International Monetary Fund

Nikul G Moradiya (10M66) Kartik Y Joshi (10F57) Jasmin R Kheni(10F52)

G H Patel PG Institute of Business Management

About the IMF

The International Monetary Fund (IMF) is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Overview The IMF works to foster global growth and economic stability. It provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty. With its near-global membership of 187 countries, the IMF is uniquely placed to help member governments take advantage of the opportunitiesand manage the challengesposed by globalization and economic development more generally. The IMF tracks global economic trends and performance, alerts its member countries when it sees problems on the horizon, provides a forum for policy dialogue, and passes on know-how to governments on how to tackle economic difficulties. The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty. Marked by massive movements of capital and abrupt shifts in comparative advantage, globalization affects countries' policy choices in many areas, including labor, trade, and tax policies. Helping a country benefit from globalization while avoiding potential downsides is an important task for the IMF. The global economic crisis has highlighted just how interconnected countries have become in todays world economy. Key IMF activities The IMF supports its membership by providing policy advice to governments and central banks based on analysis of economic trends and crosscountry experiences research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets loans to help countries overcome economic difficulties; concessional loans to help fight poverty in developing countries; and technical assistance and training to help countries improve the management of their economies.

IMF and the global financial crisis Original aims The IMF was founded more than 60 years ago toward the end of World War II (see History). The founders aimed to build a framework for economic cooperation that would avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s and the global conflict that followed. Since then the world has changed dramatically, bringing extensive prosperity and lifting millions out of poverty, especially in Asia. In many ways the IMF's main purposeto provide the global public good of financial stabilityis the same today as it was when the organization was established. More specifically, the IMF continues to provide a forum for cooperation on international monetary problems facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction promote exchange rate stability and an open system of international payments lend countries foreign exchange when needed, on a temporary basis and under adequate safeguards, to help them address balance of payments problems.

An adapting IMF
The IMF has evolved along with the global economy throughout its 65-year history, allowing the organization to retain its central role within the international financial architecture As the world economy struggles to restore growth and jobs after the worst crisis since the Great Depression, the IMF has emerged as a very different institution. During the crisis, it mobilized on many fronts to support its member countries. It increased its lending, used its cross-country experience to advise on policy solutions, supported global policy coordination, and reformed the way it makes decisions. The result is an institution that is more in tune with the needs of its 187 member countries. Stepping up crisis lending The IMF responded quickly to the global economic crisis, with lending commitments reaching a record level of more than US$250 billion in 2010. This figure includes a sharp increase in concessional lending (thats to say, subsidized lending at rates below those being charged by the market) to the worlds poorest nations. Greater lending flexibility The IMF has overhauled its lending framework to make it better suited to countries individual needs. It is also working with other regional institutions to create a broader financial safety net, which could help prevent new crises.

Providing analysis and advice The IMFs monitoring, forecasts, and policy advice, informed by a global perspective and by experience from previous crises, have been in high demand and have been used by the G-20. Drawing lessons from the crisis The IMF is contributing to the ongoing effort to draw lessons from the crisis for policy, regulation, and reform of the global financial architecture. Historic reform of governance The IMFs member countries also agreed to a significant increase in the voice of dynamic emerging and developing economies in the decision making of the institution, while preserving the voice of the low-income members.

How We Do It
The IMF's main goal is to ensure the stability of the international monetary and financial system. It helps resolve crises, and works with its member countries to promote growth and alleviate poverty. It has three main tools at its disposal to carry out its mandate: surveillance, technical assistance and training, and lending. These functions are underpinned by the IMF's research and statistics. Surveillance The IMF promotes economic stability and global growth by encouraging countries to adopt sound economic and financial policies. To do this, it regularly monitors global, regional, and national economic developments. It also seeks to assess the impact of the policies of individual countries on other economies. This process of monitoring and discussing countries economic and financial policies is known as bilateral surveillance. On a regular basisusually once each yearthe IMF conducts in depth appraisals of each member country's economic situation. It discusses with the country's authorities the policies that are most conducive to a stable and prosperous economy. Consistent with the decision on bilateral surveillance adopted in June 2007, the main focus of the discussions is whether there are risks to the economys domestic and external stability that would argue for adjustments in economic or financial policies. Member countries may agree to publish the IMF's assessment of their economies, with the vast majority of countries opting to do so. The IMF also has the option to bring together, on an as-needed basis, groups of systemically relevant economies to address issues of broad importance to the global economy. These meetings are called multilateral consultations. A consultation on how to reduce global imbalances took place in 2006-07. The IMF's work on individual countries informs its work on regional economies and the global economy. These views, along with timely analysis of important economic and financial issues, are published twice

a year in the World Economic Outlook, various Regional Economic Outlook reports, and the Global Financial Stability Report. The IMF works with the World Bank to promote resilient financial systems around the world through the joint Financial Sector Assessment Program (FSAP). Supported by experts from a range of national agencies and standard-setting bodies, IMF and World Bank staff assess the stability of a countrys financial system by identifying its strengths and vulnerabilities, determine how key sources of risks are being managed, ascertain the sector's developmental needs, and help prioritize policy responses. Technical assistance and training IMF offers technical assistance and training to help member countries strengthen their capacity to design and implement effective policies. Technical assistance is offered in several areas, including fiscal policy, monetary and exchange rate policies, banking and financial system supervision and regulation, and statistics. The IMF provides technical assistance and training mainly in four areas: 1. Monetary and financial policies (monetary policy instruments, banking system supervision and restructuring, foreign management and operations, clearing settlement systems for payments, and structural development of central banks) 2. Fiscal policy and management (tax and customs policies and administration, budget formulation, expenditure management, design of social safety nets, and management of domestic and foreign debt) 3. Compilation, management, dissemination, and improvement of statistical data 4. Economic and financial legislation. Lending In the event that member countries experience difficulties financing their balance of payments, the IMF is also a fund that can be tapped to facilitate recovery. A policy program supported by financing is designed by the national authorities in close cooperation with the IMF. Continued financial support is conditional on the effective implementation of this program. The IMF also provides low-income countries with loans at a concessional interest rate through the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF). For more on different types of IMF lending, go to Lending in the Our Work section. Research and data Supporting all three of these activities is the IMF's economic and financial research and statistics. In recent years, the IMF has applied both its surveillance and technical assistance work to the development of standards and codes of good practice in its areas of responsibility, and to the strengthening of financial sectors. These are part of the IMF's continuing efforts to strengthen the international financial system and improve its ability to prevent and resolve crises. 4

Membership
The IMF currently has a near-global membership of 187 countries. To become a member, a country must apply and then be accepted by a majority of the existing members. In June 2009, the former Yugoslav republic of Kosovo joined the IMF, becoming the institution's 186th member. Upon joining, each member of the IMF is assigned a quota, based broadly on its relative size in the world economy. The IMF's membership agreed in May 2008 on a rebalancing of its quota system to reflect the changing global economic realities, especially the increased weight of major emerging markets in the global economy. For more on the quota and voice reform, please go to the section on Country Representation in the Governance section). A member's quota delineates basic aspects of its financial and organizational relationship with the IMF, including: Subscriptions A member's quota subscription determines the maximum amount of financial resources the member is obliged to provide to the IMF. A member must pay its subscription in full upon joining the IMF: up to 25 percent must be paid in the IMF's own currency, called Special Drawing Rights (SDRs) or widely accepted currencies (such as the dollar, the euro, the yen, or pound sterling), while the rest is paid in the member's own currency. Voting power The quota largely determines a member's voting power in IMF decisions. Each IMF member has 250 basic votes plus one additional vote for each SDR 100,000 of quota. Accordingly, the United States has 371,743 votes (16.77 percent of the total), and Palau has 281 votes (0.01 percent of the total). The newly agreed quota and voice reform will result in a significant shift in the representation of dynamic economies, many of which are emerging market countries, through a quota increase for 54 member countries. A tripling of the number of basic votes is also envisaged as a means to give poorer countries a greater say in running the institution. Access to financing The amount of financing a member can obtain from the IMF (its access limit) is based on its quota. Under Stand-By and Extended Arrangements, which are types of loans, a member can borrow up to 200 percent of its quota annually and 600 percent cumulatively. However, access may be higher in exceptional circumstances.

SDR allocations Allocations of SDRs, the IMF's unit of account, is used as an international reserve asset. A member's share of general SDR allocations is established in proportion to its quota. The most recent general allocation of SDRs took place in 2009.

Collaborating with others

The IMF collaborates with the World Bank, the regional development banks, the World Trade Organization (WTO), UN agencies, and other international bodies. While all of these organizations are involved in global economic issues, each has its own unique areas of responsibility and specialization. The IMF also interacts with think tanks, civil society, and the media on a daily basis. Working with the World Bank The IMF and the World Bank are different, but complement each other's work. Whereas the IMF's focus is chiefly on macroeconomic and financial sector issues, the World Bank is concerned mainly with longer-term development and poverty reduction. Its loans finance infrastructure projects, the reform of particular sectors of the economy, and broader structural reforms. Countries must join the IMF to be eligible for World Bank membership. Given the World Bank's focus on antipoverty issues, the IMF collaborates closely with the Bank in the area of poverty reduction and helping countries draw up poverty reduction strategies. Other areas of collaboration include assessments of member countries' financial sectors, development of standards and codes, and improvement of the quality, availability, and coverage of data on external debt. An external review committee on World Bank and IMF collaboration was formed in March 2006 to assess the working relationship between the two sister agencies, known collectively as the Bretton Woods institutions. In its February 2007 report, the six-member Malan committee offered recommendations for closer collaboration between the two institutions. This led to the institutions adoption of a Joint Management Action Plan, under which, IMF and World Bank country teams discuss their country-level work programs, the division of labor, and the work needed from each insititution in the coming year. Also the Bank and Fund have improved their information sharing at the country level, including technical assistance reports. Cooperating with other international organizations The IMF is a member of the Switzerland-based Financial Stability Board, which brings together government officials responsible for financial stability in the major international financial centers, international regulatory and supervisory bodies, committees of central bank experts, and international financial institutions. It also works with standard-setting bodies such as the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors.

The IMF collaborates with the World Trade Organization (WTO) both formally and informally. The IMF has observer status at WTO meetings and IMF staff contribute to the work of the WTO Working Group on Trade, Debt, and Finance. And the IMF is involved in the WTO-led Integrated Framework for TradeRelated Technical Assistance to Least Developed Countries, whose other members are the International Trade Commission, UNCTAD, UNDP, and the World Bank. The IMF has a Special Representative to the United Nations, located at the UN Headquarters in New York. The Special Representative facilitates the liaison between the IMF and the UN system. The general arrangements for collaboration and consultations between the IMF and the UN include areas of mutual interest, such as cooperation between the statistical services of the two organizations, and reciprocal attendance and participation at events. Engaging with think tanks, civil society, and the media The IMF also engages on a regular basis with the academic community, civil society organizations (CSOs), and the media. IMF staff at all levels frequently meet with members of the academic community to exchange ideas and receive new input. The IMF also has an active outreach program involving CSOs. IMF management and senior staff communicate with the media on a daily basis. Additionally, a biweekly press briefing is held at the IMF headquarters, during which a spokesperson takes live questions from journalists.

Organization & Finances

Management
The IMF is led by a Managing Director, who is head of the staff and Chairman of the Executive Board. The Managing Director is assisted by a First Deputy Managing Director and three other Deputy Managing Directors. The Management team oversees the work of the staff, and maintain high-level contacts with member governments, the media, non-governmental organizations, think tanks, and other institutions. Managing Director: Duties and selection According to the IMF's Articles of Agreement, the Managing Director "shall be chief of the operating staff of the Fund and shall conduct, under the direction of the Executive Board, the ordinary business of the Fund. Subject to the general control of the Executive Board, he shall be responsible for the organization, appointment, and dismissal of the staff of the Fund." The IMF's Executive Board is responsible for selecting the Managing Director. Any Executive Director may submit a nomination for the position, consistent with past practice. When more than one candidate is nominated, as has been the case in recent years, the Executive Board aims to reach a decision by consensus. The current management team

Managing Director, Christine Lagarde, a French national, joined the IMF as Managing Director in July 2011. Before coming to the IMF, she was France's Minister for Economy, Finance and Industry.

David Lipton, of the United States, joined the IMF as Special Advisor to the Managing Director in July 2011. On September 1, 2011 he became First Deputy Managing Director. Prior to joining the Fund, Lipton served as Special Assistant to the President and as Senior Director for International Economic Affairs at the U.S. National Economic Council and U.S. National Security Council at the White House.

Naoyuki Shinohara, a Japanese national, joined the IMF as Deputy Managing Director in March 2010. Previously, he was Japan's Vice-Minister of Finance for International Affairs.

Nemat Shafik, from Egypt, became Deputy Managing Director of the IMF in April, 2011. Previously she had worked at the U.K. Department for International Development (DFID), the World Bank, and the International Finance Corp.

Min Zhu, from China, joined the IMF as Special Advisor to the Managing Director in May 2010. On July 26, 2011 he became Deputy Managing Director. Before coming to the IMF, Min Zhu was a Deputy Governor of the Peoples Bank of China and previously worked at the World Bank.

Staff of international civil servants

The IMF currently employs about 2,400 staff, half of whom are economists. Most of them work at the IMF's Washington, D.C., headquarters but a few serve in member countries around the world in small IMF overseas offices or as resident representatives. With its nearly universal membership, the IMF strives to employ a staff that is as diverse and broadly based geographically as possible.

The IMF has eight functional departments that carry out its policy, analytical, and technical work and manage its financial resources. Finance Department: Mobilizes, manages, and safeguards the IMF's financial resources. Fiscal Affairs Department: Provides policy and technical advice on public finance issues to member countries. Monetary and Capital Markets Department: Monitors financial sectors and capital markets, and monetary and foreign exchange systems, arrangements, and operations. Prepares the Global Financial Stability Report. Legal Department: Advises management, the Executive Board, and the staff on the applicable rules of law. Prepares decisions and other legal instruments and provides technical assistance to member countries. Strategy, Policy, and Review Department: Designs, implements, and evaluates IMF policies on surveillance and the use of its financial resources. Research Department: Monitors the global economy and the economies and policies of member countries and undertakes research on issues relevant to the IMF. Prepares the World Economic Outlook. Statistics Department: Develops internationally accepted methodologies and standards. Provides technical assistance and training to promote best practices in the dissemination of economic and financial statistics. IMF Institute: Provides training in macroeconomic analysis and policy for officials of member countries and IMF staff. The IMF's five area, or regional, departments are responsible for advising member countries on macroeconomic policies and the financial sector, and for putting together, when needed, financial arrangements to support economic reform programs. African Department: Covers 44 countries. Read the profile of the Director, Antoinette Sayeh Asia and Pacific Department: Covers 33 countries. European Department: Covers 46 countries (44 of which are IMF members). Middle East and Central Asia Department: Covers 31 countries. Western Hemisphere Department: Covers 34 countries. Read the profile of the Director, Nicols Eyzaguirre

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The IMF also has four support departments

External Relations Department: Works to promote public understanding of and support for the IMF and its policies. Technology and General Services Department: Provides services to manage information; facilitates communication, including across languages; and helps build an effective work environment. Secretary's Department: Organizes and reports on the activities of the IMF's governing bodies and provides secretariat services to them. Assists management in preparing the work program of the Executive Board and other official bodies. It is the creator and custodian of IMF records. Human Resources Department: Provides staff with a full range of information and personnel services. Manages the system of compensation and benefits, oversees staff training, offers career and education counseling, and provides legal services.

IMF offices around the world

The IMF has small offices in countries around the world. These comprise resident representative posts; overseas offices (Guatemala City, New York, Paris, Tokyo, Warsaw); and regional technical assistance centers and training institutes.

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Organizational Chart

Quotas
The IMF's resources come mainly from the money that countries pay as their capital subscription when they become members. Quotas broadly reflect the size of each member's economy: the larger a country's economy in terms of output and the larger and more variable its trade, the larger its quota tends to be. For example, the world's biggest economy, the United States, has the largest quota in the IMF. Quotas, together with the 12

equal number of basic votes each member has, determine countries' voting power. They also help determine how much countries can borrow from the IMF and their share in allocations of special drawing rights or SDRs (the reserve currency created by the IMF in 1969). Countries pay 25 percent of their quota subscriptions in SDRs or major currencies, such as U.S. dollars, euros, pounds sterling, or Japanese yen. They pay the remaining 75 percent in their own currencies. Under a quota and voice reform approved in April 2008, the IMF's member countries agreed that the quotas of dynamic economies, many of which are emerging market countries, should be increased. They also agreed that future reviews should consider adjustments to quotas to ensure that members' quota shares reflect their relative positions in the world economy. As of end-August 2009, IMF's total quotas stood at SDR 217.4 billion (about $325 billion). Quotas are reviewed every five years and can be increased when deemed necessary by the Board of Governors. At the conclusion of the Thirteenth General Review in 2008, it was determined that no general quota increase was necessary. In 2009, the G-20 agreed that the Fund should bring forward the timetable for the next general quota increase. The next general review was originally scheduled to be completed by 2013. The agreement now is that it would be completed by January 2011, two years ahead of schedule. The general quota review provides an opportunity to increase the Funds general resources and would also provide scope for a further rebalancing of quota and voting shares toward dynamic emerging markets and other economies.

Special Drawing Rights

The Special Drawing Right (SDR) is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations. SDRs value The value of the SDR is based on a basket of key international currenciesthe euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-value of the SDR is posted daily on the IMFs website. The 13

basket composition is reviewed every five years by the Executive Board to ensure that it reflects the relative importance of currencies in the worlds trading and financial systems. The SDR interest rate provides the basis for calculating the interest charged to members on regular (nonconcessional) IMF loans, the interest paid and charged to members on their SDR holdings, and the interest paid to members on a portion of their quota subscriptions. The SDR interest rate is determined weekly and is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies. SDR allocations to IMF members Under its Articles of Agreement, the IMF may allocate SDRs to members in proportion to their IMF quotas, providing each member with a costless asset. However, if a members SDR holdings rise above its allocation, it earns interest on the excess; conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall.

There are two kinds of allocations:

General allocations of SDRs General allocations have to be based on a long-term global need to supplement existing reserve assets. Decisions to allocate SDRs have been made three times: in 1970-72, for SDR 9.3 billion; in 197981, for SDR 12.1 billion; and in August 2009, for an amount of SDR 161.2 billion. Special allocations of SDRs A special one-time allocation of SDRs through the Fourth Amendment of the Articles of Agreement was implemented in September 2009. The purpose of this special allocation was to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the Fund after 1981more than one-fifth of the current IMF membershiphad never received an SDR allocation. With the general SDR allocation of August 2009 and the special allocation of Setember 2009, the amount of SDRs increased from SDR 21.4 billion to SDR 204.1 billion (currently equivalent to about $317 billion).

Gold
The IMF holds a relatively large amount of gold among its assets, not only for reasons of financial soundness, but also to meet unforeseen contingencies. The IMF holds 103.4 million ounces (3,217 metric tons) of gold, worth about $83 billion as of end-August 2009, making it the third-largest official holder of gold in the world. The IMF's Articles of Agreement strictly limit the use of the gold. But in some circumstances, the IMF may sell gold or accept gold as payment from member countries.

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Gold played a central role in the international economic system after World War II. The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates pegged in terms of the dollar and, in the case of the United States, the value of the dollar in terms of gold. This "par value system" ceased to work after 1971. Until the late 1970s, 25 percent of member countries' initial quota subscriptions and subsequent quota increases had to be paid for with gold. Payment of charges and repayments to the IMF by its members constituted other sources of gold. Through various transactions, the IMF acquired 12.97 million ounces (403.3 tons) of gold. Today, the IMF is considering selling some of the gold it has acquired over time as its finances have become unsustainable following a large decline in outstanding credit in recent years. A limited sale of gold was recommended by the Committee of Eminent Persons chaired by Andrew Crockett (the Crockett Committee) as a means to develop a new income model that relies on more diverse sources of revenue (for more on this topic, go to the section on income model reform). The proceeds from gold sales would not have to be returned to member countries. Instead, profits from any gold sales should be retained and could be invested in an income-generating fund to supplement IMF income. A proposal made by the Group of Twenty industrialized and emerging market economies calls for using additional resources from agreed sales of IMF gold to provide $6 billion in additional financing for poor countries, in a manner consistent with the IMF's new income model, over the next 2 to 3 years. The selling of gold by the IMF is rare as it requires an Executive Board decision with an 85 percent majority of the total voting power. The last time gold was sold by the institution was through off-market transactions completed in April 2001, with 12.9 million ounces traded. This transaction was approved by the membership as a means to finance the IMF's participation in the Heavily Indebted Poor Countries Initiative and the continuation of the Poverty Reduction and Growth Facility.

Borrowing arrangements
If the IMF believes that its resources might fall short of members' needsfor example, in the event of a major financial crisisit can supplement its own resources by borrowing. It has had a range of bilateral borrowing arrangements in the 1970s and 1980s. Currently it has two standing multilateral borrowing arrangements and one bilateral borrowing agreement. Through the New Arrangements to Borrow (NAB) and the General Arrangements to Borrow (GAB), a number of member countries and institutions stand ready to lend additional funds to the IMF. The GAB and NAB are credit arrangements between the IMF and a group of members and institutions to provide supplementary resources of up to SDR 34 billion (about US$50 billion) to the IMF to forestall or cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system. 15

In April 2009, the Group of Twenty industrialized and emerging market economies agreed to triple the Funds lending capacity to $750 billion, enabling it to inject extra liquidity into the world economy during this time of crisis. The additional support will come from several sources, including contributions from member countries that have pledged to help boost the Funds lending capacity.

Income model reform

The business model that the IMF has followed since it was established relies primarily on income from its lending operations to finance its work. Lending generates income because the IMF charges member countries that draw on its financial resources a higher interest rate than it pays to its member country creditors (this lending margin will be one percentage point during 2008-09). However, this model had become unsustainable in recent years because of a sharp drop-off in lending activity. A Committee of Eminent Persons, set up in January 2007 and chaired by Andrew Crockett (former general manager of the Bank of International Settlements), recommended that the IMF adopt a package of income-generating measures, including strictly limited sales of gold (amounting to about one-eighth of the Fund's total gold holdings), to establish an endowment. In 2008, the IMF's Board of Governors endorsed a new package of measures to end the IMF's overreliance on lending income. The package included most of the measures that had been proposed by the Crockett Committee.

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History
Cooperation and reconstruction (194471)
During the Great Depression of the 1930s, countries attempted to shore up their failing economies by sharply raising barriers to foreign trade, devaluing their currencies to compete against each other for export markets, and curtailing their citizens' freedom to hold foreign exchange. These attempts proved to be self-defeating. World trade declined sharply (see chart below), and employment and living standards plummeted in many countries. This breakdown in international monetary cooperation led the IMF's founders to plan an institution charged with overseeing the international monetary systemthe system of exchange rates and international payments that enables countries and their citizens to buy goods and services from each other. The new global entity would ensure exchange rate stability and encourage its member countries to eliminate exchange restrictions that hindered trade.

The Bretton Woods agreement

The IMF was conceived in July 1944, when representatives of 45 countries meeting in the town of Bretton Woods, New Hampshire, in the northeastern United States, agreed on a framework for international economic cooperation, to be established after the Second World War. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression.

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The IMF came into formal existence in December 1945, when its first 29 member countries signed its Articles of Agreement. It began operations on March 1, 1947. Later that year, France became the first country to borrow from the IMF. The IMF's membership began to expand in the late 1950s and during the 1960s as many African countries became independent and applied for membership. But the Cold War limited the Fund's membership, with most countries in the Soviet sphere of influence not joining.

Par value system

The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates (the value of their currencies in terms of the U.S. dollar and, in the case of the United States, the value of the dollar in terms of gold) pegged at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement. This par value system also known as the Bretton Woods systemprevailed until 1971, when the U.S. government suspended the convertibility of the dollar (and dollar reserves held by other governments) into gold.

The end of the Bretton Woods System (197281)

By the early 1960s, the U.S. dollar's fixed value against gold, under the Bretton Woods system of fixed exchange rates, was seen as overvalued. A sizable increase in domestic spending on President Lyndon Johnson's Great Society programs and a rise in military spending caused by the Vietnam War gradually worsened the overvaluation of the dollar. End of Bretton Woods system The system dissolved between 1968 and 1973. In August 1971, U.S. President Richard Nixon announced the "temporary" suspension of the dollar's convertibility into gold. While the dollar had struggled throughout most of the 1960s within the parity established at Bretton Woods, this crisis marked the breakdown of the system. An attempt to revive the fixed exchange rates failed, and by March 1973 the major currencies began to float against each other. Since the collapse of the Bretton Woods system, IMF members have been free to choose any form of exchange arrangement they wish (except pegging their currency to gold): allowing the currency to float freely, pegging it to another currency or a basket of currencies, adopting the currency of another country, participating in a currency bloc, or forming part of a monetary union. Oil shocks Many feared that the collapse of the Bretton Woods system would bring the period of rapid growth to an end. In fact, the transition to floating exchange rates was relatively smooth, and it was certainly timely: flexible exchange rates made it easier for economies to adjust to more expensive oil, when the

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price suddenly started going up in October 1973. Floating rates have facilitated adjustments to external shocks ever since. The IMF responded to the challenges created by the oil price shocks of the 1970s by adapting its lending instruments. To help oil importers deal with anticipated current account deficits and inflation in the face of higher oil prices, it set up the first of two oil facilities.

Helping poor countries

From the mid-1970s, the IMF sought to respond to the balance of payments difficulties confronting many of the world's poorest countries by providing concessional financing through what was known as the Trust Fund. In March 1986, the IMF created a new concessional loan program called the Structural Adjustment Facility. The SAF was succeeded by the Enhanced Structural Adjustment Facility in December 1987.

Debt and painful reforms (198288)

The oil shocks of the 1970s, which forced many oil-importing countries to borrow from commercial banks, and the interest rate increases in industrial countries trying to control inflation led to an international debt crisis. During the 1970s, Western commercial banks lent billions of "recycled" petrodollars, getting deposits from oil exporters and lending those resources to oil-importing and developing countries, usually at variable, or floating, interest rates. So when interest rates began to soar in 1979, the floating rates on developing countries' loans also shot up. Higher interest payments are estimated to have cost the nonoil-producing developing countries at least $22 billion during 197881. At the same time, the price of commodities from developing countries slumped because of the recession brought about by monetary policies. Many times, the response by developing countries to those shocks included expansionary fiscal policies and overvalued exchange rates, sustained by further massive borrowings. When a crisis broke out in Mexico in 1982, the IMF coordinated the global response, even engaging the commercial banks. It realized that nobody would benefit if country after country failed to repay its debts. The IMF's initiatives calmed the initial panic and defused its explosive potential. But a long road of painful reform in the debtor countries, and additional cooperative global measures, would be necessary to eliminate the problem.

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Societal Change for Eastern Europe and Asian Upheaval (1989-2004)

The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union in 1991 enabled the IMF to become a (nearly) universal institution. In three years, membership increased from 152 countries to 172, the most rapid increase since the influx of African members in the 1960s. In order to fulfill its new responsibilities, the IMF's staff expanded by nearly 30 percent in six years. The Executive Board increased from 22 seats to 24 to accommodate Directors from Russia and Switzerland, and some existing Directors saw their constituencies expand by several countries. The IMF played a central role in helping the countries of the former Soviet bloc transition from central planning to market-driven economies. This kind of economic transformation had never before been attempted, and sometimes the process was less than smooth. For most of the 1990s, these countries worked closely with the IMF, benefiting from its policy advice, technical assistance, and financial support. By the end of the decade, most economies in transition had successfully graduated to market economy status after several years of intense reforms, with many joining the European Union in 2004. Asian Financial Crisis In 1997, a wave of financial crises swept over East Asia, from Thailand to Indonesia to Korea and beyond. Almost every affected country asked the IMF for both financial assistance and for help in reforming economic policies. Conflicts arose on how best to cope with the crisis, and the IMF came under criticism that was more intense and widespread than at any other time in its history. From this experience, the IMF drew several lessons that would alter its responses to future events. First, it realized that it would have to pay much more attention to weaknesses in countries banking sectors and to the effects of those weaknesses on macroeconomic stability. In 1999, the IMFtogether with the World Banklaunched the Financial Sector Assessment Program and began conducting national assessments on a voluntary basis. Second, the Fund realized that the institutional prerequisites for successful liberalization of international capital flows were more daunting than it had previously thought. Along with the economics profession generally, the IMF dampened its enthusiasm for capital account liberalization. Third, the severity of the contraction in economic activity that accompanied the Asian crisis necessitated a re-evaluation of how fiscal policy should be adjusted when a crisis was precipitated by a sudden stop in financial inflows. Debt relief for poor countries During the 1990s, the IMF worked closely with the World Bank to alleviate the debt burdens of poor countries. The Initiative for Heavily Indebted Poor Countries was launched in 1996, with the aim of ensuring that no poor country faces a debt burden it cannot manage. In 2005, to help accelerate progress toward the United Nations Millennium Development Goals (MDGs), the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI). 20

Globalization and the Crisis (2005 - present)

The IMF has been on the front lines of lending to countries to help boost the global economy as it suffers from a deep crisis not seen since the Great Depression. For most of the first decade of the 21st century, international capital flows fueled a global expansion that enabled many countries to repay money they had borrowed from the IMF and other official creditors and to accumulate foreign exchange reserves. The global economic crisis that began with the collapse of mortgage lending in the United States in 2007, and spread around the world in 2008 was preceded by large imbalances in global capital flows. Global capital flows fluctuated between 2 and 6 percent of world GDP during 1980-95, but since then they have risen to 15 percent of GDP. In 2006, they totaled $7.2 trillionmore than a tripling since 1995. The most rapid increase has been experienced by advanced economies, but emerging markets and developing countries have also become more financially integrated. The founders of the Bretton Woods system had taken it for granted that private capital flows would never again resume the prominent role they had in the nineteenth and early twentieth centuries, and the IMF had traditionally lent to members facing current account difficulties. The latest global crisis uncovered a fragility in the advanced financial markets that soon led to the worst global downturn since the Great Depression. Suddenly, the IMF was inundated with requests for standby arrangements and other forms of financial and policy support. The international community recognized that the IMFs financial resources were as important as ever and were likely to be stretched thin before the crisis was over. With broad support from creditor countries, the Funds lending capacity was tripled to around $750 billion. To use those funds effectively, the IMF overhauled its lending policies, including by creating a flexible credit line for countries with strong economic fundamentals and a track record of successful policy implementation. Other reforms, including ones tailored to help low-income countries, enabled the IMF to disburse very large sums quickly, based on the needs of borrowing countries and not tightly constrained by quotas, as in the past. For more on the ideas that have shaped the IMF from its inception until the late 1990s, take a look at James Boughton's "The IMF and the Force of History: Ten Events and Ten Ideas that Have Shaped the Institution."

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Governance
Governance Structure
The IMF's mandate and governance have evolved along with changes in the global economy, allowing the organization to retain a central role within the international financial architecture. The diagram below provides a stylized view of the IMF's current governance structure.

Board of Governors The Board of Governors is the highest decision-making body of the IMF. It consists of one governor and one alternate governor for each member country. The governor is appointed by the member country and is usually the minister of finance or the head of the central bank. While the Board of Governors has delegated most of its powers to the IMF's Executive Board, it retains the right to approve quota increases, special drawing right (SDR) allocations, the admittance of new members, compulsory withdrawal of members, and amendments to the Articles of Agreement and ByLaws. The Board of Governors also elects or appoints executive directors and is the ultimate arbiter on issues related to the interpretation of the IMF's Articles of Agreement. Voting by the Board of Governors usually takes place by mail-in ballot. The Boards of Governors of the IMF and the World Bank Group normally meet once a year, during the IMF-World Bank Spring and Annual Meetings, to discuss the work of their respective institutions. The Meetings, which take place in September or October, have customarily been held in Washington for two consecutive years and in another member country in the third year. The Annual Meetings usually include two days of plenary sessions, during which Governors consult with one another and present their countries' views on current issues in international economics and finance. During the Meetings, the Boards of Governors also make decisions on how current international monetary issues should be addressed and approve corresponding resolutions. The Annual Meetings are chaired by a Governor of the World Bank and the IMF, with the chairmanship rotating among the membership each year. Every two years, at the time of the Annual Meetings, the Governors of the Bank and the Fund elect Executive Directors to their respective Executive Boards.

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Ministerial Committees The IMF Board of Governors is advised by two ministerial committees, the International Monetary and Financial Committee (IMFC) and the Development Committee. The IMFC has 24 members, drawn from the pool of 187 governors. Its structure mirrors that of the Executive Board and its 24 constituencies. As such, the IMFC represents all the member countries of the Fund. The IMFC meets twice a year, during the Spring and Annual Meetings. The Committee discusses matters of common concern affecting the global economy and also advises the IMF on the direction its work. At the end of the Meetings, the Committee issues a joint communiqu summarizing its views. These communiqus provide guidance for the IMF's work program during the six months leading up to the next Spring or Annual Meetings. There is no formal voting at the IMFC, which operates by consensus. The Development Committee is a joint committee, tasked with advising the Boards of Governors of the IMF and the World Bank on issues related to economic development in emerging and developing countries. The committee has 24 members (usually ministers of finance or development). It represents the full membership of the IMF and the World Bank and mainly serves as a forum for building intergovernmental consensus on critical development issues. The Executive Board The IMF's 24-member Executive Board takes care of the daily business of the IMF. Together, these 24 board members represent all 187 countries. Large economies, such as the United States and China, have their own seat at the table but most countries are grouped in constituencies representing 4 or more countries. The largest constituency includes 24 countries. The Board discusses everything from the IMF staff's annual health checks of member countries' economies to economic policy issues relevant to the global economy. The board normally makes decisions based on consensus but sometimes formal votes are taken. At the end of most formal discussions, the Board issues what is known as a summing up, which summarizes its views. Informal discussions may be held to discuss complex policy issues still at a preliminary stage. Governance Reform To be effective, the IMF must be seen as representing the interests of all its 187 member countries. For this reason, it is crucial that its governance structure reflect todays world economy. In 2010, the IMF agreed wide-ranging governance reforms to reflect the increasing importance of emerging market countries. The reforms also ensure that smaller developing countries will retain their influence in the IMF.

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Country Representation
Unlike the General Assembly of the United Nations, where each country has one vote, decision making at the IMF was designed to reflect the position of each member country in the global economy. Each IMF member country is assigned a quota that determines its financial commitment to the IMF, as well as its voting power. To be effective, the IMF must be seen as representing the interests of all of its 187 member countries, from its smallest shareholder Tuvalu, to its largest, the United States. In November 2010, the IMF agreed on reform of its framework for making decisions to reflect the increasing importance of emerging market and developing economies. Giving more say to emerging markets In recent years, emerging market countries have experienced strong growth and now play a much larger role in the world economy. The reforms will produce a shift of 6 percent of quota shares to dynamic emerging market and developing countries. This realignment will give more say to a group of countries known as the BRICS: Brazil, Russia, India, and China. Protecting the voice of low-income countries The reform package also contains measures to protect the voice of the poorest countries in the IMF. Without these measures, this group of countries would have seen its voting shares decline. Timeline for implementing the reform The Board of Governors, the IMFs highest decision-making body, must ratify the new agreement by an 85 percent majority before it comes into effect. The plan is for the reform to be implemented in 2012.

Accountability
The IMF is accountable to its 187 member governments, and is also scrutinized by multiple stakeholders, from political leaders and officials to, the media, civil society, academia, and its own internal watchdog. The IMF, in turn, encourages its own members to be as open as possible about their economic policies to encourage their accountability and transparency. Engagement with intergovernmental groups

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Official groups, such as the Group of Twenty (G-20) industrialized and emerging market countries (G-20) and the Group of Eight (G-8) are also actively engaged in the work of the IMF. The G-20 consists of the 20 leading and emerging economies of the world, and includes all G-8 countries plus Argentina, Australia, Brazil, China, India, Indonesia, Korea, Mexico, Saudi Arabia, South Africa, and Turkey, as well as the European Union. The G-20 discusses and coordinates international financial stability and is a key player in shaping the work of the IMF. Its meetings usually take place twice a year at the level of heads of state and government, with several other ministerial-level meetings, including finance ministers and central bank governors, held a few times a year. The G-8 finance ministers and central bank governors meet at least twice annually to monitor developments in the world economy and assess economic policies. The Managing Director of the IMF is usually invited to participate in those discussions. The G-8 functions as a forum for discussion of economic and financial issues among the major industrial countriesCanada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States. Civil society, think tanks, and the media The IMF's work is scrutinized by the media, the academic community, and civil society organizations (CSOs). IMF management and senior staff communicate with the media on a daily basis. Additionally, a biweekly press briefing is held at the IMF Headquarters, during which a spokesperson takes live questions from journalists. Journalists who cannot be present are invited to submit their questions via the online media briefing center. IMF staff at all levels frequently meet with members of the academic community to exchange ideas and receive new input. The IMF also has an active outreach program involving CSOs. Internal watchdog The IMF's work is reviewed on a regular basis by an internal watchdog, the Independent Evaluation Office, established in 2001. The IEO is fully independent from IMF management and operates at arm's length from the Executive Board, although the Board appoints its director. The IEO's mission is to enhance the learning culture within the IMF, strengthen its external credibility, promote greater understanding of the work of the Fund, and support institutional governance and oversight. The IEO establishes its own work program, selecting topics for review based on suggestions from stakeholders inside and outside the IMF. Its recommendations strongly influence the Fund's work. Ethics office and code of conduct The IMF also has its own Ethics Office. Established as an independent arm of the Fund in 2000, the Office provides advice and guidance to IMF staff, and undertakes investigations into allegations of 25

unethical behavior and misconduct. An Integrity Hotlinea 24-hour whistleblowing systemwas launched in 2008. The Ethics Office publishes an Annual Report, which is published on the IMFs website. Upon joining the IMF, all staff sign an agreement that commits them to adhere to the IMFs ethics rules, which include a Code of Conduct and rules for financial disclosure. A separate Code of Conduct applies to IMF Executive Directors. The IMFs Executive Board has also set out Applicable Standards of Conduct for the Managing Director. Transparency The IMF also encourages its member countries to be as open as possible about their economic policies. Greater openness encourages public discussion of economic policy, enhances the accountability of policymakers, and facilitates the functioning of financial markets. To that effect, the IMF's Executive Board has adopted a transparency policy to encourage publication of member countries' policies and data. This policy designates the publication status of most categories of Board documents as "voluntary but presumed." This means that publication requires the member's explicit consent but is expected to take place within 30 days following the Board discussion. In taking these steps to enhance transparency, the Executive Board has had to consider how to balance the IMF's responsibility to oversee the international monetary system with its role as a confidential advisor to its members. The IMF regularly reviews its transparency policy.

Our Work
The IMF's fundamental mission is to help ensure stability in the international system. It does so in three ways: keeping track of the global economy and the economies of member countries; lending to countries with balance of payments difficulties; and giving practical help to members.

Surveillance
When a country joins the IMF, it agrees to subject its economic and financial policies to the scrutiny of the international community. It also makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, to avoid manipulating exchange rates 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 weaknesses that are causing or could lead to financial or economic instability. This process is known as surveillance. Country surveillance Country surveillance is an ongoing process that culminates in regular (usually annual) comprehensive consultations with individual member countries, with discussions in between as needed. The 26

consultations are known as "Article IV consultations" because they are required by Article IV of the IMF's Articles of Agreement. During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country's economic and financial policies with government and central bank officials. IMF staff missions also often meet with parliamentarians and representatives of business, labor unions, and civil society. The team reports its findings to IMF management and then presents them for discussion to the Executive Board, which represents all of the IMF's member countries. A summary of the Board's views is subsequently transmitted to the country's government. In this way, the views of the global community and the lessons of international experience are brought to bear on national policies. Summaries of most discussions are released in Public Information Notices and are posted on the IMF's web site, as are most of the country reports prepared by the staff. In June 2007 the IMF's Executive Board adopted a comprehensive policy statement on surveillance. The 2007 Decision on Bilateral Surveillance over Member's Policies, complements Article IV of the IMFs Articles of Agreement and introduces the concept of external stability as an organizing principle for bilateral surveillance. This means that the main focus of the discussions between the IMF and country officials is whether there are risks to the economys domestic and external stability that would call for adjustments to that countrys economic or financial policies. Regional surveillance Regional surveillance involves examination by the IMF of policies pursued under currency unionsi ncluding the euro area, the West African Economic and Monetary Union, the Central African Economic and Monetary Community, and the Eastern Caribbean Currency Union. Regional economic outlook reports are also prepared to discuss economic developments and key policy issues in Asia Pacific, Europe, Middle East and Central Asia, Sub-Saharan Africa, and the Western Hemisphere. Global surveillance Global surveillance entails reviews by the IMF's Executive Board of global economic trends and developments. The main reviews are based on the World Economic Outlook reports and the Global Financial Stability Report, which covers developments, prospects, and policy issues in international financial markets. Both reports are published twice a year, with updates being provided on a quarterly basis. In addition, the Executive Board holds more frequent informal discussions on world economic and market developments. The IMF also has the option of holding multilateral consultations, involving smaller groups of countries , to foster debate and develop policy actions designed to address problems of global or regional importance. In 2006, multilateral consultations brought together China, euro area countries, Japan, Saudi Arabia, and the United States to discuss global economic imbalances.

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Technical assistance
The IMF shares its expertise with member countries by providing technical assistance and training in a wide range of areas, such as central banking, monetary and exchange rate policy, tax policy and administration, and official statistics. The objective is to help improve the design and implementation of members' economic policies, including by strengthening skills in institutions such as finance ministries, central banks, and statistical agencies. The IMF has also given advice to countries that have had to reestablish government institutions following severe civil unrest or war. In 2008, the IMF embarked on an ambitious reform effort to enhance the impact of its technical assistance. The reforms emphasize better prioritization, enhanced performance measurement, more transparent costing and stronger partnerships with donors. Beneficiaries of technical assistance Technical assistance is one of the IMF's core activities. It is concentrated in critical areas of macroeconomic policy where the Fund has the greatest comparative advantage. Thanks to its nearuniversal membership, the IMF's technical assistance program is informed by experience and knowledge gained across diverse regions and countries at different levels of development. About 80 percent of the IMF's technical assistance goes to low- and lower-middle-income countries, in particular in sub-Saharan Africa and Asia. Post-conflict countries are major beneficiaries. The IMF is also providing technical assistance aimed at strengthening the architecture of the international financial system, building capacity to design and implement poverty-reducing and growth programs, and helping heavily indebted poor countries (HIPC) in debt reduction and management. Types of technical assistance The IMF's technical assistance takes different forms, according to needs, ranging from long-term handson capacity building to short-notice policy support in a financial crisis. Technical assistance is delivered in a variety of ways. IMF staff may visit member countries to advise government and central bank officials on specific issues, or the IMF may provide resident specialists on a short- or a long-term basis. Technical assistance is integrated with country reform agendas as well as the IMF's surveillance and lending operations. The IMF is providing an increasing part of its technical assistance through regional centers located in Gabon, Mali, and Tanzania for Africa; in Barbados for the Caribbean; in Lebanon for the Middle East; and in Fiji for the Pacific Islands. As part of its reform program, the IMF is planning to open four more regional technical assistance centers in Africa, Latin America, and central Asia. The IMF also offers training courses for government and central bank officials of member countries at its headquarters in Washington, D.C., and at regional training centers in Austria, Brazil, China, India, Singapore, Tunisia, and the United Arab Emirates.

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Partnership with donors Contributions from bilateral and multilateral donors are playing an increasingly important role in enabling the IMF to meet country needs in this area, now financing about two thirds of the IMF's field delivery of technical assistance. Strong partnerships between recipient countries and donors enable IMF technical assistance to be developed on the basis of a more inclusive dialogue and within the context of a coherent development framework. The benefits of donor contributions thus go beyond the financial aspect. The IMF is currently seeking to leverage the comparative advantages of its technical assistance to expand donor financing to meet the needs of recipient countries. As part of this effort, the Fund is strengthening its partnerships with donors by engaging them on a broader, longer-term and more strategic basis. The idea is to pool donor resources in multi-donor trust funds that would supplement the IMF's own resources for technical assistance while leveraging the Fund's expertise and experience. Expansion of the multi-donor trust fund model is envisaged on a regional and topical basis, offering donors different entry points according to their priorities. The IMF is planning to establish a menu of seven topical trust funds over the next two years, covering anti-money laundering/combating the financing of terrorism; fragile states; public financial management; management of natural resource wealth, public debt sustainability and management, statistics and data provision; and financial sector stability and development.

Lending by the IMF

A country in severe financial trouble, unable to pay its 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 needthat is, 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 payments problems, stabilize their economies, 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. 29

The changing nature of lending About four out of five member countries have used IMF credit at least once. But the amount of loans outstanding and the number of borrowers have fluctuated significantly over time. In the first two decades of the IMF's existence, more than half of its lending went to industrial countries. But since the late 1970s, these countries have been able to meet their financing needs in the capital markets. The oil shock of the 1970s and the debt crisis of the 1980s led many lower- and lower-middle-income countries to borrow from the IMF. In the 1990s, the transition process in central and eastern Europe and the crises in emerging market economies led to a further increase in the demand for IMF resources. In 2004, benign economic conditions worldwide meant that many countries began to repay their loans to the IMF. As a consequence, the demand for the Funds resources dropped off sharply . But in 2008, the IMF began making loans to countries hit by the global financial crisis The IMF currently has programs with more than 50 countries around the world and has committed more than $325 billion in resources to its member countries since the start of the global financial crisis. While the financial crisis has sparked renewed demand for IMF financing, the decline in lending that preceded the financial crisis also reflected a need to adapt the IMF's lending instruments to the changing needs of member countries. In response, the IMF conducted a wide-ranging review of its lending facilities and terms on which it provides loans. In March 2009, the Fund announced a major overhaul of its lending framework, including modernizing conditionality, introducing a new flexible credit line, enhancing the flexibility of the Funds regular standby lending arrangement, doubling access limits on loans, adapting its cost structures for high-access and precautionary lending, and streamlining instruments that were seldom used. It has also speeded up lending procedures and redesigned its Exogenous Shocks Facility to make it easier to access for lowincome countries. More reforms have since been undertaken, most recently in November 2011. Lending to preserve financial stability Article I of the IMF's Articles of Agreement states that the purpose of lending by the IMF is "...to give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity." In practice, the purpose of the IMF's lending has changed dramatically since the organization was created. Over time, the IMF's financial assistance has evolved from helping countries deal with shortterm trade fluctuations to supporting adjustment and addressing a wide range of balance of payments problems resulting from terms of trade shocks, natural disasters, post-conflict situations, broad 30

economic transition, poverty reduction and economic development, sovereign debt restructuring, and confidence-driven banking and currency crises. Today, IMF lending serves three main purposes. First, it can smooth adjustment to various shocks, helping a member country avoid disruptive economic adjustment or sovereign default, something that would be extremely costly, both for the country itself and possibly for other countries through economic and financial ripple effects (known as contagion). Second, IMF programs can help unlock other financing, acting as a catalyst for other lenders. This is because the program can serve as a signal that the country has adopted sound policies, reinforcing policy credibility and increasing investors' confidence. Third, IMF lending can help prevent crisis. The experience is clear: capital account crises typically inflict substantial costs on countries themselves and on other countries through contagion. The best way to deal with capital account problems is to nip them in the bud before they develop into a full-blown crisis. Conditions for lending When a member country approaches the IMF for financing, it may be in or near a state of economic crisis, with its currency under attack in foreign exchange markets and its international reserves depleted, economic activity stagnant or falling, and a large number of firms and households going bankrupt. In difficult economic times, the IMF helps countries to protect the most vulnerable in a crisis. The IMF aims to ensure that conditions linked to IMF loan disbursements are focused and adequately tailored to the varying strengths of members' policies and fundamentals. To this end, the IMF discusses with the country the economic policies that may be expected to address the problems most effectively. The IMF and the government agree on a program of policies aimed at achieving specific, quantified goals in support of the overall objectives of the authorities' economic program. For example, the country may commit to fiscal or foreign exchange reserve targets. The IMF discusses with the country the economic policies that may be expected to address the problems most effectively. The IMF and the government agree on a program of policies aimed at achieving specific, quantified goals in support of the overall objectives of the authorities' economic program. For example, the country may commit to fiscal or foreign exchange reserve targets. Loans are typically disbursed in a number of installments over the life of the program, with each installment conditional on targets being met. Programs typically last up to 3 years, depending on the nature of the country's problems, but can be followed by another program if needed. The government outlines the details of its economic program in a "letter of intent" to the Managing Director of the IMF. Such letters may be revised if circumstances change. For countries in crisis, IMF loans usually provide only a small portion of the resources needed to finance their balance of payments. But IMF loans also signal that a country's economic policies are on the right

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track, which reassures investors and the official community, helping countries find additional financing from other sources. Main lending facilities In an economic crisis, countries often need financing to help them overcome their balance of payments problems. Since its creation in June 1952, the IMFs Stand-By Arrangement (SBA) has been used time and again by member countries, it is the IMFs workhorse lending instrument for emerging market countries. Rates are non-concessional, although they are almost always lower than what countries would pay to raise financing from private markets. The SBA was upgraded in 2009 to be more flexible and responsive to member countries needs. Borrowing limits were doubled with more funds available up front, and conditions were streamlined and simplified. The new framework also enables broader high-access borrowing on a precautionary basis. The Flexible Credit Line (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 countrys discretion could be for either 1-2 years, with a review of eligibility after the first year. There is the flexibility to either treat the credit line as precautionary or draw on it at any time after the FCL is approved. Once a country qualifies (according to pre-set criteria), it can tap all resources available under the credit line at any time, as disbursements would not be phased and conditioned on particular policies as with traditional IMFsupported programs. This is justified by the very 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. The Precautionary and Liquidity Line (PLL) builds on the strengths and broadens the scope of the Precautionary Credit Line (PCL). The PLL provides financing to meet actual or potential balance of payments needs of countries with sound policies, and is intended to serve as insurance and help resolve crises. It combines a qualification process (similar to that for the FCL) with focused ex-post conditionality aimed at addressing vulnerabilities identified during qualification. Its qualification requirements signal the strength of qualifying countries fundamentals and policies, thus contributing to consolidation of market confidence in the countrys policy plans. The PLL is designed to provide liquidity to countries with sound policies under broad circumstances, including countries affected by regional or global economic and financial stress. The Rapid Financing Instrument (RFI) provides rapid and low-access financial assistance to member countries facing an urgent balance of payments need, without the need for a full-fledged program. It can provide support to meet a broad range of urgent needs, including those arising from commodity price shocks, natural disasters, post-conflict situations and emergencies resulting from fragility. The Extended Fund Facility is used to help countries address balance of payments difficulties related partly to structural problems that may take longer to correct than macroeconomic imbalances. A

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program supported by an extended arrangement usually includes measures to improve the way markets and institutions function, such as tax and financial sector reforms, privatization of public enterprises. The Trade Integration Mechanism allows the IMF to provide loans under one of its facilities to a developing country whose balance of payments is suffering because of multilateral trade liberalization, 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. Lending to low-income countries To help low-income countries weather the severe impact of the global financial crisis, the IMF has revamped its concessional lending facilities to make them more flexible and meet increasing demand for financial assistance from countries in need. These changes became effective in January 2010. Once additional loan and subsidy resources are mobilized, these changes will boost available resources for low-income countries to US$17 billion through 2014. Three types of loans were created under the new Poverty Reduction and Growth Trust (PRGT) as part of this broader reform: the Extended Credit Facility, the Rapid Credit Facility and the Standby Credit Facility. The Extended Credit Facility (ECF) provides financial assistance to countries with protracted balance of payments problems. The ECF succeeds the Poverty Reduction and Growth Facility (PRGF) as the Funds main tool for providing medium-term support LICs, with higher levels of access, more concessional financing terms, more flexible program design features, as well as streamlined and more focused conditionality. The Rapid Credit Facility (RCF) provides rapid financial assistance with limited conditionality to lowincome countries (LICs) facing an urgent balance of payments need. The RCF streamlines the Funds emergency assistance, provides significantly higher levels of concessionality, can be used flexibly in a wide range of circumstances, and places greater emphasis on the countrys poverty reduction and growth objectives. The Standby Credit Facility (SCF) provides financial assistance to low-income countries (LICs) with shortterm balance of payments needs. It provides support under a wide range of circumstances, allows for high access, carries a low interest rate, can be used on a precautionary basis, and places emphasis on countries poverty reduction and growth objectives. Several low-income countries have made significant progress in recent years toward economic stability and no longer require IMF financial assistance. But many of these countries still seek the IMF's advice, and the monitoring and endorsement of their economic policies that comes with it. To help these countries, the IMF has created a program for policy support and signaling, called the Policy Support Instrument.

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Debt relief In addition to concessional loans, some low-income countries are also eligible for debts to be written off under two key initiatives. The Heavily Indebted Poor Countries (HIPC) Initiative, introduced in 1996 and enhanced in 1999, whereby creditors provide debt relief, in a coordinated manner, with a view to restoring debt sustainability; and The Multilateral Debt Relief Initiative (MDRI), under which the IMF, the International Development Association (IDA) of the World Bank, and the African Development Fund (AfDF) canceled 100 percent of their debt claims on certain countries to help them advance toward the Millennium Development Goals.

Tackling Current Challenges

As the world economy became engulfed in the worst crisis since the Great Depression of the 1930s, the IMF mobilized on many fronts to support its member countries, increasing its lending, using its crosscountry experience to advise on policy solutions, and introducing reforms to modernize its operations and become more responsive to member countries needs. With the worldwide recovery becoming more established but remaining fragile on a variety of fronts, the IMF is now rethinking its policy advice and the economic theory that underpins it and stepping up its global economic monitoring role to help countries anticipate looming problems and take early action to avoid future crises.

Reinforcing multilateralism
The crisis highlighted the tremendous benefits from international cooperation. Without the cooperation spearheaded by the Group of Twenty industrialized and emerging market economies (G-20) the crisis could have been much worse. At their 2009 Pittsburgh Summit G-20 countries pledged to adopt policies that would ensure a lasting recovery and a brighter economic future, launching the "Framework for Strong, Sustainable, and Balanced Growth." The backbone of this framework is a multilateral process, where G-20 countries together set out objectives and the policies needed to get there. And, most importantly, they undertake to check on their progress toward meeting those shared objectivesdone through the G-20 Mutual Assessment Process or MAP. At the request of the G-20, the IMF provides the technical analysis needed to evaluate how members policies fit togetherand whether, collectively, they can achieve the G-20s goals. The IMFs Executive Board has also been considering a range of options to enhance multilateral, bilateral, and financial surveillance, and to better integrate the three. It has launched spillover reports for the five most systemic economiesChina, the Euro Area, Japan, United Kingdom, and the United Statesto assess the impact of policies by one country or area on the rest of the world. 34

Rethinking macroeconomic principles

The severity of the crisisimmense hardship and suffering around the worldand the desire to avoid a repeat also raised some profound questions about the pre-crisis consensus on macroeconomic policies. In this context, the IMF is encouraging a wholesale re-examination of macroeconomic policy principles in the wake of the global economic crisis. In March 2011, the IMF hosted a high profile conference to take stock of these policy questions and promote a discussion about the future of macroeconomic policy. The agenda focused on six key areas: monetary policy; fiscal policy; financial intermediation and regulation; capital account management; growth strategies; and the international monetary system (discussed further below). A key goal of the conference was to promote a broad-based and ongoing dialogue that extends beyond the corridors of the IMF. To this end, the conference was webcast and the conference co-hosts opened an online discussion with posts on the IMF blog, iMFdirect.

Stepping up crisis lending

As part of its efforts to support countries during the global economic crisis, the IMF is beefing up its lending capacity. It has approved a major overhaul of how it lends money by offering higher amounts and tailoring loan terms to countries varying strengths and circumstances. More recently, further reforms have been approved that strengthen the IMFs capacity to prevent crises. In particular: Doubling of lending access limits for member countries and streamlining procedures to reduce perceived stigma attached to borrowing from the Fund Introducing and refining a Flexible Credit Line (FCL) for countries with robust policy frameworks and a strong track record in economic performance; and introducing a new Precautionary Credit Line (PCL) for countries that have sound economic policies and fundamentals, but are still facing vulnerabilities Modernizing conditionality to ensure that conditions linked to IMF loan disbursements are focused and adequately tailored to the varying strengths of members policies Focusing more on social spending and more concessional terms for low-income countries The IMF has committed more than $280 billion to countries hit by the crisisincluding Greece, Ireland, Portugal, Romania, and Ukraineand has extended credit to Mexico, Poland, and Colombia under a new flexible credit line. The IMF is also stepping up its lending to low-income countries to help prevent the crisis undermining recent economic gains and keep poverty reduction efforts on track.

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Strengthening the international monetary system

The current International Monetary Systemthe set of internationally agreed rules, conventions, and supporting institutions that facilitate international trade and cross-border investment, and the flow of capital among countrieshas certainly delivered a lot. But it has a number of well-known weaknesses, including the lack of an automatic and orderly mechanism for resolving the buildup of real and financial imbalances; volatile capital flows and exchange rates that can have deleterious economic effects; and related to the above, the rapid, unabated accumulation of international reserves, concentrated on a narrow supply. Addressing these problems is crucial to achieving the global public good of economic and financial stability, by ensuring an orderly rebalancing of demand growth, which is essential for a sustained and strong global recovery, and reducing systemic risk. The IMFs recent review of its mandate and resultant reformsto surveillance and its lending toolkitgo some way towards addressing these concerns but further reforms are being pursued.

Supporting low-income countries

The IMF has upgraded its support for low-income countries, reflecting the changing nature of economic conditions in these countries and their increased vulnerabilities due to the effects of the global economic crisis. It has overhauled its lending instruments, especially to address more directly countries' needs for short-term and emergency support. The IMF support package includes: Mobilizing additional resources, including from sales of an agreed amount of IMF gold, to boost the IMFs concessional lending capacity to up to $17 billion through 2014, including up to $8 billion in the first two years. This exceeds the call by the Group of Twenty for $6 billion in new lending over two to three years. Providing interest relief, with zero payments on outstanding IMF concessional loans through end-2011 to help low-income countries cope with the crisis. Establishing a new set of financial instruments

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