What is the IMF? What it said about UK economy as pound struggles, who is involved, what does it stand for

The IMF has become the latest organisation to criticise the swathe of tax cuts announced by Liz Truss’s Chancellor Kwasi Kwarteng

The IMF has become the latest organisation to criticise the swathe of tax cuts announced by Liz Truss’s Chancellor of the Exchequer Kwasi Kwarteng in his mini budget.

The new government has faced a torrid week since the fiscal event, which saw it slash headline taxes like national insurance and corporation tax, as well as raise the stamp duty threshold.

While these announcements were intended to ease the cost of living crisis and fears of a UK recession through the controversial idea of trickle down economics, critics of the major announcement have said it will only make the rich richer while crashing the UK economy.

It has led to a major slump in the pound, which tumbled to a record low of $1.03 on Monday (26 September), and has forced the Bank of England to raise the prospect of large further hikes in interest rates.

The Chancellor has also had to announce that the government will soon be setting out “credible plans” that will underline its “fiscal discipline” as he sought to soothe market anxiety.

But what has the IMF subsequently said about the UK economy - and what does the organisation do? Here’s everything you need to know.

What is the IMF?

The International Monetary Fund (IMF) is an international organisation that is governed and made accountable to 190 member countries. It is led by Kristalina Georgieva, an economist who previously led the World Bank.

member countries pay a fee to be a part of the IMF, with richer countries paying in more. States must also abide by rules governing how transparent they are about their economies.

The International Monetary Fund plays a key role in global economics (image: AFP/Getty Images)

The IMF’s main goal is to ensure “sustainable growth and prosperity” in these nations. Part of what it does is to discourage states from pursuing policies that would be harmful to prosperity.

The IMF monitors all of the world’s economies, providing advice for how they can perform to the best of their abilities, and also tracks potential global economic issues, like trade disputes.

The IMF is headed by Bulgarian economist Kristalina Georgieva (image: AFP/Getty Images)

Another role it plays is as a lender of last resort for countries whose economies get into a nosedive they cannot pull out of. When this scenario happens, the IMF can loan up to $1 trillion to allow these countries to restructure their economies and their sovereign debt.

Low-income countries pay no interest on these loans. The largest amount the IMF has paid out to a member has been the $57 billion (£53.4 billion) it lent to Argentina in 2018.

While the organisation has had success in the past by getting Mexico and Brazil through their respective economic crises, it has been criticised for being too heavy-handed in other situations.

For example, when Greece’s economy collapsed in 2009, the austerity measures it demanded the country introduce were deemed to have damaged the Greek economy and its society.

Usually, most of the organisation’s work focuses on developing countries. It means its intervention on the UK economy - one of the G7 group of the world’s richest nations - is unprecedented.

The IMF’s involvement in Argentina’s economic crisis has not been popular with some Argentines (image: AFP/Getty Images)

What was IMF statement about UK economy?

In an intervention on Tuesday (27 September), the IMF called on the UK government to change course away from its tax cutting agenda, particularly its removal of the top rate of income tax.

The organisation said it was “closely monitoring” developments and urged Chancellor Kwasi Kwarteng to “reevaluate the tax measures”.

The International Monetary Fund has been highly critical of the UK - an unprecedented intervention on a G& economy (image: AFP/Getty Images)

“We understand that the sizeable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures,” the IMF statement said.

“However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy. Furthermore, the nature of the UK measures will likely increase inequality.

“The November 23 budget will present an early opportunity for the UK Government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners.”

Kwasi Kwarteng has been urged to ignore the IMF’s warnings by several leading Tories (image: PA)

How has the government responded to IMF concerns?

Chancellor of the Exchequer Kwasi Kwarteng is set to meet with key City of London figures today as he continues to attempt to reassure investors that the government’s economic strategy is viable.

In a direct response to the IMF statement, a Treasury spokesperson said the government was “focused on growing the economy to raise living standards for everyone” and that the Chancellor’s upcoming fiscal statement on 23 November “will set out further details on the government’s fiscal rules” over the medium term.

Several leading Conservatives have lashed out at the IMF. Former Brexit Secretary and staunch Liz Truss supporter Lord Frost told the Daily Telegraph the IMF only “advocated highly conventional economic policies” that were responsible for “slow growth and weak productivity”.

However, Labour Party leader Sir Keir Starmer - who now holds a major lead over Liz Truss in UK polls - said that the government should “urgently review” the plans it laid out in the mini budget instead of “disparaging the IMF”.