In the run-up to and during the Second World War, the Leaders of many states came to the conclusion that the current pegging of gold currencies is ineffective and requires a review of the approach to this issue. Among other changes, such as pegging the dollar to gold and a stable the precious metal price of $ 35 per ounce, the Bretton Woods United Nations Monetary Conference decided to create the International Monetary Fund, an agency which will monitor the economic situation of various countries and lend to weak countries under certain conditions. The official creation date of the IMF is December 27, 1945. This agency started to function fully on March 1, 1947. It is worth noting,the first loan was also issued this year to France.
What is the IMF?
The International Monetary Fund (IMF) is a specialized agency of the United Nations, headquartered in Washington. Nowadays an agency combines 189 countries.
The IMF is engaged in short- and medium-term lending to those countries that have a deficit of payments balance. As a rule, the funds are issued only under certain conditions, that are dictated by the management of the fund. It is worth noting, the conditions are often quite dubious and aimed more at extracting benefits for themselves than at real development and improvement of the economic indicators of the borrowing state. There are many quotes on this subject on the Internet, one of which reads as follows:
The IMF is a doctor of patients which are subsequently carried forward with their feet.
IMF`s official Goals:
– To develop international cooperation in the finance field.
– To promote the development of international trade.
– To monitor the stability of currencies, to prevent their depreciation.
– To provide short-term loans to countries, which lacks for foreign exchange to maintain the stability of the economy.
– To eliminate foreign exchange restrictions, to assist in creating a multilateral system of settlements between countries.
In addition to the main tasks, an agency is collecting and processing of information regarding to the economic state of countries. This can be done in various ways. For example, the country is obliged to issue information regarding the state of its economy, gold reserves, and so on, when it applying to the IMF for lending.
All about the IMF budget
The budget of this agency is formed from the systematic contributions of the structure members. Decisions on lending and in any other matters are taken by vote. The votes number from the State depends on the amount it pays on a permanent basis. More than half of positive votes are needed to make a decision, if the question is simple. There is needed at least 70-85% (depending on importance), if the question is complex. It is worth noting, The US and The EU have the right to impose the VETO power to any decision of an agency. Based on this information, we can conclude that these States can coordinate the structure development vector based on personal preferences.
Each State is assigned such an indicator as a special right to borrow (SDR), when joining an agency. It depends on the economic indicators of the country, its capabilities and the amount of contributions.
The amount of regular contributions to the IMF is calculated on the basis of many variables, which are presented as a formula. Its main components are the indicator of gross domestic product (50%), openness (30%), economic variability (15%), the amount of international reserves (5%). As mentioned above, the USA has the right to impose VETO power on any decision of agency. This is not just because the SDR indicator of this country is 42.1 billion and the amount of contributions is 58 billion dollars as of 2016. By the way, the smallest amount is contributed by Tuval (about $ 2.5 million) and has SDR like 1.8 million.
Contributions are made as follows: at least 25% of the deposit amount should be widespread currencies, for example, the US dollar, the euro, the yen or the pound sterling, and 75% can be made in the national currency.
The contributions number to each participant is giving the same votes number, but with a higher contribution this figure can be increased. Each additional vote is given for 100,000 SDR.
The amount of funding that the State party can receive is also limited and depends on the level of its SDR. The indicator is up to 200% of its quota and up to 600% on an accrual basis.
It is worth noting, the SDR rate of each country is reviewed about once every 5 years. They need at least 85% of the votes for changing it.
The International Monetary Fund is managed with the help of the executive board, which determines the structure policy and responsible for most of decisions. It consists of 24 directors, 8 of whom designate the countries with the highest number of SDR – the USA, Japan, Germany, France, the United Kingdom, China, Russia and Saudi Arabia. The other 181 countries are divided into 16 subgroups, each of which nominates its candidacy for the director post.
The United States has the largest number of votes for making an important decision – 17.08% (due to a large SDR, as mentioned above), Japan is on the second place – 6.13%, Germany is third in list- 5.99%. However, the proportion of all European Union participants is 30.3%.
Initially it may seems like the creation and development of the fund pursues the good goals. On the one side, this is indeed right, because when The State doesn`t have the resources for the impulse development of its economy, it can receive it due to credit funds. However, the conditions for obtaining money sometimes seems absurd. Firstly, it is obligatory to provide all of its data about the cash balance, gold reserves, and so on. Secondly, advice about the future vector of development for overcoming crisis situations is often amenable to criticism. Basically, the pro-American nature of the actions is noted, which is not surprising, since the USA has the largest SDR persentage and VETO power.
On the one hand, the distribution of SDR seems logical. The one who contributed more money decides more. But in fact, it turns out that The States have the opportunity to influence the policies of less developed countries and «select» each for themselves.
In the next article, which will be released this week, we will take a closer look at how the IMF, is managing the global economy under the auspices of good intentions and forcing countries with weak economies to do what is beneficial to the International Fund.
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