International Monetary Fund: Establishment, Functions & Assistance

Over the years, the International Monetary Fund (IMF) has helped countries overcome several challenging economic situations. This financial institution was established to promote global monetary cooperation, secure financial stability, smoothen international trade, and reduce poverty worldwide, which continues to evolve and adapt to the ever-changing world economy. But before digging any deeper, it’s important that we first deal with its history. 

So, let’s discuss in this article the establishment, functions, and differences between the world bank & IMF etc.

How was IMF established?

The International Monetary Fund (IMF) was established in 1944. Its history dates back to World War II when the participating nations realised the need to create a new international financial order to curb the economic turmoil and competitive currency devaluations experienced during the Great Depression of the 1930s. 

The economic turmoil resulted from immense destruction from the war, disruptions in trade & production etc. This was when the leading economists and policymakers from 44 countries started discussions and preparations for the conference. Here we arrive at the Bretton Woods Conference.

1. Bretton Woods Conference: This United Nations Monetary and Financial Conference occurred from July 1st to 22nd, 1944. The conference brought delegates from the 44 Allied nations altogether to negotiate the terms of the new international monetary system. Prominent economists like John Maynard Keynes from the UK and Harry Dexter White from the US attended the conference.

2. Agreement on Key Principles: During the conference, the participating countries reached a consensus on various key principles monitoring the creation of an international monetary system. 

Now, what were these key principles? 

These included the establishment of a stable exchange rate regime, using a common monetary unit (later called the "Bretton Woods system" pinned to the U.S. dollar), and creating an institution to oversee this system. Basically, it played a crucial role in managing the international monetary system under the Bretton Woods system, which involved fixed exchange rates pegged to the U.S. dollar.

3. Creation of the IMF: As a result of the negotiations, an institution was finally created. The IMF was officially created on July 22, 1944, by signing the "Articles of Agreement." The Articles of Agreement briefed the IMF's objectives, governance structure, and operational framework. The agreement was enacted on December 27, 1945, after being ratified by the requisite member countries.

4. Initial Operations: After IMF’s establishment, it started its operations and initially focused on promoting exchange rate stability, providing temporary financial assistance to member countries facing difficulties in payments, and assisting in developing war-torn economies.

5. Transition to Floating Exchange Rates: The Bretton Woods system collapsed in the early 1970s, leading to the adoption of floating exchange rates. The IMF adjusted its policies and focused more on surveillance, economic policy advice, and providing financial assistance to needy countries.

Note: A floating exchange rate is a regime where the currency price of a country is set by the forex market based on supply and demand relative to other currencies, opposite to the fixed exchange rate, in which the government entirely determines the currency rate.

List of IMF Member Countries 2023

The International Monetary Fund (IMF) has a membership of 190 countries. Some of the notable member countries include:

1. United States

2. China

3. Japan

4. Germany

5. United Kingdom

6. France

7. Canada

8. India

9. Brazil

10. Russia

11. Australia

12. South Africa

13. Saudi Arabia

14. South Korea

15. Mexico etc.

What are the functions of IMF?

• Monitoring Member Country Economies

IMF’s prime job is to promote stability in the global monetary system. Therefore, it needs to monitor the economies of its 190 member countries at first. This activity is called economic surveillance, which happens at both the national and global levels. 

• Lending

The IMF lends money to nurture the economies of member countries with balance of payments problems instead of lending to individual projects. This assistance can restore international reserves, stabilise currencies, and strengthen conditions for economic growth. The IMF expects the countries to pay back the loans, and the countries must embark on structural adjustment policies monitored by the IMF.

Lending through the IMF takes place in 2 ways. 

1. The first is at non-concessional interest rates.

2. The other comes with concessional terms. 

The latter is lent to countries with low income with very low or no interest rates.

• Technical Assistance

The third function of IMF is to provide assistance, policy advice, and training through its various programs to foster human and institutional capacities, this is what it calls capacity development. The group provides member nations with technical assistance in the following areas:

1. Fiscal policy

2. Monetary and exchange rate policies

3. Banking and financial system supervision and regulation

4. Statistics

Through capacity development, member nations can help strengthen and improve economic growth and create jobs.

• Governance and Voting Rights

The body has a governance structure which includes its Executive Board and Board of Governors. Governance reforms have been undertaken to boost the representation of emerging and developing economies within the IMF.

Who are the representatives of member countries of IMF?

The country authorities in the International Monetary Fund (IMF) refer to the representatives of member countries who interact with the IMF in several capacities. The specific authorities involved in IMF-related activities can vary from country to country but generally include the following key roles:

1. Finance Ministers: Finance ministers are the highest-ranking government officials responsible for economic and financial policies in their countries. They often lead the delegations representing their countries in IMF meetings, such as the International Monetary and Financial Committee (IMFC) meetings.

2. Central Bank Governors: Central bank governors are the heads of the central banks of member countries responsible for formulating and implementing monetary policy, managing foreign exchange reserves, and maintaining financial stability. Central bank governors participate in IMF meetings.

3. Ministry of Finance Officials: Government officials from the Ministry of Finance or equivalent departments also take part in the IMF's interactions with member countries. They engage in policy discussions and provide economic data and information.

4. Treasury Officials: Treasury officials, often associated with the Ministry of Finance or Treasury departments, are responsible for managing public debt, overseeing government revenue and expenditure, and coordinating financial policies. 

5. Economic Advisors and Policy Experts: Member countries may also include economic advisors and policy experts who provide technical expertise and analysis on various economic and financial matters. 

How IMF help in financial crisis?

With time, the IMF adapted to global economic developments and underwent various modifications. The collapse of the Bretton Woods system & the emergence of floating exchange rates with several financial crisis motivated the IMF to change its policies, expand its activities, and enhance its role in promoting economic growth. The IMF helps member countries facing economic crisis by offering loans, technical assistance & surveillance of economic policies. 

Money to fund the IMF's activities comes from member countries that pay a quota based on the size of each country's economy and its significance in world trade & finance. It has also assisted in the following ways:

1. Debt Crisis and SAPs: During the 1980s and 1990s, the IMF became highly involved in addressing debt crises in developing countries, this provided financial assistance to countries facing severe economic challenges, often in exchange for implementing structural adjustment programs (SAPs). 

Note: SAPs included policy measures like fiscal austerity, market liberalization, and privatisation with the goal of promoting economic stability & growth.

2. Asian Financial Crisis: The Asian financial crisis, which commenced in 1997, showed shortcomings in the IMF's policies and approach. It was argued that IMF’s emphasis on short-term stabilisation had negative social and economic consequences.

3. Governance and Reforms: The IMF has undergone reforms over the years to enhance its effectiveness and responsiveness such as changes in governance structures to give emerging economies greater representation and voice within the organization.

4. Global Financial Crisis: The global financial crisis of 2008-2009 attracted immense attraction to the role of the IMF in managing global financial stability. The IMF provided financial assistance and policy advice to several countries affected by the crisis.

Difference between World Bank and International Monetary Fund

Which country has IMF helped?

Not one, but many. The International Monetary Fund (IMF) has granted economic assistance and support to various countries over the years. Here are some examples:

1. Greece: In 2010, during the sovereign debt crisis, Greece faced severe economic challenges. So, the IMF, the European Union, and the European Central Bank granted financial assistance to Greece through bailout packages.

2. Argentina: In 2018, Argentina experienced a severe currency crisis and faced challenges in meeting its debt obligations. So, the IMF approved a financial assistance program for Argentina to restore confidence, stabilize its currency, and address fiscal imbalances. The program included policy reforms and financial support with the aim of restoring economic stability.

3. Rwanda: The IMF has granted Rwanda policy advice and technical assistance to balance its economic development. The IMF's recommendations have helped Rwanda strengthen its macroeconomic stability, improve public financial management, enhance the business environment etc.

4. Ukraine: The IMF has also worked closely with Ukraine to support its economic reforms and stabilisation efforts. The IMF's policy advice looked upon many areas, such as fiscal consolidation, energy sector reforms, anti-corruption measures, and improving the investment climate.

5. Sub-Saharan Africa: The IMF has played a crucial role in supporting capacity development and providing technical assistance to countries in Sub-Saharan Africa such as training programs, policy advice, and institutional support to strengthen economic governance, fiscal management etc.

6. Heavily Indebted Poor Countries (HIPC) Initiative: The IMF has participated in debt relief initiatives to reduce the debt burden of heavily indebted poor countries. Under this, the IMF and other international partners have granted debt relief to eligible countries.

Conclusion

Since the pandemic, the IMF has supported more than 50 low-income countries with around $24 billion in interest-free loans via the Poverty Reduction & Growth Trust (PRGT), therefore helping to counter instability in a wide range of the world’s poorest nations, be it the Democratic Republic of Congo or Chad or Nepal.