by Michael Cronin

Created on: October 11, 2010   Last Updated: October 14, 2010

IMF is the International Monetary Fund. The IMF was established by the United Nations in 1944 to provide loans to countries that are in financial distress at a relatively low interest rate. Nations that have a problem with their balance of payments can borrow from the IMF for a short period of time. The stipulations typically require the borrowing country follow an austerity program which limits the government spending, domestic consumption and imports.

When the IMF was created in 1944, its goal was to lend funds for the reconstruction of developing countries and mange the exchange rates between countries. One decade ago the problem was not only that there was too much lending but also that there were restrictions imposed regarding trade. This would force the borrowing country to sometimes impose tariffs on goods being imported and sold within that country. In 1941 John Keynes developed a proposal for international currency and determined that a country acting alone could achieve either stable prices or a fixed exchange rate but not both.

Countries usually come to the IMF for a loan when they are having trouble with their debt and when the value of their currency is falling. Countries avoid restructuring their debt to foreign and domestic creditors because it can damage their economy. In 1999 Russia was the largest borrower from the IMF. The IMF loaned money in return for bringing Russia closer to the standards of industrialized nations. The problem with this arrangement was that at the time Russia was very corrupt and the fund repayment plan came into question. Recently, some perspectives in lending have changed and can be summarized by the idea that if you owe the bank $100 and you can’t pay, then you have a problem. On the other hand, if you owe the bank $1,000,000 and you can’t pay, then they have a problem.

The funds the IMF lends come from contributions paid by each country that is a member. The US is currently the largest contributor to the IMF and has the largest vote when they make decisions. The IMF loans a large amount of money out in exchange for cooperation from the borrowing country in terms of the restructuring of their economy. The assistance that nations in trouble receive is paid back in terms of a loan but also in terms of tariffs and trade restrictions as well as the restructuring of the borrowing nation’s economy.

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