IMF Bailouts [UPSC Notes]

In March 2023, the International Monetary Fund (IMF) is planning a bailout plan for Sri Lanka and Pakistan, both of which are struggling with an economic crisis. In this article, you can understand what is an IMF bailout, what it generally entails for the receiving country and how it will affect the economy. This topic is essential for the IAS exam economy segment.

What are IMF Bailouts?

An IMF bailout is when the International Monetary Fund (IMF) provided assistance to a country that faces bankruptcy. 

• When nations face macroeconomic concerns, currency crises, or need help to pay off their external debt, they turn to the IMF for support.
• For nations experiencing severe economic crises, the International Monetary Fund (IMF) serves as a lender of last resort.

Conditions for an IMF Bailout

• Structural Factors: Some structural reforms, such as tax reform, state-owned company reform, and fiscal transparency reforms, may be prerequisites for requesting financial assistance from the IMF.
• Macroeconomic Factors: According to the IMF, additional prerequisites for lending include macroeconomic factors like monetary and credit aggregates, foreign reserves, fiscal balances, and external borrowing.

How is an IMF Bailout provided?

• The IMF provides loans in the form of Special Drawing Rights (SDRs) to economies in crisis.
  • SDR is a currency basket made up of the US dollar, the Euro, the Chinese Yuan, the Japanese Yen, and the British Pound.
• It can be carried out by the acquisition of bonds, cash, stocks, or loans.
• Using a variety of lending programmes from the extended credit facility, the flexible credit line, the stand-by agreement, etc., the IMF finances its lending to struggling economies.

Sources of Income for IMF 

• The three sources of IMF funding are member quotas, multilateral borrowing agreements, and bilateral borrowing agreements.
• The main source of funding for the IMF is quotas, which are distributed to each member according to their relative standing in the global economy.

Significance of IMF Bailout

• An IMF bailout ensures the survival of a country amid economic turmoil.
• The impacted nation may also receive technical assistance from the IMF on how to execute reforms to enhance its institutions and economy.
• It also makes sure that crucial sectors of the economy and financial systems continue to function.

Also read: Sri Lankan Economic Crisis

Issues with IMF Bailout

• Conditional loans by the IMF have generated debate since many people feel that these measures are too onerous for the general populace.
• Others claim that the IMF’s financing decisions, which are made by representatives chosen by various states, are affected by world politics.
• Pressure on government finances, businesses, and populations is caused by IMF funding delays.
• Corruption is another problem. Due to the weak institutions and high levels of corruption in these economies, IMF lending to unstable economies may turn out to be a fruitless endeavour.
• The IMF’s requirements could lead to lower government spending and increased taxes, which could cause dissatisfaction among the populace.
• It can damage the nation’s reputation in the eyes of investors and foster a feeling of dependence on outside assistance.

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