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.