International Monetary Fund: The Role of the IMF and IMF History

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http://www.imf.org/

 

 

 

The International Monetary Fund (IMF) came into official existence on December 27, 1945, when 29 countries signed its Articles of Agreement at a conference held in Bretton Woods, New Hampshire, USA, from July 1-22, 1944. The IMF began financial operations on March 1, 1947.

 

Current Membership: 182 countries

Staff: Approximately 2,600 from 110 countries

Managing Director: Michel Camdessus assumed office in 1987

Governing Bodies: Board of Governors, Interim Committee, Executive Board

Total Quotas: SDR 145 billion (US $195 billion)

Accounting Unit: Special Drawing Right (SDR). As of September 10, 1998, SDR 1 equaled US $1.36163.

 

 

The IMF was created to promote internatioal monetary cooperation; to facilitate the expansion and balanced growth of internatioal trade; to promote exchange stability; to assist in the establishment of a multilateral system of payments; to make its general resources temporarily available to its members experiencing balance of payments difficulties under adequate safeguards; and to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

 

 

 

The International Monetary Fund (IMF or Fund) and the International Bank for Reconstruction and Development (IBRD or World Bank) were both established at the United Nations Monetary and Financial Conference, held at Bretton Woods, New Hampshire, on July 1-22, 1944. The two were created to oversee stability in international monetary affairs and to facilitate the expansion of world trade. Membership in the World Bank requires membership in the IMF, and they are both specialized agencies of the United Nations. The World Bank was given domain over long-term financing for nations in need, while the IMF's mission was to monitor exchange rates, provide short-term financing for balance of payments adjustments, provide a forum for discussion about international monetary concerns, and give technical assistance to member countries. These functions are still generally true of both organizations, although the policies determining how they are carried out have been modified and amplified over time.

 

The Fund's legal authority is based on an international treaty called the Articles of Agreement (Articles or the Agreement) which came into force in December 1945. The first Article in the Agreement outlines the purposes of the Fund and, although the Articles have been amended three times in the course of the last 47 years prior to 1998, the first Article has never been altered.

 

The IMF started financial operations on March 1, 1947. Drawings on Fund reserves were made by 11 countries between 1947 and 1948, although there were no drawings in 1950 and very few in the following years. During this time the Fund worked on its drawings policies. One outcome was the stand-by arrangements, established in 1952, modified in 1956, and reviewed periodically since then. Stand-by arrangements provide a procedure for drawing on Fund resources with conditions based on a structural adjustment program for the borrower country. Stand-by arrangements became the model for other lending procedures designed by the Fund to meet the needs of its members.

 

By the mid-1970s, the Fund found itself becoming more of a lending institution than originally envisioned. The Fund's ability to meet the needs of its members was tested when the Organization of the Petroleum Exporting Countries (OPEC) quadrupled the price of crude oil in 1973-1974. Prices were increased again in 1979 and in 1980. This altered the international flow of funds as the OPEC countries' monetary reserves accumulated rapidly. At the same time, the industrial countries experienced strong inflationary pressures. These pressures were addressed by an increase in interest rates and a reduction of imports. This resulted in balance of payments deficits for many of the developing countries, which were paying more for oil, paying higher interest rates on the loans from the industrial countries, and finding reduced markets for their exports. In response to this situation, the IMF created an Oil Facility in 1974, and enlarged it in 1975, to aid members in balance of payments difficulties. In addition, an Oil Facility Subsidy Account was established for the poorest countries to alleviate the cost of borrowing under the Oil Facility. During the 1970s, although the oil price shocks placed more countries in balance of payments difficulties and forced many of the developing countries to borrow not only against the Fund, but also against private banks which were receiving a surplus of OPEC petrodollars, it was generally perceived at the time that the debt cads would be short-lived. It was not until Mexico threatened to default on its loans in 1982 that the world monetary community realized the extent and depth of the crisis. Throughout the 1980s the Fund played an increasingly larger role, not only as "lender-of-last-resort," but also as mediator with debtor countries in relation to creditor nations and private banks.

 

In the mid-1980s the Fund's lending operations increased dramatically. Stand-by arrangements are typically for one to three years, but the exigency of the debt crisis caused the Fund to devise programs for adjustment over longer periods. These are known as extended arrangements and, with other medium-term programs, can be arranged through the Structural Adjustment Facility or the Enhanced Structural Adjustment Facility. The terms of a structural adjustment program, or stabilization program, are known as conditionality. Programs include quantified targets or ceilings for bank credit, the budget deficit, foreign borrowing, external arrears, and international reserves. They also include statements of policies that the member intends to follow. Conditionality came under detailed scrutiny during the 1980s as more and more developing countries adopted structural adjustment programs and later were unable to meet the terms of the agreement. The philosophy of the Fund was criticized as being too oriented to the industrial economies and not adapted to developing economies. During the late-1980s several plans were put forth, involving not only the Fund but the creditor nations and commercial banks as well, to reduce the debt and the debt service payments of the debtor nations. In 1989 the Fund developed new debt reduction guidelines, providing Fund support for commercial bank debt and debt service-reduction operations by member countries. The debt strategy is still being assessed and its success or failure has not been determined.

 

 

 

Assistance is extended to members in the form of training and technical assistance. Beginning in 1950, the Fund offered training courses on balance of payments statistics and on international economics. In 1964 the IMF Institute was established fortify these training activities. The IMF Institute provides training courses for officials from member countries in such subjects as financial analysis and policy, balance of payments methodology, public finance, and government finance statistics.

 

The technical assistance program is operated through the Monetary and Exchange Affairs Department, the Fiscal Affairs Department, and the Bureau of Statistics. The Legal Department, the Bureau of Computing Services, and the area departments may also participate. Assistance is provided mainly through staff missions, field assignments by staff members or outside experts, and studies and recommendations prepared at headquarters. In providing technical assistance, the IMF emphasizes training government officials in macroeconomic management, reforming the tax system and tax administration developing central banking and financing systems, and improving statistical data. Advice is also provided on money and capital markets, central and general banking legislation, the structure of interest rates, regional cooperation among central banks, and the use of various instruments in monetary management. Technical assistance is most in evidence in the transformation of the centrally planned economies of Eastern Europe and the states of the former Soviet Union to market oriented economies. The IMF is assisting the new members in the choice of currency, developing import and export sectors, agreeing on ground rules for setting interest rates, reserve requirements, and credit guidelines, and in making structural reforms.

 

 

 

Under Article VIII of the Agreement members are required to furnish the Fund such information as it deems necessary for its activities, including national data about their economic and financial condition. Article VIII also dates that the Fund shall act as a center for the collection and exchange of information on monetary and financial problems, thus facilitating the preparation of studies designed to assist members in developing policies which further the purposes of the Fund. The Fund uses these statistics, in consultation with the member, as part of the fulfillment of the Fund's regulatory function, to assess the member's quota, and as part of the Fund's role in assessing the world economic outlook. In addition, the Fund has developed standards for the classification and presentation of balance of payments statistics and government finance statistics. It is concerned with maintaining the accuracy and consistency in the reporting of the data. The IMF compiles and publishes these statistics in a variety of publications.