What is the IMF?

This blog post will provide an overview on the International Monetary Fund (IMF) and what give an overview as to what it actually is.

What is the IMF?

The International Monetary Fund is an organisation made up of participating countries (currently 190) that exists to provide financial stability and acts as a protection to the global economy.

That is what it is in a nut shell but let's dive in a bit deeper...

You can think of the IMF as kind of like a big bank full of money that can be used to help any of the countries who are members of the IMF should they require it. The IMF doesn't just provide money though, it also helps to monitor the economy and especially the economies of the members and provide advice to it's members. Its basic objective is to prevent financial crises. The IMF has access to review any of it's member's economies which means its unique as an organisation in the sense that it has in depth knowledge and builds a picture of how the global economy is looking as pretty much every country bar a few like North Korea and Cuba are members. The IMF provides a range of thorough financial reports each year and then using the data they find, they provide recommendations to the member countries about how they can improve their economy - recommendations are made and countries listen to them in order to protect the global economy but also to enhance individual economies.

Alongside its advice and recommendations, the IMF also has standards that it provides which all members must follow. All members have to agree to cooperate with each other if it's necessary to resolve any international financial issues. They also have to be transparent and share data and information to the IMF along with other rules.

How the IMF is financed:

As of right now, the IMF has around 1 trillion dollars ready for lending. So how does it get this kind of money?

There are 3 ways which are quotas, multi lateral borrowing and bilateral borrowing. Let's break these down a bit.

Quotas:

Quotas are the main way the IMF gets its money. When each country joins they have to contribute a certain amount of money (this is called the quota subscription). All countries will pay a different amount which is decided based on how economically strong and wealthy the country is. The initial quota given is set by looking at what other countries that are similar economically are paying. For example, USA have the largest quota.

This also means that the USA have the largest voting power as the more money given to the IMF, the higher that countries voting power is.

These quotas are also important because it limits the amount a country can borrow from the IMF. A member is allowed to borrow no more than 145% of its quota in a year, however, in certain circumstances this can be waivered.

It's also worth adding that quotas are reviewed about once every 5 years and can be amended.

Multilateral Borrowing:

If the IMF feels as though they do not have enough to lend members, they can supplement quota resources with multilateral borrowing. This is called the NAB (The New Arrangements to Borrow) and they are basically a credit arrangement between the IMF and only 38 member countries and these arrangements are only activated in the event that there is a major financial crisis and the quota money isn't enough. To activate these arrangements, 85% of participates have to support the decision.

Bilateral Borrowing:

This is the final option used by the IMF to generate money and only used if they need to finance their members but theres not enough money generated by the quotas of NAB. Bilateral borrowing are also arrangements with different creditors.

Structure of the IMF:

The IMF consists of a board of governors which has the biggest decision making power. The board of governors is made up of governors for each member country. Below the board of governors, there is the executive board, then the managing director and all other staff such as statisticians. The executive board are in charge of the daily ongoings of the IMF and is composed of 24 directors which have been selected by each member countries. There is a little more to the structure of the IMF but to keep this video from getting a bit boring I will leave that here.

Benefits of being part of the IMF:

So why would a country want to be apart of the IMF seeing as membership is optional. Well the main benefits are that the IMF offers technical and financial support when needed, the IMF helps economies not fail, members have access to data and information on economic situations of other members, they can borrow money should they need it, to name a few. Oh and the IMF promotes trade.

If a country needs a loan from the IMF, it is only agreed if the country requiring it agrees to a set of corrective policy actions. This ensures that they agree to implementing necessary actions to regain their economy and financial health which then allows the loan to be repaid to the IMF in the future. This money is then available to other members.

Criticisms:

• As voting power is decided by the quota which is decided by the economic strength of a country, developed countries are seen to have a much higher power in the IMF. It's believed that developed richer countries dominate the IMF.

• I've read that there are high interest rates when getting a loan from the IMF which makes it difficult for developing countries to pay their loans back.

• The conditions attached to loans are also believed to be very high which critics say have harmed developing countries.

I hope this gives you an overview! Thank you for reading,

Hayley