Since its founding in 1944, the International Monetary Fund (IMF) has had its share of successes and failures in meeting its primary mission to watch over the monetary system, guarantee exchange rate stability, and eliminate restrictions that prevent or slow trade. The IMF came about because many countries were economically devastated by the Great Depression and World War II.
Over the years, the IMF has helped countries move through many different challenging economic situations. The organization is also continuing to evolve and adapt to the ever-changing world economy. We'll look at the role the IMF has played, as well as economic issues, the levels of influence some countries have over this organization, and its successes and failures.
- The International Monetary Fund (IMF) is an organization that promotes global financial stability, economic growth, and international trade.
- The IMF helps member countries facing an economic crisis by offering loans, technical assistance, and surveillance of economic policies.
- Money to fund the IMF's activities comes from member countries that pay a quota based on the size of each country's economy and its importance in world trade and finance.
- The IMF has faced criticism from some member countries regarding the influence the United States and European countries have over the organization.
The IMF's Role in Global Economic Issues
For many countries, the IMF has been the organization to turn to during difficult economic times. Over the years this organization has played a key role in helping countries turn around through the use of economic aid. However, this is only one of the many roles the IMF plays in global economic issues.
How the IMF Is Funded
The IMF is funded by a quota system where each country pays based on the size of its economy and its political importance in world trade and finance. When a country joins the organization, it usually pays a quarter of its quota in the form of U.S. dollars, euros, yen, or pound sterling. The other three quarters can be paid in their own currency. Generally, these quotas are reviewed every five years. The IMF can use the quotas from developed nations to lend aid to economically developing nations.
The IMF is also funded through contribution trust funds where the organization acts as the trustee. This comes from the contributions from members as opposed to quotas and is used to provide low-income countries with low-interest loans and debt relief.
In 1969, the IMF created special drawing rights (SDR), a type of international reserve asset that helps supplement its member countries' official reserves.
Lending Through the IMF
When a country requests a loan, the IMF will give the country the money needed to rebuild or stabilize its currency, re-establish economic growth, and continue buying imports. The IMF offers member countries a variety of loans tailored to meet specific uses.
Poverty Reduction and Growth Trust (PRGT) Loans
These are low-interest loans for low-income countries to reduce poverty and improve growth.
Exogenous Shocks Facility (ESF) Loans
These are loans to low-income countries that provide lending for negative economic events that are outside the control of the government. These events could include commodity price changes, natural disasters, and wars that can interrupt trade.
Stand-By Arrangement (SBA) Loans
Countries with short-term balance of payment issues will apply for stand-by arrangement (SBA) loans from the IMF. SBA loans are meant to help countries emerge from an economic crisis by giving them quick access to the capital they need to restore growth.
Extended Fund Facility (EFF) Loans
Countries with long-term balance of payment issues that require economic reforms will apply for extended fund facility loans.
Supplemental Reserve Facility (SRF)
The IMF provides supplemental reserve facility (SRF) assistance to meet short-term financing on a large scale. An example of this was when the loss of investor confidence during the Asian financial crisis of 1997 caused enormous outflows of money and led to massive IMF financing.
Emergency Assistance Loans
These are designed to provide assistance to countries that have had a natural disaster or are emerging from war.
The total amount the IMF is able to lend to its member countries.
The IMF watches the economics and economic policies of its members. There are two main components of surveillance: country surveillance and multilateral surveillance. Through country surveillance, the IMF visits the country once a year to assess its economic policies and where they are headed. It reports its findings in the Public Information Notice.
Multilateral surveillance is when the IMF surveys global and regional economic trends. It reports these twice a year in the World Economic Outlook and Global Financial Stability Report. These two reports point out problems and potential risks to the world economy and financial markets. The Regional Economic Outlook Report gives more details and analysis.
The IMF helps countries to administer their economic and financial affairs. This service is provided to any member country that asks for assistance and is typically provided to low- and middle-income countries. Through the use of technical assistance, the IMF can perform useful surveillance and lending to help the country avoid economic pitfalls and create sustainable economic growth. Technical assistance helps countries strengthen their economic policy, tax policy, monetary policy, exchange rate system, and financial system stability.
Levels of Influence
With 190 member countries, some members of the IMF may have more influence over its policies and decisions than others. The United States and Europe are the major influences within the IMF.
The United States
The United States has the largest percentage of voting rights in the IMF with a 17.4% share and contributes the largest quota of any single country. Over the years there have been many complaints that the U.S. uses the IMF as a way to support countries that are strategically important to them, rather than based on economic need. Many members feel that they should have more of a stake in what the organization does when it determines how and in what ways to help out the different countries.
Many European countries have resisted the efforts for a readjustment in voting rights and influence at the IMF. In the past, a European has generally held the managing director position of this organization. However, as the world continues to change there is a greater demand to give more of a voice to new emerging economic countries. There have been discussions that Europe could pool its quotas and maintain a strong voice going forward. However, if the countries try to individually maintain the levels they have, their voice of influence could continue to diminish.
Successes and Failures of the IMF
The IMF has had many successes and failures over its history. Below we highlight two examples of this.
Jordan had been impacted by its wars with Israel, civil war, and a major economic recession. In 1989, the country struggled with a high unemployment rate and an inability to pay its loans. The country agreed to a series of five-year reforms that began with the IMF. The Gulf War and the return of 230,000 Jordanians because of Iraq's invasion of Kuwait put a strain on the government, as unemployment continued to increase.
In the period from 1993 to 1999, the IMF gave Jordan three extended fund facility loans. As a result, the government undertook massive reforms of privatization, taxes, foreign investment, and easier trade policies.
By 2000, the country was admitted to the World Trade Organization (WTO), and one year later signed a free-trade accord with the United States. Jordan was also able to bring down its overall debt payment and restructure it at a manageable level. Jordan is an example of how the IMF can foster strong, stable economies that are productive members of the global economy.
In 1985, the IMF came to Tanzania with the aim of turning a broke, indebted socialist state into a strong contributor to the world economy. The first steps taken were to lower trade barriers, cut government programs, and sell state-owned industries.
By 2000, the once-free healthcare industry started charging patients, and the AIDS rate in the country shot up to 8%. The education system that was once free started to charge children to go to school, and school enrollment, which was at 98% in 1981 dropped to 66% in 2000. As a result, the illiteracy rate of the country increased by nearly 50%. This is an example of how the organization failed to understand that a one-size-fits-all strategy does not apply to all countries.
Notwithstanding, the IMF continued its efforts to provide Tanzania with various types of assistance, and over time, the nation achieved some success in different areas. The annual inflation rate went from a high of 37.9% in 1994 to 4.1% in 2004. Simultaneously, real gross domestic product (GDP) grew from 1.6% in 1994 to 7.4% in 2004.
However, these improvements have been difficult to sustain. After over 35 years of IMF assistance, Tanzania still struggles to maintain consistent economic momentum, while problems with fiscal management have led to expenditure arrears and a higher level of non-performing loans. Inflation has proved particularly challenging, going back up to double-digits in 2012 when it spiked to 16% before coming back down to 7.9% the following year.
During the global pandemic of 2020, Tanzania was able to maintain an inflation rate of about 3.3%; however, real GDP plummeted from 7% in 2019 to 1% in 2020. In June 2020, the IMF approved $14.3 million of relief to Tanzania, noting in its press release that the money was critical to helping the country meet its debt service needs and freeing up resources for public health spending.
The Bottom Line
The IMF does serve a very useful role in the world economy. Through the use of lending, surveillance, and technical assistance, it can play a vital role in helping identify potential problems and being able to help countries to contribute to the global economy.
However, the United States and Europe have historically dominated the governing body, and the IMF has had successes and failures. While no organization is perfect, the IMF has served the purposes that it was established to do and continues to keep evolving its role in an ever-changing world.