International Monetary Fund (IMF)

The International Monetary Fund was established, like the World Bank, in 1944 at the Bretton Woods Conference, and it too is headquartered in Washington, D.C. The two institutions were created side by side to address two different halves of the same post-war problem: how to rebuild and develop war-damaged and developing economies over the long run (the World Bank's job) and how to keep the day-to-day international monetary system — exchange rates and countries' short-term ability to pay for their imports — stable and workable (the IMF's job).

The IMF's central objectives are to promote international monetary cooperation among its member countries and to promote exchange-rate stability, so that trade and investment across borders are not constantly disrupted by erratic currency movements or by individual countries taking unilateral, competitive actions on their exchange rates. To support this, the IMF provides financial assistance to member countries that run into balance-of-payments difficulties — situations where a country temporarily cannot earn or borrow enough foreign exchange to meet its external payment obligations. Unlike the World Bank's long-term development loans, IMF assistance is designed to be short- to medium-term, intended to give a country breathing room to correct the underlying imbalance, usually alongside a programme of economic policy reforms that the borrowing country agrees to undertake.

Beyond lending, the IMF conducts continuous surveillance of its member countries' economic and financial policies, monitoring exchange rates, fiscal positions, and financial-sector health, and advising governments on policy, so that problems can ideally be identified and addressed before they turn into a full-blown crisis. The IMF also maintains the Special Drawing Right (SDR), an international reserve asset that the IMF can allocate to member countries to supplement their own official foreign-exchange reserves — the SDR is not a currency in everyday circulation but an accounting unit and reserve asset held by central banks and the IMF itself. Finally, like the World Bank, the IMF provides technical assistance and capacity-building support to member countries, helping them strengthen their own economic institutions, statistical systems, and policy-making capacity.

The most frequently tested idea in this whole chapter is the distinction between the World Bank and the IMF, since students often confuse the two simply because both were born at Bretton Woods in the same year and are headquartered in the same city. The table below sets the distinction out directly.