What is an IMF bailout, when is it provided to a country, and what are the lending conditions?

Source: The post is based on the article “What is an IMF bailout, when is it provided to a country, and what are the lending conditions?” published in Indian Express on 29th March 2023

What is the News?

The International Monetary Fund (IMF) executive board approved a nearly $3 billion bailout plan for Sri Lanka last week, of which about $333 million was to be disbursed immediately to alleviate the country’s humanitarian crisis.

What are IMF bailouts?

In a general sense, a bailout means extending support to an entity facing a threat of bankruptcy. Countries seek IMF bailouts when they are facing macroeconomic risks, currency crises and need assistance to meet external debt obligations, to buy essential imports and push the exchange value of their currencies.

How is an IMF bailout provided?

The IMF lends money to the economies in peril in the form of Special Drawing Rights (SDRs), which is a basket of five currencies — US dollar, Euro, Chinese Yuan, Japanese Yen and British Pound.It can be executed in the form of loans, cash, bonds, or stock purchases.

Where does the IMF get its money from?

IMF funds come from three sources: member quotas, multilateral and bilateral borrowing agreements. Quotas are the IMF’s main source of financing, wherein each member of the IMF is assigned a quota, based broadly on its relative position in the world economy.

What are the conditions applicable to an IMF bailout?

Among the conditions laid down for a country seeking financial assistance from the IMF could be certain structural reforms such as fiscal transparency, tax reforms and reforms in state-owned enterprises. 

What are the pros and cons of IMF Bailout?

Pros: An IMF bailout ensures the survival of a country amid economic turmoil, also ensuring that essential industries and economic systems remain up and running.The IMF can also provide technical expertise to the affected country on how to implement reforms to strengthen the economy and institutions

Cons: IMF’s conditions can result in reduced government spending and higher taxes, measures which have been historically unpopular with the people and often resulted in public unrest.It can also create a sense of dependency on external funding, while also harming the country’s reputation in the eyes of investors.