Can the IMF solve global economic problems?

Since its establishment in 1944, the International Monetary Fund (IMF) has also had its success and failure experience in fulfilling its main mission of overseeing the currency system, ensuring the stability of the exchange rate, and removing restrictions that hinder or slow down trade. The International Monetary Fund emerged because many countries were hit hard by the Great Depression and World War II.

Over the years, the IMF has helped countries navigate many different and challenging economic situations. The organization is constantly evolving and adapting to the ever-changing world economy. We will study the role played by the International Monetary Fund, as well as economic issues, the degree of influence of some countries on the organization, and its success or failure.

Key points

  • The International Monetary Fund (IMF) is an organization that promotes global financial stability, economic growth, and international trade.
  • The IMF helps member countries facing economic crises by providing loans, technical assistance, and monitoring economic policies.
  • Funding for the Fund’s activities comes from member countries, which pay quotas based on the size of each country’s economy and its importance in world trade and finance.
  • The International Monetary Fund has been criticized by some member countries because of the influence of the United States and European countries on the organization.

The role of the IMF in global economic issues

For many countries, the IMF has always been the organization that seeks help in times of economic hardship. Over the years, the organization has played a key role in helping countries turn the situation around through the use of economic assistance. However, this is just one of many roles played by the International Monetary Fund in global economic issues.

IMF funding sources

The IMF is funded by a quota system, and each country pays according to its economic size and its political importance in world trade and finance. When a country joins the organization, it usually pays a quarter of its quota in the form of U.S. dollars, euros, yen, or pound sterling. The other three quarters can be paid in domestic currency. Usually, these quotas are reviewed every five years. The International Monetary Fund can use the quotas of developed countries to provide assistance to economically developing countries.

The IMF also obtains funding through donation trust funds that act as trustees. This is donations from members rather than quotas, which are used to provide low-interest loans and debt relief to low-income countries.

In 1969, the IMF established the Special Drawing Rights (SDR), which is an international reserve asset that helps replenish the official reserves of its member countries.

Loan through the International Monetary Fund

When a country requests a loan, the IMF will provide the country with the funds needed to rebuild or stabilize its currency, rebuild economic growth, and continue to purchase imports. The IMF provides member countries with a variety of loans suitable for specific purposes.

Poverty Reduction and Growth Trust (PRGT) loans

These are low-interest loans for low-income countries to reduce poverty and promote growth.

External shock fund (ESF) loan

These are loans to low-income countries to provide loans for negative economic events beyond the control of the government. These events may include changes in commodity prices, natural disasters, and wars that may disrupt trade.

Standby Arrangement (SBA) Loan

Countries with short-term balance of payments problems will apply to the International Monetary Fund for Standby Arrangement (SBA) loans. SBA loans are designed to help countries get rid of the economic crisis and allow them to quickly obtain the capital they need to resume growth.

Extended Fund Facilitation (EFF) Loan

Countries with long-term balance of payments problems that require economic reforms will apply for expanded funds to facilitate loans.

Supplementary Reserve Fund (SRF)

The International Monetary Fund provides supplementary reserve facility (SRF) assistance in response to large-scale short-term financing. An example of this is the loss of investor confidence during the Asian financial crisis in 1997, which led to a large outflow of funds and led to large-scale IMF financing.

Emergency assistance loan

These aim to provide assistance to countries that have suffered from natural disasters or are emerging from war.

USD 1 trillion

The total amount of loans the IMF can provide to its member countries.

Monitor

The International Monetary Fund pays attention to the economic and economic policies of its members. Supervision has two main components: national supervision and multilateral supervision. Through national oversight, the IMF visits the country once a year to evaluate its economic policies and direction of development. It reported its findings in the public information notice.

Multilateral surveillance is when the IMF investigates global and regional economic trends. It is reported twice a year in the World Economic Outlook and the Global Financial Stability Report. These two reports pointed out the problems and potential risks facing the world economy and financial markets. The Regional Economic Outlook report provides more details and analysis.

Technical assistance

The IMF helps countries manage their economic and financial affairs. The service is provided to any member country in need of assistance, usually to low-income and middle-income countries. Through the use of technical assistance, the IMF can conduct useful monitoring and loans to help the country avoid economic traps and create sustainable economic growth. Technical assistance helps countries strengthen the stability of economic policies, taxation policies, monetary policies, exchange rate systems, and financial systems.

influence level

The IMF has 190 member states, some of which may have more influence on its policies and decisions than others. The United States and Europe are the main influencers within the IMF.

America

The United States has the largest proportion of voting rights in the International Monetary Fund, accounting for 17.4% of the share, and has contributed the largest share of any single country. Over the years, there have been many complaints that the United States has used the IMF to support countries of strategic importance to them, rather than based on economic needs. Many members believe that when the organization decides how and how to help different countries, they should have more relationship with the organization’s work.

Europe

Many European countries oppose the readjustment of the voting rights and influence of the International Monetary Fund. In the past, the position of managing director of the organization was usually held by a European. However, as the world continues to change, there is an increasing need for emerging economies to have more say. It has been discussed that Europe can centralize its quotas and maintain a strong voice in the future. However, if these countries try to maintain their levels alone, their influence may continue to weaken.

The success and failure of IMF

The International Monetary Fund has had many successes and failures in its history. Below we focus on two examples.

Jordan

Jordan has been affected by the war with Israel, civil war and major economic recession. In 1989, the country was struggling with high unemployment and inability to repay loans. The country agreed to a series of five-year reforms beginning with the International Monetary Fund. The Gulf War and Iraq’s invasion of Kuwait resulted in the return of 230,000 Jordanians, which put pressure on the government and the unemployment rate continued to rise.

Between 1993 and 1999, the International Monetary Fund provided Jordan with three extended fund facilitation loans. As a result, the government carried out large-scale reforms of privatization, taxation, foreign investment, and looser trade policies.

By 2000, the country joined the World Trade Organization (WTO) and signed a free trade agreement with the United States a year later. Jordan was also able to reduce its overall debt payments and restructure them to a manageable level. Jordan is an example of how the International Monetary Fund has cultivated strong, stable economies that are productive members of the global economy.

Tanzania

In 1985, the International Monetary Fund came to Tanzania to transform a bankrupt and debt-ridden socialist country into a powerful contributor to the world economy. The first steps taken were to lower trade barriers, cut government plans, and sell state-owned industries.

By 2000, the one-time free medical care industry began to charge patients, and the national AIDS incidence soared to 8%. The once free education system began to charge children, and the enrollment rate dropped from 98% in 1981 to 66% in 2000. As a result, the country’s illiteracy rate has increased by nearly 50%. This is an example of the organization’s failure to understand that a one-size-fits-all strategy does not apply to all countries.

Despite this, the International Monetary Fund continued its efforts to provide various types of assistance to Tanzania, and over time, the country has achieved some success in different areas. The annual inflation rate rose from 37.9% in 1994 to 4.1% in 2004. At the same time, real gross domestic product (GDP) rose from 1.6% in 1994 to 7.4% in 2004.

However, these improvements are difficult to sustain. After more than 35 years of assistance from the International Monetary Fund, Tanzania is still unable to maintain a stable economic momentum, and fiscal management problems have led to a high level of expenditure arrears and non-performing loans. Facts have proved that inflation is particularly challenging, rising to double digits when it soared to 16% in 2012, and then fell back to 7.9% the following year.

During the global pandemic in 2020, Tanzania was able to maintain an inflation rate of around 3.3%; however, the actual GDP dropped from 7% in 2019 to 1% in 2020. In June 2020, the International Monetary Fund approved US$ 14.3 million in relief to Tanzania, and stated in its press release that this money is essential to help the country meet its debt service needs and free up resources for public health spending.

Bottom line

The International Monetary Fund has indeed played a very useful role in the world economy. Through the use of loans, supervision and technical assistance, it can play an important role in helping identify potential problems and helping countries contribute to the global economy.

However, the United States and Europe have always dominated the governing bodies, and the International Monetary Fund has had successes and failures. Although no organization is perfect, the IMF has achieved its purpose and continues to develop its role in a constantly changing world.

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