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What Does the IMF Actually do?

April 19, 2020
Editor(s): Henry Liu
Writer(s): Lan Yao, Oliver Soo, Vickram Mehtaanii

Founded in 1944, the international monetary fund has established itself as a worldwide organisation that has many important roles in the promotion of global economic prosperity. This organisation’s key aims involve encouraging global monetary cooperation, securing financial stability, the promotion of high employment and sustainable economic growth, the facilitation of worldwide trade and the reduction of worldwide poverty. As well as promoting certain economic goals, the IMF is also committed to collecting statistics and monitoring its members’ economies. 

An important role of the fund involves providing funds to member countries that are struggling financially. This is possible as the IMF receives funds in the form of quotas (pooled funds from member nations). In order for a country to receive IMF financial support, they must meet certain conditions. This involves the provision of collateral for the loan and evidence that the country will adopt policy reform to solve their economic issues.

The benefit of the IMF’s pooled fund is that countries can borrow large amounts of money without negatively impacting global credit markets. The funds website describes this as “providing [countries] with opportunities to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity”.

Funds from the IMF are high in demand and the fund’s website states that “about four out of five member countries have used IMF credit at least once”. As well as supporting large countries, the IMF also has measures to ensure that low income countries also receive financial assistance with a lowered level of conditionality on the loans. 

The existence of the IMF is also very helpful for lenders like banks, who can use IMF reports and analysis to help them decide the risks involved when lending money to a specific country. IMF approval of a country’s policies will enable them to borrow more money, therefore incentivising sound economic policies.

One drawback of the international monetary fund is that the voting right proportions for each member country have stayed relatively stable over past decades. This has created an issue where rapid growth countries are contributing more to the global economy, yet are not receiving increasing voting power within the IMF. Additionally some countries argue that the conditionality of IMF loans are ‘excessive’ and allow the IMF to exert control over struggling countries.

“Never in the history of the IMF we have had so many countries asking for financial support at the same time.” Said Kristalina Georgieva, the head of IMF. Since the outbreak of the COVID-19 pandemic, more than 90 member countries have approached the IMF for emergency aid and the IMF is supposed to step in to fulfil its very function of securing global financial stability. Three measures might help, albeit with some hindrance.

First, the IMF must offer feasible fiscal policy guidance to policymakers around the world so that people’s lives are saved, citizens’ jobs and incomes are protected while most companies’ liquidity is ensured to prevent bankruptcies. Basic guiding principles and suggested actions ought to be listed for reference. Besides that, it can serve as a platform to promote global collaboration since curbing this unexpected virus has become a pressing fight for the whole human being.

Second, the existing reserves should be used efficiently and effectively to process and implement the regular lending programmes to aid members’ health response to the epidemic, which would be called upon at a scale hitherto unseen, including Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI). Unnecessary complicated procedures could be exempted or speeded up during review to reduce finance savages.

Last but not least, new Special Drawing Rights (SDRs), an asset maintained by IMF that represents a claim to currency between IMF members per se, is called for to bail out the global economy. The nitty-gritty of creating new SDRs is like printing money because SDRs increase the amount of cash in circulation when converted, which is hailed as a way to share risk and address liquidity crunch. During the 2008-2009 global financial crisis, nearly 250 billion dollars in SDRs were created to fight the crisis and support the recovery of the economy. This time, much more is expected.

However, the idea of new SDRs is controversial and faces strong opposition from the United States, whose standpoint matters. The US holds that the IMF’s mission should be making temporary conditional loans with repayment instead of printing money. On top of that, the Trump Administration is reluctant to make life easier for countries like Iran and China due to their political and economic tension. Considering the approval from its Congress is required if the IMF wants to issue SDRs worth more than 648 billion dollars, whether the IMF could issue new SDRs becomes quite tricky.

Several countries across the world will not be able to access sufficient resources on their own to cover the large amounts of external financing. So far, there have been close to a 100 countries who have reached out to the IMF for emergency financing. Although the IMF has several tools at its disposal, the major headache for the Fund is figuring out how to assign resources to countries with different situations and what special considerations could be given to the poorest and most vulnerable countries. 

The IMF can augment existing lending programs as needed to support countries in accommodating any new high-priority needs arising from the COVID-19. An interesting fact about IMF is that it was the first international financial institution to provide additional financial funding for the West African countries such as Guinea, Liberia, and Sierra Leone in 2014 in their fight against the Ebola outbreak. This helped these countries create room in their budgets for critical health spending and at the same time, served as an avenue for further donations, whose contributions were mostly directed towards health spending. 

Furthermore, another program called the Catastrophe Containment and Relief Trust (CCRT) allows the IMF to provide finances for debt relief to the poorest countries in terms of poverty and vulnerability who have outstanding obligations to the IMF to help address disasters such as public health disasters. This would free up vital resources for health spending, containment, and mitigation. Interestingly, this program was used by the IMF to support the same West African countries: Guinea, Liberia, and Sierra Leone during the 2014 Ebola outbreak. While the program can be used to help fund the poorest and most vulnerable countries in desperate times like the current coronavirus situation, the CCRT is underfunded at the moment with just over $400 million available compared to possible needs of over $1 billion.

Moreover, through the RFI, the Fund provided an emergency loan to Ecuador after one of the largest earthquakes in history. This clearly suggests that the IMF will not hold back in doing the same again due to the ongoing circumstances. If that was not enough, some Latin American and Caribbean countries have even requested new programs in addition to the ones already in place. At the end of the day however, although the IMF can serve its 189 member countries, it can only do so through sharing, coordination, and cooperation which will help stabilise the global economy and bring it to full health.

References:

https://www.imf.org/external/about/lending.htm

https://en.wikipedia.org/wiki/International_Monetary_Fund

https://www.economist.com/leaders/2020/04/11/emerging-markets-are-in-turmoil-the-imf-must-step-in-to-help-heres-how

https://www.economist.com/finance-and-economics/2020/04/11/should-the-imf-dole-out-more-special-drawing-rights

https://www.imf.org/en/About/Factsheets/Sheets/2020/02/28/how-the-imf-can-help-countries-address-the-economic-impact-of-coronavirus/

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Henry Liu
Editor

Henry is a third-year Bachelor of Commerce student who will be majoring in Finance and Accounting at the University of Melbourne. He is interested in topics that help to explain asset price fluctuations as well as other issues that provide insights into the future.

Lan Yao
Writer

Lan is a postgraduate accounting student at Unimelb with international experience across three countries and diverse industry exposure ranging from educational services to energy. In her spare time, you can always find her cooking or baking in the kitchen to satisfy her taste buds.

Oliver Soo
Writer

Oliver is a first year Bachelor of commerce student. He is interested in finance and hopes to improve his written communication skills by writing for CAINZ. When not focusing on Uni commitments he is either playing video games, participating in some form of sport or reading a book.

Vickram Mehtaanii
Writer

Vickram is a third year Bachelor of Commerce student majoring in Accounting and Management. In his spare time, Vickram can be found in the gym, trying his hand in the kitchen or watching football (soccer).