In a previous blog post, we tackled the World Bank. This time, we’ll look at an organization closely related to the World Bank and plays a similar role in the economies of many countries – the International Monetary Fund (IMF).
It is not surprising that people get confused about the roles of the World Bank and the IMF. They have a lot in common. They were both created to stabilize countries after World War II. Their membership is the same; in fact, a country must first join the IMF before it can join the World Bank. Both organizations provide loans to national governments to help improve their economies and groups opposed to the World Bank are also opposed to the IMF. If that were not enough, their headquarters are across the street from each other in Washington, D.C. and they hold their annual meetings together. So, what is the difference?
The main difference between the two is their goals. While the World Bank aims to reduce global poverty, the IMF works to stabilize the global economy. If that does not make it clear, a little bit of history might help.
History of the IMF
In 1944, government leaders met at Bretton Woods, New Hampshire, in the United States to decide on changes to the international system. The changes were made to help countries recover from the two World Wars and prevent events that preceded them, like the Great Depression. The result was the Bretton Woods Agreement, which established both the World Bank and the IMF.
While the World Bank’s role was to help reconstruct countries that had been devasted by the wars, the IMF was put in charge of overseeing a new system of fixed foreign exchange rates. The value of the US dollar was set at 35 dollars per ounce of gold, and all other currencies were given a fixed value against the US dollar. This system came to be known as the Gold Standard, managed by the IMF. With this system, a country was free to adjust its exchange rate up or down, but any changes greater than 10% required the IMF's permission.
In 1970, the United States de-pegged its dollar from gold and the Gold Standard collapsed, resulting in today’s system of floating exchange rates. Now the values of currencies are determined by the prices at which they are bought and sold on foreign exchange markets. This changed the IMF’s role.
So what does the IMF do today?
Governed by and accountable to its 189-country constituency, the IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. There are 3 primary ways the IMF does this:
1- Economic Surveillance
The IMF oversees the international monetary system and monitors the economic and financial policies of its 189 member countries. As part of this process, which takes place both at the global level and within individual countries, the IMF highlights possible risks to stability and advises on policy adjustments.
The IMF provides loans to member countries experiencing actual or potential payments problems to help them rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth, while correcting any underlying problems.
The loans that the IMF provides come with conditions. Countries that receive assistance must fix their financial imbalances by reforming their economic policies. If conditions are not met, the IMF withholds funds. These conditional loans are also known as structural adjustment programs.
Structural adjustment programs often require governments to remove import and export restrictions and state subsidies, privatize state-owned enterprises, devalue their national currency, cut expenditures, also known as austerity, and fight corruption. The goal of these conditions is to ensure that the country will be able to repay the IMF and that the country will not try to solve its economic problems in a way that would hurt the international economy.
3- Capacity Development
In a more advisory than banking role, the IMF works with governments around the world to modernize their economic policies and institutions and train their people. This helps countries strengthen their economy, improve growth and create jobs.
Egypt and the IMF
Political and economic turbulence, such as that created by the political changes in 2011, usually lead to declined business activity, disruption of financial markets scaring off investors, and negative effects to the economy. Therefore, measures are needed to restore macroeconomic stability and bring it back to sustainable growth.
In November 2016, the IMF approved financial assistance for Egypt in the form of an Extended Fund Facility (EFF) arrangement worth USD 12 billion. The loan was delivered in six parts over three years, and in July 2019, the IMF’s Executive Board approved the final USD 2 billion tranche after completing its fifth review of the country’s economic reform program.
The program aimed to improve the function of the foreign exchange markets, bring down the budget deficit and government debt, and raise growth to create jobs, especially for women and youth. It also aimed to protect the most vulnerable groups in the society during the adjustment period.
Opposition to the IMF
While countries generally have a very good track record repaying the IMF, and the IMF has been successful at averting financial crises and help countries stabilize, critics who say that IMF loans are damaging, especially to the world’s poorest countries. Opponents point out that large and quick changes to an economy hit the poor the hardest since they do not have the savings or other financial cushions to help them adjust. They also point out that developing countries often must put health, education, and other social programs on hold in order to pay back their loans.
A larger criticism is that the structure of the IMF and the World Bank further stresses the imbalance between the world's rich and poor. The IMF’s money comes from quotas paid by its members/. Nations with larger economies pay larger quotas but countries who contribute more have a greater say in the decisions of the IMF. Critics say that this system results in economic policies being decided by the rich but implemented by the poor.
Further development … for you
The IMF’s website contains a wealth of economic and financial information from around the world and across many different disciplines. If you wish to expand your economic knowledge of the world’s financial system, you can visit their website,http://www.imf.org/. Here you will find research and gain access to their database of information and all the publications and libraries they have.