The International Monetary Fund (IMF), together with its sister organization the International Bank for Reconstruction and Development (World Bank), was established at the Bretton Woods international monetary conference in 1944 and became operational in 1946. It has around 180 country members. Its original purpose was to promote international monetary stability and co-operation between countries in general, and an orderly exchange rate regime and stable exchange rates in particular. The objective of the founding members—dominated by the USA (White) and the UK (Keynes)—was to avoid the instabilities in international monetary relations (especially with respect to exchange rates) that had characterized much of the interwar period. In particular, the Bretton Woods regime (in which the IMF was to play a central role) was based on the central feature of fixed but adjustable exchange rates with each member country agreeing a par value for its currency (formally against gold but in practice against the US dollar) with the Fund. The IMF would provide short-term balance of payments financing assistance for temporary deficits. The Fund would invariably set conditionality provisions when giving assistance and these conditions would relate to key aspects of economic policy (e.g. the conduct of fiscal and monetary policy, the size of budget deficits, etc.). A country in ‘fundamental disequilibrium’ was required, with the IMF’s agreement, to change the par value of its currency. The IMF could, therefore, have a powerful surveillance role in the international monetary system and a decisive influence on the conduct of member government’s economic policy. At times in its history this power has been substantial but has generally declined since the early 1980s.
At the outset there was to be a clear distinction between the role of the Fund and that of the World Bank. The IMF was created to provide short-term assistance for any country (developed and under-developed) in temporary balance of payment difficulty, while the World Bank was to provide long-term project finance to aid the longer-term development of economies. The distinction still exists, but over time, and most especially since the early 1980s, it has become less clear-cut in three respects: the Fund has extended the maturity of some of its facilities; the World Bank also makes non-project loans which amount to general balance of payment financing; and the financial facilities of the Fund have come to be used exclusively by less developed countries.
The IMF is essentially a fund. Each member country is assigned a quota the size of which is set mainly in relation to the importance of the country in world trade. The sum of quotas (all denominated in special drawing rights, a composite currency unit based on the world’s major currencies) determines the size of the Fund. The five largest quotas (of the USA, Japan, Germany, France and the UK) account for 43 per cent of the total. The quotas are central to the Fund’s operations in two major respects: they determine the extent to which each country has access to financing facilities, and also each member’s voting rights on the executive board.
The financial resources of the IMF are derived from the contributions of members which pay in amounts equal to 25 per cent of quota in foreign currency (this becomes the country’s reserve tranch and is included in the members’ foreign currency reserves) and 75 per cent in its domestic currency. Technically, a country does not borrow from the IMF but draws or purchases foreign currency from the Fund with its own currency. While the detail is complex, the basic drawing capacity (access to foreign currency) of each member is limited by a requirement that the Fund’s holding of a member’s currency should not exceed 200 per cent of its quota. Given that each member contributes its own currency equal to 75 per cent of quota, and pays in 25 per cent in foreign currency, each country effectively has access to additional foreign currency to finance a balance of payments deficit equal to 100 per cent of its quota. This is divided into four credit tranches. In addition to this basic condition, countries have access to a series of additional financial facilities for specific purposes. These include the Extended Fund Facility (where repayments are required only after four and a half to ten years), the Compensatory and Contingency Financing Facility (designed to cover export short-falls and other unforeseen shocks), and the Structural Adjustment Facility, which makes medium-term loans at concessional rates to low-income countries.
As members make use of the credit tranches the IMF imposes conditions with respect to the country’s economic policy. The objective is to ensure that, as normally repayment has to be made between three and a half and five years, the country’s balance of payments is improved over this period. In this way the IMF can exert considerable influence over a country’s economic policy although this power exists only when a country seeks access to the Fund’s financial facilities.
While access to the IMF’s facilities is open to all members, and the UK and Italy made substantial use of them in the 1960s and 1970s, no developed country has made drawings since 1976. This is because exchange rates have become more flexible and industrialized countries have been able to borrow substantially from international banking and credit markets. Although IMF facilities usually carry a lower rate of interest than the market, governments usually prefer the latter as it avoids both the IMF’s conditionality and the loss of esteem often associated with IMF borrowing. Overall, the Fund’s influence on industrial countries has declined.
The role of the IMF has changed since its creation and reflects changes in the prevailing international monetary regime and world economic circumstances. It does not in practice perform a powerful disciplining, management or surveillance role in the international monetary system. It certainly does not in any way manage the system or have much influence on its evolution. Power resides with national governments. In general, its surveillance role in the international monetary system has declined with the move away from fixed exchange rates. Its role in balance-of-payments financing, while significant for some developing countries from time to time, has also become less decisive and, for many countries, the amounts that can be borrowed in the markets far exceeds the facilities of the Fund. Nevertheless, its normal and special lending facilities can be of value.
Other roles have become more significant. First, it is a forum for governments to exchange views about economic conditions, policy and their objectives. The IMF, through its annual consultations with each member, has more intelligence about world economic trends than any other organization. Its publications are authoritative. Second, it collects and publishes a substantial volume of data about global economic and financial trends. Third, it performs consultancy services for governments (most especially in developing countries) in all aspects of economic management. A fourth area of influence has been in acting as a forum for debt-restructuring exercises following the substantial market borrowing of some governments during the 1970s and 1980s, and the debt-servicing difficulties that many encountered in the 1980s. Finally, and an area of particular significance since 1990, there are the advice and financing facilities offered to the transitional-economies of eastern Europe as they cope with the structural problems of shifting from rigidly centrally planned economies toward market-orientated regimes.
The IMF has evolved in a way quite different from the conception of its founders. This is largely because the nature of the international monetary system has changed.
David T.Llewellyn
Loughborough University
Further reading
de Vries, M.G. (1976) The International Monetary Fund 1966–71: The System under Stress, 2 vols, Washington, DC.
——(1985) The International Monetary Fund 1972–78: Cooperation on Trial, 3 vols, Washington, DC.
——(1986) The IMF in a Changing World, 1944–85, Washington, DC.
——(1987) Balance of Payments Adjustment, 1945 to 1986: The IMF Experience, Washington, DC.
Edwards, S. (1989) ‘The International Monetary Fund and the developing countries: a critical evaluation’, in IMF Policy Advice, Market Volatility, Commodity Price Rules, and Other Essays, Carnegie-Rochester Conference Series on Public Policy 31, Amsterdam.
Finch, C.D. (1989) The IMF: The Record and the Prospects, Essays in International Finance 175, Princeton, NJ.
Horsefield, J.K. (1969) The International Monetary Fund 1945–65: Twenty Years of International Monetary Cooperation, 3 vols, Washington, DC.
IMF (1985) ‘The role and functions of the International Monetary Fund’, Washington, DC.
Killick, T. (ed.) (1984) The IMF and Stabilization: Developing Country Experiences, New York.
——(ed.) (1986) The Quest for Economic Stabilisation: The IMF and the Third World, London.
Llewellyn, D.T. (1986) ‘The international monetary system since 1972: structural change and financial innovation’, in M.Posner (ed.) The Problems of International Money: 1972–85, Washington, DC.
——(1990) ‘The international monetary system’, in D.T. Llewellyn and C.R.Milner, Current Issues in International Monetary Economics, London.
Tew, J.H.B. (1988) The Evolution of the International Monetary System 1945–1988, London.
