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IMF2

IMF2 International Monetary Fund (IMF), international economic organization whose purpose is to promote international monetary cooperation to facilitate the expansion of international trade. The IMF operates as a United Nations specialized agency and is a permanent forum for consideration of issues of international payments, in which member nations are encouraged to maintain an orderly pattern of exchange rates and to avoid restrictive exchange practices. The IMF was established, along with the International Bank for Reconstruction and Development The IMF's Main Business: Macroeconomic and Financial Sector Policies In its oversight of member countries' economic policies, the IMF looks mainly at the performance of an economy as a whole—often referred to as its macroeconomic performance. This comprises total spending (and its major components like consumer spending and business investment), output, employment, and inflation, as well as the country's balance of payments—that is, the balance of a country's transactions with the rest of the world. The IMF focuses mainly on a country's macroeconomic policies—that is, policies relating to the government's budget, the management of money and credit, and the exchange rate—and financial sector policies, including the regulation and supervision of banks and other financial institutions. In addition, the IMF pays due attention to structural policies that affect macroeconomic performance—including labor market policies that affect employment and wage behavior. The IMF advises each member on how its policies in these areas may be improved to allow the more effective pursuit of goals such as high employment, low inflation, and sustainable economic growth—that is, growth that can be sustained without leading to such difficulties as inflation and balance of payments problems. The purposes of the International Monetary Fund are: i. To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. ii. 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. iii. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. iv. 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. v. 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. vi. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article. Stand-By Arrangements form the core of the IMF's lending policies. A Stand-By Arrangement provides assurance to a member country that it can draw up to a specified amount, usually over 12–18 months, to deal with a short-term balance of payments problem. Extended Fund Facility. IMF support for members under the Extended Fund Facility provides assurance that a member country can draw up to a specified amount, usually over three to four years, to help it tackle structural economic problems that are causing serious weaknesses in its balance of payments. Poverty Reduction and Growth Facility (which replaced the Enhanced Structural Adjustment Facility in November 1999). A low-interest facility to help the poorest member countries facing protracted balance of payments problems (see "A New Approach to Reducing Poverty"). The cost to borrowers is subsidized with resources raised through past sales of IMF-owned gold, together with loans and grants provided to the IMF for the purpose by its members. Supplemental Reserve Facility. Provides additional short-term financing to member countries experiencing exceptional balance of payments difficulty because of a sudden and disruptive loss of market confidence reflected in capital outflows. The interest rate on SRF loans includes a surcharge over the IMF's usual lending rate. Contingent Credit Lines. Precautionary lines of defense enabling members pursuing strong economic policies to obtain IMF financing on a short-term basis when faced by a sudden and disruptive loss of market confidence because of contagion from difficulties in other countries. Emergency Assistance. Introduced in 1962 to help members cope with balance of payments problems arising from sudden and unforeseeable natural disasters, this form of assistance was extended in 1995 to cover certain situations in which members have emerged from military conflicts that have disrupted institutional and administrative capacity.  The IMF is not an aid agency or a development bank. It lends to help its members tackle balance of payments problems and restore sustainable economic growth. The foreign exchange provided, the limits on which are set in relation to a member's quota in the IMF, is deposited with the country's central bank to supplement its international reserves and thus to give general balance of payments support. Unlike the loans of development agencies, IMF funds are not provided to finance particular projects or activities.  IMF lending is conditional on policies: the borrowing country must adopt policies that promise to correct its balance of payments problem. The conditionality associated with IMF lending helps to ensure that by borrowing from the IMF, a country does not just postpone hard choices and accumulate more debt, but is able to strengthen its economy and repay the loan. The country and the IMF must agree on the economic policy actions that are needed. Also the IMF disburses funds in phases, linked to the borrowing country's meeting its scheduled policy commitments. During 2000–01 the IMF worked to streamline its conditionality—making it more sharply focused on macroeconomic and finacial sector policies, less intrusive into countries' policy choices, more conducive to country ownership of policy programs, and thus more effective.  IMF lending is temporary. Depending on the lending facility used, loans may be disbursed over periods as short as six months and as long as four years. The repayment period is 3Ľ–5 years for short-term loans (under Stand-By Arrangements), or 4˝–10 years for medium-term financing (under Extended Arrangements); but in November 2000, the Executive Board agreed to introduce the expectation of earlier repayment—over 2Ľ–4 years for Stand-By Arrangements and 4˝–7 years for Extended Arrangements. The repayment period for loans to low-income countries under the IMF's concessional lending facility, the PRGF, is 10 years, with a 5˝-year grace period on principal payments. The IMF is probably best known for its policy advice and its policy-based lending to countries in times of economic crisis. But the IMF also shares its expertise with member countries on a regular basis by providing technical assistance and training in a wide range of areas, such as central banking, monetary and exchange rate policy, tax policy and administration, and official statistics. The objective is to help strengthen the design and implementation of members' economic policies, including by strengthening skills in the institutions responsible, such as finance ministries and central banks. Technical assistance complements the IMF's policy advice and financial assistance to member countries and accounts for some 20 percent of the IMF's administrative costs. The IMF began providing technical assistance in the mid-1960s when many newly independent countries sought help in setting up their central banks and finance ministries. Another surge in technical assistance occurred in the early 1990s, when countries in central and eastern Europe and the former Soviet Union began their shift from centrally planned to market-based economic systems. More recently, the IMF has stepped up its provision of technical assistance as part of the effort to strengthen the architecture of the international financial system. Specifically, it has been helping countries bolster their financial systems, improve the collection and dissemination of economic and financial data, strengthen their tax and legal systems, and improve banking regulation and supervision. It has also given considerable operational advice to countries that have had to reestablish government institutions following severe civil unrest or war. The IMF provides technical assistance and training mainly in four areas:  strengthening monetary and financial sectors through advice on banking system regulation, supervision, and restructuring, foreign exchange management and operations, clearing and settlement systems for payments, and the structure and development of central banks;  supporting strong fiscal policies and management through advice on tax and customs policies and administration, budget formulation, expenditure management, design of social safety nets, and the management of internal and external debt;  compiling, managing, and disseminating statistical data and improving data quality; and  drafting and reviewing economic and financial legislation. The IMF offers training courses for government and central bank officials of member countries at its headquarters in Washington and at regional training centers in Abidjan, Brasília, Singapore, and Vienna. In the field, it provides technical assistance through visits by IMF staff, supplemented by hired consultants and experts. Supplementary financing for IMF technical assistance and training is provided by the national governments of such countries as Japan and Switzerland, and international agencies such as the European Union, the Organization for Economic Cooperation and Development, the United Nations Development Program, and the World Bank. The IMF expects borrowers to give priority to repaying its loans. The borrowing country must pay back the IMF on schedule, so that the funds are available for lending to other countries that need balance of payments financing. The IMF has in place procedures to deter the build-up of any arrears, or overdue repayments and interest charges. Most important, however, is the weight that the international community places on the IMF's status as a preferred creditor. This ensures that the IMF is among the first to be repaid even though it is often the last lender willing to provide a country with funds, after the country's ability to fulfil its obligation has clearly come into question.  Countries that borrow from the IMF's regular, non-concessional lending windows—all but the low-income developing countries—pay market-related interest rates and service charges, plus a refundable commitment fee. A surcharge can be levied above a certain threshold to discourage heavy use of IMF funds. Surcharges also apply to drawings under the Supplemental Reserve Facility. Low-income countries borrowing under the Poverty Reduction and Growth Facility pay a concessional fixed interest rate of ˝ percent a year.  To strengthen safeguards on members' use of IMF resources, in March 2000 the IMF began requiring assessments of central banks' compliance with desirable practices for internal control procedures, financial reporting, and audit mechanisms. At the same time, the Executive Board decided to broaden the application, and make more systematic use, of the available tools to deal with countries that borrow from the IMF on the basis of erroneous information.  In most cases, the IMF, when it lends, provides only a small portion of a country's external financing requirements. But because the approval of IMF lending signals that a country's economic policies are on the right track, it reassures investors and the official community and helps generate additional financing from these sources. Thus, IMF financing can act as an important lever, or catalyst, for attracting other funds. The IMF's ability to perform this catalytic role is based on the confidence that other lenders have in its operations and especially in the credibility of the policy conditionality attached to its lending. Bibliography:

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