IMF Bailout

Context

The International Monetary Fund (IMF) has approved a $7bn loan to cash-strapped Pakistan.
The new programme “will require sound policies and reforms” to stabilise and help make the economy more resilient.
The country has relied on IMF loans to meet its needs for decades and continued to struggle after years of financial mismanagement.

Mandate of IMF

The IMF was set up in 1945 out of the Bretton Woods conference. The primary goal of the IMF back then was to bring about international economic coordination to prevent competing currency devaluation by countries trying to promote their own exports.
Eventually, the IMF evolved to be a lender of last resort to governments of countries that had to deal with severe currency crises.

Why do nations seek an IMF bailout?

Countries seek help from the IMF usually when their economies face a major macroeconomic risk, mostly in the form of a currency crisis.
In such a scenario, many countries are forced to seek help from the IMF to meet their external debt and other obligations, to purchase essential imports, and also to prop up the exchange value of their currencies.

How does the IMF help countries?

- The IMF basically lends money, often in the form of special drawing rights (SDRs), to troubled economies that seek the lender’s assistance.

SDRs is a reserve created by the IMF. The member countries have to contribute to this account in proportion to their IMF quota.

SDRs simply represent a basket of five currencies, namely the U.S. dollar, the euro, the Chinese yuan, the Japanese yen, and the British pound.

Also called “paper gold”, an SDR is neither paper nor gold but an accounting entry. It is a potential claim on the freely usable currencies of IMF members.

Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.

The IMF carries out its lending to troubled economies through a number of lending programs such as the extended credit facility, the flexible credit line, the stand-by agreement, etc.

Are there any strings attached to an IMF bailout?

It should be noted that the IMF does not lend for specific projects. Instead, the IMF provides financial support to countries hit by crises to create breathing room as they implement policies that restore economic stability and growth. It also provides precautionary financing to help prevent crises.
The IMF usually imposes conditions on countries before it lends any money to them. For example, a country may have to agree to implement certain structural reforms as a condition to receive IMF loans.
The IMF’s conditional lending has been controversial as many believe that these reforms are too tough on the public. Some have also accused the IMF’s lending decisions, which are taken by officials appointed by the governments of various countries, to be influenced by international politics.
Supporters of the IMF’s lending policies, however, have argued that conditions are essential for the success of IMF lending.

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