The International Monetary Fund (IMF) is an organization that operates internationally with the main purpose of providing advice and financial assistance. This organization has already played an integral role in the growth of developing countries and the creation of financial markets all over the world. The rest of the article is going to serve as an overview of the International Monetary Fund.
What Does IMF Do?
The IMF was founded around the time World War II ended. The year was 1945 and it came out of the Bretton Woods Conference. It has a sister organization known as the World Bank. As of now, The IMF is considered to be one of the largest lender of money on the planet. At the core, the IMF is a specialized agency of the United State, but it is operated by 186 countries. Any country is welcome to join the organization as long as they accept IMF’s organization statuses and they must conduct a foreign policy.
The IMF is not only responsible for the creation of the international monetary system, but it also plays a vital role in maintaining it. This international monetary system handles the monetary exchange between many countries. The monetary system serves as a platform for many foreign exchange transactions and the same time promoting a balanced economic trade and fostering investments worldwide.
To achieve the main goals of the IMF, the organization focuses on advising the macroeconomic policies of its member countries, mainly focusing on credit management, money, budget and exchange rate. In addition to that, the IMF will assess the financial sector of a country, together with its regulatory policies. The IMF also appraises the country’s employment and labor market in a macroeconomic level. Furthermore, as it is still considered as a “fund organization”, the IMF provides financial assistance to countries to cover the balance of payment discrepancies. As a result, the IMF plays a vital role in nurturing the economic growth of a country and maintaining its levels of employment.
How Does IMF Work?
The IMF gets its funds from the subscription of paying members countries or states. The amount of quota is determined by how much a country will be able to pay in accordance to the size of its economy. Consequently, this quota size determines the weight and importance of a country within the IMF, this also includes voting rights and how much financing a country can obtain from the IMF.
25% of the member’s quota is paid to the IMF in the form of special drawing rights (SDR), as opposed to currency. SDR is specially designed not to be a currency, but it can be used to settle international accounts with other participating members.
The real value behind the SDR is the accepting and using it, and also honoring the country’s obligation to the IMF. Each member country is assigned a certain amount of SDR contributions based on the size of its economy. The importance of the SDR was negatively affected when the major economies started adopting floating rates and dropped fixed exchange rates. However, to this day, all IMF accounting is done in the form of SDR. Commercial banks are able to accept SDR denominated units and accounts. Nowadays, the exact value of SDR changes daily in response to different major currency movements, including the British pound, the Euro, the Japanese yen and the U.S. dollar.
The larger the country’s economy, the bigger its contribution. The United States contributes roughly 18%, while the Seychelles Island contributes roughly .0004%. If needed, the IMF may authorize a country to pay its quota deficit in its local currency. If deemed necessary, the IMF may also borrow funds from the participating member countries. As of now, it is estimated that the IMF has a total SDR of 212 billion in total quotas and 34 billion SDR available for borrowing.
Benefits Of IMF
The IMF offers a lot of advantages to its member countries. However, the main benefit is in the form of surveillance information from the participating countries. The information-gathering is done on a yearly basis. This includes individual countries and its regions and global economy and its entirety. Also, a participating country may request for a financial assistance during the financial crisis, whether it is caused by the poor macroeconomic planning or sudden economic shock. In return for the help of the IMF, the country must agree to an IMF-monitored economic reform, or also known as Structural Adjustment Policies (SAPs).
There are basically three facilities that are widely implemented by IMF in terms of lending money. There is a stand-by agreement, extended fund facility and poverty reduction and growth. Each of the programs is designed to help its participating member country in response to the immediate economic needs of the participating country.
The IMF also provides assistance to economies that are considered as “transitional”. It helps the changeover from an economy being centrally planned to a market run economy. The IMF also provides emergency funds for countries that have suffered a collapsed economy. A prime example is Korea during the 1997 financial crisis. The funds from the IMF helped Korea’s economy and currency from being devalued too much. The IMF may also provide emergency funds for countries that are suffering from an economic crisis brought on by natural disasters.
Most, if not all, of IMF’s facilities are aimed at creating and developing a sustainable economy for a country, recommending policies that are not only creating a sustainable economy, but the ones that will also be accepted by the local population. However, with all assistance given by the IMF, it’s best to keep in mind that the organization is not an aid agency. This means that before providing funds, a country in need must agree to certain economic policy changes. Also, a country must make it a priority to pay back the money loaned. As of now, all countries that are under the IMF programs are emerging, transitional or developing markets.
Providing assistance to developing countries is an important step for a balanced global economy. The IMF is an organization that aims for such a goal. While it is true, that there are opinions that are opposed to the methods of the IMF, but it cannot be denied that the organization has helped a lot of economies from all over the world.