The Bail-out Bank: International Monetary Fund

Guiding light to manage economic and currency crises

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The Bail-out Bank: International Monetary Fund

You all must have read about the IMF in your school days, but that was confined to mere full form of IMF and a few basic details.

Let’s now get detailed insights into IMF.

International Monetary Fund or IMF, having Christine Lagarde as its Managing Director, is an organization with voting rights skewed in favour of the developed countries. This is her second stint as IMF MD. . For a person preparing for entrance tests such as CAT, GMAT, Banks, SSC, etc., there will always be questions about what is this institution all about. The role of International Monetary Fund (IMF), in the context of developing countries, is observed in times of crises. It has been known to be the guiding light directing nations on managing economic and currency crises & consequently their monetary policies.

International Monetary Fund: The Mandate

Reconstruction and reparation post the Second World War was a period for countries that emerged on the side that did not lose but were not left unscathed by the effect of having fought a long-drawn battle, spending both financial resources and losing precious lives. Those on the losing side, already having suffered greater losses were made to financially compensate the so-called Allied nations.

That was in the post world-war era but later on, during and post the cold-war period, domination of one set of allies over the others was decided upon by the financial might that was represented by these financial institutions. These could finance the infrastructure projects in the developing world and therefore enjoyed the patronage of the lesser developed countries. Finance for projects was thus the olive branch extended to countries at the bottom of the development ladder in return for support to the developed world and antagonism for the Soviet Group. These banks were thus an extension of the foreign policy mandate of NATO allies and the likes.

 The Import

The significance of IMF in this context is that long-term finance or funding in times of a financial upheaval became a mere tool to buy allies. The fund would extend doles and in return ask these countries to follow trade and monetary policies that would open these economies for the developed world even if that is not in their interest in the immediate future. That is what happens in the aftermath of a financial crisis. The choice is between keeping interest rates low, managing the currency, providing a stimulus through increased Government spending or as is mandated by the IMF in the form of a cut in expenditure, increasing the interest rate for potential investors that may help the currency but would damage the domestic economy as private spending is unlikely to increase. In all likelihood, the spending would decrease..

 The Developing countries’ stance

 A grouse that is not uncommon among developing countries is that these organizations seek to create a market for products of the developed world, be it the goods or that of the financial kind. It is believed that IMF would bail-out a country  but the post-bailout austerity measures that are asked for, often aggravate the problems that were the causal factors.

 Increasing the voting rights for developing countries is an issue on the agenda of financial institutions such as IMF, World Bank, etc.  BRICS bank, headquartered in Shanghai, having Mr. K V Kamath as the Chairperson, has been created primarily to serve the interest of developing countries. BRICS – term given by a Goldman executive – represents developing countries, namely Brazil, Russia, India, China and South Africa. The term, is often a part of the headlines;sometimes as a subject of ridicule and sometimes for praising  the development pace in these economies. It was not uncommon to read that ‘bricks are falling apart’ wherein bricks refers to BRICS. It remains to be seen if this bank can acquire the same prominence as the International Monetary Fund.

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