Valeria Lukyanova

Economic Essay on The Role and Performance of International Monetary Fund

The Role and Performance of International Monetary Fund

Introduction

The International Monetary Fund (IMF) was introduced 60 years ago, in the U.S in 1944 during the Breton Woods forum. After the 2nd World War, the United States and Britain realized that the past gold customary under which the currencies for various countries were tied created the basis for the great depression. As a result, it was necessary to have a stable monetary system for global economic activities.

For this reason, the International Monetary Fund started its operations in 1947. The IMF is an international organization comprising of 188 member states and it aims at enhancing global monetary association, facilitating international trade, ensuring economic stability, ensuring high employment rates, reducing the level of poverty and sustainable economic development across the globe (O’Brien & Williams, 2010).

The IMF is additionally responsible for monitoring global exchange rates and ensuring stability of multilateral payments and payments. The IMF also provides technical assistance to many countries across the globe, and it has played a great role in ensuring proper governance for instance fostering transparency in the public sector and liability. Primarily, the main focus of the IMF is to motivate countries to rectify macroeconomic instability, cut down on inflation,  begin on key trade as well as exchange besides other essential market reforms to maintain continued economic development and efficiency.

While the aforementioned duties are known to be the major objectives for the IMF, for its member states, the body also settled for various reforms that it saw necessary if its member states were to set up and uphold confidence in the private sector. Therefore, it set the foundation for continuous growth (IMF 2011).

The Role and Performance of the IMF

The international monetary system enhances trade between member states. Its major role is to ensure this kind of system exchange rates and international payments is highly effective for the purpose of ensuring sustainable economic growth, enhanced standards of living and poverty reduction across the globe. to achieve its goals, the IMF created a surveillance system among member countries that would help review and monitor the guiding principles of all member countries and international trade as well as financial development.

Surveillance also includes different features such as advising member states, facilitation and promotion of guidelines that enhance economic stability and to reduce risks of economic disasters (IMF, 2011). The monetary system also observes local and universal economic trends. It is responsible for different publications including the World Economic Outlook (WEO), which outlines a very detailed analysis of the world economy condition, explaining significant issues of interest such as the current international chaos and economic recession.

The Global Financial Stability Report (GFSR) that offers an upgraded evaluation of international financial markets and outlines issues and imbalances that may endanger the steadiness of the financial market. Fiscal observer that evaluates progress in community finances (woods, 2010).

The IMF is additionally responsible for monitoring the behavior of financial market and its effect on weaker economies. Its duty is to prevent financial crises in balance payments when it happens to be a major reason behind unstable market (Wolf, 2004). If a member state if facing financial crisis, it can consider advice from the monetary system and get resource from the institution.

If the State happens to get many resources compared to its contribution to the IMF, it is required to fulfill extra requirements that comprise of major changes to the State’s economic guidelines and have to be facilitated. This is mainly for the purpose of ensuring that member states come to control external and internal shortcomings.

If there is delay in payments, this can easily lead to renegotiation, deferral or a recoup of the resources offered (Kapur, 1998). The IMF is also known as a financial institution that gives member states credit. The credits are unlimited based on the systems quota dimension.

Since the 1950s, the credits have been issued in tranches or units that equal 25percent of the state’s quota. The first trench is provided automatically without the need for policy discussion. Credit interest rates are also calculated by the IMF in correspondence with prevailing market rates for its member states and to take care of the IMF’s operation costs (woods, 2010).

The IMF since 1996 has also focused on governance issues in involved countries. It observes weaknesses in the state’s laws and economic institutes that can easily lead to bad governance. It further suggests for changes to prevent possible dangers from occurring. The monetary system and contributes a great deal to development of good governance through different channels.

First, through the policy advices it gives to member states. The body helps its members to create systems that restrict the extent of random decision making, for rent requests and in obnoxious special treatment of organizations and individuals. The IMF also helps to enhance freedom of the exchange, price schemes and trade as well as elimination of credit allotment.

Secondly, the monetary system’s technical assistance helps member states to increase their ability to devise and apply economic policies in creating ideal policy making institutes and in enhancing the responsibility of the public sector. Thirdly, the IMF is responsible for enhancing transparency in financial dealings especially in the state’s financial plan, in the public sector and in the central bank (woods, 2010).

It also helps in enhancing auditing, statistical schemes and accounting. In the above ways, the IMF is helping member states to enhance their governance, to reduce chances of corruption and to advance any possibility of identifying poor governance cases. Additionally, the monetary body addresses specific concerns on poor governance issues such as corruption because of its significant macroeconomic effect.

The IMF is also committed to solving global imbalance issues via provision of many national reserve options, advancing usability of surveillance with many regulations on exchange rate and in helping financial schemes of developing countries. For example, the yearly conference of the IMF in Istanbul in 2009 was aimed at offering reliable self-insurance options. Developing states were accumulating a lot of foreign currency reserves after the 1997 Asia crisis, because they had doubts as to whether the IMF would help them in the event the country faced unexpected crisis (woods, 2010).

The countries that settle for the lending process of the IMF usually have to follow the stated policies of the IMF including monetary austerity, privatization, fiscal austerity and financial freedom (woods, 2010). The IMF is also known as the lender of the last resort based on its major lending task. If the IMF did not take up lending responsibility, the number of countries that would face financial crisis would be high.

The lending of the IMF enables member states to apply enhancements and policies that would lead to sustainable development. The IMF was in the 1980’s the lender of the last resort for many developing countries. Jamaica for instance requested for a 1.29 billion dollar loan from the IMF so that it can solve the country’s financial imbalance and ensure sustainable growth.

Majority of fiscal predicaments witnessed in countries such as Jamaica is because of increased imports and reduced exports. Industrialized countries with strong economies also request for loan from the IMF as a way of utilizing it to enhance technology and other things that can help the countries to achieve an economic advantage. Many of the industrialized countries also do not find it necessary to borrow gain after settling their debts because their economies become stable by the time end of paying period. As a result, they are in a position to take care of their international financial responsibilities (Ugalde, 2011).

Many developed countries in the latest economic recession had to get IMF help. Greece is one of the countries that sought help because of the financial need it experienced after successive low cost borrowing years and low monetary discipline. Therefore, the country considered reinforcing its financial reform at the time when the world witnessed economic recession (Ugalde, 2011). The table below shows fiscal problem meters for Greece.

Budget Deficit and National Debt

                                                   Greece’s Economic Indicators
YearBudget Deficit (% GDP)Public Debt (% GDP)
2005                   -5.1              98.8
2006                   -2.8              95.9
2007                   -3.6              94.8
2008                   -5.0              97.6
2009                   -5.1 (Projected)              103.4 (Projected)

As indicated in the table above, the country in 2005 has the highest budget insufficiency and this was estimated to normalize in the year 2009. In 2005 as shown in the figure, communal debt was at 98.5 percent of the country’s Gross Domestic Product. This debt reduced in the next two years however, in 2008, it increased again and it was expected to increase up to 103.4 percent by the year 2009.

Any state that settles for a lending procedure with the IMF must adhere to the principles of the institution including monetary austerity, and it means tightening the money supply for states as a way of maximizing internal interest rates to a level that would help stabilize the local currency. Monetary austerity also means imposition of fiscal discipline in a country via tax collection minimization as well reduction of government spending.

Privatization, which is intended to help the borrowing nations markets, also operates effectively without any form of interference from the government. Financial liberalization on the other hand is imposed to get rid of inflow and outflow restrictions of interstate finances in addition to restrictions on how international business operates (Ugalde, 2011).

Conclusion

The role of the IMF ensues in three main ways. The IMF member states are usually advised to apply policies designed to ensure economic growth and market stability so as to prevent the possibility of achieving unfair economic advantage via manipulation of the exchange rate. The monetary body is responsible for monitoring financial guiding principles of member states to identify possible risks that can create economic insecurity in a process known as surveillance.

The IMF is also responsible for provision of technical help to its member states by enabling them to employ their financial schemes and economic policies productively. This is achieved by helping member nations to reinforce their resources and suggesting ideal macroeconomic financial reform policies. Lastly, the IMF is responsible for issuing credits to member credits.

Any member state that is facing financial crisis cannot settle its intercontinental bills and it can be a possible issue for the intercontinental financial scheme. The IMF was as a result created for the purpose of protecting member countries from such international problems. It was also created as a lender of the last resort. Member countries are therefore in a position to get loans from IMF if the nation presents a balance of payments that is required.

 

 

Reference

IMF (2011). A Changing IMF—Responding to the Crisis. Retrieved from: http://www.imf.org/external/np/exr/facts/changing.htm

Kapur, D., 1998. The IMF: A Cure or a Curse?. Foreign Policy, Issue 111, pp. 114-129.

O’Brien, R. & Williams, M., 2010. Global Political Economy. 3rd Ed. Hampshire: Palgrave Macmillan.

Ugalde, E. (2011). The Role and Evolution of the International Monetary Fund. Neumann Business Journal Review, Spring 2011.

Wolf, M., 2004. Globalization and Global Economic Governance. Oxford Review of Economic Policy, 20 (1), pp. 72-84.

Woods, N., 2010. Global Governance after the Financial Crisis: A New Multilateralis or the  Last Gasp of the Great Powers?. Global Policy, 1(1), pp. 51-63.

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