In this article we will discuss about the achievements and shortcomings of the IMF.
The International Monetary Fund has played a very vital role in the stabilisation of exchange system, in facilitating international payment adjustments and in the promotion of steady expansion of international trade and productive capacities of the member countries.
Achievements of the IMF:
Some of the major achievements of the IMF are as follows:
(i) Stability in Exchange Rates:
The IMF started with the determination of par values of the currencies of different countries in terms of gold or the U.S. dollar. It, however, allowed the variations in exchange rates by ± 1 percent. Subsequently, the band of fluctuation of exchange rate was enlarged to ± 2.5 percent. The variation in exchange rate beyond these limits could be possible after obtaining permission from the IMF. The system of exchange rate under the IMF combines the elements of stability with flexibility.
(ii) Promotion of International Trade:
The IMF has contributed in several ways to the enlargement of global trade. It has created facilities for the member countries for financing and adjusting the balance of payments deficits. As the multilateral assistance can enable the member countries to correct their temporary or fundamental payments disequilibrium, they need not take recourse to tariffs, import quotas, exchange controls and other restrictive practices. Thus, it has attempted to create conditions for unrestrained expansion of international trade.
(iii) Check on Multiple Exchange Rates:
The IMF has not approved countries adopting the complex, cumbersome and restrictive system of multiple exchange rates. It has brought about a simplification and rationalisation of exchange system. The countries seeking the multilateral assistance are discouraged from resorting to the multiple exchange rates.
(iv) Broadening of the Credit Structure:
In the earlier decades after its inception, the IMF confined its lending operations only for the purpose of correcting short-term BOP deficits. During the recent decades, there has been a marked change in the lending operations of the IMF.
Although it continues to provide credit to the member countries for short-term adjustments in BOP disequilibrium, yet it has undertaken the loan operations for correcting fundamental disequilibrium or for facilitating structural adjustments in the economies of the member countries. The IMF has started providing loans also for specific development projects.
During 1950’s and 1960’s, the repayments of IMF loan had to be made within 3 to 5 years periods. During 1970’s and 1980’s, different types of credit facilities were created. The repayments are extended over a longer period. For instance, under the Extended Fund Facility (EFF), the repayments are to be made over a period of 4 to 10 years in the case of loans from IMF’s own resources and 3-1/2 to 7 years, if the loan is made out of Fund’s borrowed financial resources.
The IMF provides concessional assistance extended over a period of more than 10 years out of the Trust Fund. It is thus clear that IMF has in recent years adopted a more liberal attitude in the extension of credit and has brought about substantial broadening of the structure of international credit.
(v) Multilateral Payments System:
The IMF has achieved some success in the establishment of a multilateral system of international payment particularly in respect of current transactions. However, the operations of certain agencies or organisations which are out of the purview of the Fund have created some hurdles in this direction.
(vi) Compromise between Gold Standard and Managed Paper Standard:
The system of exchange rate evolved by IMF has been a compromise between the gold standard and managed paper standard. It has secured the advantages of the both. On the one hand, it has ensured the benefits of managed paper standard such as maximisation of employment and acceleration of development. On the other hand, it has helped in the maintenance of international exchange stability. Moreover, the IMF system has carefully avoided the disadvantages of both gold and managed paper standard.
(vii) Institution for Consultation and Guidance:
The International Monetary Fund has created a consciousness among the member countries that their economic problems are the matters of concern not only exclusively for them but for the whole international community. The IMF provides an excellent forum for discussions on various monetary, fiscal, financial, trade and exchange problems in general and international payments problems in particular. The Fund is a specialised institution to undertake research about various economic problems through its numerous missions and provides an expert guidance to the member nations for efficiently dealing with them.
(viii) Convertibility of Currencies:
The IMF visualizes the achievement of full global convertibility of currencies in the next decade. One – quarter to one-third of all the developing countries have already achieved full currency convertibility. The industrialised countries have abandoned foreign exchange controls with regard to trade transactions. India too has permitted currency convertibility except in the capital account. It is on move to bring about full convertibility of Rupee in a phased manner.
A key challenge for the IMF today is to promote capital account convertibility which is generally difficult to enforce and inefficient in operation. However, among industrial countries and increasingly among developing countries, capital account restrictions apply to the level of investment flows rather than to foreign exchange transactions.
Article VIII of the IMF requires that member countries move towards current account convertibility—that is refraining from placing direct restrictions on the use of foreign exchange in transactions with nonresidents and avoiding, through taxes or subsidies, the promotion of multiple exchange rates. 104 countries out of the IMF members had already accepted the obligation of Article VIII on convertibility of currency by 1995.
However the Mexican collapse of 1994, The East Asian Crisis in 1997-98 and global economic recession in 2008 and 2009 set the process of economic rethinking about the implications of free flow of short-term foreign capital and full convertibility of currencies. All the countries had to readopt appropriate exchange controls to support their depreciating currencies and to check the flight of capital.
(ix) IMF and Developing Countries:
The IMF has rendered assistance to the less developed countries in several ways. The IMF in the beginning confined its activities to the adjustment of member nation’s balance of payments deficits of essentially short-term character and the stabilisation of exchange rate. However, in recent years, the IMF has started rendering more positive assistance to the poor countries in their economic transformation.
Firstly, it has undertaken to provide financial assistance for offsetting the fundamental disequilibrium in the BOP.
Secondly, the IMF has started providing concessional long-term liquidity to the member countries for not only adjusting the balance of payments but also for furthering development through increased imports of development goods and services from other countries.
Thirdly, the IMF suggests structural reforms to the less developed countries for removing the constraints from the development process.
Fourthly, the IMF has rendered assistance to the member countries in the formulation of growth-oriented monetary, fiscal, exchange and trade policies.
Fifthly, the IMF has organised the Central Banking Advisory Service for providing technical advice to the less developed countries in the improvement of the working of their central banks.
Sixthly, the IMF has created since 1964, an institute for training the officials of the member countries in various fields.
Seventhly, the IMF has made a revolutionary innovation in the form of Special Drawing Rights (SDR’s) to tackle the problem of international liquidity. Thus the IMF operations have really achieved much significance from the point of view of the less developed member nations.
Shortcomings of the IMF:
No doubt the IMF has marked achievements to its credit but its working has exposed several deficiencies or shortcomings because of which it has been subjected to criticism.
The main objections against it are as follows:
(i) Lack of Flexibility:
The IMF is generally a conservative organisation. It lacks flexibility in its approach. It has been found incapable of making required rapid changes in its operations in the rapidly changing international economic conditions.
(ii) Determination of Par Values:
Originally the IMF determined the par values of different currencies in terms of gold or the United States dollar. This choice by IMF was ill-advised. The par values were fixed by the original members at a time when the over-valuation of currencies was the most common practice.
(iii) Weak and Passive Policy in Respect of Fixation of Exchange Rates:
Some provisions of the IMF related to variations in exchange rate are not constructive. They have rather destructive effect. For example, the IMF justifies devaluation when the fundamental disequilibrium is supposed to result from the international inflation. If inflation persists, the devaluation cannot be effective. It may actually require even subsequent devaluation. The economy can have appropriate adjustment only through internal economic policy changes.
But the IMF has little authority in this respect except consultation and persuasion. Moreover, the member countries, in some instances, have changed the par values of their currencies with impunity. For instance, more than 23 countries devalued their currencies in 1949 in complete disregard of the IMF rules but the IMF could not prevent that development and remained a silent spectator.
Such passivity on the part of the IMF raises serious doubt about its effectiveness. It may still be recognised that the IMF could achieve much greater exchange stability compared with chaos related to exchange rates during the inter-war period.
(iv) High Interest Rates:
The structure of interest rates on the IMF advances is rather high and that places much burden of interest payments on the member nations. For instance, since May 1982, an interest rate of 6.6 percent is charged upon the IMF loans out of the ordinary resources of the Fund. However, if the loans are made out of the borrowed funds, the interest charged is as high as 14.56 percent.
(v) Stiff Conditionality Clauses:
The IMF applies strict conditionality clauses on the borrowing nations. For instance, upto 1970, the IMF insisted that the member countries borrowing funds would reduce public expenditure for adjusting the BOP deficit. More stiff conditionality clauses were imposed after 1979. These clauses include periodic assessment of the performance of the borrowing countries with adjustment programmes, increase in productivity, improvement in resource allocation, reduction in trade barriers, strengthening of the collaboration of the borrowing country with the World Bank etc.
The IMF, while sanctioning a loan of 5.6 billion U.S. dollars to India, imposed stringent conditionality upon India related to performance criteria in implementing programmes and policies related to saving, exports and imports.
More recently, India could have access to IMF assistance after consenting to reorganise the structure of economy, trade and tariffs on the specified lines. The IMF surveillance and regulations are too strict and negate the declared policy of non-intervention in the domestic economic matters of the borrowing member nations.
(vi) Secondary Role:
The IMF is sometimes criticised on the ground that it plays only a secondary role rather than a primary role in international monetary relations. This organisation does not provide short-term credit facilities. This made the central banks of the Group of Ten (Group of 10 leading industrialised countries) to enter into Swap Arrangements.
Under this arrangement, countries exchange each-others’ currencies and also provide short-term credit to tide over temporary disequilibrium in balance of payments. The Swap arrangement made way to the growth of Euro-Currency Market. As a consequence, the importance of IMF as the central international monetary institution got reduced.
(vii) Failure to Achieve Exchange Stability:
The key objective of the IMF was to create a system of stable exchange rates. The original system of adjustable peg permitted only ± 1 percent variations in the par values of the currencies. However, after the collapse of Bretton Woods’s system in August 1971 consequent upon the United States refusal of convertibility of dollars into gold, the member countries have been following diverse exchange policies such as managed float, joint float or pegged exchange rates. It clearly shows that IMF has failed to maintain a stable uniform international exchange system. This failure can be attributed essentially to an absence of adequate adjustment mechanism.
(viii) Failure in the Removal of Exchange Restrictions:
One of the principal objectives of the IMF was to achieve the removal of exchange restrictions by the member countries. The Fund has not been successful in this regard. The member countries still continue to practise exchange controls and multiple exchange rates in one form or the other.
(ix) Absence of Timely Action:
The international monetary crisis before the breakdown of the Bretton Woods System could perhaps have been averted, had IMF taken timely remedial action. For a long period, IMF witnessed passively the intensifying dollar shortage in the sterling area countries and failed to declare dollar as a scarce currency.
It did not ask the United States to devalue dollar until dollar was eventually devalued in 1972. Another instance of its indecisiveness was prolonged floatation of the German Mark and the Japanese Yen. Thus the blame for worsening international monetary situation in 1970’s and in even subsequent period must be largely borne by the IMF itself.
(x) Pre-Occupation with the U.S. Interests:
The IMF has failed to inspire much confidence among the member nations on account of the fact that this institution has been found to be excessively pre-occupied with serving the economic interest of the United States. The constitution of its Executive and veto power to the United States reflects that the Fund’s policies and operations are dictated by the U.S.A. Most of the international monetary reforms undertaken by the IMF are meant essentially to relieve the U.S.A. from its balance of payments difficulties.
(xi) Failure to Tackle East Asian Currency Crisis:
A serious currency crisis engulfed the East Asian countries including Thailand, Malaysia, Philippines, South Korea, Singapore, Hong Kong and Indonesia in early July, 1997. Depreciation of their currencies, coupled with speculation, led to sharp decline in equity prices in the stock markets of these countries, collapse of financial institutions and large scale flight of foreign capital. IMF advice to these countries was to enforce high interest rates, tight money and cut on public spending. These remedies aggravated the recessionary condition in the whole region.
The conditions of recession, unemployment and low growth rates persisted in this entire region during the whole of 1998. The IMF should have come forward with a debt rescheduling plan which was unfortunately given up at the instance of the United States and other advanced countries. The IMF must partly bear the blame for worsened economic situation in the East Asian region during 1997 and 1998. The role of IMF was woefully inadequate to assist the member countries during world economic recession in 2008 and 2009 owing to lack of resources.
(xii) Discrimination against the Developing Countries:
Although the majority of the members of the Fund are the less developed countries of Asia, Africa and South America, yet it is dominated by the rich countries, more particularly the United States. The policies and operations of the IMF are generally in favour of the developed and against the poor countries. That is why, the IMF is sometimes derisively called as “Rich Countries Club”.
The rich countries have often adopted uncompromising attitude towards the issues concerning the less developed countries such as expansion in the Fund’s resources, settlement of international debt problem, unconditional and concessional development assistance etc.
IMF has always supported huge state-funded bank bailouts in the rich world, while demanding at the same time an end to all state funding in the poor world. This has been the heart-rending story of IMF inconsistency from El Salvadore to Ethiopia, to East Asian countries. They have invariably forced the poor member countries to drastically slash public expenditure on food aid, public health services and free or subsidized elementary education.
(xiv) Support to Financial Speculators:
The IMF has been found to be supporting the big banks or financial speculators even when a country or region was confronted with economic crisis. It happened at the time of the East Asian Crisis in 1997-98 and world-wide recession in 2008-09. After 2008 crash, originality Hungarian government’s step to slash public services was lauded by the IMF. It led to great public resentment and the government was kicked out.
The new government introduced a 0-7 percent levy on the banks. This made the IMF crazy and it shrieked that it was, unlike bailouts, distortive of banking activity. They shut down their entire programme in Hungary. The Nobel Prize winning economist Joseph Stieglitz lamented such an attitude of the IMF in these words, “When the IMF arrives in a country, they are interested in only one thing. How do we make sure the banks and financial institutions are paid? ……….. It is the IMF that keeps the (financial) speculators in business.”
It is true that there are some serious shortcomings in the operation of the IMF. But it is not proper to overlook the part played by the IMF in the post-war period in tackling to a large extent, the short-term balance of payments problems both of the developed and the less developed countries. It must be fully acknowledged that the IMF has adopted a flexible approach and has attempted to move with the changing international economic environment.
The original IMF Articles of Agreement were amended in 1978 to legalize the exchange rate flexibility, to raise member countries’ quotas for augmenting the resources of the Fund and to delink the international exchange system from gold. The IMF has created the system of Special Drawing Rights (SDR’s) to relieve the shortage of international liquidity.
It has created new lending facilities such as Compensatory Financing Facilities (CFF), Buffer Stock Facility (BSF), Extended Fund Facility (EEF) and Supplementary Financing Facility (SFF) etc. for providing larger flow of aid to the developing countries in tackling the balance of payments difficulties. The IMF has also started making provision for long-term financial assistance at low rates of interest. The broadening of credit structure by IMF signifies that the less developed countries should not abandon faith and hope in the efficacy of this vital international monetary institution.