International Monetary Fund (IMF) – Information, Beginnings, Role in Financial Markets, and More

The International Monetary Fund (IMF) is an association made up of practically all the world’s countries and is considered the axis of the international monetary system.

His main objective as a consultant and mediator is to act as a supervisor of the countries and mediate the relationship between their economies.

• Promotes global monetary cooperation.
• Ensures financial stability
• Facilitates international trade.
• Promotes high employment and sustainable economic growth.
• Try to reduce poverty around the world.

Beginnings of the International Monetary Fund (IMF)

This important economic organization was born in the mid-1940s -in 1944- through an international treaty to monitor. And protect the good course of the global economy. With the well-known conference of the Bretton Woods agreements (United States), more than forty countries gathered together established this framework for economic cooperation at a global level that would help alleviate the effects of the  Great Depression of the previous decade and avoid future repetitions.

Although it has its base in the North American city of Washington, its Government is permanently formed by the 184 countries currently members of the organization.

Role in Financial Markets

Important aspects of the world economy revolve around the International Monetary Fund. Such as the international payment system or the exchange rates of the different currencies or national currencies. In this sense, being the centre of the global monetary system guides economic activity between countries.

The functions that this massive international power assumes since its creation are based on the management of crises. The economic that cyclically appear in the world’s economies, advising countries when adopting measures accordingly and financing them in this type of situations, or also advising them when they have deficit problems in their balance of payments.

Within the work of the International Monetary Fund is the control and observation of the macroeconomic results of the member countries, such as their consumption, employment or inflation data, and how they develop their imports and exports in the international framework.

In the same way, other economic indicators such as the management of interest rates, credit and exchange rates are the objective of the IMF’s observation work, simultaneously with the surveillance of financial policy and the activity of banking and credit entities.

Although, as has been said before, the members of the IMF represent a large part of the countries of the world, there are notable exceptions such as Cuba, North Korea or Andorra, which do form part of the United Nations Organization (UN).

How is the IMF financed?

Member country quotas are the IMF’s main source of financial resources. The institution itself determines the amount that each adhering Government must pay and calculates it according to its wealth and the relative economic position that the country occupies in the world economy. Spain, for example, has a share of 2% of the total.

The institution itself conducts general reviews of these quotas every five years. A majority must approve any modification of the percentages of 85% of the total votes. And what a member country pays cannot be modified without its consent.

Depending on the quota, each member country assigned certain Special Drawing Rights (SDR), a kind of global currency created. And used by the Fund that functions as a reserve asset and a unit of account. SDR holders can exchange them for foreign currency (euros, dollars) through two mechanisms: by exchanging between countries or when the IMF designates a country with large SDR reserves to buy from another participant who needs foreign currency.

In addition, the IMF supplements its resources through two permanent credit multilateral mechanisms: New Arrangements for Borrowing (NAP) and General Arrangements for Borrowing (AGP).

How does the IMF make its decisions?

The IMF has three main sources of power: a managing director. The Bulgarian Kristalina Georgiev, who took over after the French Christine Lagarde, as this position reserved for a European, an Executive Board and a Board of Governors.

The IMF’s body with the greatest decision-making power is the Board of Governors. Which comprises representatives from each of the 190 member countries. Normally, the Minister of Economic or Finance or the president of the central banks of each State occupies this seat.

The vote of each governor is equivalent to his economic contribution. The US has the greatest elective capacity: it contributes more than 17% of the IMF receives 16.5% of the votes. According to de la Nava, this organizational model “generates differences in criteria within the member countries.” “The higher the subscription, the greater the weight in determining the policies that the Fund assumes. So they will be closer to the vision of the world’s economic powers,” says the professor.

The Board meets once a year and makes decisions such as the admission of new members or expanding the institution’s budget. This body advised by the International Monetary and Financial Committee, whose chairmanship Calviño would occupy in the coming weeks after a period of consultations within the Fund’s Executive Board.

During the rest of the year, the governors delegate their functions to the Executive Board, 24 directors. Six of them selected directly by the countries that contribute the most to the Fund. The USA, Japan, China, Germany, France and the United Kingdom. The other members elect the rest. On many occasions, a certain group of countries elect a single director (shares representation with Colombia, Costa Rica, El Salvador, Guatemala, Honduras and Mexico that select a single director who works with the sum of votes that corresponds to each country ).

What are the most important functions of the International Monetary Fund?

The 190 governments adhering to the powerful economic organization knock on its door to request a loan. When they find themselves in a critical situation. There is no other institution to solve the short-term or structural problems that their balance of payments presents.

“The organization has harshly criticized for imposing extreme conditions when it financially rescues a country. However, all States want to be part of the Fund,” says Professor Martín-Aceña. And also, about the functions of the International Monetary Fund. “The IMF performances as a world central bank when it acts as a lender of last resort if requested. But it is not an NGO, the countries have to repay the loan with interest set by the Fund. And agreed on the world market”, he adds. Except for interest-free loans to low-income countries through the Trust Fund for Growth and Poverty Reduction (FFCLP).

As the IMF itself explains, “when a country obtains a loan. The Government undertakes to adjust its economic policy to overcome the problems that led it to request financial assistance from the international community. The conditions of these loans also serve to guarantee. And also, the country will be able to repay the resources to the IMF”.

The translation of these “adjustments” that are part of the functions of the International Monetary Fund are restrictive and unpopular policies. “Countries have to fix their affairs to receive money from the Fund, reduce inflation, adjust imbalances or an overvalued currency. Government to propose measures such as raising taxes, cutting public spending or touching pensions.

Conclusion

Distribution of Wealth and Income is how the wealth. And income divided among its population, or how the wealth and payment of the world divided among nations. Such distribution patterns discerned. And studied by various statistical means, all of which based on data of varying degrees of reliability.

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