The International Monetary Fund (IMF) is an international organization that provides financial assistance and advice to member countries. This article will discuss the main functions of the organization, which has become an enduring institution integral to the creation of financial markets worldwide and to the growth of developing countries.
What Does It Do?
The IMF was born at the end of World War II, out of the Bretton Woods Conference in 1945. It was created out of a need to prevent economic crises like the Great Depression. With its sister organization, the World Bank, the IMF is the largest public lender of funds in the world. It is a specialized agency of the United Nations and is run by its 186 member countries. Membership is open to any country that conducts foreign policy and accepts the organization’s statutes.
The IMF is responsible for the creation and maintenance of the international monetary system, the system by which international payments among countries take place. It thus strives to provide a systematic mechanism for foreign exchange transactions in order to foster investment and promote balanced global economic trade.
To achieve these goals, the IMF focuses and advises on the macroeconomic policies of a country, which affect its exchange rate and its government’s budget, money and credit management. The IMF will also appraise a country’s financial sector and its regulatory policies, as well as structural policies within the macroeconomy that relate to the labor market and employment. In addition, as a fund, it may offer financial assistance to nations in need of correcting balance of paymentsdiscrepancies. The IMF is thus entrusted with nurturing economic growth and maintaining high levels of employment within countries.
How Does It Work?
The IMF gets its money from quota subscriptions paid by member states. The size of each quota is determined by how much each government can pay according to the size of its economy. The quota in turn determines the weight each country has within the IMF – and hence its voting rights – as well as how much financing it can receive from the IMF.
Twenty-five percent of each country’s quota is paid in the form of special drawing rights (SDRs), which are a claim on the freely usable currencies of IMF members. Before SDRs, the Bretton Woods system had been based on a fixed exchange rate, and it was feared that there would not be enough reserves to finance global economic growth. Therefore, in 1968, the IMF created the SDRs, which are a kind of international reserve asset. They were created to supplement the international reserves of the time, which were gold and the U.S. dollar. The SDR is not a currency; it is a unit of account by which member states can exchange with one another in order to settle international accounts. The SDR can also be used in exchange for other freely-traded currencies of IMF members. A country may do this when it has a deficit and needs more foreign currency to pay its international obligations.
Remember the topic is Background and methods of the lending policy from the International Monetary Fund (IMF)
The SDR’s value lies in the fact that member states commit to honor their obligations to use and accept SDRs. Each member country is assigned a certain amount of SDRs based on how much the country contributes to the Fund (which is based on the size of the country’s economy). However, the need for SDRs lessened when major economies dropped the fixed exchange rate and opted for floating rates instead. The IMF does all of its accounting in SDRs, and commercial banks accept SDR denominated accounts. The value of the SDR is adjusted daily against a basket of currencies, which currently includes the U.S. dollar, the Japanese yen, the euro, and the British pound.
The larger the country, the larger its contribution; thus the U.S. contributes about 18% of total quotas while the Seychelles Islands contribute a modest 0.004%. If called upon by the IMF, a country can pay the rest of its quota in its local currency. The IMF may also borrow funds, if necessary, under two separate agreements with member countries. In total, it has SDR 212 billion (USD 290 billion) in quotas and SDR 34 billion (USD 46 billion) available to borrow.
Remember the topic is Background and methods of the lending policy from the International Monetary Fund (IMF)
