The Breton Woods Institution.

In July 1944 it was conceived during a conference held in Mount Washington Hotel, Bretton Woods, New Hampshire, United States, where some 45 governments representatives agreed for International Economic Cooperation . The article of agreement was letter on signed by twenty nine member states in December 1945. The influence of the IMF increased with the passage of time when new members joined the forum, due to the attainment of political independence by more developing countries and the fall of the Soviet Union. The aim of the IMF is to oversee the global financial system by following the macroeconomic policies of the member states with an impact on exchange rate and the balance of payment. Presently the IMF has some 187 members working together to foster global monetary cooperation with focus to secure financial stability, facilitate international trade, promote high level of employment, achieve sustainable economic growth and reduce poverty.

The state first submit an application to the IMF which is then considered by the Board of Executives. The Board of Executives then submit the report to the Board of Governors with recommendations in the form of Membership Resolution. This membership resolution includes the amount of quota in the IMF, the payment of subscription and other terms and conditions. Once the membership resolution is adopted the applicant then fulfills the requirements of the IMF and sign the Article of Agreements.

A quota of a particular member is actually the specification of the contribution of the member state to the Fund which depends on the size of the economy. A member state can withdraw upto 25% of its quota to address its balance of payment deficit. Further withdrawal requires special agreements with the Fund. The IMF then attaches certain conditions which oblige the countries to undertake certain policies in order to receive loan installments.

The IMF in order to guarantee accurate utilisation of the fund, avoid rescheduling, achieving the targets and secure repayment attach certain conditions with the loan given to member state, these conditions are known as IMF conditionalities. The member state ought to follow these conditions in order to maintain good relationship with the IMF and to achieve economic goals. These conditions are sometimes regarded as Washington Consensus.

Fiscal Austerity Focusing economic output on direct exports Devaluation of the local currency Trade Liberalisation Balancing Budget and not overspending Removing price controls and state subsidies Privatisation of the state owned enterprises Enhancing the rights of foreign investors through national laws Improving governance and fighting corruption

There are four basic agreements take place between the IMF and the borrower. These agreements are as follows:

SBA: Standby Arrangement is the withdrawal of the loans from the IMF by the member state in accordance with the quota specified by the IMF to the member state.

EFF: The extended fund facility is the supplementation of the standby arrangements by the IMF to the member state provided the borrower has been improving and the Board has been satisfied.

SAF Or SAP: Structural Adjustment Facility or the Structural Adjustment Program are the policies implemented by the IMF in the country where the program is about to launch.

ESAF: The Extended Structural Adjustment Facility is farther and make changes in the existing policies in accord with the views of the IMF and the performance of the state. The SBAs are designed to last from 12 to 18 months while the rest cover 1 to 4 years (Polak & Taylor, 1993)

While approaching the IMF the member state has to follow the proper procedure as prescribed by the IMF. The IMF supported programs in practice are quite flexible and not the same as negotiated with the member state at the start. It involves a long process, including the policy actions of the national authorities, the need, the staff and management of the IMF, the implementation, monitoring and the completion.

The first step of the program, when launches, is the request made to the IMF by the member state . This request can not be in written but usually an oral communication takes place between the national authorities and the IMF staff. In regular process the staff or the management of the IMF impress upon the authorities to adopt measures to redress the macroeconomic imbalances. But it depends on the national authority when and how to take the advise (Mussa, 1997). Often the authorities delay the request in order to get the situation worse. As a consequence the IMF Programs start in time of crisis or near-crisis thereby necessitating rapid policy responses to normalise the situation.

Once the request is made the IMF staff prepares a blueprint of an adjustment program. The blueprint takes into account the key features of the country, the size of the public sector, the depth and soundness of the financial system, and access to international capital market, the IMF staff knows well from the regular surveillance and preprogram discussions with the authorities. The blueprint also includes the aggregate imbalance that has caused the problem, and the response of the national authorities to the unfolding crisis. The staff then make a proposal of the type of financial support, the size of the IMF loan, the time period of disbursement and the key policy measures that shall be advisable before the loans are disbursed. The summary of the blueprint then sent to other departments for comments.

After the briefing paper is cleared by the management, a delegation then visits the member state to start negotiations. The negotiations can also take place at the headquarter of the IMF or at another place where agreed upon. Normally the delegation first task is to revise the estimated imbalance and to assess whether the adjustment effort envisaged in the blueprint remain broadly adequate or not. Ambiguities can delay the process or can result in the cancelation. The staff of the IMF shall make it clear to the authorities whether or not an agreement can take place. Usually no agreement takes place until the program is cleared by the delegation and approved by the Board of Executives. When agreement is reached it represents a compromise between the blueprint briefing of the staff and the initial negotiating position of the country’s authorities which can sometime be contentious on some key aspects of the blueprint.

Back to the headquarter the delegation prepares a final report of the discussions took place with the national authorities and the policy understandings reached with them. The report is accompanied by a detailed macroeconomic framework which typically includes a full set of projection of country’s fiscal, monetary and balance of payment accounts covering at least the first year under the IMF arrangements. This report also includes an appraisal of the main risks and uncertainties surrounding the proposed adjustment program and a summary of the technical features of the financial arrangements (duration, access and phasing of the IMF Loan). The report along with the letter of intent are then circulated for comments to several non-area departments who check that the proposed program is broadly consistent with the blueprint in terms of adjustment efforts, the attainability of the program’s primary goals and the application of IMF conditionalities. A revised draft of the report is then prepared and submitted to management for clearance. The management then makes the final decision but makes no changes in the original draft prepared by the delegation.

Monitoring is the longest and probably the most important phase of the IMF supported programs, covering two to three years time period, once the loan is scheduled to be disbursed. Monitoring is the process of checking the compliance of the process of the program with the numerical and structural performance criteria and a benchmarking. Monitoring ensures access of the member state to Fund’s resources when the conditions are met but failure of the country to meet these conditions interrupt access of the state to further trances. But when large deviations are detected or foreseen then a mission travels to the borrowing country to negotiate possible revision of the arrangements based on an updated blueprint that outlines the conditions that would justify maintaining and lending from the IMF.

Completion of an IMF arrangement does not usually imply that the numerical targets for the main economic objectives of the country's program originally approved by the Executive Board were met. Completion does not even ensure that the country met the revised numerical targets agreed at the last program review. Completion of an IMF-supported program does imply that, in the IMF's view, the country made substantial and satisfactory progress toward the primary objectives of its adjustment program and that the policies of the authorities were broadly in line with the understandings reached with the IMF during the life of the arrangement.