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Role of the Imf

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The initial idea to form the International Monetary Fund originated in the year 1944, when members of 45 countries gathered for a meeting in the town of Bretton Woods in New Hampshire in the United States. The objective of this meeting was to agree on a structure for economic cooperation between countries after the Second World War in order to avoid the negative impacts caused by the economic policies in the past which resulted in the Great depression of the 1930s.The International Monetary Fund was formally established in December in the year 1945 with 29 countries signing an agreement. Its membership gradually increased during the 1950s and 1960s with most of the African countries joining the International Monetary Fund after gaining independence. Currently, the International Monetary Fund has evolved to become an organization which consists of 188 member countries working with common objectives of promoting worldwide monetary cooperation, providing financial strength to countries, promoting international trade between countries, reducing unemployment and poverty in the world.
The new countries who became members of the International Monetary Fund between the years 1945 and 1971 gave their consent to keep their respective exchange rates fixed at rates that can only be changed to revise a significant inequality in the balance of payments, and could only be done so with the consent of the International Monetary Fund. This system was referred to as the par value system or the Bretton Woods system. However in the year 1971 this system was suspended when President Richard Nixon of the United States decided to stop conversions of the US dollar into gold. Even thought efforts were made to restart the system, it did not succeed and in the year 1973 the currencies of the main countries were allowed to float against the other currencies. As a result, with the failure of the Bretton Woods system, the member countries of the International Monetary Fund have had the freedom of choosing any type of conversion method.
Even though many believed that the failure of the Bretton Woods system would have a negative impact on the development period experienced, this was not so since the shift to a floating exchange rate system took place smoothly. This shift to a floating exchange rate system proved to be beneficial since it allowed countries to become more flexible especially with the sudden increase of world oil prices. In the year 1978, the International Monetary Fund revised its constitution and made changed to its role. A surveillance, technical assistance and financial assistance roles were added to the existing roles of the International Monetary Fund.
The International Monetary Fund plays a vital role in helping its member countries to identify and seize opportunities whilst also providing assistance to overcome the many challenges brought on by rapid globalization and economic development. The International Monetary Fund closely monitors economic developments as well as global financial performance and warns its members of any deviances or future issues that may arise. Further, they also provide a platform for discussions on issues with regard to policies and provide expertise and guidance to governments on how to overcome financial and economic related issues. In addition, the International Monetary Fund plays an important role in providing financial support and policy related advice to its members during economic downturn and assists developing countries in reducing unemployment and poverty.
Although the macroeconomic conditions are ever changing and rapid globalization is affecting most countries, the International Monetary Fund still continues to provide its member countries assistance in times of global monetary crisis and encourage international trade among the countries thereby creating more employment opportunities, growth in economies and eradicating poverty. Further, the International Monetary Fund continues to support its member countries to overcome issues arising due to balance of payments through continuous lending of foreign exchange.
The outlook of the International Monetary Fund has changed due to the prevailing global economic recession and financial crisis experienced by most countries. The International Monetary Fund has evolved to become an entirely different establishment focusing more on providing assistance based on the requirements of its member countries. It has increased its lending to the member countries and become more dynamic in reacting to changes in the world economy. The International Monetary Fund has significantly increased its lending commitments and in the year 2010 recorded its highest lending of more than US$ 250 billion (www.imf.org). The International Monetary Fund has also played an important role in providing policy advice based on analysis and forecasts which have been in great demand. The International Monetary Fund is continuing to understand the current crisis for better policy and regulations and learn from the outcomes of the past so that it could be better equipped in assisting its members in overcoming similar crises in the future. In addition, the International Monetary Fund has gone a step further by reforming its governance in-order to give more prominence to the voice of the fast growing and emerging economies in the decision formulating process whilst maintaining the interests of the poorer member countries.
During the 1980s, with the backing of the conservative governments of the United States and the United Kingdom, International Monetary Fund began to enforce certain policy conditions pertaining to macro economy when providing financial assistance to developing countries. These were referred to as “structural adjustment programs” (SAPs) in developing countries while in other countries they were referred to as “bailout” packages (www.imf.org). These loan facilities required the governments of developing countries to relax rules in-order to encourage foreign direct investment, focus more on the export market instead of the local market, and reduce government expenditure by cutting down subsidies provided for agriculture and devaluation of the local currency. If the developing countries could not comply with these enforcements, they were not in a position to obtain financial assistance from the International Monetary Fund. Further, due to the debt crisis, these countries could not obtain loan facilities from the commercial banks as well. This allowed the International Monetary Fund to be the exclusive source of funding to these developing countries.
In the 1990s with the help of the World Bank, the International Monetary Fund initiated programs to reduce the burdens of debt of the developing countries. In the year 1996, the International Monetary Fund implemented the “Initiative for Heavily Indebted Poor Countries” as one such initiative. Furthermore, in the year 2005 this initiative was supported by the “Multilateral Debt Relief Initiative” (MDRI) in-order to assist the developing countries to achieve the goals set by the United Nations.
The International Monetary Fund not only assists developing countries but also developed countries which are facing various issues. The International Monetary Fund assists developed countries by providing advice on policy making as well as financial assistance. Since the global financial crisis in the year 2008, The International Monetary Fund has played an even major role in Europe and continues to assist these developed countries who are faced with the current financial crisis by offering technical assistance and analytical data for policy making. Further, the International Monetary Fund conducts regular consultation with the countries in European Union in-order to monitor the progress of the individual counties. The International Monetary Fund also conducts discussions with the Central Bank of the European Union and European Commission and provides advice on macroeconomic policy related matters. The International Monetary Fund carried out a Financial Stability Framework in the European Union referred to as EFFE in the year 2001 for the first time. One of the main focuses of this initiative was the formation of the proposed framework for financial stability in the European Union.
As per the published reports, by March 2012 the International Monetary Fund had commitments with 11 European countries totaling more than US $ 150 billion (www.imf.org). During the initial phases, the International Monetary Fund carried out support programs with countries of the emerging Europe. The International Monetary Fund provided financial assistance to EU countries such as Hungary, Romania and Latvia with the support of the European Union. The International Monetary Fund came to the rescue of Iceland in the year 2008 during the collapse of its banking system. In the year 2010, the International Monetary Fund assisted countries such as Greece, Portugal and Ireland which were severely affected due to the euro crisis by providing the much required financial support. The International Monetary Fund carried out these support programs by further extending the collaboration in the European Union in partnership with the European Central Bank. This increased level of cooperation among the International Monetary Fund, European Commission and European Central Bank, in carrying out support programs in countries in the European Union, is referred to as the “Troika”.
Although the International Monetary Fund has been assisting both developed and developing countries during times of financial crisis, it has also been heavily criticized for various issues. The International Monetary Fund facing major issues with regards to its authenticity. The confidence many countries have in the International Monetary Fund also seems to be decreasing due to much debate taking place on its policies and strategies. Ownership of policies cannot be properly gained since in most cases the member countries are not a part of this policy making process and policies are formed and implemented solely by the International Monetary Fund, often without the consent of the member countries. Many of these policies have also failed to succeed and countries, instead of improving their financial status continue to face increasing debt and financial downfall. As a result if the International Monetary Fund wants to regain its lost credibility it will have to involve the member countries in their policy making process thereby creating a sense of ownership among the member countries.
The inability of the International Monetary Fund to foresee and prevent financial crises is being seen as a major failure, and the International Monetary Fund has been greatly criticized for this. Many feel that the International Monetary Fund has failed to adhere to its original objective of maintaining a stable financial framework.
Currently many member countries feel that they are at a disadvantage when taking loans from the International Monetary Fund due to the conditions imposed by the International Monetary Fund on them. It is believed that even though the creditor countries are well equipped with market information, the debtor countries do not have access to such information and knowledge. Therefore it is believed that a proper framework should be established at the inset of a crisis where creditors as well as debtor countries can communicate and coordinate effectively and resolve any issues that may arise.
The International Monetary Fund has also been severely criticized for its double standards adopted for developed and developing countries when imposing conditions. It is believed that policies imposed by the International Monetary Fund on developing countries faced with financial crises are different to the policies adopted by developed countries. Many believed that the United States was utilizing the International Monetary Fund as an instrument to enforce its foreign policies. The International Monetary Fund was also seen backing the United States on various policy related matters and even went on to implement the same policies in all developing countries irrespective of the background of these issues.

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