IFI Law - Book Chapter 6

Question 1

Article VI Section 36 of the Articles of Agreement allow member states to do in relation to capital transactions. What is the restriction on this and what is the issue?

Answer 1

Provided they did not adversely affect the free flow of payments on current transactions. The Articles do not provide precise definitions of current or capital transactions, leaving room for interpretation based on standard economic meanings. The IMF’s Executive Board has the authority, under Article XXIX, to interpret the Articles, with the possibility of dissenting member states appealing to a committee of the Board of Governors.

Question 2

What are Standby Arrangements in the context of the International Monetary Fund (IMF)?

Answer 2

Standby Arrangements are financial agreements between the IMF and its member countries, providing short-to-medium-term financial assistance to countries facing balance of payments problems or economic crises.

Question 3

What is a key feature of Standby Arrangements related to the disbursement of financial assistance?

Answer 3

Financial assistance is provided in tranches, with each tranche contingent upon the member country meeting specific policy conditions.

Question 4

What is the purpose of policy conditionalities in Standby Arrangements? What policy goals?

Answer 4

Policy conditionalities are economic and financial policies that a member country commits to implementing in exchange for receiving IMF financing. They aim to address economic imbalances, improve fiscal and monetary policies, and promote structural reforms.

Question 5

How does the phased approach work in Standby Arrangements?

Answer 5

Financial assistance is disbursed in installments or tranches, and the release of each tranche is contingent on the member country meeting agreed-upon targets and policy commitments.

Question 6

What challenges are associated with the imposition of policy conditionalities in Standby Arrangements?

Answer 6

Challenges include concerns about the stringency of conditions, their alignment with the member country’s unique circumstances, and potential social and political consequences.

Question 7

What is the concept of “ownership” in the context of Standby Arrangements?

Answer 7

“Ownership” emphasizes the need for the member country to take ownership of the reform agenda. However, challenges exist in aligning IMF policy prescriptions with the country’s domestic priorities.

Question 8

How long is the typical duration of Standby Arrangements?

Answer 8

Standby Arrangements are typically short-to-medium-term, providing financial assistance over a period of one to two years, depending on the circumstances of the member country.

Question 9

What is the role of Standby Arrangements in the broader context of international law?

Answer 9

Standby Arrangements contribute to the evolution of international law by influencing the relationship between international organizations, member states, and non-state actors. They exemplify elements of global administrative law.

Question 10

Can the IMF rely on its articles of agreement to impose policy conditionalities?

Answer 10

Yes, policy conditionalities imposed by the IMF can be justified with the Articles of Agreement. The legal basis for these conditionalities is derived from the interpretation of specific articles. Article I (iv) of the IMF’s Articles of Agreement emphasizes the purpose of giving confidence to members by providing temporary financing, subject to “adequate safeguards” to ensure that the funds are used to correct imbalances in their balance of payments.

Question 11

Are Standby Agreements classified as contracts? What are the preceding steps to such an agreement?

Answer 11

The Standby Arrangement, a unique financial instrument used by the International Monetary Fund (IMF), was not classified as contractual but rather as sui generis, signifying its distinct characteristics. This arrangement aimed to address a member state’s balance of payments problem, referring to the economic situation where the country’s expenditures exceed its income, leading to various financial imbalances.

In this arrangement, the member state first detailed its proposed policies to rectify the balance of payments issue in a Letter of Intent. Subsequently, the IMF’s Board of Directors issued a Standby Decision expressing support for the member state’s policy measures and committing to provide a specified amount of financing. This financing was disbursed in installments, contingent upon the member state meeting specific performance criteria, such as reducing its budget deficit or implementing prescribed policy measures.

Question 12

What was the only instance of the IMF taking action against a state for failing to deal with its obligations under a financing agreement?

Answer 12

The IMF declared Czechoslovakia ineligible to use its resources due to the country’s **failure to fulfill its commitments **under a Standby Arrangement.

This Article pertained to providing necessary information justifying the maintenance of exchange restrictions. Subsequently, the IMF recommended that Czechoslovakia be requested to withdraw from membership, and the country eventually complied with this request.

Question 13

What two sources of obligations do member states have?

Answer 13

Commitments under IMF Financing Arrangements: These relate to the terms and conditions associated with specific financing arrangements, such as the Standby Arrangement, through which member states access IMF financing. Fulfillment of these commitments is essential for the disbursement of funds and is subject to conditions outlined in the respective financing agreement.

Membership Obligations: These obligations are spelled out in the Articles of Agreement of the IMF and pertain to the general obligations of membership. These may include obligations related to economic and financial policies, exchange rate stability, and providing necessary information to the IMF. Failure to meet membership obligations can lead to various consequences, including the loss of certain rights and privileges within the organization.

Question 14

What is the General Agreement to Borrow (GAB)?

Answer 14

The General Agreement to Borrow (GAB) was approved by the IMF’s Executive Board in 1962. It was created to address the risk that, with more member states assuming monetary obligations, the IMF might face increased demand for financing, potentially exceeding its available funds. The GAB allowed the IMF to borrow funds from its member states, initially focusing on the Group of Ten (G10) countries, in case of such heightened demand. This special arrangement aimed to ensure the IMF’s capacity to meet calls on its resources.

Question 15

How often was the General Agreement to Borrow (GAB) used?

Answer 15

The GAB was activated ten times during its existence, providing financial support to member states. Initially available only for the G10 countries, it was later amended to support any IMF member state. The GAB lapsed in 2018 and was succeeded by the New Agreement to Borrow (NAB).

Question 16

How does the General Agreement to Borrow (GAB) deviate from the principle of uniformity in IMF financing?

Answer 16

The GAB deviates from the principle of uniformity in IMF financing because, initially, it was available specifically for the Group of Ten (G10) countries. This meant that part of the financial support provided to G10 countries could come from a source different from the IMF’s general resources. While the form of financing under the GAB remained consistent with standard IMF Standby Arrangements, the deviation highlighted the IMF’s ability to create special arrangements for specific groups of countries with unique needs.

Question 17

Why were the original IMF governance arrangements not well-suited for the significant increase in membership, especially with newly independent states? Focus on the factor time.

Answer 17

In particular, many of these states faced macroeconomic challenges that were structural in nature and required longer periods for resolution than the standard balance of payments problems that the IMF, as a monetary institution, was primarily created to address. These challenges were not effectively accommodated within the original IMF governance arrangements.

Question 18

Why were the IMF governance arrangements ill-suited for addressing the needs of new member states, especially those facing development challenges?

Answer 18

The IMF was originally designed as a monetary institution, focusing on short-term monetary measures, while development challenges were deemed the purview of institutions like the IBRD. However, newly independent states seeking development financing from the World Bank were required to join the IMF.

This led to a situation where the IMF, primarily specializing in short-term monetary measures, gained members whose balance of payments problems required medium- to long-term structural support. This misalignment between the IMF’s design and the development needs of its members, coupled with controversial conditionalities in the 1980s, resulted in tensions between the IMF and many developing country member states and their residents.

Question 19

What built-in weakness did the Bretton Woods system have, and how was it resolved in the 1978 amendment to the IMF Articles? How did this weakness lead to the amendment?

Answer 19

The built-in weakness of the Bretton Woods system was rooted in the link between gold and the US dollar. As global trade expanded, the demand for US dollars increased, leading to a situation where international holdings of dollars grew faster than the US could acquire gold. This weakened the credibility of the US promise to maintain the value of the US dollar fixed. The crisis came to a head in the early 1970s when the US, facing sustained inflation and a growing trade deficit, unilaterally declared in August 1971 that it would no longer exchange dollars for gold at the fixed rate. President Nixon’s announcement marked the end of the original Bretton Woods arrangements and triggered international efforts to establish a new basis for the international monetary system.

In 1978, the IMF Articles were amended for the second time, culminating in the creation of a new international monetary system. This amendment addressed the weaknesses of the Bretton Woods system, adapting to the changing dynamics of the global economy and the challenges posed by the link between gold and the US dollar.

Question 20

How did the second amendment of the IMF Articles change the international monetary system?

Answer 20

The second amendment of the IMF Articles, implemented in 1978, marked a significant shift from a commodity-linked monetary system to a fiat money system. This transition effectively ended the monetary role of gold, allowing member states to determine the value of their currency “by fiat.” Unlike the previous system where states set the value of their currency in terms of gold, the new arrangement enabled each member state to independently establish and manage the value of its currency.

In practical terms, this meant that countries could adopt various policies to manage their currency values. Consequently, the global monetary and financial system evolved into a market-based framework where the values of many countries’ currencies are determined by the forces of supply and demand.

Question 21

How did the Second Amendment to the IMF Articles expand the IMF’s role and scope?

Answer 21

The Second Amendment, implemented in 1978, introduced ambiguous language in Article IV, urging member states to direct economic policies for orderly growth. This lack of specificity significantly broadened the IMF’s scope. The amended article required member states to consider factors impacting economic growth, balance of payments, and currency value. Consequently, the IMF’s surveillance and conditionalities expanded to cover a wide range of issues, including privatization, tax reform, legal changes, budgetary allocations, and banking reforms. This reflected the IMF’s shift from a purely monetary institution to a more comprehensive, macroeconomic-focused organization.

Question 22

Why were countries originally unlikely to advocate burdensome policies in the IMF?

Answer 22

Originally, the IMF’s governance assumed that all countries could potentially face balance of payments problems and require its financial support. Even powerful states recognized the possibility of needing IMF assistance in the future. Consequently, they were hesitant to endorse policies that could be overly burdensome for member states, as they understood that these policies could one day impact their own societies, making them more cautious and accountable in their support.

Question 23

What distinctions can be made between ‘IMF supplier states’ and ‘IMF consumer states’ post the Second Amendment?

Answer 23

Post the Second Amendment, two distinct groups emerged.

The first group, termed ‘IMF supplier states,’ comprised wealthy countries that could meet their foreign exchange needs independently. These states, having no intention of using IMF financing facilities, regained monetary sovereignty and, due to their dominance in IMF governance, gained the capacity to influence policies.

The second group, referred to as ‘IMF consumer member states,’ comprised countries needing or potentially needing IMF financing. They had to pay attention to IMF views as they influenced the conditions attached to financial support. The IMF’s de facto role in their policy-making, coupled with its gatekeeping role in international finance, gave it considerable bargaining power.

Question 24

Why did the IMF need to create special trusts, like the Poverty Reduction and Growth Trust (PRGT), to provide long-term concessional financing to low-income countries?

Answer 24

The IMF, bound by principles of uniformity and universality, granted all states access to its financing without distinctions.

However, when primarily utilized by developing countries, this approach became impractical. To meet the unique needs of specific member states, such as providing long-term concessional financing to low-income countries, the IMF had to establish special trusts like the PRGT. These trusts operated outside the general resources of the IMF, allowing for targeted assistance to specific subsets of member states, especially those with special financial requirements.

Question 25

What are the two consequences of the IMF relying on donor states and creating trusts like the Poverty Reduction and Growth Trust (PRGT) for funding?

Answer 25

The amount of funding the IMF can provide is contingent on the generosity of donor states.
The PRGT, akin to the International Development Association (IDA), is susceptible to being leveraged by richer states to promote their economic and political objectives. Donor states can use their contributions to impose specific conditions on the use of funds, posing a risk of multiple and onerous demands. This situation also exposes the poorest and weakest IMF member states to compliance with stringent conditions for accessing financing.

Question 26

What do the Articles of Agreement require the IMF to consider during its annual consultations with member states, and how has the IMF historically interpreted this requirement?

Answer 26

The Articles of Agreement mandate the IMF, during its annual consultations with member states, to pay due regard to social and political conditions in the country. Historically, the IMF has interpreted this requirement as prohibiting the organization from being influenced by political (non-economic) considerations in its dealings with member states.

Question 27

Why does the current interpretation of paying regard to social and political conditions seem imprudent for the IMF, especially given its expanded operations beyond monetary issues?

Answer 27

The current interpretation is considered imprudent for the IMF because, despite attaching conditions related to governance, corruption, budgetary allocations, and privatization, it pretends to avoid being influenced by social and political considerations. This approach obscures the political considerations the IMF deems relevant, the principles applied in making judgments, and the decision-making process.

Question 28

In what two ways could IMF funding lead to a deterioration of human rights?

Answer 28

Human rights issues can be linked to the IMF’s operations in two ways.

Firstly, a member state may engage in human rights violations domestically, where these violations negatively impact its macroeconomic situation. For instance, the government might allocate foreign exchange reserves to military and police equipment rather than developing infrastructure or providing essential medical supplies for citizens.

Secondly, human rights concerns can arise from the impacts of the conditionalities attached to IMF financing, which may necessitate the recipient state to reduce budget deficits, potentially leading to distributional impacts that adversely affect residents’ access to essential services like health and education.

Question 29

How has the growing number of member states affected the governance of the IMF?

Answer 29

The expanding membership of the IMF has influenced governance in two significant ways.

First, the composition of voting rights in the IMF has changed, with each member state’s vote comprising 250 basic votes plus one vote for each SDR 100,000 contributed to the IMF’s general resources. While the total number of votes has increased over time due to membership growth, the proportion of basic votes, intended to reflect sovereign equality, has decreased, enhancing the dominance of larger and wealthier countries.

Second, the number of IMF Executive Directors, representing member states, has grown more slowly than the membership itself. Originally, a twelve-member board represented thirty-nine states, but today, twenty-four directors represent 190 members, leading to disparities in representation and influence among member states.

Question 30

In what ways do G7 countries exert uneven influence on the IMF’s Executive Board?

Answer 30

G7 countries exert uneven influence on the IMF’s Executive Board in two significant ways.

Firstly, the numerical advantage of industrialized countries, particularly the permanency of G7 representation, allows these countries to maintain institutional memories and expertise within the Board. This expertise enhances their negotiating effectiveness and enables them to shape discussions and decisions effectively.

Secondly, the practice of decision-making by consensus, while mitigating the power imbalance to some extent, still allows well-respected Board members to influence decisions beyond the weight of their actual votes. Regular interactions and familiarity among Board members contribute to the influence of respected members, regardless of their formal voting power.

Question 31

How do G-7 countries impact the policy agenda of the IMF, and what potential issues arise from this influence?

Answer 31

G-7 countries, with their numerical advantage and permanency in the IMF’s Executive Board, de facto control a significant portion of the policy agenda.
However, a notable issue arises from the fact that these countries, being independent of the IMF, make policies that may have limited relevance or consequences for their own citizens. While of immense interest to people in developing countries, these decision-makers lack accountability to those most affected by their decisions. This situation creates a potential for abuse, as decision-makers hold power without being answerable to those who must live with the outcomes of their policies.

Question 32

What is the relevance of good governance for the IMF, and how does it connect to the organization’s accountability challenges?

Answer 32

Good governance, as advocated by the IMF, emphasizes that all participants in the policymaking process should be held accountable for their actions and decisions. However, the IMF itself currently lacks a mechanism through which the residents of its member countries can hold it accountable for its role in the policymaking process.

Question 33

What is the nature of the IMF’s relationship with the United Nations, and why has this relationship become problematic?

Answer 33

The IMF’s independence poses challenges as the IMF’s scope expanded beyond its original monetary function, encroaching into the jurisdictions of other specialized international organizations and UN entities. The IMF operates in areas like law reform, corruption, inequality, gender, environment, and trade liberalization without formal obligations to defer to other organizations in these areas. Despite collaboration and formal arrangements with some bodies, the IMF’s independence from the UN has become problematic in navigating complex governance and policy challenges.

Question 34

How have the changes in IMF operations impacted its legal framework?

Answer 34

While the changes in IMF operations brought legal implications, there haven’t been significant formal legal changes in the Articles of the IMF or its operating principles. Despite distinguishing between different groups of countries, the IMF still upholds the principles of uniformity and universality. This approach allows the IMF to present itself as a technocratic organization, avoiding the establishment of rules for engaging with all relevant stakeholders and sidestepping the political considerations in its undertakings.

Question 35

What is the current stance of the IMF regarding its role in the policy-making process of member states?

Answer 35

The IMF maintains that it operates on technocratic principles, precluding the consideration of political factors, despite pushing member states to undertake reforms with social and political implications. This stance enables the IMF to avoid establishing rules for engaging with all stakeholders in a society and downplays the implications of its growing de facto role in the policy-making process of many member states.

Question 36

How has the IMF’s relationship with member states changed in substance and form?

Answer 36

The IMF has changed the substance of its relationship with states providing financing, treating them under standby arrangements despite the outdated benefits of this legal form from the par value era. The relationship has evolved without a corresponding change in the legal form, prompting a need for more suitable arrangements for the current financial landscape.

Question 37

What did the classification of Standby Agreements as sui generis entail?

Answer 37

The sui generis classification allowed the IMF to assert that the Standby Arrangement was not a conventional binding international agreement, permitting the confidentiality of its terms. This distinction was particularly relevant during the par value system era, where premature public disclosure of a pending devaluation could pose challenges for the member state.

Furthermore, treating the arrangement as sui generis meant that if the member state failed to implement the specified policy initiatives outlined in its Letter of Intent, it would not be considered a breach of a standard international agreement. This approach helped the member state avoid potential international legal liability.

Question 38

When were the IMF articles of agreement revised for the first time?

Answer 38

1969. It introduced Special Drawing Rights.