CNBC Explains

The IMF: CNBC Explains

What is the International Monetary Fund?

The IMF, or International Monetary Fund, is an intergovernmental agency that works to keep exchange rates and the international system of payments stable. It manages this by providing support to countries that run into economic trouble and pose a global economic threat.

The International Monetary Fund (IMF) headquarters building is seen in Washington, DC.
Yuri Gripas | Getty Images

It was founded in 1945 following a United Nations conference in Bretton Woods, New Hampshire. The 44 nations attending the conference conceived of the Fund as an economic cooperative that could prevent the devastating cycles of worldwide currency devaluation that worsened the Great Depression.

The first men to conceive of the IMF, however, were John Maynard Keynes and Harry Dexter White, noted economists who drafted competing plans for the IMF ahead of the Bretton Woods conference. While ultimately it was White’s plan that made up the bulk of the final framework, neither man lived long enough to see the Fund fully instituted. Conceived alongside the IMF at the Bretton Woods conference was the World Bank, known principally for facilitating and promoting investment in developing nations.

Today, based in Washington, D.C., 187 nations count themselves as members of the Fund, and 2,500 individuals from 160 countries serve as staff.

What does it do?

The IMF works as both an advisor and lender to nations in need of economic assistance. Member countries contribute to a pool of money which is used for loans to countries facing dire economic circumstances. Often the loans are made based upon assurances that certain economic policies and goals will be met by the borrowing nation.

Typical demands include budgetary reforms, tax enforcement, and market-oriented currency regimes. Proponents argue these requirements for IMF loans promote sound fiscal practices and contribute to global economic stability, ultimately benefiting all IMF members.

Critics, however, note that the IMF is generally controlled by Western nations—the number of votes on its executive board is determined by a country's economic influence—and as a result its policies tend to support existing U.S. or European interests.

Under IMF auspices, overseas payments to other nations or creditors sometimes take precedence over social programs, for example. Venezuelan President Hugo Chavez has been particularly critical — he pulled the nation out of the IMF in 2007 — as have some Eastern European leaders.

Why is the IMF important?

The IMF has waged a number of high-profile campaigns to revive struggling sovereign nations. One of the most notable instances was the Fund’s involvement with Argentina amid the country’s 2001-2002 debt crisis.

Latin America, in particular, has a storied history with the IMF; in 1986, the IMF briefly shut off lending to Peru, after the country failed to make payments on its debt. The IMF also coordinated the financial rescue of Mexico first in 1982, and again in 1995. In these and other cases the Fund was credited with helping alleviate the economic effects of the debt crisis.

Here too, the Fund has also faced criticism. The IMF is sometimes chided for the stiff conditions it typically attaches to loan programs, which some argue exacerbate local economic problems. For example, the Argentinean government claimed the IMF's austerity requirements actually pushed it further into economic crisis. Also, stringent spending conditions imposed by the Fund also prevent needed health and environmental programs from being implemented in struggling economies, critics argue.