What-is-the-role-of-the-International-Monetary-Fund

What is the role of the International Monetary Fund?

The International Monetary Fund (IMF) has the function promote financial stability and monetary cooperation in the world. The organism also has the role facilitate international trade, promote employment and sustainable economic growth, and contribute to reducing poverty.

IMF foundation

In 1944, during the Allied nations conference at Bretton Woods (United States), the idea of ​​creating the International Monetary Fund was raised.

Representatives of 44 countries concluded that it was convenient to establish a framework for international economic cooperation to avoid economic debacles like the Great Depression of the 1930s. The formal founding of the IMF took place in December 1945.

Currently, the IMF has 189 member countries, represented by 24 executive directors, and is based in Washington (United States).

The functions of the IMF

The International Monetary Fund executes various functions to achieve or maintain the financial stability of its members, and prevent crises in the international monetary system.

  • Supervision: assesses the economic policies of the member countries and the national, regional and world economic situation. This function includes the advice to promote economic stability, reduce financial vulnerabilities and improve the living standards of the population.
  • Financial assistance: One of the main functions of the IMF is make loans to member countries who have balance of payments problems. The loan is accompanied by an adjustment program that the country must implement in collaboration with the Fund. Continued financial support from the IMF will depend on effective implementation of the adjustments.
  • Strengthening capacities: the body provides technical assistance and training to member countries. The objective is to strengthen their capacities to improve efficiency in the application of economic and financial policies.

How do you grant loans?

The International Monetary Fund grants loans to countries that request them to solve your balance of payments problems. It does so through various instruments that are adapted to the needs and circumstances of the requesting country.

To grant the loan, it is necessary that a team of IMF technicians, together with the government, assess the economic and financial situation of the country. An analysis of the magnitude of the problem and the financing needs is carried out.

Before the loan is granted, the IMF and the government must reach an agreement for the implementation of an economic policy program. The objective is for the country to correct the measures that caused the crisis situation.

The country assumes commitments through a letter of intent, accompanied by a detailed explanation in a memorandum of understanding. The IMF supervises the progress that the country is making.

Loans granted by the International Monetary Fund help countries in crisis to:

  • Start orderly and planned economic adjustment policies depending on the situation in the country and the corrections you need to carry out.
  • Restore the conditions for the maintenance of a stable economy where it is possible to promote sustainable growth.

To fulfill its role of financial assistance, the IMF relies mainly on resources from quotas contributed by member countries. The quota that each country contributes is determined according to the size of its economy with respect to the world economy. It also uses contributions from countries other than the IMF’s quotas and own resources.

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The International Monetary Fund provides two main types of financial assistance to low-income countries:

  • Low interest loans, through a fund for growth and the fight against poverty.
  • Debt relief, through the funds for heavily indebted poor countries, multilateral debt relief, and disaster relief and containment.

Counting all countries, historically, the IMF has provided most of the assistance through the Drawing Rights Agreements (Stand-By agreements). These agreements are established with developing and advanced economies in crisis to help them overcome short-term balance of payments problems. This instrument allows respond more quickly to the need for external financing of countries facing economic crisis.

The characteristics of the Stand-By agreements are:

  • All member countries that require external financing are eligible to access a Stand-By agreement.
  • The duration is flexible, between 12 and 24 months, and a maximum of 36 months, depending on the country’s balance of payments problems.
  • In a normal access to an agreement of this type, the country can access financing of up to 145% of its quota in any twelve month period. Accumulated access, throughout the duration of the agreement, would be up to 435% of the country’s quota.
  • In exceptional access to this instrument, the IMF may grant financing above normal limits after analyzing the case.

Criticism of the IMF

The intervention of the International Monetary Fund has been the subject of debate by researchers and organizations.

In the 80’s and 90’s, the main question was that the IMF focused on promoting free market economic policies. The structural adjustment measures that were applied brought negative consequences for the countries, such as the growth of poverty.

Another criticism of the policies recommended by the Fund in those decades is that proposed adjustment plans were similar in all countries. The characteristics of each case were not considered to design economic measures to correct the crisis.

One of the questions that persists is that the policies promoted by the IMF favor inequality, promote an economic order that benefits the elites.

According to this vision, they exacerbate existing inequalities within the country and between countries, resulting in exclusion and vulnerability to human rights violations. Among the worst affected groups are the poor, women, children, youth, the elderly, immigrants, people with disabilities, ethnic and religious minorities, and LGBTI communities.

Likewise, it is criticized that the growth model promoted by the IMF does not contribute to the protection of the environment or to the prevention of climate change.

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