From UPSC perspective, the following things are important :
Prelims level : IMF bailout mechanism
Mains level : Read the attached story
Central idea: The International Monetary Fund (IMF) last week confirmed a $3 billion bailout plan for Sri Lanka’s struggling economy. However, Pakistan failed to get a penny. Countries seek help from the IMF usually when their economies face a major macroeconomic risk, mostly in the form of a currency crisis.
International Monetary Fund (IMF)
Governing of IMF
What is an IMF Bailout?
- An IMF bailout, also known as an IMF program, is a loan package provided by the International Monetary Fund (IMF) to financially troubled countries.
- These loan packages come with specific terms and conditions that the borrowing country must meet to access the funds.
- They typically have a set of conditions that a country must meet to qualify for the loan package.
- These conditions, also known as “conditionalities,” typically include measures that promote fiscal discipline, monetary stability, and structural reforms to improve the country’s economic competitiveness.
IMF programs are often seen as a last resort for countries facing financial crises, and they are only granted if a country cannot access capital markets on its own. IMF programs can be classified into three main types:
- Stand-by Arrangements: They are short-term lending programs designed to provide financial assistance to countries experiencing short-term balance of payments problems. These programs typically last for one to two years and require countries to implement specific macroeconomic policies to stabilize their economies.
- Extended Fund Facility: Such programs are medium-term lending programs designed to help countries with balance of payments difficulties resulting from structural weaknesses. These programs are typically longer-term and come with more extensive policy conditionality, which requires more significant structural reforms to the country’s economy.
- Rapid Financing Instrument: It is a loan program designed to provide quick financing to countries facing an urgent balance of payments need. The program is designed to be more flexible than other IMF programs, with fewer conditions and a shorter application process.
Why do countries seek IMF bailouts?
- Countries need IMF bailout when their economies face major macroeconomic risks, such as a currency crisis, due to gross mismanagement of the nation’s currency by the central bank under the covert influence of the ruling government.
- Such currency crises cause a rapid rise in the overall money supply, which causes prices to rise across the economy and the exchange value of the currency to drop.
- Bad luck such as a decrease in foreign tourists can also contribute to a crisis in a country like Sri Lanka.
Benefits provided by IMF bailout:
IMF programs provide several benefits to countries in financial distress. For instance:
- Access to funding: An IMF bailout provides immediate funding to a country experiencing a financial crisis, allowing it to meet its immediate financial obligations.
- Credibility push: A bailout can provide credibility to a country’s economic policies, signalling to international investors that the country is taking the necessary steps to restore its economy.
- Assistance with structural reforms: IMF programs require countries to implement structural reforms that can help address the underlying problems that led to the financial crisis, improving the country’s long-term economic prospects.
Limitations of an IMF bailout
- Harsh austerity measures: IMF programs often require countries to implement strict economic policies, which can be unpopular and difficult to implement.
- Limited resources: The IMF has limited resources, which can limit the amount of assistance it can provide to countries in need.
- Stigmatization: Bailout can stigmatize a country in the eyes of international investors, signaling that the country is unable to manage its own economy without outside assistance.
Try this PYQ from CSP 2022
“Rapid Financing Instrument” and “Rapid Credit Facility” are related to the provisions of lending by which one of the following?
(a) Asian Development Bank
(b) International Monetary Fund
(c) United National Environment Programme Finance Initiative
(d) Word Bank
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