Recently few countries have turned to IMF for help. Could you please explain the role of IMF? How does it work and how is it funded?
The IMF was established in 1944 to help promote exchange rate stability and oversee the reconstruction of the post war financial system. Today its function is similar. In particular the IMF play a role in lending to countries during times of financial and balance of payments crisis. For example, recently the IMF agreed a loan of $2.1billion to Iceland to help stabilise the Icelandic economy.
In the past, the role of the IMF has been controversial because of:
- Loans to military dictatorships such as Argentina and Brazil
- Making strict conditions for loans which often cause economic hardship, at least in short term. For example, the role of the IMF was very controversial during Asian Financial Crisis of 1997 when IMF conditions included a tightening of fiscal policy which exacerbated the downturn.
However, supporters of the IMF argue it can play a crucial role in stabilising exchange rates and dealing with financial crisis. They also argue IMF loans provide an excellent incentive to implement popular but necessary structural reforms.
One thing is for sure they will probably have quite a few crisis to deal with in the coming months, and their intervention will remain controversial.