The IMF in the Spotlight

The ongoing debt crisis in Greece has put the International Monetary Fund (IMF) in the spotlight.  For a lot of people, the question is, what is the IMF?

I struggle with the answer as well.  My neighbor across the street worked for either the IMF or the World Bank, but I always get mixed up because all of these supranational organizations sound the same to me.

As a Columbian national, he always says my poor understanding is ‘typical’ of Americans – and he’s right, so today I thought I would try and shed some light on the two organizations.

Both the IMF and World Bank were founded out of the Bretton Woods agreements in 1944 in an effort to foster economic cooperation among world powers that could help avert another devastating World War.

Both are specialized agencies of the United Nations along with the World Health Organization (WHO) and the International Atomic Energy Agency (IAEA) and about dozen others that aren’t as well known.

The two organizations have separate mandates.  The IMF is intended to promote international monetary cooperation, provide policy advice and technical assistance to countries to help build and maintain strong economies.

When countries run into trouble, the IMF makes loans on affordable terms and then works with countries to adopt policy changes that are designed to get them back on course.

That function is part of what makes the two entities confusing – the IMF lends money but is separate from the World Bank.

The World Bank also lends money along with technical support to poor countries to help build schools, health centers, basic utilities like electricity and water and helps fight disease.

The goal for the World Bank, though, is different than the IMF.  While the IMF is designed to promote stability of the international monetary system by facilitating international trade and payments, the World Bank’s specific goal is to reduce poverty.

While a lot of people criticize the IMF, I learn a lot from their publications.  Although they don’t necessarily do a better job than anyone else at forecasting, I routinely look at their World Economic Outlook that helps put the global economy in context.

Less frequently, I also look at their Global Financial Stability Report that assesses the global financial system and markets.  Right now, they’re worried less about the shadow banking system and more about the low levels of liquidity in the bond market that we discussed the other day.

As the IMF will undoubtedly continue to be in the headlines as it relates to the continuing debt crisis, hopefully you now have a little better understanding of the organization.

After putting this together, I now realize that my neighbor worked for the IMF and it should be easy for me to remember going forward, which will make our next barbeque a little easier.