International Monetary Fund

I INTRODUCTION

International Monetary Fund (IMF), the specialized agency of the United Nations, established, along with the International Bank for Reconstruction and Development (the World Bank), at the UN Monetary and Financial Conference held in 1944 at Bretton Woods, New Hampshire. The IMF began operations in 1947. Its purpose is to promote international monetary co-operation and to facilitate the expansion and balanced growth of international trade through the establishment of a multilateral system of payments for current transactions and the elimination of foreign trade restrictions. The IMF is a permanent forum for consideration of issues of international payments, in which member nations are encouraged to maintain an orderly pattern of exchange rates and to avoid restrictive exchange practices. It also provides advice on economic policy and fiscal policy, promotes world policy coordination, and gives technical assistance for central banks, accounting, taxation, and other financial matters. Membership, comprising 184 countries as of 2005, is open to all sovereign nations.

II ACTIVITIES

Members undertake to keep the IMF informed about economic and financial policies that impinge on the exchange value of their national currencies so that other members can make appropriate policy decisions. On joining the fund, each member is assigned a quota in special drawing rights (SDRs), the fund’s unit of account since its establishment in 1969, whose value is based on the weighted average value of five major currencies. (In October 2001 the SDR was worth US$1.27557.) This replaced the old system whereby subscription of members was to be 75 percent currency and 25 percent gold. The total quotas at the end of June 2001 were SDR 212.4 billion (US$272 billion). Each member’s quota is an amount corresponding to its relative position in the world economy. As the world’s leading economy, in 1997 the United States has the largest quota, some SDR 25.5 billion; the smallest quota is about SDR 3.5 million. The amount of the quota subscription determines how large a vote a member will have in IMF deliberations, how much foreign exchange it may withdraw from the fund, and how many SDRs it will receive in periodic allocations. Thus, the European Union has almost 30 percent of the voting strength, while the United States has slightly more than 17 percent (2001).

Members who have the temporary balance of payments difficulties may apply to the fund for needed foreign currency from its pool of resources, to which all members have contributed through payment of their quota subscriptions. The IMF may also borrow from official institutions, and the General Agreement to Borrow of 1962 gave it the right to borrow from the so-called “Paris Club” of industrialized countries, which have undertaken to make up to US$6.5 billion available if needed (this sum was raised to US$17 billion). The member may use this foreign exchange for a certain time (up to about five years) to extricate itself from its balance of payments problem, after which the currency is to be returned to the IMF’s pool of resources. The borrower pays a below-market rate of interest for the IMF resources it uses; the member whose currency is used receives almost all of these interest payments; the remainder goes to the fund for operating expenses. The IMF is thus not a bank but sells countries SDRs in exchange for their own currency.

The IMF also supports economic development, such as the establishment of functioning free market economies in the former Warsaw Pact countries. This includes a special temporary fund, established in 1993, to offset trade and balance of payments difficulties experienced by any member country abandoning artificial price control policies. Its Enhanced Structural Adjustment Facility (ESAF) assists developing countries with economic reform. By the end of April 1998, it had provided SDR 6.4 billion to 48 countries. Loans under IMF terms frequently have stiff clauses attached regarding domestic economic policy: these have been the cause of some friction between the IMF and its debtors in the past.

III HISTORY

The IMF commenced operating in 1947. It initially aimed to confine exchange rate fluctuations between member currencies to within 1 percent of a par value quoted in terms of the US dollar and hence linked to gold; 25 percent of members’ subscriptions were to be in gold. The first major change in policy was the General Agreement to Borrow, concluded in 1962 when it became clear that the fund needed increasing. The 1967 IMF meeting in Rio de Janeiro led to the creating of the Special Drawing Right as a standard international unit of account.

In 1971 the IMF’s par value system was renegotiated to allow a 10 percent devaluation of the dollar and a broadening of fluctuation ranges to 2.25 per cent. The sharp oil price rises after 1973 severely affected member countries’ balances of payments and led effectively to the end of the Bretton Woods agreement to restrict exchange rate fluctuations. Revision of the fund’s articles in 1976 ended gold’s role as a basis for the IMF and hastening the demise of the gold standard, which the dollar left in 1978.

From 1982 the IMF devoted much of its resources to the resolution of the worldwide debt crisis, caused by excessive lending to developing countries. It assisted indebted members to devise programmes of economic adjustment and has backed this assistance with massive lending. In conjunction with its own loans, it encouraged additional lending from commercial banks. As the realization grew that the problems of its members involved long-term structural inadequacies, the IMF established new facilities, using funds borrowed from better-off members, to provide money in larger amounts and for longer periods to members that seek to reorganize their economies.

The IMF acquired an important new remit at the end of the 1980s with the implosion of European Communism and the appearance of a host of European states determined to join the global capitalist system. This role was initially met through a series of new funds for overhauling the former command economies of Central and Eastern Europe. The debt crisis by this time had largely abated.

The IMF has to some extent lost its original form and purpose, since exchange rates are now largely left to the currency markets to determine. Modern regimes that control exchange rates, such as the European Exchange Rate Mechanism, are usually tied to convergence programmes design to produce international currencies, and the ERM’s breakdown in 1992 demonstrated the IMF’s relative impotence when confronted with currency problems in modern developed economies. The financial crisis in Mexico in 1995 showed once more that IMF funds are now unequal to the vast amounts of private capital circulating in the world economy. The financial crises in Mexico in 1995, and in Asia and Russia during 1998, showed once more that IMF funds are now unequal to the vast amounts of private capital circulating in the world economy. In November 1998 it agreed on a rescue package for the Brazilian economy that helped to forestall the threat of a global financial collapse due to economic turbulence in Asia, Latin America, and elsewhere. In April 1999 the IMF introduced stricter lending measures designed to allay crises like those that devastated many Asian countries in 1998. It established a pre-approved line of credit for qualifying countries to draw upon when international financial conditions threaten their economic well-being. Conditions included a positive economic review from the IMF, use of internationally accepted practices of disclosing economic data and statistics, good relations with private creditors, sound debt management, and a viable economic programme. The policies were aimed at bolstering investor confidence before a crisis develops, and the IMF believed that the system would prevent crises by providing incentives to follow sound economic policies.

In the 1990s high levels of external debt among developing nations were increasingly being recognized as a major threat to sustainable development and the reduction of global poverty, and in 1999 a major review of the Highly Indebted Poor Countries (HIPC) debt relief programme was announced. The HIPC programme had been established in September 1996 by both the IMF and the World Bank to ensure that countries would no longer face a debt burden they could not manage, and to provide exceptional assistance to countries following “sound economic policies” to reduce debt to sustainable levels. The review, known as the HIPC Initiative, was designed to place debt repayment within an overall framework of poverty reduction and economic growth and allowed eligible countries more control over their own finances. The following year, the IMF indicated that it intended to respect to a greater degree the individual economic, political, and social profiles of countries requiring assistance and that it would move away from endorsing free market economics as a prerequisite for assistance. By 2004, 27 of the world’s poorest nations had had their total debt reduced by more than US$34 billion. In order to meet the programme’s original target of a reduction of US$100 billion, leaders at the 2004 G-8 summit agreed to extend the initiative until December 2006.

IV ORGANIZATION

The board of governors, made up of leading monetary officials from each of the member nations, is the highest authority in the IMF. Day-to-day operations are the responsibility of the 24-member executive board, which represents member nations individually (for larger countries) or in groups. The managing director chairs the executive board. The main headquarters is in Washington, D.C.

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