IMF stands for International Monetary Fund. It’s an international monetary body comprising of member of different states which came together in order to synchronize and meet their monetary economic demands. IMF like other monetary bodies such as World Bank plays vital roles in not only stabilizing monetary base among members states but also ensure global financial standards are adhered in each member state in order for them to benefit and access their financial support especially the times of frequency financial crisis. IMF grants its financial ideologies such as international financial standards to the member states through the central bank in regard to the function of last resort.
IMF uses various structures to meet its role in administering and streamlining the financial market especially for the member states. This paper will therefore focus on the following aspects: The responsibility of this body as a lender of last resort, explain what is meant by lender of the last resort, how IMF manages to adequately play its role as a lender of last resort with the aid of Monetary structures and also show the consequences of intervention by the IMF as lender of the last resort. The paper will then summarize these ideas and provide an insight on the main topic of discussion.
Responsibilities of the International Monetary Fund (IMF)
As a lender of last resort IMF has many responsibilities. This means the body’s responsibilities in sustaining applicants in the system of finance during crisis. For instance IMF bank can intervene in providing monetary backup to states which have failed to meet its financial obligations in international markets. The bottom line is that the body is the only institution with powers over other monetary bodies managing action when there is the involvement of sovereign nations or if fast crisis in finance needs huge and instantaneous boost of credit. Like the recent global financial crises.
The base for development in the continuous wide-reaching world via worldwide funding intermediation not only does funding intermediaries or present necessary, recommended and globally accepted alteration, but also handles important currency exposure transformation. As worldwide business transactions grows at a more rapid pace more than world output, the need for these IMF services swell. “Therefore as the lender the International Monetary Fund, sustains organizations to control their financial crisis. Despite this the IMF does not give direct asses to open obligation currency via exchange in Central Banks to hand out this service.” (Nixon 27)
Still, while the International Monetary Fund has the right to apply to all currencies via callable capital, a number of these currencies carry small values in a crisis. This implies that via the International Monetary Fund mediation, there is mitigation on the consequences of the many monetary crises which usually happens to states when they are experiencing economic hardships or monetary deficits, additionally the International Monetary Fund involvement currently in the global economic atmosphere amplifies the present day moral hazards. This is exemplified by the “new recommendations contained in the recent communiqué from G-7 Finance Ministers whose major target was to foster transparency and strengthening national financial systems.” (Mann 98)
With the aid of the central governments, IMF facilitates formulation of monetary policies which gives clear focus on how to meet a states macro and micro economic objectives. This is important for stabilization of economic activities in an economy to achieve a balance economic growth. Financial mediators also play necessary roles in economically transforming funds to investments. Many financial mediators, normally banks, give maturity transformation as the main service: they change temporary deposits to longer-term loans.
As a fraction of the necessities, the banks access and run exposure risks to small economical occasions (these encompasses variation in interest or exchange) as well borrower effects. Therefore through the IMF system as a financial organ, it assesses and transforms economic exposure to member’s states which enhances economic prosperity.
Financial institutions in different states may be faced with financial distress due to combination of management factors such as inefficient banking policies. This may spillover to other institutions thus affecting the functioning of the whole financial system. These organizations do not price into their tune-up the probability of absorbing the aftermath spillovers due from other organizations. Therefore as a lender of last resort, IMF relieves financial distress among the member states. Consequently the International Monetary Fund utilizes its responsibility as go-between and as straightforward broker, possibly with information on the state of affairs in states, to supply governments with credit.
For a lender of last resort to be effective in balancing the risks of financial crisis against the risks of moral hazard, the International Monetary fund’s role in the intervention is crucial. While there isn’t worldwide correspondence in regard to conducts in monetary contexts policing, the worldwide general flow of funds in state and other non governmental bodies necessary for growth on the international level. These funding mediators turn the savings of an economy to investments, which in turn brings higher returns which could be realized in a state.
Structures employed by IMF
State mechanisms, which include insurance deposit are not encompassed by IMF, even though they can be availed to another lender. For instance as suggested by Soros, (63) “international insurance agencies would guarantee loans for a fee. However, the extent to which such schemes reduce or magnify financial distress is not clear. So extending them internationally may be the wrong direction, particularly in the absence of supervision. G-10 central banks, working through the BIS, are implementing in their own markets the Basle Accord on Capital Adequacy, which sets guidelines for both provisioning and equity capital that these central bankers see as minimum equity exposure”. IMF uses the following to function effectively in lending as a last resort choice internationally.
Without super-national money IMF cannot offer liquidity money it can issue debt, or it could activate its lines of credit by seeking permission from relevant stakeholders. Therefore there would be no authority funding intervention costs. When liquidity is unavailable, funding organizations can be reorganized via fiscal spending.
The International Monetary Fund loaning in sustaining of economic divisions regulation programs makes it possible for states to transfer their burdens in a specified time frame, but still the burden remains within the boundaries. For help facilitation on the burdens, restructuring on the international level is needed. This is done by global fiscal influences. Furthermore, if the International Monetary Fund has assisted in coordination and postponement of a debt, it would have carried out the kind of functions a fiscal authority performs, but cannot impose tax.
Consequences of intervention by the IMF as lender of the last resort
“The IMF, through its control and coordination of international monetary credit, provides liquidity in financial crisis to states economies and not majorly through institutions. Through its conditionality it supervises as well as provides advisory information during financial crisis.” (Kamau 12) For instance the modern global financial crisis and the following of rampant and recent fast-moving nature of the crisis, there is need for immediate and large injections of credit.
Because sovereign nations are involved too, the IMF is the only institution that can offer a synchronized action. Even if this can be realized the International Monetary Fund can’t enforce the conditions properly, particularly during supervision and also restructuring of the funding systems. Moral hazards’ pertaining gain and loses are often seen to stretch these kinds of incidences and there is the unavailability of redistributing measures towards the business communities and investments to carry the losses.
There are speculations that the International Monetary Fund does not qualify to carry out this responsibilities (lender of last resort). The reason for this being that IMF does not print money, for this reason there is no limitations in resources. In operation the relevancy of this case has not been felt. The issue of adequacy in International Monetary Fund’s resources in carrying out lending of the last resort is increasingly relevant. Nevertheless the biggest shares of its resources are focused on loaning developing worlds. This has made the lending of last resort principles that ensure punctual loan repayment become difficult.
IMF is inconvenienced by this as delay in repayment makes the loaning capacity held up in outstanding loans. As shown in this paper therefore, International monetary fund (IMF) plays a very important role as lender of the last resort through regulatory, supervisory and advisory functions. It facilitates functions in supporting the global participants in the financial systems in times of financial crises it enhances formulation of monetary policies which gives clear focus on how to meet a states macro and micro economic objectives. This is important for stabilization of economy financial systems to meet global monetary obligations such as international financial exchange and trade deficits.
Through IMF role distress in participant states pertaining monetary issue, resulting from mismanagement of finances and cross boarder intermediation with multiple currencies are curtailed. International Monetary Fund has used its responsibility to control and broke financial activities in a consistent way, jointly with the available details on the real situation of states and nations, the International Monetary Fund channels credit to governments through the central organs that are mostly central banks.
Kamau, John. IMF and the Financial Crisis 2nd Edition. Nairobi: East African Publishers, 2002 Print.
Mann, Catherine. International economics and National Financial systems, Washington DC: Davidson and Sons: Publishers. 1998. Print.
Nixon, David. IMF as a Lender of last Resort, New York: W.H. Freeman and company Publishers. 2005. Print.
Soros, George. Basle Accord on Capital Adequacy. New York: W.H. Freeman and Company Publishers. 2005. Print.