International Monetary Fund
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Related to International Monetary Fund: World Trade Organization, World Bank, international monetary system
International Monetary Fund (IMF)
International Monetary Fund
International Monetary Fund (IMF)
International Monetary Fund (IMF).
The IMF was set up as a result of the United Nations Bretton Woods Agreement of 1944 to help stabilize world currencies, lower trade barriers, and help developing nations pay off debt.
The IMF's activities are funded by developed nations and are sometimes the subject of intense criticism, either by the nations the IMF is designed to help, the nations footing the bill, or both.
International Monetary Fund (IMF)an international organization established in 1947 to promote, alongside the General Agreement on Tariffs and Trade (now the WORLD TRADE ORGANIZATION), the expansion of INTERNATIONAL TRADE in a way consistent with the maintenance of BALANCE OF PAYMENTS equilibrium by individual member countries. This has involved the Fund in negotiating the removal of restrictions (such as FOREIGN EXCHANGE CONTROLS) on the convertibility of currencies, the establishment of ‘orderly’ EXCHANGE RATES between members' currencies and the provision of borrowing facilities and INTERNATIONAL RESERVES to members in balance of payments difficulties.
Up to the 1970s the IMF supervized a FIXED EXCHANGE RATE SYSTEM and established ‘fixed’ pivotal values for members' currencies for concluding trade and capital transactions. Countries could devalue or revalue their currency to a new fixed rate when their balance of payments situation warranted it, subject to Fund negotiation and approval. This procedure ensured that currency realignments were decided by multilateral agreement rather than initiated as a unilateral act. In the early 1970s, however, with a continued weakening of the US dollar, the pivotal currency in the Fund's operations, and the onset of a world recession, a large number of currencies were ‘floated’ to provide a greater degree of exchange rate flexibility (see FLOATING EXCHANGE RATE SYSTEM). As a result of these developments the Fund has lost formal control over exchange rate movements, but member countries are still obliged, in theory, to maintain orderly exchange rates, avoiding in particular the manipulation of their exchange rates to disadvantage trade partners.
The Fund's resources consist of a pool of foreign currencies (see FOREIGN EXCHANGE) and international reserve assets (excluding gold, however) subscribed by its members. Each country is allocated a ‘subscription quota’, weighted according to its economic status, and is required to pay 75% of its quota in its own currency and the remainder in international reserve assets. Included in the Fund's stock of reserve assets is the SPECIAL DRAWING RIGHT (SDR) unit, an asset which the Fund itself creates and holds in the form of a book-keeping entry (i.e. unlike currencies, SDRs have no tangible life of their own), and which is valued in terms of a weighted average of five major currencies. Countries needing extra resources over and above their own nationally-held reserves to finance a balance of payments deficit may borrow (i.e. exercise their ‘drawing rights’ on) the currencies they require from the Fund. A substantial proportion of these borrowings, however, are subject to the Fund's ‘conditionality’ rules, whereby the Fund stipulates the measures a member must implement to remove its payments deficit. Borrowings are normally required to be repaid within three to five years, but the INTERNATIONAL DEBT problem has not only forced the Fund to ‘roll-over’ credits but has led to the establishment of various new facilities to accommodate its poorer members. See GROUP OF 7.
International Monetary Fund (IMF)a multinational institution set up in 1947 (following the Bretton Woods Conference, 1944) to supervise the operation of a new international monetary regime - the ADJUSTABLE-PEG EXCHANGE RATE SYSTEM. The IMF is based in Washington DC (USA) and currently has a membership of 181 countries. The Fund seeks to maintain cooperative and orderly currency arrangements between member countries, with the aim of promoting increased INTERNATIONAL TRADE and BALANCE OF PAYMENTS EQUILIBRIUM. The Fund is active in two main areas:
- EXCHANGE RATES. Down to 1971, countries established FIXED EXCHANGE RATES for their currencies that provided pivotal values for concluding trade transactions. A country, provided it first obtained the approval of the Fund, could alter its exchange rate, adjusting the rate upwards (REVALUATION) or downwards (DEVALUATION) to a new fixed level to correct a FUNDAMENTAL DISEQUILIBRIUM in its balance of payments -a situation of either chronic payments surplus or deficit. This procedure ensured that currency realignments were decided by multilateral agreement rather than initiated as a unilateral act. In the early 1970s, however, with a continued weakening of the US dollar, the pivotal currency in the Fund's operations, and the onset of a world recession, a large number of currencies were ‘floated’ to provide a greater degree of exchange-rate flexibility (see FLOATING EXCHANGE-RATE SYSTEM). Most major currencies have continued to float, although fixed exchange-rate arrangements have been reintroduced on a limited basis (see EUROPEAN MONETARY SYSTEM). This has resulted in the Fund losing formal control over exchange-rate movements, but member countries are still obligated to abide by certain ‘rules of good conduct’ laid down by the Fund, avoiding in particular EXCHANGE CONTROLS and BEGGAR-MY-NEIGHBOUR tactics;
- INTERNATIONAL LIQUIDITY. The Fund's resources consist of a pool of currencies and INTERNATIONAL RESERVE assets (excluding GOLD) subscribed by its members according to their allocated ‘quotas’. Each country pays 75% of its quota in its own currency and 25% in international reserve assets. Countries are given borrowing or drawing rights with the Fund, which they can use, together with their own nationally held international reserves, to finance a balance-of-payments deficit.
Under the Fund's ordinary drawing-right facilities, members with balance-of-payments difficulties may ‘draw’ (i.e. purchase foreign currencies from the Fund with their own currencies) up to 125% of their quota. The first 25% (the ‘reserve tranche’) may be drawn on demand; the remaining 100% is divided up into four credit tranches’ of 25% each, and drawings here are ‘conditional’ on members agreeing with the Fund a programme of measures (for example, DEFLATION, DEVALUATION) for removing their payments’ deficit. Members are required to repay their drawings over a three- to five-year period.
In 1970 the Fund created a new international reserve asset, the SPECIAL DRAWING RIGHT (SDR), to augment the supply of international liquidity Over the years, the IMF has introduced a number of ‘special’ funding arrangements mainly to assist DEVELOPING COUNTRIES suffering from acute foreign exchange difficulties, including: Extended Fund Facilities (EFF), which was established in 1974 to make funds available for longer periods and in larger amounts to members experiencing severe balance of payments difficulties, particularly countries whose development policies have been held back as a result; Compensating Financing Facility (CFF), which was established in 1963 to assist members, particularly primary producing countries, experiencing balance of payments difficulties because of shortfalls in earnings from exports (the Compensatory and Contingency Finance Facility superseded the CFF in 1988, adding ‘contingency’ support for adjustment programmes approved by the Fund); Supplementary Financing Facility (SFF), which was established in 1979 to provide assistance to members facing payments difficulties that are large in relation to their economies and their Fund quotas; Buffer Stock Financing Facility (BSFF), which was established in 1969 to provide assistance to members with a balance of payments need related to their participation in arrangements to finance approved international buffer stocks of primary products; Systematic Transformation Facility (STF), which was established in 1993 as a temporary facility to help member countries (such as eastern European countries) with severe payment problems arising from a shift away from trading at non-market prices to multilateral, market-based trade; Enhanced Structural Adjustment Facility (ESAF), which was established in 1988 to offer credits at concessional interest rates to developing countries that carry out Fund-supervised economic reform programmes. Some 73 countries are eligible for the 0.5% credits, which are paid back over a period of 10 years. The Fund's increasing involvement in the provision of roll-over’ credits to assist developing countries has led to criticism that it has become more of a . long-term economic aid provider (see INTERNATIONAL DEBT) and that it now needs to get back to its core activity, namely, the provision of short-term liquidity to countries in temporary payment difficulties. See also DOMESTIC CREDIT EXPANSION.