The International Monetary Fund (IMF) is an international organization that provides

financial assistance and advice to member countries. This article will discuss the main
functions of the organization, which has become an enduring institution integral to the
creation of financial markets worldwide and to the growth of developing countries.
What Does It Do?
The IMF was born at the end of World War II, out of the Bretton Woods Conference in 1945.
It was created out of a need to prevent economic crises like the Great Depression. With its
sister organization, the World Bank, the 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.
The IMF is responsible for the creation and maintenance of the international monetary
system, the system by which international payments among countries take place. It thus
strives to provide a systematic mechanism for foreign exchange transactions in order to
foster investment and promote balanced global economic trade.
To achieve these 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 will also appraise a country's financial sector and its regulatory
policies, as well as structural policies within the macroeconomy 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 countries.
How Does It Work?
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 its voting rights - as well as how much financing it can receive from the IMF.
Twenty-five percent 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.
IMF Benefits
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). (For more insight, see Can The IMF Solve Global Economic Problems?)
There are three more 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 three- to four-year period. The 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 implement the SAPs and
make 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 (countries that
have faced financial crisis).
Not Everyone Has the Same Opinion
Because the IMF lends its money with "strings attached" in the form of its SAPs, many
people and organizations are vehemently opposed to the its activities. Opposition groups
claim that structural adjustment is an undemocratic and inhumane means of loaning funds
to countries facing economic failure. Debtor countries to the IMF are often faced with having
to put financial concerns ahead of social ones. Thus, by being required to open up their
economies to foreign investment, to privatize public enterprises, and to cut government
spending, these countries suffer an inability to properly fund their education and health
programs. Moreover, foreign corporations often exploit the situation by taking advantage of
local cheap labor while showing no regard for the environment. The oppositional groups say
that locally cultivated programs, with a more grassroots approach towards development,
would provide greater relief to these economies. Critics of the IMF say that, as it stands now,
the IMF is only deepening the rift between the wealthy and the poor nations of the world.
Indeed, it seems that many countries cannot end the spiral of debt and devaluation. Mexico,
which sparked the infamous "debt crisis" of 1982 when it announced it was on the verge of
defaulting on all its debts in the wake of low international oil prices and high interest rates
in the international financial markets, has yet to show its ability to end its need for the IMF
and its structural adjustment policies. Is it because these policies have not been able to
address the root of the problem? Could more grassroots solutions be the answer? These
questions are not easy. There are, however, some cases where the IMF goes in and exits once
it has helped solve problems. Egypt is an example of a country that embarked upon an IMF
structural adjustment program and was able to finish with it.
Several of the types of loans offered include:

 Poverty Reduction and Growth Facility (PRGF) loans. These are low-interest loans for
low-income countries to reduce poverty and improve growth for these countries.
 Exogenous Shocks Facility (ESF) loans. These are loans to low-income countries that
provide lending for negative economic events that are outside the control of the
government. These could include commodity price changes, natural disasters and wars
that can interrupt trade.
 Stand By Arrangements (SBA). These are used to help countries with short-term balance
of payment issues. (Refresh your understanding of balance of payments with our
article: Understanding Capital And Financial Accounts in The Balance Of Payments.)
 Extended Fund Facility (EFF). This is used to assist countries with long-term balance
of payment issues that require economic reforms.
 Supplemental Reserve Facility (SRF). This is provided to meet short-term financing on
a large scale, like the loss of investor confidence during the Asian Financial Crisis that
caused enormous outflows of money and led to massive IMF financing.
 Emergency Assistance loans. These are designed to provide assistance to countries that
have had a natural disaster or are emerging from war.
Surveillance
The IMF watches the economics and economic policies of its members. There are two main
components of surveillance, country surveillance and multilateral surveillance. Through
country surveillance, the IMF visits the country once a year to assess its economic policies
and where they are headed. It reports its findings in the Public Information Notice. The
second way, multilateral surveillance, is when the IMF surveys global and regional economic
trends. It reports these twice a year in the World Economic Outlook and Global Financial
Stability Report. These two reports point out problems and potential risks to the world
economy and financial markets. The Regional Economic Outlook Report gives more details
and analysis.
The IBRD offers assistance to middle-income and poor, but creditworthy, countries. It also
works as an umbrella for more specialized bodies under the World Bank. The IBRD was the
original arm of the World Bank that was responsible for the reconstruction of post-war
Europe. Before gaining membership in the WBG's affiliates (the International Development
Association, the International Finance Corporation, the Multilateral Investment Guarantee
Agency, and the International Centre for Settlement of Investment Disputes), a country must
be a member of the IBRD.
The International Development Association offers loans to the world's poorest countries.
These loans come in the form of "credits" and are essentially interest-free. They offer a 10-
year grace period and hold a maturity of 35 years to 40 years.
The International Finance Corporation (IFC) works to promote private sector
investments by both foreign and local investors. It provides advice to investors and
businesses, and it offers normalized financial market information through its publications,
which can be used to compare across markets. The IFC also acts as an investor in capital
markets and will help governments privatize inefficient public enterprises.
The Multilateral Investment Guarantee Agency (MIGA) supports direct foreign
investment into a country by offering security against the investment in the event of political
turmoil. These guarantees come in the form of political risk insurance, meaning that MIGA
offers insurance against the political risk that an investment in a developing country may
bear.
Finally, the International Centre for Settlement of Investment Disputes facilitates and
works toward a settlement in the event of a dispute between a foreign investor and a local
country.
What Is the World Bank?
The World Bank is an international organization dedicated to providing financing, advice,
and research to developing nations to aid their economic advancement. The bank
predominantly acts as an organization that attempts to fight poverty by offering
developmental assistance to middle- and low-income countries.
Currently, the World Bank has two stated goals that it aims to achieve by 2030. The first is
to end extreme poverty by decreasing the number of people living on less than $1.90 a day
to below 3% of the world population. The second is to increase overall prosperity by
increasing income growth in the bottom 40% of every country in the world.
Understanding the World Bank
The World Bank is a provider of financial and technical assistance to individual countries
around the globe. The bank considers itself a unique financial institution that sets up
partnerships to reduce poverty and support economic development.
The World Bank supplies qualifying governments with low-interest loans, zero-interest
credits, and grants, all for the purpose of supporting the development of individual
economies. Debt borrowings and cash infusions help with global education, healthcare,
public administration, infrastructure, and private-sector development. The World Bank also
shares information with various entities through policy advice, research and analysis, and
technical assistance. It offers advice and training for both the public and private sectors.
KEY TAKEAWAYS
 The World Bank is an international organization dedicated to providing financing,
advice, and research to developing nations to aid their economic advancement.
 The World Bank and International Monetary Fund were founded simultaneously
under the Bretton Woods Agreement with generally the same focus to help serve
international governments globally.
 The World Bank has expanded to become known as the World Bank Group with five
cooperative organizations, sometimes known as the World Banks.
 The World Bank Group offers a multitude of proprietary financial assistance products
and solutions for international governments as well as a range of research-based
though leadership for the global economy at large.
History of the World Bank
The World Bank was created in 1944 out of the Bretton Woods Agreement, which was
secured under the auspices of the United Nations in the latter days of World War II. The
Bretton Woods Agreement included several components: a collective international monetary
system, the formation of the World Bank, and the creation of the International Monetary
Fund (IMF). Since their foundings both the World Bank and the International Monetary Fund
have worked together toward many of the same goals. The original goals of both the World
Bank and IMF were to support European and Asian countries needing financing to fund post-
war reconstruction efforts.
Both the World Bank and IMF outlasted the collective international monetary system which
was central to the Bretton Woods Agreement. President Nixon halted the Bretton Woods
international monetary system in the 1970s. However, the World Bank and IMF remained
open and continued to thrive on providing worldwide aid.
The World Bank and IMF are headquartered in Washington, D.C.. The World Bank currently
has more than 10,000 employees in more than 120 offices worldwide.
Though titled as a bank, the World Bank, is not necessarily a bank in the traditional, chartered
meanings of the word. The World Bank, and its subsidiary groups, operate within their own
provisions and develop their own proprietary financial assistance products, all with the same
goal of serving countries capital needs internationally. The World Bank’s counterpart, the
IMF, is structured more like a credit fund. The differing in the structuring of the two entities
and their product offerings allows them to provide different types of financial lending and
financing support. Each entity also has several of its own distinct responsibilities for serving
the global economy.
World Banks
Through the years, the World Bank has expanded from a single institution to a group of five
unique and cooperative institutional organizations, known as the World Banks or collectively
as the World Bank Group. The first organization is the International Bank for Reconstruction
and Development (IBRD), an institution that provides debt financing to governments that
are considered middle income. The second organization within the World Bank Group is the
International Development Association (IDA), a group that gives interest-free loans to the
governments of poor countries. The International Finance Corporation (IFC), the third
organization, focuses on the private sector and provides developing countries with
investment financing and financial advisory services. The fourth part of the World Bank
Group is the Multilateral Investment Guarantee Agency (MIGA), an organization that
promotes foreign direct investments in developing countries. The fifth organization is the
International Centre for Settlement of Investment Disputes (ICSID), an entity that
provides arbitration on international investment disputes.