International Monetary Fund: History, Roles and Challenges

What is IMF, and what is its purpose?

The term IMF (International Monetary Fund) is an acronym used in reference to a global organization that is charged with the responsibility of watching over global financial systems. In addition, it is the responsibility of the IMF to oversee the various macroeconomic policies that affect its member countries (Dreher 59). This is especially the case with the macroeconomic policies that entails balance of payments as well as exchange rates.

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Therefore, at its inception, the IMF was expected to ensure that the international exchange rates are stable, in addition to facilitating development among member countries. The IMF has its headquarters in the United States, in Washington, D.C (IMF p. 3). These purposes that the IMF fulfils are crucial; if at all the rising standards of living and economic growth are to be sustained. In a bid to prevent crises and at the same time, maintain stability, in as far as the global monetary system is concerned it is the responsibility of the IMF to assess the regional, global as well as the national financial and economic developments.

Accordingly, the IMF is charged with the reasonability of offering all the 184 member countries that are affiliated to it with advice, in essence encouraging these countries to embrace policies which would effectively enhance their economic stability, while at the same time also reducing their level of vulnerability with respect to financial and economic crises (IMF 3). Additionally, the IMF is also committed to enhancing the standards of living amongst the population in its member countries.

Therefore, during the various IMF meetings, the organizations facilitate a forum in which regional, global and national issues regarding financial and economic elements of the member countries. Besides, member countries to the IMF benefits from temporary financial assistance, in a bid to assist them overcome problems related to their balance of payments. This is in addition to offering such member countries training and technical assistance, with a view to helping them establish institutions and expertise necessary to attain economic growth and stability.

The current leader of the IMF

At the moment, the IMF is headed by Dominique Strauss-Kahn. The Frenchman, who is also affiliated with his country’s Socialist Party, is a trained lawyer, economist as well as a politician. In September 2007, DSK, as he is popularly called, received the nod to head the IMF, as its new Managing Director. Prior to his plunging into politics, during which time he also doubled as the economy and finance minister in France, DSK had been a professor of economics at both the HEC management school, and at the political; studies institute based in Paris. Allegations have been put forth to the effect that the French president, Nicholas Sarkozy, was influential in lobbying for Strauss-Kahn’s position as the IMF managing director (Reuters p. 2).

The history of IMF

The history of the IMF can be summarized in five stages spanning over 60 years.

Stage 1

The period between 1944 (at the inception of the IMF) and 1971 was one of cooperation and reconstruction, characterised by instabilities in as far as the economy of various countries were concerned. To start with, national were still reeling form the aftermath of the Great Depression, which had occurred in the early 1930s. Consequently, not were foreign currencies facing devaluation, but foreign trade was also faced with barriers.

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In addition, the citizens of individual countries lacked the freedom that they desired to enable them hold foreign exchange. As a result, there was a sharp decline in world trade, not to mention the level at which the living standards and employment were plummeting, in a majority of the countries (Boughton 2). Due to the breakdown that had faced the international monetary cooperation, the founders of the IMF were inspired to form an institution whose responsibility would be to supervise the monetary system globally.

Consequently, these new global institution would see to it that the stability of exchange rates is attained, in addition to encouraging the abolishing of exchange restrictions by member countries that had hitherto stifled trade. Although the IMF was initially conceived way back in 1944 (July), nonetheless, its formal operations commenced in 1945 (December), a time when the institution’s Articles of Agreement was signed by its initial member countries, who at the time were 29. However, the institution started its operations two years later, in 1947 (IMF 2).

The first beneficiary to borrow funds from the IMF was France. During the next two decades, an increasing number of countries became signatory member of the IMF, including those from Africa, who were at the time gaining independence. However, once the cold war had set in, most of the aspiring members were unable to join the IMF, especially those who were at the time affiliated to the Soviet Union. From 1945 up to 1971, those countries that joined the IMF reached an agreement that their rates of exchange would be pegged at adjustable rates, in what came to be called the ‘par value system’. This system was in use up to the end of 1971.

Stage 2

In the years between 1972 and 1981, the IMF experienced what is now popularly referred to as ‘end of Bretton Woods System’.

This came after Richard Nixon, the then reigning president of the United States, issued an announcement that the convertibility of the country’s dollar into gold that had hitherto been carried out in keeping with the agreement of the IMF, would be suspended temporarily (IMF p. 3). This had been occasioned by failed exchange rates, out of the fear by the members countries that the oil crisis that occurred at about this time, would bring to an end rapid growth periods that the member countries had been enjoying.

Although the oil crisis proved to be a challenge to the IMF, nonetheless, the institution managed to respond to this crisis by adapting their instruments of lending. In a bid to assist the importers of oil handle foreseen current inflation and deficits in their current accounts, the IMF deemed it necessary to establish two oil facilities that would help these dealers cope, in the face of escalating oil prices (Weiss 2).

At the same time, the IMF intervened into the issue of balance of payments, as these affected various poor nations of the world. This was by way of offering them concessional financing in a form of scheme that was dubbed Trust Fund. The SAF (Structural Adjustment Facility) was subsequently created by the IMF in 1986 (March), to act as a novel concessional loan program. In December 1987, the IMF established another loan program, ESAF (Enhanced Structural Adjustment Facility), to replace SAF.

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Stage 3

For the IMF, the period between 1982 and 1989 was one characterized by debts and reforms that were painful to administer. As a result of the rise in the interest rates, occasioned by petrodollars that were being ‘recycled’ by countries importing oil, along with their developing counterparts, the loan held by developing countries also rose, and they are estimated to have lost about $ 22 billion in sum, for the period between 1978 and 1981 (IMF p. 4).

Following the 1982 oil crisis that broke out in Mexico, the IMF was duty-bound to undertake a synchronized global response, to the extent of taking on board commercial banks as well. At this point, it dawned on the IMF that there would be no beneficiaries if all the member countries were unable to repay those debts that they had assumed. Thanks to the initiative by the IMF, the initial panic that had started to develop was slowly calmed. Nonetheless, the IMF also realized that the debtor countries needed to embrace painful reforms. In addition, cooperative global measures were necessary; if at all the prevailing problems were to be eliminated.

Stage 4

From 1990 up to 2004, the IMF was faced with the societal changes that were taking place in Eastern Europe, along with the upheavals that were being faced by some of the Asian countries. Following the 1989 unification of Germany, after the Berlin wall had been felled, and after the Soviet Union had been dissolved in 1991, the IMF was left as the only organization that had a near-global reach. Within a space of only three years, the IMF realized an increase in the number of its member countries by 20, to reach 172, down from 152.

This represented a period when the institution enjoyed a high rate of new members joining, only matched by the 1960s, when an influx of African countries had joined the organization. Owing to the increase in number of new members, the IMF was forced to also increase its staff by almost 30 percent, within a space of six years (IMF p. 5).

At the same time, the Executive Board to the IMF allocated Switzerland and Russia one seat each. In addition, a number of the existing Directors realized an expansion of their territories, to occupy a number of countries. The IMF was instrumental in assisting those countries that were formerly affiliated with the Soviet Bloc make a transition towards a market-driven economy, from one based on central planning, after the dissolution of the Soviet Union.

For the better part of the 1990s, these nations sought to closely work with the institution, in the process benefiting enormously from IMF’s technical assistance, policy advice as well as financial support. By the turn of the millennium, a majority of the economies in transition could boats of a successful market economy status, following a number of years characterized by intense reforms. During the 1997 financial crisis that affected such Asian countries as Thailand, Korea, and Indonesia, amongst others, the IMF was again on the forefront in providing them with advice and financial assistance; with a view to enabling these countries implement economic reforms (UC Atlas of Global Inequality p.3).

However, there was conflict regarding the best strategies to overcome this crisis and in the process, the IMF was immensely criticised for not doing enough to assist these afflicted nations. It was also during this time that the IMF forged an alliance with the World Bank in a bid to reduce the debt burdens that had stifled economic growth and development amongst the poor nations.

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Stage 5

This stage spans from 2005, up to the present time. For the IMF, this has been the period of globalisation, coupled with various forms of crisis that have affected their member countries. More than any other period, the IMF has be called upon to offer financial assistance to various countries, in a bid to enhance the global economy, especially in the face of the global financial crisis, the worst in recent years, since the Great Depression.

Prior to 2007, this period was characterized by positive capital flow, at the international level, buoyed by globalisation, in effect enabling a majority of the nations to pay back the loan that the IMF had lend out to them. However, since the start of the global financial crisis in 12007, occasioned by the a collapse system of mortgage lending, specifically in the U. S., but which later on moved to other economies in 2008, there followed a period of large imbalance with respect to the flow of capital globally (IMF 2).

Owing to this problem, the IMF has found itself on the receiving end, in the form of numerous request such as ‘stand-by arrangements’, in addition to other types of policy and financial support. It is important to note that the international community has also realised the significance of the financial resource of the IMF. Creditor countries have also come to the aid of the IMF, amid request to support cash-strapped nations, even as their financial resources have been stretched thin. Consequently, the lending capacity of the IMF has realized a three-fold increase in its usual capacity, to stand at approximately $ 750 billion (Hudson p. 5).

What services does IMF provide?

The main services to which the IMF is dedicated include the surveillance of the economic growth and development of the member countries, in addition to offering them technical assistance while implementing economic policies. The surveillance responsibility of the IMF entails an assessment of the financial as well as economic development of the organization’s member countries (Weiss 3). This is in addition to advice provision.

On the other hand, lending involves financial resources provision in accordance with the established conditions, with a view to assisting those nations faced with challenges in their balance of payments. With respect to technical assistance, this role involves the IMF assisting member countries to improve or design process of domestic policy-making that is effective and of sound quality (Teunissen and Akkerman p. 4).

The kind of surveillance that the IMF subjects its member countries in as far as their financial and economic growth prospects are at best, candid, independent and even-handed. Moreover, the IMF is charged with the responsibility of lending money to these member countries to help them meet their financial obligations (Weiss 5). In this respect, the IMF endeavors to secure financial stability to its member countries, enhance global monetary cooperation, enable the conduction of international trade, promote sustainable economic growth and high employment as well as assist in poverty reduction. Accordingly, the main goal of the IMF is to ensure that those countries that are faced with dire economic and financial difficulties get financial assistance by utilizing the funds that its 186 member countries have deposited with the organization.

The role of IMF to solve the financial crisis

In its quest to offer policy advice to its member countries, in addition to providing them with financial assistance, the IMF endeavors to assist these countries achieve economic reforms and in the process. In the face of the reigning global financial crisis, the role of the IMF in lending member countries to sustain their economic growth is unmistakable.

The organization has also previously sought to assist nations when faced with a financial crisis, such as during the oil crisis in Mexico, the economic crisis that affected Asian countries and earlier on, after the oil crisis of the mid-1970s. it is important therefore that the IMF continues with its dedication at adapting lending facilities, in addition to be ready and wiling to offer international liquidity support to the various member countries affiliated with this organization, as the need arises (Weiss 4).

Since October 2008, hen the global financial crisis intensified, the IMF has released more than $ 50 billion. This money so released has taken the form of balance of payments, with the intention of offering support to those countries that have been hit by the global financial crisis. At the same time, the institution anticipates that by the end of 2011, it shall have increased the support it offers to low-income nations three-folds. Additionally, the IMF is committed to ensuring that its consessional lending capacity, in the medium-term, is doubled.

Even as the IMF has played a significant role in assisting the member countries affected by the global financial crisis there are critics who have sought to debate on the institution’s future role. Therefore, debate is rife as to how the IMF may be improved to enable it deal with and avert global financial instability in the future. At the same time, the IMF has been called upon to ensure that its exchange rates are effective in enabling adjustments. There is also the need to ensure that the institution is in a position to adapt its financial lending facilities to suit the demands in the financial market.

What is the contribution of Saudi Arabia on IMF?

In relation with previous downturns, Saudi Arabia has managed to tackle the prevailing global financial crisis with even stronger ground rules. Lately, the kingdom has been instrumental in helping to consolidate its macroeconomic position, enhance its financial sector as well as establish structural reforms that are aimed at improving the rate of growth, especially from the private sector ( Abi-Habaib and Davis 2).The efforts of Saudi Arabia in enhancing its economic situation have been noted by global financial institutions, such as the world bank, who ranked the kingdom in position one amongst the rest of the Arab countries, in terms of economic improvements.

As a leading producer of oil, the high increase in the prices of crude oil in 2008 means that Saudi Arabia recorded surpluses in its external current and fiscal account, even as many of the countries were counting their losses. Therefore, Saudi Arabia is best placed to provide financial assistance to the IMF. In turn, the institution can then offer financial assistance to its member countries that have been hardest hit by the prevailing global financial crisis. Saudi Arabia has been a staunch contributor to the IMF, since the 1970s (Abi-Habaib and Davis 3). Thus far, Saudi Arabia alone is believed to have contributed $ 10 billion to the IMF, while the combined European Union has contributed $ 70 billion.

IMF Tackling Current Challenges

Many are of the opinion that the current global financial crisis has acted to put to test the role played by the IMF as an oversight board in as far as global monetary systems are concerned. Even as the IMF may not be in a position to offer financial assistance to the developed nations that have been hardest hit the prevailing financial crisis, and although the institution will have to face the competition of other existing financial institution with a global reach in offering the affected countries global; macroeconomic policies and ideas, nonetheless, the fact that the less-developed countries, along with the emerging economies are reeling from the spillover effect that has been occasioned by this crisis acts as an opportunity for the IMF to effectively reasserts the role it plays in coordinating the international economy on two fronts (Weiss 2).

First, the IMF requires undertaking a crisis management regarding the issue at hand. Secondly, the IMF needs to implement systemic reforms that will be aimed at helping the global financial system in the long-term.

Criticism of IMF

The IMF has also come under a scathing attack for tying certain conditionalities to the loans that the financial assistance they offer member countries, with the argument that such conditions stifle economic development (Toussaint 1), thereby resulting in increased poverty and retarded social development (Axel 461).

End Notes

  1. A. Martin Weiss. The Global Financial Crisis: The Role of the International Monetary Fund (IMF). Specialist in International Trade and Finance Foreign Affairs, Defence, and Trade Division. 2008. Web.
  2. Axel, Dreher (2002).The development and implementation of IMF and World Bank Conditionality. Web.
  3. Axel, Dreher. (2004). “A Public Choice Perspective of IMF and World Bank Lending and Conditionality”. Public Choice, 119.3–4): 445–464. Web.
  4. Axel, Dreher. (2004). “The Influence of IMF Programs on the Re-election of Debtor Governments”. Economics & Politics, 16.1: 53–75. Web.
    Éric Toussaint. World Bank – IMF support to dictatorships.
  5. CADTM. 2004. Web.
  6. IMF. International Monetary Fund. 2010. Web.
  7. IMF. Internartional Monetary Fund: history. 2010. Web.
  8. Jan Joost Teunissen and Age Akkerman (2005). Helping the Poor? The IMF and Low-Income Countries. Web.
  9. Maria Abi-Habaib and Bob Davis. Saudi Arabia Seeks to Protect IMF Role.
  10. The Wall Street Journal. 2009. Web.
  11. Michael, Hudson. The IMF rules the world. Counterpunch, 2009. Web.
  12. IMF. International Monetary Fund. 2010. Web.
  13. M. James Boughton. The IMF and the Force of History: Ten Events and Ten Ideas that Have Shaped the Institution. 2004. Web.
  14. UC Atlas of Global Inequality (n. d.). IMF History and Structural Adjustment Conditions. Web.
  15. Reuters. France’s Sarkozy wants Strauss-Kahn as IMF head. 2007. Web.
  16. The Economist. Rivalries between IMF and IBRD. The Economist, 2007. Web.
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