History of IMF

What is the IMF?

The International Monetary Fund, or IMF, promotes international financial stability and monetary
cooperation. It also facilitates international trade, promotes employment and sustainable economic
growth, and helps to reduce global poverty. The IMF is governed by and accountable to its 190-
member countries.

Cooperation and reconstruction (1944–71)

During the Great Depression of the 1930s, countries attempted to shore up 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.

This breakdown in international monetary cooperation led the IMF's founders to plan an institution
charged with overseeing the international monetary system—the system of exchange rates and
international payments that enables countries and their citizens to buy goods and services from
each other. The new global entity would ensure exchange rate stability and encourage its member
countries to eliminate exchange restrictions that hindered trade.

1. 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 1950s and during the 1960s 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.

2. 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.

The end of the Bretton Woods System (1972–81)

By the early 1960s, 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.

1. End of Bretton Woods system

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 1960s 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.

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.

2. Oil shocks
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 1970s 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.

3. Helping poor countries

From the mid-1970s, 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 1970s, 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 1970s, 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.

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 and Asian Upheaval (1990-2004)

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 1960s.

In order to fulfill its new responsibilities, the IMF's staff expanded by nearly 30 percent in six
years. The Executive Board increased from 22 seats to 24 to accommodate Directors from Russia
and Switzerland, and some existing Directors saw their constituencies expand by several countries.

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 1990s,
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.

1. Asian Financial Crisis

In 1997, a wave of financial crises swept 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.

From this experience, the IMF drew several lessons that would alter its responses to future
events. First, 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 and began conducting national assessments on a voluntary basis.
Second, the Fund realized that the institutional prerequisites for successful liberalization of
international capital flows were more daunting than it had previously thought. Along with
the economics profession generally, the IMF dampened its enthusiasm for capital account
liberalization. Third, 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.

2. Debt relief for poor countries

During the 1990s, 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).

Globalization and the 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 21st 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 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.

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.

Organization structure of the International Monetary

Fund
IMF has a management team and 18 departments that carry out its country, policy, analytical, and
technical work. The IMF's mandate and governance have evolved along with changes in the global
economy, allowing the organization to retain a
central role within the international financial
architecture. The diagram below provides a stylized
view of the IMF's current governance structure.

The IMF is accountable to its member country

governments. At the top of the organizational
structure is the Board of Governors, consisting of one
governor and one alternate governor from each
member country, usually the top officials from the
central bank or finance ministry. The Board of
Governors meets once a year at the IMF–World Bank
Annual Meetings. Twenty-four of the governors
serve on the International Monetary and Financial Committee, or IMFC, which advises the IMF's
Executive Board.
The day-to-day work of the IMF is overseen by its 24-member Executive Board, which signifies
the entire membership and is supported by IMF staff. The Managing Director is the head of
the IMF staff and Chair of the Executive Board and is aided by four Deputy Managing Directors.
Apart from the management department, other departments will be discussed below which were
mentioned above.

Independent Evaluation Office (IEO): Conducts independent evaluations of the IMF's policies,
programs, and activities.

Institute for Capacity Development (ICD): Provides training in economic management to

officials of the IMF's member countries.

Communications Department (COMM): Develops and implements the IMF's communication

strategy.

Finance Department (FIN): Manages the IMF's financial resources and provides financial
services to IMF departments and member countries.

Legal Department (LEG): Provides legal advice to the IMF's management, staff, Executive
Board, and member countries.

Monetary and Capital Markets Department (MCM): Conducts surveillance of global financial
markets, provides policy advice on monetary and financial stability issues, and develops standards
for financial sector regulation.

Statistics Department (STA): Compiles and disseminates data on international economic

activity, provides technical assistance to member countries on statistical issues, and develops
international statistical standards.

Research Department (RES): Conducts research on macroeconomic issues, provides policy

analysis to IMF management and member countries, and publishes research papers on economic
topics.

Fiscal Affairs Department (FAD): Provides policy advice, technical assistance, and training to
IMF member countries on fiscal issues such as taxation, public expenditure management, and debt
management.

Strategy, Policy, and Review Department (SPR): Develops the IMF's strategic direction,
provides policy advice on global economic issues, conducts reviews of IMF policies and
operations, and manages relations with other international organizations.

The International Monetary Fund (IMF) does not have departments organized by geographical
areas or regions. Instead, the IMF is structured around functional departments and divisions that
focus on various aspects of its work, such as macroeconomic analysis, financial stability, policy
advice, technical assistance, and research.
However, the IMF does have regional offices and departments that focus on specific regions of the
world. These regional offices help the IMF engage with member countries in their respective
regions, conduct economic analysis, provide policy advice, and facilitate technical assistance.
Some of these regional offices include:

1. African Department (AFR)

2. Asia and Pacific Department (APD)
3. European Department (EUR)
4. Middle East and Central Asia Department (MCD)
5. Western Hemisphere Department (WHD)

Each of these regional offices works with member countries within its designated region to address
economic and financial issues specific to that region.
It's important to note that the IMF's primary function is to promote international monetary
cooperation, exchange rate stability, balanced trade, economic growth, and financial stability on a
global scale, rather than being organized primarily by geographic areas.

The International Monetary Fund (IMF) provides a range of support services to its member
countries to help promote international monetary cooperation, exchange rate stability, balanced
trade growth, and financial stability. These support services include:

Financial Assistance: The IMF provides financial support to member countries facing balance of
payments problems. This assistance comes in the form of loans or credit lines to help stabilize a
country's economy and restore macroeconomic stability. These financial programs often come
with policy conditions aimed at addressing the root causes of the economic crisis.

Policy Advice: The IMF offers policy advice and technical assistance to member countries. It
conducts in-depth economic and financial analysis, makes recommendations on fiscal, monetary,
and structural policies, and helps countries design and implement effective economic reforms.

Capacity Development: The IMF helps member countries strengthen their economic institutions
and capacity to design and implement effective economic policies. This includes providing
technical assistance and training to central banks, finance ministries, and other relevant
government agencies.

Data and Economic Research: The IMF collects and disseminates economic and financial data,
research, and analysis. Its World Economic Outlook and other publications provide valuable
information to policymakers, investors, and the public. The IMF also helps member countries
improve the quality and availability of their economic data.
Surveillance: The IMF conducts regular surveillance of the global economy and member
countries' economic and financial developments. This involves monitoring exchange rates, fiscal
policies, monetary policies, and other macroeconomic indicators to identify potential risks and
vulnerabilities.

Crisis Prevention and Resolution: The IMF plays a role in helping countries prevent financial
crises and, when necessary, resolving them. This includes assisting in the negotiation of debt
restructuring agreements and providing financial support to countries in crisis.

Capacity Building: The IMF offers training programs and technical assistance to member
countries' officials, helping them build the skills and knowledge necessary to manage economic
policy effectively.

Research and Policy Analysis: The IMF conducts research on various aspects of the global
economy, monetary policy, fiscal policy, financial stability, and more. This research informs its
policy advice and contributes to the broader understanding of economic issues.

Financial Sector Assessment: The IMF assesses the stability and resilience of a country's
financial sector, identifying potential vulnerabilities and recommending reforms to strengthen it.

Macroprudential Policy Advice: The IMF provides guidance on macroprudential policies aimed
at safeguarding the stability of the financial system and preventing systemic risks.

The IMF's support services are designed to promote global economic stability, reduce poverty, and
foster sustainable economic growth. Member countries can request assistance from the IMF when
facing economic challenges, and the organization tailors its programs to address specific country
circumstances. However, it's important to note that IMF assistance often comes with conditions
and policy requirements to ensure that countries implement necessary reforms and restore
economic stability.

Functions of IMF
IMF was established for specific purposes. For achieving the objectives, IMF performs the
following functions for the member countries.

1. Stability in Exchange Rate

In order to maintain stability in the exchange rates of the currencies of the member countries, IMF
has determined the value of their currencies in term of gold and dollar at the very beginning of its
establishment and thereby discourages any fluctuations in the rate of exchange.
2. Determination of par value
IMF enforces the system of determination of par values of the currencies of the members countries.
As per the Original Articles of Agreement of the IMF every member country must declare the par
value of its currency in terms of Gold or US dollars.

3. Maintenance of liquidity
The IMF was set up for the purpose of increasing international liquidity. International liquidity
was quite inadequate due to the scarce availability of gold and existence of smaller number of key
currencies.

4. Maintaining balance between demand and supply of currencies

IMF is also entrusted with important function to maintain balance between demand and supply of
various currencies. Accordingly, the fund can declare a currency as scarce currency which is in
great demand and can increase its supply by borrowing in form the country concerned or by
purchasing the same currency in exchange for gold.

5. Technical assistance
The IMF is also performing a useful function to provide technical assistance to the member
countries. Such Technical assistance is given in two ways, firstly by granting the member countries
the services of its specialists and exports, and secondly by sending the outside experts. Moreover,
the fund has also set up two specialized new departments: (a) Central Banking Services
Department and (b) Fiscal Affairs Department for sending specialists to member countries so as
to manage its central banks and also on fiscal management.

6. Training
IMF is helping in the economic development of the member countries through various training
programs. These training programs are related mainly to the economic department, international
payment data collection, analysis and financial arrangement.

7. Consultancy services
The IMF renders advice to the member countries on economic and monetary matters because IMF
is in a position to do so in view of its special status. By doing so, the IMF helps the member
countries to stabilize their economies. For this purpose, the IMF has set up two departments,
namely, central banking services department and fiscal Affairs Department.

8. Reducing Tariffs
The fund also aims at reducing tariffs and other restrictions imposed on international trade by the
member countries so as to cease restrictions of remittance of funds or to avoid discrimination and
failures.

These functions aim to promote global economic stability and growth while preventing and
addressing financial crises.
Criticisms of IMF
Over time, the IMF has been subject to a range of criticisms, generally focused on the conditions
of its loans. The IMF has also been criticised for its lack of accountability and willingness to lend
to countries with bad human rights records.

1. Criticisms of the IMF include

On giving loans to countries, the IMF make the loan conditional on the implementation of certain
economic policies. These policies tend to involve:

• Reducing government borrowing – Higher taxes and lower spending

• Higher interest rates to stabilise the currency.
• Allow failing firms to go bankrupt.
• Structural adjustment. Privatisation, deregulation, reducing corruption and bureaucracy.
The problem is that these policies of structural adjustment and macroeconomic intervention can
make difficult economic situations worse.

• For example, in the Asian crisis of 1997, many countries such as Indonesia, Malaysia and
Thailand were required by IMF to pursue tight monetary policy (higher interest rates) and
tight fiscal policy to reduce the budget deficit and strengthen exchange rates. However,
these policies caused a minor slowdown to turn into a serious recession with very high
levels of unemployment.
• In 2001, Argentina was forced into a similar policy of fiscal restraint. This led to a decline
in investment in public services which arguably damaged the economy.

2. Exchange rate reforms

When the IMF intervened in Kenya in the 1990s, they made the Central bank remove controls
overflows of capital. The consensus was that this decision made it easier for corrupt politicians to
transfer money out of the economy (known as the Goldenberg scandal, BBC link). Critics argue
this is another example of how the IMF failed to understand the dynamics of the country that they
were dealing with – insisting on blanket reforms.

The economist Joseph Stiglitz has criticised the more monetarist approach of the IMF in recent
years. He argues it is failing to take the best policy to improve the welfare of developing countries
saying the IMF “was not participating in a conspiracy, but it was reflecting the interests and
ideology of the Western financial community.”

3. Devaluations
In earlier days, the IMF have been criticised for allowing inflationary devaluations.
4. Neo-Liberal Criticisms
There is also criticism of neo-liberal policies such as privatisation. Arguably these free-market
policies were not always suitable for the situation of the country. For example, privatisation can
create lead to the creation of private monopolies who exploit consumers.

5. Free market criticisms of IMF

As well as being criticised for implementing ‘free-market reforms’ Others criticise the IMF for
being too interventionist. Believers in free markets argue that it is better to let capital markets
operate without attempts at intervention. They argue attempts to influence exchange rates only
make things worse – it is better to allow currencies to reach their market level.

• There is also a criticism that bailing out countries with large debt creates moral hazard.
Because of the possibility of getting bailed out, it encourages countries to borrow more.

6. Lack of transparency and involvement

The IMF has been criticised for imposing policy with little or no consultation with the affected
countries.

Jeffrey Sachs, the head of the Harvard Institute for International Development said:
“In Korea the IMF insisted that all presidential candidates immediately “endorse” an agreement
which they had no part in drafting or negotiating, and no time to understand. The situation is out
of hand…It defies logic to believe the small group of 1,000 economists on 19th Street in
Washington should dictate the economic conditions of life to 75 developing countries with around
1.4 billion people.”

7. Supporting military dictatorships

The IMF has been criticised for supporting military dictatorships in Brazil and Argentina, such as
Castello Branco in 1960s received IMF funds denied to other countries.