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The International Monetary Fund (IMF) was created on December 27, 1945. Twenty nine countries signed its Articles of Agreement in the hopes of preventing a repetition of the economic policies that contributed to the United States Great Depression in the 1930s. Other purposes of the IMF include the promotion of international monetary cooperation, the growth of international trade, and what has become its major purpose, the lending of money to member countries that cannot make loan payments. However, this money is only made available after the country needing the loan has implemented certain structural adjustment programs. The IMF is an international organization of 184 member countries. It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment.
The International Monetary Fund (IMF or Fund) and the International Bank for Reconstruction and Development (IBRD or World Bank) were both established at the United Nations Monetary and Financial Conference, held at Bretton Woods, New Hampshire, on July 1-22, 1944. The two were created to oversee stability in international monetary affairs and to facilitate the expansion of world trade. Membership in the World Bank requires membership in the IMF, and they are both specialized agencies of the United Nations. The World Bank was given domain over long-term financing for nations in need, while the IMFs mission was to monitor exchange rates, provide short-term financing for balance of payments adjustments, provide a forum for discussion about international monetary concerns, and give technical assistance to member countries. These functions are still generally true of both organizations, although the policies determining how they are carried out have been modified and amplified over time.
The Funds legal authority is based on an international treaty called the Articles of Agreement (Articles or the Agreement) which came into force in December 1945. The first Article in the Agreement outlines the purposes of the Fund and, although the Articles have been amended three times in the course of the last 47 years prior to 1998, the first Article has never been altered.
The IMF started financial operations on March 1, 1947. Drawings on Fund reserves were made by 11 countries between 1947 and 1948, although there were no drawings in 1950 and very few in the following years. During this time the Fund worked on its drawings policies. One outcome was the stand-by arrangements, established in 1952, modified in 1956, and reviewed periodically since then. Stand-by arrangements provide a procedure for drawing on Fund resources with conditions based on a structural adjustment program for the borrower country. Stand-by arrangements became the model for other lending procedures designed by the Fund to meet the needs of its members.
By the mid-1970s, the Fund found itself becoming more of a lending institution than originally envisioned. The Funds ability to meet the needs of its members was tested when the Organization of the Petroleum Exporting Countries (OPEC) quadrupled the price of crude oil in 1973-1974. Prices were increased again in 1979 and in 1980. This altered the international flow of funds as the OPEC countries monetary reserves accumulated rapidly. At the same time, the industrial countries experienced strong inflationary pressures. These pressures were addressed by an increase in interest rates and a reduction of imports. This resulted in balance of payments deficits for many of the developing countries, which were paying more for oil, paying higher interest rates on the loans from the industrial countries, and finding reduced markets for their exports. In response to this situation, the IMF created an Oil Facility in 1974, and enlarged it in 1975, to aid members in balance of payments difficulties. In addition, an Oil Facility Subsidy Account was established for the poorest countries to alleviate the cost of borrowing under the Oil Facility. During the 1970s, although the oil price shocks placed more countries in balance of payments difficulties and forced many of the developing countries to borrow not only against the Fund, but also against private banks which were receiving a surplus of OPEC petrodollars, it was generally perceived at the time that the debt cads would be short-lived. It was not until Mexico threatened to default on its loans in 1982 that the world monetary community realized the extent and depth of the crisis. Throughout the 1980s the Fund played an increasingly larger role, not only as “lender-of-last-resort,” but also as mediator with debtor countries in relation to creditor nations and private banks.
In the mid-1980s the Funds lending operations increased dramatically. Stand-by arrangements are typically for one to three years, but the exigency of the debt crisis caused the Fund to devise programs for adjustment over longer periods. These are known as extended arrangements and, with other medium-term programs, can be arranged through the Structural Adjustment Facility or the Enhanced Structural Adjustment Facility. The terms of a structural adjustment program, or stabilization program, are known as conditionality. Programs include quantified targets or ceilings for bank credit, the budget deficit, foreign borrowing, external areas, and international reserves. They also include statements of policies that the member intends to follow. Conditionality came under detailed scrutiny during the 1980s as more and more developing countries adopted structural adjustment programs and later were unable to meet the terms of the agreement. The philosophy of the Fund was criticized as being too oriented to the industrial economies and not adapted to developing economies. During the late-1980s several plans were put forth, involving not only the Fund but the creditor nations and commercial banks as well, to reduce the debt and the debt service payments of the debtor nations. In 1989 the Fund developed new debt reduction guidelines, providing Fund support for commercial bank debt and debt service-reduction operations by member countries. The debt strategy is still being assessed and its success or failure has not been determined.
The IMFs statutory purposes include promoting the balanced expansion of world trade, the stability of exchange rates, the avoidance of competitive currency devaluations, and the orderly correction of a countrys balance of payments problems. To serve these purposes, the IMF:
monitors economic and financial developments and policies, in member countries and at the global level, and gives policy advice to its members based on its