International Monetary Fund--A Primer

Monday, October 5, 2009
by Biodun Iginla and Judith Stein, BBC News Analysts




International Monetary Fund IMF member states in green[dubious – discuss][citation needed] Headquarters Washington, D.C., USA Managing Director Dominique Strauss-Kahn Central Bank of
Currency Special Drawing Rights ISO 4217 Code XDR Base borrowing rate 3.49% for SDRs[1] Website www.imf.org

The International Monetary Fund (IMF) is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments. It is an organization formed with a stated objective of stabilizing international exchange rates and facilitating development.[2] It also offers highly leveraged loans mainly to poorer countries. Its headquarters are located in Washington, D.C., United States.

Organization and purpose Headquarters in Washington D.C.

The International Monetary Fund was created in July 1944, originally with 45 members,[3] with a goal to stabilize exchange rates and assist the reconstruction of the world's international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances. (Condon, 2007)

The IMF describes itself as "an organization of 186 countries (Kosovo being the 186th, as of June 29, 2009),[4][5] working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". With the exception of Taiwan (expelled in 1980),[6] North Korea, Cuba (left in 1964),[7] Andorra, Monaco, Liechtenstein, Tuvalu and Nauru, all UN member states participate directly in the IMF. Most are represented by other member states on a 24-member Executive Board but all member countries belong to the IMF's Board of Governors.[8]

History

The International Monetary Fund was formally created in July 1944 during the United Nations Monetary and Financial Conference. The representatives of 44 governments met in the Mount Washington Hotel in the area of Bretton Woods, New Hampshire, United States of America, with the delegates to the conference agreeing on a framework for international economic cooperation.[9] The IMF was formally organised on December 27, 1945, when the first 29 countries signed its Articles of Agreement. The statutory purposes of the IMF today are the same as when they were formulated in 1943 (see #Assistance and reforms).

Today

The IMF's influence in the global economy steadily increased as it accumulated more members. The number of IMF member countries has more than quadrupled from the 44 states involved in its establishment, reflecting in particular the attainment of political independence by many developing countries and more recently the collapse of the Soviet bloc. The expansion of the IMF's membership, together with the changes in the world economy, have required the IMF to adapt in a variety of ways to continue serving its purposes effectively.

In 2008, faced with a shortfall in revenue, the International Monetary Fund's executive board agreed to sell part of the IMF's gold reserves. On April 27, 2008, IMF Managing Director Dominique Strauss-Kahn welcomed the board's decision April 7, 2008 to propose a new framework for the fund, designed to close a projected $400 million budget deficit over the next few years. The budget proposal includes sharp spending cuts of $100 million until 2011 that will include up to 380 staff dismissals.[10]

At the 2009 G-20 London summit, it was decided that the IMF would require additional financial resources to meet prospective needs of its member countries during the ongoing global crisis. As part of that decision, the G-20 leaders pledged to increase the IMF's supplemental cash tenfold to $500 billion, and to allocate to member countries another $250 billion via Special Drawing Rights.[11][12]

Data dissemination systems IMF Data Dissemination Systems participants: IMF member using SDDS IMF member, using GDDS IMF member, not using any of the DDSystems non-IMF entity using SDDS non-IMF entity using GDDS no interaction with the IMF

In 1995, the International Monetary Fund began work on data dissemination standards with the view of guiding IMF member countries to disseminate their economic and financial data to the public. The International Monetary and Financial Committee (IMFC) endorsed the guidelines for the dissemination standards and they were split into two tiers: The General Data Dissemination System (GDDS) and the Special Data Dissemination Standard (SDDS).

The International Monetary Fund executive board approved the SDDS and GDDS in 1996 and 1997 respectively and subsequent amendments were published in a revised “Guide to the General Data Dissemination System”. The system is aimed primarily at statisticians and aims to improve many aspects of statistical systems in a country. It is also part of the World Bank Millennium Development Goals and Poverty Reduction Strategic Papers.

The IMF established a system and standard to guide members in the dissemination to the public of their economic and financial data. Currently there are two such systems: General Data Dissemination System (GDDS) and its superset Special Data Dissemination System (SDDS), for those member countries having or seeking access to international capital markets.

The primary objective of the GDDS is to encourage IMF member countries to build a framework to improve data quality and increase statistical capacity building. This will involve the preparation of metadata describing current statistical collection practices and setting improvement plans. Upon building a framework, a country can evaluate statistical needs, set priorities in improving the timeliness, transparency, reliability and accessibility of financial and economic data.

Some countries initially used the GDDS, but lately upgraded to SDDS.

Some entities that are not themselves IMF members also contribute statistical data to the systems:

• Palestinian Authority – GDDS
• Hong Kong – SDDS
• European Union institutions:
  • the European Central Bank for the Eurozone – SDDS
  • Eurostat for the whole EU – SDDS, thus providing data from Cyprus (not using any DDSystem on its own) and Malta (using only GDDS on its own)

Membership qualifications

Any country may apply for membership to the IMF. The application will be considered first by the IMF's Executive Board. After its consideration, the Executive Board will submit a report to the Board of Governors of the IMF with recommendations in the form of a "Membership Resolution." These recommendations cover the amount of quota in the IMF, the form of payment of the subscription, and other customary terms and conditions of membership. After the Board of Governors has adopted the "Membership Resolution," the applicant state needs to take the legal steps required under its own law to enable it to sign the IMF's Articles of Agreement and to fulfil the obligations of IMF membership. Similarly, any member country can withdraw from the Fund, although that is rare. For example, in April 2007, the president of Ecuador, Rafael Correa announced the expulsion of the World Bank representative in the country. A few days later, at the end of April, Venezuelan president Hugo Chavez announced that the country would withdraw from the IMF and the World Bank. Chavez dubbed both organisations as “the tools of the empire” that “serve the interests of the North”. [1] As of June 2009, both countries remain as members of both organisations. Venezuela was forced to back down because a withdrawal would have triggered default clauses in the country's sovereign bonds.

A member's quota in the IMF determines the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of Special Drawing Rights (SDRs). The United States has exclusive veto power. A member state cannot unilaterally increase its quota—increases must be approved by the Executive Board and are linked to formulas that include many variables such as the size of a country in the world economy. For example, in 2001, China was prevented from increasing its quota as high as it wished, ensuring it remained at the level of the smallest G7 economy (Canada).[13] In September 2005, the IMF's member countries agreed to the first round of ad hoc quota increases for four countries, including China. On March 28, 2008, the IMF's Executive Board ended a period of extensive discussion and negotiation over a major package of reforms to enhance the institution's governance that would shift quota and voting shares from advanced to emerging markets and developing countries. The Fund's Board of Governors must vote on these reforms by April 28, 2008.

Members' quotas and voting power, and Board of Governors

Major decisions require an 85% supermajority.[14] The United States has always been the only country able to block a supermajority on its own. However, the 27 member states of the European Union have a combined vote of 710,786 (32.07%).

Table showing the top 20 member countries in terms of voting power (2,216,193 votes in total):[15]

IMF member country Quota: millions of SDRs Quota: percentage of total Governor Alternate Governor Votes: number Votes: percentage of total United States 37149.3 17.09 Timothy F. Geithner Ben Bernanke 371743 16.79 Japan 13312.8 6.13 Kaoru Yosano Masaaki Shirakawa 133378 6.02 Germany 13008.2 5.99 Axel A. Weber Peer Steinbrück 130332 5.88 France 10738.5 4.94 Christine Lagarde Christian Noyer 107635 4.86 United Kingdom 10738.5 4.94 Alistair Darling Mervyn King 107635 4.86 China 8090.1 3.72 Zhou Xiaochuan Hu Xiaolian 81151 3.66 Italy 7055.5 3.25 Giulio Tremonti Mario Draghi 70805 3.2 Saudi Arabia 6985.5 3.21 Ibrahim A. Al-Assaf Hamad Al-Sayari 70105 3.17 Canada 6369.2 2.93 Jim Flaherty Mark Carney 63942 2.89 Russian Federation 5945.4 2.74 Aleksei Kudrin Sergey Ignatiev 59704 2.7 Netherlands 5162.4 2.38 Nout Wellink L.B.J. van Geest 51874 2.34 Belgium 4605.2 2.12 Guy Quaden Jean-Pierre Arnoldi 46302 2.09 India 4158.2 1.91 Pranab Mukherjee D. Subbarao 41832 1.89 Switzerland 3458.5 1.59 Jean-Pierre Roth Hans-Rudolf Merz 34835 1.57 Australia 3236.4 1.49 Wayne Swan Ken Henry 32614 1.47 Mexico 3152.8 1.45 Agustín Carstens Guillermo Ortiz 31778 1.43 Spain 3048.9 1.40 Pedro Solbes Miguel Fernández Ordóñez 30739 1.39 Brazil 3036.1 1.40 Guido Mantega Henrique de Campos Meirelles 30611 1.38 Korea, South 2927.3 1.35 Okyu Kwon Seong Tae Lee 29523 1.33 Venezuela 2659.1 1.22 Gastón Parra Luzardo Rodrigo Cabeza Morales 26841 1.21 remaining 165 countries 60081.4 29.14 respective respective 637067 28.78 Assistance and reforms Main articles: Washington consensus and Structural adjustment program

The primary mission of the IMF is to provide financial assistance to countries that experience serious financial and economic difficulties using funds deposited with the IMF from the institution's 186 member countries. Member states with balance of payments problems, which often arise from these difficulties, may request loans to help fill gaps between what countries earn and/or are able to borrow from other official lenders and what countries must spend to operate, including to cover the cost of importing basic goods and services. In return, countries are usually required to launch certain reforms, which have often been dubbed the "Washington Consensus". These reforms are thought to be beneficial to countries with fixed exchange rate policies that may engage in fiscal, monetary, and political practices which may lead to the crisis itself. For example, nations with severe budget deficits, rampant inflation, strict price controls, or significantly over-valued or under-valued currencies run the risk of facing balance of payment crises. Thus, the structural adjustment programs are at least ostensibly intended to ensure that the IMF is actually helping to prevent financial crises rather than merely funding financial recklessness.

IMF/World Bank support of military dictatorships

The role of the Bretton Woods institutions has been controversial since the late Cold War period, as the IMF policy makers supported military dictatorships friendly to American and European corporations. Critics also claim that the IMF is generally apathetic or hostile to their views of democracy, human rights, and labor rights. The controversy has helped spark the Anti-globalization movement. Arguments in favor of the IMF say that economic stability is a precursor to democracy; however, critics highlight various examples in which democratized countries fell after receiving IMF loans.[16]

In the 1960s, the IMF and the World Bank supported the government of Brazil’s military dictator Castello Branco with tens of millions of dollars of loans and credit that were denied to previous democratically-elected governments.[17]

Countries that were or are under a Military dictatorship whilst being members of the IMF/World Bank (support from various sources in $ Billion):[18]

Country indebted to IMF/World Bank Dictator In power from In power to Debt %[clarification needed] at start of dictatorship Debt % at end of dictatorship Country debts in 1996 Dictator debts generated $ billion Dictator generated debt % of total debt Argentina Military dictatorship 1976 1983 9.3 48.9 93.8 39.6 42% Bolivia Military dictatorship 1962 1980 0 2.7 5.2 2.7 52% Brazil Military dictatorship 1964 1985 5.1 105.1 179 100 56% Chile Augusto Pinochet 1973 1989 5.2 18 27.4 12.8 47% El Salvador Military dictatorship 1979 1994 0.9 2.2 2.2 1.3 59% Ethiopia Mengistu Haile Mariam 1977 1991 0.5 4.2 10 3.7 37% Haiti Jean-Claude Duvalier 1971 1986 0 0.7 0.9 0.7 78% Indonesia Suharto 1967 1998 3 129 129 126 98% Kenya Moi 1979 2002 2.7 6.9 6.9 4.2 61% Liberia Doe 1979 1990 0.6 1.9 2.1 1.3 62% Malawi Banda 1964 1994 0.1 2 2.3 1.9 83% Nigeria Buhari/Babangida/Abacha 1984 1998 17.8 31.4 31.4 13.6 43% Pakistan Zia-ul Haq 1977 1988 7.6 17


Paraguay Stroessner 1954 1989 0.1 2.4 2.1 2.3 96% Philippines Marcos 1965 1986 1.5 28.3 41.2 26.8 65% Somalia Siad Barre 1969 1991 0 2.4 2.6 2.4 92% South Africa apartheid 1948 1992
18.7 23.6 18.7 79% Sudan Nimeiry/al-Mahdi 1969 present 0.3 17 17 16.7 98% Syria Assad 1970 present 0.2 21.4 21.4 21.2 99% Thailand Military dictatorship 1950 1983 0 13.9 90.8 13.9 15% Zaire/Congo Mobutu 1965 1997 0.3 12.8 12.8 12.5 98%

Notes: Debt at takeover by dictatorship; earliest data published by the World Bank is for 1970. Debt at end of dictatorship (or 1996, most recent date for World Bank data).

Criticism

"The interests of the IMF represent the big international interests that seem to be established and concentrated in Wall Street."

— Che Guevara, Marxist revolutionary, 1959[19]

Two criticisms from economists have been that financial aid is always bound to so-called "Conditionalities", including Structural Adjustment Programs. It is claimed that conditionalities (economic performance targets established as a precondition for IMF loans) retard social stability and hence inhibit the stated goals of the IMF, while Structural Adjustment Programs lead to an increase in poverty in recipient countries.[20]

One of the main SAP conditions placed on troubled countries is that the governments sell up as muc