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The Role of the IMF in the Global Economy



 

The International Monetary Fund (IMF) was founded in 1944 by John Maynard Keynes and members of the American Treasury such as Harry Dexter White, with the aim of supporting sustainable growth for all of its 190 member countries. But how does the IMF achieve these goals?


 
For a one minute explainer on the the IMF and the World Bank, check this out 👇

 

All 190 member countries of the IMF are required to contribute money to a capital account (often calculated in relation to a country's GDP), acting as a subscription to the IMF. These capital contributions have amounted to a total $1 trillion lending capacity for the IMF, in order to help finance nations who need funding. This funding can come in two different forms of lending:


Concessional: this funding is charged at a 0% interest rate, often to lower income countries who are eligible for the Poverty Reduction and Growth Trust (PRGT), such as Afghanistan and Congo.


Non-concessional: non concessional lending is charged at interest rates calculated to be the same or slightly lower than current market rates, where member countries have access to the General Resources Account held by the IMF.


But what is this capital for?


This money is used to support sturggling economies. 35 Countries are currently receiving funds from the IMF, most importantly countries such as Argentina and Ukraine. Argentina is currently experiencing a very severe financial crisis under Javier Milei, experiencing inflation rates of almost 300%, highlighting why their $44 billion loan was approved in March 2022.


 
For a look into the history of Argentine politics, check out this fantastic article by Hari Reilly-Singh
Also, check out this video by the Economist on the current state of the Argentine economy ⬇️

 

The second objective of the IMF is fiscal and monetary policy advice as well as forecasting. Whilst the IMF is not allowed to actively change monetary and fiscal policies of its member countries, it will often provide advice on how to achieve sustainable growth.


For example, the IMF recently published an article on growth in Estonia, who have been experiencing a prolonged recession recently. It created forecasts on growth over the next year, predicting growth to rebound in 2025 due to the falling impact of recent supply side shocks affecting energy and oil prices. On top of that, the IMF advised an overall neutral fiscal policy in 2024, however expansionary fiscal policy focused primarily on government spending was suggested over the next few months.


The third and final main objective of the IMF is capacity development. This is the training and technical support that the IMF provides to any member countries on request. The funding for the IMF’s capacity development makes up one third of the total spending by the IMF, with 50% of this going to LICs (Low Income Countries) and a further 25% going to conflict-affected states. The aim of capacity development is to enable these countries to improve their policy-making abilities in order to improve their tax-collecting abilities and to strengthen monetary and exchange policies. As well as that, the IMF can provide technical and data collection support, on top of support to such states to achieve the sustainable development goals (SDGs).


Through the support of some of the IMF’s capacity development partners such as the EU, USA and the UK, Somalia has benefited from the capacity development program, strengthening the country’s technical capacity and making their financial institutions more effective.


But just how successful have these goals been?


The IMF has shown great success through the lending program. The funds provided to member countries act as a cushion for economic shocks, particularly the global financial crisis in 2008 where the IMF provided $540 billion to almost 90 countries in the years following this event. On top of this, the support of lending has helped with financial payments after World War II, as well as providing support to newly independent African states following the effects of colonialism.


Policy advice and forecasts provided by the IMF have been extremely beneficial in preventing financial crises and stabilising many economies globally.

Capacity development has also been successful as stated by the recent 5-yearly review of the scheme, suggesting that the support provided has had a great impact in improving technical capacity and government policy making.


However, one of the problems with the IMF is the lack of accountability, as there are no agreed standards to assess the IMF against. This creates the problem that the members of the IMF can’t be held accountable for their actions which can affect entire nations. On top of this, there can potentially be issues with funding, such as the capacity development program having to rely on external partners to help provide sufficient funding.


Overall, I would argue that the IMF has had a very positive impact on the global economy, especially through its support through times of financial crisis, helping mitigate the impacts of global financial crises and stabilise the economies of many member countries.



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