Role of the IMF
The IMF is a cooperative intergovernmental monetary and financial institution with near universal membership. Its policies and activities are guided by its charter, known as the Articles of Agreement (the Articles), and are conducted under a decision-making structure that has evolved over the years (see Box 1). The IMF is unique among intergovernmental organizations in its combination of regulatory, consultative, and Financial functions, which derive from the purposes for which it was established (see Box 2): to promote international monetary cooperation; to facilitate the balanced growth of international trade; to promote exchange rate stability; to assist in the establishment of a multilateral system of payments and in the elimination of foreign exchange restrictions that hamper the growth of world trade; to make its resources available to its members to correct balance of payments imbalances without resorting to trade and payments restrictions; and to provide a forum for consultation and collaboration on international monetary problems. Thus, the IMF is concerned not only with the problems of individual countries but also with the working of the international monetary system as a whole. Its activities focus on promoting policies and strategies through which its members can work together to ensure a stable world financial system and sustainable economic growth.
The Articles effectively place the IMF at the center of the international monetary system. The IMF provides a forum for international monetary cooperation, and thus for an orderly evolution of the system, and it subjects a wide area of international monetary affairs to covenants of law, moral suasion, and understandings. The IMF must also stand ready to deal with crisis situations, not only those affecting individual members but also those representing threats to the international monetary system.
IMF policy and practice are constantly evolving in response to new challenges, most recently the further globalization of capital markets and the increased risk of financial crises and their spillover effects. The work of the IMF in the immediate future, as outlined by the Interim Committee at its meeting in April 1998 (the Spring 1998 Interim Committee), will be shaped importantly by exploring ways to prevent, manage, and resolve financial crises.
Decision-Making Structure of the IMF
The IMF was established in 1945, after the United Nations Monetary and Financial Conference held at Bretton Woods, New Hampshire (better known as the Bretton Woods Conference), as a unique international organization with its own agenda (see Box 2). The Bretton Woods Conference was attended by representatives from 45 countries; IMF membership as of June 30. 1998 is 182 countries.
The IMF has a Board of Governors, an Executive Board, a Managing Director, and a staff of about 2,000 that roughly reflects the diversity of its membership. The Board of Governors is the top policymaking body of the IMF; it consists of one Governor and one Alternate appointed by each member. The Board of Governors, whose members are usually ministers of finance, heads of central banks, or officials of comparable rank, normally meets once a year. An Interim Committee, currently composed of 24 IMF Governors, ministers, or others of comparable rank (reflecting the composition of the Executive Board and representing all IMF members), usually meets twice a year. This Committee advises and reports to the Board of Governors on the management and functioning of the international monetary system (including developments in global liquidity), proposals by the Executive Board to amend the Articles of Agreement, and any sudden disturbances that might threaten the system. A committee with a similar composition, the Development Committee, maintains an overview of the development process and reports to the Boards of Governors of the World Bank and the IMF and makes suggestions on all aspects of the broad question of the transfer of real resources to developing countries. The Executive Board is responsible for conducting the business of the IMF and exercises the powers delegated to it by the Board of Governors. It functions in continuous session at IMF headquarters and currently consists of 24 Executive Directors, with the Managing Director or one of the three Deputy Managing Directors as the Chairman, The Managing Director is selected by the Executive Board and is the chief of the operating staff of the IMF. The three Deputy Managing Directors are appointed by the Managing Director with the approval of the Executive Board.
The number of votes that a member can cast is related to the size of its quota at the IMF. The five members with the largest quotas each appoint their Executive Directors, as can the two members with the largest net creditor positions in the IMF over the two years preceding the election if these members are not pan of the group of the five largest members. The remaining Directors are elected from among the other member countries that may form themselves into groups or constituencies. A number of important decisions specified in the Articles of Agreement require either 70 percent or 85 percent of the total voting power; other decisions are made by a majority of the votes cast.
As an immediate response to the Asian financial crisis, in late 1997 the IMF established a new credit facility—the Supplemental Reserve Facility (SRF)—to address potentially large but short-term financing needs that emanate mainly from the capital account, reflecting a loss of market confidence. To make its financial assistance more expeditious, the IMF put into use during the Asian financial crisis the rapid procedures of the Emergency Financing Mechanism that had been set up in the aftermath of the Mexican crisis in 1995 (see Chapter III).
Surveillance
Central to the IMF’s purposes and operations is the mandate, under the Articles of Agreement, to “exercise firm surveillance” over the policies of its members in complying with their obligations. Under the Articles, each member undertakes to collaborate with the IMF and other members to ensure orderly exchange arrangements and to promote a stable system of exchange rates. Members’ specific obligations under Article IV include directing their economic and financial policies to foster economic growth with reasonable price stability, seeking to promote stability by fostering orderly economic and financial conditions, and avoiding manipulation of exchange rates to prevent balance of payments adjustment or to gain unfair competitive advantage over other members. Members are also obliged to follow exchange rate policies compatible with these undertakings.
The IMF exercises surveillance through both multilateral and bilateral means. Multilateral surveillance consists of Executive Board reviews of developments in the international monetary system based principally on the staff’s World Economic Outlook reports and through periodic discussions of developments, prospects, and key policy issues in international capital markets. Bilateral surveillance takes the form of consultations with individual member countries, conducted annually for most members, under Article IV of the IMF’s Articles of Agreement.1
Purposes of the IMF
The purposes of the International Monetary Fund are laid out in Article I of its Articles of Agreement:
(i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.
(ii) 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.
(iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
(iv) 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.
(v) 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.
(vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.
After the 1994–95 Mexican crisis, efforts to strengthen IMF surveillance included more intensive treatment of issues relating to members’ financial sectors. In March 1996 the Executive Board examined the relationship between banking system soundness and macroeconomic and structural policies, as well as ways in which issues in bank soundness could be incorporated into IMF surveillance, IMF-supported programs, and technical assistance.2
The increasing globalization of capital markets, together with the possibility of abrupt changes in capital flows and the risk of contagion, may result in large financial imbalances, as experienced by Mexico in early 1995 and several of the emerging Asian economies in 1997–98. The April 1998 Interim Committee envisaged that the future work of the IMF should include strengthening financial systems by continuing the work already in progress in various forums to develop supervisory frameworks consistent with internationally accepted practices and strengthened standards for bank and nonbank financial entities, and by advancing work in other areas such as accounting, auditing, disclosure, asset valuation, and corporate governance. The Committee called on the IMF to work with other concerned institutions and organizations responsible for the development of standards and guidelines in these areas. The Committee also called for intensifying IMF surveillance of financial sector issues and capital flows, giving particular attention to policy interdependence and the risks of contagion.
The timely provision of macroeconomic and financial data by member countries is of crucial importance for the smooth functioning of markets. Accordingly, the IMF has developed a set of standards to guide members in the provision of these data to the public. A two-tier approach has been followed, comprising a special standard intended to guide members that have or may seek access to international capital markets, and a general standard to guide all IMF members. The Special Data Dissemination Standard (SDDS) opened for subscription in April 1996. Although subscription is voluntary, it carries a commitment by the subscribing member to observe the standard and provide information about its data and data dissemination practices—metadata—for posting on the Internet on the IMF’s Dissemination Standards Bulletin Board (DSBB i, which opened to the public in September 1996. As of June 30, 1998, 46 members had subscribed to the SDDS and 40 of them have their metadata posted on the DSBB, some with electronic links that enable users to move between the DSBB and the actual data maintained by countries on their Internet sites. In the period through end-1998 subscribers must bring their statistical practices fully into line with the SDDS. while members that subscribe after 1998 will be required to meet all the SDDS requirements at the time of subscription. The second of the two standards, the General Data Dissemination System (GDDS), established in December 1997, emphasizes the development and dissemination of comprehensive statistical frameworks and economic and financial indicators. The implementation of the GDDS will be phased over the next six to seven years and will be carried out in consultation with other regional and international organizations that have expertise in the areas covered by the system.
The April 1998 Interim Committee noted that the effectiveness of the IMF’s surveillance depends critically on the timely availability of accurate information, and stated that if there were persistent deficiencies in disclosing relevant information for the IMF’s surveillance, the conclusion of Article IV consultations should be delayed. In order to increase the availability and transparency of information regarding economic data and policies, the Committee called for the SDDS to be broadened and strengthened to cover additional financial data, including net reserves, short-term debt, and indicators of the stability of the financial sector. It also encouraged more members to agree to the release of Press (now Public) Information Notices on the conclusion of consultations with the IMF. The April 1998 Interim Committee also stated that the IMF’s views on members’ policies will need to be communicated effectively, possibly with a “tiered response” that would allow increasingly strong warnings to members that are considered to be seriously off course in their policies.
Reflecting the significance of good governance to achieve and sustain economic efficiency and growth, in July 1997 the Executive Board adopted guidelines covering the role of the IMF on issues of governance. These guidelines seek to provide greater attention to IMF involvement in economic aspects of governance, in particular through (1) a more comprehensive treatment, in the context of both Article IV consultations and IMF-supported programs, of those governance issues within the IMF’s mandate and expertise; (2) a more proactive approach in advocating policies and the development of institutions and administrative systems that eliminate the opportunity for bribery, corruption, and fraudulent activity in the management of public resources; (3) an evenhanded treatment of governance issues in all member countries; and (4) enhanced collaboration with other bilateral and multilateral institutions, in particular the World Bank, to make better use of complementary areas of expertise. The IMF’s contribution to good governance would be in fostering an improved management of public resources through reforms of public sector institutions, and supporting the development and maintenance of a transparent and stable economic and regulatory environment conducive to efficient private sector activities. The April 1998 Interim Committee adopted a code of good practices to serve as a guide for members to increase fiscal transparency, and thereby enhance the accountability and credibility of fiscal policy as a key feature of good governance.3
Global Liquidity
Because the IMF is responsible for the smooth functioning of the international monetary and payments system, it is particularly concerned with global liquidity—that is, with the level and composition of reserves available to member nations to meet their trade and payments requirements, and their access to capital markets. The IMF is a repository of part of members’ liquid international reserves in the form of reserve positions and loan claims on the institution (see Chapter II). When there is a global need to supplement world reserves, the IMF can be a source of additional liquidity through the allocation to its members of the special drawing right (SDR), a reserve asset created by international decision (see Chapter V). Moreover, the IMF has a promotional role in fulfilling the objective, as established in its Articles, of making the SDR the principal reserve asset of the international monetary system. However, there has not been agreement on the existence of a global need to increase liquidity and no general allocation of SDRs has been made since 1981.
In March 1996, the IMF arranged a seminar attended by outside experts and IMF staff where the general sentiment was that it was unlikely that the SDR would become the principal reserve asset of the international monetary system but that it had an important role in the IMF’s financial operations and as a safety net for dealing with serious difficulties that could arise in the functioning of the international monetary system. There was agreement at the seminar on the need to find ways to solve the “equity issue” arising from the fact that many members had never received an SDR allocation. This issue had already been discussed thoroughly by the Executive Board, and is now being addressed by a proposed amendment of the Articles approved by the Board of Governors to allow a special allocation of SDRs (see Chapter V).
Capital Account Convertibility
Recognizing the increasing importance of capital flows in the international monetary system, the IMF has been intensively examining the issue of capital account convertibility. The April 1997 Interim Committee emphasized that an open and liberal system of capital movements is beneficial to the world economy and considered the IMF uniquely placed to promote the orderly liberalization of capital movements and to play a central role in this effort. The Committee endorsed the concept of an amendment to the IMF’s Articles of Agreement to make the promotion of capital account liberalization a specific purpose of the IMF and to give it appropriate jurisdiction over capital movements. Following Executive Board discussion of possible transitional arrangements and approval policies, and legal aspects of capital movements, the September 1997 Interim Committee invited the Executive Board to complete its work on the proposed amendment of the IMF’s Articles of Agreement through the establishment of carefully defined and consistently applied obligations regarding the liberalization of capital movements. It was emphasized that safeguards and transitional arrangements are necessary for the success of this major endeavor, and flexible approval policies would have to be adopted.
The April 1998 Interim Committee reaffirmed the view that a new chapter should be added to the Bretton Woods Agreement by making the liberalization of capital movements one of the purposes of the IMF and extending, as needed, the IMF’s jurisdiction for that purpose. The Committee called for an appropriate amendment of the Articles to be submitted for its consideration as soon as possible.
Use of IMF Resources and Other Assistance to Member Countries
Surveillance through Article IV consultations is the main channel for collaboration between the IMF and its members. In addition, for members facing balance of payments difficulties, formal financial arrangements for the immediate use of IMF resources provide a framework for more intensive collaboration.
The IMF maintains a pool of resources from which to help finance temporary imbalances in the balance of payments of its members. These resources are of a revolving character and are primarily derived from currencies and SDRs made available by members as their quota subscriptions (see Chapter II). The IMF may supplement these resources by borrowing. To use IMF resources, a member must represent to the institution that it has a need to do so because of its balance of payments or reserve position or developments in its reserves. The use of IMF resources is based on the uniform and nondiscriminatory treatment of members, with due regard paid to their domestic social and political objectives. The IMF’s policies encourage members to have recourse to the IMF’s financial facilities at an early stage of a member’s balance of payments problems. Financial assistance provided by the IMF allows members to correct their payments imbalances without having to resort to trade and payments restrictions. The IMF acts as a catalyst to the extent that policy adjustments implemented by members undertaking IMF-supported programs help generate additional financial assistance from other sources, such as private and official creditors. The IMF functions as a financial intermediary insofar as it recycles funds from surplus to deficit countries.
The use of IMF resources typically takes place under an IMF arrangement, a decision of the IMF that gives the member assurance that the institution stands ready to provide foreign exchange or SDRs in accordance with the terms of the decision during a specified period of time. An IMF arrangement is approved by the Executive Board in support of an economic program under which the member undertakes a set of policy actions to reduce external and internal economic imbalances (see Chapter III).
Apart from the resources derived from members’ quota subscriptions, the IMF administers other resources that are made available to low-income member countries facing protracted balance of payments problems. Such assistance is provided in the form of highly concessional loans to support medium-term macroeconomic and structural adjustment programs. Assistance is also provided to eligible heavily indebted poor countries, where debt burdens are unsustainable, in the form of grants through a trust administered by the IMF to support the reduction of debt-service burdens to sustainable levels (see Chapter IV).
Precautionary arrangements and program monitoring are used to assist members interested in boosting confidence in their economic management. Under a Stand-By or an Extended Arrangement that the member treats as precautionary, the member agrees to meet the conditions applied for such use of the IMF’s resources but expresses its intention not to draw on them. This expression of intent is not binding; consequently, as with an arrangement under which a member is expected to draw, approval of a precautionary arrangement signifies the IMF’s endorsement of the member’s policies according to the standards applicable to the particular form of arrangement. Program monitoring by the IMF staff can be provided outside the context of an arrangement; such monitoring is generally requested by members in need of policy advice and technical support during a specific period—for example, preceding the negotiation of an arrangement with the IMF if a record of performance needs to be established, during a World Bank lending program, or following an intense period of collaboration under a series of IMF arrangements.
The enhanced surveillance procedure also has been used to assist a member to boost domestic and external confidence in its continuing efforts to pursue appropriate adjustment policies and to help secure financial support. The procedure was adopted in 1985 to help members address their debt problems and improve relations with their creditors in the context of multiyear debt-rescheduling arrangements. Use of the procedure, which has been very limited, requires approval by the Executive Board for a specified period of usually 12 months. During this period, economic developments in the member country are monitored by the IMF, and an assessment of the country’s economic program is provided by the staff to the Executive Board. Enhanced surveillance does not represent an endorsement of a country’s policies by the IMF, although the staff’s assessment could be presented by the member to official and private creditors and donors for their consideration. Enhanced surveillance is undertaken only at the request of a member country and usually only in those cases in which the member has a strong record of adjustment under IMF-supported programs. In 1993, the possibility of applying the enhanced surveillance procedure was broadened from assisting in resolving issues related to debt restructurings to cover any situation where a member would find this form of monitoring by the IMF helpful.
Financial Structure
The financial transactions and operations of the IMF are conducted through the General Department, the SDR Department, and the Administered Accounts (Figure 1). The transactions of the IMF in the General Resources Account are exchanges of monetary assets by the IMF for other monetary assets. The operations of the IMF are other uses or receipts of monetary assets by the IMF.
Financial Structure of the IMF
1No resources have been held in these accounts since December 1991.2Account inactive as of June 30, 1995.3Account established to receive and administer the proceeds of grants and/or loans made available so eligible members that qualify for assistance under the terms of the ESAF-HIPC Trust.The IMF is a quota-based institution (see Chapter II). When a country becomes a member of the IMF, an amount not exceeding 25 percent of its quota has to be paid in SDRs or usable currencies (“reserve assets”) specified by the IMF and the balance in the member’s own currency, normally in the form of nonnegotiable, non-interest-bearing notes (essentially promissory notes).
The portion of a member’s quota paid in reserve assets becomes its initial reserve tranche in the IMF (known as the “gold tranche” before the Second Amendment of the Articles, when this reserve asset was paid in gold; see Appendix I). The reserve tranche position can be defined as the amount by which a member’s quota exceeds the IMF’s holdings of its own currency. A member may draw up to the full amount of its reserve tranche position at any time (subject only to its representation to the IMF that it has a balance of payments need) by transferring to the IMF an equivalent amount of its own currency. (For more on the reserve tranche position, see Chapter II, under “Remuneration,” and Appendix II.)
The IMF’s unit of account is the special drawing right (SDR), whose value is calculated daily on the basis of a “valuation basket” comprising five major currencies (see Chapter V). The IMF’s financial year runs from May 1 to April 30, with financial quarters starting in May, August, November, and February.
Accounts in Member Countries
Each member is required to designate a fiscal agency and a depository to conduct its financial dealings with the IMF. The fiscal agency may be the member’s treasury (ministry of finance), central bank, official monetary agency, stabilization fund, or other similar entity. The IMF can deal only with, or through, the designated fiscal agency, which is accordingly authorized to carry out on behalf of the member country all operations and transactions authorized under the Articles. In addition, each member is required to designate its central bank as a depository for all IMF holdings of its currency. If it has no central bank, the member can designate another institution, such as a monetary agency or even a commercial bank, that is acceptable to the IMF.
A depository is required to pay out of the IMF’s holdings of the member’s currency, on demand and without delay, sums to any payee named by the IMF in the member’s own territory, and hold securities for safe custody on behalf of the IMF if the member issues nonnegotiable, non-interest-bearing notes, or similar instruments, in substitution for part of its currency holdings. In addition, each member guarantees all assets of the IMF against loss resulting from failure or default on the part of the designated depository.
Each depository maintains (without any service charge or commission) two accounts, the IMF No. 1 Account and the IMF No. 2 Account, and some depositories also maintain a Securities Account at the option of the member. The balances in these accounts, which originate, in the first instance, from the payment to the IMF of the member’s quota subscription, do not yield any interest for the IMF.
The No. 1 Account is used for IMF transactions and operations, including subscription payments, purchases, repurchases, repayment of borrowing, and sales of the member’s currency. Provided that a minimum is maintained in the No. 1 Account, as explained below, all these transactions can also be carried out through the IMF Securities Account.
A member may establish an IMF Securities Account to hold nonnegotiable, non-interest-bearing notes, or similar obligations, payable to the IMF on demand if the currency is needed for the IMF’s operations and transactions. The depository holds these notes for safekeeping and acts as the agent of the IMF to obtain encashment of the notes in order to maintain at all times the minimum balance in the No. 1 Account. If any payment by the IMF reduces the balance in the No. 1 Account below a minimum of ¼ of 1 percent of the member’s quota, the balance is to be restored to that level by the next business day through the encashment of sufficient notes.
The No. 2 Account is used for the IMF’s administrative expenditures and receipts (for example, receipts from sales of IMF publications) in the member’s currency and within its territory. Small, out-of-pocket expenses, such as telecommunications charges, may be debited to this account on a quarterly basis.
General Department
Under the Articles, the IMF’s General Department consists of the General Resources Account (GRA), the Special Disbursement Account (SDA), and the Investment Account (not activated as of June 30, 1998). The General Department also includes the Borrowed Resources Suspense Accounts, which were established by a decision of the Executive Board in May 1981 but which have been inactive since 1991 when remaining borrowed resources under the Enlarged Access Policy were disbursed to members.
Most transactions between member countries and the IMF take place through the GRA, This account handles, among other transactions and operations, the receipt of quota subscriptions, purchases and repurchases, receipt and refund of charges, payment of remuneration on members’ creditor positions in the IMF, and repayment of principal to the IMF’s lenders. The assets held in the GRA include currencies of member countries (held in the No. 1 Account, the No. 2 Account, and the Securities Account with each member: see above), the IMF’s own holdings of SDRs, and gold.
The Special Disbursement Account is the vehicle for (1) receiving and investing profits from the sale of the IMF’s gold (that is, the net proceeds in excess of the book value of SDR 35 per fine ounce); and (2) making transfers for special purposes authorized in the Articles. The SDA was activated in 1981 initially to receive transfers from the Trust Fund, which had been funded from gold sales, upon its termination.
The IMF is authorized to establish an Investment Account in the General Department; to date, however, no decision has been taken to this effect.4 The assets in the Investment Account would be held separately from the General Resources Account and would not be subject to maintenance-of-value requirements. The Articles envisage that assets in the Investment Account could derive—if authorized by the requisite majority vote—from profits from the sale of the IMF’s gold, from a transfer of currencies held in the GRA, or from the income or proceeds of investments in the account. With the exception of income from the account’s investments, the total amount transferred to the Investment Account may not exceed the resources held in the IMF’s General and Special Reserves. Investments may be made only in income-generating marketable obligations of international financial organizations or of the member whose currency is used for the investment. The income may be reinvested or used to meet the expenses of conducting the business of the IMF, including both operational and administrative expenses.
The Borrowed Resources Suspense Accounts were established to hold, transfer, convert, and invest (1) currencies borrowed by the IMF before they were transferred to the GRA for use in transactions or operations, and (2) currencies received by the IMF in repurchases financed with borrowed resources before repayments to lenders could be made. Members were not obligated to maintain the SDR value of their currencies held by the IMF in the Borrowed Resources Suspense Accounts, and as far as practicable the currencies were invested in SDR-denominated obligations. As mentioned above, since December 1991 no amount has been held in suspense in these accounts.
SDR Department
The IMF’s SDR Department records all transactions and operations involving SDRs. The SDR is an interest-bearing asset allocated by the IMF to each member that is a participant in the SDR Department. As already noted, the IMF uses the SDR as its unit of account. The IMF can hold SDRs in the GRA and can use them in transactions and operations. The GRA receives SDRs in partial payment of quota increases and in the settlement of charges and repurchases; it uses SDRs to finance purchases by members and to pay remuneration to members (see Chapter V and Appendix III).
Administered Accounts
The IMF may establish administered accounts for purposes, such as financial and technical assistance, that are consistent with the Articles. Accounts have been established to administer resources for support for the low-income and heavily indebted members (the Enhanced Structural Adjustment Facility and the Heavily Indebted Poor Countries Initiative). There are several other Administered Accounts established for different purposes, including a Framework Administered Account to administer resources to finance technical assistance activities (see Chapter IV).
Operating Costs
The expenses of conducting the business of the IMF’s General Department along with the IMF’s general overhead are paid from the net operational income of the General Resources Account. The expenses of conducting the business of the SDR Department are also paid from the GRA, which is reimbursed by the participants in the SDR Department at the end of each financial year. For this purpose, the IMF levies an assessment on the participants, at the same rate for all participants, in relation to their net cumulative allocations. Also at the end of each financial year, the ESAF Trust reimburses the GRA for the cost of administering the trust during the year.5 The General and SDR Departments and the Administered Accounts are operated, recorded, and accounted for separately, and no assets in one department or administered account may be used to discharge liabilities or to meet losses incurred in the administration of other accounts or departments.
