Order Code RL30575
CRS Report for Congress
Received through the CRS Web
The International Monetary Fund: An Overview
of Its Mission and Operations
June 6, 2000
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade
Congressional Research Service ˜ The Library of Congress
The International Monetary Fund (IMF) is an integral part of the mechanism for maintaining
international financial stability, yet events over the past five years suggest that it has struggled
to keep pace with this mission. The U.S. Congress appropriated additional funding for the
IMF in October 1998 in the midst of the Asian financial turmoil, a decision that engendered
considerable debate in light of the growing criticism of the IMF’s track record. Congress
attached to the funding a number of conditions, including a call for major reevaluation of the
IMF. This report supports congressional interest in the IMF by providing a basic
understanding of its mission and operations, and how they may have evolved over time. It will
be updated as events warrant.
The International Monetary Fund: An Overview of Its
Mission and Operations
The International Monetary Fund (IMF) is the institution designed to support
global trade and economic growth by helping maintain stability in the international
financial system. Originally created to finance short-term balance of payments deficits
during the Bretton Woods era of gold/dollar fixed exchange rates (1944-1971), in the
current world where flexible exchange rates dominate in the industrial economies, it
has focused on developing countries where ever larger financial crises have erupted.
As part of the periodic IMF quota review process, the U.S. Congress in October 1998
appropriated funds to increase the IMF quota at a time when many challenged the
IMF’s abilities to help resolve these financial crises. Congress attached a number of
conditions, including a call for major reevaluation of the IMF. This report supports
congressional interest in the IMF by providing a basic understanding of its mission and
operations, and how they may have evolved.
The permanent assets of the IMF used for lending ($283 billion) are provided by
the member countries, which join the Fund by making a capital subscription (quota)
and agreeing to abide by rules of the charter. The quota also determines a country’s
voting power and borrowing capacity. The IMF also maintains two borrowing
arrangements with selected member countries for times when the Fund may not be
sufficiently liquid to meet all borrowing needs. The General Arrangements to Borrow
(GAB) is a $23 billion credit line established with 11 industrialized countries in 1962.
The New Arrangements to Borrow (NAB) was established following the 1994-95
Mexican peso crisis as a supplemental line of credit with 25 member countries, adding
another $23 billion of borrowing authority.
The IMF provides hard currencies to member countries with balance of payments
problems based on need, willingness to adjust economic policies, and ability to repay.
Under the general resources account there are three types of financing facilities: 1)
stand-by arrangements; 2) extended arrangements (these two constitute most IMF
assistance); and 3) special facilities. Two programs created since December 1997, the
Supplemental Reserve Facility (SRF) and the Contingent Credit Line (CCL), amount
to special access policies and limits to stand-by and extended arrangements under
extenuating circumstances. As part of the IMF’s evolving sense of mission, it has
developed lending facilities to address the needs of the poorest developing countries:
the Poverty Reduction and Growth Facility (PRGF) – renamed in November 1999
from the Enhanced Structural Adjustment Facility (ESAF); and the Heavily Indebted
Poor Countries (HIPC) initiative.
Many view events in the 1990s as evidence of the IMF’s limitations to predict
and ameliorate financial panics. The central question remains, what role should or can
the IMF play in reducing instability in an increasingly liberalized and, at times, volatile
international financial system. The debate has at least two key focal points: 1)
rethinking what should be expected from national policies and institutions, particularly
financial market regulation and oversight in developing countries, to help reduce the
frequency and extremity of financial panics; and 2) rethinking how the IMF should
operate in numerous functional areas.
Rationale and Operations of the IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Source of IMF Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The IMF Quota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The GAB and NAB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Use of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General Resources Account Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stand-by and Extended Arrangements . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental Reserve Facility (SRF) . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent Credit Line (CCL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Concessional Financing: The PRGF and HIPC . . . . . . . . . . . . . . . . . . . . . .
The PRGF Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The HIPC Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Role for the IMF? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
List of Figures
Figure 1. IMF Outstanding Credit by Financing Facility, April 1999 . . . . . 7
The International Monetary Fund: An Overview
of Its Mission and Operations
In December 1994, following prolonged capital flight, Mexico suddenly devalued
its peso in what was to become the first in a series of national financial crises to
challenge the international economic community. Just as Mexico was beginning to
recover, the Asian financial turmoil hit in the summer of 1997, followed by Russia a
year later and Brazil in 1999. The International Monetary Fund (hereafter IMF or the
Fund) is an important part of international coping mechanism for reducing the length,
depth, and magnitude of financial panics, yet events over the past five years suggest
that it has struggled to keep up with this task. Critics from various viewpoints have
taken on the IMF, arguing that it has overstepped its original mission in one way or
another and some assert it may be exacerbating rather than resolving recurring
episodes of financial problems.
The U.S. Congress has been an active overseer of the IMF’s activities,
particularly during Asia’s financial problem, when it was debating the merits of
increasing its funding as part of the five-year quota review cycle mandated in the
Fund’s Articles of Agreement. Deciding to increase the IMF quota when many
believed the Fund showed little ability to anticipate or manage currency crises was a
controversial issue. In October 1998, however, Congress did appropriate additional
funds in the Omnibus Consolidated and Emergency Supplemental Appropriations Act
for FY1999 (H.R. 4328, P.L. 105-277), but with a number of conditions attached,
including a call for major reevaluation of the IMF. This report supports congressional
interest in the IMF by providing a basic understanding of its mission and operations,
and how they may have evolved over time.
Rationale and Operations of the IMF
The International Monetary Fund is the institution designed to support global
trade and economic growth by helping maintain stability in the international financial
system. Specifically, it is chartered to facilitate the balanced growth of international
trade, promote orderly exchange rates and a sound multilateral system of payments,
provide liquidity (financial resources) to members with balance of payments problems,
and serve as a forum for consultation and collaboration on international monetary
problems, including surveillance and technical assistance through the Article IV
Article IV Consultations are annual meetings with leaders of member countries to review
their policies affecting overall economic performance. These reviews are becoming
increasingly extensive and now evaluate social, environmental, and labor policies in addition
The IMF was conceived at the Bretton Woods Conference in 1944 as part of the
planning for an orderly post-war international economy based on a gold/dollar
standard of “pegged but adjustable exchange rates” and capital controls. Under the
Bretton Woods system, countries pegged their exchange rate to the dollar, which in
turn was fixed to gold at $35 per ounce. Stability in the international system would
be maintained by supporting currency pegs, which could come under pressure to
change from short-term imbalances that arise through normal trade and finance
exchanges among countries. In cases where the “peg” was considered fundamentally
misaligned, a country could devalue (or revalue) its currency.
A core principle of the Bretton Woods system was that sufficient international
reserves be made available to help countries defend their pegged exchange rates
(avoid devaluation) when running short-term deficits.2 Specifically, if a country
spends more abroad on goods and services than it receives, it incurs a current account
deficit. The shortfall, or deficit, can be financed by selling assets or borrowing, which
involves a private capital inflow into the deficit country (a capital account surplus).
If, however, private sources do not cover the current account deficit, then it must be
financed by the government through the sale of foreign exchange (official reserves),
which is referred to as a balance of payments deficit.
With flexible exchange rates, the deficit (or surplus) is corrected by a marketdriven adjustment to the exchange rate, that is it depreciates or appreciates. Under
a pegged exchange rate system, however, countries are reluctant to alter exchange
rate values and so use their foreign exchange reserves to finance the balance of
payments deficit, leaving the currency value intact. When a country does not have
adequate foreign exchange reserves to finance its balance of payments deficit, it
petitions the IMF, which can lend hard currencies to countries, for a fee.
IMF funds provide “liquidity” to smooth short-term financing of deficits and to
maintain or restore confidence in a country’s financial position, ideally before a crisis
occurs. This allows the borrowing country time to make necessary adjustments and
avoid the pain of devaluation, inflation, and recession that can occur when countries
are unable to defend their pegged currency against large capital outflows. If these
adjustments can be made, then the additional cost of instability to the international
financial system may also be avoided.
Initially, the IMF served primarily industrialized countries by supporting currency
convertibility and providing them with short-term financing when needed to defend
their pegged exchange rates. The Bretton Woods system became increasingly difficult
to maintain in the post-war period of global economic growth, however, leading to
its demise in March 1973 and the adoption of floating exchange rates by most
to standard macroeconomic, financial, and external account issues.
Pegged exchange rates may also be defended by using capital controls, changing interest
rates that in turn affect capital flows, or altering macroeconomic policies.
industrial countries. At this point, developed countries had no need to borrow from
the IMF, which some argue put an end to its primary mission.3
Many developing countries continued to use pegged exchange rates, however,
so the overall mission of supporting international financial stability has evolved to its
current state of dealing with the developing world’s balance of payments problems,
which combined with their often weak financial systems, relatively small economies,
and the increasingly liberalized nature of capital markets has left them vulnerable to
occasional, extreme outflows of capital. If not stopped, these large erratic capital
movements can become the “currency crises” witnessed in the 1990s, often leading
to longer-term economic problems.
Trends in IMF lending reflect the changing focus of its mission over time. For
the first three decades of operation, total IMF credit outstanding at the close of each
fiscal year remained under SDR 10 billion.4 This figure jumped to SDR 38 billion by
1986 at the height of the Latin American debt crisis, and ballooned to SDR 67 billion
by 1999 to cover increasingly concentrated lending to Asia, Russia, and Brazil.5 As
the IMF has accommodated these requests, critics pointed increasingly to the risk of
“moral hazard,” or the over commitment of particularly short-term financing by
private investors and lenders to certain developing countries in part because of an
expectation that the IMF would provide the foreign exchange to allow them to exit
the country in time of crisis without bearing the full cost of the risk they had assumed.
In addition to the IMF supporting large developing country bailouts, its mission
has been expanded to assist low-income developing countries with structural
adjustment problems through concessional, longer-term lending arrangements. This
began in 1976 and evolved into a formal program called the Structural Adjustment
Facility (SAF) in 1981, which was revised and extended again as the Enhanced
Structural Adjustment Facility (ESAF) in 1996. In 1999, it was renamed the Poverty
Reduction and Growth Facility (PRGF) to reflect more precisely its concern with
addressing poverty issues as part of a country’s adjustment process. The current
Heavily Indebted Poor Country (HIPC) debt reduction initiative is also supported by
the IMF through the PRGF. The extension of the IMF’s purview over what many
consider development lending presents another problem of clearly delineating the
mission of the IMF with development institutions such as the World Bank.
A good discussion of the history of the international monetary system can be found in most
international economics textbooks, for example: Lindert, Peter H. and Thomas A. Pugel.
International Economics, Tenth Edition. Chicago, Irwin, 1995. For a very accessible
detailed history, see: Eichengreen, Barry. Globalizing Capital: A History of the
International Monetary System. Princeton, Princeton University Press, 1996.
The Special Drawing Right (SDR), created in 1970, is an international reserve asset and unit
of account used to settle transactions at the IMF. Its value is calculated as a weighted average
of five “hard” currencies, making it a more stable international asset than a single currency,
such as the dollar, which used to be the key international reserve currency. The value of the
SDR is determined in the currency markets, calculated here at $1.35 per SDR.
International Monetary Fund. Annual Report 1999. Washington, D.C. p. 142.
Currently the IMF plays a central role in providing liquidity and regulatory-type
oversight to assure that borrowing countries reform domestic economic policies to
address their problems. There is much disagreement, however, over the effectiveness
of, and necessity for, IMF programs, with some critics arguing that the IMF has
already overstepped its original mission. Others suggest its basic mission is
unchanged, but the evolving international economy has necessitated redirecting its
efforts to meet current problems. Understanding how the IMF works provides the
groundwork for informing the IMF debate.
Source of IMF Funds
All funds used by the IMF are provided by the member countries, which join the
Fund by making a capital subscription (quota) and agreeing to abide by rules set up
by its charter, known as the Articles of Agreement.6 The 182 member countries may
then borrow from the Fund to finance short-term balance of payment problems, but
also to help manage or prevent longer-term financial imbalances. As a condition of
using IMF resources, countries must adopt economic policies to ensure that problems
causing the financial shortfall are being corrected (so-called conditionality). There are
two basic sources of funds for the IMF, one permanent, the other temporary.7
The IMF Quota
The permanent assets of the IMF are currencies and securities, known as the
quota, deposited by member countries. Each country’s quota is calculated by a
formula reflecting the relative size of its economy, using various measures of output
and trade. Originally, a country paid its quota 25% in gold and 75% in its local
currency. Now any “hard currency” may be used to cover the gold portion. Total
IMF paid-in quotas, including the latest 45% increase that took effect in January
1999, equals SDR 210 billion ($283 billion). The IMF’s “useable reserves” are much
smaller, however, because members and the Fund must maintain working balances
and many currencies are not in demand internationally.
Members’ quotas account for 95.5% of the IMF’s resources8, but quotas are
important beyond their financial value; they also determine a country’s voting power
and borrowing capacity. Control of the IMF, therefore, is heavily weighted toward
the larger countries. It takes a majority vote to change policy, but many key policy
U.S. contributions to the IMF require congressional authorization and appropriation. There
is no net effect on the U.S. fiscal balance, however, because transactions are considered an
exchange of financial assets. As cash is transferred from the United States, it receives in turn
an increase in its reserve position in the IMF. See: CRS Report 96-279 E, U.S. Budgetary
Treatment of the International Monetary Fund, by (name redacted).
March 20, 1996,
Details on the IMF’s financial operations are drawn from: IMF. Financial Organization
and Operations of the IMF. Pamphlet Series No. 45, Fifth edition, Washington, D.C. 1998.
More information is available at the IMF web site: http://www.imf.org.
The remaining assets are an allocation of SDRs (1.4%) and gold holdings (3.1%).
decisions such as increasing quota size, selling gold reserves, allocating SDRs, and
amending the Articles of Agreement require an 85% special voting majority.
Although the United States cannot make policy by itself, with a quota equal to 17.8%
of the total, it has virtual veto authority over these “super majority” policy votes.
The GAB and NAB
In addition to permanent assets, the IMF has two borrowing arrangements with
select member countries for times when the Fund may not be sufficiently liquid to
meet all borrowing needs. The General Arrangements to Borrow (GAB) is an SDR
17 billion ($23 billion) credit line established with 11 industrialized countries in 1962
to provide a backup source of funds in case one of the GAB members needed to make
a large purchase from the Fund, reducing its liquidity. There is an associated
agreement with Saudi Arabia for an additional SDR 1.5 billion ($2.0 billion).
Countries participate voluntarily and proposals to activate the GAB must be approved
by the participating members before they are taken to the IMF Executive Board. If
currencies are borrowed, lending countries are assured of early repayment should they
encounter balance of payment problems of their own. The GAB was last activated
in July 1998 when the Russian financial crisis hit on top of the Asian turmoil, severely
reducing the IMF’s liquidity. All borrowed funds were repaid in March 1999 after the
most recent quota increase had been paid by member countries.
The New Arrangements to Borrow (NAB) was established following the 199495 Mexican peso crisis as a supplemental line of credit with 25 member countries. It
too serves as a reserve lending source, targeted more broadly toward the potential
financial problems of the middle-income developing countries. It added another $23
billion of currency borrowing authority, doubling the borrowing authority of the IMF
to allow greater potential response to global financial crises. As with the GAB,
activation requires approval of the participating countries and the IMF Executive
Board. The NAB became effective on November 17, 1998 and was activated in
December 1998 to provide a credit line of $12.7 billion for Brazil, from which Brazil
drew $4.1 billion. All funds borrowed by the NAB were also repaid with the 1999
Use of Funds
The IMF provides hard currencies to member countries with balance of payments
problems based on need, willingness to adjust policies, and ability to repay. Funds are
disbursed through various programs referred to as financing facilities. IMF financial
assistance is not a “loan” in the traditional sense, although it is often referred to as
such. What transpires is an exchange of currencies, with the “borrowing” country
“purchasing” a strong currency with its own relatively weak currency. The purchased
currency then becomes part of the borrowing country’s foreign exchange reserves,
enhancing its international liquidity. The “borrowing” country is responsible for
“repurchasing” or exchanging a hard currency for its own currency at some future
date under terms of the agreement.
All exchanges are done at a specified interest rate, depending on the facility used,
and countries whose currencies are lent receive financial remuneration (interest). Two
accounts track IMF resources, the general resources account, from which most funds
are drawn, and the concessional loan account, from which low-income countries
borrow at lower interest rates and for longer periods of time to help achieve longerterm development goals.
General Resources Account Funds
Most IMF assistance is drawn from the General Resources Account (GRA). At
the close of fiscal 1999, GRA funds accounted for 90% of outstanding credit (see
details below). The IMF typically lends its resources to countries in a series of
installments referred to as tranches. This means lending is phased in by stages rather
than done in one large disbursement. The first, or reserve, tranche equals the
country’s reserve position in the IMF and usually represents a country’s contribution
of hard currency to the Fund. A country technically must make a case for a balance
of payments need, but the IMF has no authority to challenge a country’s request for
its reserve tranche or attach any conditions to it. In effect, countries have relatively
easy access to these funds and many use them regularly.
Beyond this first installment, additional draws are referred to as credit tranches.
All draws beyond the first credit tranche are referred to as upper-credit tranches.
Successive borrowing is usually done under increasingly stringent terms. IMF
conditionality comes into play here; a country borrows with the understanding that
it must follow a specific, detailed, plan of action, including adopting policies intended
to help correct the balance of payments deficit. These policies are frequently painful
to absorb and politically difficult to implement, so the IMF is often subject to
criticism, particularly from constituencies within the borrowing country.
Under the general resources account there are three types of financing facilities
from which most IMF credit is drawn: 1) stand-by arrangements; 2) extended
arrangements; and 3) special facilities. Two programs created since December 1997,
the Supplemental Reserve Facility (SRF) and the Contingent Credit Line (CCL),
provide special access policies and limits to stand-by and extended arrangements
under extenuating circumstances.
Stand-by and Extended Arrangements. These two arrangements constitute
most IMF assistance. Both entail a formal request and then approval to draw a
specified amount of hard currency under binding conditions. As seen in figure 1,
these two arrangements together accounted for 62.2% of IMF outstanding credit as
of the close of the IMF fiscal 1999 year (81.1% including SRF arrangements). A
stand-by arrangement allows access to IMF resources for a 12-18 month period,
although it can be extended. If drawn, resources are repaid in eight quarterly
installments beginning 3 years and 3 months and ending 5 years after the draw.
The Extended Fund Facility (EFF) allows for larger and longer-term loans to
countries needing more time to make adjustments. The extended arrangement is
usually in effect for three years, but can be lengthened to four. Repayments are made
over a 4.5-10 year period. Under both arrangements, early repayment is expected if
the country’s financial condition improves faster than anticipated. Additionally, the
Figure 1. IMF Outstanding Credit by Financing Facility, April 1999
IMF developed the Emergency Financing Mechanism (EFM) following the 1994-95
Mexican peso crisis to expedite IMF decisions for stand-by and extended
arrangements under circumstances that threaten the international financial system with
contagion or other potentially severe problems.
Supplemental Reserve Facility (SRF). In response to the high demand for
financial assistance during the Asian financial crisis, the IMF created the SRF in
December 1997 to provide financing to members through, but beyond the normal
limits defined in, the stand-by and extended arrangements. The SRF was designed to
help countries with severe balance of payments problems stemming from a sudden
loss of market confidence. Use of the SRF is granted to countries where there is a
“reasonable expectation” that structural adjustment policies are, or shortly will be, in
place and that SRF assistance will help correct the balance of payments problem. The
SRF is more likely to be activated when the IMF considers a country’s capital
outflows to be large enough to “potentially threaten the international monetary
system.” Financing is provided for one year, with repayments expected within 1.5
years of the draw, but may be extended by another year. The cost of borrowing is 3-5
percentage points higher than normal arrangements, depending on length of the draw.
The SRF was activated for Korea, Russia, and Brazil.
Contingent Credit Line (CCL). Created in April 1999, the CCL is a
“precautionary” line of credit granted to member countries with “fundamentally sound
and well-managed economies” who want a line of credit in place as a reserve against
potential future financial shortfalls. It is intended to complement the SRF by
providing a preventative option for financial assistance. Access is available for funds
beyond those normally provided under stand-by and extended arrangements, once
activation of the CCL is approved in a special review process. Funds are provided
under guidelines similar to the SRF. The CCL was approved for a trial two-year
period, terminating May 4, 2001.
Special Facilities. There are three additional facilities operated with IMF
general resources that are designed to help countries with special balance of payments
problems. The Compensatory and Contingency Financing Facility (CCFF), begun in
1963, assists countries with short-term export earning shortfalls “beyond their
control.” It was designed to support developing countries that export commodities,
which can be subject to volatile market pricing. The Buffer Stock Financing Facility
also helps agricultural exporting countries, but has not been drawn since 1983.
Finally, the Systematic Transformation Facility was a temporary lending facility that
assisted primarily countries of the former Soviet Union in the transition to a market
economy. It operated from April 1993 through 1995.
Concessional Financing: The PRGF and HIPC
As part of the IMF’s evolving sense of mission, it has developed lending facilities
to address the needs of the poorest developing countries: the Poverty Reduction and
Growth Facility (PRGF) – renamed in November 1999 from the Enhanced Structural
Adjustment Facility (ESAF) – and the Heavily Indebted Poor Countries (HIPC)
initiative. Unlike most IMF resources, which are managed from the General
Resources Account, funds for these facilities are accounted for through separate trust
funds to distinguish clearly their concessional purpose.
The PRGF Program. The PRGF is the IMF’s response to helping the poorest
countries address both balance of payments problems and structural adjustment goals.
Since 1999, it has taken on the explicit mission of assisting countries with poverty
reduction. An added feature is the requirement that a borrowing country develop a
formal Poverty Reduction Strategy Paper as part of its structural adjustment process
to ensure that macroeconomic reform be done with a clear mandate to address
concerns for the poorest segments of society. The lending arrangements work in the
same way as the old ESAF program. The IMF lends on concessional terms, with
annual interest rates as low as 0.5% and loan maturities ranging from 5.5 to 10 years.
The low interest rate and longer maturity give borrowing countries leeway to make
longer-term adjustments and meet poverty reduction goals without pressing budgets
immediately for IMF repayment.
IMF members support the facility in two ways. First by lending the program
money, which the IMF in turn lends to eligible poor countries, and second, through
grants that are used to pay the interest subsidy. PRGF loans are made under strict
conditions, including a required 3-year plan demonstrating how adjustment policies
will be implemented. Unlike draws from the standard IMF programs, PRGF
assistance is similar to a traditionally defined loan in that there is no exchange of
currencies involved in receiving the funds. Use of the PRGF program has grown
steadily in recent years, but remains relatively small, averaging approximately 10% of
total annual IMF credit extended over the past five years (see Figure 1 for most
recent fiscal year-end data).
The HIPC Initiative. In September 1996, the Board of Governors of the IMF
and the World Bank endorsed the HIPC debt relief initiative. It is designed to reduce
the unsustainably high debt levels of qualified developing countries to help alleviate
poverty and stimulate development. The IMF finances its portion of HIPC debt relief
through the PRGF. Grant donations from member countries cover the cost of both
the PRGF interest subsidy and HIPC debt relief. The U.S. Congress has appropriated
funds for the PRGF, but has not made a bilateral donation to fund reduction of
multilateral debt under the HIPC initiative, although it is being considered in the 106th
What Role for the IMF?
The financial crises that erupted in the 1990s were costly to international lenders
and borrowers alike, eliminating large portions of wealth literally overnight. The
deeper economic pain, however, was far more widespread, producing serious social
hardships, particularly for low-income groups. This is a compelling reason for
developing countries to attempt to avoid financial crises. In response to this turmoil,
the IMF has evolved from a manager of moderate balance of payments problems, to
a financier of large national “bailouts.”
IMF lending patterns reflect the growing severity of financial crises over time.
Since the 1980s Latin American debt crisis, developing countries with severe external
finance problems have required increasingly larger draws with extended maturities
from the IMF, unlike anything experienced during the Bretton Woods period. The
IMF’s growing loan portfolio combined with the severe consequences of recent
financial crises and their possible continuation over the long run has made the Fund
a ripe target for oversight and reevaluation. Experience of the 1990s points to clear
limitations in what can be expected from the IMF’s ability to predict and ameliorate
crises, although there is considerable disagreement over its overall efficacy.
The central question remains, what role should or can the IMF play in reducing
instability in an increasingly liberalized and potentially volatile international financial
system. Some argue that the IMF is as much of the problem as it is the solution to
instability by encouraging “moral hazard,” or providing an implicit guarantee to
lenders that they will be “bailed out” if they commit too many resources to a particular
country. Opponents of this view argue that the IMF has helped make even the worst
crises less painful than otherwise would have been the case if left to be resolved by the
capital markets without IMF assistance. Others point out that historically, instability
has been a part of financial markets long before the IMF was created and will not be
eliminated regardless of how the IMF operates.
The continuing debate has at least two key focal points: 1) rethinking what
should be expected from national policies and institutions, particularly financial
market regulation and oversight in developing countries, to help reduce the frequency
and extremity of financial panics; and 2) rethinking how the IMF should operate in
numerous functional areas including its overall mission (lender of last resort versus
development assistance), conditionality, transparency, and accountability, among
other issues. Observers disagree over whether it might be preferable to let the market
For details on the HIPC initiative and debt in developing countries see: Nowels, Larry. Debt
Reduction: Initiatives for the Most Heavily Indebted Poor Countries. CRS Report
RL30214. Updated periodically, and Hornbeck, J. F. Debt and Development in Poor
Countries: Rethinking Policy Responses. CRS Report RL30449. March 1, 2000.
punish countries when they fail to implement sound policies and programs, or use
external leverage from the IMF and others to encourage such change. In addition, a
current discussion is focusing on whether the IMF should require changes in financial
systems and other areas prior to allowing country eligibility for assistance, or use the
need for such assistance as the leverage for change during or after financial problems
All of these and their related issues have been the subject of congressional
investigation and oversight. A consensus has not emerged on the IMF with the
possible exception that it may not be up to the task it currently faces and may best
serve its diverse constituencies by clearly redefining its mission relative to the reality
of today’s enormous, fluid capital markets. In an ideal world, it would be able to
balance the need for international liquidity assistance without encouraging widespread
moral hazard. Although this seems unlikely in the near term, such a goal would be
consistent with achieving long-term stability of the international financial system,
which was a guiding principle of the Bretton Woods conference that created the IMF
in the first place over fifty years ago.
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