Finance: International Monetary Fund

Introduction

The International Monetary Fund (IMF) was established in 1945 with its headquarters in Washington, D.C. Presently, it has a membership of 187 countries to which it is accountable. The core function of the institution is to foster international cooperation in the monetary issues, facilitating international trade, securing financial stability, promoting high employment, and sustaining economic growth. Importantly, the core purpose of the IMF is to ensure that the monetary system is stable internationally.

For that matter, stability in the monetary system is desired to prevent the vicious cycle of crises in the financial industry. The institution performs this function by reviewing national, regional, and international monetary policies through a surveillance system (Shefrin, 2009). Moreover, the institution provides technical assistance to aid its member states in strengthening their potential in developing and implementing good economic policies.

The rationale behind setting up of IMF

The IMF has a significant role in the global financial industry. Therefore, the rationale behind its formation revolves around the surveillance function of the financial issues globally. For instance, in the recent global financial crunch of 2008, the institution released a surveillance report that warned major financial players of the impending global financial crisis (Shefrin, 2009). However, the report was not taken seriously hence the occurrence of the crisis in that year. For that matter, the setting up of this institution can be justified since it is intended to prevent such kind of financial crisis from occurring since they end up being costly to the entire globe.

Additionally, the rationale for setting up the institution can also be derived from the advisory role that it plays to its member countries. About this, IMF issues its members with reports that advise them on the best decision to make about investment (Mankiw, 2010). For instance, it issues its members with advisory reports that potential investors should use to improve their financial markets’ functioning. As a result, this helps to reduce the effect of financial shocks that may be threatening in the financial markets.

Furthermore, it is a justifiable reason for the setting up of the IMF as a loaner in the global financial market. The institution was set up to provide loans to its members to help them solve problems of balance of payment which helps them in stabilizing their economies to have sustainable growth. This has been important to third-world countries which have limited access to the global financial market.

Classification of countries by IMF

Classification of countries by the IMF follows a classification system which is based on the Human Development Index (HDI) which was launched in 1990 (Fight, 2006). The HDI uses three facets to classify its member states. These facets include longevity achievement, income, and education level. For that matter, the Gross National Income per capita of the member countries is used to determine their income levels.

Therefore, countries have been classified according to their development status. For example, members are classified as advanced economies, emerging economies, or developing economies. Consequently, most sub-Saharan Africa and East Asia are classified as developing countries. Latin America and some of East Asia are classified as middle-level income. On the other hand, Europe and central Asia are classified as the high-income level which the US, Canada, Britain, France, Germany, Russia, and Japan leading the pack (Fight, 2006).

Nonetheless, for a member state to be classified as a low-income level, its Gross National Income is usually placed at 975 US dollars or less, middle-level income placed at 11, 905 US dollars or less while high-income levels are put at 11,905 or more. For that case, the IMF uses this classification system to leverage the financial market to all its players by formulating sound policies for smooth financial performance.

Types of Projects that are financed by IMF

The IMF usually finances various categories of projects in their member countries. For instance, they provide concessional loans which are normally given to low-income members for poverty eradication projects and also for growth facilities. These kinds of projects are normally financed since they are in line with the core function of the institution which is concerned with stabilizing the economy of member countries.

Furthermore, the IMF also assists member countries when they are faced with armed conflicts and natural disasters (Fight, 2006). For that matter, the institution provides emergency assistance to help member states in attaining the balance of payment on these demanding occasions. Moreover, in the case of these conditions, the IMF provides funds without the need for the conditionality of the program. In addition, the institution also provides policy advice and technical assistance in such cases.

Procedure to be completed to get financial assistance from IMF

Financial assistance provided by IMF to its member countries follows given procedures which members need to obey to the latter to be eligible for the assistance. Nonetheless, the core purpose of providing this assistance is for the member counties to fix maladjustment in their payment balance. This may be a result of natural disasters, trade shocks, and situations resulting from post-conflict, poverty reduction, and currency crises problems. For that matter, the institution has come up with procedures that are usually followed for a member to get financial assistance.

For that case, the institution assesses every situation for financial institutions before granting any assistance. Therefore, after a member country presents its request for assistance, the IMF analyzes the strength of the fundamentals and policies of the applicant nation (Yescombe, 2002). Thereafter, the institution discusses with the recipient country the best policies that can help it to overcome the problem in question. Subsequently, the funds are then dispersed in installments throughout the life of the project in question. This helps to ensure that the set targets are being met.

Financial assistance provided during 2005- 2010 period

The IMF provides financial assistance to its member countries whenever they have a pressing need in their financial operation. For instance, financial assistance may entail the provision of technical help that is intended to solve the financial problems of the member states. As a result of this, the IMF has provided various financial assistance in a period spanning from 2005 to 2010. For example, Niger which has a gross domestic product of 230 US dollars has suffered from insufficient human capital, political turbulence, and a weak economic base plus unproductive natural conditions (Yescombe, 2002).

As a result, the IMF started a poverty eradication program in Niger to stabilize its economy in this period. Consequently, economic performance started to get stronger in this period as the agricultural sector recorded strong performance. This has resulted in a reduction in the fiscal deficit hence reducing its budgetary grants.

In addition, the IMF has been involved heavily in financing member countries that have been at war in recent times. About this, Afghanistan which is among the poorest nations in the world has been in the war for more than a decade. As a result of overstretched war, institutions and infrastructure were in disarray. The IMF has therefore been at the forefront in rebuilding the country. It does this by providing financial assistance that is necessary for improving the conditions of the war-torn country (Yescombe, 2002).

Moreover, the IMF has been of great importance to the Sub-Saharan countries since the region is comprised of low-income nations. As a result, the institution has played and continues to play a more significant role in this region by providing the much desired financial assistance. For that matter, the IMF has come up with several programs that are designed to reduce the level of poverty in this region. For instance, the institution has come up with agricultural projects in this region in which it provides financial and technical assistance in the effort of stabilizing its food production (Fight, 2006). For that case, it must be acknowledged that the IMF has heavily provided financial assistance to its member countries especially the poor states.

Management Board of IMF

The management board of IMF is an organ of the institution which is responsible for its day-to-day operation. It is made up of the twenty-four (24) directors appointed by member states. Moreover, the board has a managing director who serves as its chair. The managing director is normally chosen by the directors and he is concerned with the daily business of the institution. This board meets several occasions in a week and it deliberates largely on the reports prepared by its management and staff.

Nonetheless, the powers of the institution are normally with its board of governors where all countries are represented (IMF, 2009). Usually, each member country’s finance minister, the head of its central bank, or any high-ranking government official can serve as its governor. For that matter, the principle of one member one vote applies to the board of governors. Nonetheless, multiple votes are given to member states with larger quotas in fund contributions. Therefore, this means that the more a member contributes to the fund’s resources the more powerful it is in decision making through voting.

Role of IMF

The IMF plays numerous roles in the effort of achieving stability and growth in the international economy. However, these roles can be categorized into three major areas of financial assistance, technical assistance, and surveillance. Therefore, any function of this body falls in one of the three major roles.

For instance, in its surveillance role, the institution normally serves as the watchdog over the economic policies of its member countries. This means that every member country usually consults with the institution regularly about their current and future policy changes which may have effects domestically or internationally (IMF, 2009). Through this role, the institution can promote transparency and coordination in the economic policy internationally. This is geared towards achieving international stability.

Moreover, technical assistance is another role of the IMF. This role consumes the biggest percentage of the daily operation of the institution. It provides fiscal consultation and technical expertise to stabilize and strengthen the currency values of member states (IMF, 2012). However, the technical assistance extends to other areas such as education to improve leaving standards in its member countries.

Importantly, the IMF plays a role in providing its members with financial assistance, especially those going through economic crises. This involves the provision of loans and credits for members with a severe problem of balance of payment which leads to their currency devaluation. This has seen many countries stabilize from economic crises. For instance, in 1995, Mexico was faced with economic crises that resulted in a devaluation of its currency. However, the IMF came to its aid by proving financial assistance that stabilized its economy.

Problems Facing IMF

Importantly, according to Yescombe (2002), despite the huge contribution of IMF in the global economy, several problems affect it. However, it must be noted that these challenges are intertwined hence they have adverse effects on the smooth operation of the institution. These problems in the long run hurt the mandate of the institution.

About this, it is acknowledged by Mankiw, (2010) that sovereign debt presents itself as the biggest problem. For instance, it was postulated by Yescombe (2002) that the fiscal problems in Europe have had risks that were brought about by incompetent economic policies. For that case, it resulted in economic crises in the whole of the Euro area.

In addition, it was acknowledged by Esteban, Buljevich, and Park (1999) that unbalanced economic growth among member states is also a major problem that faces the institution. For instance, the average economic growth for the year 2012 is reasonably expected to be at 4 percent. However, there exist different economic environments that are unbalanced among member states since some of them stagger due to surging currencies. For that reason, some of the member countries especially from the Horn of Africa have been largely affected by food security crises (Mankiw, 2010). For that reason, IMF faces problems in dealing with the unbalanced economic growth rate to attain durable, strong, and inclusive growth in all of its member countries.

Moreover, social instability is another problem that IMF is finding it hard to perform its role and discharging its mandate. For instance, in North Africa and the Middle East, the countries experienced political upheaval due to social imbalance in 2011 which has been a problem for institutions such as IMF to discharge their roles.

Organizational structure

Diagrammatic representation of the organizational structure of IMF
Figure 1: diagrammatic representation of the organizational structure of IMF (IMF, 2012).

Conclusion

To wind up, it is important to acknowledge that the IMF is playing an important role in the world financial performance. This can be attributed to its three core functions of surveillance, provision of financial and technical assistance. For that matter, the institution has played an important role in stabilizing the world economy. This is attained through solving several economic crises that constantly occur in all parts of the globe.

References

Esteban, C., Buljevich, Y. & Park, S. (1999). Project Financing and the International Financial Markets. Klluwer Academic Publishers: USA.

Fight, A. (2006). Introduction to Finance. Butterworth-Heinemann: USA.

IMF. (2009). Communication of the International Monetary and Financial Committee of the Board of Governors of the IMF. Washington: IMF.

IMF. (2009). World Economic Outlook. Washington: IMF.

IMF. (2012). Global financial stability report. Web.

Mankiw, G. (2010). Questions about Fiscal Policy: Implications from the Financial Crisis of 2008-2009. Federal Reserve Bank of St. Louis, 92(3), 177.

Shefrin, H. (2009). Ending the Management Illusion: Preventing Another Financial Crisis. Ivey Business Journal, 32(4), 432.

Yescombe, E. (2002). Principles of Finance. Academic Press: California.

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