The IMF: The World's Money Lenders

Memba Ben By Memba Ben, 1st Mar 2017 | Follow this author | RSS Feed | Short URL http://nut.bz/3_9aghmk/
Posted in Wikinut>Writing>Politics

A simple explanation of what the International Monetary Fund is, what their job is, and how it affects global economy and trade.

Understanding how the International Monetary Fund operates.

Ever since the IMF was established in July 1944, some 76 years ago, countries that have been under impoverished have been using their services to try and steady their underperforming economies. They function to maintain an orderly system of payments and receipts between nations in order to steady the global economy and to solve global financial problems.

To put it in a simpler way, when most people need money immediately, they might try to go to some financial institution to try and get a short term loan. The IMF works the same way for countries that are close to bankruptcy or do not have the money to pay other things.

However, while the IMF will help a country out when it’s down on its luck, that doesn’t mean that their loans don’t come with conditions:

“Set up as a voluntary and cooperative institution, the IMF attracts to its membership nations that are prepared, in a spirit of enlightened self-interest, to relinquish some measure of national sovereignty by abjuring practices injurious to the economic well being of their fellow member nations. The rules of the institution, contained in the IMF's Articles of Agreement signed by all members, constitute a code of conduct. The code is simple: it requires members to allow their currency to be exchanged for foreign currencies freely and without restriction, to keep the IMF informed of changes they contemplate in financial and monetary policies that will affect fellow members' economies, and, to the extent possible, to modify these policies on the advice of the IMF to accommodate the needs of the entire membership.”

If a country goes to the IMF looking for help, the IMF will help them out but the country should be prepared to let the IMF have control of their economic activities. The IMF does this to try and find the causes of why the economy isn’t doing so well. Once the causes are found, the IMF and the country begin working together on new economic policies that will work best for the short term until the country is back on its feet. This might include lowering interest rates to expand the supply of credit, adjusting the country’s currency to reflect the level of world prices, and encouraging exports over imports.

Things tend to get a bit complicated here. Because these countries are so desperate, they have no other choice but to comply with the IMF, they have to sacrifice a lot in the short term so that things can work out in the long term. With the implementation of the IMF’s policies, naturally there will be a shift from where money was spent to directing that money to other places.

In other words, things that the IMF deem as immediate expenses will have their funding cut e.g. governmental projects, social development initiatives, research funding, educational expenses. Now, nationalists will argue that with all of this will bring a drop in quality of everyday life and lead to a monopolization of the local economy by the IMF and its leading members but other people will feel that what the IMF does is a necessary evil to ensure the long term stability of a country and the global economy.

The IMF's homepage goes on to explain that:

“Because reorganizing the economy to implement reforms is not without cost, the IMF will lend money to subsidize policy reforms during the period of transition. To ensure that this money is put to the most productive uses, the IMF closely monitors the country's economic progress during this time, providing technical assistance and further consultative services as needed.”

So, what exactly are these conditions that have people in an uproar about how the institution is run?

“First, the IMF continues to urge its members to allow their national currencies to be exchanged without restriction for the currencies of other member countries.

Second, in place of monitoring members' compliance with their obligations in a fixed exchange system, the IMF supervises economic policies that influence their balance of payments in the presently legalized flexible exchange rate environment. This supervision provides opportunities for an early warning of any exchange rate or balance of payments problem. In this, the IMF's role is principally advisory. It confers at regular intervals (usually once a year) with its members, analyzing their economic positions and apprising them of actual or potential problems arising from their policies, and keeps the entire membership informed of these developments.

Third, the IMF continues to provide short and medium term financial assistance to member nations that run into temporary balance of payments difficulties. The financial assistance usually involves the provision by the IMF of convertible currencies to augment the afflicted member's dwindling foreign exchange reserves, but only in return for the government's promise to reform the economic policies that caused the balance of payments problem in the first place. The IMF sees its financial role in these cases not as subsidizing further deficits but as easing a country's painful transition to living within its means.

In addition to assisting its members in this way, the IMF also helps by providing and running technical assistance in organizing central banks, establishing and reforming tax systems, and setting up agencies to gather and publish economic statistics.


While these conditions may be seen as intrusive, the IMF does this to make sure that their debt gets repaid and the policies implemented reap rewards.

After all, this is not meant to be free money.

Speaking of money, you might be wondering where they get the means to provide such assistance to countries:

“To help nations abide by the code of conduct, the IMF administers a pool of money from which members can borrow when they are in trouble. These resources come from quota subscriptions, or membership fees, paid in by the IMF's 182 member countries. Each member contributes to this pool of resources a certain amount of money proportionate to its economic size and strength (richer countries pay more, poorer less). “

To reiterate, The IMF is not a bank but more like a credit union whose members have access to a common pool of resources to help them out in times of need. All member nations of the IMF have the right to financial assistance from the IMF.

But let’s say a country applies for aid from the IMF and their application is successful. They get the money they asked for and allow the IMF to do their thing. But while the IMF is implementing change, the country’s leaders decide to pull a fast one and just default on their payment.

What happens then?

As previously seen with Argentina and Greece, the IMF doesn’t fuck around. When they want their money, they’ll get it. The genius in the IMF’s loan agreements is that the country that takes out a loan with the IMF will have its debt tied with a lot of cross default and cross acceleration clauses that make it safe to assume that one default and acceleration would trigger demands for repayment on most, if not all, of the rest.

Failure to pay the IMF would allow them to declare a default which would then give them the option to demand immediate repayment of all their loans. If the country continues to ignore the IMF, they’ll be declared bankrupt, beginning the knockoff effects of:

• Scaring off potential investors.
• Other global credit rating agencies will then downgrade the country’s rating to the worst possible status.
• When that happens, NO ONE will help that country out with its debt.
• The country’s stock market would then take a huge hit
• Due to the stock market taking a hit, the country’s currency to be practically useless, especially if the country is one that imports more than it produces.
• With the currency down, the price of everything will be on the rise, leading to inflation.
• Because of that, industries would have to retrench people, bringing unemployment rates higher. Government would have to implement drastic cost cutting measures just to get by and the cost of living will be astronomical.

This will all happen until the country pays back the loan.

Measuring the success of the IMF's operations over the years is not easy but it goes without saying that without the IMF, it is highly unlikely that the global economy would be flourishing the way is currently is.

Thanks to the help of the IMF, countries have been able to buy time to fix economic policies and restore growth.

But it is important to remember that the goal of the IMF isn't to directly help the countries it gives the money to, but to stabilize the global economic scene.

Countries may try and gain leniency with the IMF but that shit won’t work. If they ask for assistance, they have to comply with the IMF because the repercussions are far worse.

And in the end, everyone pays.

If you want to play in the international economy, if you want to have credit, if you want to have any kind of normal relationship with the outside world, you need to have a normal relationship with the IMF.

If you don't pay back the IMF, the last guys you turn to for a loan, then no one will lend you money.

They aren’t the good guys and they aren’t the bad guys.

They are THE guys.

Tags

Analysis, Business, Economics, Explained, Explanation, Global Economy, Imf

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author avatar Memba Ben
A fan's view on the business of football.

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