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The International Monetary Fund (IMF) and its control over the monetary policy of states

The International Monetary Fund (IMF) is the first international financial institution to be formed. During World War II, the Washington Conference on International Finance was held in 1943 by 30 industrialized nations to shape the post-war international financial system. In 1944, in Atlantic City, USA, United Nations experts signed the Declaration on the Establishment of the International Monetary Fund. The agreement on the relevant economic union was signed at the initiative of the United States and Great Britain in 1944 at the United Nations Financial and Monetary Conference in Bretton Woods, USA, with the participation of 55 countries [1].

It should be noted that the Bretton Woods conference made important decisions on the establishment of a post-war international economic system, the formation of a new payment and settlement system, the development of free trade, financial assistance to countries facing economic difficulties, expanding economic cooperation. At the conference, both agreements on the International Monetary Fund, as well as on the International Bank for Reconstruction and Development, entered into force in 1945. Both organizations officially began their activities in 1947 [4].

The IMF Agreement consists of 30 articles and so far only 3 amendments have been made to this act. The first change was related to the introduction of the SDR (in 1968), the second to the independent choice of the exchange rate in connection with the transition to a free currency system and the regulation of SDR activities, and the third issue is related to the granting of exclusive rights to the Executive Directorate. Thus, if a member State fails to fulfill its obligations, the Executive Directorate may deprive that State of voting and other similar rights [2].

The main objectives of the organization are to prevent problems in the balance of payments of states, to expand international trade, to maintain stability, to control the exchange rate regime of the Fund’s member states in the field of currency relations; Deprivation of membership of states that systematically violate the Fund’s financial operations and agreements, obligations; issues related to capital transfers; regulation of relations arising from foreign exchange reserves and deficits, etc.

The organizational structure of the IMF includes the following bodies: the Board of Directors, which has the status of a supreme body with 2 representatives from all member states for a period of 5 years, the Executive Directorate or the Directorate as an executive body. The Directorate oversees the mechanism of exchange rate formation, as well as decides on the provision of financial assistance to member states. The fund has 5 departments on tax law, treasury, settlement services, currency disputes [5].

In order to use the resources of the IMF, tranche agreements and stand-by agreements are concluded. In the case of tranche agreements, the requesting state receives foreign currency in exchange for its own currency. From a legal point of view, in this case, the Fund does not lend to its members, but only sells currency, provided that it retains the right to buy for a certain period. Although this agreement was a form of financial assistance, it did not justify itself. That is why stand-by agreements are widely used in financial and credit relations between the Fund and member states. The stand-by agreement consists of a credit line and is formalized in two documents. If the first document stipulates the amount and term of the loan, the obligation of the receiving state, the second document sets out the currency policy of the receiving state. As a rule, the submission of a stand-by agreement depends on the state’s plan to strengthen the economy [3, p.230]

The IMF’s assistance mechanism to low-income countries is implemented through two funds: the System Change Fund and the Structural Change Expansion Fund, which provide loans to member states. The effective participation of member states in the work of the IMF, the amount of loans to be received from the Fund, voting opportunities, as a rule, depends on their quotas in the authorized capital. Quotas arise from the combination of monetary resources. Based on it, the amount that can be given to the state is determined. Total quotas are reviewed by the Fund at 5-year intervals. When there is an increase in the quotas of new members, up to 25% of the quotas are given in international reserve currencies (SDRs) and 75% in their own national currencies. If there is a deficit in the balance of payments of the state, it can borrow from the Fund in the amount of its quota in the Fund, using its special right of borrowing [3, p.284].

The number of IMF votes of the member states corresponds to the quota of the member states in the authorized capital. Each member state of the Foundation initially has 250 votes. For each vote in excess of this limit, states must pay SDR 100,000 from their quotas. The United States has 180,000 votes, the United Kingdom 6%, Germany and Japan 5.5% and the EU 26%. The IMF quota is 160.90 million SDR or 1,609 votes [5].

The IMF has overseas regulatory powers. According to Article IV of the founding agreement, the supranational nature of the Fund is expressed in the regulation of the currency and the determination of exchange rates with the member states. Under no circumstances may States regulate foreign exchange beyond the Fund’s control. At the same time, states are deprived of the right to receive any amount of currency and change the value of currencies without notifying the Fund. In addition, states cannot implement devaluation and revaluation measures without the control of the Fund. Pursuant to Article XII of the IMF Treaty, Member States are also required to keep the Fund informed of the state of their financial and monetary systems [6].

Following the amendment to Article IV of the founding agreement on the bankruptcy of the Bretton Woods financial system in the 1970s, the Fund’s supranational powers were somewhat weakened. The reduction of supranational authority was associated with the transition to a new “floating currency” system, and as a result, the powers of states in the relevant field were expanded. Nevertheless, control over the regulation of the SDR, one of the international currency instruments, is again under the full control of the IMF [6].

An analysis of the foundation’s founding agreement suggests that the body may issue binding instructions to member states on about 40 issues. The Fund monitors the monetary policies of member states in a multilateral and unilateral manner. According to Article VIII of the founding agreement, member states must not engage in currency manipulations that could harm the international monetary system, and states must not change exchange rates in order to gain an advantage in international payments under the agreement with the Fund. By 1975, the Group of 5, consisting of permanent members of the Foundation and the Executive Directorate of the IBRD, was established, and then, with the accession of the two countries, the Group of 7 was formed. This group is a quasi-international organization. Just as the group does not have a permanent organizational structure, its activities are regulated by political norms [7].

One of the groups in the field of international monetary relations is the Group of 10, which is a party to the General Agreement on Debts (1962) within the IMF. The members of the group lend to the Fund to finance other countries, and as a result, they can receive foreign currency from the Fund on concessional terms, regardless of their quotas.

The Group of 10 serves as the finance ministers and chairman of the central banks of the member states. Unlike industrialized countries, developing countries have formed the Group of 24. The members of the group pursue a common policy in the IMF and IBRD Board of Directors, the Executive Directorate and other bodies. The Republic of Azerbaijan and seven other countries belong to the Swiss Group. The main activity of the group is to coordinate the positions of countries with economies in transition within the Fund and the World Bank [5].


References and sources:

  1. Declaration on the Establishment of the International Monetary Fund and World Trade Organization / 1944 – https://www.wto.org/english/docs_e/legal_e/34-dimf_e.htm
  2. The role of the SDR in the regulation of the International Monetary System – https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR
  3. Eli Salzberger (Author, Editor) “Law and Economics of Innovation (Economic Approaches to Law series)” / Edward Elgar Pub, May 30, 2012, p.880
  4. Understanding The Bretton Woods System – https://www.thoughtco.com/the-bretton-woods-system-overview-1147446
  5. The IMF: structure and functions. The World Bank – https://www.imf.org/en/About/Factsheets/Sheets/2016/07/27/15/31/IMF-World-Bank
  6. Matthias Herdegen “Principles of International Economic Law 2nd Edition” / Oxford University Press; 2nd edition (November 8, 2016), p 552.
  7. An Introduction To The International Monetary Fund – https://www.investopedia.com/articles/03/030703.asp


Graduated from Baku State University,

Faculty of Law (SABAH group) Kamran Khalilov



Bakı Dövlət Universiteti Hüquq fakültəsi

(SABAH qrupu) məzunu Xəlilov Kamran





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