International Monetary Fund History of IMF

International Monetary Fund

History of IMF • The IMF has played a part in shaping the global economy since the end of World War II. • During the Great Depression of the 1930 s, countries attempted to help their failing economies by: – sharply raising barriers to foreign trade, – devaluing their currencies to compete against each other for export markets, and – curtailing their citizens' freedom to hold foreign exchange. These attempts proved to be self-defeating. World trade declined sharply (see chart below), and employment and living standards plummeted in many countries.

The Bretton Woods agreement • The IMF was conceived in July 1944, when representatives of 45 countries meeting in the town of Bretton Woods, New Hampshire, in the northeastern United States, agreed on a framework for international economic cooperation, to be established after the Second World War. • They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression. • The IMF came into formal existence in December 1945, when its first 29 member countries signed its Articles of Agreement. It began operations on March 1, 1947. Later that year, France became the first country to borrow from the IMF. • The IMF's membership began to expand in the late 1950 s and during the 1960 s as many African countries became independent and applied for membership. But the Cold War limited the Fund's membership, with most countries in the Soviet sphere of influence not joining.

Fast Facts on the IMF, 2012 • Membership: 188 countries • Headquarters: Washington, D. C. • Executive Board: 24 Directors representing countries or groups of countries Staff: Approximately 2, 475 from 156 countries • Total quotas: US$360 billion (as of 8/9/12) • Biggest borrowers (amount agreed as of 8/9/12): Greece, Portugal, Ireland • Original aims: Article I of the Articles of Agreement sets out the IMF’s main goals: – promoting international monetary cooperation; – facilitating the expansion and balanced growth of international trade; – promoting exchange stability; – assisting in the establishment of a multilateral system of payments; and – making resources available (with adequate safeguards) to members experiencing balance of payments difficulties

Surveillance To maintain stability and prevent crises in the international monetary system, the IMF reviews country policies, as well as national, regional, and global economic and financial developments through a formal system known as surveillance. Under the surveillance framework, the IMF provides advice to its 188 member countries, encouraging policies that foster economic stability, reduce vulnerability to economic and financial crises, and raise living standards. It provides regular assessment of global prospects in its World Economic Outlook, financial markets in its Global Financial Stability Report, and public finance developments in its Fiscal Monitor.

Financial assistance • IMF financing provides member countries the breathing room they need to correct balance of payments problems. A policy program supported by IMF financing is designed by the national authorities in close cooperation with the IMF. • Continued financial support is conditioned on effective implementation of this program. • In an early response to the recent global economic crisis, the IMF strengthened its lending capacity. • In the most recent reforms, IMF lending instruments were improved further to provide flexible crisis prevention tools to members with sound fundamentals, policies, and institutional policy frameworks. • In low-income countries, the IMF doubled loan access limits and is boosting its lending to the world’s poorer countries, with interest rates set at zero through end-2012.

Technical assistance and training • The IMF provides technical assistance and training to help member countries strengthen their capacity to design and implement effective policies. • Technical assistance is offered in several areas, including: – – tax policy and administration, expenditure management, monetary and exchange rate policies, banking and financial system supervision and regulation, – legislative frameworks, and – statistics.

Resources of IMF • The IMF’s resources are provided by its member countries, primarily through payment of quotas, which broadly reflect each country’s economic size.

Governance and organization • The IMF is accountable to the governments of its member countries. • At the top of its organizational structure is the Board of Governors, which consists of one Governor and one Alternate Governor from each member country. The Board of Governors meets once each year at the IMF-World Bank Annual Meetings. • Twenty-four of the Governors sit on the International Monetary and Financial Committee (IMFC) and normally meet twice each year. • The day-to-day work of the IMF is overseen by its 24 -member Executive Board, which represents the entire membership; this work is guided by the IMFC and supported by the IMF staff. In a package of reforms approved by the Governors in The Managing Director is the head of the IMF staff and Chairman of the Executive Board, and is assisted by four Deputy Managing Directors.

Back to history: The end of the Bretton Woods System (1972– 81) • 1. By the early 1960 s, the U. S. dollar's fixed value against gold, under the Bretton Woods system of fixed exchange rates, was seen as overvalued. A sizable increase in domestic spending on President Lyndon Johnson's Great Society programs and a rise in military spending caused by the Vietnam War gradually worsened the overvaluation of the dollar. • 2. The system dissolved between 1968 and 1973. In August 1971, U. S. President Richard Nixon announced the "temporary" suspension of the dollar's convertibility into gold. While the dollar had struggled throughout most of the 1960 s within the parity established at Bretton Woods, this crisis marked the breakdown of the system. • An attempt to revive the fixed exchange rates failed, and by March 1973 the major currencies began to float against each other.

The end of the Bretton Woods System (1972– 81) Since the collapse of the Bretton Woods system, IMF members have been free to choose any form of exchange arrangement they wish (except pegging their currency to gold): – allowing the currency to float freely, – pegging it to another currency or a basket of currencies, – adopting the currency of another country, – participating in a currency bloc, – or forming part of a monetary union.

Oil shocks 1970 s • Many feared that the collapse of the Bretton Woods system would bring the period of rapid growth to an end. • In fact, the transition to floating exchange rates was relatively smooth, and it was certainly timely: flexible exchange rates made it easier for economies to adjust to more expensive oil, when the price suddenly started going up in October 1973. • Floating rates have facilitated adjustments to external shocks ever since. • The IMF responded to the challenges created by the oil price shocks of the 1970 s by adapting its lending instruments. To help oil importers deal with anticipated current account deficits and inflation in the face of higher oil prices, it set up the first of two oil facilities.

Helping poor countries From the mid-1970 s, the IMF sought to respond to the balance of payments difficulties confronting many of the world's poorest countries by providing concessional financing through what was known as the Trust Fund. In March 1986, the IMF created a new concessional loan program called the Structural Adjustment Facility. The SAF was succeeded by the Enhanced Structural Adjustment Facility in December 1987.

Debt and painful reforms (1982– 89) • The oil shocks of the 1970 s, which forced many oil-importing countries to borrow from commercial banks, and the interest rate increases in industrial countries trying to control inflation led to an international debt crisis. • During the 1970 s, Western commercial banks lent billions of "recycled" petrodollars, getting deposits from oil exporters and lending those resources to oil-importing and developing countries, usually at variable, or floating, interest rates. So when interest rates began to soar in 1979, the floating rates on developing countries' loans also shot up. Higher interest payments are estimated to have cost the non-oil-producing developing countries at least $22 billion during 1978– 81. At the same time, the price of commodities from developing countries slumped because of the recession brought about by monetary policies. Many times, the response by developing countries to those shocks included expansionary fiscal policies and overvalued exchange rates, sustained by further massive borrowings.

Debt and painful reforms (1982– 89) • When a crisis broke out in Mexico in 1982, the IMF coordinated the global response, even engaging the commercial banks. It realized that nobody would benefit if country after country failed to repay its debts. • The IMF's initiatives calmed the initial panic and defused its explosive potential. But a long road of painful reform in the debtor countries, and additional cooperative global measures, would be necessary to eliminate the problem.

Societal Change for Eastern Europe 1990 • The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union in 1991 enabled the IMF to become a (nearly) universal institution. In three years, membership increased from 152 countries to 172, the most rapid increase since the influx of African members in the 1960 s. • The IMF played a central role in helping the countries of the former Soviet bloc transition from central planning to market-driven economies. This kind of economic transformation had never before been attempted, and sometimes the process was less than smooth. For most of the 1990 s, these countries worked closely with the IMF, benefiting from its policy advice, technical assistance, and financial support. • By the end of the decade, most economies in transition had successfully graduated to market economy status after several years of intense reforms, with many joining the European Union in 2004.

Asian Financial Crisis • In 1997: financial crises in over East Asia, from Thailand to Indonesia to Korea and beyond. Almost every affected country asked the IMF for both financial assistance and for help in reforming economic policies. Conflicts arose on how best to cope with the crisis, and the IMF came under criticism that was more intense and widespread than at any other time in its history. • IMF experience - several lessons. 1. it realized that it would have to pay much more attention to weaknesses in countries’ banking sectors and to the effects of those weaknesses on macroeconomic stability. In 1999, the IMF—together with the World Bank—launched the Financial Sector Assessment Program. 2. The institutional prerequisites for successful liberalization of international capital flows were more difficult than it had previously thought. The IMF dampened its enthusiasm for capital account liberalization. 3, the severity of the contraction in economic activity that accompanied the Asian crisis necessitated a re-evaluation of how fiscal policy should be adjusted when a crisis was precipitated by a sudden stop in financial inflows.

Debt relief for poor countries • During the 1990 s, the IMF worked closely with the World Bank to alleviate the debt burdens of poor countries. The Initiative for Heavily Indebted Poor Countries was launched in 1996, with the aim of ensuring that no poor country faces a debt burden it cannot manage. In 2005, to help accelerate progress toward the United Nations Millennium Development Goals (MDGs), the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI).

Global Crisis (2005 - present) • The IMF has been on the front lines of lending to countries to help boost the global economy as it suffers from a deep crisis not seen since the Great Depression. • For most of the first decade of the 21 st century, international capital flows fueled a global expansion that enabled many countries to repay money they had borrowed from the IMF and other official creditors and to accumulate foreign exchange reserves. • The global economic crisis that began with the collapse of mortgage lending in the United States in 2007, and spread around the world in 2008 was preceded by large imbalances in global capital flows.

Global Crisis (2005 - present) • Global capital flows fluctuated between 2 and 6 percent of world GDP during 1980 -95, but since then they have risen to 15 percent of GDP. In 2006, they totaled $7. 2 trillion—more than a tripling since 1995. The most rapid increase has been experienced by advanced economies, but emerging markets and developing countries have also become more financially integrated. • The founders of the Bretton Woods system had taken it for granted that private capital flows would never again resume the prominent role they had in the nineteenth and early twentieth centuries, and the IMF had traditionally lent to members facing current account difficulties. • The latest global crisis uncovered a fragility in the advanced financial markets that soon led to the worst global downturn since the Great Depression. Suddenly, the IMF was inundated with requests for stand-by arrangements and other forms of financial and policy support.

Global Crisis (2005 - present) • The international community recognized that the IMF’s financial resources were as important as ever and were likely to be stretched thin before the crisis was over. With broad support from creditor countries, the Fund’s lending capacity was tripled to around $750 billion. To use those funds effectively, the IMF overhauled its lending policies, including by creating a flexible credit line for countries with strong economic fundamentals and a track record of successful policy implementation. Other reforms, including ones tailored to help low-income countries, enabled the IMF to disburse very large sums quickly, based on the needs of borrowing countries and not tightly constrained by quotas, as in the past.

Key IMF activities • The IMF supports its membership by providing – policy advice to governments and central banks based on analysis of economic trends and crosscountry experiences; – research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets; – loans to help countries overcome economic difficulties; – concessional loans to help fight poverty in developing countries; and – technical assistance and training to help countries improve the management of their economies

How IMF does it • The IMF’s job is to promote a stable international monetary system, in which member countries can achieve high rates of employment, low inflation, and sustainable economic growth. The IMF does this by: • overseeing the international monetary system by regularly reviewing national, regional, and global economic and financial developments; • providing economic monitoring and policy advice to its 188 member countries, encouraging them to adopt policies that foster economic stability, reduce their vulnerability to economic and financial crises, and raise living standards; and • analyzing the impact of countries’ policies on others; applying lessons from cross-country experiences to each country’s unique situation; and providing a forum for international cooperation on global economic and financial issues

Membership • The IMF currently has a near-global membership of 188 countries. To become a member, a country must apply and then be accepted by a majority of the existing members. • Upon joining, each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy. . • A member country's quota defines its financial and organizational relationship with the IMF, including: • Subscriptions A member country's quota subscription determines the maximum amount of financial resources the country is obliged to provide to the IMF. A country must pay its subscription in full upon joining the IMF: up to 25 percent must be paid in the IMF's own currency, called Special Drawing Rights (SDRs) or widely accepted currencies (such as the dollar, the euro, the yen, or pound sterling), while the rest is paid in the member's own currency. • Voting power The quota largely determines a member's voting power in IMF decisions. • Access to financing The amount of financing a member country can obtain from the IMF is based on its quota. • SDR allocations SDRs are used as an international reserve asset. A member's share of general SDR allocations is established in proportion to its quota.

Par value system • The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates (the value of their currencies in terms of the U. S. dollar and, in the case of the United States, the value of the dollar in terms of gold) pegged at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement. This par value system—also known as the Bretton Woods system—prevailed until 1971, when the U. S. government suspended the convertibility of the dollar (and dollar reserves held by other governments) into gold.