International Monetary Fund (IMF)
Since its creation during the post-Great Depression era, the International Monetary Fund (IMF) has been a prominent figure in global finance. With the objective of promoting global currency and economic stability, it influences financial governance worldwide.
Creation At Bretton Woods
In July 1944, delegates from 44 countries met at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. They investigated the pressing issues of the day, such as exchange rate stability and exploding international debt. At Bretton Woods, the concept of the IMF was developed as a solution to these challenges and then introduced to the world.
Along with the International Bank for Reconstruction and Development (World Bank Group), the IMF was created to be a mechanism for economic and monetary cooperation between competing world powers. At Bretton Woods, the Articles of Agreement for the IMF were crafted. Initial plans to balance post-WWII debt obligations and mandate that members adopt a fixed exchange rate within one percent of gold were outlined. In 1945, the 29-country entity became an official body.
Since then, the IMF has been a prominent figure in crisis resolution and global economic management. From the end of the Bretton Woods System in 1971 to the Global Financial Crisis of 2008, the IMF has influenced the policies of countries around the globe.
The IMF's Form And Function
The IMF is an international organisation that aspires to promote financial stability, economic growth and cooperation among its members. Headquartered in Washington D.C., it is made up of 189 member countries.
The policy-making body of the IMF is the Board of Governors, which is commissioned with ensuring the structure and function of the IMF remains uncompromised. It is made up of one representative and alternate from each member country.
The entity tasked with executing day-to-day operations is known as the Executive Board, which is made up of 24 elected directors, each with voting rights proportional to the economic size and scope of the home nation.
The self-stated mission of the IMF is multi-fold and is as follows:
- Promote international monetary cooperation
- Facilitate global trade
- Promote employment and sustainable economic growth
- Reduce poverty worldwide
In an attempt to address issues such as global poverty and sustainable economic growth, the IMF performs several core functions on a routine basis:
- Surveillance: The IMF closely monitors the economic situation of each member nation on a single, regional and global basis. Throughout this process, forthcoming risks to stability are identified. In response, policy recommendations are made at both the country and global level. IMF publications such as the World Economic Outlook, Fiscal Monitor and Global Financial Stability Report are issued periodically to address evolving financial conditions.
- Lending: The IMF issues loans to member countries in need of financial assistance. Terms vary, but in times of imminent crisis, emergency lines of credit may be extended at a 0% interest rate. IMF financing is meant to aid in the payment of international creditors, preserve domestic stability and foster future economic growth. The IMF often acts as a lender-of-last-resort for countries that are unable to secure affordable financing on the world's capital markets. Example nations in 2018 include Greece, Kosovo, Bangladesh and Yemen.
- Technical Assistance/Training: Member nations are the regular recipients of IMF expertise pertaining to finance and economics. Extensive training and assistance are provided in the areas of banking, monetary policy, public fund management and tax policies.
The primary objective served by each of these functions is crisis aversion. By monitoring, advising and extending credit, the IMF aspires to reduce systemic risks facing member nations while promoting broad-based economic health.
IMF: Membership And Quotas
The IMF has extended membership to countries in every geographic locale. Whether a nation has a developing economy or is an established economic superpower, it may seek membership.
In order to gain and maintain acceptance by the IMF, a country must satisfy the following ongoing requirements:
- Pay a "quota" subscription fee
- Direct domestic economic policy toward the primary goals of pricing stability and orderly growth
- Avoid exchange rate manipulation to gain unfair competitive advantages
- Disseminate information and data that may impact international economics in the spirit of cooperation
The IMF is a quota-based institution, which means that individual quotas are assigned to each member and are representative of that nation's global economic standing. Quotas are derived via a mathematical formula that incorporates factors such as GDP, reserves and variability.
At the IMF, quotas are denominated in terms of Special Drawing Rights (SDRs). An SDR is an international reserve asset created by the IMF in 1969, that serves as a unit of measure. Its value is representative of a basket of global currencies, including the United States dollar (USD), euro (EUR), Chinese yuan renminbi (CNY, RMB), Japanese yen (JPY) and British pound (GBP).
In respect of their SDR qualifications, larger countries receive larger quotas while smaller members are allocated smaller quotas in the much the same fashion. The IMF uses quotas to determine benefits and obligations designated for member nations. This is accomplished in several ways:
- Contributions: A country's maximum financial obligation to the IMF is determined by quotas.
- Voting Rights: The number of votes given to members is determined according to quotas.
- Available Financing: The amount of IMF financing a member may obtain (under normal circumstances) is based on quotas.
- Special Drawing Rights (SDR): Quotas are used to decide a member's share of the IMF's aggregate SDR holdings.
The IMF quota system is designed to ensure that member countries are treated fairly and receive any assistance that may be needed. In this fashion, an economic superpower such as the U.S. or U.K. is able to secure ample resources in a similar manner as those in smaller, developing nations.
Although its stated mission is service-oriented, the IMF has been a polarising entity since its inception. Over the decades, detractors have periodically cited many concerns as being reason enough for the organisation's dissolution. Below are two criticisms of the IMF that opponents frequently reference.
As a "lender of last resort" for nations experiencing severe economic challenges, the IMF is thought to wield a great deal of political influence. The extension of credit to embattled nations essentially places the Fund in a supervisory role. In some cases, IMF guidance has been perceived to undermine democratic governments in favor of more credit-worthy regimes.
One example of this critique is the IMF's relationship with Pakistan. From 1958-2019, Pakistan secured 21 loans from the Fund, totalling more than US$27.0 billion. Subsequently, the national debt rose to 71.4% of GDP annually, with payments exceeding 17% of government revenue. To ensure that the terms of the financing continued to be met, the IMF was accused of supporting numerous hard-line governments in Pakistan. Accordingly, human rights violations and the impoverishment of the domestic populace were blamed on the terms of IMF-issued loans.
Operates With Impunity
Because the IMF operates independent of government oversight, it is thought to enjoy "absolute immunity" from prosecution. This concept exempts the Fund from any liabilities stemming from the financing of projects that end up having a negative economic impact. Subsequently, critics claim that because the IMF is not held accountable, it is able to operate with impunity.
In 2019, the issue of "absolute immunity" came under fire in a case before the United States Supreme Court. Claiming economic damages from the construction of the Tata Mundra power plant in India, local fishermen won a judgement against the IMF. Although the Supreme Court's decision was groundbreaking, the liability critique is one that persists.
IMF In The News
The onset of the novel coronavirus (COVID-19) pandemic in early 2020 brought on a period of unprecedented economic strife. Businesses around the world were forced to shut down as aggressive measures were adopted to control the contagion. The result was widespread uncertainty regarding a potentially devastating economic crisis.
As a global financial leader, the IMF committed vast resources to hard-hit regions. Accordingly, the Fund pledged the following actions in April 2020:
- Extend US$1 trillion in lending capacity to member nations
- Issue US$100 billion in emergency loans
- Establish short-term lines of credit and custom financing solutions
- Restructure the Catastrophe Containment and Relief Trust (CCRT), increasing the budget to US$1.4 billion
Throughout the COVID-19 pandemic, the IMF was looked to for its expertise and financial resources. From an analytical perspective, the IMF projected global economic growth to contract by 3% for 2020, placing extreme pressure on emerging economies. The Fund's estimates stated that developing nations required US$2.5 in external financing to weather the crisis. Given the IMF's mission to reduce global poverty, they were to act as the primary lender for many of the hardest-hit regions. As of May 2020, the IMF had extended loans to 50 of 103 countries that requested aid.
Since its inception, the IMF has been an integral part of the global monetary and financial system. Through monitoring, extending credit and educating member nations, the IMF has built a truly international body representing 189 of the 195 officially recognised countries.
However, the IMF is also a controversial figure. High-profile partnerships with member nations such as Iceland and Greece have prompted voracious debate over the role of international lending in contemporary finance. Concerns pertaining to the negative impacts of globalisation, as well as nation building, are frequently cited by critics. In addition, widespread criticisms of the quota and SDR system have been prevalent over the course of its history.
In spite of its detractors, the IMF is a viable entity. Given the levels of membership and resources, it is poised to remain at the forefront of global finance for decades to come.
FXCM Research Team
FXCM Research Team consists of a number of FXCM's Market and Product Specialists.
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