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International Monetary Fund (IMF)

International Monetary Fund
In July 1944, The IMF, also known as the Fund, was conceived at a UN conference in Bretton Woods, New Hampshire, United States. It was created to prevent economic crises like the great depression. With its sister organization, the World Bank, IMF is the largest public lender of funds in the world. It is a specialized agency of the United Nations and is run by its 186 member countries. Membership is open to any country that conducts foreign policy and accepts the organization’s statutes. Prime purpose behind The IMF 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. The Fund’s mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability. The IMF’s fundamental mission is to ensure the stability of the international monetary system. It does so in three ways: keeping track of the global economy and the economies of member countries; lending to countries with balance of payments difficulties; and giving practical help to members.

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 in individual countries, the IMF highlights possible risks to stability and advises on needed policy adjustments.
Lending
A core responsibility of the IMF is to provide loans to member countries experiencing actual or potential balance of payments problems. This financial assistance enables countries to rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth, while undertaking policies to correct underlying problems. Unlike development banks, the IMF does not lend for specific projects.
Capacity Development
IMF capacity development, technical assistance and training, helps member countries design and implement economic policies that foster stability and growth by strengthening their institutional capacity and skills. The IMF seeks to build on synergies between technical assistance and training to maximize their effectiveness.

HOW IMF WORKS
To achieve its goals, the IMF focuses and advises on the macroeconomic policies of a country, which affect its exchange rate and its government’s budget, money and credit management. The IMF also appraises a country’s financial sector and its regulatory policies, as well as structural policies within the macro economy that relate to the labor market and employment. In addition, as a fund, it may offer financial assistance to nations in need of correcting balance of payments discrepancies. The IMF is thus entrusted with nurturing economic growth and maintaining high levels of employment within. The IMF gets its money from quota subscriptions paid by member states. The size of each quota is determined by how much each government can pay according to the size of its economy. The quota in turn determines the weight each country has within the IMF - and hence it’s voting rights - as well as how much financing it can receive from the IMF.

25% of each country’s quota is paid in the form of special drawing rights (SDRs), which are a claim on the freely usable currencies of IMF members. Before SDRs, the Bretton Woods system had been based on a fixed exchange rate, and it was feared that there would not be enough reserves to finance global economic growth. Therefore, in 1968, the IMF created the SDRs, which are a kind of international reserve asset. They were created to supplement the international reserves of the time, which were gold and the U.S. dollar. The SDR is not a currency; it is a unit of account by which member states can exchange with one another in order to settle international accounts. The SDR can also be used in exchange for other freely-traded currencies of IMF members. A country may do this when it has a deficit and needs more foreign currency to pay its international obligations. The SDR’s value lies in the fact that member states commit to honor their obligations to use and accept SDRs. Each member country is assigned a certain amount of SDRs based on how much the country contributes to the Fund (which is based on the size of the country’s economy). However, the need for SDRs lessened when major economies dropped the fixed exchange rate and opted for floating rates instead. The IMF does all of its accounting in SDRs, and commercial banks accept SDR denominated accounts. The value of the SDR is adjusted daily against a basket of currencies, which currently includes the U.S. dollar, the Japanese yen, the euro, and the British pound.
The larger the country, the larger its contribution; thus the U.S. contributes about 18% of total quotas while the Seychelles Islands contribute a modest 0.004%. If called upon by the IMF, a country can pay the rest of its quota in its local currency. The IMF may also borrow funds, if necessary, under two separate agreements with member countries. In total, it has SDR 212 billion (USD 290 billion) in quotas and SDR 34 billion (USD 46 billion) available to borrow. The IMF offers its assistance in the form of surveillance, which it conducts on a yearly basis for individual countries, regions and the global economy as a whole. However, a country may ask for financial assistance if it finds itself in an economic crisis, whether caused by a sudden shock to its economy or poor macroeconomic planning. A financial crisis will result in severe devaluation of the country’s currency or a major depletion of the nation’s foreign reserves. In return for the IMF’s help, a country is usually required to embark on an IMF-monitored economic reform program, otherwise known as Structural Adjustment Policies (SAPs).

There are three widely implemented facilities by which the IMF can lend its money.
  • A stand-by agreement offers financing of a short-term balance of payments, usually between 12 to 18 months.
  • The Extended Fund Facility (EFF) is a medium-term arrangement by which countries can borrow a certain amount of money, typically over a 3-4 years’ period. The Extended Fund Facility (EFF) aims to address structural problems within the macro economy that are causing chronic balance of payment inequities. The structural problems are addressed through financial and tax sector reform and the privatization of public enterprises.
  • The third main facility offered by the IMF is known as the poverty reduction and growth facility (PRGF). As the name implies, it aims to reduce poverty in the poorest of member countries while laying the foundations for economic development. Loans are administered with especially low interest rates.
The IMF also offers technical assistance to transitional economies in the changeover from centrally planned to market run economies. The IMF also offers emergency funds to collapsed economies, as it did for Korea during the 1997 financial crisis in Asia. The funds were injected into Korea’s foreign reserves in order to boost the local currency, thereby helping the country avoid a damaging devaluation. Emergency funds can also be loaned to countries that have faced economic crisis as a result of a natural disaster. All facilities of the IMF aim to create sustainable development within a country and try to create policies that will be accepted by the local populations. However, the IMF is not an aid agency, so all loans are given on the condition that the country makes it a priority to pay back what it has borrowed. Currently, all countries that are under IMF programs are developing, transitional and emerging market countries.
IMF SHAPING GLOBAL ECONOMY
Cooperation and Reconstruction (1944–71)
As the Second World War ends, the job of rebuilding national economies begins. The IMF is charged with overseeing the international monetary system to ensure exchange rate stability and encouraging members to eliminate exchange restrictions that hinder trade.
The End of the Bretton Woods System (1972–81)
After the system of fixed exchange rates collapsed in 1971, countries were free to choose their exchange arrangement. Oil shocks occurred in 1973–74 and 1979, and the IMF steps in to help countries deal with the consequences.
Debt and Painful Reforms (1982–89)
The oil shocks lead to an international debt crisis, and the IMF assists in coordinating the global response.
Societal Change for Eastern Europe and Asian Upheaval (1990–2004)
The IMF plays a central role in helping the countries of the former Soviet bloc transition from central planning to market-driven economies.
Globalization and The Crisis (2005 - Present)
The implications of the continued rise of capital flows for economic policy and the stability of the international financial system are still not entirely clear. The current credit crisis and the food and oil price shock are clear signs that new challenges for the IMF are waiting just around the corner.

IMF & PAKISTAN RELATIONSHIP 
HIGHER THAN EVEREST, DEEPER THAN PACIFIC
It is very easy to understand the PAK – IMF relationship as it directly relates with PAK – US relations. During the 1980s, Pakistan was an important player in American foreign policy, and was blessed with generous US aid programs. When the aid dried up, the IMF stepped in and the flow continued. Again 9/11 resumed the US aid generosity; the Fund became less important as a source of foreign exchange for Pakistan. Following the year 2008, although a complex system was instituted to channel civilian aid with very high accountability mechanisms through the Kerry-Lugar bill, military aid continued and the IMF was engaged to provide balance of payments support to manage the reserves. But at no point was Pakistan cut off from its continuous injections of external assistance.
IMF aid for Pakistan has become a Dutch disease phenomenon. Dutch Disease is a technical term used by economists to describe a situation where a country gets used to easy money from a particular source like oil exports. The said country does not develop any other sector/s of its economy or break its dependence on easy money flowing in through a single source in the form of loaning. Gulf countries are the best example to understand this phenomenon. The affair between Pakistan and IMF started in the 1980s when the agency started to play an increasingly important and confident role in our economic policies. Pakistan first went to the IMF in 1980 to avail an ‘Extended Fund Facility’. Leading and well-reputed economists still believe that when the IMF facility was availed by Pakistan, it was not really needed. Pakistan’s economy was in a better profile than any other developing country. This is a dilemma that you borrow to pay off the loan, which means that you are being burdened by debt after debt. This is just like the example of an individual who borrows from one bank in order to pay another. Considering that no strong increases are accruing in the said individual’s income, he/she is forced to live in a burden of lifetime debt. The IMF issues a loan to one of its member countries with certain conditions. The country has to submit a Letter of Intent (LoI), specifying its economic plan to recover and repay the IMF loan. The executive board then agrees with the country and the terms and conditions.

Low-income countries may borrow on relatively generous terms through one of the:
  1. EXTENDED CREDIT FACILITY (ECF): Financing under the ECF currently carries a zero interest rate, with a grace period of 5 and half years, and a final maturity of 10 years.
  2. STAND-BY CREDIT FACILITY (SCF): Financing under the SCF currently carries a zero interest rate, with a grace period of 4 years, and a final maturity of 8 years.
  3. EXOGENOUS SHOCK FACILITY (ESF): ESF loans carry a zero annual interest rate until 2011, with repayments made twice a year, beginning at 5 and half years and ending 10 years after the loan was issued. The Fund reviews the level of interest rates for all concessional facilities every two years.

Then there are other loans for more established countries that come under one of the following categories:
  1. Stand-by Arrangements (SBA): The length of a SBA is typically 12-24 months, and repayment is due within 3-5 years of disbursement. The majority of Fund assistance to middle-income countries is provided through SBAs.
  2. Extended Fund Facility (EFF): Arrangements under the EFF are longer than SBAs, usually 3 years. Repayment is due within 4-10 years from the date of disbursement.
  3. Flexible Credit Line (FCL): The FCL is for crisis prevention or response purposes. The length of the FCL is one or two years (with an interim review of continued qualification after one year) and the repayment period the same as for the SBA but unlike SBA, this loan is available in a single up-front disbursement rather than phased.
  4. Precautionary Credit Line (PCL): The PCL can only be used for crisis prevention and countries with a good track record of recovery. It can have the length of between one and two years.
Coming to the policy recommendations, Pakistan was advised by the IMF in 1980 to devalue the rupee against the dollar, reduce government expenditures, establish tax reforms to increase domestic resource mobilization, encourage savings, institute price reforms and push for export-led growth and privatization. Most of such measures are policies with which most political economists, simply, don’t disagree. But there will be criticism when reduction of government expenditures as leading directly to cut down the social welfare programs and privatization will be discussed or advised. External Debt in Pakistan has increased to 88,891 USD Million in the fourth quarter of 2017 from 85,052 USD Million in the third quarter of 2017. External Debt in Pakistan averaged 53,029.34 USD Million from 2002 until 2017, reaching an all-time high of 88,891 USD Million in the fourth quarter of 2017 and a record low of 33,172 USD Million in the third quarter of 2004. As of 1988, Pakistan has entered into 12 different programs with the IMF. India till now has signed only one facility with the Fund, while countries such as Nepal and Bangladesh have signed just two. Pakistan, for this very reason, was classified as a ‘prolonged user’ by the IMF in 2002, ranking third in the world, higher than every low-income African nation, but surpassed only by two countries; the Philippines and Panama. One reason for this most certainly has been our constant and very costly effort to keep at par with India, economically and militarily, as well as our long-standing war on terror, all of this done too in the face of exceptionally low levels of savings in the country. As a result of such expenditures, our external accounts have typically remained under pressure, which along with soaring costs of commercial borrowing from international markets, made the IMF an easy solution to our problems.