Who Is The IMF?

In any discussion of economics these days the International Monetary Fund, or IMF, is likely to be mentioned. This often causes alarm – it’s a powerful organization that isn’t accountable to US taxpayers, and its interventions can have significant effects on the economy. What exactly is it, what does it do and who makes the decisions?

The IMF was originally set up as a result of the 1944 Bretton Woods talks between the Allied nations. The aim was to stabilize exchange rates between nations and reduce economic uncertainty, and at first the preferred method was by tying currencies to bullion values – the Gold Standard. The IMF itself began operating on March 1, 1947; its role in the Bretton Woods system was to give loans, usually of cash, to members that had temporary payment imbalances. Since the collapse of the Gold Standard in 1971 it has adapted its methods, but the main function is still to use lending and capital transfers to keep national economies stable.

Today the IMF has 188 member states, up from an original 29, and operates in six official languages that include English, French, Spanish and Arabic. Its headquarters is in Washington, D.C. – although many people think it’s a United Nations organization it actually isn’t. Instead it’s controlled by a Board of Governors. Each member nation has one governor and one alternate governor, which it appoints itself. The Board of Governors usually meets annually, and is mostly responsible for electing members to the Executive Board.

The Executive Board has most of the real power and is made up of 24 members, appointed from the Board of Governors. Eight countries have their own member on the Executive Board – the USA, the UK, Germany, Japan, France, Russia, China and Saudi Arabia. The other 16 members represent geographical areas, and are chosen from among the countries in the area they’re responsible for. The Executive Board invites new members, suspends existing members if necessary and allocates members’ voting shares.

Because each member state has one governor but very different population sizes and economic power, votes are weighted using a complicated system. For example Poland has 17,621 votes; the USA has 421,961 to reflect its much larger economy. This system makes sense, because nations with larger economies contribute more to the funds the IMF administers so deserve more influence. What’s more controversial is the means of appointing the top officials.

The IMF’s senior figure is the Managing Director, the head of the Executive Board. There’s a tradition that the USA provides the head of the associated World Bank while a European is the IMF Managing Director. That naturally attracts criticism from growing economies like China and Brazil, but it’s also very noticeable that certain European countries have supplied more than their fair share of IMF chiefs. In total there have been eleven Managing Directors – and five of them, including the incumbent Christine Lagarde and her predecessor, were French. Two more were Swedish. Meanwhile Europe’s largest economy, Germany, has only held the position once – and the UK has never held it at all. The result is that despite criticism that the IMF tries to force US-style capitalism on the whole world, in practice it leans heavily towards continental-style social democracy.

The IMF has helped avert many financial crises, but the strict terms it imposes in exchange for loans probably caused plenty more. It’s definitely a valuable tool for stabilizing the world economy but for an advanced nation like the USA it carries risks to, and needs to be closely monitored.

Controversies Surrounding The IMF

IMF stands for the International Monetary Fund, an international organizations that offers both loans and bailout packages, and that has been subjected to extensive debate and controversy over the past years. Initially designed to ensure the stability of the worldwide financial system after World War III, the IMF has become one of the most important financial institutions of its kind, with a great influence over many countries. The policies of the International Monetary Fund has changed, and while many agree with them, others claim that they bring a lot of damage not only to the economy, but also to the surrounding environment. That being said, here is a deeper insight into some of the most important and controversial aspects related to the IMF:

1. Some Say Its Policies Hurt The Surrounding Environment

Many environmentalists and other environmentally-conscious people claim that the International Monetary Fund offers loans that are paving the way for the exploitation of the natural resources, which are depleting at a very fast pace. Apparently, the IMF does not take into account the impact of its lending policies on nature, and environmental aspects are not included in the policy making process. Some people also claim that the struggle to pay back the loans granted by the International Monetary Fund has lead to an unsustainable and damaging liquidation of some of the world’s most valuable natural resources, such as cocoa. The cocoa exports have soared in the Ivory Coast, and this has led to the loss of approximately 70% of the forests found here.

2. Some Critics Consider The Lending Conditions To Be Too Harsh

The lending conditions imposed by the International Monetary Fund are by far the most controversial and most commonly debated topic, and for a good reason given the fact that the IMF primarily lends money to poorer countries and then it applies severe financial restrictions. The problem is not the fact that it helps poor countries re-stabilize their economy as it did after the recession that hit the entire world a few years back, as this is a very good and helpful thing for the countries in question, but the fact that the conditions attached to these loans are very difficult to meet, and often with great sacrifices.

With that in mind, it must be said that in order for a country to repay its loans (usually millions or billions of dollars), its economy must be liberalized and there must be some serious government spending cuts involved, which can take their toll on the country’s economy in the long run. Besides this, the overall social structure of the country can be impacted as well, given the fact that the conditions imposed by the IMF often reflect the finance-related beliefs of Western nations, which may not always be in the best interests of the borrower.

Many people claim that these conditions are often designed to compromise not only the economic sovereignty of the receiving countries, but also their political structure. The fact that the conditions are too intrusive has generated a lot of backlash from other countries, and so did the so-called “structural adjustments” that the receiving countries had to meet in order to be eligible for the loan.

In addition to the government spending cuts imposed by the International Monetary Fund, the IMF also implies strict banking regulations, addressing various government deficits as well as a regulated pension policy. All these changed have caused a severe domestic opposition in most of the receiving countries, over the years.

3. The Policies Are Imposed All At Once, Which Leads To Privatization And An Increased Unemployment Rate

Besides the fact that these policies are severe enough and likely to cause domestic opposition, the IMF did not even impose them in an appropriate sequence, but rather all at once, which leads to a serious of consequences including the privatization of government services in a very rapid manner (for instances, selling utilities companies to private investors).

In turn, given the fact that private owners aim to make a company as efficient and as cost-effective as possible, the chances are that the new owners of such companies (which, as stated above, are often either utilities or water supply companies) are very likely to let go a significant part of the staff, which leads to an increased rate an unemployment. The reduced government salaries and pensions coupled with an increased unemployment rate can destabilize the financial and social structure of a country even more than the financial crisis itself.

In some cases, the borrowing countries do not have a properly developed unemployment management program, neither does it have social safety programs or other plans to support families who have lost one or more primary sources of income. In other words, those people who were fired when the company they worked for was sold will be unable to financially support their families.

This is why privatization must be introduced as part of a larger, more comprehensive and thoroughly designed program that involves creating new jobs designed to replace the lost ones. These programs should include low interest rates for mortgages and other loans, along with other more specific macroeconomic policies.

4. The IMF Accepts Little To No Public Criticism

Those who oppose the policies of IMF claim that the International Monetary Fund was not even open to public criticism when it came out with these severe policies, and in many cases the agreements that took place between the receiving countries and the IMF were often kept secret until the papers were signs and the loan was already taken out. In many times,this led to a severe backlash from the general public in the borrowing countries.

5. The Policies Of The Washington Consensus Are Universally Imposed

Last, but certainly not least, the critics of the International Monetary Fund also claims that the institution imposes the policies of the Washington Consensus on all the borrowing countries, without understanding the distinct and primary financial and social characteristics (and differences) of the borrowing countries, which in turn makes these policies very difficult to carry out and, as mentioned earlier, often very counter-productive for the general economy of the receiving countries.

In order for an international monetary organization such as the IMF to be able to impose generally applicable rules, regulations and policies, it must firstly study and specialize in the economies and the political climate of the borrowing countries, economies that the International Monetary Fund often oversees.



How Much Gold Bullion Does The IMF Really Have?

According to the reports released in June 2009, the IMF or International Monetary Fund held around 103 million troy ounces or 3,200 tonnes of gold. For many years, the amount of gold in the reserves has been constant. In the third financial quarter of 2009, the International Monetary Fund made an announcement about selling one eighth of the holdings. The amount was around 403 tonnes.

The announcement was made on the basis of a new income model agreed upon by member countries in April, 2008. Subsequently, the IMF announced the sale of around 200 tonnes gold to India, 10 tonnes to the Republic of Sri Lanka, 10 tonnes to Bangladesh Bank, and 2 tonnes to the Bank of Mauritius. The sales of these reserves were conducted in different stages at existing market prices.

The International Monetary Fund maintains a special book value of the gold deposits. This internal book value if way below the market value. In 2000, the internal book value specified by the IMF was XDR 35. This is equivalent to US $45 per troy ounce. There have been many attempts to revalue the IMF’s gold bullion reserve to the current market value. However, it has seen resistance for a lot of reasons.

The primary reasons have been the calculation of gold reserves per capita, and official reported gold holdings. The International Monetary Fund maintains accurate statistics of national assets as reported by member countries. The data is used by the WGC or World Gold Council to periodically report and rank the gold holdings of members countries and various official organizations.

It’s worth mentioning that the gold amounts listed on the official website may not be physically located or stored in the country. The primary reason is that central banks normally don’t allow independent audits of the reserves.

 Gold Reserves in the International Monetary Fund

 Gold had always played a very important role in the International Monetary System. However, the scenario changed after the collapse of Bretton Woods system of standard, fixed exchange rates in 1973. Since then, the role of gold in the IMF has diminished.

 But this precious metal still remains a very important asset in the reserve holdings of many different countries. The International Monetary Fund is still the largest holder of gold in the world.

 The IMF wanted to comply with the new income model suggested in April, 2008. Due to this, funds from some limited gold sales were used to boost the institution’s lending capacity and establish an endowment. The International Monetary Fund started lending more money to low income countries.

 How the IMF Acquired it’s Gold Holdings

IMF Gold Holdings

 Currently, the International Monetary Fund holds approximately 2,800 metric tons or 90.5 million ounces of gold at specific depositories. Based on gold’s historical cost, the International Monetary Fund’s gold holdings are valued at SDR 3.2 billion. This is equivalent to $4.8 billion.

 However, if you value these holdings at current market prices, the value is closer to SDR 73.8 billion. This is equivalent to $113.2 billion. According to statistics, the International Monetary Fund has acquired the gold holdings through four different channels :

 The International Monetary Fund was founded in 1944. At the time, it was decided that around 25% of initial quota increases and quota subscriptions were supposed to be paid in gold. The amount paid represents the largest source of the International Monetary Fund’s gold.

 All payments of interest rates and charges imposed on member countries regarding the IMF credit were usually made in gold. In addition to this, if a member country wished to acquire the currency of some other member, the only way was to sell gold to the International Monetary Fund.

 The most prominent use of this provision was when South Africa sold gold to the IMF in 1970-71. Last but not the least, member countries used gold to repay the International Monetary Fund for extended credit.

The IMF Rules Surrounding Gold

 The legal framework of the International Monetary Fund for gold is straightforward. When the institution was established, the member countries designed a proper framework for regulating the gold reserves. Since then, there have been many changes to the framework :

 Role of Gold – The Article of Agreement was amended for the second time in 1978. This fundamentally changed the basic role of gold in the IMF’s International Monetary System. The IMF eliminated gold’s use as a common denominator of the post World War II currency exchange rate system. It’s use as the basis of monetary value of the SDR or Special Drawing Right was also eliminated.

 The International Monetary Fund also abolished the standard price of gold. The institution ended its mandatory use in financial transactions between member countries and the IMF. In addition to this, the International Monetary Fund required to avoid establishing or managing a fixed price of gold.

 Transactions – The second amendment made to the Articles of Agreement limited the use of gold in the International Monetary Fund’s transactions and operations. It’s worth mentioning that the institution can still sell gold outright on the basis of prevailing market prices.

 The IMF can also accept gold to discharge a member’s country’s financial obligations, such as loan repayment, at an agreed price. The agreed price will also depend on the prevailing market price at the time of offer acceptance.

 It’s important to understand that such financial transactions require the Executive Board’s approval. The petition needs to get at least 85% majority during the vote. The International Monetary Fund does not have any authority to engage in other kinds of gold transactions, such as leases, loans, using gold as collateral, swaps and more. Moreover, the IMF does not even have the authority to purchase gold outright.

 It’s worth mentioning that a lot has changed in the last 60 years. In the last 6 decades, there have been many instances when the International Monetary Fund wanted to return some gold to the member countries. It even wanted to sell some of the gold holdings. The major reasons for such instances are varied.

 Between 1957-70, the International Monetary Fund sold a large part of gold on various occasions to replenish the institution’s holdings of various currencies. During the same period, some gold held by the IMF was sold to America, and even invested in the United States Government securities. This was done to offset some operational deficits. Through gold’s role in the IMF has diminished over the years, it still continues to play a significant role in the global economy.

IMF Objectives Simplified

The International Monetary Fund (IMF), conceived in July 1944 at a UN’s conference held in Bretton, New Hampshire, U.S.A is a leading global financial organization made up of 188 countries. Its main goals concentrate on securing financial stability, facilitating international trade, alleviating high rates of unemployment and reducing poverty around the world. During its establishment, the 44 governments, which were represented in the conference, created a credible framework that would eradicate competitive devaluations that were witnessed after the First World War that caused 1930s Great Depression. This is an international organization whose functions keeps on expanding year by year owing to various economic, social and political factors. But still its core functions will always stand out and they include the following.

Providing Financial Assistance

The primary objective of IMF is to provide financial assistance to poor countries that are experiencing difficult economic times due to civil wars, natural disasters etc. Member countries who would want to boost their economies through infrastructural development and other things that help to create a good investing environment may also solicit funds from IMF. This organization lends out money through loans that are given under certain conditions.

Preventing Possible Financial Crisis

Countries are required to launch certain reforms that will regulate how the borrowed funds will be utilized to prevent fraudulent individuals from embezzling the funds. Also, these reforms are meant to cushion those countries which have fixed exchange rates policies from a crisis resulting from monetary, fiscal and various political practices. The risk of a possible staggering balance of payments in future may arise due to under/over-valued currencies, inflation and budget deficits if these reforms aren’t put in place. Therefore, IMF not only assists member states to develop economically by lending them loans but they also provide measures that cushion them from experiencing a possible financial crisis.

Carrying Out National, Regional & Global Surveillance

Through a formal system known as surveillance, IMF tries to review a country’s policies, regional and global financial and economic developments to ensure its own stability and prevent a financial crisis from happening in their system. By so doing, this organization encourages all member countries to establish policies that stirs up economic growth as well as polices which fosters living standards of the locals in a particular state. It also gives countries various advices that guide them in reducing financial instabilities and vulnerability to economic recessions.
Using its World Economic Outlook, this organization provides a reliable and regular assessment of all global prospects found in the world’s financial markets. It also assesses public financial developments in its Fiscal Monitor and Global Financial Stability Report. After thorough assessment it publishes a series of region-based economic outlooks which countries can take advantage of them to assess their own economic system.

Providing Various Types of Financial & Economic Training to Member Countries

Apart from lending loans to the member countries, IMF trains individual countries on various monetary habits to avoid rampant inflation, disequilibrium in the balance of payments and other financial crises, which affect most countries having ‘struggling’ economies. Since, 1950s, IMF has been offering various training courses on international economics and on balance of payments statistics. In fact, in 1964, the IMF Institute was founded to foster these training activities allowing various countries to take advantage of good money management habits. The IMF Institute is composed of professional monetary and management officers that equip officials from member countries with lots of financial knowledge. These officials benefit from various subjects including methodologies used in balance of payments, managing public finance, analyzing government finance statistics and subjects that deal with financial policies.
Providing Technical Assistance

This is another important and core function of IMF that aims at providing technical assistance in various sectors to individual countries. It is a program, which is regulated by the Fiscal Affairs Department, the Bureau of Statistics and Monetary and Exchange Affairs Department. Other departments, which may chip in, include the Bureau of Computing Services, the Legal Department and country-based departments may participate.

How Technical Assistance is Offered

Technical assistance is delivered through field assignments, staff missions and studies as well as workshops meant to update state officials with trending developments in the global financial industry. In this particular training, IMF focuses on ensuring that each and every official of its member countries are well conversant with tax systems, analysis of huge financial statistical data, macroeconomic management, developing a central banking system and regional and global fiscal policies.
Member countries also benefit from advices on central and general banking legislation, money and capital markets, as well as structure of interest rates at different times of the year. IMF’s objective is to ensure that, through regional and global cooperation, every country gets to take advantage of the various financial and economic instruments it provides. This is evident in Eastern Europe and Soviet Union where IMF has transformed the centrally planned economies through their technical assistance services to holistic market oriented economies.

Partnering With Donors

IMF collaborates with various donors on behalf of each member country that requires assistance at any time. These donors may be either bilateral or multilateral donors. They both help IMF in meeting the requirements of all member countries. Robust and well-bonded partnerships with other institutions such as UN ensure that countries receive every kind of assistance whether political, social, or economic.

What About New Members?

This international monetary organization assist new member states in developing export and import sectors, choosing the right currency, setting up interest rates and credit regulations, making structural reforms and reserving certain financial requirements. This enables the new members to acquaint themselves with IMF’s rules, terms, & conditions before starting a long-term economic relationship.

Generally, the functions of IMF not only involve financial assistance but also incorporates various things that are meant to improve economic status of each member country. Since the Asian crisis (1997-1998) and Mexican peso crisis (1994 – 1995), IMF has been very vibrant in providing technical, financial and economic assistance to all member countries to prevent such crises from happening in the future. It develops universal standards that help in creating an equal platform where all countries can access help. It offers useful advices to member countries regarding financial markets and how to create a good business environment where investors can find it favorable. This allows countries to develop economically without straining their resources.