IMF – International Monetary Fund
What is the IMF?
Headquartered in Washington, D.C., U.S., the IMF (International Monetary Fund) is one of the world’s most important financial institutions. The IMF was founded in 1944 alongside the World Bank Group at the UN-convened Bretton Woods Conference. The two bodies were formed in the aftermath of the Great Depression, with the IMF idea particularly inspired by the need to prevent competitive currency devaluations witnessed during the 1930s as well as to lay the ground for future international economic cooperation. The IMF officially started its operations in December 1945 and has now grown its membership from the original 29 countries to the current 190 members as of November 2021.
The IMF initially oversaw the Bretton Woods monetary system before its collapse in the 1970s. The system mandated member countries to keep their external forex rates to within 1 per cent, with currencies tied to the Gold standard. The IMF now promotes a system of floating exchange rates, where market forces of supply and demand determine the value of currencies. In addition to enhancing exchange rate stability, the IMF has stated objectives of promoting international monetary cooperation, sustainable economic growth, high employment, international trade, and lending resources to member countries during financial turmoil.
The International Monetary Fund has over $1 trillion of resources that it is able to lend to member countries as well as to provide other services so as to meet its objectives. The IMF has two sources of its funds: quotas and loans. Quotas are its main financing source, where each member is assigned an amount that reflects its standing in the world economy. Quotas are typically reviewed every five years. The IMF can also supplement its resources via loans, with special bilateral and multilateral credit agreements in place with a group of certain members and institutions.
The IMF has its own unit of accounts known as SDR (Special Drawing Rights). SDR has been allocated the currency code XDR by ISO, but it is not quite a currency. SDR is an international reserve asset that the IMF created to supplement the official reserves of its member countries. The SDR was created in 1969, and it was initially pegged to Gold and the US dollar. But since the collapse of the Bretton Woods System in 1973, the SDR was reformulated as a basket of major world currencies.
The SDR now has 5 constituent currencies: US dollar, euro, Chinese yuan, Japanese yen, and the Sterling pound. The SDR basket is re-evaluated every 5 years, with each currency assigned a certain weighting based on its fee usability and export criteria. SDRs are allocated by the IMF to member countries and cannot be held or used by private entities. In recent years, the SDR allocations have been significantly boosted, particularly in 2009 (post-Great Recession) and in 2021 (post-Great Lockdown); and it helped IMF members navigate tricky financial and economic situations.
The Board of Governors is the highest decision-making body of the International Monetary Fund. It consists of one governor and one alternate governor representing each member country. These individuals are usually finance ministers or central bank governors of their respective countries, and they can speak authoritatively for the members they represent.
The Board of Governors meets once a year, and they have the powers to admit new members, approve quota increases and SDR allocations, amend the IMF bylaws and articles of agreement, as well as compulsorily withdraw any member.
Twenty-four of these governors are elected or appointed to serve in the IMF Executive Board, which oversees the day-to-day operations of the organisation, assisted by the IMF Staff. The IMF Managing Director chairs the Executive Board and is also the head of the IMF Staff. The IMF MD is supported by four Deputy Managing Directors.
What Does the IMF Do?
The IMF describes its mission as “working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.” It is able to work towards these goals by performing the following functions:
The IMF lends to its members who are experiencing economic problems so that they are able to prevent or curb financial crises. The source of crises to IMF members can either be Domestic (such as large current accounts, fiscal deficits, and high public debt) or External (such as commodity price swings, health pandemics, and capital flow volatilities).
The IMF lending helps members to have sufficient breathing room while they implement vital structural reforms. The IMF lending toolkit is diverse and customised to meet the needs of individual members. The tools include Standard Credit Facility (SCF); Extended Fund Facility (EFF); Flexible Credit Line (FCL); Precautionary and Liquidity Line (PLL); Rapid Financing Instrument (RFI); and the Rapid Credit Facility (RCF).
The IMF conducts global, regional and country-level surveillance activities so as to identify potential stability and growth risks. The IMF will then analyse the information gathered and recommend policy adjustments that will help confront the risks, prevent any likely spillovers, and promote economic stability. To achieve this, the IMF maintains constant consultations with member countries. The IMF will also always adapt its surveillance methods and activities so that they are in tandem with prevailing global trends and challenges.
The IMF has various capacity building programs that provide technical assistance, training, and policy advice to help members share knowledge and adopt best practices that will help their economies grow and prosper. The programs are designed to help the member countries build strong institutions that will have the ability to create and implement the right policies. The capacity development programs focus on a wide range of issues such as statistics, public finances, monetary policies, macroeconomic frameworks, and legal frameworks.
The International Monetary Fund in Fundamental Analysis
The IMF is one of the most important financial bodies in the world, and its influence when doing fundamental analysis of financial assets cannot be overlooked. The majority of IMF interventions in member countries is usually conditional. Most countries that receive IMF help are usually required to implement various structural adjustments locally. This typically has the effect of promoting macroeconomic stability, something that is very crucial for the efficient working of financial markets.
For instance, the IMF intervention in Brazil since 2002 has been very impactful in both the country’s economy and financial markets. In mid-2002, Brazil was gearing up for general elections. Its financial markets came under immense pressure from both the political uncertainty and potential spillovers from the financial crisis in neighbouring Argentina. The IMF advanced a record-breaking credit facility of SDR 22.8 billion (about $30.5 billion) to the country. The financial program helped stabilise the financial markets, with Brazilian equities and bonds becoming attractive ever since. Continuous engagement with the IMF has also seen the Brazilian real become more stable in recent years.
The IMF has some of the highest holdings of Gold in the world. Throughout its history, it has sometimes had to sell some of it to boost its financial resources. A typically shrewd seller, the IMF has seen its actions inspire profit taking or market corrections in the price of Gold.
For instance, after Gold prices rose in the aftermath of the 2008 Great Recession, the International Monetary Fund sold over 403 metric tons of the commodity in 2009 and 2010. Gold prices then proceeded to correct from above $1800 per ounce in 2011 to just above $1500 by mid-2012. The IMF actions were obviously not the only contributing factor, but they surely contributed to market sentiment during that period.
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