The IMF regularly monitors exchange rate policies, the general economic situation and other economic policies. It does so through the (to some countries, ominous) mechanism of "consultation" (with the countries' monetary and fiscal authorities). The famed (and dreaded) World Economic Outlook (WEO) report amalgamates the individual country results into a coherent picture of multilateral surveillance.
Sometimes, countries, which have no on-going interaction with the IMF and do not use its assistance do ask it to intervene, at least by way of grading and evaluating their economies. The last decade saw the transformation of the IMF into an unofficial (and, incidentally, non-mandated) country credit rating agency. Its stamp of approval can mean the difference between the availability of credits to a given country – or its absence. At best, a bad review by the IMF imposes financial penalties on the delinquent country in the form of higher interest rates and charges payable on its international borrowings.
The Precautionary Agreement is one such rating device. It serves to boost international confidence in an economy. Another contraption is the Monitoring Agreement, which sets economic benchmarks (some say, hurdles) under a shadow economic program designed by the IMF. Attaining these benchmarks confers reliability upon the economic policies of the country monitored.
Financial Assistance
Where surveillance ends, financial assistance begins. It is extended to members with BOP difficulties to support adjustment and reform policies and economic agendas. Through 31/7/97, for instance, the IMF extended 23 billion USD of such help to more than 50 countries and the outstanding credit portfolio stood at 60 billion USD. The surprising thing is that 90% of these amounts were borrowed by relatively well-off countries in the West, contrary to the image of the IMF as a lender of last resort to shabby countries in despair.
Hidden behind a jungle of acronyms, an unprecedented system of international finance evolves relentlessly. They will be reviewed in detail later.
Technical Assistance
The last type of activity of the IMF is Technical Assistance, mainly in the design and implementation of fiscal and monetary policy and in building the institutions to see them through successfully (e.g., Central Banks). The IMF also teaches the uninitiated how to handle and account for transactions that they are doing with the IMF. Another branch of this activity is the collection of statistical data – where the IMF is forced to rely on mostly inadequate and antiquated systems of data collection and analysis. Lately, the IMF stepped up its activities in the training of government and non-government (NGO) officials. This is in line with the new credo of the World Bank: without the right, functioning, less corrupt institutions – no policy will succeed, no matter how right.
From the narrow point of view of its financial mechanisms (as distinct from its policies) – the IMF is an intriguing and hitherto successful example of international collaboration and crisis prevention or amelioration (=crisis management). The principle is deceptively simple: member countries purchase the currencies of other member countries (USA, Germany, the UK, etc.). Alternatively, the draw SDRs and convert them to the aforementioned "hard" currencies. They pay for all this with their own, local and humble currencies. The catch is that they have to buy their own currencies back from the IMF after a prescribed period of time. As with every bank, they also have to pay charges and commissions related to the withdrawal.
A country can draw up to its "Reserve Tranche Position". This is the unused part of its quota (every country has a quota which is based on its participation in the equity of the IMF and on its needs). The quota is supposed to be used only in extreme BOP distress. Credits that the country received from the IMF are not deducted from its quota (because, ostensibly, they will be paid back by it to the IMF). But the IMF holds the local currency of the country (given to it in exchange for hard currency or SDRs). These holdings are deducted from the quota because they are not credit to be repaid but the result of an exchange transaction.