IMF: how the fund works

The International Monetary Fund is an intergovernmental monetary and financial organization which has the status of a specialized agency of the United Nations. The IMF was founded at the Bretton Woods Conference in 1944. The US-based fund began operations on March 1, 1947. Today, the IMF has 190 member states. The total number of employees is around 2,500 workers from 156 nations.

The activity of the IMF combines regulatory, advisory and financial functions. The main tasks of the fund are to ensure the financial stability of the world financial system and the balanced growth of international trade, to facilitate the stability of exchange rates and balance of payments, to create a multifaceted payment system for current transactions among IMF members and promote global monetary policy. Cooperation.

The Governing Council comprising a Director General and a Deputy Director General (as a rule, the Minister of Finance or the Head of the Central Bank) of each Member State elected once every five years is the supreme body. The Council makes changes to the articles of the Agreement with the IMF, admits and excludes member states, defines and reviews their share in the capital, elects directors. Critical decisions are taken by a majority of 70-85% of the total number of votes, while other decisions are taken by a simple majority of votes. Governors meet in sessions at least once a year.

The IMF aid mechanism to member states depends on the nature of the macroeconomic problems to be solved (financing mechanism to fight poverty and facilitate economic growth, emergency aid, financing mechanism to deal with external shocks, etc. .). Stand-by agreements guarantee a member state that it can receive foreign money from the IMF in exchange for the national currency according to an agreement at any time if the country meets specific conditions.

The largest loans from the IMF, amounting to 120 billion dollars, were granted in the years 1997-1999. The countries that have suffered from a financial crisis – South Korea, Indonesia, Brazil and Russia – have emerged as the main recipients of aid. Under new borrowing agreements in 2009, a record increase in IMF aid to $ 600 billion was decided to support the balance of payments in order to combat a crisis in developing countries.

IMF Quotas: What They Give and How They Are Counted

Membership quotas are the main source of financial resources for the IMF. A member’s contingent largely reflects its size and position in the global economy. A member’s quota determines the highest amount of its debt to the fund, and the number of votes it votes, influences its access to IMF financing.

The current quota formula is a weighted average of GDP (50 percent weight), openness (30 percent), economic variability (15 percent), and international reserves (5 percent). To this end, GDP is measured using a mixture of GDP — based on market exchange rates (60 percent weighting) and PPP exchange rates (40 percent). The formula also includes a “compression factor” that reduces the dispersion of calculated quota shares among members.

Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account. The largest member of the IMF is the United States, with a current quota (as of January 25, 2016) of SDR 42.1 billion (about $ 58 billion), and the smallest member is Tuvalu, with a quota -part of 1.8 million SDR (about 2.5 million dollars).

SDR: Special Drawing Rights

Under the current IMF program of SDR 465 billion, Russia received SDR 12.9 billion, Russia’s quota in the fund is 2.71%.

SDRs were created in 1969 as an international reserve asset supplementing the official reserve of member states. Today, SDR 660.7 billion has been distributed, equivalent to $ 943 billion. The value of the SDR is based on a basket of five currencies: the US dollar, the euro, the Chinese yuan, the Japanese yen and the British pound sterling. The value of the SDR is determined daily based on market exchange rates. As of August 26, 2021, the SDR was $ 1,4185.

The SDR serves as the unit of account for the IMF and other international organizations. The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.

Program details and money usage options

Developing countries, including low-income countries, received about $ 275 billion (out of a total of $ 650 billion). Overall, the program is the largest SDR allocation in IMF history. The aim is to stimulate the world economy during the crisis, to meet the need for long-term reserves, to strengthen confidence in the financial authorities. The IMF will try to persuade richer countries to channel their SDRs to poorer countries through the IMF’s Poverty Reduction and Growth Trust to fight poverty.

Countries have several options for using the money:

1. Exchange their SDRs for any converted currency.
2. Settle current debts to the IMF.
3. Exchange the SDR for a currency and spend it to reduce the domestic external or onerous public debt.
4. The SDR can be used in some countries to increase public funding. The central banks of these countries can exchange the SDR for a currency and lend it to the local finance ministry.

In conclusion, I would like to underline how Russia can spend the money received from the IMF. Experts agree that there will be three options: replenish international reserves, which now stand at $ 594 billion, join the initiative to support countries in need, since the country does not have need additional reserves, allocate the SDR to support Belarus (such as debt or free).

Many would probably say that this money should just be distributed to people. But judge for yourself: there will be a one-time payment of 9,000 rubles for each citizen. That’s 36,000 rubles for a family of four. Personally, I think this money should be spent on developing drugs, buying equipment in hospitals, for a specific purpose, not just as money for helicopters.

Artur Safiulin