The International Monetary Fund looks like the big winner in the G20 summit, with huge increases planned in its resources and new roles.

ut what does it do, and how will its role change in the future?

The IMF was set up to help countries which get into short-term financial crises because they do not have enough currency to pay their bills.

It offers short-term loans to help those countries over the difficulties.

But in return, it imposes strict conditions on those countries, such as cutting their budget deficits.

At first, when the IMF was set up in 1944, it was mainly European countries that turned to it for help. But in recent years, it has been developing countries that have been forced to ask for help when times are hard.

Now, with the financial crisis intensifying, more and more countries are coming to the IMF for help and its supply of funds to loan may run out.

So the G20 has agreed that the IMF should triple its borrowing, to ensure that it has enough money to offer loans.

The money would have to be pledged by other IMF countries. Japan, for example, has already offered to loan the IMF $100bn and the EU says it will put in $100bn.

Radical step

The IMF wants to use this money to offer a new kind of loan that would be preventative. Rather than waiting for countries to get into financial difficulties, it would offer them a line of credit to help them defend their currencies in advance.

In the past, countries were reluctant to ask for such money, as the financial markets got worried that they were in trouble. But Mexico has become the first country to ask for such a facility and there now seems to be less stigma about this approach.

Much of the new IMF funds would be used in this facility, which would mainly be directed to the middle income countries who had relatively sound economies.

But in an even more radical step, the G20 leaders appear to have agreed to increase another type of IMF funds, the quotas owned by individual countries, by an additional $250bn.

This would be done by creating more of its own currency, the SDR or special drawing right, which is a basket of currencies including the US dollar, the yen and the euro.

This would give countries essentially free money, which they could use as they wish without having to negotiate deals with the IMF, and would do much to boost confidence among poorer countries. Many of them have been critical of the harsh conditions imposed by the IMF before they are given help.

In the past, such moves have always been resisted by Germany, on the grounds that creating money is inflationary. But in the current deflationary climate, they appear to have lifted their objections.

Reform looms

The IMF is also set to have a bigger role in preventing future crises, by developing an early warning system for financial problems, and taking a larger role in looking at the problems of the financial sector as a whole, in conjunction with a new global regulator, the Financial Services Board.

But the biggest changes in the IMF will come after 2011, when it has been agreed that there will be a review of the voting structure. That could lead to the US losing its veto power, while China and other emerging countries get a bigger voice.

It has already been agreed that in future, the convention that the World Bank and IMF must be headed by an American and a European respectively will be abandoned.

In return, China will be asked to lend some of its reserves to the IMF - and will continue to push for the idea that the SDR will become a real reserve currency, ultimately replacing the dollar.

The changes to the resources and the role of the IMF are historic and perhaps the most important outcome of the G20 summit.

But it must be borne in mind that providing more resources for the IMF can be only a short-term solution to the immediate crisis now engulfing developing countries.

It is no substitute for a fiscal stimulus, as the money is loaned and must be paid back. Nor will it counter the need for additional development aid to counteract poverty.

But it is a move towards a more global system of international finance.