The International Monetary Fund: What does the world’s ‘financial firefighter’ do?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Spencer Feingold, Digital Editor, Public Engagement, World Economic Forum

• The International Monetary Fund (IMF) is a major international institution that promotes economic stability worldwide.
• The organization monitors the economic health of member countries and provides loans for governments in economic distress.
• IMF lending is expected to increase as the global economy navigates “uncharted waters” ahead, as the World Economic Forum’s latest Chief Economists Outlook noted.

A new government in the UK put forth a fiscal plan last month that included steep tax cuts. The proposal rattled the financial markets and caused the value of the British pound to plummet, with many critics voicing concern that the plan would increase the UK’s debt. This week, the UK government announced it will drop the controversial tax plan.

One such skeptic of the tax cuts was the International Monetary Fund (IMF), which released a public statement urging the UK to “reevaluate” its plan. “Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture,” an IMF spokesperson said.

The IMF statement is one small example of how the institution advances its mission of promoting economic stability worldwide. Most often, this entails monitoring the economic health of countries and, when economic turmoil erupts, stepping in to provide loans and other forms of assistance to stabilize the situation and prevent the contagion of financial unrest.

IMF tactics have been criticized and many have called for institutional reforms. Yet the organization continues to be a major player when global economic stability is under threat.

Why the IMF was founded

The first half of the 20th century can be characterized by enormous international upheaval. Two world wars devastated Europe and parts of Asia while an unprecedented economic downturn in the 1930s caused financial pain worldwide.

Yet in the 1940s, on the heels of the Great Depression and World War II, more than 40 countries met in the US to develop a new, rules-based world order that would be facilitated by a series of international institutions. Recognizing that economic instability poses a major threat to global security, the governments created the IMF and a partner organization, the World Bank.

The IMF, which is based in Washington, D.C., began operating in 1944 with 44 member countries. In the subsequent decades, the IMF would step into several crises, providing loans and mandated financial adjustment plans in efforts to restore financial stability and prevent the spread of economic turbulence. Such crises include the OPEC oil embargo in the 1970s, the collapse of the Soviet Union in the 1990s, the Asian financial crisis in 1997 and the COVID-19 pandemic in 2020, to name a few.

Today, the IMF has 190 member countries. Each government contributes to the financing of the IMF through a quota system that is based on a country’s relative size in the global economy. The IMF can also boost funding through multilateral and bilateral borrowing programmes. The organization consists of a Board of Governors and is led by a 24-member Executive Board, which is headed by a managing director. By tradition, the managing director has always been European; many, however, are pushing to end this practice.

How the IMF promotes financial stability

In the early decade of the IMF, the organization was focused on monitoring and facilitating the world’s monetary system. This largely entailed managing exchange rates and international payment systems. In the early 1970s, however, the global system of fixed exchange rates dissolved after the US government suspended the US dollar’s convertibility into gold. Since then, countries have been allowed to freely establish exchange rates, with many governments maintaining free-floating currencies.

The shift in global monetary policy also shifted the IMF’s role. In more recent decades, the organization has increased its role as an international lender, stepping in to provide funding to stabilize debt-ridden countries and support development projects. Given its focus on economic crises, the IMF is often referred to as the world’s “financial firefighter.”

First, the IMF tries to promote financial stability through surveillance mechanisms. This entails the monitoring of debt levels, fiscal policies and overall economic health in member countries. As it did with the UK recently, the IMF can provide policy advice to governments or regional blocs. This year, for instance, the IMF urged El Salvador to suspend its use of Bitcoin as a legal tender.

When economic crises do occur, the IMF often steps in to provide loans to unstable governments. In 2010, for example, Greece—like several other eurozone countries—was faced with soaring debt and a deteriorating economic situation. Over the next several years, the IMF and European Union financial institutions would provide several loans to Greece that totalled roughly €280 billion.

Other noteworthy IMF loans include $50 billion to support Mexico in the 1990s, $37 billion provided to help stabilise the Middle East during the Arab Spring in the 2010s and a record-breaking $57 billion to Argentina in 2018.

IMF loans are often accompanied by mandated economic reforms. These conditions can include controversial adjustments like fiscal austerity measures, privatization and interest rate hikes. Many of the mandated reforms have been criticized, with detractors arguing that the conditions can harm the public and are not fair to developing countries. For instance, in April 2022, Oxfam called on the IMF to suspend austerity requirements, which included measures like tax hikes, for countries that received loans during COVID-19.

Aside from loans, the IMF also provides technical assistance to countries in economic distress. This includes the sharing of best practices for finance ministries, central banks and tax authorities.

Global economy facing ‘uncharted waters’

Today, compounding crises have plunged the global economy into a precarious situation. In fact, the World Economic Forum’s most recent Chief Economists Outlook warned that the global economy is facing “significant economic danger.”

In particular, experts note that national debt levels pose a threat to stability. “Debt distress is at worrying levels among lower-income countries, increasing their exposure to additional shocks, such as climate-related natural disasters and placing many in a vicious cycle of debt servicing costs,” the Chief Economists Outlook stated.

Moreover, the Forum’s Global Risks Report 2022 found that government debt constituted a “critical short- and medium-term threat to the world, and one of the most potentially severe risks over the next decade.”

IMF lending is expected to continue and increase as the global economy navigates “uncharted waters” in the coming months and years, as the Forum’s Chief Economists Outlook noted. Already this year, IMF lending hit a record high, with $140 billion being dispersed across 44 loan programmes, according to a Financial Times analysis.