News Column

Are We Going Back to the IMF? (1)

May 27, 2014

I. K. Gyasi.

Are we going back to the International Monetary Fund (IMF), or are we already there? By the way, what is the IMF, how did it come into being, what does it do, and how does its policies affect those countries that go to it for a financial bail-out?

The Second World War caused so much destruction that a decision was taken to rebuild Europe. In July 1944, a group of 44 nations met at a place in the United States of America called Bretton Woods, in the state of New Hampshire. Though there were 44 nations, 26 of them were coming from very poor countries. It was the United States of America and Great Britain that actually created what have come to be known as the Bretton Woods institutions, namely, the International Bank for Reconstruction and Development, and the International Monetary Fund.

The United States team was led by Harry Dexter White, and the British side was led by John Maynard Keynes. It was agreed that the International Bank for Reconstruction and Development, better known as the World Bank (WB), would have an American as President, while the IMF would have somebody from Western Europe as the Managing Director.

Article 1 of the IMF Constitution states as follows:  To promote international monetary cooperation through a permanent institution, which provides the machinery for consultation and collaboration on international monetary problems. * To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income, and to the development of the productive resources of all members as primary objectives of economic policy. * To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. * To assist in the establishment of a multilateral system of payments in respect of current transactions between members, and in the elimination of foreign exchange restrictions which hamper the growth of world trade. * To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. * In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. * The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article.

Ghana became a member of both the World Bank and the IMF after independence. The basic difference between the two bodies is that the IMF lends money to countries for a short period, while the World Bank lends money for long-term projects. What must a borrowing country do when it applies for what is known as a Stand-by Arrangement? It is obvious that the individual going to a bank to borrow money is not going to have the money simply handed over.

In the same way, a country going to the IMF must meet certain requirements, as set out in the principles established under the Rooth Plan of 1952. Ivar Rooth was a Swedish economist and lawyer, who became the second Managing Director of the International Monetary Fund, from August 3, 1951 to October 3, 1956. He died in 1972, aged 83. Under the Rooth Plan: Credit should be only for a short periods, within an outside range of three to five years.

The borrowing country should agree with the IMF on policies to ensure that it could repay as soon as possible (maximum five years). A country requesting credit would be expected to include in its authenticated request a statement that it will comply with the principles agreed upon. The Fund would monitor the use of the credit to determine whether it is used in accordance with the agreed principles.

Request for finance within the gold tranche (that is relatively small amounts) would be treated liberally. If the borrowing country agrees to the Rooth Principles, IMF officials visit the country and examine the government's accounts books very thoroughly. If the officials are satisfied, the IMF draws up what is known as Letter of Intent. The Letter of Intent sets forth the programmes to be pursued by the borrowing country, usually the Minister of Finance.

Items covered by the Letter of Intent include exchange rate practices, import regulations, control of the domestic budget deficits, bank credit controls, and policies towards foreign investment. If the government fails to keep the commitments in the Letter of Intent, its right to borrow under the Stand-by Agreement will be suspended. The IMF spells out conditionalities to be followed by the borrowing country. Watch out for the second installment.

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Source: AllAfrica

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