Effects of IMF in our economy

MADEBY: NOOR-UL-AIN

I.D: 09-2634
About the IMF
The International Monetary Fund (IMF) is an organization of 186 countries, working to foster
global monetary cooperation, secure financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and reduce poverty around the world.

The IMF promotes international monetary cooperation and exchange rate stability,
facilitates the balanced growth of international trade, and provides resources to help
members in balance of payments difficulties or to assist with poverty reduction.
Membership:

The IMF has 186 member countries. It is a specialized agency of the United Nations but has its
own charter, governing structure, and finances. Through its economic surveillance, the IMF
keeps track of the economic health of its member countries, alerting them to risks on the horizon
and providing policy advice. It also lends to countries in difficulty, and provides technical
assistance and training to help countries improve economic managementThe IMF is helping
many emerging market countries tackle the problems brought on by the devastating global
economic crisis. Its lending to low-income countries has also been stepped up, as these countries
start to feel the effects of the crisis. And it is providing policy advice to advanced countries, for
instance on how to address problems in their financing and banking sectors, and how to design
effective stimulus packages. As part of its response, the IMF has already more than doubled its
financial assistance to low-income countries, with new IMF concessional lending commitments
to low-income countries through mid-July 2009 reaching $2.9 billion compared with $1.5 billion
for the whole of 2008.

As the global economy continues to struggle in 2009, and with both trade and capital flows
plummeting, the IMF is foreseeing mounting problems for many countries. The Fund is therefore
seeking to add to its resources, and has already negotiated borrowing agreements with a number
of countries. The Fund has already made good progress toward its target of $250 billion in
bilateral government loans as part of moves to triple the IMF’s lendable resources to $750
billion. Agreements are already in place with Japan ($100 billion), Canada ($10 billion), and
Norway ($4.5 billion), and a number of other countries have committed funds either through
Since 2008, the IMF has committed more than $160 billion in lending to a number of countries
affected by the crisis, including Belarus, Hungary, Iceland, Latvia, Pakistan, Poland, Romania,
Serbia, Sri Lanka, and Ukraine. It announced a precautionary loan for El Salvador and an IMF
team has also been in negotiations with Turkey.

loans or the purchase of IMF notes. Since 2008, the IMF has committed more than $160 billion
in lending to a number of countries affected by the crisis, including Belarus, Hungary, Iceland,
Latvia, Pakistan, Poland, Romania, Serbia, Sri Lanka, and Ukraine. It announced a precautionary
loan for El Salvador and an IMF team has also been in negotiations with Turkey.

In addition, the Fund is closely tracking economic and financial developments worldwide so
that it can provide policymakers with the latest forecasts and analysis of developments in
financial markets. And it is engaging with the Group of 20 (G-20) leading economies and
other stakeholders on issues related to the evolution of the international financial system.
Since 2008, the IMF has committed more than $160 billion in lending to a number of
countries affected by the crisis, including Belarus, Hungary, Iceland, Latvia, Pakistan, Poland,
Romania, Serbia, Sri Lanka, and Ukraine. It announced a precautionary loan for El Salvador
and an IMF team has also been in negotiations with Turkey. Advantages of the IMF.

Advantages of IMF:
 IMF can be seen as lender of last resort. When a country is seeing an exodus of currency due
to a balance of payments crisis, the IMF can provide crucial loans to stabilise the economy
and prevent a collapse of confidence.e.g. Recent loans to:
 Supporters argue that the IMF can also impose necessary reforms on an economy. Reforms
such as privatization, fiscal responsibility, control of Money supply, and attacking
corruption. These policies may cause short term pain, but, are essential for preventing future
crisis and long term development.
 Provides an external assessment of the economy, which helps the government to implement
popular ideas.

Yet, despite the potential benefits of having a monetary fund which can provide an effective
counter to financial crisis, the role of the IMF has proved very controversial.
Its critics argue the IMF is dominated by the perspective of the G8 industrialised nations. They
argue the IMF insists on blanket policies of structural adjustment which may actually harm the
economies.

Yet, whilst it is easy to criticize the doctor which prescribes a bitter pill, there is a consensus
that, now more than ever, we need an effective international organization which can deal with
the many financial crisis that are occuring around the world.

Tackling current challenges

The IMF is helping many emerging market countries tackle the problems brought on by the
devastating global economic crisis. Its lending to low-income countries has also been stepped up,
as these countries start to feel the effects of the crisis. And it is providing policy advice to
advanced countries, for instance on how to address problems in their financing and banking
sectors, and how to design effective stimulus packages. As part of its response, the IMF has
already more than doubled its financial assistance to low-income countries, with new IMF
concessional lending commitments to low-income countries through mid-July 2009 reaching
$2.9 billion compared with $1.5 billion for the whole of 2008.

As the global economy continues to struggle in 2009, and with both trade and capital flows
plummeting, the IMF is foreseeing mounting problems for many countries. The Fund is therefore
seeking to add to its resources, and has already negotiated borrowing agreements with a number
of countries. The Fund has already made good progress toward its target of $250 billion in
bilateral government loans as part of moves to triple the IMF’s lendable resources to $750
billion. Agreements are already in place with Japan ($100 billion), Canada ($10 billion), and
Norway ($4.5 billion), and a number of other countries have committed funds either through
loans or the purchase of IMF notes.

In addition, the Fund is closely tracking economic and financial developments worldwide so that
it can provide policymakers with and analysis of development in financial market .And it is
engaging with the Group of 20 the latest folrecasts (G-20) leading economies and other
stakeholders on issues related to the evolution of the international financial system.

Emergency lending to emerging markets

Emerging market countries are facing increasing difficulties around the world because of the
spreading global economic crisis, with demand falling for their exports, investment slumping,
and cross-border lending drying up. A growing number of emerging economies have found room
for policy maneuver becoming increasingly limited, and large-scale official support has been
needed from bilateral and multilateral sources. Since 2008, the IMF has committed more than
$160 billion in lending to a number of countries affected by the crisis, including Belarus,
Hungary, Iceland, Latvia, Pakistan, Poland, Romania, Serbia, Sri Lanka, and Ukraine. It
announced a precautionary loan for El Salvador and an IMF team has also been in negotiations
with Turkey.The global economic crisis is threatening to undermine recent economic gains and
to create a humanitarian crisis in the world’s poorest countries. In response, the IMF has stepped
up lending to low-income countries to combat the impact of the global recession with a new
framework for loans to the world’s poorest nations, including increased resources, a doubling of
borrowing limits, zero interest rates until the end of 2011, and new lending instruments that offer
more flexible terms. Most low-income countries escaped the early phases of the global crisis,
which began in the financial sectors of advanced economies. But it is now hitting them hard,
mainly through trade, as financial problems in advanced countries trigger recessions that dampen
demand for imports from low-income countries. In addition, more than $18 billion of a planned
$250 billion allocation of IMF Special Drawing Rights (SDRs) will go to low-income countries.
These countries can benefit by either counting the SDRs as extra assets in their reserves, or
selling their SDRs for hard currency to meet balance of payments needs.

Advocating global fiscal stimulus

The IMF is also providing policy advice to advanced countries, for instance on how to address
problems in their financing and banking sectors, and how to design effective stimulus packages.

Because of the constraints on the effectiveness of monetary policy, fiscal policy must play a
central role in supporting demand. The IMF has advised countries that a key feature of a fiscal
stimulus program is that it should support demand for a prolonged period of time and be applied
broadly across countries with policy space to minimize cross-border leakages.

But countries also need to be mindful of medium-term fiscal sustainability. The cost of fiscal
stimulus packages to revive economies battered by the financial crisis, combined with tax
revenue losses from output decline and the huge price tag for financial sector restructuring, will
be very large.

Reforming the international financial system

The global economic crisis has sparked a rethinking of how the international financial system is
structured. The IMF is assisting the G-20 industrialized and emerging economies with
recommendations to reshape the system of international regulation and governance. To a large
extent, global efforts thus far have been focused on the crisis at hand, but reforms are in progress
with a view toward the post-crisis world. As input into the reform process, the IMF published a
comprehensive study of the causes of the global financial crisis. The study takes stock of the
initial lessons learnt from the crisis and presses for a worldwide rethink of how to handle
systemic risk management.

Although economic and financial sector policies will remain primarily the business of national
governments, ongoing changes to the global financial architecture—including to the IMF—can
reduce the frequency and depth of future crises. Additional changes could also include
addressing some of the shortcomings of the decision-making structure of the G-20 by allowing
greater scope for joint decision making on a wider set of international economic and financial
issues, with the IMF in its newly expanded role as a central player.