IMF Quiz

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International Monetary Fund (IMF)

The idea of creating a body that could foster international monetary cooperation started at the Bretton Woods conference that took place in New Hampshire, United States in July 1944. During this conference, 44 governments agreed to create a body that could oversee economic cooperation with the aim of avoiding financial turmoil and currency devaluations that had contributed to crises such as the great depression in the 1930s. Two years later in 1946, 46 countries came together to create the International Monetary Fund (IMF). Currently, this organization has a membership of 188 countries.

ORIGIN

Before the start of the Second World War, there was no single international system governing trade or even monetary policies. Whenever a country faced economic difficulties, it tried to deal with its issues in its own way. This created a huge problem because countries would adopt protectionist trade policies to safeguard their industries from goods produced by other countries. For this reason, economic crises became frequent leading to unstable currency exchanges, economic depressions, and currency devaluations. As a result, governments that attended the United Nations Monetary and Financial Conference in NH in 1944 sought to cooperate in order to foster greater economic stability in the world.

International Monetary Fund (IMF) Purpose and Objectives

The aim of setting up a global monetary policy was threefold: foster monetary stability, facilitate trade and fix balance-of-payments problems by making it easy for member countries to access short-term financing. These aspects would make international trade easier, enhance economic growth, and reduce poverty rates.

HOW THE IMF WORKS

At the top of the International Monetary Fund is a three-tiered governance body that consists of a board of governors, an executive board, and a managing director. Out of these, the board of governors is in charge of making monetary policy with each member country having a representative (usually a central bank governor or finance minister). In addition, the Board of Governors elects an International Monetary and Financial Committee (IMFC) that meets two times every year to deliberate on economic and monetary issues that affect the world. After its deliberations, it makes its recommendations to the board of governors.

The executive board is in charge of the IMF’s day-to-day operations including lending money to member countries. This board consists of 24 members and meets at least thrice every week to oversee daily operations. It is the duty of the executive board to select the IMF’s managing director to serve for a renewable five-year period. In turn, the managing director is in charge of supervising the funds 2,800 employees as well as scrutinizing loan proposals. Traditionally, European nations nominate a candidate for the managing director’s post while the post of deputy managing director goes to a US citizen.
Besides the governance structure, member countries contribute money to IMF. Each country’s contribution or quota depends on factors such as gross domestic product and trade with other countries. Furthermore, each country’s quota level determines its capacity to access IMF loans, voting power, and subscriptions. According to figures published by the fund, the total number of quota subscriptions available to members stands at 238 billion IMF Special Drawing Rights (SDRs).

VOTING SYSTEM

Before implementing certain policies, members must vote to approve or disapprove such decisions. To start with, the board of governors has the power to approve loans and policy decisions through a simple majority vote. In most cases, a 70 per cent voting majority is enough to approve such decisions. Certain issues such as admitting a new member require an 85 per cent vote majority. However, a study carried out and published by the Congressional Research Service found that 10 countries control 52.35% of the total votes. These countries include the US (16.75%), Japan (6.23 percent), Germany (5.81%), France (4.29%), UK (4.29%), China (3.81%), Italy (3.16%), Saudi Arabia (2.80%), Canada (2.56%), and Russia (2.39%).

LOAN PROGRAMS

In general, the IMF has several financial assistance programs that member countries can access including the Stand-By Arrangement, the Extended Fund Facility (EFF), the Flexible Credit Line (FCL), the Rapid Credit Facility (RCF), the Post-Catastrophe Debt Relief (PCDR) tryst fund, the Policy Support Instrument (PSI), and the Precautionary and Liquidity Line (PLL). Each of these loan programs addresses a particular need. For example, the PCDR is available to low-income countries that experience devastating natural disasters such as earthquakes or floods. Some of the countries that have benefited from these loan programs in recent years include Greece, Colombia, Mexico, Macedonia, Poland, and Haiti. As of February 2013, the fund’s loan portfolio stood at more than $144.6 billion.

TECHNICAL ASSISTANCE

Besides financial assistance, the IMF also provides technical assistance to member countries. This includes the provision of expertise in financial sector management, macroeconomic policy planning, as well as streamlining tax and revenue collection. In most cases, beneficiaries of this assistance are low and middle-income countries.
Overall, the International Monetary Fund is a major player in the world’s economy. It plays a big role in fostering financial stability and raising the living standards of all humans. This has become necessary following the 2008 financial crisis as well as the current economic crisis affecting the Eurozone. At the same time, it provides financial assistance to members for purposes of correcting trade imbalances with other countries.

http://www.imfsite.org

IMF Quiz

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Oyindamola Lateef

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