International Monetary Fund (IMF)

The International Monetary Fund (IMF) is an international organization headquartered in Washington, D.C., of 189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

  • It was formed in 1945 at the Bretton Woods Conference.
  • It came into formal existence in 1945 with 29 member countries and the goal of reconstructing the international payment system. It now plays a central role in the management of balance of payments difficulties and international financial crises.
  • Countries contribute funds to a pool through a quota system from which countries experiencing balance of payments problems can borrow money.
  • Through the fund, and other activities such as the gathering of statistics and analysis, surveillance of its members’ economies and the demand for particular policies, the IMF works to improve the economies of its member countries.

The organisation’s objectives stated in the Articles of Agreement are:

  • To promote international monetary co-operation,
  • International trade,
  • High employment,
  • Exchange-rate stability,
  • Sustainable Economic Growth, and
  • Making resources available to member countries in financial difficulty.

What is Balance of Payment (BoP)?

BoP of a country is the record of all economic transactions between the residents of the country and of the world in a particular period (over a quarter of a year or more commonly over a year). These transactions are made by individuals, firms and government bodies. Thus the balance of payments includes all external visible and non-visible transactions of a country.

According to IMF, Balance of Payment is:

Current Account + Financial Account + Capital Account + Balancing Item = 0

The IMF uses the term current account with the same meaning as that used by other organizations, although it has its own names for its three leading sub-divisions, which are:

  • The goods and services account (the overall trade balance)
  • The primary income account (factor income such as from loans and investments)
  • The secondary income account (transfer payments)

Balance of payments are also known as “balance of international trade”.

When two countries (their people) trade with each other, the overall settlement of balance is done based on the value of exports & imports between the countries in that financial year. The country (amongst the two) with higher exports as compared to imports (Exports > Imports) gets cash to settle the balance & vice-versa for the other country which has lower exports than it’s imports (Imports > Exports).

Hence, the BoP combined for all the economies of the world has to be 0 (zero) as all the balances have to be settled with respective trading partners.

CONDITIONALITY FOR LOAN

IMF conditionality is a set of policies or conditions that the IMF requires in exchange for financial resources. The IMF does require collateral from countries for loans but also requires the government seeking assistance to correct its macroeconomic imbalances in the form of policy reform. If the conditions are not met, the funds are withheld.

Some of the conditions for structural adjustment can include:

  • Cutting expenditures, also known as austerity.
  • Focusing economic output on direct export and resource extraction,
  • Devaluation of currencies,
  • Trade liberalisation, or lifting import and export restrictions,
  • Increasing the stability of investment (by supplementing foreign direct investment with the opening of domestic stock markets),
  • Balancing budgets and not overspending,
  • Removing price controls and state subsidies,
  • Privatization, or divestiture of all or part of state-owned enterprises,
  • Enhancing the rights of foreign investors vis-a-vis national laws,
  • Improving governance and fighting corruption.
  • These conditions are known as the Washington Consensus.

SPECIAL DRAWING RIGHTS

  • Special Drawing Rights (SDR / XDR) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).
  • The XDR is the unit of account for the IMF and is not a currency per se. XDR instead represent a claim to currency held by IMF member countries for which they may be exchanged.
  • The XDR was created in 1969 to supplement a shortfall of preferred foreign-exchange reserve assets, namely gold and the U.S. dollar.
  • XDR are allocated to countries by the IMF. Private parties do not hold or use them.
  • The value of the XDR is based on a basket of key international currencies reviewed by IMF every five years. The weights assigned to each currency in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves.
  • The XDR basket now consists of the following five currencies: U.S. dollar 41.73%, Euro 30.93%, Renminbi (Chinese yuan) 10.92%, Japanese yen 8.33%, British pound 8.09%.

CRITICISM OF IMF

  • Developed countries were seen to have a more dominant role and control over less developed countries (LDCs).
  • Secondly, the Fund worked on the incorrect assumption that all payments disequilibria were caused domestically. The Group of 24 (G-24), on behalf of LDC members, and the United Nations Conference on Trade and Development (UNCTAD) complained that the IMF did not distinguish sufficiently between disequilibria with predominantly external as opposed to internal causes. This criticism was voiced in the aftermath of the 1973 oil crisis. Then LDCs found themselves with payments deficits due to adverse changes in their terms of trade, with the Fund prescribing stabilisation programmes similar to those suggested for deficits caused by government over-spending. Faced with long-term, externally generated disequilibria, the G-24 argued for more time for LDCs to adjust their economies.
  • Some IMF policies may be anti-developmental; the report said that deflationary effects of IMF programmes quickly led to losses of output and employment in economies where incomes were low and unemployment was high. Moreover, the burden of the deflation is disproportionately borne by the poor.
  • Lastly is the suggestion that the IMF’s policies lack a clear economic rationale. Its policy foundations were theoretical and unclear because of differing opinions and departmental rivalries whilst dealing with countries with widely varying economic circumstances.