IMF General Information

The International Monetary Fund (IMF) is an international organization headquartered in Washington, D.C., of 188 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. Formed in 1944 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. Countries contribute funds to a pool through a quota system from which countries experiencing balance of payments difficulties can borrow money. As of 2010, the fund had about US755.7 billion at then exchange rates.

The International Monetary Fund (IMF) is an international

organization headquartered in Washington, D.C., of "188 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

"Formed in 1944 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 Countries

contribute funds to a pool through a quota system from which

countries experiencing balance of payments difficulties can borrow money As of 2010, the fund had about US$755.7 billion at then exchange rates

Through the fund, and other activities such as statistics-keeping 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 organization's objectives stated in the

Articles of Agreement are: to promote international monetary

cooperation, international trade, high employment, exchange-rate stability, sustainable economic growth, and making resources

available to member countries in financial difficulty

Functions.

According to the IMF itself, it works to foster global growth and

economic stability by providing policy, advice and financing to

members, by working with developing nations to help them achieve macroeconomic stability and reduce poverty The rationale for this is that private international capital markets function imperfectly and many countries have limited access to financial markets Such

market imperfections, together with balance-of-payments financing, provide the justification for official financing, without which many countries could only correct large external payment imbalances through measures with adverse economic consequences The IMF provides alternate sources of financing

Upon the founding of the IMF, its three primary functions were: to oversee the fixed exchange rate arrangements between countries, thus helping national governments manage their exchange rates and allowing these governments to prioritise economic growth, and to provide short-term capital to aid balance of payments This

assistance was meant to prevent the spread of international

economic crises The IMF was also intended to help mend the pieces

of the international economy after the Great Depression and World War II As well, to provide capital investments for economic growth and projects such as infrastructure

The IMF's role was fundamentally altered by the floating exchange rates post-1971 It shifted to examining the economic policies of countries with IMF loan agreements to determine if a shortage of capital was due to economic fluctuations or economic policy The IMF also researched what types of government policy would ensure

economic recovery The new challenge is to promote and implement policy that reduces the frequency of crises among the emerging market countries, especially the middle-income countries that are vulnerable to massive capital outflows Rather than maintaining a position of oversight of only exchange rates, their function became one of surveillance of the overall macroeconomic performance of member countries Their role became a lot more active because the IMF now manages economic policy rather than just exchange rates

History.

The IMF was originally laid out as a part of the Bretton Woods system exchange agreement in 1944 During the Great Depression,

countries sharply raised barriers to trade in an attempt to improve their failing economies This led to the devaluation of national

currencies and a decline in world trade

This breakdown in international monetary co-operation created a need for oversight The representatives of 45 governments met at the Bretton Woods Conference in the Mount Washington Hotel in Bretton Woods, New Hampshire, in the United States, to discuss a framework for postwar international economic cooperation and how

to rebuild Europe

There were two views on the role the IMF should assume as a global economic institution British economist John Maynard Keynes

imagined that the IMF would be a cooperative fund upon which

member states could draw to maintain economic activity and

employment through periodic crises This view suggested an IMF that helped governments and to act as the U.S government had during the New Deal in response to World War II American delegate Harry Dexter White foresaw an IMF that functioned more like a bank, making sure that borrowing states could repay their debts on time Most of White's plan was incorporated into the final acts adopted at Bretton Woods

The IMF formally came into existence on 27 December 1945, when the first 29 countries ratified its Articles of Agreement By the end of

1946 the IMF had grown to 39 members On 1 March 1947, the IMF began its financial operations, and on 8 May France became the first country to borrow from it

The IMF was one of the key organisations of the international

economic system; its design allowed the system to balance the

rebuilding of international capitalism with the maximisation of

national economic sovereignty and human welfare, also known as embedded liberalism The IMF's influence in the global economy steadily increased as it accumulated more members The increase reflected in particular the attainment of political independence by many African countries and more recently the 1991 dissolution of the Soviet Union because most countries in the Soviet sphere of influence did not join the IMF

The Bretton Woods system prevailed until 1971, when the U.S

government suspended the convertibility of the US$ (and dollar reserves held by other governments) into gold This is known as the Nixon Shock

Since 2000

In May 2010, the IMF participated, in 3:11 proportion, in the first Greek bailout that totalled €110 billion, to address the great

accumulation of public debt, caused by continuing large public

sector deficits As part of the bailout, the Greek government agreed

to adopt austerity measures that would reduce the deficit from 11%

in 2009 to "well below 3%" in 2014 The bailout did not include debt restructuring measures such as a haircut, to the chagrin of the

Swiss, Brazilian, Indian, Russian, and Argentinian Directors of the IMF, with the Greek authorities themselves (at the time, PM George Papandreou and Finance Minister Giorgos Papakonstantinou) ruling out a haircut

A second bailout package of more than €100 billion was agreed over the course of a few months from October 2011, during which time Papandreou was forced from office The so-called Troika, of which the IMF is part, are joint managers of this programme, which was approved by the Executive Directors of the IMF on 15 March 2012 for SDR23.8 billion, and which saw private bondholders take a haircut of upwards of 50% In the interval between May 2010 and February

2012 the private banks of Holland, France and Germany reduced exposure to Greek debt from €122 billion to €66 billion

As of January 2012, the largest borrowers from the IMF in order were Greece, Portugal, Ireland, Romania, and Ukraine

On 25 March 2013, a €10 billion international bailout of Cyprus was agreed by the Troika, at the cost to the Cypriots of its agreement: to close the country's second-largest bank; to impose a one-time bank deposit levy on Bank of Cyprus uninsured deposits No insured

deposit of €100k or less were to be affected under the terms of a novel bail-in scheme

The topic of sovereign debt restructuring was taken up by the IMF in April 2013 for the first time since 2005, in a report entitled

"Sovereign Debt Restructuring: Recent Developments and

Implications for the Fund’s Legal and Policy Framework" The paper, which was discussed by the board on 20 May, summarised the

recent experiences in Greece, St Kitts and Nevis, Belize, and

Jamaica An explanatory interview with Deputy Director Hugh

Bredenkamp was published a few days later, as was a

deconstruction by Matina Stevis of the Wall Street Journal

In the October 2013 Fiscal Monitor publication, the IMF suggested that a capital levy capable of reducing Euro-area government debt ratios to "end-2007 levels" would require a very high tax rate of about 10%

The Fiscal Affairs department of the IMF, headed at the time by

Acting Director Sanjeev Gupta, produced a January 2014 report

entitled "Fiscal Policy and Income Inequality" that stated that "Some taxes levied on wealth, especially on immovable property, are also

an option for economies seeking more progressive taxation

Property taxes are equitable and efficient, but underutilized in many economies There is considerable scope to exploit this tax more fully, both as a revenue source and as a redistributive instrument."

At the end of March 2014, the IMF secured an $18 billion bailout fund for the provisional government of Ukraine in the aftermath of the

2014 Ukrainian revolution

Member countries.

Not all member countries of the IMF are sovereign states, and

therefore not all "member countries" of the IMF are members of the United Nations Amidst "member countries" of the IMF that are not member states of the UN are non-sovereign areas with special

jurisdictions that are officially under the sovereignty of full UN

member states, such as Aruba, Curaçao, Hong Kong, and Macau, as

well as Kosovo The corporate members appoint ex-officio voting members, who are listed below All members of the IMF are also International Bank for Reconstruction and Development (IBRD)

members and vice versa

Former members are Cuba (which left in 1964) and the Republic of China, which was ejected from the UN in 1980 after losing the

support of then U.S President Jimmy Carter and was replaced by the People's Republic of China However, "Taiwan Province of China" is still listed in the official IMF indices

Qualifications

Any country may apply to be a part of the IMF Post-IMF formation, in the early postwar period, rules for IMF membership were left

relatively loose Members needed to make periodic membership payments towards their quota, to refrain from currency restrictions unless granted IMF permission, to abide by the Code of Conduct in the IMF Articles of Agreement, and to provide national economic information However, stricter rules were imposed on governments that applied to the IMF for funding

The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates secured at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement

Some members have a very difficult relationship with the IMF and even when they are still members they do not allow themselves to

be monitored Argentina, for example, refuses to participate in an Article IV Consultation with the IMF

Benefits

Member countries of the IMF have access to information on the

economic policies of all member countries, the opportunity to

influence other members’ economic policies, technical assistance in banking, fiscal affairs, and exchange matters, financial support in times of payment difficulties, and increased opportunities for trade and investment

When can a country borrow from the IMF?

One of the IMF's single biggest functions is lending money to

members in need If a country is unable to make payments to other countries without taking "measures destructive of national or

international prosperity," such as implementing trade restrictions or

devaluing its currency, it may borrow money from the IMF When the IMF lends a country money, it often requires the borrower to follow a program aimed at meeting certain quantifiable economic goals, which are described in a letter of intent from the borrowing

government to the IMF's managing director IMF loans are not

provided to fund particular projects or activities, they are provided to promote a country's overall economic health The duration, payment terms, and lending conditions vary on a case-by-case basis The IMF charges borrowers a market-related interest rate and also requires service charges and a refundable commitment fee Low-income countries pay as little as 0.5% interest per year

The IMF also lends money to countries dealing with sudden losses of financial confidence, such as after natural disasters or wars, in order

to prevent the spread of financial crises stemming from those

countries There are five main facilities from which the IMF makes loans: IMF Stand-By Arrangements (for short-term lending), the

Extended-Fund Facility, the Poverty Reduction and Growth Facility, the Supplemental Reserve Facility, and the Exogenous Shocks

Facility

Conditionality of loans.

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 Conditionality is perhaps the most controversial aspect of IMF policies The concept of conditionality was introduced in a 1952 Executive Board decision and later incorporated into the Articles of Agreement

Conditionality is associated with economic theory as well as an

enforcement mechanism for repayment Stemming primarily from the work of Jacques Polak, the theoretical underpinning of

conditionality was the "monetary approach to the balance of

payments"

The process of IMF lending.

Upon request by a member country, IMF resources are usually made available under a lending “arrangement,” which may, depending on the lending instrument used, specify the economic policies and

measures a country has agreed to implement to resolve its balance

of payments problem The economic policy program underlying an arrangement is formulated by the country in consultation with the IMF and is in most cases presented to the Fund’s Executive Board in

a “Letter of Intent” and is further detailed in the annexed

“Memorandum of Understanding” Once an arrangement is approved

by the Board, IMF resources are usually released in phased

installments as the program is implemented Some arrangements provide very strongly performing countries with one-time up-front access to IMF resources and thus are not subject to explicit policy understandings

Similarly, the steps involved for acquiring an IMF loan, are as follows:

The country has to be in Trouble! - Firstly, the nation that wants to borrow from the IMF needs to be in a crisis such as a balance of payment crisis(i.e Too much of Import money owed and other

External debts)

Loan Application - The country, then as a last resort turns to the IMF for financial help The country needs to submit a request to the IMF stating their current scenario, the consequences etc

IMF decides - On receiving the country's request, IMF's help is made available under a lending arrangement, which will depend on the kind of lending instrument to be used, stipulate specific economic policies and measures a country has agreed to implement to resolve its problem A economic recovery program is then formulated by the Country in consultation with the IMF and is in most cases presented

to the Fund’s Executive Board in a “Letter of Intent.”

Fund Release - Once IMF's board approves the nation's request, Steps are taken to release the fund in installments and phases thus ensuring the rightful implementation of the recovery program In rare cases, if the country has a strong credibility, the resources are released directly as a one-time payment

Top 10 debtor countries owe 86% of total IMF loans (2015).

Data collected from the IMF website suggest that a total of 79

countries owed a staggering 68.82 billion in SDRs (special drawing rights) as on May 31 this year As on May 31, 2015, the value of one SDR in dollar terms stood at 1.390500, valuing the total amount due from the borrowing countries at $84.57 billion

Among continents, Africa (40 African countries) owes a combined

$8.46 billion

It is followed by Central America (11 countries), Asia (nine), Europe (seven) and the European Union (six)

Of the total amount owed to IMF as on May 31, the 10 biggest

borrowing countries, including Portugal, Greece, Ukraine, Ireland and Pakistan, owed $72.4 billion, or nearly 86% of the total amount lent The biggest outstanding loans from the IMF were issued to European nations, notably Greece and Portugal In the past few years,

European countries have been the biggest borrowers of loans from the organisation

Most nations turn to the IMF for a loan when they run into dire

financial woes

Examples.

Thailand.

Pressures on Thailand’s currency, the baht, which had been evident already in late 1996, increased dramatically during the first half of

1997 Primary contributors to this built up pressure were an

unsustainable current account deficit, significant appreciation of the real effective exchange rate, rising foreign debt (in particular short-term), a deteriorating fiscal balance, and increasing difficulties in the financial sector Reserve money growth accelerated sharply as the Bank of Thailand provided liquidity support for ailing financial

institutions “Most of the policy responses to the pressures in the exchange market focussed on spot and forward intervention,

introduction of controls on some capital account transactions and limited measures to halt the weakening of the fiscal situation.” On July 2, 1997, following more and more speculative attacks on its currency, Thailand’s Central Bank decided to float its exchange rate However, the policy changes introduced with the floatation of the baht were inadequate Market confidence failed to return and the baht depreciated by 20 percent against the U.S dollar during On August 20, 1997, the IMF’s Executive Board approved financial

support for Thailand of up to SDR 2.9 billion or about $4 billion,

equivalent to approximately 505 percent of Thailand’s quota, over a

34 month period (see Table 5) Additional financing in the amount of

$2.7 billion was pledged by the World Bank and the Asian

Development Bank while Japan and other interested countries

pledged another $10.5 billion “The underlying adjustment program was aimed at restoring confidence, bringing about an orderly

reduction in the current account deficit, reconstituting foreign

exchange reserves and limiting the rise in inflation to the one-off effects of the depreciation.” Growth was expected to slow down dramatically, but still remain positive Key elements of the initial economic reform package included restructuring of the financial sector (focusing on the identification and closure of insolvent

financial institutions; included 56 finance companies); fiscal

measurers equivalent to about three percent of GDP to correct the public sector deficit to a surplus of one percent of GDP in

1997/1998.and contribute to shrinking the current account deficit; and control the domestic credit, with indicative ranges for interest rates

In subsequent months, the baht continued to depreciate as roll-over

of short-term debt declined and the crisis in Asia spread Despite the fact that macroeconomic policies were on track and nominal interest rates were raised, market confidence further declined because of delays in the implementation of financial sector reform, political instability and poor communications of the key aspects of the

program In light of a larger than expected depreciation in the baht and a sharper than anticipated slowdown in the economy, the bailout program was strengthened at the first quarterly review on December

8, 1997 The indicative range for interest rates was raised and a specific timetable for financial sector restructuring was announced

In early February 1998, the baht started to strengthen as

improvements in the policy setting revived market confidence At each subsequent quarterly review (March 4, 1998; June 10, 1998; September 11, 1998), the program was again revised Real GDP growth projections were continuously revised downward, reaching a projected decline of 4-5 percent in 1998 as of June 10 and a decline

of 6-8 percent as of September 11 From February to May, the baht strengthened markedly (almost 35 percent vs the U.S dollar from the low in January), but the economy fell into a deeper than

expected recession In order to stimulate growth (or more

appropriately, curb the real GDP contraction), further adjustments were made to allow for an increase in the fiscal deficit target for fiscal-year 1997/98 The fiscal deficit target for 1997/98 was raised from two percent to three percent of GDP

Interest rates started to slowly decrease in late March of 1998

Additional measures to strengthen the social safety net were

planned and the program for financial sector and corporate

restructuring was further specified By the fourth quarter review

completed September 11, 1998, foreign exchange market conditions were relatively stable, allowing room for further lowering of interest rates

Table: Selected Economic Indicators for Thailand.

1996 1997 1998 (1) 1999 (2)

percent change

Real GDP Growth 5

.5

-0.4

-7 to – 8

1 0

Consumer Prices

(period avg.)

5 9

5 6

8 9

2.5 to 3.0

percent of GDP; a minus signifies a deficit

Central

government

balance (3)

1 9

-1.4

-2.4

-3.0

Current account

balance

-7.9

-2.0

11 5

8 5

(billions U.S dollars)

External debt 90

.5

93 4

73 0

N.A

Source: Thai authorities and IMF staff estimates.

(1) Estimate

(2) Program

(3) Fiscal year, which runs from October 1 to September 30

Indonesia.

In July 1997, soon after the floating of the Thai baht, pressure on the Indonesian rupiah intensified While the key macroeconomic

indicators in Indonesia were stronger than in Thailand (the current account deficit had been modest, export growth had been

reasonably well maintained, and the fiscal balance had remained in surplus), Indonesia’s short-term private sector external debt had been rising rapidly Increased evidence of weakness in the financial sector raised doubts about the government’s ability to defend the currency peg