Where the IMF gets its money
Most of the IMF's money comes from the quotas that member countries deposit when they join the institution. Countries deposit 25% of their quota subscriptions in Special Drawing Rights (SDRs) or major currencies; the IMF can call on the remainder as needed.
Some loans are also financed under the Poverty Reduction and Growth Facility, which are paid out of through a trust fund administered by the IMF.
The IMF earns an income from interest charges and fees on its loans. When necessary, the Fund can borrow from the most financially sound member countries to supplement its income.
The IMF performs three basic functions: lending, surveillance, and technical assistance.
Much of the following information is taken directly from the Bretton Woods Project website.
Lending
The IMF states that its loans are intended to ease balance of payment problems, stabilize economies, and restore sustainable economic growth.
The IMF lends to member states which cannot finance international debt payments, known as a 'balance of payment' problem. Balance of payment difficulties occur when a nation is short of foreign exchange because their payments to countries exceed their foreign exchange earnings.
The highest volume of lending has occurred during times of international financial instability, for example: in the 1960s after many colonial territories gained independence, during the oil price shocks of the 1970s, the debt crisis of the 1980s, the economic transition of the former socialist countries in the early 1990s, and the wave of exchange rate and financial crisis in the second half of the 1990s.
The process of lending involves the drafting of a "letter of intent" between the IMF and the borrowing country. The letter of intent must be accepted by the IMF's executive board. The letter contains the economic policy and structural adjustment conditions a country's government has agreed to fulfill in order to obtain the loan. The letter acts as a program of policies aimed at specific quantifiable goals. As the Fund sometimes acts as a lender of last resort in crisis situations, governments are often not in a position to decline or negotiate conditions. Conditions attached to loans have been criticized as being too specific in their requirements, not tailored specifically to a country's needs, and often damaging to governments' social programs which impact most effects the poorest in society.
The IMF technically does not give out loans; instead countries purchase foreign exchange from IMF's reserve assets. Repayment occurs when countries repurchase their own currency from the IMF in exchange for reserve assets.
Lending instruments
There are a number of 'instruments' through which countries can borrow money, they include the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shock Facility (ESF), which make loans available to low-income member states at a concessional fixed rate of interest of 0.5% a year.
PRGFs were established in 1999 to replace Enhanced Structural Adjustment Facilities (ESAFs) with the official aim of making poverty and growth more central to the Fund's lending. ESAFs had been criticized for their restrictive conditionality and detrimental effect on poverty; however PRGFs have come under similar criticism for imposing strict conditions especially in the area of public expenditure. PRGFs are available to the poorest member countries, of which the majority of IMF loans now fall under.
The ESF, created in 2005, provides loans at short notice for countries to solve balance of payments or other macroeconomic problems caused by external shocks to the economy, for instance, a sudden rise in the oil price. Poor countries are often severely affected by external shocks. The necessary protection mechanisms, such as building up foreign exchange reserves, are often unavailable to these countries.
Other lending instruments include: Stand-By Arrangements (SBA) designed to deal with short-term balance of payment problems; the Extended Fund Facility (EFF) helps address structural problems that are beyond macroeconomic imbalances; the Supplemental Reserve Facility (SRF) provides quick loans with short maturities for countries in capital account crisis; and the Compensatory Financing Facility (CFF) assists countries effected by fluctuating world commodity prices. Loans via these instruments are made at non-concessional rates. The price, known as "the rate of charge" is determined by the SDR interest rate and is adjusted on a weekly basis to account for fluctuations in international money markets.
Surveillance
Surveillance can otherwise be described as monitoring and consultation. Its aim is to monitor world economic developments while encouraging international dialogue over the effects of member states' domestic economic policy. The IMF periodically undertakes Article IV consultation reports for individual member states assessing strengths and weaknesses of their financial systems. Article IV consultations are required under Article IV of the IMF's Articles of Agreement. These consultations involve scrutiny of the impact of larger economies' policies on smaller economies and global economic conditions effect on the performance of individual countries.
Global and regional surveillance results are published in biannual publications, the World Economic Outlook and Global Financial Stability Report. Global surveillance entails reviews by the IMF's Executive Board on global economic trends and developments. Regional surveillance involves inspection of IMF polices pursued under regional arrangements.
In its surveillance of member countries the IMF focuses on: governments' macroeconomic policies, the performance of macroeconomic indicators, balance of payments, financial sector policies, as well as structural policies that can affect macroeconomic performance.
Technical Assistance
The third component of IMF activities is technical assistance which any member state can obtain free of charge. More than three quarters of technical assistance goes to low or low-middle income countries and there is a high level of activity in post-conflict countries such as Iraq, Afghanistan, and the Democratic Republic of Congo. The Fund provides technical assistance in many areas including, but not exclusively, macroeconomic, fiscal (government spending and taxation) and monetary policy; exchange rates; and financial and macroeconomic statistics. The majority of technical assistance is specifically focused on improving tax collection, dissemination of financial and economic data, enhancing banking regulations, supporting financial systems, and strengthening legal and tax systems.
Technical assistance is provided to nations through a number of facets. IMF staff visit with member countries to advise the government and central bank officials, on short- or long-term basis. As well as providing training courses for central bank and government officials. There are also a number of regional centers that supply technical assistance: AFRITAC, West AFRITAC, and East AFRITAC, serving Africa; CARTAC, serving 20 Caribbean islands; METAC, serving the Middle East; and PFTAC, serving the Pacific region.
Japan is the largest financier for IMF technical assistance and training programs.