Does the IMF want every country to have a flat trade balance?

In economics when a country imports more than it exports, it has a "trade deficit." As a result, trade deficits can cause foreign exchange reserve shortages. Without foreign exchange reserves, businesses and governments can't meet financial obligations they owe other countries. A balance of payment problem hurts both the country with the trade deficit and the other countries it trades with.

The dollar, as reserve currency, can develop increase in demand if the Federal Reserve doesn’t increase the supply driving the price of dollars in the exchanges to go up. In this case U.S. goods are now more expensive compared to foreign goods, which reduces demand for U.S. exports.

According to the International Monetary Fund (IMF) the currency most commonly held as a foreign exchange reserve is the U.S. dollar. It comprises nearly 62% of allocated reserves as of late 2012. Other currencies held in reserve are the euro, Japanese yen, Swiss franc and pound sterling. The dollar still is the most widely held reserve currency, but the euro is narrowing the gap as it has grown demand from less than an 18% share of allocated reserves, at the time it was introduced in 1999, to 24% at the end of 2011.

Reserve currency status isn't without its drawbacks. The Federal Reserve must constantly play a balancing act between current domestic economic politics and the realities of international financial markets. Budget deficits and large debt to GDP ratios have to be carefully managed. The United States reported a government debt equivalent to 106.10 percent of Gross Domestic Product in 2016. Historically, US Government Debt to GDP ratio in the United States has averaged 61.14 percent from 1940 until 2016, reaching an all-time high of 118.90 percent in 1946—at the end of WWII-- and a record low of 31.70 percent in 1981.

Monetary policy used by the Feds includes “quantitative easing” which really means printing more money to keep the supply high and interest rates low. The method is however a temporary solution until growth and capital gains return to the overall economy otherwise inflation can set in as the value of the dollar shrinks. Economic politics can nevertheless upset sound monetary policy such as the case of recent tax cut mounting to a trillion dollars Trump just sign into law. But a high debt to GDP ratio indicates that the US economy is printing an excessive amount of dollars into the world economy. This action has the effect of reducing the value of a county’s foreign reserves denominated in dollars as it will reduced the balance of trade sheet in its purchasing power by increasing debt obligations. The combination of low borrowing costs stemming from issuing a reserve currency may encourage free spending by both the public and private sectors which can easily result in asset bubbles bloating government debt. Tax cuts in the U.S., for example, led Chinese leaders to fear a weak dollar since that would erode the country's value of dollar-denominated debt which might prompt a Chinese dumping of dollars in favor of other reserve currency. In the recent past the U.S. was able to spend freely because the excess Chinese savings had to be invested somewhere, and that somewhere was in dollar back US government bonds.

One important thing the IMF does is to help member countries cope with foreign exchange shortages caused by balance of payments problems. Many a case, providing rescue packages so that a country can avoid a default on its balance of payments. This policy however is linked to the political climate in the debtor country in order to avoid putting funds in a waste basket.

The International Monetary Fund, founded in 1944, is a voluntary financial institution with an initial membership of 184 countries. Its charter is to stand-in among these countries with cooperative monetary policies to stabilize the exchange of one national currency for another thereby, encouraging international trade. The IMF offers a tool in which each member state can collaborate with one another to promote its domestic economic prosperity and that of the membership. The IMF maintains a wide-ranging database of statistics of economies of the world as a whole, which publicly shares. It also acts as a consulting partner at the request of a member state and extends technical assistance in financial, fiscal, and economic matters. It can assist a country on implementing reform financial policies and funds are made available until the reforms take effect. It follows that this assistance is to shorten the duration and lessen the degree of disequilibrium in the international balance of payments of its members.

Moreover, encourage cooperation by IMF members in eliminating restrictions on the exchange of currencies and the timely payment for goods and services. This has been a major factor in bringing about the economic miracle of the second half of the century. Success by IMF members in meeting the challenges of integrating developing countries into the world economy in the 1960′s and 1970′s. Additionally, resolving the debt crisis of the 1980′s, encouraging reform of the former Communist economies, responding to the crises of the 1990′s, and expanding the benefits of globalization. Taken as a whole, international cooperation has demonstrated that it is indispensable for prosperity in today’s economy.

The IMF encourages its members to be open and transparent about their economic policies, balance sheets and stock market trading. The view is that the better informed a member country is about economic conditions in other countries, the more efficiently they can achieve international trade and investments. As trade and economic activity increases, so does employment in both the exporting and importing country which should lead to higher standards of living and a reduction of global poverty.

The IMF also urges its member to have transparent politics, economic stability, honest government, and the rule of law. In a widely anticipated report ahead of the Davos meeting of the Group of 20 finance ministers, “the IMF outlined two taxes that the group should consider and warned that international harmonization would be critical to prevent regulatory arbitrage.” This is a practice where firms capitalize on loopholes of regulatory systems in order to circumvent unfavorable regulation. Opportunities for arbitrage may be accomplished by a variety of tactics, “including restructuring transactions, financial engineering and geographic relocation.”