Context:
The International Monetary Fund (IMF) last week confirmed a $3 billion bailout plan for Sri Lanka’s struggling economy.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- Reasons for Nations Seeking an IMF Bailout
- How does the IMF help countries?
- About International Monetary Fund (IMF)
Reasons for Nations Seeking an IMF Bailout
Currency Crisis and its causes
- IMF bailout sought when economies face major macroeconomic risk, such as currency crisis
- Currency crisis seen in countries like Sri Lanka and Pakistan
- Crisis often due to mismanagement of nation’s currency by central bank, under covert influence of ruling government
- Central banks may be forced to create fresh money for populist spending, causing rapid rise in money supply and drop in exchange value of currency
- Rapid, unpredictable fall in currency value can destroy confidence and affect economic activity
- Foreign investors may be hesitant to invest in economy with unstable currency
- IMF sought to meet external debt and obligations, purchase essential imports, and prop up exchange value of currency
Domestic Economic Policies and Bad Luck
- Domestic economic policies can also impact currency exchange rate and foreign exchange reserves
- Economic policy that imperils productivity can affect ability to attract necessary foreign exchange
- Bad luck can also contribute to crisis, as seen in decrease in foreign tourists leading to fall in flow of U.S. dollars in Sri Lanka.
How does the IMF help countries?
- The IMF provides financial assistance to countries in need by lending money, often in the form of special drawing rights (SDRs).
- SDRs represent a basket of five currencies and can be used for various purposes depending on a country’s individual circumstances.
- The IMF offers lending programs such as the extended credit facility, the flexible credit line, and the stand-by agreement to troubled economies seeking assistance.
- Countries receiving the bailout can use the funds to meet their external debt and other obligations, purchase essential imports, and prop up the exchange value of their currencies.
- The IMF has evolved from its primary goal of international economic coordination to being a lender of last resort to governments dealing with severe currency crises.
About International Monetary Fund (IMF)
- The International Monetary Fund (IMF) is an international organization headquartered in Washington, D.C.
- It consists of 189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. It periodically depends on the World Bank for its resources.
- Through the fund and other activities such as the gathering of statistics and analysis, surveillance of its members’ economies, and the demand for particular policies, the IMF works to improve the economies of its member countries.
Functions of the IMF
- To provide financial assistance to member countries with balance of payments problems, the IMF lends money to replenish international reserves, stabilize currencies and strengthen conditions for economic growth.
- Countries must embark on structural adjustment policies monitored by the IMF.
- It oversees the international monetary system and monitors the economic and financial policies of its 189 member countries.
- As part of this process, which takes place both at the global level and in individual countries, the IMF highlights possible risks to stability and advises on needed policy adjustments.
- It provides technical assistance and training to central banks, finance ministries, tax authorities, and other economic institutions.
- This helps countries raise public revenues, modernize banking systems, develop strong legal frameworks, improve governance, and enhance the reporting of macroeconomic and financial data.
- It also helps countries to make progress towards the Sustainable Development Goals (SDGs).
-Source: The Hindu
