The ultimate purpose of the International Monetary Fund is to promote stability and cooperation in the international monetary system, that is, the collective monetary and exchange rate policy of the countries of the world, in order to promote growth in the member countries.
To achieve this goal, the IMF’s most important tasks are to establish rules for monetary cooperation, monitor the international currency and financial markets and the economic policies of individual members, provide financial support in the form of short-term loans to countries in acute economic crisis and contribute technically. assistance.
According to ehealthfacts, the IMF analyzes the member countries’ policies for currency and balance of payments and ensures that they follow the organisation’s guidelines through recurring so-called Article IV consultations. The consultations, which are normally held once a year, involve a working group from the IMF staff visiting the country examined to collect data on economic policy. A report is then compiled to the IMF’s Executive Board. The results of the Executive Board’s deliberations are summarized in a report sent to the government of the country surveyed.
Initially, the annual country analyzes focused on issues concerning each country’s monetary and balance of payments policies. But in the last two decades, more analysis points have been added. Given the slowdown in growth that affected many countries in the 1980’s due to a new sharp rise in oil prices and the growing debt crisis among developing countries, the IMF felt that many countries needed to change their economic policies.
Therefore, the country analyzes since then address a country’s structural economic policy, such as foreign trade, labor market issues and energy policy. A series of banking crises during the 1990’s have led the analyzes to also address issues concerning the financial sector. One point, which has certainly existed before but which has gained even more importance in recent years, is to look at the risks and weaknesses in an economy, especially risks arising from large and volatile currency flows.
Since the end of the 1990’s, the IMF has been working to strengthen cooperation with the member states, which intensified in particular in connection with the financial crisis in Asia 1997-1998. A number of measures have been taken to make the monitoring issues work more smoothly. Among other things, great emphasis is placed on exchanging correct information. Recommendations have been issued for how member states can improve their economic statistics and the IMF has begun to become more transparent in providing information to the public and member governments.
The IMF also conducts regular analyzes of regional economic cooperation and of global economic development trends (so-called multilateral surveillance). In the report World Economic Outlook, which is published twice a year, the IMF discusses the outlook for the world economy and makes in-depth analyzes of particularly important issues.
In addition to monitoring, lending is the IMF’s most important activity. It is primarily a matter of providing financial support to individual Member States whose economies have become unbalanced. Unlike the World Bank and the various regional development banks, the IMF does not provide loans for specific development projects.
The IMF’s general resources can be used by all members. How much a country can borrow is based on its membership contribution (quota) (see Budget). There are different types of loan arrangements depending on the countries’ problems. A country with a temporary economic imbalance can, without special conditions, borrow an amount corresponding to a maximum of 25 percent of the country’s quota.
To allow the country to borrow from the remaining parts of the quota, the IMF sets much stricter requirements. Under this so-called conditionality, a country must agree to meet a number of economic goals in the near future, such as the country’s state budget, lending, foreign exchange policy and external debt.
The poorest countries can borrow at a favorable interest rate through the IMF’s financing program Poverty Reduction and Growth Facility (PRGF), which in 1999 replaced the previous program for the low-income countries Enhanced Structural Adjustment Facility (ESAF). The interest rate for loans within the framework of PRGF is 0.5 percent and the loans must be repaid within a period of five and a half to ten years. PRGF loans are intended to finance various structural reforms in a country’s economy. Programs funded by the PRGF must have been prepared in accordance with the country’s poverty reduction plan, PRSP (Poverty Reduction Strategy Paper). This means that they should not only have been produced in a dialogue between the country’s government and the IMF, as was the case with ESAF, but also in dialogue with representatives of the country’s civil society.
The financing through PRGF is based on how well the country succeeds in implementing the commitments that have been established in the country’s PRSP. Unlike the ESAF programs, the PRGF programs must also include measures to combat poverty and achieve good governance, such as increased transparency in government activities. In recent years, most of the IMF’s loans have been PRGF loans.
For other countries, there are primarily four different loan arrangements that are given at market interest rates. The most common, and one that utilizes most of the IMF’s resources, are loans under a so-called Stand-By Arrangements (SBA). This loan is given to countries with a temporary balance of payments deficit. The loan normally runs over one to two years, when the country must meet the conditions set for the loan between the country’s government and the IMF. The loan will be repaid within two and a half to four years.
Countries that need support for a longer period of time to deal with profound imbalances in the economy can apply for support from the IMF’s Extended Fund Facility (EFF). The loans are associated with approximately the same terms as the Stand-by agreements but have a longer repayment period, normally between four and a half years and seven years.
In connection with the Asian crisis in 1997, a new lending arrangement, the Supplemental Reserve Facility (SRF), was introduced for countries with exceptional needs for short-term financing in the event of a sudden crisis of confidence in the market. These loans should normally be repaid within two to two and a half years. For example, for commodity-exporting countries that experience financial problems in connection with a sudden decrease in export earnings or that suffer from sharply increased expenses for imports of essential goods such as grain, there are loans under the Compensatory Financing Facility (CFF).
In addition, there is a loan program, the so-called Contingent Credit Lines, where countries are promised financing to calm the market and prevent spillover effects from other countries in economic crisis. The IMF also provides special crisis assistance to countries that have been affected by natural disasters and to countries that are recovering from an armed conflict. Repayment of such loans should normally take place within three and a half to five years.
In recent years, the IMF’s technical assistance has become increasingly central to its operations, not least because of the growing realization that the IMF should work more on preventing crises than on providing support only when a crisis is already a fact. Technical assistance is provided primarily to third world countries and to the former planned economies of the former Soviet Union and Eastern Europe. Knowledge is imparted, for example, about how countries should reform their tax system, how a functioning banking system is built up, how the foreign exchange reserve is to be managed and how to compile accurate economic statistics.
The technical assistance is transferred in many different ways. Experts can be sent to countries in need to help implement administrative changes or draft a legal text for a period of time. Other types of advice are provided through analyzes of economic policies in different countries. The IMF also trains civil servants who work at, for example, a country’s finance ministry or central bank.