International
monetary fund
Introduction;
The International Monetary Fund (IMF) is an
organization of 189 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.[1] The International Monetary Fund (IMF) promotes international
financial stability and monetary cooperation. It also seeks to facilitate
international trade, promote high employment and sustainable economic growth,
and reduce poverty around the world. Created in 1945, the IMF is governed by
and accountable to the 189 countries that make up its near-global membership.[2]
The IMF’s
History;
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. It now plays a central role in
the management of balance of payments difficulties and international financial
crises.[3] 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.[4] 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.[5]
The IMF,
also known as the Fund, was conceived at a UN conference in Bretton Woods, New
Hampshire, United States, in July 1944. The 44 countries at that conference
sought to build a framework for economic cooperation to avoid a repetition of
the competitive devaluations that had contributed to the Great Depression of
the 1930s.[6]
The IMF’s responsibilities/objectives;
The IMF's primary purpose is to ensure the stability
of the international monetary system—the system of exchange rates and
international payments that enables countries (and their citizens) to transact
with each other.[7]
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.[8]
The
IMF's Goals;
The Bretton Woods Conference set
out six goals for the IMF in its Articles of Agreement. Those goals, remain the
guiding principles of the IMF today.
In simple meaning these goals are
to;
1)
Facilitate
the cooperation of countries on monetary policy, including providing the
necessary resources for both consultation and the establishment of monetary
policy in order to minimize the effects of international financial crises.
2)
Assist
the liberalization of international trade by helping countries increase
their real incomes while lowering unemployment.
3)
Help
stabilize exchange rates between countries. Especially after the global
depression of the 1930s, it was considered vital to establish currencies that
could hold their value, serve as mediums of international exchange, and resist
any speculative attacks.
4)
Maintain
a multilateral system of payments that eliminates foreign exchange
restrictions. Countries are thus free to trade with each other without worrying
about the effects of interest rates and currency depreciation on their payments.
5)
Provide
a safeguard to members of the IMF against balance of payments crises, i.e.,
when governments cannot balance the money they have with the money they owe to
other countries. IMF members can have the confidence to adjust the imbalances
in their national accounts without resorting to painful measures that would
hamper their prosperity, such as devaluing their currency in relation to other
countries'.
6)
Try
to reduce the effects of volatility in countries' balance of payments accounts,
the IMF helps assure that global trade and financial relationships can continue
at a steady rate without the risks of global depressions like that of the
1930s.[9]
The IMF’s mission;
The IMF now has 188 member
countries and has evolved over time as the global economy has expanded, become
more integrated, and endured both boom and bust. But the IMF’s mission has
remained the same:
a) To ensure the stability of the
international monetary system—the system of exchange rates and international
payments that enables countries (and their citizens) to transact with one other
and that is essential for promoting sustainable economic growth,
b) Increasing living standards, and
c) Reducing poverty.[10]
The IMF’s Facilities/services;
The key activities of the IMF can
be classified under three areas;
1)
Lending,
2)
Surveillance,
and the provision of,
3)
Capacity-building,
services.
1)
Lending;
This financial assistance enables
countries to rebuild their international reserves, stabilize their currencies,
continue paying for imports, and restore conditions for strong economic growth,
while implementing policies to correct underlying problems. The IMF is also
actively engaged in promoting economic growth and poverty reduction for its
poorer members. Non-concessional loans are also provided mainly through
Stand-By Arrangements, and IMF also provide emergency assistance via the Rapid
Financing Instrument to all its members facing urgent balance of payments
needs. [11]
2)
Surveillance;
To maintain stability and prevent
crises in the international monetary system, the IMF reviews country policies
and national, regional, and global economic and financial developments through
a formal system known as surveillance.[12] These activities include;
a)
Bilateral
surveillance, which is the regular monitoring and peer review by other members
of economic and financial developments and policies in each member country.
b)
Regional
and multilateral surveillance is conducted through ongoing reviews of world
economic conditions, financial markets, fiscal developments and outlooks, and
through oversight of the international monetary system.[13]
3)
Capacity building;
Capacity building and other services to members of the
IMF include provision of technical assistance, external training[14] and training to help
member countries strengthen their capacity to design and implement effective
policies including in the areas of tax policy and administration, expenditure
management, monetary and exchange rate policies, banking and financial system
supervision and regulation, legislative frameworks, and statistics.[15]
To sum up, the IMF is much more
than a lending institution. It is concerned not only with the economic problems
of individual member countries but also with the working of the international
monetary system as a whole. Its activities are aimed at promoting policies and
strategies through which its members can work together to ensure a stable world
financial system and sustainable economic growth.[16]
The
IMF’s governance and decision making structure;
The IMF has evolved along with the global economy
throughout its 70-year history, allowing the organization to retain a central
role within the international financial architecture. Unlike the General
Assembly of the United Nations, where each country has one vote, decision
making at the IMF was designed to reflect the relative positions of its member
countries in the global economy.[17]
1)
Board of
Governors;
The IMF is controlled by its 187
member-countries, each of whom appoints a representative to the IMF's Board of Governors.
The Board of Governors, most of whom are the finance ministers or heads of the
central bank of the members, meet once per year to discuss and possibly achieve
consensus on major issues.[18] Each member country
appoints a Governor, usually the country's minister of finance or the governor
of its central bank, and an Alternate Governor.
2)
Executive Board;
The
Executive Board
consists of 24 Executive Directors, with the Managing Director as chairman. The
Executive Board usually meets three times a week, in full-day sessions, and
more often if needed, at the organization's headquarters in Washington, D.C. The
Executive Directors represent all 188 member countries in a geographically
based roster.[19]
Countries with large economies have their own Executive Director, but most
countries are grouped in constituencies representing four or more countries.[20]
The world's major economic and
political powers, consists, the United States (the IMF's largest shareholder),
Great Britain, Japan, Germany, France, China, Russia, and Saudi Arabia, each have
permanent seats on the executive board, while the 16 other directors are
elected for two-year terms by groups of countries divided roughly by geography,
e.g., Caribbean, Africa, Southeast Asia, etc. The executive board, in turn, is
run by the managing director, who is elected for renewable five-year terms.[21]
3) The Managing Director;
The IMF is led by a managing director, who is
head of the staff and serves as Chairman of the Executive Board. The managing
director is assisted by a First Deputy managing director and three other Deputy
Managing Directors.[22]
The Executive Board selects the Managing
Director, who besides serving as the Chairman of the Board, is the Chief
of the IMF staff and conducts the business of the IMF under the direction of
the Executive Board. He is appointed for a renewable five-year term.
4)
International
Monetary and Financial Committee;
The IMF also has an International
Monetary and Financial Committee of 24 representatives of the member-countries
that meets twice yearly to provide advice on the international monetary and
financial system to the IMF's staff.[23]
In all of its operations, voting
power is weighted based on the size of the economy and therefore the quota
allocation of each country. Decisions are usually taken by consensus, but the
United States, as the IMF's major shareholder, has the most influence in the
institution's policy-making.[24]
5) Other Staff of IMF
IMF
employees are international civil servants whose responsibility is to the IMF,
not to national authorities. The organization has about Approximately 2,663
from 148 countries[25]. About two-thirds of its
professional staff are economists.
The IMF’s Resources;
Most resources for IMF
loans are provided by member countries, primarily through their payment of
quotas.[26]
1)
The quota system
The
primary source of the IMF's financial resources is its members’ quotas, which
broadly reflect members’ relative position in the world economy.[27] Each
member of the IMF is assigned a quota, based broadly on its relative size in
the world economy. This determines its maximum contribution to the IMF’s
financial resources. On joining the IMF, a country normally pays up to
one-quarter of its quota in the form of widely accepted foreign currencies
(such as the U.S. dollar, euro, yen, or pound sterling) or Special Drawing
Rights (SDRs). The remaining three-quarters are paid in the country’s own currency.[28]
Quotas
determine not only a country's subscription payments, but also its voting
power, the amount of financing that it can receive from the IMF, and its share
in SDR allocations.
A member country’s quota
determines its maximum financial commitment to the IMF, its voting power, and
has a bearing on its access to IMF financing.[29] The IMF's quota system was created to raise funds for loans.[30]
Quotas are denominated in Special
Drawing Rights (SDRs), the IMF’s unit of account. The largest member of the IMF
is the United States, with a current quota (as of January 25, 2016) of SDR 42.1
billion (about $58 billion), and the smallest member is Tuvalu, with a current
quota of SDR 1.8 million (about $2.5 million).[31]
2)
Gold holdings
The IMF’s gold holdings amount to
about 90.5 million troy ounces (2,814.1 metric tons), making the IMF one of the
largest official holders of gold in the world. However, the IMF’s Articles of
Agreement strictly limit the use of this gold. If approved by an 85 percent
majority of total voting power of member countries, the IMF may sell or accept
gold as payment by member countries. But it is prohibited from buying gold or
engaging in other gold transactions.[32]
3)
Borrowing arrangements
The IMF maintains two standing
multilateral borrowing arrangements;
a)
The New Arrangements to Borrow (NAB)
and
b)
The General Arrangements to Borrow
(GAB)
If the IMF believes that its quota
resources might fall short of the needs of its member countries, for example,
in the event of a major financial crisis, it can activate these arrangements.[33]
4)
Special drawing rights (SDR)
A
Special Drawing Right (SDR) is
basically an international monetary reserve asset.[34]
The SDR is an international reserve
asset, created by the IMF in 1969 to supplement its member countries’ official
reserves. As of March 2016, 204.1 billion SDRs (equivalent to about $285
billion) had been created and allocated to members. SDRs can be exchanged for
freely usable currencies.[35]
The SDR,
or special drawing right, is an international reserve asset introduced by the
IMF in 1969 (under the First Amendment to its Articles of Agreement) out of
concern among IMF members that the current stock, and prospective growth, of
international reserves might not be sufficient to support the expansion of world
trade. The main reserve assets were gold and U.S. dollars, and members did not
want global reserves to depend on gold production, with its inherent
uncertainties, and continuing U.S. balance of payments deficits.
Therefore, the international
community decided to create a new international reserve asset under the
auspices of the IMF.[36]
The SDR is neither a currency, nor a
claim on the IMF. Rather, it is a potential claim on the freely usable
currencies of IMF members.[37]
Sometimes
it is known as "paper gold" although they have no physical form have
been allocated to member countries (as book-keeping entries) as a percentage of
their quotas.
Holders of SDRs can obtain these
currencies in exchange for their SDRs in two ways:
a)
First, through the arrangement of
voluntary exchanges between members; and
b)
Second, by the IMF designating
members with strong external positions to purchase SDRs from members with weak
external positions.
In addition to its role as a
supplementary reserve asset, the SDR serves as the unit of account of the IMF
and some other international organizations.[38]
The
value of the SDR
Basket of currencies determines the
value of the SDR;
The value of the SDR was initially
defined as equivalent to 0.888671 grams of fine gold which, at the time, was
also equivalent to one U.S. dollar. After the collapse of the Bretton Woods
system in 1973, the SDR was redefined as a basket of currencies. The value of
the SDR is currently based on a basket of four major currencies:
a)
The U.S.dollar,
b)
Euro,
c)
The Japanese yen, and
d)
Pound sterling
The basket will be expanded to
include the Chinese renminbi (RMB) as the fifth currency.[39]
Review
of the Special Drawing Right (SDR) currency basket
The Review of the Method of
Valuation of the Special Drawing Right (SDR) basket is conducted every five
years by the IMF’s Executive Board, or earlier if warranted by developments.
The purpose of the review is to ensure that the SDR basket reflects the
relative importance of major currencies in the world’s trading and financial
systems, with a view to enhancing the SDR’s attractiveness as a reserve asset.[40]
IMF and globalization;
Charles Derber argues in his book “People before Profit”. “These interacting institutions create a new global power system where sovereignty is globalized, taking power and constitutional authority away from nations and giving it to global markets and international bodies”.[41]
The IMF and the World Bank;
The International Monetary Fund and
the World Bank were both created at an international conference convened in
Bretton Woods, New Hampshire, United States in July 1944. The goal of the
conference was to establish a framework for economic cooperation and
development that would lead to a more stable and prosperous global economy.[42]
a)
The IMF’s mandate
The IMF
promotes international monetary cooperation and provides policy advice and
technical assistance to help countries build and maintain strong economies. The
IMF also makes loans and helps countries design policy programs to solve
balance of payments problems. IMF loans are short and medium term. And staff
are primarily economists with wide experience in macroeconomic and financial
policies.[43]
b)
The World Bank’s mandate
The World Bank promotes long-term
economic development and poverty reduction by providing technical and financial
support to help countries reform particular sectors or implement specific
projects, such as building schools and health centers, providing water and
electricity, fighting disease, and protecting the environment. World Bank
assistance is generally long term and is funded both by member country
contributions and through bond issuance. World Bank staff are often specialists
in particular issues, sectors, or techniques.[44]
c)
Coordination
During the
Annual Meetings of the Boards of Governors of the IMF and the World Bank,
Governors consult and present their countries’ views on current issues in
international economics and finance. The Managing Director of the IMF and the
President of the World Bank meet regularly to consult on major issues. IMF and
Bank staffs collaborate closely on country assistance and policy issues that
are relevant for both institutions. The IMF and the World Bank are also working
together to make financial sectors in member countries resilient and well
regulated.[45]
“Despite
these and other similarities, however, the Bank and the IMF remain distinct.
The fundamental difference is this: the Bank is primarily a development institution; the IMF is a
cooperative institution that
seeks to maintain an orderly system of payments and receipts between nations.
Each has a different purpose, a distinct structure, receives its funding from
different sources, assists different categories of members, and strives to
achieve distinct goals through methods peculiar to itself.” [47]
|
International Monetary Fund
|
World Bank
|
Advantages of the IMF;
1)
IMF
can be seen as lender of last resort. When a country is seeing an exodus of
currency due to a balance of payments crisis, the IMF can provide crucial loans
to stabilize the economy and prevent a collapse of confidence.
2)
Supporters
argue that the IMF can also impose necessary reforms on an economy. Reforms
such as privatization, fiscal responsibility, control of Money supply, and
attacking corruption.
3)
Provides
an external assessment of the economy, which helps the government to implement
popular ideas.[49]
4)
It
serves as a council and adviser to countries attempting a new economic policy.[50]
Disadvantages of the IMF;
1)
The IMF has been criticized for not doing
much and for overreaching. It has been criticized for being too slow or too
eager to assist failing national policies, simultaneously, free-market supporters
roundly criticize the IMF for being too interventionist.[51]
2)
The
IMF has been passive in its approach and not been effective in promoting
exchange stability and maintaining orderly exchange arrangements.[52]
3)
The
unsound policy for fixation of exchange rate is one of the disadvantages of
IMF.
4)
The
resources at the disposal of the IMF are not adequate to cater to the needs of
member countries which is a setback of IMF.
5)
High
interest rates charged on its advances are considered one of the major
disadvantages of IMF. So, the debt servicing for the less developed countries
is difficult.
6)
The
stringent conditions imposed by IMF on its member nations are one of the big
disadvantages of IMF.
7)
The
domination by rich countries is another major disadvantages of IMF. Though the
majority of the members of the IMF are from the less developed countries of
Asia, Africa and South Africa, the IMF is dominated by the rich countries like
USA.[53]
Criticism on IMF;
The
IMF has been subject to a range of criticisms that are generally focused on the
conditions of its loans, its lack of accountability, and its willingness to
lend to countries with bad human rights records.[54]
It
can be understood as under,
1)
The
conditions placed on loans are too intrusive and compromise the economic and
political sovereignty of the
receiving countries.[55]
2)
The
IMF imposed the policies on countries without understanding the distinct
characteristics of the countries that made those policies difficult to carry
out, unnecessary, or even counterproductive.[56]
3)
According
to Stiglitz, the economists of the IMF had a "one-size-fits-all"
policy based on their academic training, which focused on economic models with
unrealistic assumptions about how real-life economies work.[57]
4)
The
policies were imposed all at once, rather than in an appropriate sequence.[58]
5)
The
IMF was not open to criticism or public oversight when working on these
policies. Stiglitz points out that the agreements between the IMF and borrower
countries were always kept secret from the general public in those countries.[59]
6)
Unlike
democracy, the rich countries dominate decision-making in the IMF because
voting power is determined by the amount of money that each country pays into
the IMF’s quota system.[60]
7)
The
IMF is funded with taxpayer money, yet it operates behind a veil of secrecy.
Members of affected communities do not participate in designing loan packages.[61]
8)
The
IMF and World Bank frequently advise countries to attract foreign investors by
weakening their labor laws. The IMF’s mantra of “labor flexibility” permits
corporations to fire at whim and move where wages are cheapest.[62]
9)
Developed
countries were seen to have a more dominant role and control over less
developed countries.[63] And sometimes,
10)
The
government officials of borrowing countries often felt powerless to question
the IMF's policies, believing that just to ask a question would be viewed by
the IMF as a challenge to its authority and jeopardize the loans it was
offering.[64]
One group, called “50 Years Is
Enough”, argues that the IMF, World Bank, and the World Trade Organization (WTO) are anti-democratic institutions.
According to them "Only when the well-being of all, including the most
vulnerable peoples and ecosystems, is given priority over corporate profits can
we achieve genuine sustainable development and create a world of justice,
equality, peace, and ecological values, where fundamental human rights,
including internationally-recognized social, cultural, environmental, and
economic rights, are respected."[65]
Conclusion;
IMF and Pakistan
The IFIs (international financial
institutions) World Bank and IMF are pillars of globalization. They are
designed to help manage the international financial system, they have taken on
major roles as drivers of closer economic integration of all of the world’s
countries, from the advanced to the least developed.
They have provided funds and advice
to assist countries with their economic development and policy-making. At the
same time, they are criticized on many levels, like, for intrusiveness into the
economic and political sovereignty of
nations dependent on their aid, lack of transparency, and impact of their
policies on societies and the environment.[66]
Pakistan’s
relationship with the IMF, there is one question that always comes up; is the
IMF evil? A careful look at the IMF and its
role in Pakistan over the decades shows that the Fund is certainly not evil, as
the popular imagination would like to believe. But it also is not the purely
technocratic “lender of last resort”, coming in with purely economic advice in
times of crisis either. In fact, the Fund appears to be responding to political
compulsions as much as to its own bureaucratic interests when dealing with
Pakistan. Nobody in the world wants to push an unstable, nuclear armed country
too hard on difficult economic choices.[67]
[1] www.imf.org
[2] www.imf.org, The IMF at a Glance
[3] Lipscy, Phillip
(2015). "Explaining Institutional Change: Policy Areas, Outside Options,
and the BrettonWoods Institutions"
[4] Cooperation
and Reconstruction (1944–71)
[5] en.wikipedia.org
[6] www.imf.org, The IMF at a Glance
[7] www.imf.org, The IMF at a Glance
[9]
IMF and
World Bank, www.globalization101.org
[10]
IMF
Financial Operations 2015
[11]
ibid
[12] www.imf.org, The IMF at a Glance
[13] IMF Financial Operations 2015
[14]
ibid
[15] www.imf.org, The IMF at a Glance
[16] IMF Financial Operations 2015
[17]
Factsheet How the IMF makes decision
[18] IMF and World Bank, www.globalization101.org
[19] "IMF
Executive Directors and Voting Power". Member Quotas
Shares, Governors, and Voting Power. International Monetary Fund.
[21] IMF and World Bank, www.globalization101.org
[23] IMF and World Bank, www.globalization101.org
[24]
Ibid,
[25] www.imf.org, The IMF at a Glance
[26] Factsheet
Where the IMF Gets Its Money
[27]
Ibid,
[28] Ibid,
[29] Factsheet
IMF Quotas
[30] “A comparison of the IMF and the WTO”. Theory
and Society
[31] Factsheet
IMF Quotas
[32] Factsheet
Where the IMF Gets Its Money
[33]
Ibid,
[34] Book,
Challenges and Opportunities in International Business
[35]
Factsheet Special drawing rights
[36]
Ibid,
[37]
Ibid,
[38]
Ibid,
[39]
Factsheet Special drawing rights
[40] Factsheet Review
of the Special Drawing Right (SDR) currency basket
[41] Derber,
Charles (2002). People Before Profit. New York: Picador.
[42] factsheet IMF and the World bank
[43]
Ibid,
[44]
Ibid,
[45]
Ibid,
[49] http://econ.economicshelp.org
[50] http://www.investopedia.com
[51]
Ibid,
[52] http://accountlearning.com/disadvantages-of-imf
[53]
Ibid,
[54] David N. Balaam and Michael Veseth, Introduction to International Political Economy, 4th ed.
2005
[55] IMF and World Bank, www.globalization101.org
[56] Ibid,
[57]
www.whirledbank.org/ourwords/stiglitz.html
[58] IMF and World Bank,
www.globalization101.org
[59] Ibid,
[60] www.globalexchange.org
[61] Ibid,
[62] Ibid,
[63] Alexander, Titus (1996).
Unravelling Global Apartheid: an overview of world politics. Polity press.
p. 133.
[64] IMF and World Bank,
www.globalization101.org
[65] www.50years.org/about
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