INTERNATIONAL

UNIT 5 SECTION 6 INTERNATIONAL MONETARY FUND (IMF)

BUSINESS Unit 5, section 6: International monetary fund (IMF)

Welcome to Section 6 of unit 5. This Section will look at the original

framework of the international monetary fund and its relevance to today’s
financial and economic development. The Section will further look at the
purposes of the fund and the future if the international monetary system

By the end of the Section, you should be able to;

 explain the role of IMF in international business
 outline and explain at least four purposes of IMF
 examine the future of international monetary system

Read on

The Nature of the International Monetary Fund System

The International Monetary Fund (IMF) was established in 1945 and
headquartered in Washington DC, in the United States of America. The
rules for international financial dealings among countries are often set at the
IMF, and substantial international loan decisions are made between
governments and the IMF. The IMF is an international agency that attempts
to stabilise currencies by monitoring the foreign exchange systems of
member countries and lending money to developing economies.

The original IMF framework functioned well for about 15 years. However,
by the 1960s problems were beginning to develop. One reason was that the
United States had been supplying international liquidity through a steady net
outflow of dollars for such things as economic aid, private foreign direct
investment and military expenditures. During the 1970s, as the economies
of more and more countries strengthened, it became evident that gold and
internationally acceptable currencies could not handle the reserve
requirements of these nations. In 1970, to help increase international
reserves, the IMF created the special drawing right (SDR) as a unit of value
to replace the dollar as a reserve asset, and today a number of countries peg
their currency to the SDR. Another major development was a 1976 IMF
amendment that resulted in a managed float system, characterised by
flexible exchange rates in which the value of currencies is allowed to
change. Some of the main purposes of the IMF include:
 promoting international monetary cooperation
 promoting exchange stability, to maintain orderly exchange
arrangements among members, and to avoid competitive exchange
depreciation
 facilitating expansion and balanced growth of international trade
 assisting in the establishment of a multilateral system of payments
 making IMF resources available to members
 shortening the duration and lessening the degree of disequilibrium in the
international balances of payments of members.
Membership in the IMF is available to any country willing to agree to its rules
and regulations, and willing to make a deposit, called a quota, partly in gold and

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partly in the country's own currency. The size of a quota reflects the global
importance of the country's economy, its voting power and the country's
borrowing power from IMF.

At the time of its formation, the IMF had just 29 members but today, it has
185 members, including Ghana. The IMF advises and supports member
countries in implementing economic and financial policies that promote
stability, reduce vulnerability to crisis, and encourage sustained growth and
high living standards. It also reviews global economic trends and
development that affect the health of the international monetary and
financial system by promoting dialogue among member countries.

The IMF has retained a central role since its inception. The Board of
Governors is the highest decision making body and consists of one governor
and one alternate governor for each member country. The governor is
always appointed by the member country and is usually the head of the
central bank or the minister of finance. The Board of Governors retains the
right to approve quota increases, SDR allocations, admittance of new
members, compulsory withdrawal of members, and the amendments and
interpretations of the article of Agreement and bye-laws.

The Future of the International Monetary System (IMS)

Whereas some leaders have appreciated the global market operations, others
have called for the elimination of the IMF and its replacement by institutions
not yet clearly defined. The development of internationally accepted codes of
good practice to allow comparisons of countries' fiscal and monetary practices
is underway. Countries are becoming clearer with their financial policies and
responsibilities.

The IMF should be more transparent and accountable on issues of

leadership and increase its efforts and abilities in the area of financial-sector
analysis. Risks should be properly and effectively managed to avoid future
financial crisis. IMF should stop bailing debtor countries and must be more
cautious when loaning money in such risky situations. Greater cooperation
and understanding among the IMF, private-sector banks, and debtor nations
are needed. Integration is highly recommended to the growth and
development of better international monetary systems.

The IMF promotes international monetary cooperation, exchange rate

stability, and orderly exchange arrangements and encourages countries to
adopt sound economic policies. The IMF plays an important role in
addressing financial and monetary crises faced by nations around the world.

Now assess your understanding of this Section by answering the following

self-assessment questions. Good luck!

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BUSINESS Unit 5, section 6: International monetary fund (IMF)

Activity 5.6
 How may the International Monetary Fund affect companies’ activities in
international business?
 Explain the differences between the international monetary system and
the International Monetary Fund. What are the three major types of
crises most frequently addressed by the International Monetary Fund?

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