The Major Functions of the IMF
Table of Contents
The International Monetary Fund was established in
Creation of the IMF
The International Monetary Fund has the status of a UN specialized agency. Practically, it is an institutional framework of the global monetary system. “The International Monetary and Financial Conference was held at Bretton Woods, New Hampshire, attended by representatives of 44 countries” (Tenney & Humphreys 2011, p.4). The Conference adopted the Articles of Agreement of the IMF, which act as its charter. This document came into force December 27, 1945. The fund started its practical activity in May. At that time, it included 59 member countries. In 1947, the IMF started currency transactions.
Initially, the fund credited mainly Western countries. In the mid-70s, industrialized and developing countries received roughly equal amounts. From the 80s, the IMF shifted almost entirely to crediting developing countries. This turn was largely due to the fact that getting a loan of the fund was mainly related to the adoption of certain obligations in the field of macroeconomic policy. Therefore, Western countries prefer to borrow resources to cover the current account deficit in the world market of loan capitals. Nowadays, the IMF consists of more than 180 countries (Vreeland 2006). When joining the fund, each country pays a sum of money as a membership fee, which is called the quota. Quotas are reviewed periodically. The US has the highest quota and therefore, the biggest number of votes. It serves for:
- Formation of the pool for lending by the member countries.
- Determination of the amount that a country can get in the event of financial difficulties.
- Determination of the number of votes that the participating country gets (Tenney & Humphreys 2011).
The Procedure of Granting Loans
In the book The IMF and Economic Development, it is noted that the International Monetary Fund provides loans only to stabilize economy and remove it from the crisis, but not for the economic development. Loans are granted for a period from three to five years at an interest rate below the market. The transfer of the credit is accomplished in parts – tranches (Vreeland 2003). The interval between tranches may be from one to three years. This procedure is developed to control the use of the credit. “IMF lending programmes consist of two elements: a certain amount of financing and a set of economic policy adjustments or “conditionality”, that the borrower country must implement in order to receive the IMF credit” (Copelovitch 2010, p. 14). If a country does not fulfil obligations to the IMF, the transfer of the next tranche is postponed.
Limited time offer
Before giving the loan, the International Monetary Fund conducts a system of consultations. Several representatives of the Fund visit a country that has applied for a loan in order to collect statistical information on various economic indicators (the price level, the level of employment, tax revenues). They make a report on the results of the study. Later, the report is discussed at a conference of the Executive Board of the IMF, which provides recommendations and suggestions to improve the economic situation of the country (Copelovitch 2010). In recent years, the IMF has extenuated its demands on structural adjustment programmes. It has appealed for developing countries to advance their poverty reduction strategies to have the right to loans.
The Major Functions of the IMF
The actions of the International Monetary Fund are based on the monetary approach to the regulation of economic activity, which is achieved through the implementation of three main functions. “According to the Articles of Agreement, one goal of the IMF is to encourage international monetary cooperation” (Hollander 2012, p. 14). The first function of the IMF is the surveillance. This function provides the right to monitor the policies of member countries in setting exchange rates and related macroeconomic policies. Each country is required to provide information to the IMF, on request, necessary to oversee its economic policies. It usually consists of detailed information about the monetary and fiscal sectors and the structural policy of the government (environment, labour market, and privatization,). The main purpose of surveillance is to identify potentially harmful macroeconomic imbalances that could affect the stability of exchange rates and, using the best international practices, to give recommendations to the government how to correct them.
Benefit from Our Service: Save 25%
Along with the first order offer - 15% discount, you save extra 10% since we provide 300 words/page instead of 275 words/page
The second function is financial assistance. It is the use of financial resources of the IMF by member countries experiencing difficulties with a balance of payments. Countries should give a reform programme to the IMF, indicating government’s intention to overcome difficulties. IMF’s financial resources consist of its resources (each country’s contribution to the authorized capital of the IMF in accordance with the quota), interest income for the use of IMF resources, as well as an amount of borrowed funds. The IMF loan is a purchase of foreign currency with the national one. Repayment of the loan is a reverse exchange. IMF loans are issued by shares (tranches). The use of financial resources of the IMF provides their allocation in a process of performance of country’s economic reform programmes agreed with the IMF’s. Credit tranches (starting with the second) can be obtained only on the assumptions of criteria specified in the program. This property of the IMF tranches is called the conditionality of funding. All kinds of access to financial resources of the fund are based on the national implementation of certain conditions that are being developed jointly by experts from the IMF and the government of the country within the program of economic reforms aimed at overcoming balance of payments difficulties.
The third function is technical. Technical assistance is the assistance of the IMF to member countries in the field of monetary and foreign exchange policy, banking surveillance, fiscal and tax policy, statistics, development of financial and economic legislation, as well as training of people. Technical assistance is provided through the direction of missions to central banks and finance ministries and statistical agencies of the countries which requested this assistance. The IMF sends experts for a period of 2-3 years (Fritz-Krockow & Ramlogan 2007).
Changes in the IMF
For decades that have passed since the Second World War, in the world economy and monetary system, besides the growth of prosperity, there have been other significant changes. They have increased the importance and urgency of the tasks performed by the IMF. However, at the same time, they demanded new reforms and adaptation from the IMF. The rapid progress in the sphere of technologies and communication contributed to the growth of the international market integration and the development of closer ties between the countries’ economies. As a result, emerging financial crises usually spread among countries extremely fast now.
Because of the growing integration and interdependence, economic well-being of any country depends on economic indicators of other countries, as well as on the availability of open and stable global economic environment. The functionality of the global trading and payment system equally dependents on economic and financial policies pursued by individual countries. In such a way, globalization requires the development of more active international cooperation, which, in turn, imposes an additional responsibility on the international institutions that organize this cooperation including the IMF (Coffey & Riley 2006).
IMF’ purposes have also become more important due to the increasing number of its members. The number of IMF member countries increased significantly compared to 44 states participating in its creation. In particular, it is associated with political independence of many developing countries and a collapse of the Soviet bloc. The growing number of member states, as well as changes in the global economy, requires from the IMF an adoption of various adaptation measures in order to perform its functions effectively. Countries that became members of the IMF until 1971 pledged to maintain the linkage of their exchange rates at certain levels, which could be corrected, but only to eliminate the fundamental disequilibrium of balance of payments and with the consent of the IMF. It is the so-called Bretton Woods exchange rate system. “IMF exchange rate regime has evolved from 1950 till early period of this century” (Horvath 2006). In 1971, the system ceased to exist, because the US government temporarily abolished the convertibility of dollar into gold. After that, IMF members have gained the right to choose any form of exchange rate regimes in its sole discretion. Some countries allow the currency to float freely. Others tie the currency to another currency or a group of currencies. Some countries are involved in the currency bloc (Kenen 2007).
Try our Top 30 Writers
Benefit from the incredible opportunity
at a very reasonable price
Order only for $10.95Hire a TOP writer
Simultaneously with the IMF, International Bank for Reconstruction and Development (IBRD) was established, more commonly known as the World Bank. “The World Bank has been described as the world’s foremost international development agency” (Darrow 2003, p. 9). Its aim is to promote the long-term economic development through the funding of infrastructure projects. The IMF and the World Bank Group complement each other’s activities. The IMF focuses on policies in the financial sector, as well as macro-economic indicators, while the World Bank is engaged primarily in poverty reduction and long-term development. Its activities include crediting of developing countries and countries with transition economies in order to finance infrastructure projects, reforms of certain sectors of economy, and the expansion of structural reforms. The IMF extends financing for the general support of the balance of payments and international reserves at the time of the adoption of measures to overcome difficulties. “Likewise, the International Monetary Fund works closely with other international organizations such as the World Trade Organization (WTO)” (Hollander 2012, p. 14).
Argentinean Economic Crises and the IMF
At the end of the XX century, Argentina could be called the country of economic shocks. The entire second half of the XX century, Argentina suffered from inflation. When in
Try our VIP Support
Benefit from the incredible opportunity
at a very reasonable price
Order only for $9.99Get VIP Support
The crisis in Argentina began from the events of the Asian crisis, which had a direct impact on the Argentinean trade. The crisis in Asian countries made Argentine exports extremely expensive and uncompetitive, which plunged economy into recession. It had a negative impact on regional trade. A trend of capital outflow became the overall result of these crises. Although economies of Latin America had no large debts at that time, past debts provoked hyperinflation and undermined the business reputation of Argentina. Already in 1999, the decline in GDP was 4%. Against this background, a fiscal policy became inadequate. Due to the fall of export earnings, all attempts of the government to reduce budget expenditures were blocked by trade unions. Argentina’s foreign debt grew. However, the government decided to hold pegging peso to dollar. The IMF provided new loans only on the assumption of budgetary austerity, as well as preservation of a fixed exchange rate. Devaluation of peso would destroy the banking system, which had mostly dollar-denominated liabilities and assets in pesos. Investors and the Argentineans did not believe in the ability of the country to maintain pegging peso to dollar. The population massively began to withdraw deposits in pesos, and convert them into dollars. The government froze deposits for 12 months (Mussa 2002).
In fact, the budget deficit was larger than experts could imagine. The reason was economically unjustified measures to change the funding principles of the social sphere, and pension payments in particular. Excessive social expenditures established in 1982 were reformed and, therefore, reduced in the early 1990s. However, it was found that the decrease in liabilities for social benefits in the long term, in reality, meant their increase in the short term (Desai 2003).
Affiliate Program (Earn 10%)
Earn 10% from all orders made by people you bring!
Your people also get 17% discount for their first order
Start earnings now!Learn more
As a result of these changes, there was an increase in the interest rates. The government made a decision to pay off an old debt at the expense of a new debt, which was more expensive. Because of an increase in the interest rates, the tax increased, and the reduction of government costs entailed recessive consequences. Deflation began in the country. Because of volatile prices, recession continued, which, in turn, caused a decline in revenues. The government decided to show rigidity in the tax area. To have a positive impact on the redistribution of capital flows in the country, it raised taxes, cut wages in the public sector, thereby increasing the unemployment rate. After two years spent in crisis, without any hope for getting the budget designed to provide long-term economic well-being, the government resigned in 2001. “This act symbolised the weakness of the government of Argentina in an economic and political crisis” (Cohen 2012, p. 39). At the end of December 2001, the IMF did not provide the next tranche of the loan.
The new administration believed that the main problem of the country was a fixed monetary system and a threatening debt. It began to implement asymmetric deflation, including denomination of peso in relation to dollar. The government abandoned pegging peso to dollar. Immediately, peso was devalued, and dollar deposits in banks were converted into pesos at the exchange rate that was less than before the crisis. The government did not realize that the measures of the 1930s implemented in the US, the UK, and even in Argentina, would not work in modern conditions of hyperinflation. It only worsened the situation. “A default of the government debt, which occurred against the backdrop of a prolonged recession, sent the Argentina currency and economy into a tailspin” (Daseking, Ghosh, Lane & Thomas 2005, p. 1). The consequences of this default were extremely heavy for the Argentine economy. GDP of the country in dollar terms decreased almost by three times. It was a real economic disaster. In 2002, the unemployment rate in Argentina was more than 20%. Within two weeks, five presidents changed in the country, and government stopped payment on the debt that exceeded $ 100 billion. It was the largest sovereign default in the world. Nowadays, the situation in Argentina has improved slightly. The country has returned to a pre-crisis level (Cohen 2012).
A certain share of responsibility for the crisis in Argentina lies on the IMF. The IMF was involved in the situation of the country because of the budget deficit. Initially, the fund supported the Argentine reforms. In the 1990s, the IMF considered Argentina as a successful country. When complexities began, the IMF continued to credit Argentina insisting on keeping pegging peso to dollar. The IMF underestimated the costs of this policy. However, in the upshot, the IMF stopped financing Argentina (Mussa 2002).
Argentina joined the IMF in 1956. By 1984, the government of the country was unable to pay its debts both to the fund and foreign banks and individuals. Lengthy negotiations resulted in adoption of the so-called “Austral Plan”. It included the introduction of the regime of austerity, cutting wages by 20%, a significant decrease in government spending and realization of a deflationary policy. In fact, an anti-inflationary policy was reduced to freezing of prices and wages. However, the wages were more frozen than the prices that decreased for a year in real terms by 29%. In 1984, within the framework of the financial plan, an external debt was restructured for a total amount of $ 19 billion, $ 1.8 billion of which fell to the share of the Paris Club, $ 16.6 billion – on foreign commercial banks, and $ 913 million – on foreign individuals. The government received a loan of $ 2 billion. The IMF gave $ 1.2 billion. As a result, by 1991, Argentina’s economy was in an extremely poor condition. Only in the mid-90s, the situation was rectified. According to the IMF, a proposed plan to resolve Argentina’s economic and political crises was a role model. The country implemented all requirements of the fund (Mateos y Lago 2004).