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| Fiscal Policy: planning financial matters and/or a government budget |
| Monetaryrefers to government or central bank management of the supply of money or trading in foreign currencies |
| Exchange Ratesis equal to how much domestic currency is equal to one unit of foreign currency |
| Macroeconomic: the part of economics dealing with the performance, structure, and behavior of national economies as whole. For example, macroeconomics includes studying national income, unemployment, inflation, and international trade. |
| Capital Markets: A market where companies, governments, or other institutions can go and raise money (capital) for their needs. Two types of capital are stocks and bonds (debt), hence two well-known capital markets are the stock market and the bond market. |
| Balance of Payments: The Balance of Payments (BOP) is a statistical statement that summarizes, for a specific period (typically a year or quarter), the economic transactions of an economy with the rest of the world. |
| Poverty Reduction and Growth Facility: developed by the IMF to make poverty reduction and growth more central to its lending operations to the poorest countries . |
| Supplemental Reserve Facility: A facility to provide financial assistance for countries experiencing exceptional capital account problems resulting from a sudden and disruptive loss of market confidence. Source: http://www.brettonwoodsproject.org/glossary/item.shtml?x=345131 |
| Contingent Credit Lines: “IMF credit line established after the financial crisis in 1997-1999. Countries are required to satisfy certain conditions in order to join the CCL to provide emergency assistance.” http://www.brettonwoodsproject.org/glossary/index.shtml |
The IMF has three main activities: surveillance, financial assistance, and technical assistance.
Surveillance. Each year, the IMF sends economists to each of its member countries to analyze the country’s economic situation. The team examines fiscal and monetary policy, exchange rate, general macroeconomic stability, and any related policies, such as labor policy, trade policy, and social policy (such as the pension system). This process is known as an Article IV consultation, after the section authorizing it in the Articles of Agreement. The purpose of such consultation is to provide an outside check on national decisions that might have an affect on the international economic system.
After the team finishes its analysis, the IMF executive board discusses the report and gives it to the leaders of the country in question as the official opinion of the IMF. A version of the report is also published and available as an IMF Public Information Notice (PIN). The IMF also performs similar reviews of regional policy by such organizations as the European Union (EU), the West African Economic and Monetary Union, and the Eastern Caribbean Currency Union.
On a global level, the IMF also publishes its analysis of the world economic system in its World Economic Outlook twice per year and the Global Financial Stability Report, which focuses specifically on the international capital markets, also twice per year.
Financial Assistance. The central activity undertaken by the IMF is financial assistance to national treasury departments. Member countries with balance of payments problems can receive credits and loans to pay off their obligations and readjust their economic policies so that they will not face another crisis or near-crisis. To receive assistance, however, the member-country must agree, through a “letter of intent,” to implement changes in its fiscal and monetary policies that IMF experts have determined are necessary. These conditions, as explained below, are the cause of some of the most vociferous resentment toward the IMF because they often involve very detailed changes in national policies. Nevertheless, the IMF assistance is considered so essential to national economic health that countries generally agree even when they have strong reservations.
The loans are disbursed in phases to ensure that the receiving country moves forward with the reforms required of it. Loans are generally granted for relatively short periods of time, for just a few months, or for as long as ten years, depending on the type of loan. The receiving country must pay back loans on time, on a rigorous schedule, because the loans are intended to be temporary assistance.
Countries are discouraged from becoming dependent on IMF loans, and, in fact, may face extra charges if too much of their government funding comes from the IMF. Rather, the IMF hopes to play a role as a catalyst for private banks to lend to governments, because the extension of an IMF loan is intended to express confidence that the receiving country is getting its financial house in order.
The IMF provides the assistance through several lending programs, (“facilities”):
- Stand-by arrangements are loans granted for specific amounts over 12 to 18 months to deal with short-term problems.
- The Extended Funds Facility is used to help a member-country deal with what are called “structural” economic problems resulting from a history of poor economic planning. The IMF attaches strong conditions to loans through this facility, which are granted for three to four year terms.
- The Povery Reduction and Growth Facility is granted at low interest rates to poor countries.
- The Supplemental Reserve Facility grants short-term loans during crises, but adds a surcharge to discourage too much borrowing.
- Contingent Credit Lines are granted during waves of crises that can spread from one country to another, called “contagions.”
- Emergency Assistance is granted to countries facing military conflicts or other sudden disasters.
Technical Assistance. The IMF provides technical assistance on fiscal and monetary policy, regulatory procedures, tax policy, and collection of statistics, among other issues. These programs are aimed at strengthening developing countries’ abilities to reform and properly manage their macroeconomic policies. The IMF dispatches its own experts and private consultants on training missions to educate government officials and also runs the IMF Institute in Washington, D.C. to provide courses for officials.
In addition to these three main activities, the IMF also has instituted various programs to ensure the stability of financial system management on a global scale. For example, the IMF, along with the World Bank and other institutions, has drafted voluntary standards and codes for countries and financial institutions to adapt in order to increase accountability and transparency and to limit corruption. The IMF also has developed two systems of collection and dissemination of statistical information to help assess the economic viability of the domestic and international financial systems.