The IMF role in the global economy

The international emergency lender is likely to have a big influence in shaping the region's policies

The International Monetary Fund (IMF) is very busy in the region these days. It has existing arrangements with Mauritania, Jordan and Morocco; provided Yemen with an emergency loan last year; has ongoing negotiations with Egypt; and is finalising an agreement with Tunisia. If we also counted the recently-expired programme with Iraq and the possibility that other countries could soon seek its help, the result would be one of the most active periods of the Fund’s involvement in the region.

What is the role of the IMF in the global economy? The Fund helps countries experiencing crises created by the mismatch between the payments they make to the outside world (for example debt service and imports) and the reverse payments from the world into the country (such as export of goods and tourism). Jordan experienced such imbalances when it was forced to buy expensive fuel from international markets following interruptions to the gas supply from Egypt in 2011. Similarly, Egypt’s balance of payments deteriorated as capital flowed out of the country and number of tourists declined after its 2011 revolution. When such imbalances persist, they can lead to crises manifesting themselves through currency crashes, runaway inflation or default on external debt.

To avoid such fate, the IMF provides loans to finance short-term payments. In return, it requires recipient countries to implement policies that should eliminate—or at least reduce—payment mismatch. Examples of such structural policies include asking Jordan to diversify its energy sources or—more controversially—asking Egypt to allow its currency to float hoping that the resulting depreciation would reduce imports by making them more expensive, and boost the competitiveness of Egyptian exports by making them cheaper.

In this sense, the IMF’s role is different from that of the World Bank. The former handles short-term financing crises while the latter focuses on long-term development projects. Yet despite the difference in the time-span of policies, both institutions aim to improve economic conditions by promoting changes in the structure of economies.

The IMF’s funding comes primarily through member countries subscriptions. Each country makes payments according to a quota system reflecting its size in the world economy. Linked to each country’s subscription is its voting power in the Executive Board—the body responsible for running the IMF. The quota system has left the Fund open to criticism of being dominated, both in thinking and decision making, by a few countries. Indeed, the five most powerful voting members of the Executive Board (the US, Japan, Germany, France and the UK) have 37% of total votes between them.

In response to criticism, the IMF has been undergoing a reform process to give more weight to emerging countries and to better reflect recent changes in the global economy. Irrespective of how these reforms pan out, one thing is for sure: for the next few years, the IMF is going to have a big influence on economic policy-making in the region.