The IMF is an independent international organization. It is a cooperative of 185 member countries, whose objective is to promote world economic stability and growth.¹ The member countries are the shareholders of the cooperative, providing the capital of the IMF through quota subscriptions (Box 1.1 and the Appendix). In return, the IMF provides its members with macroeconomic policy advice, financing in times of balance of payments need, and technical assistance and training to improve national economic management.

Box 1.1. The IMF’s Quota System¹

Quotas as the Basis of Capital Subscriptions to the IMF. Each member of the IMF is assigned a quota expressed in special drawing rights (SDRs), the IMF’s unit of account for financial transactions with member countries. The member’s capital subscription to the IMF is equal to its quota. Members pay up to 25 percent of their quota in the form of reserve assets and the remainder in their own currency. A member borrows from the IMF by purchasing reserve assets using its own currency, and repays the IMF by repurchasing its own currency using reserve assets. The total quota or capital subscription of all members is currently SDR 212.8 billion.

Other Functions of Quotas. Quotas determine the size of the IMF and play a central role in the IMF’s operations.

Lending Capacity. Quota subscriptions by members provide by far the bulk of the resources (reserve assets) available to the IMF to finance its lending operations. Therefore, quotas to a large extent determine the lending capacity of the IMF.
Voting Power. Quotas largely determine the distribution of the voting power of the IMF and, therefore, the relative influence of individual members in decision-making at the IMF.
Access Limits. The limit of members’ access to IMF resources is stated as a percent of quota, so that quotas in principle determine the maximum level of a country’s access. These access limits vary according to the type of borrowing arrangement between the member and the IMF. For example, under the credit tranches and the Extended Fund Facility, borrowing is subject to an annual limit of 100 percent of quota and a cumulative limit of 300 percent of quota.
SDR Allocations. Quotas determine a member’s share in a general allocation of Special Drawing Rights.

How Quotas Are Determined. The Board of Governors determines the aggregate quota and the distribution of this aggregate among the individual member countries. The aggregate quota is set taking into account the IMF’s capacity to satisfy the projected financing needs of the membership, while individual quotas are based broadly on members’ relative economic sizes in the world economy. The IMF normally conducts general quota reviews every five years with a view to adjusting, if necessary, the aggregate size and distribution of members’ quotas to reflect developments in the world economy and changes in members’ relative economic sizes. Quota reviews have focused on the role and size of the IMF; the adequacy of IMF resources and the need for a possible quota increase; the distribution of quotas, including possible changes to quota formulas; and governance and representation. The IMF may also undertake ad hoc quota adjustments at the request of individual members, both within and outside the context of a general review, although significant adjustments in quota shares have tended to take place in the context of general quota increases. The twelfth general review of quotas was concluded in January 2003 with no change in quotas. An 85 percent majority of the total voting power of the Board of Governors is required for any change of quotas.

Quota Formulas. Quota formulas exist to calculate the quotas of member countries. Five quota formulas are currently used for this purpose, incorporating variables that measure the economic size, external position, openness to trade, and variability of export earnings of member countries. In principle, calculated quotas help guide decisions regarding the aggregate size and distribution of members’ actual quotas. In practice, the IMF has tended to distribute the bulk of quota increases as a uniform percentage of existing quotas, with the result that actual quotas of individual members differ significantly from the calculated quotas. The quota formulas have not produced quota shares that would be considered acceptable to the IMF’s membership, in part because of the politically-sensitive nature of quota shares and perceived deficiencies of the formulas themselves. The formulas are currently being reviewed with a view to simplifying and updating them.

1 See Articles of Agreement; IMF, Financial Organization and Operations of the IMF, Pamphlet Series No. 45, sixth edition, 2001.

The IMF is one of several autonomous organizations designated by the United Nations (UN) as “Specialized Agencies,” with which the UN has established working relationships.² The IMF is a permanent observer at the UN.

The Articles of Agreement that created the IMF and govern its operations were adopted at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire, on July 22, 1944, and entered into force on December 27, 1945.³ Article I sets out the mandate of the IMF as follows:

To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems;
To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy;
To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation;
To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade;
To give confidence to members by making the general resources of the IMF 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; and
To shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

This mandate gives the IMF its unique character as an international monetary institution, with broad oversight responsibilities for the orderly functioning and development of the international monetary and financial system.

Functions

The IMF pursues the various facets of its mandate in a number of ways. These are summarized below, and described more detail in later chapters.

Surveillance over Members’ Economic Policies

In becoming members of the IMF, countries agree to pursue economic policies that are consistent with the objectives of the IMF. The Articles of Agreement confer on the IMF the legal authority to oversee compliance by members with this obligation, making the IMF “the only organization that has a mandate to examine on a regular basis the economic circumstances of virtually every country in the world.”⁴

Financing Temporary Balance of Payments Needs

The Articles of Agreement enable the IMF to lend to member countries that have a balance of payments need to provide temporary respite and enable countries to put in place orderly corrective measures and avoid a disorderly adjustment of the external imbalance. Such lending is usually undertaken in the context of an economic adjustment program implemented by the borrowing country to correct the balance of payments difficulties, which also safeguards IMF resources. In addition to providing direct financing to its member countries, the IMF plays an important catalytic role in helping member countries to mobilize external financing for their balance of payments needs.

Combating Poverty in Low-Income Countries

The IMF provides concessional loans to low-income member countries to help support these countries’ efforts to eradicate poverty. In this venture, the IMF works closely with the World Bank and other development partners. In this area the IMF also plays a critical catalytic role to mobilize external financing and donor support for the countries’ balance of payments and development needs. The IMF also participates in two international initiatives to provide debt relief: the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI).

Mobilizing External Financing

IMF endorsement of a country’s policies serves as an important catalyst for mobilizing resources from bilateral and multilateral lenders and donors. They rely on an IMF endorsement of a country’s economic policies or might even require a formal IMF-supported economic program before committing or disbursing their own resources to that country or granting debt relief. IMF policy assessments and recommendations also provide important signals to investors and financial markets regarding a country’s economic future, and impact on investor and market confidence in the economy.

Strengthening the International Monetary System

The IMF is the central institution in the international monetary system. It serves as a forum for consultation and collaboration by members on international monetary and financial matters, and works with other multilateral institutions to devise international rules that would facilitate the prevention and orderly resolution of international economic problems.

Increasing the Global Supply of International Reserves

The IMF is authorized to issue an international reserve asset called the Special Drawing Right (SDR) if there is a global need to supplement existing reserve assets. These allocated SDRs are part of the net international reserves of members and can be exchanged for convertible currencies. They are not a claim on the IMF. The SDR is also the IMF’s unit of account for all financial transactions with members.

Building Capacity through Technical Assistance and Training

Technical assistance and training are provided in the core areas of IMF expertise to help member countries design economic policies and improve economic management capabilities, which in turn can help reduce the risk of policy failures and the countries’ resilience to shocks, and facilitating program design and implementation. These activities are particularly important in developing countries, where resources are scarce and institutions often weak.

Dissemination of Information and Research

The IMF is a premier source for economic analysis of its member countries’ economic policies and statistical information. Information is disseminated through its numerous economic reports and research studies on member countries, as well as specialized statistical publications. The IMF also conducts research in areas relevant to its mandate and operations, mainly to improve its economic analysis and its advice to member countries. The results of this research are disseminated through books, IMF and academic journals and working papers, occasional papers, and the internet.

Medium-Term Strategy

In light of the economic transformation wrought by 21^st century globalization, the IMF embarked on a review of its future direction, publishing the Managing Director’s Report on Implementing the Fund’s Medium-Term Strategy (MTS) in April 2006. The strategy concluded that the emergence of new economic powers, integrated financial markets, unprecedented capital flows, and new ideas to promote economic development required an updated interpretation of the IMF’s mandate as the steward of international financial cooperation and stability. Without new focus and carefully chosen priorities, the institution risked being pulled in too many directions and losing its relevance to large parts of the membership.

The proposals put forward in the MTS cover the following issues:

New directions in surveillance. The difficulties in tackling unprecedented global imbalances, and the challenges facing individual countries, underscore the need for stronger exercise of surveillance by the IMF. At the global level, the MTS calls for efforts to identify—and promote effective responses to—risks to economic stability, including from payments imbalances, currency misalignments, and financial market disturbances. At the country level, the MTS calls for efforts to choosing focus and effectiveness over comprehensiveness, with deeper analysis of financial systems, a greater multilateral perspective to surveillance, and more regional context and outreach.⁵ In this context, discussions are ongoing about the introduction of a new surveillance remit—understood as a statement of objectives, priorities, and responsibilities—to strengthen the effectiveness of surveillance.⁶
The changing role of the IMF in emerging market countries. In the many countries that have already emerged to become major global players, the MTS calls for efforts to augment can...

Cover Page
Title Page
Copyright Page
Contents
Foreword
Abbreviations and Acronyms
1. Overview of the IMF
2. Surveillance Over Members’ Economic Policies
3. Financing Temporary Balance of Payments Needs
4. Special Drawing Rights
5. Combating Poverty in Low-Income Countries
6. Capacity Building: Technical Assistance and Training
7. Strengthening the International Financial System
8. Collaboration with the World Bank and the World Trade Organization
9. Governance and Decision-Making
10. Internal Organization and Financing
Boxes
Appendix
Footnotes

About this book

Trusted by 375,005 students

Information

Chapter 1. OVERVIEW OF THE IMF

Mandate