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    w4rren
    The International Monetary Fund (IMF) was founded in 1944 to promote global financial stability and operates by lending money to countries experiencing balance of payments problems. It is governed by 187 member countries. The IMF creates Special Drawing Rights (SDRs) to supplement official reserves and loans are tied to conditions aimed at issues like reducing borrowing and structural economic reforms. While IMF intervention was criticized after the 1997 Asian Financial Crisis, its role remains important for global recovery from economic downturns.

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    Mid Term Essay

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    The International Monetary Fund (IMF) was founded in 1944 to promote global financial stability and operates by lending money to countries experiencing balance of payments problems. It is governed by 187 member countries. The IMF creates Special Drawing Rights (SDRs) to supplement official reserves and loans are tied to conditions aimed at issues like reducing borrowing and structural economic reforms. While IMF intervention was criticized after the 1997 Asian Financial Crisis, its role remains important for global recovery from economic downturns.

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    The International Monetary Fund (IMF) was founded in 1944 to promote global financial stability and operates by lending money to countries experiencing balance of payments problems. It is governed by 187 member countries. The IMF creates Special Drawing Rights (SDRs) to supplement official reserves and loans are tied to conditions aimed at issues like reducing borrowing and structural economic reforms. While IMF intervention was criticized after the 1997 Asian Financial Crisis, its role remains important for global recovery from economic downturns.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    57 views4 pages

    Mid Term Essay

    Uploaded by

    w4rren
    The International Monetary Fund (IMF) was founded in 1944 to promote global financial stability and operates by lending money to countries experiencing balance of payments problems. It is governed by 187 member countries. The IMF creates Special Drawing Rights (SDRs) to supplement official reserves and loans are tied to conditions aimed at issues like reducing borrowing and structural economic reforms. While IMF intervention was criticized after the 1997 Asian Financial Crisis, its role remains important for global recovery from economic downturns.

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    of 4

    What is the principal role of the

    International Monetary Fund and how does


    it operate?
    Warren McQuillan
    40042015
    ECO1006
    Tutorial: Monday @ 2pm
    Subhadip Chakrabarti
    4th April 2011
    What is the principal role of the International Monetary Fund and how does it
    operate?
    The International Monetary Fund (IMF) is a body founded in 1944 following the Great Depression of the 1930s
    to help secure financial stability across the 44 original members. In addition its goals are to facilitate in
    international trade, promote high employment and reduce poverty around the world. Today it is made up and
    governed by the 187 countries in its membership. The main role of the IMF is to help countries overcome
    balance-of-payments problems by lending money.

    The IMF’s features;

    Special Drawing Rights (SDRs) are an international reserve asset created by the IMF to supplement countries’
    official reserves. Original key reserves; gold and the U.S. dollar proved inadequate in supporting world
    expansion in trade and financial development, so the IMF created the SDR. It is a potential claim on the freely
    usable currencies of the members. Countries can exchange their SDRs for these currencies (U.S. Dollar,
    Sterling, Euro and Japanese Yen) through either voluntary exchange between countries or by the IMF
    designating members with a strong financial position to purchase these SDRs. Its value today is based on the
    basket of the 4 currencies mentioned as opposed to originally being valued against the value of gold. SDR
    allocations are based on countries’ IMF quotas. Nations earn interest on any excess holdings and pay interest
    on any shortfall.

    Upon joining the IMF a nation is given a quota based relatively on the rest of other member’s quotas. In
    addition is it determined by their position in the world’s economy. There is a quota formula that takes into
    consideration a countries’ GDP, openness and other factors. This quota determines their financial commitment
    to the IMF, its voting power and financing available. Financial commitment or their quota share must be paid
    in full upon joining the fund. The voting share of a nation is determined by the worth of their SDR in addition
    to a percentage of total votes (known as basic votes, around 5.5 %.) It’s access to financing is also based on it’s
    quotas, a nation can usually borrow around 200% of its quota annually. Quotas are reviewed to make sure that
    shares are aligned productively. This is often to shift shares from over presented countries to
    underrepresented countries,

    If a nation wants to increase the size of their quota they must get agreement from 85% of the total voting
    power. Speaking the other way around, the IMF cannot increase a member’s quota without their consent.
    Quota reviews happen around once in every five years to discuss potential changes in quota distribution. They
    focus on looking at the adequacy of a member’s quota based on their balance of payments and any financial
    needs. They also reflect on changes on their relative position within the world economy. The most recent
    general review (fourteenth) once approved by all member states will allow for a 100% increase in the total
    quotas. This will double quotas to SDR 476.8 billion or around $750 billion.

    Lending from the IMF is important in times of financial crisis for countries. The nation’s reserves are likely to be
    depleted, economic activity low or decreasing and their currency becoming devalued. Lending from the IMF
    can avoid complete crisis and help restore stability in the economy. Loans from the IMF are also likely to act as
    a catalyst for Governments in increasing borrowing from other sources.

    With loans, specific conditions are applied to the country borrowing; these are likely to be quantified goals in
    terms of fiscal and foreign exchange targets. Loans are likely to be given in instalments when conditional
    targets are met. For countries in crisis the IMF loans aren’t likely to be a large amount of the total resources
    needed to correct their balance of payments problem. The conditions are based on issues like; reducing
    borrowing and increasing taxes, letting failing businesses go under, increasing interest rates and structural
    adjustment including privatisation and deregulation of industries.
    One of main criticisms of the IMF involves this structural adjustment of the country. One prime example is
    during the Asian financial crisis in 1977 where the IMF ordered countries including; Thailand, Indonesia and
    Malaysia to pursue tight monetary and fiscal policies which led to a huge depression and a high level of
    unemployment. The IMF’s response to this situation was that any crisis is going to lead to some difficulties
    somewhere. Where dealing with a balance of payments problem is going to need some painful readjustment.

    The IMF today

    As of more recently the IMFs activity has fallen considerably, shown in the graph below. There are reasons for
    the decrease in the demands for the IMF’s rescue services. Nations had potentially learnt from previous
    problems and built up reserves large enough to not need the help of the IMF. This led to the IMF in 2009
    actually forcing budget cuts through early retirements. It was felt that the IMF should play a greater role in the
    world economy and this led to the IMFs resources being increased to around $750 billion which I stated
    previous.

    hjj

    However, as of more recently we have seen resurgence in the demand for the IMFs rescue packages. In
    December 2010 the IMF agreed to a rescue package of €22.5 billion aimed to restore the banking
    system. The package included plans to safeguard public finances and restore economic growth through
    restoring consumer confidence. In addition we know that a similar bailout for Portugal is likely in the
    coming month.

    With national deficits around the world increasingly large the likelihood that the demand for the
    services of the IMF is far from over. The importance of the IMF is likely to be crucial if recovery from
    the recent recession is ever going to happen.

    References

    http://bosco.foreignpolicy.com/posts/2011/03/25/the_imf_braces_for_portugal

    http://www.imf.org/external/about/lending.htm#conditions

    http://www.imf.org/external/pubs/ft/survey/so/2010/car121610a.htm

    http://www.economicshelp.org/dictionary/i/imf-criticism.html
    http://www.economist.com/node/13447231 April 8th 2009

    http://www.imf.org/external/np/exr/facts/sdr.htm December 9th 2010

    http://www.imf.org/external/np/exr/facts/quotas.htm March 3rd 2011

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