Operation of IMF
To stabilize currency exchange rates:
x Each member declared the value of its currency to the US, which, in turn, was pegged to gold
(the gold standard)
x The exchange rate of a country could only go 1 percent of the declared value.
x However, in August 1971 President Nixon ended this system of pegged exchange rates by
refusing to sell gold to other governments at the stipulated price.
x Since then members have been permitted to choose various methods to determine the
exchange rate such as free float t supply and demand
x After losing its authority to regulate currency exchange rates, the IMF shifted its focus to loaning
money to developing countries. This is its role today, more or less.
To finance the balance-of-payments deficits
x Members with balance-of-payments deficits may borrow money in foreign currencies. They
must repay the money with interest by purchasing with their own currencies the foreign
currencies held by the IMF.
x Each member may immediately borrow up to 25 percent of its quota in this way.
x The amounts available for purchase are denominated in Special Drawing Rights (SDRs), whose
value is calculated daily as a weighted average of four currencies: the U.S. dollar, the Euro, the
Japanese yen, and the British pound sterling.
x Additional loans are available for members with financial difficulties that require them to
borrow more than 25 percent of their quotas.
x The IMF uses an analytic framework known as financial programming, which was first fully
formulated by IMF staff economist Jacques Polak in 1957. The programming is to determine the
amount of the loan and the macroeconomic adjustments and structural reforms needed to
reestablish the country's balance-of-payments equilibrium.
x The Fund has several financing programs, or facilities, for providing these loans, including a
standby arrangement, which makes short-term assistance available to countries experiencing
temporary or cyclical balance-of-payments deficits.
adjustments and structural reforms required by the IMF as conditions for assistance.
x Typical loan conditionality requires borrowing governments to reduce budget deficits and rates
of money growth; to eliminate monopolies, price controls, interest rate ceilings, and subsidies;
to deregulate selected industries, particularly the banking sector; to lower tariffs and eliminate
quotas; to remove export barriers; to maintain adequate international currency reserves; and to
devalue their currencies if faced with fundamental balance-of-payments deficits.
To advise borrowing governments
x The IMF consults annually with each member government. -- ^]o/s}vµo]}vX_
x The IMF attempts to assess each country's economic health and to forestall future financial