IMF and Functioning of National Economy

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The International Monetary Fund (IMF) is a membership-based organization with 190 member nations. The most influential nations in the global economy are represented on the IMF’s executive board in proportion to their financial weight. For all 190 of its member nations, it works to achieve sustainable growth and prosperity. In order to increase productivity, job creation, and economic well-being, it does this by supporting economic policies that support monetary cooperation and financial stability.

At the Bretton Woods Conference, the IMF’s creation was first discussed in 1944. The International Monetary Fund (IMF) was established on December 27th, 1945, and currently has 189 member nations. IMF, which has its main office in Washington, D.C., is dedicated to fostering international monetary cooperation, ensuring financial stability, and advancing global trade, employment, and economic growth. A specialized department of the UN is the IMF.

What are the objectives of the IMF?

  • Foster global monetary cooperation
  • Secure financial stability
  • Facilitate international trade.
  • Promote high employment and sustainable economic growth.
  • And reduce poverty around the world
  • Macro-economic growth
  • Policy advise & financing for developing countries,
  • Promotion of exchange rate stability, and an international payment system

What Does the IMF Do?

  • It has three critical missions:
    • Encouraging the expansion of trade and economic growth, and advancing global monetary cooperation.
    • Avoiding measures that would undermine economic growth.
    • IMF member nations cooperate with one another and other international organizations to carry out these missions.

What is the History of IMF?

  • At a UN meeting held in Bretton Woods, New Hampshire, in July 1944, the idea for the IMF, also known as the Fund, emerged.
  • In order to prevent a recurrence of the competitive devaluations that had exacerbated the Great Depression of the 1930s, the 44 nations present at that conference sought to establish a framework for economic cooperation.
  • The International Bank for Reconstruction and Development (IBRD) did not allow countries to join unless they were IMF members.
  • In order to promote global financial cooperation, the IMF implemented a system of convertible currencies with fixed exchange rates and replaced gold as the official reserve with the U.S. dollar (gold at $35 per ounce).
    • The IMF has supported the system of floating exchange rates since the Bretton Woods system (system of fixed exchange rates) collapsed in 1971.  The value of currencies relative to one another is determined by market forces because countries are free to choose their exchange system. This framework is still in use today.
  • IMF estimates that during the 1973 oil crisis, 100 developing nations that imported oil saw an increase in their foreign debt of 150% between 1973 and 1977, which was further complicated by a global switch to floating exchange rates. Between 1974 and 1976, the IMF oversaw a brand-new lending initiative known as the Oil Facility. It was made available to countries experiencing severe problems with their trade balance due to the rise in oil prices and was funded by oil-exporting countries and other lenders.
  • The International Monetary Fund (IMF) was one of the major players in the global economic order; embedded liberalism, as it is also known, was made possible by the IMF’s design, which enabled the system to strike a balance between the revival of global capitalism and the maximization of national economic sovereignty.
  • The former Soviet Union’s nations were greatly assisted by the IMF in making the switch from centrally planned to market-based economies.
  • From Korea to Thailand and beyond, East Asia experienced a wave of financial crises in 1997.
    • In order to help the most affected economies avoid default, the International Monetary Fund developed a number of bailouts (rescue packages) that were conditional on financial, banking, and currency reforms.
  • Global Economic Crisis (2008): In response to a more globalized and connected world, the IMF undertook significant initiatives to strengthen surveillance.
    • These initiatives included updating the legal framework for surveillance to account for spillovers (when economic policies in one country may have an impact on those in another), deepening analysis of risks and financial systems, stepping up assessments of members’ external positions, and responding more quickly to member concerns.

What are the functions of the IMF?

  • Provides Financial Assistance: The IMF lends money to member nations experiencing balance of payments issues in order to restock global reserves, stabilize currencies, and improve the environment for economic growth. Governments must implement structural adjustment plans that are supervised by the IMF.
  • IMF Surveillance: It keeps an eye on the 190 nations that make up its membership’s economic and financial policies as well as the global monetary system.
    • The IMF highlights potential stability risks as part of this process, which occurs both globally and in specific nations, and offers guidance on necessary policy adjustments.
  • Capacity Development:  Central banks, finance ministries, tax authorities, and other economic institutions can receive technical support and training from it.
    • Developing strong legal frameworks, enhancing governance, modernizing banking systems, increasing public revenue, and improving the reporting of macroeconomic and financial data are all aided by this. Furthering the Sustainable Development Goals (SDGs) also aids nations in their efforts to achieve these objectives.

What is the Governance Setup of the IMF?

  • Board of Governors:
  • For each of the member nations, there is a governor and an alternate governor. The two governors are selected by each member nation.
    • It is in charge of choosing or appointing the Executive Board’s executive directors.
    • approving the allocation of Special Drawing Rights, quota increases,
    • Adding new members, removing members who are obligated to do so,
    • Articles of Agreement and By-Laws Amendments
    • The International Monetary and Financial Committee (IMFC) and the Development Committee are two ministerial committees that advise the Board of Governors.
    • In order to discuss the activities of their respective organizations, the Boards of Governors of the World Bank Group and the IMF typically meet once a year for annual meetings.
  • There are two ministerial committees that provide advice to the Board of Governors.
    • The International Monetary and Financial Committee (IMFC), which has 24 members and is made up of 190 governors, represents all of the member nations.
      • The administration of the world’s financial and monetary system is covered.
      • The Executive Board’s suggestions for changing the Articles of Agreement are also covered.
      • Aside from anything else that is a matter of general concern and affects the world economy.
    • Development Committee: 
    • The joint IMF and World Bank Board of Governors committee known as the “Development Committee” has the responsibility of advising both boards on matters pertaining to the economic development of the emerging markets and developing nations. It is composed of 25 members.
      • It functions as a forum for fostering intergovernmental agreements on important development issues.
  • Executive Board:
  • The Board of Governors chooses the Executive Board, which has 24 members.
    • It manages the IMF’s daily operations and carries out the authority granted to it by the Articles of Agreement and the Board of Governors.
    • It covers every facet of the Fund’s operations, from the staff’s yearly evaluations of the economies of member nations to global economic policy concerns.
    • In general, the Board decides by consensus, but formal votes are occasionally taken.
    • The total of each member’s basic votes (equally distributed among all members) and quota-based votes constitute that member’s vote. The voting power of a member is determined by its quota.
  • IMF Management: The Managing Director of the IMF serves as both the Executive Board’s chairman and the organization’s administrative leader. By vote or consensus, the Executive Board appoints the Managing Director.
  • IMF Members: In accordance with the IMF Articles of Agreement and conditions set by the Board of Governors, any other state, whether or not it is a UN member, may join the IMF.
    • Prior to joining the IBRD, one must first become an IMF member.
    • Pay a quota subscription: As a condition of membership in the IMF, each member nation is required to make a financial contribution known as a quota subscription. This contribution is based on the nation’s economic performance and wealth (Quota Formula).
      • It is a weighted average of GDP (weight of 50 %)
      • Openness (30 %),
      • Economic variability (15 %),
      • International reserves (5 %).
      • A combination of the GDP based on market exchange rates (weighted at 60%) and PPP exchange rates (weighted at 40%) is used to calculate the GDP of each member nation.
      • The International Monetary Fund (IMF) uses Special Drawing Rights (SDRs) as its unit of account rather than actual money.
        • The value of an SDR basket of currencies is calculated by adding up their respective values in U.S. dollars at market exchange rates.
        • The U.S. dollar, Euro, Japanese yen, British pound, and Chinese renminbi (included in 2016) are among the currencies in the SDR basket.
        • Except on IMF holidays and other times the IMF is closed for business, the SDR currency value is calculated every day.
      • Quotas are denominated (expressed) in SDRs.
      • SDRs are claims on currencies held by IMF members that can be exchanged for them.
    • The amount of money members contribute to the institution (their quotas) directly affects their ability to vote.
    • Each member nation is free to select its own method of determining the value of its currency under IMF guidelines. The only prerequisites are that the member no longer bases the value of its currency on gold (which has proven to be too rigid) and that it discloses the precise methodology it uses to determine the currency’s value to other members.