The International Monetary Fund

The IMF, with 187 member countries and the WBG, with 188 member countries have kept the general goals and organizations they were designed with.

Purpose

The IMF's duties are set in the updated article 1 “purpose” of its byelaws:

(i) To promote international cooperation through a permanent institution.

(ii) To facilitate the expansion and balance growth of international trade and to contribute thereby to the promotion and maintenance of a high level of employment and real income, and to the development of the productive resources of the members as a primary object of economic policy.

(iii) To promote exchange stability, to maintain orderly exchange arrangements among members and to avoid competitive exchange depreciation.

(iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and the elimination of foreign exchange restrictions, which hamper the growth of world trade.

(v) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments without resorting to measures destructive to national or international prosperity.

The main reason for the IMF is set out in (iii) above; the ultimate goal assigned to it was to avoid repetition of the vicious circle of competitive devaluation. However, behind this goal was the reality of the gold reserves of both the USA and the IMF itself coming from its member states. After decades of war (Korea and then Vietnam being the main ones), implicit conflicts such as the Cold War and inflation in the exchange rate, these gold reserves were no longer either adapted to the nominal value of circulating money if claimable or to the expansion of the world trade and financial development that was to take place after.[1] Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF – special drawing rights.

In 1969, SDR appeared to complement national currencies and support the fixed exchange system. The purpose was to allow loans to those countries that needed to refinance their external exchange deficits. The SDR are claim rights against the freely usable currency of IMF members. 21.4 billion was originally issued, but after the last increase in 2009 the issued amount is now 204 trillion (equivalent to US$311 billion). The purpose of this money is to be used between countries with an external trade surplus to support those in need. The money is determined by volume in proportion to dollars, euros, British pounds and Japanese yen in theory, based on their respective share of the international trade and central bank reserves.[2] As a consequence of the grounding concept, this proportion has to be revisited from time to time and this is done through a board. The last revision was in 2010 and the next one is due in 2015. In October 2011, the Board of the IMF was submitted a debate on the possibility of revision before that date, but this was rejected. The value of the SDR results as a set proportion of the various referential currencies above evaluated at market price. It is also a unit of account for the IMF and some other international organizations. The drawing rights are available to each member country in proportion to their capital stake in the IMF. Up to this proportion there is no interest charged between members.

As opposed to any receivable created against a transaction, SDR are not money but more of a clearing process of countries – those in balance of payment surpluses and those with payment deficits. It does affect directly the national currencies and the books of the economic agents in these countries, but may add up to guarantees given to the issuers of debts through national central banks that will be able to buy currency-denominated instruments and therefore take action on the currency markets. We note immediately that the system as designed (and there is no surprise in this) is in opposition to the philosophy that dominated the world after the USA abandoned the gold reference of “no intervention” in the currency exchange market. It was created in 1969 to support the system that ended in August 1971.

What is interesting in the SDR system is the value determination decided by a special executive board of the IMF that is supposed to convene at least every 5 years, if not before as a case of urgency. The value is determined in dollars and published every day on the IMF website. It results from a mix of euros, yen, British pounds and US dollars. The proportion of each currency expressed in dollars will be determined by microeconomic aggregates to ensure that it reflects the relative importance of such currencies in the world's trading and financial system. With effect as of January 2011, it was reassessed so as to fairly represent the value of exports and reserves.

Staff

The IMF has a staff of around 2670 coming from 154 different countries, half of them economists based at its headquarters.

Governance

With 188 member countries, the IMF has kept its general goals and organizations. With a new capital structure extended to emerging countries and through its board of governors representing 24 member countries, it is still a key gathering place to be taken into account as an international governance body. In addition to its General Manager, Mrs Christine Lagarde of France, there is now a First Deputy Managing Director from the USA and three Deputy Managing Directors – one from China, one from Egypt and one from Japan. Two important committees operate to advise the Board, the IMF, the Financial Committee and the Development Committee.

Because of its still influential role, quotas in the IMF capital and voting rights are important topics as well as its governance. The allocation is deemed to reflect the position of each member country in the global economy.[3] A reform was decided in April 2010 (under the 14th general review of quotas). The proposed reform included an amendment to reform the Executive Board, also with 24 members, to move to an all-elected Executive Board. This reform has still not been achieved, the required quorum having not been reached.[4] The Executive Board is composed of eight directors representing the major countries – USA, Japan, Germany, France, UK and China – and 16 directors in constituencies representing between 4 and 22 countries.

The Executive Board's duties are to set new members' quotas and quota increases, SDR allocations and to propose amendments to byelaws and articles of agreement. After that, and with this last unachieved revision of quotas and voting rights, the USA will remain the dominant country in the institution.

Quota share (after revision still to be enforced)

USA

17.4

Japan

6.5

Germany

5.6

UK

4.2

France

4.2

China

6.7

Russian Federation

2.7

India

2.7

Source: IMF website, June 2013.

The IMF's revised duties are

[5] to promote international cooperation through a permanent institution. To summarize according to its byelaws (see the IMF website release of August 2013), the IMF is to provide loans to its member countries experiencing balance of payment problems and to provide advice to troubled countries with economic policy advice. To fulfil its lending role, the IMF has several loan structures depending on need and a country's issues (Extended Credit Facility (ECF), Standby Credit Facility (SCF), Rapid Credit Facility (RCF) with no interest, Stand By Arrangements (SBA), Flexible Credit Line (FCL), Precautionary and Liquidity Line (PLL), and Extended Fund Facility (EFF) for longer-term needs where interest is charged). This financial assistance is deemed to enable countries to rebuild their international reserves, stabilize their currencies, continue paying for imports and restore conditions for strong economic growth while undertaking policies to correct underlying problems. The IMF distinguishes between the poorest countries that are granted concessional terms (meaning charging no interest to them) and non-concessional terms where interest is charged. The access limit is typically a multiple of the country's IMF quota.

It should be noted that in 1969, before the formal abandonment of the Bretton Woods agreements, there was an attempt to fix the matter of providing money to those countries in need. This was the design of the SDR complementary reserve money for national currencies. It was created to support the fixed exchange system. The purpose was to allow loans to those countries in need, to refinance their external exchange deficits. The SDR are claim rights against the freely usable currency of IMF members. They survived the official abandonment of the fixed exchange system and the Jamaica agreements with free currency exchanges that could not mean a total loss of control – not acceptable for the simple reason that exports and imports are dependent on exchange rates and the world, the troubled country for its imports and its counterparts for their exports are immediately concerned when the trade volume is significant. Being contagious, political unrest that results from or causes an economic failure is also at stake. Article (ii) (see footnote 14) remained in the IMF byelaws as a general goal, and so the SDR came about.

Issues

As an existing international agency the IMF is, so far, the only organized forum where nations can gather to issue new money if needed. The factual influence of the IMF is linked to the fact that in borrowing money from the IMF the troubled country becomes committed to following its economic and tax policy recommendations, and that when split into tranches, loan transfers are subject to reaching the set economic goal achievements.

Because of its lending and economic analysis competences, the IMF overlaps with some of the World Bank's duties and capacities. Both institutions coordinate through the IMF World Bank Development Committees (see below). This role – the sharing of duties with other international institutions – is certainly to be debated, as well as the governance of the IMF when dealing with separate matters if in the future extended like SDR.

  • [1] Originally, 0.888671 grams of fine gold equalled 1 dollar.
  • [2] US$0,666. €0.423, Y12.1, £0.111.
  • [3] Looked at through GDP and blended GDP, meaning directly for 60% and PPI adjustment for 40%.
  • [4] Press releases no. 12/499 and 13/127 on reforming the Board; the required quorum is 3/5th of the 188 members representing 85% of the Fund's total voting power. In April 2013 only 71.3% of the total voting power has approved the Board reform. The quota increase approval only requests a quorum of 70% of the total voting lights, which was reached but still has to be completed.
  • [5] Set out in the article 1 “purpose” of its updated byelaws:

    (i) To facilitate the expansion and balance growth of international trade and to contribute thereby to the promotion and maintenance of a high level of employment and real income, and to the development of the productive resources of the members as a primary object of economic policy.

    (ii) To promote exchange stability to maintain orderly exchange arrangements among members and to avoid competitive exchange depreciation.

    (iii) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and the elimination of foreign exchange restrictions which hamper the growth of world trade.

    (iv) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments without resorting to measures destructive to national or international prosperity.

 
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