IMF Financial Operations 2016

International Monetary Fund. Finance Dept.

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 2016
• ISBN:
  9781475532197

NONE

1. Overview of the IMF as a Financial Institution

The International Monetary Fund was founded some 70 years ago near the end of World War II. The founders aimed to build a framework for economic cooperation that would forestall the kinds of economic policies that contributed to the Great Depression of the 1930s and the global conflict that ensued. The world has changed dramatically since 1944, bringing extensive prosperity to many countries and lifting millions out of poverty. The IMF has evolved as well, but in many ways its main purpose—to support the global public good of financial stability and prosperity—remains the same today as when the organization was established.

Throughout its history, the organization has played a central role within the international financial architecture. With its near-global membership of 189 countries, the IMF is uniquely positioned to help member governments take advantage of the opportunities and manage the challenges posed by globalization and economic development more generally.

More specifically, the IMF continues to serve a number of critical international functions, including to provide a forum for cooperation on international monetary issues; facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction; promote exchange rate stability and an open system of international payments; and lend countries foreign exchange when needed, on a temporary basis and under adequate safeguards, to help them address balance of payments problems. Marked by massive movements of capital and shifts in comparative advantage, globalization has affected IMF member countries’ policy choices in many areas. Helping its members benefit from globalization, while avoiding potential pitfalls, is an important task for the IMF.

A core responsibility of the IMF is to provide resources to member countries experiencing actual or potential balance of payments problems, meaning that the country cannot find sufficient financing on affordable terms to meet its net international payments (for example, for imports or external debt redemptions). This financial assistance enables countries to rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth, while implementing policies to correct underlying problems without resorting to measures that could be destructive to national or international prosperity. Unlike development banks, the IMF does not lend for specific projects.

The global financial crisis of 2007-09 highlighted how economically interconnected countries have become. During the crisis, the IMF mobilized on many fronts to support its members. To meet the ever-increasing financing needs of countries hit by the crisis and help strengthen global economic and financial stability, the IMF significantly bolstered its lending capacity. It did so both by securing large bilateral borrowing agreements from individual member countries and/or their agencies and by expanding the New Arrangements to Borrow (NAB) as a first step, as well as obtaining commitments to increase quota subscriptions of member countries—the IMF’s main source of financing. The IMF has refined its general lending framework to make it better suited to member countries’ needs, in particular to give greater emphasis to crisis prevention. The IMF also undertook an unprecedented reform of its policies toward low-income countries and significantly boosted the resources and concessional lending available to the world’s poorest countries. To increase its permanent resource base and strengthen its legitimacy, in December 2010, the IMF’s member countries also agreed to a historic quota and governance reform to double quotas and increase the role of emerging market and developing economies in the decision-making of the institution while simultaneously preserving the voice of the low-income members.

This chapter describes the evolution of the IMF’s financial structure and operations, its role and functions, governance structure, and the nature of recent reforms. It provides an overview of the material covered in detail in subsequent chapters, looking in turn at the IMF’s nonconcessional financing (Chapter 2), concessional financing (Chapter 3), the Special Drawing Rights (SDR) mechanism (Chapter 4), income generation (Chapter 5), and financial risk management (Chapter 6). The chapter concludes with suggested sources for further information on IMF finances.

1.1 Role and Purposes of the IMF

The IMF is a cooperative international monetary organization whose nearly universal membership comprises 189 countries.¹ It was established in 1945, together with the International Bank for Reconstruction and Development (known as the World Bank), under agreements reached by delegates from 44 countries who convened during July 1944 at the Bretton Woods Conference.

The responsibilities of the IMF derive from the basic purposes for which the institution was established, as set out in Article I of the IMF Articles of Agreement—the charter that governs all policies and activities of the IMF:

• To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.
• To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.
• To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
• To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
• To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
• In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

In pursuit of these objectives, the key activities of the IMF can be classified under three areas—lending, surveillance, and the provision of capacity-building services:

• Lending functions of the IMF are tailored to address the specific circumstances of its diverse membership. The IMF is probably best known as a financial institution that provides resources to member countries experiencing temporary balance of payments problems (actual or potential). This financial assistance enables countries to rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth, while implementing policies to correct underlying problems. The IMF is also actively engaged in promoting economic growth and poverty reduction for its poorer members facing a protracted or short-term balance of payments need by providing financing on concessional terms. Nonconcessional loans are provided mainly through Stand-By Arrangements, the Flexible Credit Line, the Precautionary and Liquidity Line, and the Extended Fund Facility. The IMF may also provide emergency assistance via the Rapid Financing Instrument to all its members facing urgent balance of payments needs. Low-income countries may borrow on concessional terms from the IMF as a trustee of the Poverty Reduction and Growth Trust, currently through the Extended Credit Facility, the Standby Credit Facility, and the Rapid Credit Facility.
• Surveillance functions stem primarily from the IMF’s responsibility for overseeing the international monetary system and the policies of its members, a task entrusted to the IMF following the collapse of the Bretton Woods fixed exchange rate system in the early 1970s. These activities include bilateral surveillance, which is the regular monitoring and peer review by other members of economic and financial developments and policies in each member country. Regional and multilateral surveillance is conducted through ongoing reviews of world economic conditions, financial markets, fiscal developments and outlooks, and through oversight of the international monetary system. Following the global financial crisis, the IMF undertook several major initiatives to strengthen surveillance in a more globalized and interconnected world and adopted an Integrated Surveillance Decision in July 2012.²
• Capacity building and other services to members of the IMF include provision of technical assistance and external training; creation and distribution of international statistical information and methodologies; and establishment and monitoring of standards and codes for international best practice in several areas, including timely country economic and financial statistics, monetary and fiscal transparency, assessment of financial sector soundness, and promotion of good governance.

To sum up, the IMF is much more than a lending institution. It is concerned not only with the economic problems of individual member countries but also with the working of the international monetary system as a whole. Its activities are aimed at promoting policies and strategies through which its members can work together to ensure a stable world financial system and sustainable economic growth. The IMF provides a forum for international monetary cooperation, and thus for an orderly evolution of the global system, and it subjects wide areas of international monetary affairs to the covenants of law, moral suasion, and mutual understanding. The IMF must also stand ready to deal with financial crises, which not only affect individual members but can also threaten the entire international monetary system.

All operations of the IMF are conducted under a decision-making structure that has evolved over time (Box 1.1). The governance structure attempts to strike a balance between representation of its members and the operational necessities of managing an effective financial institution. Although every member country is represented separately on the Board of Governors, most members form combined constituencies on the much smaller Executive Board, which conducts the day-to-day business of the IMF. Members’ voting power is based mainly on the size of their quotas, or capital subscriptions, which are intended to reflect members’ relative economic positions in the world economy. This structure gives the greatest voice to the institution’s largest contributors, although smaller members are protected through a system of basic votes.³ Moreover, the Executive Board bases most of its decisions on consensus, without a formal vote. This procedure ensures the thorough consideration of all points of view.

The IMF is a quota-based institution, and quotas play a number of key roles; they not only determine a country’s voting power and maximum financial commitment but are also relevant for access to IMF resources. The IMF normally conducts general reviews of quotas every 5 years. These reviews provide an opportunity to assess the appropriate size of the Fund and the distribution of quotas among its members. In the past, general quota increases have been distributed largely in proportion to existing quota shares with a smaller amount of the quota increases generally allotted to realign members’ quotas with their relative positions in the world economy as reflected in their calculated quota shares, which are based on a quota formula designed for this purpose.⁴

Because earlier adjustments have been largely proportional to existing quotas, changes in the distribution of actual quotas have lagged behind global economic developments. Consequently, in order to safeguard and enhance the institution’s credibility and effectiveness, in 2006 the IMF began a process to review and reform the quota and voice of its member countries. The specific aim was to better align members’ quota shares with their economic positions in the world economy and to enhance the voice of low-income countries in the governance of the IMF.

At its annual meeting in Singapore in September 2006, the Board of Governors adopted a resolution requiring the IMF Executive Board to implement a comprehensive program of reforms that, when complete, would increase the representation of dynamic economies (many of which are emerging market economies) whose position an...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Preface
• Acknowledgments
• Abbreviations
• 1. Overview of the IMF as a Financial Institution
• 2. Nonconcessional Financial Operations
• 3. Financial Assistance for Low-Income Countries
• 4. Special Drawing Rights
• 5. The IMF’s Income Model
• 6. Financial Risk Management
• Appendix 1 IMF Membership: Quotas, and Allocations and Holdings of SDRs
• Appendix 2 Special Voting Majorities for Selected Financial Decisions
• Appendix 3 Administered Accounts
• Appendix 4 Disclosure of Financial Position with the IMF in the Balance Sheet of a Member’s Central Bank
• Glossary
• Index
• Figures
• Footnotes