oil shock had led to a global debt crisis. Commercial banks had lent “recycled” petrodollars, by acquiring deposits from oil exporting countries and lending to oil importing and developing ones. When the rate of interest rose in 1979, it was found that the floating rate of interest on loans also rose. During 1978-81, the interest payment was against the loans was expected to be $22 billion.
Also with the recession setting in he price of commodities from developing countries dropped. Expansionary fiscal policies and exchange rate overvaluation were adopted to help deal with such states. During the crisis in Mexico in 1982, IMF synchronized a comprehensive response with all its members and commercial banks, as a fall of most economies would lead to a global disaster. A lot of economic reforms and global movements had to be taken to help improve the condition. Societal Change for Eastern Europe and Asian Upheaval (1990-2004)
IMF was a global institution with the fall of the Berlin Wall in 1989 and closure of Soviet Union (1991). Membership was found to increase speedily from 152 to 172 countries. In an attempt to meet the additional responsibilities the staff had to be increased by close to thirty percent in six years. The board of directors was increased to 24 seats and the constituencies under directors also expanded. IMF played a crucial role in the transition phase of Soviet bloc to become a market driven economy. The economic transition was rather dynamic and never attempted before.
The countries worked directly with IMF taking note of its financial advice, guidance and support. Most of the countries went through great reforms and later joined the European Union (2004). In 1997 East Asia was faced by great crisis, almost all the countries asked IMF for assistance (financially and to formulate economic policies). Because of difference of opinions in ways to deal with the wide spread crisis, IMF came under serious criticism. IMF learned from the Asian Financial Crisis and ensured that in future they paid attention to a country’s banking sector.
IMF later in 1999, along wth World Bank, initiated a program called the Financial Sector Assessment Program and assessed various macroeconomic elements of a nation on a voluntary basis. A re-evaluation of fiscal policies during the time of crisis and limitation of financial resources were also analyzed again. IMF and World Bank worked together during the 1990s to help ease the burdens of under developed or poor countries. In 1996 an initiative was launched so that these economies would not face debt burden. Globalization and the Crisis (2005 – present)
IMF has been among the primary institutions to lend to countries to help enhance global economy. The global crisis which began in 2007 with the mortgage lending, had a global impact on all countries. This lead to large imbalances in capital flows internationally. The capital flows totaled to $7. 2 trillion in 2006. The crisis showed weakness in the financial markets, so IMF was appealed by many to formulate a stand by agreement and provide mechanisms of financial and reform related support. With support from creditor countries the lending power of IMF rose significantly to $750 billion.
To help greater countries IMF included flexible credit line, it also started keeping a track of economic fundamentals of all countries. They also initiated various programs to help the low income and developing economies. Reforms were created to help IMF provide borrowings in a more efficient and quick manner. (IMF official website, 2010) IMF Objectives and functions The functions of IMF are wide spread; but a concise summary of these functions are mentioned below: Surveillance over Member Economic Policies
The members of IMF have to follow economic reforms and policies which are in consensus with the objectives and goals of IMF. The Article of Agreement signed in the very threshold gives IMF the responsibility and legal authority to oversee that the countries that are members with the organization are following the common policies. Financing temporary balance of payment requirements: The member countries can lend funds required to meet their balance of payment needs. The funds are provided on a temporary basis so that the countries can take the required corrective measures to set the problem right.
It also helps evade unorganized adjustment of the imbalance. The lending is mostly under the “economic adjustment program” which is executed by borrowing countries. So the resources given by IMF are safe as these are given against corrective measures being adopted by countries. IMF also helps members mobilize external financing for similar needs. Combating Poverty In low income countries IMF provides concessional loans to help these countries grow so that they can eliminate poverty. They are closely affiliated with the World Bank and other development partners who help them support such cause.
It also helps members mobilize external financing and donor support to help meet development needs of low income countries. IMF also partakes in two global initiatives, Heavily Indebted Poor Countries and Multilateral Debt Relief Initiative. Mobilizing External Financing Since IMF endorses the policies of a country so they often help mobilize funds through lenders and donors. The donors or lenders need lend their resources to a country or grant a debt relief, when IMF endorses the countries economic policies or a IMF supported economic program.
Assessment and recommendations by IMF also help investors to predict the likely economic future of a country which helps the market confidence. (Blanco Sandra, Enrique Carrasco, 2007) Building Capacity The core areas of IMF expertise are well trained through technical assistance and training. This helps them build capabilities to design and structure better economic policies and management capabilities. This also reduces the risk of failure of the policies adopted and makes the country more capable of confronting a sudden economic shock.
Such functions are really beneficial for developing countries as they have less resources and their structure is no built strong enough by then. Strengthening IMF IMF consults and collaborates with its members on various monetary and financial issues; it also works closely with several multilateral institutions. To ensure that it is able to prevent and resolve economic issues on time, IMF s primary objective is to build its strength and capabilities. Increase Global supply of International Reserves:
IMF can issue Special Drawing Rights, which are international reserve assets, provided there is a need to enhance the reserve assets that are existent. The SDR s can be exchanged for convertible currencies and they cannot be claimed by the IMF as they are component of the net international reserves of all the member countries. Dissemination Of research and information: IMF provides economic analysis and reports of countries and their economic policies. Various data and statistical information can be accessed through IMF reports and research. Specialized publication and economic reports are generated from time to time.
Research related to IMF mandates and operations are also conducted. The research work helps the company guide and support the countries better in formulating economic policies and reforms. These results and findings are disseminated through various sources such as working papers, journals, internet, books etc. (IMF Handbook, 2007) IMF Areas of financial assistance IMF provides financial assistance to its member countries in various forms. Concessional loans are generally approved for countries which have a low income. The allotments are done through the Poverty Reduction and Growth Facility (PRGF).
Non concessional loans are given by five mechanisms, namely: Standby Arrangement (SBA), Extended Fund Facility (EFF), Supplemental Reserve Facility (SRF), Contingent Credit Lines (CCL) and Compensatory Financing Facility (CCF). All the non concessional loans are generally have a market based interest rate attached to it. A member country facing issue in the balance of payment can withdraw from its quota (gold/ convertible currency). The limit for the withdrawal is set at 25 percent. Beyond this, if the country still needs further resources it can lend up to thrice the total paid in quota it holds.
(Bretton Woods Projects, 2005) Standby Arrangement and Extended Fund Facility are among the two most used mechanisms implemented by IMF. When the countries which are members of IMF are allowed to lend money for a period of one or two years; the funds are used to sustain macro economic stabilization programs. The loans are subject to interest payments and the funds are to be returned within three to five years. This mechanism is called the Standby Arrangement. The Extended Fund Facility allow the member countries to borrow for three to four years, however the repayment period is longer than in standby arrangements.
The repayments are generally not outstanding before five to ten years. IMF also provides short term financing at non concessional rates to its member countries. The Supplemental Reserve Facility gives very short term loans to merging and developing economies. These funds are generally created by a sudden loss of confidence in the market due to great outflow of capital. The IMF provides large scale funds for such situations, so that the market sentiments can be revived and maintained. Under the Contingent Credit Lines IMF provides financing for national economic policies.
These policies are formulated to prevent any economic crisis which arises due to a crisis situation arising in any other country in the world. Both Supplemental Reserve Facility and Contingent Credit Lines need the loans to be repaid within a one or two, and they have a surcharge applicable on it. Compensatory Financing Facility is loans provided to help a country during phases where there is an unexpected shortfall in export income. The reasons could be any unanticipated circumstance such as famine or natural disaster which has affected the harvest in a negative manner.
The repayments of the loans are due within quarter to five years. Both compensatory and contingent financing are for unpredictable problems which arise in any economy. (IMF Official website, 2010) IMF Countries being helped for the last 5 years: IMF has helped many countries over the years from its foundation till now. Over 186 countries have seeked the guidance and support of the institution in the last five years to develop and maintain its economic conditions. A list of all the countries who are and have been assisted by IMF in the last five years and even presently are stated below in an alphabetical manner:
A: Afghanistan, Albania, Algeria, Angola, Antigua and Barbuda, Argentina, Armenia, Aruba, Australia, Austria, Azerbaijan B:Bahamas,Bahrain,Bangladesh,Barbados,Belarus,Belgium,Belize,Benin,Bhutan,Bolivia,Bosnia,Botswana,Brazil,Brunei Darussalam, Bulgaria, Burkina Faso, Burundi C: Cambodia, Cameroon, Canada, Cape Verde, Central African Republic, Chad, Chile, China, Colombia, Comoros, Congo, Costa Rica, Croatia, Cyprus, Czech Republic D: Denmark, Djibouti, Dominica, Dominican Republic E: Ecuador, Egypt, El Salvador, Equatorial Guinea, Estonia, Ethiopia F: Fiji, Finland, France
G: Gabon, Gambia, Georgia, Germany, Ghana, Greece, Grenada, Guatemala, Guinea, Guinea- Bissau, Guyana H: Haiti, Honduras, Hong Kong, Hungary I: Iceland, India, Indonesia, Iran, Iraq, Israel, Italy J: Jamaica, Japan, Jordan K: Kazakhstan, Kenya, Kiribati, Korea, Kosovo, Kuwait, Kyrgyz republic L: Lao people’s democratic republic, Latvia, Lebanon, Lesotho, Liberia, Libyan Arab Jamahiriya, Lithuania, Luxemborg M: Macao ,Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mali, Malta, Marshall Islands, Mauritania, Mauritius, Mexico, Micronesia, Moldova, Mongolia, Montenegro, morocco, Mozambique, Myanmar
N: Namibia, Nepal, Netherlands, Netherlands Antilles, New Zealand, Nicaragua, Niger, Nigeria, Norway O: Oman P: Pakistan, Palau, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Portugal Q: Qatar R: Romania, Russian federation, Rwanda S: Samoa, San Marino, Sao Tome and Principe, Saudi Arabia, Senegal, Serbia, Seychelles, sierra Leone, Singapore, Slovak republic, Slovenia, Solomon, Somalia, south Africa, Spain, Sri Lanka, St. Kitts and Nevis, St. Lucia, St. Vincent and the grenadines, Sudan, Suriname, Swaziland, Sweden, Switzerland, Syrian Arab republic.
T: Tajikistan, Tanzania, Thailand, Timor-Leste, Togo, Tonga, Trinidad and Tobago, Tunisia, turkey, Turkmenistan, Tuvalu U: Uganda, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Uzbekistan V: Vanuatu, Venezuela, Vietnam Y: Yemen Z: Zambia, Zimbabwe (IMF Official website, 2010) IMF Problems and challenges of IMF The primary objective of IMF is to promote financial stability to all its member countries. Over the years the international market has broadened greatly which have posed as a challenge for IMF, the number of members has also grown sharply so the responsibilities have grown as well.
Globalization has also intensified over the years and cross border flows have also been high, so the role of IMF broadened. With the sub prime crisis the last few years have seen great amounts of anti crisis and multilateral policies which have been formulated and applied which have helped most economies. The economic data and financial performance show optimistic growth prospects. (Fischer Stanley, 2003) With the economic downturn setting in U. S. and other economies have taken major economic measures to deal with the crisis and avert it from reaching historical levels of failure.
Layoffs and cutbacks in investment have been witnessed as global measures taken up. However the years to come would have to be cautious phase as the economies are still in the reviving stage. High level of unemployment and limited consumption gains have leaded to lower household spending prospects. The financial conditions are found to improve however the normal levels are still to be achieved. Credit losses are still high in many sectors, especially real estate. With gap in the outputs and moderate economic recovery, means that IMF cannot withdraw their support.
The three key areas where IMF needs to render its help to member countries are surveillance, financial support provisions and technical assistance. Few of the key challenges which the IMF may face are specified below: IMF needs to safeguard the recovery of economies by supporting and ensuring global economic policies which support expansion and growth. Especially in developed and advanced economy the economic reforms should be implemented properly. Moving ahead of a medium term of limited spending and debt the global economies would set into a higher growth pattern.
The responsibility of formulating required policies to ensure a sustainable balance growth is thereby a primary challenge which the IMF will face. The mutual assessment of G-20 countries at Pittsburgh Leaders Summit looks at the same. IMF will support by providing analytical and innovative approach and provide multilateral assistance. The other challenge would be to defend and help the vulnerable economies survive the downturn and prosper. The IMF challenge is to make contribution to the growth of low income companies. The resources should help the countries increase their present level of unemployment and standard of living.
To identify emerging vulnerabilities by providing research and economic analysis which may help the countries detect any imbalances before hand. IMF has to continually provide data and analysis on all its member countries. The surveillance by IMF must focus on correct issues. With the wide range of fiscal, exchange rate issues and monetary policies there are a lot of issues that are to be overviewed by IMF. The structural and financial strength, external vulnerability and institutional issues all have a force on economic conditions, so IMF must make the right choice between the issues to concentrate on.
Correct surveillance would help IMF identify risks and help formulate policies better. The integration of multilateral, bilateral and global surveillance also poses as a problem for IMF. The countries need to take surveillance more seriously. Most companies have domestic technical expertise so to help them realize how the resources and potential cost for IMF resources poses a difficulty for the fund at times. So a strategic management of surveillance programs should be initiated. (IMF official website, 2010)
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The implementation of more systematic common framework for assessment of public and debt sustainability is also a continuous process. IMF also needs to consider authorities priorities keeping in mind that no vulnerability is not avoided. The IMF also faces a challenge in balancing its act as a confidential advisor and a market analyst which help provide lenders and creditors to help market sentiments. The IMF also needs to analyze whether the availability of funds would indeed help an economy to overcome dilemma so it is important to analyze whether the problem can be credibly overcome by financial resources.
(Truman Edwin, 2009) Role of IMF for stabilizing the international financial system IMF has 186 member countries and they together work towards creating a global monetary cooperation. The objective is to stabilize the financial system through well designed and planned economic policies that will enhance international trade, promote employment, support growth and reduce poverty. The primary functions are to stabilize the exchange rate for currencies, finance short term deficits, and provide advice and technical assistance to countries. (Global Financial Reports, 2010)
Under the gold standard system, the value of each currency declared its value against the US dollar and the US dollar was tied to gold, which they agreed to trade at $35 per ounce. The exchange rate could vary only by 1 percent, any movement greater than 1 percent was allowed to countries with a “fundamental balance-of-payments disequilibrium” after approval of the IMF was seeked. This system was planned to stabilize the entire global system, however in 1971 Richard Nixon ended this system. Post these countries were allowed to choose their own method to determine exchange rate.
Post the fall of this system to regulate exchange rates, IMF started focusing on providing loans to developing countries. (Britannica Website, 2010) To help improve the objective of stabilizing international monetary system, the system was changed greatly since its time of inception. Beyond providing loans and monitoring macroeconomic policies, IMF has incorporated various microeconomic elements as well. It realized that to realize the goal it needed to focus on “second generation reforms” such as institutional and structural reforms and policies. Also the amount of funds has been raised with a rise of funds first initiated in October 1998.