.. is quota is individually set by the new nation’s wealth and economic strength. 25 percent of this quota must be paid by gold or a major convertible currency, the other 75 percent is paid by the nations own currency. This quota is then used for several reasons. First, it weighs the joining nation’s voting power (each nation’s contribution to the total fund’s value is calculated as a percentage, the nation’s voting power is then equal to the that percentage). Second, the quota contributes to the general funds’ value, later used to lend currency to the countries in financial need.
The nations involved with the IMF reap many benefits. One of the hidden perks of the IMF is its economic counseling and surveillance. Economic counseling takes place on a yearly basis. Each year representatives of the IMF visit each participating nation’s capitals and perform a series of tasks. They collect information concerning the particular nation’s economic position.
They collect data on the country’s aggregate wages, prices, exports, along with how much currency is in circulation, and other data relating to the economic well-being of the country. The representatives then converse with the nation’s officials to investigate how their economic policies have done during the last year, and what is the forecast of new economic policies for the next year. With this information the IMF representatives are able to compile a non-bias analysis of that nation’s economic position. This non-bias compilation is than reviewed by other IMF representatives and ultimately forwarded to the appropriate nation. This analysis includes productive suggestions on how to improve strategies, and formulate better economic goals. This analysis is just a suggestion and cannot be enforced by any means.
If the nation who receives the suggestion doesn’t like it, it is their prerogative not to take its advice. When times are really in dire straits for a nation the IMF gives the participating nation a sense of security. The quotas mandatory to join the IMF now becomes the savior. Nations in real need of financial assistance are welcome to money saved by the IMF. There are guidelines of removing currency from the IMF, specifically a country who cannot pay it’s debt to other nations can immediately withdraw twenty-five (25) percent of its original quota that was paid by major convertible currency or gold.
If that amount is not sufficient to cover the debt, other options become available to the country. A line of credit may be extended to a nation. This line of credit is only extended if the borrowing country provides the IMF with and abides by an economic policy that will in a specific time frame repair the country’s current financial problem and repay the debt. If the expectations have been meet, and the collective members of the IMF agree to lend money, the county is able to borrow against a predetermined line of credit. Installments may be withdrawn as long as the Executive Board of the IMF is satisfied that the borrowing country is following the economic policy provided to receive the loan.
It is important to note, the economic policy is provided by the country who wishes to borrow. The economic policy need only be approved and followed before currency is released by the International Monetary Fund. The repayment of the loan varies in a case by case fashion, generally it is paid back within three (3) to five (5) years. The borrowing country may borrow up to three (3) times the amount contributed by the respective country’s quota. This may seem a bit unfair, because the borrowing country always demands major convertible currency, in fact, only about 20 different currencies are borrowed in any one year, but this borrowed currency is not interest free. The borrowing nation must now pay back the principal and about 4 1/2 percent interest to the country whose currency has been borrowed.
A small service fee is also paid, this is used to finance some of the IMF’s operation costs. To supplement the need for the growing need for cash reserves, the IMF in 1969 decided to implement a need means for exchange. The SDR (special drawing right) is a form of revenue that is allocated to nations. These SDR units can be used to repay debts of currency previously borrowed or, among other things, be used as tools to make payments to other countries belonging to the IMF. The IMF can, with the consent of the Board of Governors issue SDR units at any time in proportion to the members quotas. This units are distributed to all nations belonging to the IMF at the time of their issuing. The SDR units do not have a fixed value, in fact, their value is based on the collective value of five major currencies. The US dollar, Deutsche mark, French franc, Japanese yen, and British pound are the basis of the SDR value.
SDR’s may be exchanged directly for currency, the SDR units are in this case shifted to the nation dispensing the currency, and currency is given to the nation giving up there SDRs. SDR’s are simply a means of expanding mediums of exchange in the international arena. SDRs allow nations to buy and sell goods on paper while maintaining hard currency as cash reserves. To relate the entity of the IMF to real personnel we must understand the structure itself. The IMF currently employs over 2500 people. The most influential of these employees are the representatives from each of the participating countries.
Each nation has two representatives, known as the Governor and the Alternate Governor. These Governors make the votes for policies, and ultimately make the IMF what it is. The Governors are the voices from each nation. These Governors are not without assistance. In order to make economic decisions intelligently a special committee of economic professionals are at the Governors’ disposal. This Interim Committee, as it is called, advises the Governors, hence the individual nations, on key economic issues that may arise.
The Interim Committee has no direct power over the Governor’s decisions, and acts strictly as an advisory tool. Other personnel of the IMF include 24 Executive Directors, including a Managing Director on staff in Washington D.C. These Executive Directors represent individual countries or groups of countries and work full-time in enforcing the policies set forth by the Governors. These executive directors make no policies, rather keep existing policies enforced. The IMF is not exclusively a lending organization. It is an organization that moderates world trade by defining (through policy) international currency and provides suggestions which under-developed countries can use to grow. However, in the interest of all nations, countries who are unable to pay its debts may borrow currency. This borrowing aspect keeps world wide currencies at a steady rate so that international trade can proceed without question or delay. The IMF’s counseling is equally beneficial to all nations.
Not only to stimulate the growth of a nation, but to stimulate world trade. Counseling does another valuable service. Counseling tends to bring consistency on how each country reports its economic progress. The ‘template’ provides clarification on the true economic position of each nation, making it easier to understand our international neighbors, ultimately making it easier to do business with them.