The contradiction of views at the mention of IMF-International Monetary Fund, paints an antagonistic sentiment about this Bretton Wood institution that was established in 1944 after the second world war and charged to oversee the monetary system to prevent self-defeating financial policies. The IMF would ensure that exchange rate stability is maintained and encourage its member countries to eliminate exchange restrictions that could potentially hinder or complicate trade. In March 1947,France became the first country to borrow from the IMF.
What really should a person know about the IMF and its dealings with nations
The IMF works to achieve sustainable growth and prosperity for all of its 190 member countries. It does so by supporting economic policies that promote financial stability and monetary cooperation.
The International Monetary Fund assists countries hit by crisis by providing them financial support to create breathing room so they can implement adjustment policies that will restore economic stability and growth. The fund also provides precautionary financing to help prevent and insure against crisis by providing tailor made lending facilities to meet countries changing needs.
The IMF’s three main roles are: Economic surveillance- Providing member countries with advice on adopting policies to achieve macroeconomic stability, accelerate economic growth, and alleviate poverty; Lending- Making financing available to member countries to help address balance of payments problems, including foreign exchange shortages that occur when external payments exceed foreign exchange earnings; Capacity development– Delivering capacity development (including technical assistance and training), when requested, to help member countries strengthen their economic institutions to design and implement sound economic policies.
We can liken the role of the IMF to that of a medical professional who through diagnosis and prescription helps patients regain their health. The natural way for a person to stay healthy is by eating balanced meals and getting involved in exercises, etc., but in times of crisis, doctors recommend medication to rejuvenate the body. This is similar to what the IMF stands to do for economies which are in crisis.
And just us the patient is not intended to stay perpetually on medication in order to stay healthy, so do economies need not stay perpetually on an IMF program, since the support they provide are supposed to be within timelines, in order for economies to get back on track and do the needful for robust growth.
Crisis in economies arises mainly due to two factors: domestic and external factors or both. The domestic factors comprise inappropriate fiscal and monetary policies that lead to large economic imbalances like fiscal deficits, high levels of external or public debt, current account deficits, loss of official reserves, weak financial system, and Political instability. These are self-induced crisis that worsens economic vulnerabilities.
Crisis emanating from external factors include shocks from natural disasters, spikes in commodity prices, and capital flow volatility due to sudden change in market sentiment. These external effects affect all economies alike, but their impacts are higher on low-income economies because they depend on a narrow range of export products and have limited capacity to prepare for such shocks. The COVID-19 pandemic and the Russia-Ukraine war are clear examples of external shocks.
Going by the doctor-patient relationship, the usual behaviour patients exhibit is to visit the hospital only when the symptoms persist or when it gets to an acute stage. By the time most countries approach the IMF, they are usually faced with multiple crisis or challenges that spreads throughout the economy and slows growth, causing higher unemployment, lower incomes, and greater uncertainty, and almost at the brink of a deep recession.
Tailor-made lending approach
The IMF in their bid to salvage the situation provides financial assistance and guides governments to ensure responsible spending. They do this by providing tailor made loans, which in the case of low-income countries carry zero interest rates. The policies they provide are tailor-made, so they are country specific. For example, a country facing a sudden drop in prices of key exports and another country suffering from severe capital outflows, need different specific assistance that will widen one’s export base and address the loss of investor confidence in the other. The IMF provides the needed financial assistance and works with governments to ensure responsible spending.
However, with an IMF financing program, countries are assured of gradual and carefully considered adjustment through sets of corrective policy actions that provide a seal that appropriate policies are taking place.
The lending Instruments
In the bid to make this tailor-made lending possible, the IMF provides sets of lending instruments based on the different types of balance of payment. IMF member countries have access to resources either through the General Resource Account (GRA) or the Poverty Reduction and Growth Trust (PRGT). The resources are made up of its members’ quotas so the Fund therefore functions like a credit cooperative, making its resources available to members on a temporary and revolving manner. GRA-supported programs are expected to resolve the member’s Balance of Payment problems during the program period, while PRGT programs envisage a longer duration for addressing Balance of Payment problems.
The lending arrangements that provide access to resource accounts could be through the Stand-By Arrangements (SBA’s) or Stand-by Credit facilities (SCF)- which addresses short term balance of payment problems; Extended Fund Facility (EFF) or Extended Credit Facility (ECF)- the fund’s main tools for medium-term support since the global financial crisis; RFI (Rapid Financing Instrument) and the corresponding RCF(Rapid Credit Facility) – which provides rapid assistance to countries with urgent balance of payments needs like commodity price shocks, natural disasters, and domestic fragilities; FCL (Flexible Credit Line) or PLL(Precautionary and Liquidity Line)- helps to mitigate crisis and boost market confidence during periods of heightened risks; and PSI (Policy Support Instrument) or PCI (Policy Conditional instrument).
The EFF- Extended Fund Facility, is usually a 3–4-yeararrangement that aids countries to correct serious medium-term balance of payments problems because of structural weaknesses, slow growth, that require time to address. The engagement and repayment cover longer periods than most fund arrangements as repayments can be over 4½- 10years. The size of borrowing is guided by the country’s needs, capacity to repay, and track record with IMF resources. IMF member countries have either Normal access to the General Resource Account (GRA), which is 145% annually of a country’s IMF quota, which has been temporarily increased to 245% as part of the Fund’s COVID-19 response, or the Extended access which is above normal limits and decided on a case-by-case basis.
The ECF- Extended Credit Facility, under the Poverty Reduction and Growth Trust (PRGT), is a 3–5-year instrument, and considered the Fund’s main tool for providing medium-term support to Low Income Countries(LIC’s) that face protracted balance of payments problem by supporting countries’ economic programs that lead to stable and sustainable macroeconomic position with strong and durable poverty reduction and growth that help catalyse additional foreign aid. The normal access to concessional financing is limited to 145% of quota, and total outstanding concessional credit to 435% of quota, but can be exceeded in exceptional circumstances provided the PRGT exceptional access criteria are satisfied.
ECF Applicants agree to implement a set policy described in the country’s letter of intent that will help them make progress over the medium term. Access to ECF financing is determined on a case-by-case basis, guided by the balance of payment need, strength of the country’s economic program, capacity to repay, amount of outstanding Fund credit and the member’s record of fund credit.
The IMF’s ECF program conditionality is expected to be prudent and focused on policy actions aligned with the country’s own development strategy laid out in a Poverty Reduction and Growth Strategy document.
Special Drawing Rights as unit of account
In 1969 The IMF created the Special Drawing Rights as an international reserve asset to supplement its member countries’ official reserves and to allow participants to exchange SDRs for freely usable currencies. The SDR is neither a currency nor a claim on the IMF but rather serves as the unit of account and a potential claim on the freely usable currencies of IMF members.
The value of the SDR is currently based on a basket of five currencies: the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound. The currencies included are reviewed periodically and the next review of the valuation of the SDR basket is scheduled to occur by the end of July 2022. As of April 30, 2021, the SDR/US dollar exchange rate wasUS$1 = SDR 0.696385, and the US dollar/SDR exchange rate was SDR 1 = US$1.43599
The Request Process
Unlike development banks, the IMF does not lend for specific projects. They provide financial support for balance of payments needs upon request by its member countries.
The first step in seeking IMF bailout is to submit a letter of intent to the fund, which includes the selection, designing and implementing policy programme submitted to the Fund’s executive board after initial discussions in a detailed Memorandum of Understanding.
Once the understanding has been reached on policies and financing package, a recommendation is made to the IMF’s Executive board to endorse the country’s policy intentions and extend access to IMF resources.
Typically, a country’s government and the IMF must agree on a programme of economic policies before the IMF provides lending to the country. A country’s commitments to undertake certain policy actions, known as policy conditionality, are in most cases an integral part of IMF lending.
Progress is typically reviewed by monitoring the implementation of the policy actions. However, for some arrangements, countries can use IMF resources with no or limited conditionality if they have already established their commitment to sound policies or where they are designed for urgent and immediate needs.
IMF criticism and success stories
IMF has had some successes, but the failures of the IMF tend to be widely publicised. Also, criticism tends to focus on short-term problems and ignores the longer-term view. IMF loans have helped many countries avoid liquidity crisis, such as Mexico in 1982 and more recently, Greece and Cyprus who received IMF loans. The fact there is a lender of last resort provides an important confidence boost for investors. This is important during the current financial turmoil.
Another notable thing to note is that it is countries who approach the IMF for a loan and assistance and that suggest there must be at least some benefits since countries are not obliged to take an IMF loan.
To create international liquidity, Special Drawing Rights(SDRs)—an artificial currency— were created in 1969 as foreign exchange reserves to benefit member countries to finance the Balance of Payment deficits.
The IMF has assisted its members in the formulation of appropriate monetary, fiscal and trade policies.
Over time, the range of criticisms, have generally focused on the policy conditions of its loans which tend to cause higher taxes and lower spending, higher interest rates in the bid to stabilise the currency, allowing firms to go bankrupt and the structural adjustments with interventions that can make the already difficult economic situation get worse. Moreover, there are the exchange reform criticism like the interventions in Kenya in the1990’s, criticism of allowing inflationary devaluations, neo-liberal policies such as privitisation, being too interventionist rather letting the free market operate without interventions, lack of transparency by imposing policies on countries, lack of accountability and willingness to lend to countries with bad human rights records. There is also a criticism that bailing out countries with large debt creates moral hazard, because the possibility of getting bailed out, encourages countries to borrow more.
The response to this is that, because the Fund deals with economic crisis, whatever policy they offer are likely to pose some difficulties – it is not possible to deal with a balance of payment without some painful adjustment. Also, sometimes countries may want to undertake painful short-term adjustment but there is lack of political will, so the IMF becomes the easy target to secure a loan and then pass the blame on to the IMF for the difficulties.
The IMF has been and continues to be quintessentially important monetary cornerstone of the international global economy and is responsible for many of the world’s most comprehensive and influential economic decisions of the 20th and 21st centuries.
Without the IMF, the global economy would be a drastically different place.
