The International Monetary Fund - International Economic Cooperation

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Chapter One


IMF was formed by the mental act of the representatives of 45 governments, in the city of Bretton Woods, New Hampshire, (north-eastern United States) in July 1944 where they agreed to build up a framework for international economic cooperation. They had strong belief that such a framework was essential to avoid a repetition of the terrible and unsuccessful monetary rules that had played a vital role to the enormous misery of early nineteen hundreds..The International Monetary Fund (IMF) was created on December 27, 1945. Twenty nine countries with mutual agreement signed its Articles of Agreement with the intention and hope of preventing the repetition of such economic policies that contributed to the United States Great Depression in the 1930's.

Other purposes of the IMF include the promotion of international monetary cooperation, the growth of international trade, and what has become its major purpose, the lending of money to member countries that cannot make loan payments. However, this money is only made available after the country needing the loan has implemented certain structural adjustment programs. The IMF is an international organization of 184 member countries. The aim of IMF was to establish and encourage international monetary cooperation and exchange stability; basically to encourage economic growth and to decrease the level of unemployment; and to assist poor countries with financial assistance to help ease balance of payments adjustment.


International Monetary Fund is the world's central organization for international economic cooperation. It is an organization in which almost all countries in the globe work jointly to resolve the problems of countries who are going through certain financial crises. IMF's main purposes as stated in Articles of agreement are:

“To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.

In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.”

3. Functions and Structure of the International Monetary Fund

IMF's AOA is proposed to be a Code of Good Conduct handling members' financial policies. “Joseph gold”, writing in 1965, characterised the adoption of the rules of good conduct in the monetary sphere as:

“A remarkable development in international relations because it represents massive agreement on the introduction of the rule of law into an area in which previously the discretion of states to act as they wished was almost wholly unlimited”

4. The structure of the IMF.

The structure is basically divided in to two organs, namely the BOG that is Board of Governors and secondly the Executive Board. Every member state has one delegate; normally it's the finance minister or the central bank's head, on the Board of Governors, which usually meet up once a year.

There are also two very important committees namely. The International Monetary and Financial Committee it's their duty to consider vital financial system policies. Moreover the members of the BOG have to serve these committees.

The Development Committee is a combination of joint committee and the World Bank, their duty is to give advice to the Board regarding the policies regarding 3rd world or developing countries.

The executive board has the responsibility to operate and to manage the day to day procedure. Its members (24 Executive Directors) are elected or appointed by the member sates.

All the directors have a right to say during a decision making process as each one of them has the right of vote. The decision making process between the directors is not entirely based on voting power but on general consensus. Normally the Executive Board meets up every week but can be summoned more often if required.

Workforce is divided into different departments and each department has its own responsibilities separate from the others. For example a number of “regional” and “functional” departments from which 5 regional departments cover operations for the entire globe, whereas the functional departments include Finance and economic Affairs, which coach or educate national finance officers, and different administrative departments such as departments relating to policy Development, Research work and External Relations. The Executive Board has also established the “Independent Evaluation Office”, which runs separately to assess the efficacy of IMF operations and policies.

Managing Director

Managing Director is the leading authority who is above all, that is the IMF staff and Chairman of the Executive Board. The Executive Board has the responsibility to appoint a Managing Director for managing the agency's employees, and providing direction to the Executive Board.

6. The IMF's "Lending" Facilities

Any developed or a developing country which is a member of IMF can turn to the IMF for financial help if it unable to find sufficient funds to resolve its financial health. The IMF does not finance different projects and neither it's some kind of a bank which helps different countries when ever that particular country is in need of money. It provides loans which are basically projected to assist its member's states to tackle balance of payments problems and to stabilize their economies

Any member state may request IMF's financial assistance. An IMF loan helps a developing country in a way that it alleviates the adjustment policies that a country desperately needs to solve its balance of payments problem so that it can restore its strong economic growth.

Although there has been impressive progress in recent years, but still due to the intense poverty especially in low income countries it has been a major problem facing the international community.

The quantity of monetary aid given by the Fund has varied considerably over time. IMF goes through its policies when ever a member state appeal or demand for monetary help before taking any action. An arrangement is made between IMF and that specific country, and afterwards it is handed over to the international monetary Fund's Executive Board, in the form of a letter i.e. Letter of Intent. The agreement has to be permitted by the Board in any case or situation.

IMF helps developing (poor) countries in different ways through different channels, such as PRGF i.e. Poverty Reduction and Growth Facility. Countries which are going through financial crises and are in desperate need of funds, PRGF helps such countries by lending them money on concessional terms.

“FCL borrowers can borrow on a precautionary basis based on potential balance of payments needs.”

Stand-By Arrangements (SBA), are generally used to provide non-concessional loans to help states facing BOP problems. If for instance a state has gone through some kind of natural disaster, the IMF is always willing to provide emergency assistance for fast recovery.

We are now aware of the fact that how and from where IMF supports member countries in certain financial cries, the question is that from where IMF gets funds resources.

“The IMF funds its loans from its General Resources Account (GRA)

The method for acquirement of resources is done by the IMF through the member's quota subscriptions; it (IMF) basically uses the money paid in quotas or other procedures mainly to help third world countries to fight with their fiscal problems.

Countries maximum contribution to the IMF's fund is determined by the particular amount of quota assigned to it. A member state normally has to pay one quarter of its quota in foreign currency and the rest i.e. three-quarters is paid by that particular state in its own currency.

The size of the quota is determined by the size and the economic strength of a country.

There are huge numbers of countries which seek assistance and help from IMF, the loans provided by IMF from the fund's general resources are used for multipurpose for example: to solve general Balance of Payment problem, restoring reserves in a state's central bank etc.

A member state has to show and give evidence that it really is in need for financial assistance and is unable to solve its BOP problem with out the help of IMF. After it has shown proper evidence it needs to fulfil certain conditions laid down by IMF. (Conditionality)

7. Technical Assistance

Member states which usually encounter or bump into hazardous situations regarding to their financial affairs and who are unable to manage their economic policies, IMF provides such countries with technical assistance for example “Zimbabwe" and other African countries, who are in desperate need of technical assistance so that they are able to reduce poverty and stabilize their economy.

The IMF technical assistance can be divided into two parts firstly it aims to “strengthen their policymaking capacity”and secondly it guides on how to design those policies, which may consist of reforms. IMF offers technical assistance in various areas such as tax policy to improve the administrative and economic efficiency, taxes related to property etc, expenditure policy etc.

According to the IMF approximately ninety percent of the technical assistance goes to the poorest countries (Low income countries) moreover in recent years there has been a huge demand for IMF's technical assistance to increase the efficiency of the international financial system.

8. The law of Conditionality

Conditionality is a term where by a party signs an agreement and makes a commitment with another for the required services in return of some kind of consideration. This consideration can be of any form or kind, e.g. following certain policies etc.

Conditionality in the context of IMF refers to such kind of policies that a member state has to abide by in order gain assistance from IMF.

These policies are basically intended to help out the country to prevail over its balance of payment problems and to make sure that in future the fund's money is repaid on time.

“It is designed to help member countries to solve balance of payments problems, while at the same time it establishes sufficient safeguards for the use of IMF resources”.

9. Surveillance

Surveillance is one of the most important function that an IMF undertakes; under this IMF following the Articles' of Agreement observes the exchange rate rules and policies of a member states to check that if the system is working effectively and efficiently. It helps IMF to assess countries credibility and that the policies of that particular state are up to standard in order to achieve a sustainable growth economically, so that IMF could help such member states by warning of the forthcoming danger and advising them of needed policy adjustments. There are two types of surveillance namely Bilateral and Multilateral surveillance. Bilateral surveillance is when all the member states get together in order to engage into a dialogue to discuss and analyse a specific countries development conditions.

Where as in multilateral surveillance the IMF focuses on a state's economic conditions

13. The Fund's ability to take actions on non Compliance by the member states.

As a general rule when IMF assists a member state with its Balance of payment problem, the organization (IMF) expects that particular state to follow the regulations and policies set by IMF. If for instance a member state does not abide by the rules, IMF may command and put reasonable amount of pressure on that particular member state to comply with the rules, because it has no real power to force members to comply.

Generally a country's policy is described in a “letter of intent” which is later presented to the IMF by a member state requesting for financial help. Officially, letter of intent is not an agreement or any type of legal contract, so a member state cannot be sued by IMF for non-compliance of the policies. The only thing that IMF can do is to put pressure for compliance.

There are certain points that may automatically force a member state to abide by the rules and policies laid down by IMF. E.g. IMF may hold back funds and may not give it back unless or until the state comply, IMF may exclude the state from the organisation an example is Czechoslovakia, IMF may consult other member countries to put pressure and persuade the country. So eventually a member state is bound to pay back the money to the Fund or as mentioned above certain sever actions will be taken if a country does not comply with the rules set by IMF.

IMF facing Financial crises

Two-thirds of the IMF's members have experienced a financial crisis during the last two decades.

• Since the mid-1990s, there have been a number of high- rofile financial crises in emerging markets.

15. Background: Economic Impact of the Financial Crisis

IMF facing financial crisis

Background: Economic Impact of the Financial Crisis


The world is going through terrible financial crisis at the present age and it is time to see that what IMF really is capable of in relation of tackling such crises, although IMF has the capability to counter such crisis but in some areas new reforms and change of practice is required.

Time to time many countries come forward for financial assistance from IMF, IMF has applied certain changes to increase its financial resources, so that developing countries could solve their monetary health. Nearly Two-thirds of the IMF's members have experienced a financial crisis during the last two decades. Since the mid-1990s, there have been a number of high- profile financial crises in emerging markets.

There are a number of problems that the IMF is engaged in for example there has been disagreements between the political parties in connection to a country adopting an economic adjustment plan and getting financial assistance from IMF. Moreover due to the slow pace of IMF's functions and policies many private sectors have started playing a leading role.

As we know that IMF is basically governed by the most developed countries in the world such as United States and different EU states the legality of other countries are being undermined.

The international monetary fund has been playing an important role in different areas of financial assistance. But it needs hence has been reformed time to time; according to Martin A. Weiss Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division many observers argued that IMF is not performing its job as it should, and it's no longer playing a vital role in assisting, helping or guiding the world in crises management.

IMF credit outstanding peaked (on an end-of-year basis) at almost $100 billion at the end of 2005, but had declined to about $10 billion by the end of September 2008.”

Impact of financial crises on world's economy

Recently on April 22, 2009 there were some figures shown by the IMF relating to the economic growth declining by -1.3% in the present year of 2009. This has been the lowest rate ever in the IMF's history. However IMF has predicted that by January, conditions will improve by 0.5 %( output). Moreover the World Bank in March 2009 also predicted that global economy will have a negative impact in 2009. The situation is so worse and disastrous that even the most developed countries such as US, Japan and EU countries are going through a period of recession.

Nearly fifty one million people might lose their jobs; over the globe in 2009 as it is predicted by International Labour Organisation (ILO).

“The United Nations agency said the worldwide unemployment rate could rise from 6% last year to 7.1%.”

The world's economy is going through its worst conditions ever and is trying to fight with the recent problems.

A spokesperson for the ILO stated that if the situation remains the same or goes down this year, the recession will get worse sharply throughout the world.In related news, figures today have revealed that Spain's economy is in recession for the first time since 1993.

The conditions are so bad that even one of the biggest countries “China” is also going through the same situation as there has been a reduction in its economic growth just like the whole world.

The world's biggest economies are being knocked out by the present recession as there has been a decline of exports and reduction of capital flows. There has been an increase in commodity prices for example in China in between 2003 to 2008 the petrol and food prices have risen from 320 % and 138% respectively.

Due to the immense impact of the current financial situation people will spend less in developing countries, as they will be earning less from developed states, ultimately, there will be less or no investment causing unemployment and job losses. If there are no jobs, there will be no taxes for the government to collect eventually causing a reduction in Government revenues. The poorest people will be the one's most affected as they are totally dependent on social spending.

World poverty and financial crises

When it comes to the poor countries the first name that appears in one's mind is of the sub-Sahara African countries. Although they are less involved in the worlds economic market but they still are being affected by the financial crises that the world is facing at the moment.

According to “ Shaohua Chen” and “Martin Ravallion” in their column “THE IMPACT OF THE GLOBAL FINANCIAL CRISES ON THE WORLD'S POOREST” The world's poverty ratio will decline from 42% to 39% in the present year, further more before the occurrence of present crises the poverty level was already deteriorating.

Note: Poverty lines in 2005 prices. Source: Chen and Ravallion (2008).

China and India are one of those countries who have been working hard on controlling their poverty ratio, and have been successful in increasing their economic growth rate, but it has been argued that countries like China and India who are worlds most popular countries might be affected strongly at a large scale in the present situation.

According to the World Bank poverty all over the globe is being affected so much that every one %age drop in the world's economic growth will increase the level of poverty to approximately 20 million.

As we are aware of the fact that these two countries are well know by their population, and if the present conditions remained the same that is “slow economic growth”, both of the countries will shatter into doom by creating millions of people unemployed and ultimately breaking their backbone i.e. their “economy”, “more over the newly unemployed people are from developed countries.”

Countries like India and Mexico are being affected swearly as people migrate from such developing countries in search for jobs and employment in other developed states, because of job losses and inflation these workers now avoid to migrate to advanced countries.

If we look upon the African countries compared to Asian countries, in present situation there has been more interest in Africa. As the victims of the present crisis are the developed countries, on the west side of the globe. But on the other hand high hopes for Africa may not live for long. In May 2009, the African's were warned by the International Monetary Fund (IMF) that their economy will go down to 1.5% in 2009.

The IMF is now helping and is providing financial help to support to an increasing number of African countries.

World Bank's chief economist for Africa has forecasted that:

700,000 children may well die over the next few years as a result of the financial crisis and the ensuing recession”

Although the current world economic situation is going into slump, the recent studies show that poverty ratio will still be deteriorating in near future.

Impact of the Crisis on the IMF

IMF is going through some really serious financial crises, as we know that the aim of IMF is to provide fund's to countries that are facing monetary problems. Normally the developed countries that assist IMF in helping poor countries and who play a vital role in contributing resources with IMF, it is very unusual for such states to seek assistance. But recently the circumstances are such that developed countries like United States and other western countries them selves have fallen into difficult position. So it is hard for IMF to lend money to such states.

It was in 1976 and 1978, when some of the developed countries took financial aid from the Fund (IMF) these states were Italy, Spain and United Kingdom (UK) The International Monetary Fund has approximately two hundred billion dollars from which it can lend money to different member states and if required. IMF is capable of giving assistance under emergency conditions and giving loans to solve only core problems. According to IMF it needs to increase its resources by 55%. To counter the current financial crises IMF needs more resources than ever or the conditions might get more critical in the future, there was a joint agreement between the world leaders to increase the IMF resources in the recent G-20 meeting which was held in April.

If we look back the last year (2008):

“IMF landing was SDR11.65 billion (about $16.65 billion), down from a peak of SDR76.84 billion (then around $116 billion) in September 200”

The recent annual report of IMF projects, that there will be a shortfall of about SDR150 million for FY2009. New challenges for IMF have been created over past years due to the emerging markets all over the globe. Countries all over the world are improving their economic conditions from time to time and many of theses countries e.g. Asian and South Americans believe that their quota should be increased. Moreover many developing countries think that IMF's quota system is biased against them.

Generally if we talk about IMF facing financial crises there are a number of points that can be focused e.g. we can see that it (IMF) has stopped doing what it used to do and it is not generating sufficient revenue to cover its operating costs. IMF is facing with some real problems such as failing to construct correct polices relating to financial regulation, in other words the regulations regarding finance are not properly prepared to foresee the up coming risks, moreover macroeconomic policies, through which the Fund was not able to figure out the risks in financial system and in other markets.

It is time for the introduction of some really solid reforms to balance the present financial crises through which the world is going. Some of the reform suggestions should include giving more power to the poorest countries because usually they hardly are given a chance to participate in IMF meetings relating to the shaping of the world economy. Usually the developed countries have been undermining these types of suggestions for years; they have been drafting policies with the say of other developing countries. But the recent crises are so swear that even the most powerful states are now thinking to bring changes in the system so that the poor countries may get benefit from it. But still it's hard to believe that whether such changes will be brought or not.

If the G-20 pledges of $500 billion in new resources are realized, the IMF would once again have the financial resources to credibly lend to developing countries impacted by the crisis, which may turn the tables up side down “hopefully”. Now we will look upon some of the reforms that IMF has brought and is planning to bring to change the present system to pull out the world from the worse crises ever.