A number of the world economies depend on the IMF for economic stability, it is indeed hard to address issues of world economies and not involve the IMF in some way. So what is IMF? What exactly does it do? And how does it do it? This article will answer these questions along with many more to ensure that you get a better understanding of the organisation.
IMF in full is International Monitory Fund. This is an organisation charged with providing economic advice, support and monitoring to its member nations. It is primarily to ensure stability of the global monetary system in turn creating a safe environment for international trade.
The role of the IMF
Part of its role has been touched in the international monitory fund definition. To elaborate on that, the international monitory fund is responsible for provision of systematic mechanisms that enable a smooth foreign exchange trade among countries for the promotion of investment and balance of global trade. This requires that the IMF observes and advises countries on their macroeconomic policies that have an impact on exchange rates. These may include a country’s budget, its management of credit and flow of money within the country.
The international Monetary Fund also gives an annual report for each country’s economic status, providing details of key indicators of progress and general performance of certain sectors that affect its position in the financial markets. Within this report, are recommendations for improvement and growth as well as predictions and forecasts for growth.
In cases where a country is going through financial crisis, the IMF can offer financial assistance. The organization will draw from the reserves and loan the country money to improve its economy. The loan, however, comes with strict suggestions for the country to follow in order to get back on its feet. There are a number of situations that may warrant such a bailout, but the IMF will first evaluate the situation before it approves such assistance. The IMF, therefore, natures economic growth and maintains economic activity within member nations.
Funding for IMF
The role and responsibilities of the IMF obviously entail that it should have a lot of money to carry out these responsibilities. So where does the money come from?
The IMF has 188 member nations, and each nation pays a membership fee. The membership fee is paid as a quota subscription calculated according to a country’s economy. Countries with a stronger economy will pay more to the IMF. 25 percent of the quota is paid in the IMF Special Drawing Rights (SDR) which is a special accounting unit used by the IMF like a currency among member nations. Member states have to commit towards using this currency and accepting it during transactions of currency and the IMF stands to gain from such transactions carried out using SDR.
It is this membership or subscription that is used to lend money to countries that need an economic boost and this will be paid back with interest. The IMF may also choose to borrow money under special arrangements. International Banks accept SDR for loan transactions which makes it easier for the IMF to get Funding.
The IMF also gets funding from countries that fail to maintain their SDR reserve. Every member country is given a reserve after it pays its quota, and that reserve can be used to buy other currencies, but sometimes countries may send a lot and end up with a reserve below what was allocated to them, in such a situation, the country is expected to pay interest to IMF.
Benefits of the IMF
The IMF has come to the aid of a number of countries when they are experiencing financial crisis. Korea is one such country that was hit by the Asian financial crisis and the IMF was able to come to its rescue, providing structural adjustment policies along with a loan to help it rebuild its economy. When countries also are hit by disasters that have a major impact on the economy, the IMF is able to provide financial assistance to rebuild the country’s economy as well as to aid in humanitarian assistance.
The financial assistance and structural adjustment policies do not just help the country that is given the loan, it helps the entire global economy. In fact, the main reason such loans are given is to maintain the balance of the global economy. The IMF would like to see a world where trade carries on smoothly, but if a country has a crumbling economy and its currency has to be devalued, this will affect the global economy, some countries also may employ certain policies that will affect the rest of the world. For example when America once tried to limit the amount of dollars in circulation and this was affecting international trade, Which is one of the reasons why the SDR was introduced.
The monitoring and reporting carried out by the IMF help individual countries assess their policies and make adjustments where necessary to align them with a more favorable course for development. Many countries that have followed the recommendations of the IMF have seen major boosts in their economies. The world in general also benefits from the IMF world economic outlook which is also published in the report. This shows where the world economy is and what prospects are there for the future. Transitional economies benefit from technical support provided by the international monitory fund.
In as much as there are many benefits of the IMF, there are complaints as well. Some countries especially developing countries complain about the structural adjustment policies. They feel they are being forced into accepting terms and conditions which may at times not be favourable for them. While IMF news reports a number of success stories, opposition of the IMF claim that the IMF opens the way for forced privatisation of government institutions and exploitation of labour in developing countries that adopt policies suggested by the IMF as terms for accepting the loan.
Overall however there has been evidence of success stories of countries that have partnered with the IMF to transform their economies using IMF technical and financial support and they have not had trouble paying back their loans.