International Monetary Fund (IMF)

The IMF also as the 'Fund' was conceived at a United Nation Conference convened in Bretton Wood, New Hampshire, U in July 1944. The IMF is an organisation of 188 member countries that works to foster global monetary cooperation secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty around the world.
At the Bretton Woods conference of 1944, the goal was ambitious and largely successful to create a cooperative and institutional framework for the global economy that would facilitate international trade and balanced global economic stability and growth. At the conference, articles of agreement for the IMF and the International Bank for Reconstruction and Development (IBRD) later Known as the world Bank, were drafted and adopted.

Functions of IMF

In practice, the IMF's mandate of promoting international monetary stability translates into 3 main functions:

1.       Surveillance of financial and monetary conditions in its member countries and in the world economy.

2.       Financial assistance to help countries overcome major balance of payment problems; and

3.       Technical assistance & advisory service to member countries.

·         Surveillance

When a country joins the IMF, it agrees to subject its economic and financial policies to the scrutiny at the international community. It also makes a commitment to pursue policies that are conductive to underly economic growth and reasonable price stability to avoid manipulating exchange for unfair competitive advantage and to provide the IMF with data about its economy. The IMF's regular monitoring of economies and associated provision of policy advice is intended to identify weakness that are causing or could lead to financial or economic instability. This process is known as surveillance. The IMF engages in country surveillance, regional surveillance and global surveillance.

·         Financial assistance

A country in severe financial trouble, unable to pay it international bills, poses potential problems for the stability of the international financial system, which the IMF was created to protect. Any member country whether rich, middle income or poor can turn to the IMF for financing if it has a balance of payments need - that i if it cannot find sufficient financing on affordable terms in the capital markets to make its international payments and maintain a safe level of reserves.

IMF loans are meant to help member countries tackle balance of payment problems, stabilise their economics and restore sustainable economic growth. This crisis resolution role is at the core of IMF lending. At the same time, the global financial crisis has highlighted the need for effective global financial safety nets to help countries cope with adverse shocks. A key objective of recent lending reforms has therefore been to complement the traditional crisis resolution role of the IMF with more effective tools for crisis prevention.

The IMF is not a development bank and unlike the world bank and other development agencies it does not finance projects.

Some of the lending facilities provided by the IMF are:

                                 i.            Standby Agreement (SBA)

SBA are the usual vehicle for member to access upper credit tranche financing. Requests for resource in the upper credit tranches require substantial justification in the form of a balance of payments (BOP)need and the authorities promise of appropriate adjustment policies that return the economy to a sustainable BOP position over a specific time frame. The normal period for an SBA is 12 - 18 month but it may extend up to a maximum of 3 years. All upper credit tranche borrowing is subject to phasing and observance of performance criteria, normally on a quarterly basis. purchases in the credit tranches are subject to an annual limit of 100% of quota and a cumulative limit of 300% of quota.

                               ii.            Flexible credit line (FCL)

FCL is for countries with very strong fundamentals policies and track records of policy implementation. It represents a significant shift in how the IMF delivers fund financial assistance particularly with recent enhancements as it has no ongoing (ex-post) conditions and no caps on the size of the credit line. The FCL is a renewable credit line which at the country's discretion could be for either 1 - 2 years with review of eligibility after the first year. There is the flexibility to either treat the credit line as a precautionary or draw on it at any time after the FCL is approved. Once a country qualifies (according to pre-set criteria), it can top all resources available under the credit line at any time, as disbursement would not be phased and conditioned on particular policies as with traditional IMF - supported programs. This is justified by the strong track records of countries that qualify to the FCL, which give confidence that their economic policies will remain strong or that corrective measures will be taken in the face of shocks.

                              iii.            Precautionary and liquid line (PLL)

PLL builds on the strengths and broader the scope of the precautionary credit line (PCL). The PLL provides financing to meet actual or potential BOP need of countries with sound policies and is intended to solve as insurance and help resolve crises. It combines a qualification process (similar to that for the FCL) with focused ex post conditionally aimed at addressing vulnerability identified during qualifications. The PLL is designed to provide liquidity to countries with sound policies under broaded circumstances including countries affected by regional or global economic and financial stress.

                             iv.            Rapid Financing Instrument (RFI)

RFI provides rapid and low-access financial assistance to member countries facing an urgent BOP need without the need for a full - flefge program. It can provide support to meet a broad range of urgent needs including those arising from commodity price stocks, natural disasters, post-conflict situation and emergencies resulting from fragility.

                               v.            Extended Fund Facility (EFF)

EFF was established in 1974 as a vehicle for providing medium term assistance to (a) an economy suffering serious payments imbalances relating to structural maladjustments in production and trade where price and cost distortions have been widespread
or (b) an economy characterised by slow growth and an inherently weak BOP position which prevents pursuit of an active development policy. Hence, the EFF is used to help countries address BOP difficulties related partly to structural problems that may take longer to correct than macro economic imbalances.

                             vi.            Trade Integration Mechanism (TIM)

TIM allows the IMF to provide loans under one of its facilities to a developing country whose bop is suffering because of multilateral trade liberalisation, either because its export earnings decline when it loses preferential access to certain markets or because prices for food imports go up when agricultural subsidies are eliminated.

·         Technical assistance

Access to technical assistance is one benefit of IMF memberships accounting for about 20% of the IMF's annual operating budget. The IMF provides technical assistance in its core areas of expertise: macroeconomic policy; tax and revenue policies; expenditure management; exchange rates; financial sector sustainability; and economic statistics. IMF technical assistance supports the development of the productive resources of member countries by helping them to effectively manage their economic policy and financial affairs. The IMF helps these countries to strengthen their capacity in both human and institutional resources and to design appropriate macroeconomic, financial and structural policies. About 90% of IMF technical assistance goes to low and lower - middle income countries.
Most economists judge the current international monetary system a success. It permits market forces and national economic performance to determine the value of foreign currencies, yet enables nations to maintain orderly foreign exchange markets by cooperating through the IMF.

In addition to promoting international liquidity, the IMF monitors worldwide economic developments and provides policy advice, loans and technical assistance.