International Monetary Fund: Overview & Definitions
International Monetary Fund
IMF is to ensure financial cooperation and stability in world trade and to support the development of international trade through its member countries.
Documents filed at the United Nations Monetary and Financial Conference, which was approved with the signature of the representatives of 44 countries at the Bretton Woods Conference held in Washington in 1944, is considered the founding memorandum of the IMF. Today, the number of IMF members has exceeded 180. The IMF is an organization affiliated with the United Nations Organization but autonomous in its main fields of activity.
The primary function of the IMF is to evaluate the International Monetary System and to offer advice and criticism. Since 2012, the IMF has been evaluating the economies of member countries and the economic policies of governments on macroeconomic and financial issues. The IMF’s goals are sustainable growth, reducing global poverty, and promoting international trade. IMF member countries have voting rights and borrowing rights in IMF negotiations. Some of the members contribute to IMF funds to the extent of their economic development.
What Are the Fundamental Activities of the IMF
While the area of activity of the IMF was limited to industrialized countries at the establishment stage, the task of the World Bank was envisaged as creating financial resources for the development problems of underdeveloped countries. The oil crisis in the 1970s and many concerns until today have changed the IMF’s approach. Structural adjustment programs of the IMF carry out adaptation studies to new crises. Accordingly, Mutual integration will affect the success of projects to ensure the full integration of underdeveloped countries with the world economic system.
The USA had covered IMF resources since 1947 when the IMF became functional. In the following years, members such as France, the UK, and Germany started to contribute to the IMF fund to evaluate member countries’ loan demands. The liquidity of the IMF is provided by fixed resources and resources borrowed from member countries. The IMF fund consists of a stock of different country currencies.
Within the IMF fund, there are also gold stocks created with the contributions of member countries. Compared to the use of monetary resources, for example, lending to member states, it is much more difficult to transact with gold funds because it is not possible to sell, transfer or transfer gold funds without the approval of 85% of the member states.
Brief History of IMF
The main objective in establishing the IMF was to create a fund to provide financial support to the European countries that were destroyed in the second world war, using methods parallel to the World Bank. It was made in 1944 to help solve short-term foreign current account problems arising from the Bretton Woods system of fixed exchange rates.
In the eighties and nineties, due to the liberalization of capital movements, the IMF supported these countries by offering funds within the scope of stabilization packages during the crises experienced in “developing countries.”
The Mexican Tequila Crisis, Argentina, East Asian Regional Crisis, and the economic crises in countries such as Brazil and Turkey were tried to be overcome with the support of the IMF. However, it was seen that the stabilization packages offered by the IMF to these countries were not always successful. In other words, the economic crisis could not be overcome in some countries that received financial support from the IMF and implemented the financial and structural reforms demanded by the IMF.
The global financial crisis of 2008-2009. In Europe, the inability of Iceland and Greece to pay their debts and Portugal and Cyprus’s requests for aid, by offering the IMF and EU support together, enabled the economies of these countries to recover.
IMF Participation and Membership Conditions
The member countries that will join the IMF accept that their currencies will fall into the category of currencies in circulation. For example, a country’s currency, USD or EUR, agrees with the terms of being Convertable with other countries’ currencies. IMF member countries agree that they will follow monetary policies in line with IMeconomicry guidelines and will not restrict foreign exchange between different countries’ currencies and their own currencies.
Tasks of the IMF
The IMF supports international monetary cooperation and provides policy advice and capacity-building support to help member countries build strong economies. The IMF also provides loans to countries and assists them in designing policy programs to solve balance of payments problems when adequate financing on favorable terms cannot be obtained to meet net international payments. IMF loans are short- or medium-term and financed primarily from a pool of quota contributions from their members.
IMF VS World Bank
Many people confuse the IMF and the World Bank with each other. In fact, the IMF and WB are organizations with different structures, functions, and purposes. However, the most fundamental differences are; While the World Bank is a development organization, the IMF is a cooperation organization. While the World Bank provides financial support to developing countries, the IMF carries out activities that reduce poverty, increase employment, and promote financial stability and international trade.
How is IMF’s Money Sourced?
IMF liquidity is obtained from standard sources and borrowed resources. There is a stock of different country currencies in IMF Funds, although it consists of a high proportion of USD. IMF members should also be members of the World Bank. While IMF loans cover short terms such as five years, the World Bank was established to provide long-term loans.
Resources for IMF come from quotas, capital commitments that countries pay when they become members. Quotas generally reflect the size of each member country’s economy. Quotas, together with the number of equal unit votes each member has, determine the countries’ voting power.
How to Get IMF Support
Countries that want to get support from the IMF, for example, those that want long-term debt from the IMF for reasons such as economic crisis, unpaid foreign debts, send a “letter of intent” to the IMF management and request debt. This letter of intent indicates that the requesting country has accepted the conditions that must be met to pay the debt. These conditions are the bitter prescription that the IMF offers to that country. For example, after the 2008-2009 financial crisis, the IMF gave loans to many countries with long-term repayment programs. But in return, austerity measures such as cuts in public spending have been sought. Suppose the IMF is negotiating with a country for a support program. In that case, the addressee will be some or all of the institutions and ministries such as the central bank, ministry of economy, and treasury of that country. On the IMF side, there are the members of the Board of Governors, who act as the shareholders’ general assembly.