International Monetary Fund (IMF),is a specialized agency of the United Nations, established in 1945. It was planned at the Bretton Woods Conference (1944), and its headquarters are in Washington, D.C. There is close collaboration between it and the International Bank for Reconstruction and Development. Its primary mission is to ensure stability in the international monetary system. The IMF provides policy advice and financing to member countries with economic problems. The organization, using a fund subscribed by the member nations, purchases foreign currencies on application from its members so as to discharge international indebtedness and stabilize exchange rates. The IMF currency reserve units are called Special Drawing Rights (SDRs); from 1974 to 1980 the value of SDRs was based on the currencies of 16 leading trading nations. Since 1980 it has been reevaluated every five years and based on the relative international economic importance of the British pound sterling, the European Union euro (formerly the French franc and German mark), the Japanese yen, and the U.S. dollar. To facilitate international trade and reduce inequities in exchange, the fund has limited power to set the par value of currencies. Members are provided with technical assistance in making monetary transactions. In 1995 the fund moved to increase disclosure requirements of countries borrowing money and at the same time created an emergency bailout fund for countries in financial crisis. IMF was criticized in 1998 for exacerbating the Asian financial crisis, through the fund's decision to require Asian nations to raise their interest rates to record levels. During the international financial crisis of the early 21st century the IMF provided loans and access to credit of more than $100 billion to developing countries that were affected by falling demand for their exports and other financial problems.
Instead of increasing government expenditure and boosting domestic demand, local employment and economic activity to overcome the recession, the IMF is cutting spending and increasing tariffs and taxes in already contracting economies for the express purpose of maintaining low inflation and fiscal deficit rates, flexible exchange rates, and trade and financial liberalization. In this paper we try to analyze effect of reduced government expenditure for developing countries that sought aid on dealing with currency crisis. We also analyze the reasons behind strict monetary policy prescribed by IMF. Our analysis provides a framework that would help improve IMF’s approach in future.
Reasons behind strict monetary policy:
IMF claims upon maintaining transparency in setting up operation, but it is actually extremely secretive. In recent years, as criticism about this policy has grown, IMF has made certain parameters of structural adjustment of various developing countries public. Although IMF assumes a dominating role in structuring policies for affected nations, it imposes its policies on them rather than involving them in the decision making process.
Key structural adjustment measures include:
• Privatizing government-owned enterprises and government-provided services, • Slashing government spending,
• Orienting economies to promote exports,
• Trade and investment liberalization,
• Higher interest rates, eliminating subsidies on consumer items such as foods, fuel and medicines and tax increases
The basic idea of these policies is to shrink the size and role of government, rely on market forces to distribute resources and services and integrate poor countries into the global economy. Also, despite pledges to address the crisis in flexible and innovative ways, the IMF's key objective in crisis loans remained 'macroeconomic stability' through the 'tightening of monetary and fiscal policies' with below objectives: • Lowering fiscal deficits and inflation levels...