International Monetary Fund

The International Monetary Fund (IMF), founded at the Bretton Woods Conference in 1944, is the official organization for securing international monetary cooperation. It has done useful work in various fields, such as research and the publication of statistics and the tendering of monetary advice to less-developed countries. It has also conducted valuable consultations with the more developed countries.

Of particular interest to this discussion is the Fund’s system of Drawing Rights, which permits countries in temporary deficit to draw supplies of foreign currency according to predetermined quotas. These extra supplies of currency give a country more time in which to adjust its balance of payments.

IMF does so by observing the world exchange rates and the balance of payments and multilateral payments. The key objective of the IMF is to promote the growth of trade as a whole. The IMF uses three paths to achieve this target: it acts as a forum for world negotiation; it provides the world financial system with liquidity by correcting anomalies in the balance of payment; it regulates the world exchange rates to a certain degree by providing for a relevant code of conduct.

In the past a number of criticisms have been directed towards the role of the IMF. A major criticism against the IMF has been the fact that it should not only seek exchange rate stability around the world, but it should also identify what should be regulated and what is necessary to be regulated.

Secondly, the role of the IMF has been compromised by lawyers and economists alike. Lawyers have been the victims of legal technicality and economists have been the main designers when it came to the structure of the Fund.

Another major concern has been the fact that the IMF has not always been effective in the implementation of its policies, in addition to the fact that the IMF has not managed to persuade States to achieve consensus in a number of certain legal matters of international economic significance.

Despite the efforts of the IMF it must be stressed that it is not the IMF’s fault if the different economies around the world refuse to fully comply with the IMF’s policies. This is the case, as states are predominantly influenced by self-interest. Additionally, regional economic regulation in exchange rate matters does not always follow international economic regulation in the same matters and vice-versa. Most importantly, the purposive school of thought (mutatis mutandis interpretivism) has won over the literal school of thought (mutatis mutandis legalism) in the case of interpreting the Articles of Agreement, the leading statute of the IMF.

International monetary law tends to be abstract or rather minimal. For this reason international monetary law does not so much deal with “black letter law” (the practice of arranging legal texts and citing legal authorities in black letter form).

Little is provided in international law when it comes to monetary matters (exception to this is the case of the Eurozone, even though this has a regional character as opposed to a more global character). There are historical reasons for the absence of norms in international monetary law. The main reason is that the regulation of monetary matters is a sovereign area of national politics and economics.

The Articles of Agreement is the leading international monetary law instrument which is, however, interpreted liberally (school of interpretivism).

Exchange rate can be defined as the value of a given currency vis-à -vis another currency. Exchange rates are influenced by national politics. Such influence, however, may have an impact on other States’ currency value (domino effect). If, for example, the American dollar is devalued, orthodox economic theory dictates that foreigners would be more willing to buy American products by mere reason of the fact that they would have to pay less in their own currency to obtain American products. The opposite is also true. For this reason the national exchange rates are of concern to international economics.

Under the IMF’s Articles of Agreement a discretionary system of exchange rates is the case. This means that system members have the choice of the system according to which the values of their exchange rates are determined. Yet, it has to be stressed that the current system is one of soft law (law which creates “obligations” being non-binding and generally unenforceable in nature).

This is a rather vague approach, as Article I (iii) of the IMF Articles of Agreement provides:

“To promote exchange rates stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation”.

Furthermore, Article IV of the IMF Articles is the key provision in relation to world exchange rates. The current system is a system of discretionary exchange arrangements. As the system stands, the linking of exchange rates to gold is now prohibited and an IMF member, whilst not obliged to have the IMF’s approval for its national exchange rate policy, must still inform the IMF of its exchange rate policy decisions.

With regard to the multilateral system of payments, this is a system of payments across national borders. Essentially, this system requires the existence of currencies which are convertible. In practical terms, convertibility of currencies is tantamount to the economic freedom of citizens of a State to buy and sell currency in the world markets. Normally, an IMF member's currency can be perceived as convertible if it complies with the particularities of Article VIII of the IMF Articles of Agreement.

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