The International Monetary Front, or IMF, was created in 1944 and has 188 member countries. Its main role is to help one or more countries facing a financial crisis
A country facing a financial crisis is a country that, for example, has a balance of payments that is often in deficit. In other words, it means that the country imports benefits of goods and services compared to the number of goods and services it exports.
This balance of payments also refers to capital inflows, when a non-resident agent invests in the country, and capital outflows when another agent, this time resident, makes investments abroad.
How can the balance of payments deficit be covered?
This deficit can be covered by the reserves of convertible currencies such as the dollar, euro, yen etc. held by the Central Bank of the country in question. However, when these reserves are lower, the country can no longer pay for its imports because it has to pay them in convertible currencies. Moreover, no other country is in favour of paying him money because of the high risk of repayment.
What does a balance of payments deficit mean?
A balance of payments deficit therefore leads to the depletion of the country’s foreign exchange reserves, a reduction in imports and the inability to borrow money from other states or institutions. In such a situation, the country in a state of crisis can therefore call on the IMF, which can then grant it a loan. This loan has a cost. Indeed, the borrowing country is subject to conditions, in the form of measures, whose objectives are to reform the country’s economy in order to avoid further crises.
What types of reforms are involved?
These economic reforms aimed at preventing future crises can be:
- Reducing government spending: This involves privatizing public enterprises, or reducing the salaries of government officials, for example.
- The increase in government revenue: Thanks to an increase in taxes…
- The country’s openness to foreign investment and international trade.
Where does the IMF’s money come from?
The loans granted by the IMF to countries in economic crisis come from Member States that contribute to the International Monetary Front. This contribution defines the “Quota Share”.
Indeed, once a country joins the IMF, a quota is allocated to it according to its economic weight, measured in particular by the GDP (Gross Domestic Product) of the new acceding country. Quotas may change every 5 years in order to take into account more or less changes in the economic weight of each country.
The higher the quota, the higher the member country’s contribution to the IMF and the more votes it will have in organized decision-making votes.
IMF figures for 2014
In 2014, 12 countries held 60% of the quotas, including 17.5% for the United States. Some decisions require an 85% majority, which gives the United States a Veto right. The United States therefore plays an essential role in the IMF.
That is why the IMF is currently facing a crisis of legitimacy. The share of emerging countries such as Brazil and China is still perceived as too low in relation to their economic weight. The effectiveness of the measures it imposes is therefore often called into question.