OSIAS COLLEGES, INC

F. Tañedo St., San Nicolas, Tarlac City

(045) 982-0245, email:osiastrc@pldtdsl.net

A Report Presented

To

OSIAS COLLEGES INC

Tarlac City,

Business Administration Department

by:

Topia, Devy Mar M.

Valdez, Ma. Francine Mikee Hillary
Valencia, Lawrente

In fulfillment of the
requirements for the degree of
Bachelor in Business Administration for the
subject Investment and Portfolio Management

Submitted to
Ma’am Camille Cristobal
 Teacher

International Monetary Fund

IMF is the intergovernmental organization that oversees the global financial system by following
the macroeconomic policies of its member countries, in particular those with an impact on
exchange rate and the balance of payments. It is an organization formed with a stated objective
of stabilizing international exchange rates and facilitating development through the enforcement
of liberalizing economic policies on other countries as a condition for loans, restructuring or aid.
IMF is a forum of national economic policies, international monetary and financial systems,
which involves active dialogue with each member country.

The Philippines has been a member of the IMF since 27 December 1945. The Philippines is
represented in the IMF through the Board of Governors, which is the highest decision-making
body of the IMF and consists of one Governor and one Alternate Governor from each member
country (usually the Finance Minister or the Central Bank Governor). In accordance with the
designation signed by the President of the Republic of the Philippines, BSP Governor Benjamin
E. Diokno serves as the Philippine Governor to the IMF while Finance Secretary Carlos G.
Dominguez serves as the Alternate Governor. The Board of Governors of the IMF usually meet
twice a year during the Spring Meetings in April and the Fall/Annual Meetings in October.

History of International Monetary Fund

The International Monetary Fund grew out of the aftermath of World War I, the Great
Depression, and World War II. The wars physically destroyed countries, especially in Europe and
Asia, while the Great Depression brought financial turbulence to world economies. In order to
create a new financial system after the wars had finished, the United Nations Monetary and
Financial Conference convened in Bretton Woods, New Hampshire, US, in July 1944. At the
conference, the delegates from 44 countries proposed a new set of rules to govern the system that
would focus on trade, investment, and economic growth that were needed after the World Wars,
which was known as the Bretton Woods System. A keystone of the agreement was the usage of
fixed exchange rates to convert currencies allowing countries to keep a positive balance of
payments and a backup system of loans to be accessed in the event of a negative balance of
payments. This loan system avoided trade barriers and high-interest rates, some of the causes of
the Great Depression. The IMF was legally created in December 1945 with the directors’ first
meeting in 1946 and operations starting in 1947.

There were two main issues that prevented full membership from being achieved. Firstly, a
country had to be fully in control of its own finances, and this excluded colonies, notably in
Africa. Once these countries gained independence starting in the 1960s they began applying for
IMF membership. At that point, the remaining countries that chosen not to join were led by the
Soviet Union due to the Cold War, with only a few exceptions. However, after the dissolution of
the Soviet Union, the newly formed independent countries and those formerly under the
influence of the Soviet Union steadily applied for membership in the 1990s.

Objectives of International Monetary Fund (IMF)

The objectives of the International Monetary Fund are as follows:

 International Monetary Cooperation: The most important objective of the IMF was to
establish monetary cooperation among the various member countries. One of the major
causes of the Second World War was the absence of monetary cooperation amongst the
countries of the world. Hence it was considered necessary to establish international
monetary cooperation to prevent the outbreak of war in future.
 To Ensure Stability in Foreign Exchange Rates: There was a lot of instability in foreign
exchange rates before the Second World War, which produced adverse repercussions on
international trade. So, IMF was established to eliminate this instability of foreign
exchange.
 To Eliminate Exchange Control: Every country has resorted to exchange control as a
deviceto fix its exchange rate at a particular level before the Second World War, which
produced adverse effects on international trade. So IMF came up to remove or relax these
exchange controls.
  To Promote International Trade: Another important objective of the IMF was to promote
international trade by removing all the obstacles and hindrances, which had the effect of
restricting it.
 To Promote Investment of Capital in Backward and Underdeveloped Countries: IMF
exports capital from the richer to the poorer countries so that the poor countries can
develop their economic resources for achieving a higher standard of living.
 To Eliminate or Reduce the Disequilibrium in the Balance of Payments: IMF helps to
reduce the disequilibrium in the balance of payments by selling or lending foreign
currencies to the member nations.

Functions of International Monetary Fund

The functions of the International Monetary Fund are as follows:

 Stability in Foreign Exchange Rate: IMF helps to achieve stability in foreign exchange
rates. The rates of exchange under the IMF had not fluctuated as much as they used to
before the establishment of the IMF.
 Advisory and Technical Assistance: IMF helps its member countries through its policy
advice and technical assistance in formulating sound policies and building strong
institutions.
 Support for Low-Income Countries: IMF provided help to its low-income members with
policy advice, technical assistance and loans for poverty reduction and reducing the debt
burden.
 Establishment of a Monetary Reserve Fund: IMF helps to establish monetary reserve by
accumulating a sizeable stock of the national currencies of different countries. It is out of
this stock that the Fund meets the foreign exchange requirements of the member
countries.
 Setting up of a Multilateral Trade and Payment System: IMF helps to set up multilateral
trade and payment system. Member countries were allowed to impose exchange control
on commercial transactions, but it was hoped that these restrictions on foreign trade
would be eliminated.
  Check on Competitive Currency Devaluation: For boosting exports, different countries of
the world would often resort to competitive currency devaluation before the
establishment of the IMF. IMF helps to keep a check on competitive currency
devaluation.

What is a central bank?

The term “central bank” refers to a country’s chief monetary authority. The central bank of a
country is tasked with a variety of responsibilities but the primary one is the issuance of money
that circulates in the economy, and is used by individuals, enterprises and households to generate
transactions, which is ultimately tracked down to know where the money is being spent.

Furthermore, central banks ensure an economy’s financial stability by setting the money supply,
monitoring banks, lending to banks and supporting consumer protection. Also, when the
government needs funds and there are no other options or access to finances, the central bank
acts as the lender of last resort.

Central banks also monitor and keep track of economic data, based on which economists derive
key insights.

The Role of the International Monetary Fund (IMF) in Central Banking.

The International Monetary Fund (IMF) plays a critical role in overseeing the international
monetary system, monitoring global economic developments, and providing policy
recommendations and technical assistance to central banks. This report outlines the IMF's
involvement in central banking and monetary policy, focusing on its surveillance activities,
policy advice, technical assistance, and efforts to enhance transparency and modernization in
central banking operations.

1. Surveillance and Monitoring

 Global Economic Surveillance
The IMF conducts global economic surveillance to identify potential risks and provide policy
advice aimed at promoting sound economic growth. This involves continuous monitoring of
global economic trends and developments to detect emerging threats to economic stability. The
IMF’s surveillance activities help to ensure that central banks and governments are aware of the
international economic environment and can adjust their policies accordingly.

 Bilateral Surveillance

The IMF engages in bilateral surveillance with individual member countries, known as Article
IV consultations. During these consultations, IMF teams meet with central bank officials and
other key stakeholders to assess the country's economic and financial policies. The consultations
cover a wide range of macrocritical issues, including fiscal policy, financial stability, foreign
exchange management, monetary policy, and structural reforms. The goal is to identify risks and
vulnerabilities and provide tailored policy advice to address these challenges.

2. Policy Advice and Technical Assistance

 Policy Recommendations

Through its surveillance activities and Article IV consultations, the IMF provides policy
recommendations to central banks. These recommendations are based on in-depth analysis of the
country’s economic conditions and are aimed at enhancing monetary and financial stability. The
advice covers various areas, including inflation targeting, interest rate management, exchange
rate policies, and financial sector supervision.

 Technical Assistance

The IMF offers technical assistance to central banks to help them build capacity and operate
more effectively. This assistance includes guidance on the design and implementation of
monetary policy frameworks, macro prudential policies, and exchange rate management. The
technical assistance programs are tailored to the specific needs of each country and aim to
strengthen the institutions responsible for economic policy.

 Capacity Building
Capacity building is a crucial aspect of the IMF's work with central banks. The IMF organizes
training programs, workshops, and seminars for central bank officials to enhance their skills and
knowledge in various areas of monetary policy and financial regulation. These capacity-building
initiatives help central banks improve their policy formulation and implementation processes.

3. Enhancing Transparency and Modernization

 Central Bank Transparency Code (CBT)

The IMF’s Central Bank Transparency Code (CBT) is a tool designed to help central banks
examine their existing transparency practices and facilitate informed discussions with
stakeholders. The CBT covers five key areas: governance, policies, operations, outcome, and
official relations. By promoting transparency, the CBT contributes to policy effectiveness and
enhances the accountability and credibility of central banks.

 Modernization of Policies and Frameworks

The IMF assists central banks in modernizing their monetary, macroprudential, and exchange
rate policies and frameworks. This involves updating policy tools and strategies to align with
best practices and international standards. The modernization efforts help central banks respond
more effectively to changing economic conditions and enhance their ability to maintain financial
stability.

Challenges Faced by International Monetary Fund

IMF with its complex structure and wide range of aims and objectives faces a set of substantial
challenges in various fronts that need to be addressed in a timely manner. The major challenges
faced by IMF include its governance structure, increasing level of politicisation, leadership
challenges, performance evaluation difficulties, and dealing with social instability. Detailed
discussions of each of these challenges are provided further below.

1. Governance Structure
A major challenge faced by IMF is directly related to governance of the organisation in practical
levels. It has been argued that international organisations such as IMF “face the problem of
‘multiple principals’ to a much larger extent than public and private enterprises. They are
controlled by many governments – governments that often do not agree on what the organisation
should do” (Martinez-Diaz and Lamdany, 2009, p.2).

In other words, there are often disagreements amongst governments in control of IMF in terms of
the aims and objectives to be achieved by IMF and the manner in which they need to be achieved
and this halts the performance of the organisation to a great extent.

2. Increasing Level of Politicisation

Increasing level of politicisation of IMF can be specified as an additional issue that is proving to
be obstruction in achievement of core aims and objectives of the organisation. It has been argued
that “IMF lending is not a technocratic process; rather, the Fund is a highly political institution
whose policies depend on the interests of not only its largest shareholders but also its
bureaucrats, both of whom exercise partial incomplete control over IMF policymaking”
(Copelovich, 2010, p.6).

To put it simply, rather than dealing with its aims and objectives in a direct and timely manner,
IMF is being hostage to bureaucracy and geopolitical ambitions of specific countries.

The USA is considered to be the most powerful member of IMF with exclusive privileges that
include powerful institutional linkages between the IMF, US Treasury Department and Congress,
the ability to veto IMF decisions and modify its budget and quota (Breen, 2008), and there is a
popular viewpoint that this position is taken advantage of by US government for political
purposes.

Moreover, high level of politicisation of IMF is proving to have detrimental impact on the
organisational image of IMF, especially amongst developing countries and newly emerging
economic superpowers.

3. Leadership Challenges

According to Dunaway (2011) a substantial challenge faced by IMF Managing Director is to be

decisive and courageous in terms of facing European leaders and communicating to them the
current state of global economic situation and policy changes and other measures that need to be
implemented in order to deal with these issues.

A recent article in Financial Times shifts attention to this issue by arguing that IMF has
“challenged Berlin’s game plan for pulling the eurozone out of its crisis by advocating a series of
short-term fixes that the German government has resisted” (Spiegel and Barker, 2012).
Specifically, stance taken by IMF chief, Christine Lagarde has been praised for being courageous
to challenge German chancellor Angela Merkel advocating the use of eurozone’s 500 billion
EURO bailout fund to recapitalise banks directly rather than doing it through corresponding
governments.

Nevertheless, the leadership challenge is greater for the current IMF Managing Director
Christine Lagarde due the numerous scandals associated with the former head of organisation
Dominique Strauss-Kahn. Specifically, Mr. Strauss-Kahn has been forced to quit as the head of
the IMF after he was accused of rape attempt of a chambermaid at a New York hotel (Allen,
2012). Although this specific case against Strauss-Kahn has been subsequently suspended,
additional accusations of similar nature emerged with negative implications on the image of IMF
in general, and the bargaining power of the next Managing Director in dealing with heads of
member states.

4. Performance Evaluation Difficulties

Another difficulty associated with IMF can be specified as challenges of evaluating its
performance (Carbaugh, 2010). In other words, IMF aims to achieve a wide range of aims and
objectives such as promoting international monetary cooperation and exchange stability,
facilitating the expansion and balanced growth of international trade etc. and measuring IMF
performance in contributing to the achievement of such a variety of aims presents substantial
challenges in practical levels.

IMF established Independent Evaluation Office (IEO) in July 2001 and the office issues regular
reports evaluating various aspects of IMF performance in an occasional manner. The most
popular reports issued by IEO include Governance of the IMF: An Evaluation (2008) and IMF
Performance in the Run-UP to the Financial and Economic Crisis: IMF Surveillance in 2004-07
(2011).

IEO conducts its evaluations on the basis of multiple surveys involving organisation’s governing
documents, its historical record, and surveys involving monetary and fiscal authorities of
member countries, members of Board, IMF senior level management, and external specialists
(IEO, 2012).

However, although IEO is being positioned as ‘independent’ there is a great deal of doubt about
the quality and the level of objectivity of IEO performance evaluations of IMF, taking into
account that this evaluation office is governed and financed directly by IMF.

Therefore, due to the absence of specific set of performance criteria agreed by IMF stakeholders
in general, members in particular, IMF performance evaluation in an objective manner remains a
considerable challenge yet to be addressed.

5. Dealing with Social Instability

Justifiably the issue of global social instability has been specified as one of the most complex
challenges faced by IMF by its Managing Director Christine Lagarde. This challenge relates to
political upheavals in the Middle East and North Africa partially resulted by socially imbalanced
growth. The negative impact of political situation and a range of other forces on the state of
deteriorating national economies in these regions create additional challenges for IMF.

Moreover, it is important to note that, both, developing, as well as, highly developed economies
is experiencing the issues of social instability. In developing countries these issues are expressed
in the forms of increasing prices for commodity and high levels of unemployment, whereas
developed countries are experiencing the issues of rising level of joblessness among young
people and the difficulties associated with the protection of health and pension benefits amongst
older people (Lagarde, 2011).

Thus, today IMF is faced with a complex task of securing financial stability, promoting high
employment and sustainable economic growth amid harsh economic realties and uncertainties.
Furthermore, there is a growing among of discontent among IMF member countries in relation to
huge financial resources the organisation has lent to the euro zone. This is mainly caused by
spiralling debt issues in Greece and IMF’s role in dealing with the issue. According to Wall
Street Journal despite the repeated pledges of IMF to European countries to ease the Greek debt
burden “the German government has said repeatedly in recent weeks that it expects Greece to
uphold the program it agreed to in early 2012 and that no extra German financial aid will be
made available” (Dalton, 2012).

Therefore, IMF management is placed in a difficult position of having to accomplish its duties
effectively, at the same time when acknowledging and addressing the concerns of all of member
countries of the organisation.

REFERENCE:
Challenges faced by international monetary fund (IMF) and the ways of dealing with them.
(2021, February 11). Research-Methodology. https://research-methodology.net/challenges-faced-
by-international-monetary-fund-imf-and-the-ways-of-dealing-with-them/
GeeksforGeeks. (2023, April 6). International Monetary Fund (IMF) Objectives and Functions.
GeeksforGeeks. https://www.geeksforgeeks.org/international-monetary-fund-imf-objectives-and-
functions/
Ahmed, T. (2023, December 21). What is the role of the IMF in central banking and monetary
policy? Early Growth. https://earlygrowthfinancialservices.com/blog/the-role-of-central-banks-
in-shaping-monetary-policy/
About the Bank – Who We Are. (n.d.).
https://www.bsp.gov.ph/Pages/AboutTheBank/WhoWeAre/MandateFunctionsAndResponsibilitie
s/InternationalEconomicCooperation/InternationalEconomicCooperationIMF.aspx
International Monetary Fund | IMF Definition, History & Functions. (2023, November 21).
Study.com. Retrieved June 6, 2024, from https://study.com/academy/lesson/the-international-
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