The International Monetary Fund or IMF is a cooperative monetary organization whose mission is to ensure the

stability of the international monetary system, the system of exchange rates and international payments that enable
countries and their citizens to transact with one another. Its near-global membership uniquely positions the IMF to
help governments to manage the challenges posed by globalization and economic development. The key activities of
the IMF can be classified into three areas - lending, surveillance, and capacity-building. These activities promote
policies and strategies through which members can work together to ensure a stable world financial system and
sustainable economic growth. The IMF is a quota-based institution. Each member is assigned a quota-based broadly
on its relative economic position in the world economy. The IMF's core responsibility is to provide resources to its
members experiencing actual or potential balance-of-payments problems, meaning that the country cannot find
sufficient funding on affordable terms to meet its net international payments. Most resources for IMF loans are
provided by member countries, primarily through their payment of quotas. Borrowing provides a temporary
supplement to quota resources and has played a critical role in enabling the IMF to meet members' needs for
financial support during the global financial crisis. IMF financing is extended through arrangements that are similar
to lines of credit and is based on an exchange of assets. The IMF provides financial resources to members with
balance of payments problems by calling on members that are considered financially strong to provide freely usable
currencies.

The IMF primarily monitors exchange rates, stabilizes international monetary systems and fosters global financial
cooperation. Since World War 2, the world’s economies have become interdependent on each other through trade
and investment. While this helps strengthen the global financial system, it also creates weaknesses in the economic
chain. When an unforeseeable crisis, like a recession or a natural disaster, destabilizes one nation’s economy, it can
severely affect dependent countries. The balancing force of the IMF prevents any potential “domino effect” in
collapsing economies. Despite their support, the IMF has been widely criticized for allowing disparate levels of
influence. This is because member nations which invest more money in the IMF get more voting rights. The US
comprises nearly a fifth of all available votes because they are the largest contributor. Additionally, since the IMF is
somewhat of a last resort, countries in trouble have no choice but to agree to significant austerity measures that may
not necessarily be in their best interests, or agree with their ideologies. While the IMF is a powerful force within the
world economic balance, it also openly serves the interests of its member countries. With so much influence in the
political policies of struggling countries, it is dangerous to try to treat domestic problems with simple cash infusions
and austerity measures.

Changes in the Fund’s Activities

The three phenomena described above demand change from the IMF and, to its credit, the institution
has undergone many reforms, often far-reaching, since 2008. However, there are questions about all of
these changes—for example, their coherence, and whether they have gone far enough, or too far, in
addressing these challenges. Here, we briefly take stock of reforms to surveillance, lending, resources
and governance.
● Changes in the focus and balance of IMF surveillance - As the GFC and the crisis in euro-area countries
revealed there were shortcomings in the way in which IMF surveillance had adapted to the trends
discussed, it is clear that the IMF had not sufficiently developed its analysis and understanding of financial
sectors, macrofinancial linkages and related risks. In particular, the Fund was insufficiently focused on the
economic and financial risks in advanced countries. is therefore not surprising that there is a general
perception that the Fund’s surveillance is not even-handed, that is equal treatment for countries/economies
in equal circumstances. Fund surveillance was, in part, coloured by the widely shared misperception that
advanced economies were not crisis prone. Moreover, it was difficult for the Fund to demonstrate that it
could add value to the extensive private sector analysis of these economies. This acknowledges that all
economies are not equal and the major economies would warrant special scrutiny because of their systemic
importance and the spillovers they may generate. Related, but distinct, are the perceptions of unequal
treatment. The perception of bias in the Fund’s analysis and treatment of countries is detrimental for IMF
governance, irrespective of the degree of actual uneven-handedness.
○ Reforming the surveillance framework
■ One of the most complete assessments of IMF surveillance around the time
of the outbreak of the GFC was undertaken by the IMF’s Independent
Evaluation Office (IEO, 2011). The IEO found that instead of highlighting
the risks that eventually resulted in the crisis, the Fund focused on the
possibility that a disorderly unwinding of global imbalances would trigger a
rapid and sharp depreciation of the U.S.dollar. Surveillance Decisions were
made such as the Bilateral Surveillance Over Members’ Policies of 2007,
and the Decision on Bilateral and Multilateral Surveillance, otherwise
known as the Integrated Surveillance Decision (ISD) in 2013.
■ However, some concerns remain. The IMF’s 2012 Guidance Note on Article
IV Surveillance went some way to addressing these elements. It spelled out
more clearly that surveillance at the country level was to consider
implications for the stability of the union as a whole, and that reports at the
union level should refer to significant vulnerabilities in individual members.
○ External Sector Report (ESR)
■ In the past few years, the IMF has taken steps to integrate its mandate to
exercise firm surveillance over members’ exchange rates into part of a
broader External Sector Report (ESR) which aims to analyze external
balances and the potential risks to international economic stability from a
broader multilateral perspective. The ESR provides a multilaterally
consistent snapshot of the external positions of 29 economies, and its
conclusions are starting to become translated into headline messages on
global imbalances and risks. As such, it constitutes a clear step in the right
direction.
○ Financial sector surveillance
■ The global financial crisis was also a wake-up call for financial sector
surveillance. While the Fund pointed to some of the key vulnerabilities in its
Global Financial Stability Report, it failed to show how they would interact
to cause a crisis.
■ The IMF responded in two ways. Firstly, FSAPs were revamped to include
more risk assessment and greater focus on country concerns. They were also
made compulsory for the largest financial centers. Secondly, in 2012, the
IMF began developing a Financial Surveillance Strategy designed to
strengthen the analysis of macro financial linkages and risks, improve the
instruments and products to foster an integrated policy response, and
enhance traction. As part of this endeavor, the IMF is developing key
aspects of macroprudential policy, which are to become an integral part of
bilateral and multilateral surveillance.
○ Spillovers
■ The crisis highlighted the need for a far better understanding of
inter-linkages. As a result, the IMF studies the policy spillovers of major
systemic economies on the rest of the world which is greatly improving the
quality of the global dialogue on inter-linkages and the transmission channels
of shocks.
 ○ New view on capital controls
■ In a related initiative, the IMF developed a new institutional view on the
management of capital flows (IMF, 2012). This was one outcome of the
IMF’s attempt to expand its surveillance of the capital account, following
instructions by the International Monetary and Financial Committee (IMFC)
to review its mandate “to cover the full range of macroeconomic and
financial sector policies that bear on global stability”. The Integrated
Surveillance Decision (2012) explicitly requires the Fund to consider capital
account policies in the context of multilateral surveillance. At the same time,
it does not change the nature of member countries’ obligations under the
Articles of Agreement, and the IMF does not have jurisdiction over the
capital account.
■ The new view sought to secure the membership’s backing for IMF
monitoring and policy advice on capital flow management, which remains a
controversial issue.
○ Traction and even-handedness
■ Whether all these initiatives go far enough in meeting the Fund’s surveillance
challenges depends on their implementation. The Global Policy
Agenda—also a post-crisis innovation—helpfully draws the different
surveillance strands together into a consolidated overview of risks and
policy advice. Yet effective surveillance also requires traction to the extent
to which a country’s authorities take IMF advice on board. The IMF cannot
bend too far if it is to retain the trust of advanced economies in the process.
It must be seen as neutral, which requires surveillance that is seen to be
objective and dispassionate.
● Changes in IMF lending - Just as with surveillance, the crisis exposed gaps in the IMF’s
lending framework that had to adapt on the fly, under pressure of countries rapidly losing
access to liquidity in a climate of contagion. In what follows, we will consider, in turn,
changes to EMDC loans, of which the main ones were primarily precautionary in nature, and
loans to advanced countries, which included high-access programs.
○ Precautionary programs
■ Once the crisis broke, new precautionary facilities were created to both
prevent the spread of contagion and re-engage EMEs. Following a false start
with the introduction of a Short-Term Liquidity Facility in October 2008, the
IMF subsequently created precautionary facilities suited to countries with
differing degrees of macroeconomic stability. The Flexible Credit Line
(FCL), created in 2009, targeted strong performers and is viewed as a “seal
of approval” from the IMF.
■ Notwithstanding the willingness of the IMF to make large sums available at
short notice, EMEs do not yet appear ready to depend on the IMF for their
safety net.
○ Large-scale loans to euro-area countries
■ At first, IMF loans were primarily provided to emerging Europe. Once the sovereign
debt crises in some euro-area countries erupted, however, the IMF found itself lending to
advanced countries for the first time since the collapse of the Bretton Woods System and,
for the first time ever, to members of a systemically important monetary union. It soon
became clear that the design of a program for euro- area countries would be unlike those
for standard IMF members.
● Changes in the IMF resource base
 ○ The global financial crisis revealed IMF resources to be woefully inadequate. The
mainstay of IMF resources is its quota system, i.e., contributions from members.
Quotas have been shrinking over the past two decades as a share of world GDP, but
even more so when scaled by world merchandise trade and international assets.
○ Following the Asian crisis, the IMF introduced the New Arrangements to Borrow
(NAB), a set of credit arrangements through which the IMF can borrow from
participating members in an effort to boost resources and make them available at short
notice. However, this inadequacy did not give cause for alarm before the crisis, as
lending had all but dried up and the external environment appeared benign.
○ Subsequently, in December 2010, an agreement was reached to double IMF quotas
under the 14th General Review of Quotas. This first general increase in 12 years will
raise quotas to around SDR 476 billion. This increase will only take effect now,
almost seven years after the London Summit. With the U.S. Congress approved the
quota increase in December 2015, the rise in quotas finally had the support of
three-fifths of the members having 85 percent of the total voting power.
○ The outbreak of the crisis in some euro-area countries led to a second round of
bilateral loans and promissory note purchase arrangements (NPAs). Many saw these
funds as a second line of defense, to be drawn on only after a large drawdown of
dedicated European resources and the NAB. In contrast, the approval of quota-based
loans only requires a simple majority of the memberships’ votes.
○ The pertinent question is whether the amount of IMF resources is now sufficient.
Despite the headline figure for IMF resources of over one trillion U.S. dollars, the
forward commitment capacity (i.e., the amount available to lend) is only US$420
billion (June 2015). Following the recent quota increase, it is not clear if there is an
appetite for devoting additional quota resources to the IMF.
○ EMEs caught in the current global turmoil may lack the motivation to devote their
reserves to financing further quota increases. The demands made on IMF resources
can be expected to remain within limits in the absence of new large programs. The
future of precautionary loans and their take-up is a key factor, given that FCLs are not
subject to access caps.
● Changes in IMF governance
○ During the decade before the global financial crisis, IMF governance changed little,
leading to frustration among the major EMEs (Malkin and Momani, 2011). A
country’s voting share in the IMF is determined by its quota, for which there is a
formula. The quota formula is composed of four variables that seek to reflect the
IMF’s mandate. Reviews of quotas take place every five years, but ad hoc changes to
quotas are also possible. Since 2000, two rounds of ad hoc increases in quotas have
been implemented to benefit under-represented countries. Still, on the basis of
economic weight alone, the change in the distribution of quotas has not kept up with
developments. The inability of the Fund’s voting structure to reflect the growing
economic power of emerging-market countries is seen as damaging the Fund’s
legitimacy (Seabrooke, 2007).
○ The global financial crisis provided the impetus for governance reform in favour of
EMEs, but negotiations on quota shares have been difficult, owing to the multiple
roles that quotas play in the Fund and also because the shifting of voting power is a
zero sum game. Countries will always favour formulae that maximize their relative
positions.
○ Following the G20 Leaders’ Pittsburgh statement, which called for quotas to better
reflect the relative weights of its members in the world economy, the 14th General
 Review of Quota was agreed to in 2010. This Review doubles quota resources and
accords dynamic EMDCs a 6 percentage point increase in their quota share. China
will have the third-largest quota share, while the BRIC countries will all be among
the Fund’s 10 largest quota holders. The long delay in implementing the 14th Review
frustrated EMEs. Moreover, the upward adjustment of the BRIC countries’ quotas
still leaves them below what their quotas would be under the current formula
(“calculated quota”). For example, under the 14th Review, the BRIC countries’
current quota share is set to rise from 11 percent to 14 percent. However, their
calculated quota share is 18 percent (Chart 6).
○ Despite the reform having been accepted in most other countries, the United States
was unable to get the quota reform passed through Congress for six years. Its
ratification in December 2015, as part of an omnibus budget law aimed at avoiding a
government shutdown, is a crucial step towards re-enfranchising EMDCs and, for the
first time in years, opens up the possibility of a real discussion of much needed
reforms beyond quotas. Still, more progress on quotas is required. New data are
becoming available, which means that the quota formula will deliver a further shift of
quotas in favour of EMEs. Some agreed means of automatically approving
mechanical quota increases by all countries would be a firm step forward.
○ The package of reforms being considered along with the 14th quota review also
included a rebalancing of the seats on the IMF’s Executive Board to reflect the change
in quotas. Two seats are to be transferred from advanced European countries to
EMEs. In addition, all Executive Directors will be elected, enabling formerly
appointed single seat members (the United States, Japan, Germany, France and the
United Kingdom) to form their own constituencies with other members.
○ EMEs will feel disenfranchised until they are appropriately represented at the IMF. Indeed, the
2010 refroms are already a compromise, and there may be a need to go further. Should these
countries decide to concentrate their efforts in parallel institutions, it could be difficult for the
Fund to recover its role as a global institution. It is the task of the IMF to ensure fair country
representation and a governance structure that is not out of kilter with any group.

Challenges Ahead - After reviewing the main changes at the IMF in light of the major trends in the global economy,
it is apparent that key issues still remain.

● Strengthening analytical independence for greater traction

Concerns over unequal treatment have not been laid to rest by recent far-reaching reforms to
surveillance and lending, breeding an atmosphere of mistrust and undermining confidence in the advice
of the IMF Board, management and staff. The Fund, being a creation of sovereign governments, is
naturally subject to political forces. However, if the IMF is to fulfill its mandate of promoting a stable
and functional international monetary system, its economic analysis and advice should be insulated
from political pressures, remaining frank, competent and unbiased. Leading members have to buy into
the benefits of an independent view, which may sometimes differ from their own. This can be a
challenge for some advanced economies as well as some emerging market countries. Reforms to bolster
the Fund’s “operational” or “analytical” independence—meaning measures to ensure that its
surveillance, loans and conditionality are based on objective analysis and are not unduly influenced by
the interests of one or several members—are critical to preserving the Fund’s credibility and traction on
national policies in AEs and EMEs alike.

● The need for fair and effective representation

 The IMF’s relevance and legitimacy require not only trust in the independence of the institution, but also fair
representation in its decision-making bodies. It is hard to expect rapidly growing EMEs to be full participants in the
Fund if they cannot get fair representation, and failure to address this is likely to encourage the further development
of regional financing arrangements in competition with the IMF. Consequently, the IMF’s legitimacy depends on a
rational governance structure.

● IMF balance-sheet constraints: the need to improve lending efficiency

Large capital flows, heightened vulnerability to shocks, and large precautionary facilities potentially
imply bigger IMF packages. Since its resources are finite, it is imperative that the Fund improve the
efficiency of its lending. This means ensuring a good balance among official financing, adjustment and
private sector involvement.