International Monetary Fund (IMF) bailout

Why in news?

Recently Sri Lanka secured a $3 billion bailout from the International Monetary Fund (IMF) amid the worst economic crisis.

What is IMF?

• Establishment - The IMF was established in 1944 in the aftermath of the Great Depression of the 1930s.
• Aim - To bring about international economic coordination to prevent competing currency devaluation by countries trying to promote their own exports.
• Membership -IMF has 190 countries as its members.
• Headquarters –Washington, D.C., United States.
• Role - IMF is the last resort lender for countries facing severe economic crises.
• The IMF fosters international financial stability by providing
  • Policy advice
  • Financial assistance
  • Capacity development
• IMF provides financial support to countries hit by crises in order to restore economic stability and growth.
• IMF does not lend for specific projects.
• Resources of IMF - IMF funds come from three sources
  • Member quotas
  • Multilateral borrowing agreements
  • Bilateral borrowing agreements

What is the IMF bailout?

• Bailout - Means extending support to an entity facing a threat of bankruptcy.
• Lending - The IMF lends money countries the form of Special Drawing Rights (SDRs)
  • Special Drawing Rights (SDRs) is a basket of five currencies, US dollar, Euro, Chinese Yuan, Japanese Yen and British Pound
• The bailout can be executed in the form of loans, cash, bonds, or stock purchases.
• Reasons for bailout - Countries seek IMF bailouts for the following reasons
  • To resolve macroeconomic risks
  • To solve currency crises
  • To meet external debt obligations
  • To buy essential imports
  • To push the exchange value of their currencies

• Conditions - The countries are expected to meet  following conditions for the IMF bailout
  • Structural reforms such as fiscal transparency, tax reforms.
  • Reforms in state-owned enterprises.
  • Reforms in macroeconomic variables like monetary and credit aggregates.
  • Reforms in international reserves.
  • Reforms in fiscal balances and external borrowing.

What about the crisis in Sri Lanka and Pakistan?

• Sri Lankan economy crisis - Sri Lanka witnessed a sharp rise in domestic prices and the exchange value of their currencies plunged.
• Currency crisis are usually the result of mismanagement of the currency by its central bank.
• It is partly contributed to decline of foreign tourists during the Covid-19 pandemic.
• Pakistan economy crisis – It is a part of 2022-2023 political unrest in Pakistan.
• The crisis caused severe economic challenges for months due to which food, gas and oil prices have risen.

• General factors that lead to economic crisis

• Inappropriate fiscal and monetary policies
• Large current account and fiscal deficits
• High public debt levels
• Exchange rate fixed at an inappropriate level
• Weak financial system
• Political instability and weak institutions

What are the pros and cons of IMF bailout?

Quick facts

India and the IMF

• India is a founder member of the IMF.
• India has not taken any financial assistance from the IMF since 1993.
• Repayments of all the loans taken from International Monetary Fund have been completed on May 2000.
• Finance Minister is the ex-officio Governor on the Board of Governors of the IMF.
• RBI Governor is the Alternate Governor at the IMF.
• India’s current quota in the IMF is SDR (Special Drawing Rights) 5,821.5 million making it the 13th largest quota holding country at IMF and giving it shareholdings of 2.44%.
• India has invested SDR 750 million through nine note purchase agreements with the IMF.

Note purchase agreements is usually a temporary bilateral arrangement for an initial period of one year which may be extended by a period of up to two years and the principal of the notes is to be denominated in SDR

References

1. The Indian Express │IMF Bailout
2. Department Of Economic Affairs │IMF and India