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Cooperation and reconstruction (194471)

The multimedia content on this page cannot be printed. Video (2:38): A new era of economic cooperation began in Bretton Woods, New Hampshire in 1944

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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. 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 systemalso 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 (1972 81)

The multimedia content on this page cannot be printed. Video (3:29): Former U.S. President Richard Nixon announces end of dollar link to gold

U.S. gas station during the 1970s oil price shock.

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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 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 (198289)

Cotton harvest in Burkina Faso: Prices for commodities from developing countries slumped in the early 1980s because of recessions in industrial countries (photo: Issouf Sanogo/AAFP)

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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 non-oil-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.

The end of communism (1989-2004)

Berlin Wall coming down November 9, 1989

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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. 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).

Continued globalization (2005-present)

Optical fiber plant in Nanjing, China: World trade has expanded dramatically in recent years Video (7:07): The IMF historian compares the 2008 financial crisis to earlier crises, including the Great Depression.

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Another development with far-reaching consequences for the IMF's work was the sharp rise in private international 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. But a series of financial crises during the 1990s, triggered by sharp changes in the direction of capital flows, forced both the IMF and national policymakers to revisit these assumptions. The first capital account crisis erupted in Mexico in 1994. Crises followed in East Asia in 199798, Russia in 1998, and elsewhere in the years that followed. As the decade progressed, it became clear that these crises were fundamentally different from earlier ones. All were capital account crises, large in scale and, like most financial crises, involved enormous upheaval for the countries involved. The speed with which capital account crises erupted meant that financial support from the IMF for affected countries was often urgently neededin days rather than the weeks or months that Fund programs for current account crises had usually taken to put together. And the support needed tended to be on a much larger scale than the Fund had customarily provided because of the scale of the outflows experienced by crisis countries. The crises stimulated fresh thinking about the international financial system and how to respond to financial stress. The IMF's policy advice was adjusted, and its lending facilities were reviewed. But the changes have not stopped there. Since the late 1990s, the IMF has been undergoing constant reform to try and keep up with the fast-changing global economy. Like a snowball rolling down a mountain, globalization seems to be gathering more momentum. The implications of this continued rise of capital flows for economic policy and the stability of the international financial system are still not entirely clear. The current financial crisis and the food and oil price shock are clear signs that new challenges are waiting just around the corner. 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 Institutio

Governance Structure
The multimedia content on this page cannot be printed. Video (1:09): IMF's Executive Board

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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 By-Laws. 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. The multimedia content on this page cannot be printed. Video (4:55): Youssef Boutros Ghali, IMFC Chair 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 185 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 186 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 germane 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 Important progress was made in the reform of the Fund's governance in 2006-08, including the initiation of a process to realign members' voting power (see Country Representation). However, enhancing the Fund's legitimacy and effectiveness must also deal with the question of whether the significant changes since the establishment of the Fund require reform of the institutional framework through which members' voting power is actually exercised. Among other things, this requires careful consideration of the respective roles and responsibilities of the Board of Governors, the IMFC, the Executive Board, and IMF management. Managing Director Dominique Strauss-Kahn appointed in September 2008 a committee of eminent persons to assess the adequacy of the IMF's current framework for decision making and advise on any modifications that might enable the institution to fulfill its global mandate more effectively. The eight-person committee, chaired by Trevor Manuel, Minister of Finance of South Africa, reported its findings in March 2009.

Country Representation
The IMFC in session.

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How countries are represented is key to the IMF's legitimacy as an international organization representing the interests of its 186 member countries. Upon joining the IMF, each country is allocated a quota based approximately on the relative size of its economy. The quota determines the country's financial contribution to the IMF, its voting power, and ability to access IMF financing.

Because of rapid changes in the global economy in recent years, the IMF's members agreed that the existing quota allocations had become somewhat misaligned and needed to be adjusted. However, any changes in quotas require approval by an 85 percent majority. A broad-based consensus was therefore needed before any changes could be implemented. Two-year program In 2006, the IMF launched a two-year program to reform the system of quota shares. First-round changes included ad hoc quota increases for the four most underrepresented countries: China, Korea, Mexico, and Turkey (see chart). Agreement to further increase the voting share of emerging market and developing economies was reached in March 2008. This shift will be based on a new quota formula, replacing the old, complex system of five formulas. Under the reform, 135 countries will see increases in their voting power, with an aggregate shift of 5.4 percentage points. A total of 54 countries will see increases in their nominal quotas ranging from 12 to 106 percent, with aggregate quota shares for these countries increasing by 4.9 percentage points (see chart). Consistent with the objectives of the reform, some of the largest increases will go to dynamic emerging market countries. The Board of Governors also encouraged the Executive Board to recommend further realignments as a means to raise the shares of underrepresented members in future general quota reviews (conducted every five years). Such realignments would recognize that member country representation should continue to adjust to changes in the global economy.

Protecting voice of low-income countries Enhancing the voice of low-income countries was another central element of the reform package. A key mechanism for achieving this goal is through an increase in basic votes. Basic votes reflect the principle of equality of states and give the smallest members of the IMF (many of which are low-income countries), a greater voice in the organization's deliberations. The agreement reached endorsed a tripling of basic votes, the first such increase since the IMF was established in 1945. This boost is crucial as it will more than compensate many low-income countries that would have otherwise seem their voting shares diminished (see chart). Additionally, the Articles of Agreement will be amended so that the share of basic votes in total voting power does not decline in the event of future quota increases.

To further enhance the participation of low-income countries, the amendment will also enable the two Executive Directors representing African constituencies to appoint a second Alternate Executive Director.

Watch a video on governance reform. Read more about quota and voice reform. Listen to a podcast with Leo van Houtven, former Secretary of the IMF.

Accountability
The multimedia content on this page cannot be printed. Video (3:19): An interview with the head of the IMF's evaluation office

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The IMF is held accountable by multiple stakeholders, including by its own internal watchdog, member governments, the media, civil society, and academia. The IMF, in turn, encourages its own members to be as open as possible about their economic policies to encourage their accountability and transparency. 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. It has recently reviewed the IMF's engagement with sub-Saharan Africa, its advice to member countries on exchange rate policy, and its governance. Ethics office and whistleblower hotline 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 unethical behavior and misconduct. An Integrity Hotlinea 24-hour whistleblowing systemwas launched in 2008. Engagement with intergovernmental groups Official groups, such as the Group of Seven (better known as the G7) and the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development (better known as the G24), are also actively engaged in the work of the IMF. The G7 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. Russia has joined the group, thereby forming the Group of Eight. The G8 functions as a forum for discussion of economic and financial issues among the major industrial countries.

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The G24 consists of 24 countries from Africa, Latin America and the Caribbean, and Asia. The G24 seeks to coordinate the positions of developing and emerging market countries on international monetary and development finance issues and to ensure that their interests are adequately represented in negotiations on international monetary matters.Its meetings usually take place twice a year, prior to the IMFC and Development Committee meetings, to enable developing country members to discuss agenda items beforehand. 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. An IMF and Civil Society webpage was launched in December 2007. Transparency Accountability also works the other way, with the IMF encouraging 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 MF'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.

Surveillance
The multimedia content on this page cannot be printed. Video (6:47): A senior IMF official talks about why surveillance matters.

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More on surveillance and the global economic crisis Factsheet - IMF Surveillance 2007 Decision on Bilateral Surveillance Multilateral consultations IEO on multilateral surveillance Board IMF Public Information Notices Article IV consultations

What does the IMF look at? Surveillance covers a range of economic policies, with the emphasis varying in accordance with a country's individual circumstances.

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Exchange rate, monetary, and fiscal policies. The IMF provides advice on issues such as the choice of exchange rate policies and ensuring consistency between the regime and fiscal and monetary policies. Financial sector issues are receiving elevated coverage in surveillance reports, building on the achievements under the Financial Sector Assessment Program (FSAP), which enables the IMF and the World Bank to gauge the strengths and weaknesses of countries' financial sectors. Assessment of risks and vulnerabilities stemming from large and sometimes volatile capital flows has become more central to IMF surveillance in recent years. Institutional and structural issues have also gained importance in the wake of financial crises and in the context of some countries' transition from planned to market economies. The IMF and the World Bank play a central role in developing, implementing, and assessing internationally recognized standards and codes in areas crucial to the efficient functioning of a modern economy such as central bank independence, financial sector regulation, and policy transparency and accountability.

Highlights of this section:

Country Surveillance Regional Surveillance Global 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 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

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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.

Technical Assistance
The multimedia content on this page cannot be printed. Video (1:50): IMF's technical assistance work

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The multimedia content on this page cannot be printed. Video (6:26): A closer look at how knowledge is transferred. The IMF provides technical assistance and training mainly in four areas: The IMF provides technical assistance and training mainly in four areas:

monetary and financial policies (monetary policy instruments, banking system supervision and restructuring, foreign management and operations, clearing settlement systems for payments, and structure development of central banks); 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); compilation, management, dissemination, and improvement of statistical data; and economic and financial legislation.

Highlights of this section:

Beneficiaries of Technical Assistance Types of Technical Assistance Working Closely with Donors

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

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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 near-universal 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 hands-on 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. 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.

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Lending by the IMF

The multimedia content on this page cannot be printed. Video (5:51): The Prime Minister of Georgia discusses in an interview his country's lending program with the IMF.

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Key Issues: IMF lending Factsheet on lending Crisis lending Short-term lending facility IEO evaluates IMF loan conditions SDR interest rate Lending for poverty reduction Debt relief

Highlights of this section:

The changing nature of lending Three main purposes of lending Conditions for lending Main lending facilities Helping low-income countries Debt relief

A country in severe financial trouble, unable to pay its international bills, poses potential problems for 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. The IMF is not a development bank and, unlike the World Bank and other development agencies, it does not finance projects. 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-middleincome 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 (see chart below).

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But in 2008, the IMF began making loans again to countries hit by the financial crisis and high food and fuel prices. In late 2008 and early 2009 the IMF lent $60 billion to emerging markets affected by the 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 stand-by 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 low-income countries. Three main purposes of lending 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 short-term trade fluctuations to supporting adjustment and addressing a wide range of balance of payments problems resulting from terms of trade shocks, natural disasters, postconflict situations, broad 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

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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. 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 track, which reassures investors and the official community, helping countries find additional financing from other sources. Main lending facilities The Stand-By Arrangement is a key lending facility established in 1952. Although its use has been declining in recent years, it has remained the most popular facility for middle-income countries that seek financial assistance. Under its structure, financing is provided in support of adjustment to a balance of payments need and disbursed in tranches based on conditions spelled out in the program. The IMF's largest loans have traditionally been provided under SBAs. The IMF has introduced a new Flexible Credit Line (FCL) for countries with very strong fundamentals, policies, and track record of policy implementation. Once approved according to pre-set qualification criteria, countries can tap all resources available under the credit line at any time, as disbursements would not be phased and conditioned on compliance with a traditional Fund-supported program. 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 establishment of the FCL represents a significant shift in delivering Fund financial assistance. The FCL's flexibility includes:

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Assuring qualified countries of automatic and upfront access to Fund resources with no ongoing (ex post) conditions; Lack of restrictions in renewing the credit line, which at the countrys discretion could be for either a six-month period, or a 12-month period with a review of eligibility after six months; Longer repayment period (3 to 5 years).

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 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, and steps to make labor markets more flexible. The IMF also provides Emergency Assistance to countries coping with balance of payments problems caused by natural disasters or military conflicts. The interest rates are subsidized for low-income countries. 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 Low-income countries can borrow from the IMF at a very low, or concessional, interest rate. They can use the Poverty Reduction and Growth Facility, which is the main vehicle by which the IMF provides financial support to countries' poverty-reduction strategies. The facility's core objectives are to promote sustainable balance of payments positions and to foster sustainable growth, leading to higher living standards and a reduction in poverty. In recent years, the largest number of IMF loans has been made through the PRGF. Member countries can also access the Exogenous Shocks Facility, which helps deal with economic shocks, such as food and fuel price hikes or a natural disaster, that are beyond the control of a government but have a significant negative impacts on the economies. The interest rate levied on PRGF and ESF loans is only 0.5 percent, and loans are to be repaid over a period of 5-10 years. 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. 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

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The IMF is helping many emerging market countries tackle the problems brought on by the devastating global economic crisis. Its lending to low-income countries has also been stepped up, as these countries start to feel the effects of the crisis. And it is providing policy advice to advanced countries, for instance on how to address problems in their financing and banking sectors, and how to design effective stimulus packages. As part of its response, the IMF has already more than doubled its financial assistance to low-income countries, with new IMF concessional lending commitments to low-income countries through mid-July 2009 reaching $2.9 billion compared with $1.5 billion for the whole of 2008. As the global economy continues to struggle in 2009, and with both trade and capital flows plummeting, the IMF is foreseeing mounting problems for many countries. The Fund is therefore seeking to add to its resources, and has already negotiated borrowing agreements with a number of countries. The Fund has already made good progress toward its target of $250 billion in bilateral government loans as part of moves to triple the IMFs lendable resources to $750 billion. Agreements are already in place with Japan ($100 billion), Canada ($10 billion), and Norway ($4.5 billion), and a number of other countries have committed funds either through loans or the purchase of IMF notes. In addition, the Fund is closely tracking economic and financial developments worldwide so that it can provide policymakers with the latest forecasts and analysis of developments in financial markets. And it is engaging with the Group of 20 (G-20) leading economies and other stakeholders on issues related to the evolution of the international financial system.

Emergency lending to emerging markets Emerging market countries are facing increasing difficulties around the world because of the spreading global economic crisis, with demand falling for their exports, investment slumping, and cross-border lending drying up. A growing number of emerging economies have found room for policy maneuver becoming increasingly limited, and large-scale official support has been needed from bilateral and multilateral sources. Since 2008, the IMF has committed more than $160 billion in lending to a number of countries affected by the crisis, including Belarus, Hungary, Iceland, Latvia, Pakistan, Poland, Romania, Serbia, Sri Lanka, and Ukraine. It announced a precautionary loan for El Salvador and an IMF team has also been in negotiations with Turkey.

Helping low-income countries fight the crisis The global economic crisis is threatening to undermine recent economic gains and to create a humanitarian crisis in the worlds poorest countries. In response, the IMF has stepped up lending to low-income countries to combat the impact of the global recession with a new framework for loans to the worlds poorest nations, including increased resources, a doubling of borrowing limits, zero interest rates until the end of 2011, and new lending instruments that offer more flexible terms. Most low-income countries escaped the early phases of the global crisis, which began in the financial sectors of advanced economies. But it is now hitting them hard, mainly through trade, as financial problems in advanced countries trigger recessions that dampen demand for imports from low-income countries. In addition, more than $18 billion of a planned $250 billion allocation of IMF Special Drawing Rights (SDRs) will go to low-income countries. These countries can benefit by either counting the SDRs as extra assets in their reserves, or selling their SDRs for hard currency to meet balance of payments needs.

Advocating global fiscal stimulus

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The IMF is also providing policy advice to advanced countries, for instance on how to address problems in their financing and banking sectors, and how to design effective stimulus packages. Because of the constraints on the effectiveness of monetary policy, fiscal policy must play a central role in supporting demand. The IMF has advised countries that a key feature of a fiscal stimulus program is that it should support demand for a prolonged period of time and be applied broadly across countries with policy space to minimize cross-border leakages. But countries also need to be mindful of medium-term fiscal sustainability. The cost of fiscal stimulus packages to revive economies battered by the financial crisis, combined with tax revenue losses from output decline and the huge price tag for financial sector restructuring, will be very large.

Reforming the international financial system The global economic crisis has sparked a rethinking of how the international financial system is structured. The IMF is assisting the G-20 industrialized and emerging economies with recommendations to reshape the system of international regulation and governance. To a large extent, global efforts thus far have been focused on the crisis at hand, but reforms are in progress with a view toward the post-crisis world. As input into the reform process, the IMF published a comprehensive study of the causes of the global financial crisis. The study takes stock of the initial lessons learnt from the crisis and presses for a worldwide rethink of how to handle systemic risk management. Although economic and financial sector policies will remain primarily the business of national governments, ongoing changes to the global financial architectureincluding to the IMFcan reduce the frequency and depth of future crises. Additional changes could also include addressing some of the shortcomings of the decision-making structure of the G-20 by allowing greater scope for joint decision making on a wider set of international economic and financial issues, with the IMF in its newly expanded role as a central player.

Floating exchange rate

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20 one. (November 2008) It has been suggested that this article or section be merged with Floating currency. (Discuss)

Foreign exchange

Exchange rates Currency band Exchange rate Exchange rate regime Fixed exchange rate Floating exchange rate Linked exchange rate Markets Foreign exchange market Futures exchange Retail forex Products Currency Currency future Non-deliverable forward Forex swap Currency swap Foreign exchange option See also Bureau de change A floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency. It is not possible for a developing country to maintain the stability in the rate of exchange for its currency in the exchange market. There are two options open for them- [1] Let the exchange rate be allowed to fluctuate in the open market according to the market conditions, or [2] An equilibrium rate may be fixed to be adopted and attempts should be made to maintain it as far as possible. But, if there is a fundamental change in the circumstances, the rate should be changed accordingly. The rate of exchange under the first alternative is know as fluctuating rate of exchange and under second alternative, it is called flexible rate of exchange. In the modern economic conditions, the flexible rate of exchange system is more appropriate as it does not hamper the foreign trade. There are economists who think that, in most circumstances, floating exchange rates are preferable to fixed exchange rates. As floating exchange rates automatically adjust, they enable a country to dampen the impact of shocks and foreign business cycles, and to preempt the possibility of having a balance of payments crisis. However, in certain situations, fixed exchange rates may be preferable for their greater stability and certainty. This may not necessarily be true, considering the results of countries that attempt to keep the prices of their currency "strong" or "high" relative to others, such as the UK or the Southeast Asia countries before the Asian currency crisis. The debate of making a choice between fixed and floating exchange rate regimes is set forth by the Mundell-Fleming model, which argues that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. It can choose any two for control, and leave third to the market forces. In cases of extreme appreciation or depreciation, a central bank will normally intervene to stabilize the currency. Thus, the exchange rate regimes of floating currencies may more technically be known as a managed float. A central bank might, for instance, allow a currency

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price to float freely between an upper and lower bound, a price "ceiling" and "floor". Management by the central bank may take the form of buying or selling large lots in order to provide price support or resistance, or, in the case of some national currencies, there may be legal penalties for trading outside these bounds.

[edit] Fear of floating

The examples and perspective in this section may not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page.

A free floating exchange rate increases foreign exchange volatility. There are economists who think that this could cause serious problems, especially in emerging economies. These economies have a financial sector with one or more of following conditions:

high liability dollarization financial fragility strong balance sheet effects

When liabilities are denominated in foreign currencies while assets are in the local currency, unexpected depreciations of the exchange rate deteriorate bank and corporate balance sheets and threaten the stability of the domestic financial system. For this reason emerging countries appear to face greater fear of floating, as they have much smaller variations of the nominal exchange rate, yet face bigger shocks and interest rate and reserve movements.[1] This is the consequence of frequent free floating countries' reaction to exchange rate movements with monetary policy and/or intervention in the foreign exchange market. The number of countries that present fear of floating increased significantly during the nineties.[2]

[edit] References

Managed float regime

Investment Dictionary: Dirty Float Sponsored Links Scientific Fishing Lures New, patented lures. Tests show show they outfish live bait 3 to 1! www.ngcsports.com Home > Library > Business & Finance > Investment Dictionary A system of floating exchange rates in which the government or the country's central bank occasionally intervenes to change the direction of the value of the country's currency. In most instances, the intervention aspect of a dirty float system is meant to act as a buffer against an external economic shock before its effects become truly disruptive to the domestic economy. Also known as a "managed float". Investopedia Says: For example, country X may find that some hedge fund is speculating that its currency will depreciate substantially, thus the hedge fund is starting to short massive amounts of country X's currency. Because country X uses a dirty float system, the government decides to take swift action and buy back a large amount of its currency in order to limit the amount of devaluation caused by the hedge fund. A dirty float system isn't considered to be a true floating exchange rate because, theoretically, true floating rate systems don't allow for intervention.

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Related Links: Baffled by exchange rates? Wonder why some currencies fluctuate while others don't? This article has the answers. Floating And Fixed Exchange Rates Why would a country choose to implement dual or multiple exchange rates? It's risky, but it can work. Dual And Multiple Exchange Rates Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers. A Primer On The Forex Market

Official settlements balance (overall balance)

Definition: [crh] An overall measurement of a country's private financial and economic transactions with the rest of the world.