What Is the IMF? Its Role and Functions

3 Ways the IMF Protects the Global Economy

IMF Director Christine LaGarde and German Chancellor Angela Merkel
IMF Director Christine Lagarde (L) and German Chanceller Angela Merkel attend a press conference at the German federal Chancellery on March 11, 2015 in Berlin, Germany. These are two of the most powerful people in Europe. Photo: Adam Berry/Getty Images

Definition: The International Monetary Fund is an organization of 189 member countries. It stabilizes the global economy in three ways. First, it monitors global conditions and identifies risks. Second, it advises its members on how to improve their economies. Third, it provides technical assistance and short-term loans to prevent financial crises.The IMF's goal is to prevent these disasters by guiding its members.

These countries are willing to give up some of their sovereign authority to achieve that aim. (Source: "How the IMF Promotes Financial Stability," March 10, 2016.)

IMF Chief

The IMF chief has been Managing Director Christine Lagarde since July 5, 2011.  She is Chairman of the 24-member Executive Board. It appointed her to a second renewable five-year term in February 2016. That's effective July 5, 2016. The Managing Director is the chief of the IMF’s 2,700 employees from 147 countries. She supervises four Deputy Managing Directors.  (Source: "IMF Reappoints Lagarde," February 19, 2016.)

The IMF Governing Board sets direction and policies. Its members are the finance ministers or central bank leaders of the member countries. They meet each year in conjunction with the World Bank. The International Monetary and Financial Committee meets twice a year. It reviews the international monetary system and makes recommendations.

(Source: "IMF Governance Structure.")

Functions

Survey Global Conditions. The IMF has the rare ability to look into and review the economies of all its member countries. As a result, it has its finger on the pulse of the global economy better than any other organization.

The IMF produces a wealth of analytical reports thanks to that role.

It provides the World Economic Outlook, the Global Financial Stability Report, and the Fiscal Monitor each year. It also delves into regional and country-specific assessments. It uses this information to determine which countries need to improve their policies. The IMF can identify which ones threaten global stability. The member countries have agreed to listen to the IMF's recommendations. They want to improve their economies and remove these threats.  

Advise Member Countries. Since the Mexican peso crisis of 1994–95 and the Asian crisis of 1997–98, the IMF has taken a more active role to help countries prevent financial crises. It develops standards that its members should follow.

For example, members agree to provide adequate foreign exchange reserves in good times. That helps them increase spending to boost their economies during recessions. It reports on members countries' observance of these standards. It also issues member country reports that investors use to make well-informed decisions. That improves the functioning of financial markets. The IMF encourage sustained growth and high living standards. That's the best way to reduce members' vulnerability to crises.

Provide Technical Assistance and Short-term Loans. The IMF provides loans to help its members tackle balance of payments problems, stabilize their economies, and restore sustainable growth.

Since the Fund does lend money, it's often confused with the World Bank. The Bank lends money to developing countries for specific projects that will fight poverty. Unlike the World Bank and other development agencies, the IMF does not finance projects.

Traditionally, most IMF borrowers were developing countries. They had limited access to international capital markets due to their economic difficulties. An IMF loan signals that a country's economic policies are on the right track. That reassures investors and acts as a catalyst for attracting funds from other sources.

That shifted in 2010. The eurozone crisis prompted the IMF to provide short-term loans to bail out Greece. That was within the IMF's charter since it prevented a global economic crisis.

Members

Rather than listing all 189 members, it's easier to list the countries that are not members.

The seven countries (out of a total of 196 countries) that are not IMF members are: Cuba, East Timor, North Korea, Liechtenstein, Monaco, Taiwan and Vatican City. The IMF has 11 members that are not sovereign countries: Anguilla, Aruba, Barbados, Cabo Verde, Curacao, Hong Kong, Macao, Montserrat, Netherlands Antilles, Sint Maarten and Timor-Leste. 

Members do not receive equal votes. Instead, they have voting shares based on a quota. The quota is based on their economic size. If they pay their quota, they receive the equivalent in voting shares. The number of voting shares was updated in 2010.  That gave emerging market members more voting authority. Here are the Member Quotas and Voting Shares.

Role 

The role of the IMF has increased since the onset of the 2008 global financial crisis. In fact, an IMF surveillance report warned about the economic crisis but was ignored. As a result, the IMF has been called upon more and more to provide global economic surveillance. It's in the best position to do so because its requires members to subject their economic policies to IMF scrutiny. Member countries also committed to pursuing policies that are conducive to reasonable price stability. They agree to avoid manipulating exchange rates for unfair competitive advantage.

History

In 2011, the IMF was rocked by a sex scandal involving its Executive Director, Dominique Strauss-Kahn. Polcie arrested him on allegations he sexually assaulted a hotel maid. Although the charges were subsequently dropped, he resigned. 

Many emerging market members argued that it was time for a Director to come from one of their countries. That reflects the growing economic clout of these countries. They proposed many excellent candidates. They included Singapore Finance Minister Tharman Shanmugaratnam, former Turkish Economic Minister Kemal Dervis and India's Montek Singh Ahluwalia, a former IMF director. Instead, France replaced Strauss-Kahn with Lagarde, the country's respected Finance Minister. 

The IMF was created at the 1944 Bretton Woods conference. It sought to rebuild Europe after World War II. The Conference also set up a modified gold standard to help countries maintain the value of their currencies. The planners wanted to avoid the trade barriers and high-interest rates that helped cause the Great Depression.