The International Monetary Fund (“IMF”) is an international organization comprising of 186 member countries, working to promote macro-economic stability through global economic cooperation. The IMF endeavors to stabilize global economies by facilitating international trade, promoting sustainable economic growth, reducing poverty, and thereby creating a more egalitarian world. IMF headquarters is located in Washington, D.C., United States.
The Great Depression of the 1930s and the catastrophic effects of Second World War badly hit global economies and world trade. This necessitated the creation of an institution charged to stabilize exchange rates and to rebuild the international payment system that would enable world trade to flourish. The IMF was formed in December 1945, with 29 member countries and the organization began its operations on March 1, 1947.
Until 1971, IMF member countries followed a par value system called Bretton Woods system whereby their exchange rates were 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. 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 and the Bretton Woods system was abandoned between 1968 and 1973. By March 1973 the IMF members were free to choose any type of exchange agreement, allowing their currency to float freely. The member states were also allowed to peg their currency to another, participate in a currency bloc or to join a monetary union.
As part of its endeavor to promote poorer economies, the IMF started providing concessional financing from the mid-1970s though a Trust Fund. Later, in March 1986, the IMF created a new concessional loan program called the Structural Adjustment Facility (SAF). Structural Adjustment refers to the policy changes implemented by the IMF in member countries as part of the conditionalities for sanctioning new loans from the IMF. Conditions are imposed to prevent diversion of loaned resources. The SAF was succeeded by the Enhanced Structural Adjustment Facility in December 1987.
Member countries have a quota in the IMF which determines the member country’s voting weight, access to loans, and Special Drawing Rights. Normally, IMF offers short-term loans, which are to be repaid between two and a half and four years. However, a few longer term options are also available, with repayment period up to seven years. IMF also offers assistance to countries in times of natural disaster or conflict.
With a lending capacity of around $750 billion, the IMF is onto a variety of novel initiatives and in the aftermath of the global economic crisis, the IMF offers many rescue packages and exit strategies to member countries. The “Flexible Credit Line and High Access Precautionary Arrangements” help members cope with financial volatility. Flexible credit line is offered to countries with strong economic fundamentals and a track record of successful policy implementation.
The IMF is also planning for Quota reform by January 2011. The reform package envisages shifting quota share to dynamic emerging and developing countries of at least five percent from over-represented to under-represented countries. Attempts are also being made to infuse more transparency in IMF management.