COLLEGE OF AGRICULTURE
FACULTY OF ENVIRONMENT, GENDER AND DEVELOPMENT STUDIES
DEPARTMENT OF AGRIBUSINESS AND VALUE CHAIN MANAGEMENT
SCHOOL OF GRADUATE STUDIES
COURSE TITLE: INTERNATIONAL TRADE
COURSE CODE: ABVM 532
Assignment Title: Review on international monetary fund
Submitted by: Boja Senbeta
Id.no: GPABVM 0002/14
Submitted To: Workalemahu Tasew (PhD candidate, ass.prof.)
June, 2022
Hawassa, Ethiopia
Table of Contents
1. Background ................................................................................................................................. 2
1.1. Establishments of IMF ......................................................................................................... 2
2. Objectives of IMF ....................................................................................................................... 3
2.1. General objectives of IMF.................................................................................................... 3
2.2. Specific objectives of IMF ................................................................................................. 3
3. Major Achievements of the International Monetary Fund (IMF) ............................................... 3
3.1. Stability in Exchange Rates: ................................................................................................ 4
3.2. Promotion of International Trade: ........................................................................................ 4
3.3. Check on Multiple Exchange Rates: .................................................................................... 4
3. 4. Broadening of the Credit Structure: .................................................................................... 4
3.5. Multilateral Payments System:............................................................................................. 5
3.6. Compromise between Gold Standard and Managed Paper Standard:.................................. 5
3.7. Institution for Consultation and Guidance: .......................................................................... 5
3.8. Convertibility of Currencies: ................................................................................................ 5
4. Trade Patterns and Protection of IMF ....................................................................................... 6
5. Summary and Conclusion ........................................................................................................... 7
6. References .................................................................................................................................. 9
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1. Background
1.1. Establishments of IMF
The International Monetary Fund was founded in 1944 as the agency charged with overseeing the
so-called Bretton Woods system (named after the town in New Hampshire where the summit
establishing it was held), as well as promoting postwar global economic growth more generally.
Common economic wisdom held at the time that a series of competitive currency devaluations was
a significant contributor to the international contagion of the Great Depression (though later
Depression scholarship has raised doubt about the importance of this factor). The Bretton Woods
plan, by which the US would return to the gold standard and other participating countries would
peg their currencies to the dollar, was meant to prevent such “beggarthy-neighbor” policies. In
addition to its oversight and international coordination roles, the IMF also served as an
international lender of last resort: any member country facing a balance of payments crisis could
apply for a loan that would allow it to repay its sovereign debt on time (from a pool of funds backed
by capital contributed by all the member countries). In the 1970s, rapid US inflation (brought about
primarily by the Vietnam War) made the gold standard unsustainable, as the supply of dollars
rapidly outstripped the Federal Reserve’s ability to maintain enough gold reserves to back them.
The combination of the end of dollar-gold convertibility and the rapid increase in dollar supply
(causing unexpected monetary-policy effects in the countries that pegged to the dollar) led to the
abandonment of the Bretton Woods system. The IMF continues to serve as a “global credit union”
as well as an organization for research and international economic cooperation
The first half of the 20th century was marked by two world wars that caused enormous physical
and economic destruction in Europe and a Great Depression that wrought economic devastation in
both Europe and the United States. These events kindled a desire to create a new international
monetary system that would stabilize currency exchange rates without backing currencies entirely
with gold; to reduce the frequency and severity of balance-of-payments deficits (which occur when
more foreign currency leaves a country than enters it); and to eliminate
destructive mercantilist trade
policies,
such
as
competitive devaluations and foreign
exchange restrictions—all while substantially preserving each country’s ability to pursue
independent economic policies. Multilateral discussions led to the UN Monetary and
Financial Conference in Bretton Woods, New Hampshire, U.S., in July 1944. Delegates
representing 44 countries drafted the Articles of Agreement for a proposed International Monetary
Fund that would supervise the new international monetary system. The framers of the new Bretton
Woods monetary regime hoped to promote world trade, investment, and economic growth by
maintaining convertible currencies at stable exchange rates. Countries with temporary, moderate
balance-of-payments deficits were expected to finance their deficits by borrowing foreign
currencies from the IMF rather than by imposing exchange controls, devaluations, or deflationary
economic policies that could spread their economic problems to other countries.
After ratification by 29 countries, the Articles of Agreement entered into force on December 27,
1945. The fund’s board of governors convened the following year in Savannah, Georgia, U.S., to
adopt bylaws and to elect the IMF’s first executive directors. The governors decided to locate the
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organization’s permanent headquarters in Washington, D.C., where its 12 original executive
directors first met in May 1946. The IMF’s financial operations began the following year.
2. Objectives of IMF
2.1. General objectives of IMF
The aim of the International Monetary Fund (IMF_ was to remove the instability in international
business and economy by creating a climate of mutual co-operation between countries in economic
matters.
2.2. Specific objectives of IMF




To promote international monetary co-operation.
To ensure balanced international trade
To ensure exchange rate stability
To eliminate or to minimize exchange restrictions by promoting the system of
multilateral payments.
 To grant economic assistance to members countries for eliminating the adverse
balance of payment
 To minimize the imbalances in quantum and duration of international trade
3. Major Achievements of the International Monetary Fund (IMF)
Some of the major achievements of the IMF are as follows:
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3.1. 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.
3.2. 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.
3.3. 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 rationalization of exchange
system. The countries seeking the multilateral assistance are discouraged from resorting to the
multiple exchange rates.
3. 4. 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.
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3.5. 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.
3.6. 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 maximization 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.
3.7. 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 specialized 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.
3.8. 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 industrialized 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.
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4. Trade Patterns and Protection of IMF
These loan conditions ensure that the borrowing country will be able to repay the IMF and that the
country will not attempt to solve their balance-of-payment problems in a way that would
negatively
impact
the international
economy. The
incentive
problem
of moral
hazardwhen economic agents maximize their own utility to the detriment of others because they
do not bear the full consequences of their actions is mitigated through conditions rather than
providing collateral; countries in need of IMF loans do not generally possess internationally
valuable collateral anyway.
Conditionality also reassures the IMF that the funds lent to them will be used for the purposes
defined by the Articles of Agreement and provides safeguards that country will be able to rectify
its macroeconomic and structural imbalances. In the judgment of the IMF, the adoption by the
member of certain corrective measures or policies will allow it to repay the IMF, thereby ensuring
that the resources will be available to support other members.
Structural adjustment programs (SAPs) consist of loans (structural adjustment loans; SALs)
provided by the International Monetary Fund (IMF) and the World Bank (WB) to countries that
experience economic crises. Their purpose is to adjust the country's economic structure, improve
international competitiveness, and restore its balance of payments.
The IMF and World Bank (two Bretton Woods institutions) require borrowing countries to
implement certain policies in order to obtain new loans (or to lower interest rates on existing ones).
These policies are typically centered around increased privatization, liberalizing trade and foreign
investment, and balancing government deficit. The conditionality clauses attached to the loans
have been criticized because of their effects on the social sector.
SAPs are created with the stated goal of reducing the borrowing country's fiscal imbalances in the
short and medium term or in order to adjust the economy to long-term growth.[3] By requiring the
implementation of free market programmes and policy, SAPs are supposedly intended to balance
the government's budget, reduce inflation and stimulate economic growth. The liberalization of
trade, privatization, and the reduction of barriers to foreign capital would allow for increased
investment, production, and trade, boosting the recipient country's economy. Countries that fail to
enact these programmes may be subject to severe fiscal discipline. Critics argue that the financial
threats to poor countries amount to blackmail, and that poor nations have no choice but to comply.
Since the late 1990s, some proponents of structural adjustments (also called structural reform),
such as the World Bank, have spoken of "poverty reduction" as a goal. SAPs were often criticized
for implementing generic free-market policy and for their lack of involvement from the borrowing
country. To increase the borrowing country's involvement, developing countries are now
encouraged to draw up Poverty Reduction Strategy Papers (PRSPs), which essentially take the
place of SAPs. Some believe that the increase of the local government's participation in creating
the policy will lead to greater ownership of the loan programs and thus better fiscal policy. The
content of PRSPs has turned out to be similar to the original content of bank-authored SAPs. Critics
argue that the similarities show that the banks and the countries that fund them are still overly
involved in the policy-making process.
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Conditions
Typical trade patterns and protections of IMF used are includes the followings:








balance of payments deficits reduction through currency devaluation
budget deficit reduction through higher taxes and lower government spending, also known
as austerity
restructuring foreign debts
monetary policy to finance government deficits (usually in the form of loans from central
banks)
eliminating food subsidies
raising the price of public services
cutting wages
Decrementing domestic credit.
Long-term adjustment policies usually include








liberalization of markets to guarantee a price mechanism
privatization, or divestiture, of all or part of state-owned enterprises
creating new financial institutions
Improving governance and fighting corruption (from the perspective of
a neoliberal formulation of 'governance.
enhancing the rights of foreign investors vis-à-vis national laws
focusing economic output on direct export and resource extraction
increasing the stability of investment (by allowing foreign investors) with the opening of
companies
reducing government expenditure e.g. reducing government employment
5. Summary and Conclusion
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The International Monetary Fund (IMF were established in 1945 on the basis of Bretton Woods
conference with the aim of aim of remove the instability in international business and economy by
creating a climate of mutual co-operation between countries in economic matters.
The first half of the 20th century was marked by two world wars that caused enormous physical
and economic destruction.
The following are some of the International Monetary Fund's (IMF) key accomplishments. The
IMF has aided the expansion of global trade in a variety of ways. It has not given its approval for
countries to adopt the complex, onerous, and restrictive multiple exchange rate system. The
exchange system has been simplified and rationalized as a result of this. The International
Monetary Fund (IMF) has significantly broadened the structure of international finance
During 1950's and 1960's, 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. System of exchange rate
evolved by IMF has been a compromise between the gold standard and managed paper standard.
IMF provides an excellent forum for discussions on various monetary, fiscal, financial, trade and
exchange problems. The Fund is a specialized institution to undertake research about various
economic problems through its numerous missions.
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 industrialized countries have abandoned foreign exchange controls with regard
to trade transactions.
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6. References
The latest warning for Europe. http://rendezvous.blogs.nytimes.com/2012/10/10/ another-wakeup-call-for-europe/.
The IMF and the euro crisis: Less cash, more impact. The Economist, October 2012.
James M. Boughton. Tearing Down Walls: The International Monetary Fund 1990-1999.
http://www. imf.org/external/pubs/ft/history/2012/.
Steven Erlanger and Stephen Castle. German vision prevails as leaders agree on fiscal pact. The
New York Times, December 2011.
Jack Ewing. I.M.F. urges Europe’s central bank to buy more government debt. The New York
Times, July 2012.
Jack Ewing. Stirrings of resentment over I.M.F. help for Europe. The New York Times, October
2012.
International Monetary Fund. IMF conditionality. http://www.imf.org/external/np/exr/facts/
conditio.htm
International Monetary Fund. IMF history. http://www.imf.org/external/about/history.htm.
International Monetary Fund. IMF overview. http://www.imf.org/external/about/overview.htm.
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