GROUP 17  What is the ‘International Monetary Fund – IMF’?

 What is the ‘International Monetary Fund – IMF’?

[As defined in Investopidia]

The International Monetary Fund (IMF) is an international organization created for the purpose of standardizing global financial relations and exchange rates. The IMF generally monitors the global economy, and its core goal is to economically strengthen its member countries. Specifically, the IMF was created with the intention of:

  1. Promoting global monetary and exchange stability.
  2. Facilitating the expansion and balanced growth of international trade.
  3. Assisting in the establishment of a multilateral system of payments for current transactions.

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The IMF is officially charged with managing the global regime of exchange rates and international payments that allows nations to do business with one another.


I.             IMF Management

The IMF is financed by member countries who contribute funds on joining. They can also increase this throughout their membership. The IMF can also ask its member countries for more money. IMF financial resources have risen from about $50 billion in 1950 to nearly $300 billion last year, sourced from contributions from its 183 members. This initial amount depends on the size of the countries economy. E.g. the US deposited the largest amount with the IMF. The US currently has 16% of voting rights at the IMF, a reflection of its quotas deposited with IMF. The UK has 4% of IMF Voting rights. Loans are also available to developing countries to ‘deal with poverty reduction.


II.           IMF Missions:

1) Surveillance. A formal system of review that monitors the financial and economic policies of member countries to ensure they are living within their means—tracking developments on a national, regional, and global level. In this process, IMF officials consult regularly with member countries and offer macroeconomic and financial policy advice.

2) Technical Assistance. Practical support and training directed mainly at low- and middle-income countries to help manage their economies (e.g., providing advice on tax policy, expenditure management, monetary and exchange rate policy, financial system regulation, privatization, trade liberalization, etc.).

3) Lending. Giving short- to mid-term loans to member nations that are struggling to meet their international obligations. Loans (or bailouts) are provided in return for implementing specific IMF conditions designed to help restore the macroeconomic dynamics conducive to sustainable growth.




III.         Function of IMF

  • International monetary cooperation
  • Promote exchange rate stability
  • To help deal with balance of payments adjustment
  • Help deal with economic crisis by providing international coordination

IMF and Europe

According to the International Monetary Fund official website, there is no doubt that the IMF have always been an active contributor and fully engaged in Europe, and especially playing different roles such as a provider of policy advice, financing, and technical assistance. Actually, they work independently and in cooperation with European institutions, such as the European Commission (EC) and the European Central Bank (ECB).

 The IMF’s work in Europe has intensified since the start of the global financial crisis in 2008, and has been further stepped up since mid-2010 as a result of the euro area crisis.

Assessing individual countries and the euro area

The IMF provides economic analysis and policy advice as part of its standard surveillance process for individual advanced and emerging European economies that culminates in regular (usually annual) consultations with individual member countries and, if relevant, EU institutions such as the ECB and EC. The bilateral surveillance staff reports for these consultations include assessments of the economic outlook, and economic and financial stability.

In addition to its policy discussions with the 19 individual members of the euro area, IMF staff also holds consultations annually for the euro area as a whole, similar to those held for other currency unions. Here, IMF staff exchange views with counterparts from the ECB, the EC and other European institutions in a number of areas, including monetary and exchange rate policies and regional fiscal policies, financial sector supervision and stability, trade and cross-border capital flows, as well as structural policies. The final staff report includes an overall assessment of the economic outlook, external and fiscal position, and financial stability of the euro area as a whole. As part of the euro area consultation, the IMF’s views on the economic outlook and policies of the euro area are presented to the Eurogroup, comprising the 19 finance ministers of the euro area.

Global and regional analysis, spillovers and cross-cutting themes

The outlook and risks, spillovers, and policy recommendations for individual European countries and the euro area are assessed in a global context in the World Economic Outlook, the Global Financial Stability Report, Fiscal Monitorand the External Sector Report—the IMF’s flagship publications published twice a year. These assessments are integral to the IMF’s surveillance of its member countries.

The IMF also undertakes cross-country analysis to draw policy lessons for common challenges facing member countries. Since 2013, it has examined cross-cutting issues via a new approach—analyzing clusters of economies with strong interlinkages or common concerns—as a complement to the Fund’s bilateral surveillance, e.g., the Nordic Regional Report, the German-Central European Supply Chain Report, the Baltic Cluster Report, the Housing Cluster Report and the New Member States Policy Forum Cluster Report. The Fund has also published analyses to address several issues of broad policy concern in Europe: achieving external and internal balance; high youth unemployment; large non-performing loans in the banking system; inflation; the refugee surge and the impact of emigration 1 ; minimum wages 2, female labor force participation and the impact of the U.K. referendum to leave the EU. 3

For Central, Eastern and Southeastern Europe (CESEE), the IMF publishes CESEE Regional Economic Issues; a semi-annual publication that discusses analytical issues of broader interest to the region. Recent issues have looked at the challenges to post-crisis potential growth, growth-friendliness of fiscal consolidation, credit cycle and external funding patterns in the region.

Euro area integration

The IMF pays considerable attention to progress in fostering integration within the euro area to ensure the effective operation of the monetary union. The first-ever EU wide Financial Sector Assessment Program (FSAP), in March 2013, argued for a Single Supervisory Mechanism (SSM). In addition, the IMF published papers making the case for a Banking Union to strengthen the EU financial oversight and sever bank-sovereign linkages; a Fiscal Union to address gaps in the euro area’s architecture; and a more effective Economic Governance framework to betterincentivize structural reforms.

Providing financing

Since the start of the global financial crisis, a number of emerging and advanced European countries have requested financial support from the IMF to help them overcome their fiscal and external imbalances. Access to IMF resources for Europe was provided through Stand-By Arrangements (SBA), the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL), and the Extended Fund Facility (EFF).

Most of the first wave of IMF-supported programs in 2008-09 was for countries in emerging Europe. The IMF also provided financing to Iceland when its banking system collapsed in late 2008. Starting in 2010, credit was also provided to euro area members – Greece, Ireland, Portugal and Cyprus. Credit outstanding to these members peaked in July 2014 at SDR 66.3 billion, but has declined to about SDR 29.7 billion as of September 16, 2016, due in part to early repayments by Portugal and Ireland. Ireland’s and Portugal’s EFFs concluded in December 2013 and June 2014, respectively, and they then entered into Post-Program Monitoring (PPM). The arrangement with Greece was cancelled in January 2016. Cyprus’s EFF was cancelled in March 2016—shortly before its expiration—and it has entered PPM.

As of September 16, 2016, the IMF had active arrangements with 6 emerging market countries in Europe (see table) with commitments totaling about EUR 33.9 billion or $38 billion. Total credit outstanding to European members was around EUR 49.4 billion or around US$ 55.4 billion.

In most EU countries—including in Hungary, Latvia, and Romania—Fund financing was provided in conjunction with the EU, while Poland has a FCL arrangement with the Fund. The experience developed with the joint programs in Central and Eastern Europe proved useful when euro area countries requested IMF support. At that stage, the collaboration was further extended to include another partner—the ECB. Cooperation between the three institutions is aimed at ensuring maximum coherence and efficiency in staff-level program discussions with governments on the policies that are needed to put their economies back on the path of sustainable economic growth. While the IMF coordinates closely with the other two institutions, Fund decisions on financing and policy advice are ultimately taken by the IMF’s 24-member Executive Board.

The Vienna Initiative was launched at the height of the financial crisis in 2008/09 to help avoid a rush-to-the-exit of Western European cross-border banking groups whose subsidiaries dominate the banking systems of CESEE. Banks entered into explicit exposure maintenance agreements in the case of five program countries. This Initiative brings together key International Financial Institutions (EBRD, WB, and IMF), the European Commission and relevant EU institutions, the main cross-border banking groups, and home and host country authorities.

The initiative was re-launched as Vienna 2 in January 2012 in response to a second wave of deleveraging and supervisory ring-fencing. The focus is on improving cooperation between home and host authorities, while monitoring the pace of deleveraging with a view to keeping it orderly and following credit developments. It publishes quarterly CESEE Deleveraging and Credit Monitor, makes recommendations to relevant European institutions for improvements in supervisory coordination and cross-border bank resolution, and organizes “Host Country Cross-Border Banking Forums.” These forums provide an opportunity for dialogue between the banks that are systemically important in a country and major interlocutors of those banks: the monetary authority and regulator, the parent international banking groups, and the latter’s regulators. So far, these forums have been held in Albania, Bosnia, Croatia, Hungary, Serbia, Slovenia, Montenegro, and Ukraine.



Providing technical expertise

The IMF’s technical assistance helps countries improve the capacity of their institutions and the effectiveness of their policymaking. As such, it contributes to the overall effectiveness of the Fund’s surveillance and lending programs.

Emerging market economies in Europe—such as Albania, Bosnia and Herzegovina, Belarus, Romania, Serbia and Ukraine—are the main recipients of such assistance in a broad range of areas. However, in the wake of the global financial crisis, there have also been demands for IMF technical assistance in advanced economies. For instance, the IMF provided assistance to monitor progress on Spain’s financial sector reforms, as well as on tax policy and revenue administration issues to Denmark, Finland, Italy, Portugal, Greece, Estonia, and Slovakia.

The IMF delivers technical assistance in various ways. Support is often provided through staff missions of limited duration sent from headquarters, or the placement of experts and/or resident advisors for periods ranging from a few weeks to a few years. Assistance might also be provided in the form of technical and diagnostic studies, training courses, seminars, workshops, and “on-line” advice and support.

The IMF has increasingly adopted a regional approach to the delivery of technical assistance and training. The IMF Institute organizes courses for officials from new EU member countries and other economies in transition in Europe and Asia at the Joint Vienna Institute in Austria.





 Interventions of IMF  in Iceland:

  • The credit crunch of 2008 caused Icelandic banks to lose money and default.
  • Collapse in Icelandic banks led to loss of confidence in Icelandic economy
  • Withdrawal of money caused depreciation in currency.
  • This depreciation caused inflation and necessity of higher interest rates

Rescue package to Iceland:

  • $2.1billion loan to Iceland. This represents 1,190 percent of Iceland’s quota. The loan is part of a package aiming at:
  • restoring confidence in financial sector.
  • Stabilizing Icelandic krona.
  • Stabilizing Icelandic fiscal position