Monday, January 12, 2009

How the IMF ( International Mutual Fund ) Promotes Global Economic Stability

The IMF advises member countries in implementing economic and financial policies that promote stability, reduce vulnerability to crisis, and encourage sustained growth and high living standards. It also reviews global economic trends and developments that affect the health of the international monetary and financial system and promotes dialogue among member countries on the regional and international consequences of their economic and financial policies. The IMF now publishes the bulk of its analysis. In addition to these activities, called "surveillance", the IMF provides technical assistance to help strengthen members' institutional capacity, and makes resources available to them to facilitate adjustment in the event of a balance of payments crisis.

Why is global economic stability important?

Promoting economic stability is partly a matter of avoiding economic and financial crisis. Economic stability also means avoiding large swings in economic activity, high inflation, and excessive volatility in exchange rates and financial markets. Such instability can increase uncertainty and discourage investment, impede economic growth, and hurt living standards.

A dynamic market economy necessarily involves some degree of instability, as well as gradual structural change. The challenge for policymakers is to minimize this instability without reducing the ability of the economic system to raise living standards through the increasing productivity, efficiency, and employment that it generates.

Economic and financial stability is both a national and a multilateral concern. As recent experience in world financial markets has shown, countries are becoming ever more interconnected. Problems in one apparently isolated sector, within any one country, can result in problems in others sectors and spillover across borders. And global economic and financial conditions have a significant impact on developments in most national economies. Thus, no country is an "island" when it comes to economic and financial stability.

How the IMF helps

The IMF helps countries to implement sound and appropriate policies through its key functions of surveillance, technical assistance, and lending.

Surveillance: Every country that joins the IMF accepts the obligation to subject its economic and financial policies to the scrutiny of the international community. Conversely, the IMF is mandated by its statutes to oversee the international monetary system in order to ensure its effective operation, and the compliance of each member with its undertaking, under Article IV, to run policies consistent with domestic and global stability. Thus, the IMF monitors and assesses developments and policies at the country, regional, and global levels.

Bilateral surveillance. The core of bilateral surveillance are regular-usually annual-consultations that the IMF holds with each member country. During these consultations the IMF staff discuss economic and financial developments and policies with national policymakers, and often with representatives of business and civil society. In particular, consultations consider potential national and international consequences of domestic policies, and possible domestic repercussions of developments in other countries or regions. Staff also assess the exchange rates of members to ensure they are broadly appropriate. On this basis, the IMF offers advice on policies to promote macro-financial stability and external stability, drawing on experience across the membership.

The policy framework for these consultations was updated in 2007 with a new surveillance Decision that clarifies expectations, enhances accountability, sets out best practice, and introduces the concept of external stability as organizing principle-innovations to improve the focus, candor, evenhandedness and effectiveness of surveillance. These consultations are also supported by membership-wide initiatives to inform bilateral surveillance and promote global economic stability, including:

(i) work to systematically assess countries' vulnerabilities to crisis;

(ii) in collaboration with the World Bank, the Financial Sector Assessment Program (FSAP), which identifies strengths, risks, and vulnerabilities of countries' financial systems and helps formulate appropriate policy responses;

(iii) also in collaboration with the World Bank, development and assessment of countries' observance of a dozen standards and codes of good practice regarding the "rules of the game" for the design and implementation of economic and financial policies

Multilateral surveillance. The IMF also closely monitors economic and financial developments at the global and regional levels.

The IMF's periodic reports on the World Economic Outlook, its regional spin-offs, and the Global Financial Stability Report analyze global and regional macroeconomic and financial developments-to ensure a global perspective to surveillance. The IMF is also well positioned to facilitate multilateral discussions on issues of relevance or common concern to groups of members, and in the process advance shared understanding on policies to promote stability.

Through dialogue with member countries, the IMF is developing voluntary best practices for sovereign wealth funds. This effort is expected to benefit both countries with SWFs and recipients of their investments, helping to allay the potential concerns about these funds, reducing the risks of protectionism, and helping to maintain open capital markets.

Technical assistance: The IMF helps countries strengthen their capacity to design and implement sound economic policies. The Fund provides advice and training on a range of issues within its mandate, including fiscal, monetary, and exchange rate policies; the regulation and supervision of financial systems; statistics systems; and legal frameworks.

Lending: Even the best economic policies cannot completely eradicate instability or avert crises. In the event that a member country does experience financing difficulties, the IMF can provide financial assistance to support policy programs that will correct underlying macroeconomic problems, limit disruption to the domestic and global economies, and help restore confidence, stability, and growth. IMF financing instruments can also support crisis prevention.