International Monetary Fund and Global financial Stability over the years…
The International Monetary Fund was set up in 1944 in the aftermath of Great Economic Depression of 1939 and as a measure to rebuild the European economies post World War II. It was formed with a mandate of 44 founding members who pledged to rebuild the world economy in a synchronised manner to avoid global disruptions in financial markets. As part of Bretton-Woods institution a country could become a member of International bank of Reconstruction and Development (popularly known as World Bank) only if it was a part of IMF. Thus today IMF boasts a membership of a total of 190 countries. Nuaru being the latest to join.
The International Monetary Fund was formed with 5 major objectives which shall be explained in the following sections.
- Global financial Stability: For this purpose it releases its Global Financial Stability report and World Economic Outlook report twice a year. Through which it analysis the state of world finances, the best and worst practices, state of banking sector, availability and openness of the economy, levels of external debt etc, with respect to member countries.
IMF has also played a key role in refinancing multiple countries as and when they were threatened with major balance of payment crises.
Starting with 1939 Global financial crises it sought to rebuild a framework for economic cooperation to avoid the repetition of competitive devaluation among the countries which ultimately led to great economic depression of 1939.
During 1973 oil crisis, IMF estimated that the foreign debts of 100 oil-importing developing countries increased by 150% between 1973 and 1977, complicated further by a worldwide shift to floating exchange rates. IMF administered a new lending program during 1974–1976 called the Oil Facility. Funded by oil-exporting nations and other lenders, it was available to nations suffering from acute problems with their balance of trade due to the rise in oil prices.IMF has also helped the former soviet countries to transition from centrally planned economy to market driven economies.
IMF was one of the key organisations of the international economic system; its design allowed the system to balance the rebuilding of international capitalism with the maximisation of national economic sovereignty and human welfare, also known as embedded liberalism.The IMF played a central role in helping the countries of the former Soviet bloc transition from central planning to market-driven economies.
During the ASEAN tigers crises of 1997 IMF bailed out multiple east asian countries including the likes of Indonesia, Philippines, South Korea and beyond to enable them avoid default. This they did by tying the economic packages to their currency, and creating a roadmap for their banking and financial system reforms.
IMF has also helped India avoid its balance of payment crises in 1991 where it came out with multiple bailout packages along with economic reforms for the country.
During the Global Economic Crisis (2008) IMF undertook major initiatives to strengthen surveillance to respond to a more globalized and interconnected world. These initiatives included revamping the legal framework for surveillance to cover spill-overs (when economic policies in one country could affect others), deepening analysis of risks and financial systems, stepping up assessments of member’s external positions, and responding more promptly to concerns of the members.
2. Its second objective is to Ensure Global Monetary cooperation:
IMF, as per Bretton Woods agreement encourages international financial cooperation and hence introduced a system of convertible currencies at fixed exchange rates, and replaced gold with the U.S. dollar (gold at $35 per ounce) for official reserve in 1944.
After the Bretton Woods system (system of fixed exchange rates) collapsed in the 1971, the IMF promoted the system of floating exchange rates where the countries were free to choose their exchange arrangement, meaning that market forces determined the value of currencies relative to one another. This system continues to be in place today.
Similarly the IMF has the Board of Governors which consists of one governor and one alternate governor for each member country. Each member country appoints its two governors.
- It is responsible for electing or appointing executive directors to the Executive Board.
- Approving quota increases, Special Drawing Right allocations,
- Admittance of new members, compulsory withdrawal of member,
- Amendments to the Articles of Agreement and By-Laws.
This Board of Governors is inturn advised by two ministerial committees, the International Monetary and Financial Committee (IMFC) and the Development Committee.
Ministerial Committees: The Board of Governors is advised by two ministerial committees,
International Monetary and Financial Committee (IMFC): IMFC has 24 members, drawn from the pool of 189 governors, and represents all member countries.
It discusses the management of the international monetary and financial system and any other matters of common concern affecting the global economy.
The Development Committee on the other hand is a joint committee(25 members from Board of Governors of IMF & World Bank), tasked with advising the Boards of Governors of the IMF and the World Bank on issues related to economic development in emerging market and developing countries. It serves as a forum for building intergovernmental consensus on critical development issues.
3. The third objective of IMF is to Facilitate international trade:
IMF’s Supplemental Reserve Facility (SRF)
It is provided to meet short-term financing on a large scale to prevent outflow of money from international investors. For example the loss of investor confidence during the Asian Financial Crisis that caused enormous outflows of money of east asian countries led to massive IMF financing through SRF
4th and 5th objectives are to Promote high employment and sustainable economic growth and promote international trade.
For this purpose IMF uses multiple channels to restock funds in the country’s economy:
Exogenous Shocks Facility (ESF) Loans
These are loans to low-income countries that provide lending for negative economic events that are outside the control of the government. These could include commodity price changes, natural disasters, and wars that can interrupt trade.
Stand-By Arrangement (SBA) Loans
Countries with short-term balance of payment issues will apply for stand-by arrangement (SBA) loans from the IMF. SBA loans are meant to help countries emerge from an economic crisis by giving them quick access to the capital they need to restore growth.
Extended Fund Facility (EFF) Loans
Countries with long-term balance of payment issues that require economic reforms can apply for extended fund facility loans.
Reduce poverty around the world through its Poverty Reduction and Growth Trust (PRGT) Loans which are low-interest loans for low-income countries to reduce poverty and improve growth.
How the IMF Is Funded?
The IMF is funded by a quota system where each country pays based on the size of its economy and its political importance in world trade and finance. When a country joins the organization, it usually pays a quarter of its quota in the form of U.S. dollars, euros, yen, yuan or pound sterling. The other three quarters can be paid in its own currency. Generally, these quotas are reviewed every five years. The IMF can use the quotas from the economically-sturdy countries to lend as aid to developing nations.
The IMF is also funded through contribution by trust funds where the organization acts as the trustee. This comes from the contributions from members as opposed to quotas and is used to provide low-income countries with low-interest loans and debt relief.
Lending Through the IMF
When a country requests a loan, the IMF will give the country the money needed to rebuild or stabilize its currency, re-establish economic growth, and continue buying imports. The IMF offers member countries a variety of loans tailored to meet specific uses.
Currently the IMF is 1 trillion strong. As pointed out by the Managing Director Kristalina Georgieva of the fund, they have received a request from more than 80 member countries to refinance them, the fund is looking for ways to rebuild economies post Covid 19 induced economic lockdowns. the outlook of global growth is in negative, but global economists are hoping for better recovery in 2021.
The International Monetary Fund, both criticized and lauded for its efforts to promote financial stability, continues to find itself at the forefront of pandemic induced global economic crisis management.
As many look for hope and assistance from the funding facility there are many lingering concerns on the functioning of IMF.
The IMF has drawn vocal criticism over the years. In his 2002 book, Globalization and Its Discontents, Nobel Prize–winning economist Joseph Stiglitz denounced the fund as a primary culprit in the failed development policies implemented in some of the world’s poorest countries. He argues that many of the economic reforms the IMF required as conditions for its lending — fiscal austerity, high interest rates, trade liberalization, privatization, and open capital markets — have often been counterproductive for target economies and devastating for local populations.
The fund has also been criticized on the basis of overreach or “mission creep.” William Easterly makes this case in his 2006 account of the failures of Western aid to the undeveloped world, The White Man’s Burden. While he acknowledges some IMF successes in firefighting financial crises in Mexico and East Asian countries in the mid-1990s, he criticizes many of the fund’s interventions in severely impoverished countries, particularly in Africa and Latin America, as overly ambitious and intrusive. In addition, he describes many of the fund’s loan conditions and technical advice as out of touch with ground-level realities.
Overall we can say IMF has come a long way since its inception. But the current pandemic induced economic hardships needs once in a lifetime measures from all the global funding agencies including IMF to bring global finances back on pre covid levels. IMF needs to liquidate its funds to ensure maximum returns on its fundings, as well as ensure strict surveillance of respective economies which shall be funded for economic bailouts.
