INTRODUCTION TO IMF

History:The IMF has played a part in shaping the global economy since the end of World War II.

Cooperation and reconstruction (1944 !1"# $uring the %reat $epression of the 19&'s( countries attempted to shore up their failing economies by sharply raising barriers to foreign trade( de)aluing their currencies to compete against each other for e*port mar+ets( and curtailing their citi,ens- freedom to hold foreign e*change. These attempts pro)ed to be self#defeating. World trade declined sharply( and employment and li)ing standards plummeted in many countries. This brea+do.n in international monetary cooperation led the IMF-s founders to plan an institution charged .ith o)erseeing the international monetary system/the system of e*change rates and international payments that enables countries and their citi,ens to buy goods and ser)ices from each other. The ne. global entity .ould ensure e*change rate stability and encourage its member countries to eliminate e*change restrictions that hindered trade.

The Bretton Woods agreement

The IMF .as concei)ed in 0uly 1944( .hen representati)es of 41 countries meeting in the to.n of 2retton Woods( 3e. 4ampshire( in the northeastern 5nited 6tates( agreed on a frame.or+ for international economic cooperation( to be established after the 6econd World War. They belie)ed that such a frame.or+ .as necessary to a)oid a repetition of the disastrous economic policies that had contributed to the %reat $epression. The IMF came into formal e*istence in $ecember 1941( .hen its first 79 member countries signed its 8rticles of 8greement. It began operations on March 1( 194!. 9ater that year( France became the first country to borro. from the IMF. The IMF-s membership began to e*pand in the late 191's and during the 19:'s as many 8frican countries became independent and applied for membership. 2ut the Cold War limited the Fund-s membership( .ith most countries in the 6o)iet sphere of influence not ;oining.
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Par va !e system

The countries that ;oined the IMF bet.een 1941 and 19!1 agreed to +eep their e*change rates (the )alue of their currencies in terms of the 5.6. dollar and( in the case of the 5nited 6tates( the )alue of the dollar in terms of gold" pegged at rates that could be ad;usted only to correct a <fundamental dise=uilibrium< in the balance of payments( and only .ith the IMF-s agreement. This par )alue system/also +no.n as the 2retton Woods system/pre)ailed until 19!1( .hen the 5.6. go)ernment suspended the con)ertibility of the dollar (and dollar reser)es held by other go)ernments" into gold.

 The end of the 2retton Woods 6ystem (19!7 >1"# 2y the early 19:'s( the 5.6. dollar-s fi*ed )alue against gold( under the 2retton Woods system of fi*ed e*change rates( .as seen as o)er)alued. 8 si,able increase in domestic spending on ?resident 9yndon 0ohnson-s %reat 6ociety programs and a rise in military spending caused by the @ietnam War gradually .orsened the o)er)aluation of the dollar.

"nd o# Bretton Woods system

The system dissol)ed bet.een 19:> and 19!&. In 8ugust 19!1( 5.6. ?resident Aichard 3i*on announced the <temporary< suspension of the dollar-s con)ertibility into gold. While the dollar had struggled throughout most of the 19:'s .ithin the parity established at 2retton Woods( this crisis mar+ed the brea+do.n of the system. 8n attempt to re)i)e the fi*ed e*change rates failed( and by March 19!& the ma;or currencies began to float against each other. 6ince the collapse of the 2retton Woods system( IMF members ha)e been free to choose any form of e*change arrangement they .ish (e*cept pegging their currency to gold"B allo.ing the currency to float freely( pegging it to another currency or a bas+et of currencies( adopting the currency of another country( participating in a currency bloc( or forming part of a monetary union.

Oi sho$%s
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Many feared that the collapse of the 2retton Woods system .ould bring the period of rapid gro.th to an end. In fact( the transition to floating e*change rates .as relati)ely smooth( and it .as certainly timelyB fle*ible e*change rates made it easier for economies to ad;ust to more e*pensi)e oil( .hen the price suddenly started going up in Cctober 19!&. Floating rates ha)e facilitated ad;ustments to e*ternal shoc+s e)er since. The IMF responded to the challenges created by the oil price shoc+s of the 19!'s by adapting its lending instruments. To help oil importers deal .ith anticipated current account deficits and inflation in the face of higher oil prices( it set up the first of t.o oil facilities.

He &ing &oor $o!ntries

From the mid#19!'s( the IMF sought to respond to the balance of payments difficulties confronting many of the .orld-s poorest countries by pro)iding concessional financing through .hat .as +no.n as the Trust Fund. In March 19>:( the IMF created a ne. concessional loan program called the 6tructural 8d;ustment Facility. The 68F .as succeeded by the Dnhanced 6tructural 8d;ustment Facility in $ecember 19>!.

$ebt and painful reforms (19>7 >9"#

The oil shoc+s of the 19!'s( .hich forced many oil#importing countries to borro. from commercial ban+s( and the interest rate increases in industrial countries trying to control inflation led to an international debt crisis. $uring the 19!'s( Western commercial ban+s lent billions of <recycled< petrodollars( getting deposits from oil e*porters and lending those resources to oil#importing and de)eloping countries( usually at )ariable( or floating( interest rates. 6o .hen interest rates began to soar in 19!9( the floating rates on de)eloping countries- loans also shot up. 4igher interest payments are estimated to ha)e cost the non#oil#producing de)eloping countries at least E77 billion during 19!> >1. 8t the same time( the price of commodities from de)eloping countries slumped because of the recession brought about by monetary policies. Many times( the response by de)eloping countries to those shoc+s included e*pansionary fiscal policies and o)er)alued e*change rates( sustained by further massi)e borro.ings. When a crisis bro+e out in Me*ico in 19>7( the IMF coordinated the global response( e)en engaging the commercial ban+s. It reali,ed that nobody .ould benefit if country after country failed to repay its debts. The IMF-s initiati)es calmed the initial panic and defused its e*plosi)e potential. 2ut a long road of painful reform in the debtor countries( and additional cooperati)e global measures( .ould be necessary to eliminate the problem. 6ocietal Change for Dastern Durope and 8sian 5phea)al (199'# 7''4"#

The fall of the 2erlin .all in 19>9 and the dissolution of the 6o)iet 5nion in 1991 enabled the IMF to become a (nearly" uni)ersal institution. In three years( membership increased from 117 countries to 1!7( the most rapid increase since the influ* of 8frican members in the 19:'s. In order to fulfill its ne. responsibilities( the IMF-s staff e*panded by nearly &' percent in si* years. The D*ecuti)e 2oard increased from 77 seats to 74 to accommodate $irectors from Aussia and 6.it,erland( and some e*isting $irectors sa. their constituencies e*pand by se)eral countries. The IMF played a central role in helping the countries of the former 6o)iet bloc transition from central planning to mar+et#dri)en economies. This +ind of economic transformation had ne)er before been attempted( and sometimes the process .as less than smooth. For most of the 199's( these countries .or+ed closely .ith the IMF( benefiting from its policy ad)ice( technical assistance( and financial support. 2y the end of the decade( most economies in transition had successfully graduated to mar+et economy status after se)eral years of intense reforms( .ith many ;oining the Duropean 5nion in 7''4.

'sian Finan$ia Crisis

In 199!( a .a)e of financial crises s.ept o)er Dast 8sia( from Thailand to Indonesia to Forea and beyond. 8lmost e)ery affected country as+ed the IMF for both financial assistance and for help in reforming economic policies. Conflicts arose on ho. best to cope .ith the crisis( and the IMF came under criticism that .as more intense and .idespread than at any other time in its history. From this e*perience( the IMF dre. se)eral lessons that .ould alter its responses to future e)ents. First( it reali,ed that it .ould ha)e to pay much more attention to .ea+nesses in countriesG ban+ing sectors and to the effects of those .ea+nesses on macroeconomic stability. In 1999( the IMF/together .ith the World 2an+/launched the Financial 6ector 8ssessment ?rogram and began conducting national assessments on a )oluntary basis. 6econd( the Fund reali,ed that the institutional prere=uisites for successful liberali,ation of international capital flo.s .ere more daunting than it had pre)iously thought. 8long .ith the economics profession generally( the IMF dampened its enthusiasm for capital account liberali,ation. Third( the se)erity of the contraction in economic acti)ity that accompanied the 8sian crisis necessitated a re#e)aluation of ho. fiscal policy should be ad;usted .hen a crisis .as precipitated by a sudden stop in financial inflo.s.

De(t re ie# #or &oor $o!ntries

$uring the 199's( the IMF .or+ed closely .ith the World 2an+ to alle)iate the debt burdens of poor countries. The Initiati)e for 4ea)ily Indebted ?oor Countries .as launched in 199:( .ith the aim of ensuring that no poor country faces a debt burden it cannot manage. In 7''1( to help accelerate progress to.ard the 5nited 3ations Millennium $e)elopment %oals (M$%s"( the 4I?C Initiati)e .as supplemented by the Multilateral $ebt Aelief Initiati)e (M$AI".

O)"R)I"W
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The IMF .or+s to foster global gro.th and economic stability. It pro)ides policy ad)ice and financing to members in economic difficulties and also .or+s .ith de)eloping nations to help them achie)e macroeconomic stability and reduce po)erty. With its near#global membership of 1>> countries( the IMF is uni=uely placed to help member go)ernments ta+e ad)antage of the opportunities /and manage the challenges/posed by globali,ation and economic de)elopment more generally. The IMF trac+s global economic trends and performance( alerts its member countries .hen it sees problems on the hori,on( pro)ides a forum for policy dialogue( and passes on +no.# ho. to go)ernments on ho. to tac+le economic difficulties. The IMF pro)ides policy ad)ice and financing to members in economic difficulties and also .or+s .ith de)eloping nations to help them achie)e macroeconomic stability and reduce po)erty. Mar+ed by massi)e mo)ements of capital and abrupt shifts in comparati)e ad)antage( globali,ation affects countries- policy choices in many areas( including labor( trade( and ta* policies. 4elping a country benefit from globali,ation .hile a)oiding potential do.nsides is an important tas+ for the IMF. The global economic crisis has highlighted ;ust ho. interconnected countries ha)e become in todayGs .orld economy.

*ey IMF a$tivities

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The IMF supports its membership by pro)iding

policy advice to governments and central banks based on analysis of economic trends and cross-co ntry e!periences" researc#$ statistics$ forecasts$ and analysis based on tracking of global$ regional$ and individ al economies and markets"

loans to #elp co ntries overcome economic diffic lties" concessional loans to #elp fig#t poverty in developing co ntries" and

tec#nical assistance and training to #elp co ntries improve t#e management of t#eir economies%

origina aims

The IMF .as founded more than :' years ago to.ard the end of World War II. The founders aimed to build a frame.or+ for economic cooperation that .ould a)oid a repetition of the disastrous economic policies that had contributed to the %reat $epression of the 19&'s and the global conflict that follo.ed. 6ince then the .orld has changed dramatically( bringing e*tensi)e prosperity and lifting millions out of po)erty( especially in 8sia. In many .ays the IMF-s main purpose/to pro)ide the global public good of financial stability/is the same today as it .as .hen the organi,ation .as established. More specifically( the IMF continues to

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provide a for m for cooperation on international monetary problems facilitate t#e gro&t# of international trade$ t# s promoting 'ob creation$ economic gro&t#$ and poverty red ction"

promote e!c#ange rate stability and an open system of international payments" and

lend co ntries foreign e!c#ange &#en needed$ on a temporary basis and nder ade( ate safeg ards$ to #elp t#em address balance of payments problems%

'n ada&ting IMF

The IMF has e)ol)ed along .ith the global economy throughout its :1#year history( allo.ing the organi,ation to retain its central role .ithin the international financial architecture 8s the .orld economy struggles to restore gro.th and ;obs after the .orst crisis since the %reat $epression( the IMF has emerged as a )ery different institution. $uring the crisis( it mobili,ed on many fronts to support its member countries. It increased its lending( used its cross#country e*perience to ad)ise on policy solutions( supported global policy coordination( and reformed the .ay it ma+es decisions. The result is an institution that is more in tune .ith the needs of its 1>> member countries.

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Stepping up crisis lending. )#e *+, responded ( ickly to t#e global economic crisis$ &it# lending commitments reac#ing a record level of more t#an -./250 billion in 2010% )#is fig re incl des a s#arp increase in concessional lending 0t#at1s to say$ s bsidi2ed lending at rates belo& t#ose being c#arged by t#e market3 to t#e &orld1s poorest nations% Greater lending flexibility. )#e *+, #as over#a led its lending frame&ork to make it better s ited to co ntries1 individ al needs% *t is also &orking &it# ot#er regional instit tions to create a broader financial safety net$ &#ic# co ld #elp prevent ne& crises%

Providing analysis and advice. )#e *+,1s monitoring$ forecasts$ and policy advice$ informed by a global perspective and by e!perience from previo s crises$ #ave been in #ig# demand and #ave been sed by t#e 4-20%

Drawing lessons from the crisis. )#e *+, is contrib ting to t#e ongoing effort to dra& lessons from t#e crisis for policy$ reg lation$ and reform of t#e global financial arc#itect re%

Historic reform of governance.)#e *+,1s member co ntries also agreed to a significant increase in t#e voice of dynamic emerging and developing economies in t#e decision making of t#e instit tion$ &#ile preserving t#e voice of t#e lo&-income members%
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 Mem(ershi&: The IMF currently has a near#global membership of 1>> countries. To become a member( a country must apply and then be accepted by a ma;ority of the e*isting members. In 8pril 7'17( Aepublic of 6outh 6udan ;oined the IMF( becoming the institution-s 1>>th member.5pon ;oining( each member country of the IMF is assigned a =uota( based broadly on its relati)e si,e in the .orld economy. The IMF-s membership agreed in 3o)ember 7'1' on a ma;or o)erhaul of its =uota system to reflect the changing global economic realities( especially the increased .eight of ma;or emerging mar+ets in the global economy. Co a(orating +ith others: The IMF collaborates .ith the World 2an+( regional de)elopment ban+s( the World Trade Crgani,ation (WTC"( 53 agencies( and other international bodies. While all of these organi,ations are in)ol)ed in global economic issues( each has its o.n uni=ue areas of responsibility and speciali,ation. The IMF also .or+s closely .ith the %roup of T.enty (%#7'" industriali,ed and emerging mar+et economies and interacts .ith thin+ tan+s( ci)il society( and the media on a daily basis. .

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FUNCTION, OF IMF

INT"RN'TION'- MON"T'R. FUND :International Monetary Fund .as established in 194!. Follo.ing .ere the main ob;ecti)es of this fund. /0 To promote e*change rate stability among the different countries. 7. To ma+e an arrangement of goods e*change bet.een the countries. &.To promote short term credit facilities to the member countries. 10To assist in the establishment of International ?ayment 6ystem. 20 To ma+e the member countries balance of payment fa)ourable. 30 To facilitate the foreign trade.
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40 To promote The international monetary corporation. Management O# F!nd :The t.el)e member e*ecuti)e committee manages the affairs of IMF. Fi)e members are the representati)es of 5.F( 5.6.8( China( France and India. The remaining are elected by the other members countries. Its head office in in 5.6.8. ,o!r$e O# IMF :The initial capital of IMF .as >.1 billion dollar .hich .as contributed by the 49 members. The =uota of each member country .as fi*ed in proportion to the national income and )olume of foreign trade. D)ery country .as re=uired to pay in the form of gold and domestic currency.

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5O)"RN'NC" ,TRUCTUR"

The IMF-s mandate and go)ernance ha)e e)ol)ed along .ith changes in the global economy( allo.ing the organi,ation to retain a central role .ithin the international financial architecture. The diagram belo. pro)ides a styli,ed )ie. of the IMF-s current go)ernance structure.

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The 2oard of %o)ernors also elects or appoints e*ecuti)e directors and is the ultimate arbiter on issues related to the interpretation of the IMF-s 8rticles of 8greement. @oting by the 2oard of %o)ernors usually ta+es place by mail#in ballot. The 2oards of %o)ernors of the IMF and the World 2an+ %roup normally meet once a year( during the IMF#World 2an+ 6pring and 8nnual Meetings( to discuss the .or+ of their respecti)e institutions. The Meetings( .hich ta+e place in 6eptember or Cctober( ha)e customarily been held in Washington for t.o consecuti)e years and in another member country in the third year. The 8nnual Meetings usually include t.o days of plenary sessions( during .hich %o)ernors consult .ith one another and present their countries)ie.s on current issues in international economics and finance. $uring the Meetings( the 2oards of %o)ernors also ma+e decisions on ho. current international monetary issues should be addressed and appro)e corresponding resolutions. The 8nnual Meetings are chaired by a %o)ernor of the World 2an+ and the IMF( .ith the chairmanship rotating among the membership each year. D)ery t.o years( at the time of the 8nnual Meetings( the %o)ernors of the 2an+ and the Fund elect D*ecuti)e $irectors to their respecti)e D*ecuti)e 2oards.

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OR5'NI6'TION 7 FIN'NC",
The IMF has a management team and 1! departments that carry out its country( policy( analytical( and technical .or+. Cne department is charged .ith managing the IMF-s resources. This section also e*plains .here the IMF gets its resources and ho. they are used.

Huotas
Countries pay their =uota subscriptions in their o.n and ma;or currencies Dach member country-s =uota broadly reflects the si,e of its economyB the larger a country-s economy in terms of output and the larger and more )ariable its trade( the larger its =uota tends to be. For e*ample( the .orld-s biggest economy( the 5nited 6tates( has the largest =uota in the IMF. Huotas( together .ith the e=ual number of basic )otes each member has( determine countries- )oting po.er. They also help determine ho. much countries can borro. from the IMF and their share in allocations of special dra.ing rights or 6$As (the reser)e currency created by the IMF in 19:9". Countries pay 71 percent of their =uota subscriptions in 6$As or ma;or currencies( such as 5.6. dollars( euros( pounds sterling( or 0apanese yen. They pay the remaining !1 percent in their o.n currencies. The IMF-s lending resources come mainly from the money that countries pay as these =uota subscriptions .hen they become members.

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 6pecial $ra.ing Aights

Cnce 6$As ha)e been added to a member countryGs official reser)es( the country can )oluntarily e*change its 6$As for usable currencies. The 6pecial $ra.ing Aight (6$A" is an international reser)e asset( created by the IMF in 19:9 to supplement the e*isting official reser)es of member countries. The 6$A is neither a currency( nor a claim on the IMF. Aather( it is a potential claim on the freely usable currencies of IMF members. 4olders of 6$As can obtain these currencies in e*change for their 6$As in t.o .aysB first( through the arrangement of )oluntary e*changes bet.een membersI and second( by the IMF designating members .ith strong e*ternal positions to purchase 6$As from members .ith .ea+ e*ternal positions. In addition to its role as a supplementary reser)e asset( the 6$A ser)es as the unit of account of the IMF and some other international organi,ations. In addition to its role as a supplementary reser)e asset( the 6$A ser)es as the unit of account of the IMF and some other international organi,ations.

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 5o d The IMF holds a relati)ely large amount of gold among its assets( not only for reasons of financial soundness( but also to meet unforeseen contingencies. The IMF holds about 9'.1 million ounces( or 7(>14.1 metric tons( of gold at designated depositories. The IMF-s total gold holdings are )alued on its balance sheet at about E4.9 billion (6$A &.7 billion" on the basis of historical cost. The IMF-s holdings amount to about E1:' billion (as determined by end#February 7'17 mar+et prices".

2orro.ing 8rrangements
While =uota subscriptions of member countries are its main source of financing( the IMF can supplement its o.n resources by borro.ing if it belie)es that additional resources may be re=uired to meet members- needs. (photoB 3e.scom" If the IMF belie)es that its resources might fall short of members- needs/ for e*ample( in the e)ent of a ma;or financial crisis/it can supplement its o.n resources by borro.ing. It has had a range of bilateral borro.ing arrangements in the 19!'s and 19>'s. Currently it has t.o standing multilateral agreement. Through the 3e. 8rrangements to 2orro. (382" and the<J %eneral 8rrangements to 2orro. (%82"( a number of member countries and institutions stand ready to lend additional funds to the IMF. These credit arrangements bet.een the IMF and a group of members and institutions can pro)ide supplementary resources of up to roughly E7: billion (6$A 1!
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borro.ing

arrangements

and

one

bilateral

borro.ing

billion" under the %eneral 8rrangements and roughly E1:1 billion (6$A &!'.' billion" under the 3e. 8rrangements to the IMF to forestall or cope .ith an impairment of the international monetary system or to deal .ith an e*ceptional situation that poses a threat to the stability of that system. In 8pril 7''9( the %roup of T.enty industriali,ed and emerging mar+et economies agreed to triple the FundGs lending capacity to E!1' billion( enabling it to in;ect e*tra li=uidity into the .orld economy during this time of crisis. The additional support .ill come from se)eral sources( including contributions from member countries that ha)e pledged to help boost the FundGs lending capacity.

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IMF IN D")"-OPIN5 COUNTRI",

4orst faces immense challenges as the ne. Managing $irector of the International Monetary Fund (IMF". 2ut no challenge is more crucial than ma+ing sure the IMF plays the right role in de)eloping countries. Too often( it is not playing that role no.. The IMF-s acti)ities in the de)eloping .orld ha)e gro.n radically. Today( much of its .or+ goes beyond macroeconomic issues and crisis pre)ention and management( into deeper structural issues. 8nd as a ma;or pro)ider of long#term de)elopment finance( it is significantly in)ol)ed in efforts to reduce po)erty. 2ut the IMF lac+s e*pertise in the .ide#ranging policy and institutional comple*ities of de)elopment and po)erty reduction. Its e*pertise lies in macroeconomic policy and restoring stability amid financial crises. Macroeconomics is the same for poor and rich countries ali+e( as IMF First $eputy Managing $irector 6tanley Fischer has said. 2ut much of .hat the IMF is in)ol)ed in no. is not macroeconomics. The Fund should focus onB short#term li=uidity lending to all countries hit by macroeconomic crisesI ad)ising through policy dialogueI and collecting( assessing( and distributing information on countries .ith regard to macroeconomic policy and financial mar+ets. While poor countries need access to the Fund-s short#term lending and macroeconomic ad)ice( the IMF should lea)e long#term de)elopment lending to the World 2an+ and to other lenders and donors e*pert in po)erty reduction.

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The IMF in the ?oorest CountriesB# The Fund-s )ehicle for long#term lending to poor countries is its ?o)erty Aeduction and %ro.th Facility (?A%F"( formerly the Dnhanced 6tructural 8d;ustment Facility. 8s its name implies( the facility-s ne. goal is po)erty reduction. For t.o reasons( the Fund is not the right institution to manage this facility. First( .hile the IMF is uni=uely =ualified in macroeconomic analysis( it has not speciali,ed in po)erty reduction. Fifty years of .or+ on de)elopment cooperation teach one thing abo)e allB that reducing po)erty is an enormously comple* process re=uiring a different mi* of policies and institutions for each country. The IMF has e*pertise on an important set of these policies the macroeconomic ones but many other factors of po)erty reduction and gro.th (such as health( education( and institutional de)elopment" are outside its e*perience and realm of +no.ledge. 6econd( the IMF-s use of conditionality in its programs is far more effecti)e in short#term stabili,ation situations than in longer#term interactions .ith countries. In crises( there are steps countries can ta+e =uic+ly to restore stability. Though often politically difficult( the re=uired steps can be implemented and monitored o)er a relati)ely short period of time. 4o.e)er( the structural reform re=uired for long#term gro.th and po)erty reduction is a different story. It ta+es time and mediation through political institutions to ensure the country <o.nership< that ultimately determines .hether or not reforms are sustained.

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2ecause poor countries continue to need the financing pro)ided by the ?A%F( the facility should be mo)ed to the World 2an+ the international financial institution .ith e*pertise in de)elopment. The Fund should continue to play the lead role in analy,ing the macroeconomic components of these programs( .hile the 2an+ assumes o)erall responsibility and accountability for helping countries reconcile macroeconomic re=uirements .ith the other factors necessary for po)erty reduction and gro.th. This proposal recommended by an C$C Tas+ Force on the future role of the IMF in de)elopment carries to a logical conclusion the spirit of 5.6. Treasury 6ecretary 9a.rence 4. 6ummers- recent remar+s( .hen he argued that the IMF should ha)e a financing role more focused on pre)enting and managing crisesB <International financial institutions need to focus on core competencies. %oing for.ard( the IMF needs to be more tightly focused in its financial in)ol)ement .ith countries( lending selecti)ely and on short maturities.< (6ecretary 6ummers said nothing about the ?A%F being outside the Fund-s core competencies." 9i+e the C$C Tas+ Force( the 5.6. Congress#sponsored commission chaired by 8llan Melt,er also argued against IMF in)ol)ement in long#term lending. 2ut this led the Melt,er Commission to conclude the ?A%F should be closed. This .as misguided. ?A%F financing is needed by the poorer de)eloping countries( many of .hich ha)e )irtually no access to pri)ate capital.

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The IMF-s Cther Aoles in $e)elopmentB# 8pplying its reasoning to all IMF acti)ities( the C$C Tas+ Force also recommended that the Fund stop longer#term lending (beyond 1> months duration" to middle#income countries. This .ould mean that the Fund-s financial role in all de)eloping countries .ould lie in its regular short#term stand#by arrangements. This is the appropriate role of the IMF. 8s the Tas+ Force e*plained( the interest rates of these arrangements .ould ha)e to be subsidi,ed for the poorest countries. The IMF-s short#term lending for stability is itself a crucial contribution to de)elopment( since po)erty reduction and gro.th re=uire macroeconomic stability. 2ut the policies re=uired for stabili,ation can also hurt the poor (for e*ample( by cutting go)ernment spending". For this reason( the IMF should enlist the World 2an+-s help in assessing the li+ely impact of policies before they are instituted( so that negati)e impacts are minimi,ed. IMF policy conditions should be focused on reforms necessary to restore economic stability and( in effect( ensure timely repayment of the loans. The conditions should not e*tend to deeper structural issues( .hich are unnecessary to fulfill this role. The IMF has another critical role in de)elopmentB sur)eillance and policy ad)ice for countries during stability. These functions can be important contributions to the decision#ma+ing in de)eloping countries. With sur)eillance and policy ad)ice not bac+ed up by long#term lending( the relations bet.een the IMF and client countries .ould be more transparent( and probably more reassuring to pri)ate in)estors.
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8t present( .hen a country signs on to an IMF loan( it appears to be accepting the policy conditions only because of the money it .ill recei)e from the IMF and the 2an+ (.hich does not lend for ad;ustment to countries .ithout the IMF-s appro)al of the macroeconomic en)ironment". If the IMF-s ad)ice .ere not tied to lending( then a country-s policy reforms .ould be more credible to e*ternal in)estors. 2y the same logic( the implicit IMF )eto on World 2an+ lending for ad;ustment should be eliminated. With regard to the specific policy ad)ice the IMF gi)es( a number of lessons rele)ant to de)elopment ha)e been learned in the last decade( particularly from the recent financial crisis. The IMF should e*plicitly recogni,e and incorporate them. They includeB ta+ing an open( yet cautious approach to controls on inflo.s of short# term capitalI ac+no.ledging that e*change rate policy is faddish and that the appropriate e*change rate arrangement .ill )ary by a country-s circumstancesI approaching financial sector liberali,ation .ith cautionI and ac+no.ledging e*plicitly the potential tradeoff bet.een policies that fa)or economic stability and those that fa)or gro.thI countries should be a.are of these tradeoffs and ma+e their o.n choices.

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The Fund-s %o)ernanceB# The Fund-s continuing important role in de)eloping countries means that its go)ernance structure must change. In its early decades( many of the IMF-s borro.ers had a large )oice in the institution-s decisions. Today( the IMF-s main clients ha)e little influence o)er the institution. This lac+ of representation is harmful to the IMF-s effecti)eness( since client countries )ie. the Fund as dominated by rich countries and do not regard it as impartial. While this is not the only reason that Fund programs ha)e been less than successful in many de)eloping countries (certainly poor go)ernance is a ma;or factor"( it does play a role in .hether or not go)ernments are li+ely to buy into proposed policy reforms. The Fund-s 2oard should be realigned both to better reflect current economic realities and to gi)e more representation to the poorest countries( .hich are as li+ely as any to e*perience macroeconomic crises. Furthermore( in pursuit of a more broadly <o.ned< institution( no country should ha)e a )eto( as the 5nited 6tates no. does in a small but important set of issues. Mr. FKLhler is ta+ing the helm of an institution .ith a significant and important role to play in de)elopmentB ad)ising on and monitoring macroeconomic policy and restoring stability in crisis#hit countries. In the interests of the .orld-s poor( and in the interests of the effecti)eness of the institution itself( the IMF should maintain a tight focus on this role.

28

TH" CH'N5IN5 RO-" OF IMF

The IMF is .ell#positioned to help its members o)ercome the financing gaps resulting from the crisis. In the run#up to the %7' summit access to the Fund-s credit facilities .as increased and policy conditions .ere streamlined. In a .atershed .ith former practice( a ne. non#conditional credit line .as introduced for .ell#performing countries. Me*ico and ?oland .ill be its first users and more countries .ill line up. These more fle*ible lending policies reflect a ne. image of the IMF. The negati)e stigma attached to IMF financing is a thing of the past. Its financing role in this crisis secured( the IMF no. needs to strengthen its position as guardian of an open international financial system. The IMF .as created to pre)ent crises li+e the current one and in this it has failed. 8dmittedly( there .ere .arnings( but policyma+ers( particularly in ad)anced countries( did not follo. suit. The -ne.- IMF should be an institution that communicates better .ith its members( balances the interests of its ad)anced( emerging and de)eloping members in an e)en#handed manner( and aligns its policies better to the needs of the moment. 3o. that the IMF has been gi)en a second lifetime( it needs to regain its central position in the international financial system. For this( it needs to focus on three issuesB impro)ed sur)eillance of financial stability( strengthened international coordination( and an updated decision#ma+ing process.

29

The ne. IMF needs to become more )ocal on global financial stability issues. The IMF should see to it that there are no gaps in the sur)eillance of financial institutions. It can help shape a more robust global super)isory system .hich needs to be built in order to preser)e the benefits of global financial mar+ets. 8nd it should help de)elop a )ision on .hat the future financial landscape should loo+ li+e. To this end IMF sur)eillance should include regular updates on super)isory regimes in systemically important countries. Darly .arnings( commissioned by the %7'( should be specific and the IMF should monitor .hether policyma+ers gi)e follo.#up to the Fund-s ad)ice. The %7' summit mar+ed the return of the 5nited 6tates to multilateralism. This acceptance of collecti)e responsibility should come .ith abandoning 56 )eto po.er in the IMF by lo.ering re=uired )oting ma;orities( as .ell as abandoning Durope-s prerogati)e of appointing the managing director. Cne of the strengths of the IMF-s present go)ernance structure( the constituency system( should be duplicated at the %7' as .ell( so as to ensure inclusi)eness. The rapid gro.th of China( India( and other emerging countries should come .ith increased influence( to be implemented through the planned =uota increase in 7'11. 8d)anced countries( including Duropean countries( .ill see a relati)e decrease in )oting po.er. 8n increased say for emerging economies .ill imply ta+ing more international responsibility as .ell( also in financial terms.

30

3o. Duropean countries finance 47M of IMF lending and :7M of concessional World 2an+ lending. This tas+ .ill ha)e to be shared by emerging countries .ith large reser)es. These reser)es are put to better use by assisting the IMF in maintaining an open and stable financial system and pre)ent crises li+e these from recurring.

T'C*-IN5 CURR"NT CH'--"N5",

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The global economic crisis created the .orst recession since the %reat $epression of the 19&'s. The crisis began in the mortgage mar+ets in the 5nited 6tates in 7''! and s.iftly escalated into a crisis that affected acti)ity and institutions .orld.ide. The IMF mobili,ed on many fronts to support its member countries( increasing its lending( using its cross#country e*perience to ad)ise on policy solutions( and introducing reforms to moderni,e its operations and become more responsi)e to member countriesG needs. 8s the ape* of the crisis shifted to Durope( the Fund has become acti)ely engaged in the region and is also .or+ing .ith the %#7' to support a multilateral approach. 4ereGs some of the issues that top the agendaB

,te&&ing !& $risis ending

8s part of its efforts to support countries during the global economic crisis( the IMF has beefed up its lending capacity. It has appro)ed a ma;or o)erhaul of ho. it lends money by offering higher amounts and tailoring loan terms to countriesG )arying strengths and circumstances. More recently( further reforms strengthen the IMFGs capacity to respond to and pre)ent crises. In particularB

$oubling of lending access limits for lo.#income member countries and streamlining procedures to reduce percei)ed stigma attached to borro.ing from the Fund Introducing and refining a Fle*ible Credit 9ine (FC9" for countries .ith robust policy frame.or+s and a strong trac+ record in economic performanceI a ?recautionary and 9i=uidity 9ine (?99" for countries
32

that ha)e sound economic policies and fundamentals( but are still facing )ulnerabilitiesI and a Aapid Financing Instrument (AFI" for countries facing an urgent financing need but that do not need a full# fledged economic program

Moderni,ing conditionality to ensure that conditions lin+ed to IMF loan disbursements are focused and ade=uately tailored to the )arying strengths of membersG policies

Focusing more on social spending and more concessional terms for lo.#income countries

The IMF has committed more than E&'' billion to crisis#hit countries/ including %reece( Ireland( ?ortugal( Aomania( and 5+raine/and has e*tended credit to Me*ico( ?oland( and Colombia under a ne. fle*ible credit line. The IMF is also stepping up its lending to lo.#income countries to help pre)ent the crisis undermining recent economic gains and +eep po)erty reduction efforts on trac+.

' &artner in "!ro&e

The IMF is acti)ely engaged in Durope as a pro)ider of policy ad)ice( financing( and technical assistance. We .or+ both independently and( in
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Duropean 5nion countries( in cooperation .ith Duropean institutions( such as the Duropean Commission and the Duropean Central 2an+ as part of the so#called troi+a. The IMF-s .or+ in Durope has intensified since the start of the global financial crisis in 7''>( and has been further stepped up since mid#7'1' as a result of the so)ereign debt crisis in the euro area. The IMF has recommended that Durope focus on structural reforms to boost economic gro.th( such as product and ser)ices mar+et reforms( as .ell as labor mar+et and pension changes. The IMF has also urged euro,one members to ma+e a more determined( collecti)e response to the crisis by ta+ing concrete steps to.ard a complete monetary union( including a unified ban+ing system and more fiscal integration. Aead our Factsheet on Durope and )isit our .ebpage that pulls together IMF information about Durope. 6ee also article on fi*ing the fla.s in DM5.

,!&&orting o+-in$ome $o!ntries

The IMF has upgraded its support for lo.#income countries( reflecting the changing nature of economic conditions in these countries and their increased )ulnerabilities due to the effects of the global economic crisis. It has o)erhauled its lending instruments( especially to address more directly countries- needs for short#term and emergency support. The IMF support pac+age includesB

Mobili,ing additional resources( including from sales of an agreed amount of IMF gold( to boost the IMFGs concessional lending capacity to up to E1! billion through 7'14( including up to E> billion
34

in the first t.o years. This e*ceeds the call by the %roup of T.enty for E: billion in ne. lending o)er t.o to three years.

?ro)iding interest relief( .ith ,ero payments on outstanding IMF concessional loans through end#7'17 to help lo.#income countries cope .ith the crisis.

Commiting resources to secure the long#term sustainability of IMF lending to lo.#income countries beyond 7'14.

Rein#or$ing m! ti atera ism

The 7''> global financial crisis highlighted the tremendous benefits from international cooperation. Without the cooperation spearheaded by the %roup of T.enty industriali,ed and emerging mar+et economies (%#7'" the crisis could ha)e been much .orse. 8t their 7''9 ?ittsburgh 6ummit %#7' countries pledged to adopt policies that .ould ensure a lasting reco)ery and a brighter economic future( launching the <Frame.or+ for 6trong( 6ustainable( and 2alanced %ro.th.< The bac+bone of this frame.or+ is a multilateral process( .here %#7' countries together set out ob;ecti)es and the policies needed to get there. 8nd( most importantly( they underta+e to chec+ on their progress to.ard meeting those shared ob;ecti)es/done through the %#7' Mutual 8ssessment ?rocess or M8?. 8t the re=uest of the %#7'( the IMF pro)ides the technical analysis needed to e)aluate ho. membersG policies fit together /and .hether( collecti)ely( they can achie)e the %#7'Gs goals.
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The IMFGs D*ecuti)e 2oard has also been considering a range of options to enhance multilateral( bilateral( and financial sur)eillance( and to better integrate the three. It has launched Nspillo)er reportsO for the fi)e most systemic economies/China( the euro area( 0apan( 5nited Fingdom( and the 5nited 6tates/to assess the impact of policies by one country or area on the rest of the .orld. The IMF recently strengthened the .ays in .hich it +eeps an eye on country economies .ith its global analysis( and as Managing $irector Christine 9agarde has stressed( the IMF must continue to pay more attention to understanding interconnectedness and incorporating this understanding into ris+ and policy analysis.

,trengthening the internationa monetary system The current International Monetary 6ystem/the set of internationally agreed rules( con)entions( and supporting institutions that facilitate international trade and cross#border in)estment( and the flo. of capital among countries/has certainly deli)ered a lot. 2ut it has a number of .ell# +no.n .ea+nesses( including the lac+ of an automatic and orderly mechanism for resol)ing the buildup of real and financial imbalancesI )olatile capital flo.s and e*change rates that can ha)e deleterious economic effectsI and related to the abo)e( the rapid( unabated accumulation of international reser)es( concentrated on a narro. supply. 8ddressing these problems is crucial to achie)ing the global public good of economic and financial stability( by ensuring an orderly rebalancing of demand gro.th( .hich is essential for a sustained and strong global reco)ery( and reducing systemic ris+. The IMFGs recent re)ie. of its
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mandate and resultant reforms/to sur)eillance and its lending tool+it/go some .ay to.ards addressing these concerns but further reforms are being pursued. Im& ementing organi8ationa $hanges The IMF must represent the interests of all of its 1>> member countries( from its smallest shareholder Tu)alu( to its largest( the 5nited 6tates. 5nli+e the %eneral 8ssembly of the 5nited 3ations or the World Trade Crgani,ation( .here each country has one )ote( decision ma+ing at the IMF .as designed to reflect the position of each member country in the global economy. Dach IMF member country is assigned a =uota that determines its financial commitment to the IMF( as .ell as its )oting po.er. In recent years( emerging mar+et countries such as China( India( 2ra,il( and Aussia ha)e e*perienced strong gro.th and no. play a larger role in the .orld economy. In $ecember 7'1'( the IMF agreed on reform of its frame.or+ for ma+ing decisions to reflect the increasing importance of emerging mar+et and de)eloping economies. When fully implemented( the reforms .ill produce a shift of more than : percent of =uota shares to dynamic emerging mar+et and de)eloping countries. The reform contains measures to protect the )oice of the poorest countries in the IMF. Without these measures( this group of countries .ould ha)e seen its )oting shares decline.

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The reform .ill enter into force once three fifths of the IMFGs membershipP.hich currently amounts to 11& countriesP representing >1 percent of total )oting po.er ha)e accepted the proposed amendment.

CONC-U,ION
The International Monetary Fund (IMF" in the e)ol)ing global financial system from the perspecti)e of de)eloping country interests. It finds that on certain issues( such as the scope and purposes of its lending operations( a consensus has been reached that IMF should continue
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to ser)e all its members( including the poorest( and that its resources should be a)ailable for supporting macro#rele)ant structural reforms as .ell as for dealing .ith financial crises. Cn a number of other issues( there remain differences bet.een industrial and de)eloping country )ie.s( including on the e*tension of IMF sur)eillance to co)er the obser)ance of international standards and codes. 9argely unsettled are the modalities of the in)ol)ement of the pri)ate sector in crisis resolution( .ith special reference to the de)elopment of arrangements in the international sphere that .ould be analogous to domestic ban+ruptcy procedures( including the declaration of standstills and principles for orderly and e=uitable debt .or+outs. The liberali,ation of the capital account and the choice of e*change regimes are t.o interconnected areas in .hich international prescriptions conflict .ith de)eloping country insistence on the preser)ation of national autonomy and in fa)our of intermediate regimes( as opposed to corner solutions. The scope and content of IMF conditionality raises the issue of ho. to reconcile it .ith the importance of assuring country o.nership. Finally( the go)ernance of IMF poses =uestions about the e*ercise of decision#ma+ing po.ers in the institution. $e)eloping country positions are e)ol)ing in all these areas( especially on the sub;ect of pri)ate#sector in)ol)ement in financial crisis pre)ention and resolution. 4o.e)er( there appears to be a general preference for a more rules#based frame.or+( rather than one deri)ed on a Ncase#by#caseO basis. There are four areas of great interest to de)eloping countries .here the international debate has remained muted or has been largely absent in the recent literatureB these relate to the sur)eillance o)er( and coordination of( the macroeconomic policies of the three principal international currency issuersI the relationship of international and regional
39

arrangementsI the distribution of )oting po.er in both IMF and the international system generally( and the future e)olution of the international reser)e system.

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