Context

• The International Monetary Fund (IMF) has warned that Maldives needs “urgent and stronger” fiscal consolidation to salvage its troubled economy despite a thriving tourism industry.
• The IMF said overall fiscal deficits and public debt are projected to stay elevated and called for urgent policy adjustment.

About IMF

• The IMF was set up in 1945 out of the Bretton Woods conference (along with World Bank). 
• 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, in the form of a currency crisis, balance of payment issues, etc.

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 rapid credit facility, rapid financing instrument, 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.