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What Is the IMF (The International Monetary Fund)?

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What Is the IMF (The International Monetary Fund)?

The IMF seeks to stabilize world currencies and prevent another global economic crisis. (Photo Credit: Chung Sung Jun/Getty Images)

The IMF, or International Monetary Fund, is an organization of 187 member countries. Their goal is to work with the Fund to stabilize the global economy by cooperating in practices which achieve that aim. Ideally, these countries are willing to forfeit some of their sovereign authority if it is necessary to strengthen the global economy.

In return, the IMF helps its members by:

  • Surveying global economic conditions.
  • Advising member countries on methods to improve their economy.
  • Providing short-term loans to avoid currency instability.
Since the IMF does lend money, it is often confused with the World Bank. The Bank's purpose is to lend money to developing countries for specific projects that will fight poverty. The IMF, on the other hand, only provides loans if it will help prevent a global economic crisis. Its overall goal is to prevent these crises through guidance to, and cooperation among, its members.

Who Runs the IMF?:

The IMF is governed a Board consisting of the finance minister or central bank leader of each member countries. They meet annually, in conjunction with the World Bank. Another committee, the International Monetary and Financial Committee, or the IMFC, meets twice a year to review the international monetary system and make recommendations. The day-to-day work of the IMF is carried out by the Executive Board, who appoints the IMF's Managing Director to a renewable five-year term.

In 2011, the IMF was rocked by a sex scandal involving its Executive Director, Dominique Strauss-Kahn. He was arrested while visiting New York on allegations he sexually assaulted a maid in a hotel there. Although the charges were subsequently dropped, he resigned. Many emerging market IMF members argued that it was time for a representative from one of their countries be named director. This reflects the growing power of these countries, which are contributing a larger share of global economic growth. The IMF had just agreed to transfer 6% of voting power to emerging market countries in 2010.

Many excellent candidates were proposed, including: Singapore Finance Minister Tharman Shanmugaratnam, former Turkish Economic Minister Kemal Dervis and India's Montek Singh Ahluwalia, a former IMF director. However, France was allowed to replace Strauss-Kahn with its highly respected Finance Minister, Christine LaGarde.

Importance of the IMF:

The importance of the IMF has increased since the onset of the 2008 global financial crisis. In fact, an IMF surveillance report warned about the economic crisis, but was ignored. As a result, the IMF has been called upon more and more to provide global economic surveillance. It's in the best position to do so because its requires members to subject their economic policies to IMF scrutiny. Member countries also committed to pursue policies that are conducive to reasonable price stability, and avoid manipulating exchange rates for unfair competitive advantage.

IMF Advises Member Countries:

Since the Mexican peso crisis of 1994–95 and the Asian crisis of 1997–98, the IMF has taken a more active role to help countries prevent financial crises. It develops standards that countries should follow, such as providing adequate foreign exchange reserves in good times to help provide for increased spending during recessions. It reports on members countries' observance of these standards. It also issues member country reports that investors use to make well-informed decisions, improving the functioning of financial markets, and reducing potential financial shocks.

IMF Provides Short-term Loans:

The Fund provides loans to help its members tackle balance of payments problems, stabilize their economies, and restore sustainable growth. Unlike the World Bank and other development agencies, the IMF does not finance projects.

Traditionally, most IMF borrowers were developing countries which have only limited access to international capital markets, partly because of their economic difficulties. Since IMF lending signals that a country's economic policies are on the right track, it reassures investors and can act as a catalyst for attracting funds from other sources.

This shifted in 2011, when the eurozone crisis prompted the IMF to provide short-term loans to developed markets to bail out Greece. This was within the IMF's charter, however, since it prevented an even worse global economic crisis.

History of the IMF:

The International Monetary Fund (IMF), like the World Bank, was conceived at the Bretton Woods conference that sought to rebuild Europe after World War II. Unlike the Bank, its goal was to help countries maintain the value of their currencies without resorting to trade barriers and high interest rates. These were seen as a major cause of the Great Depression.
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