IMF BAILOUT

• Exports are cheaper to foreign customers
• Imports are more expensive.
• In the short term, a devaluation tends to cause inflation, higher growth, and increased demand for exports.

4. Effects of Devaluation

• Regulatory functions: IMF functions as a regulatory body and as per the rules of the Articles of Agreement, it also focuses on administering a code of conduct for exchange rate policies and restrictions on payments for current account transactions.
• Financial functions: IMF provides financial support and resources to the member countries to meet short-term and medium-term Balance of Payments (BOP) disequilibrium.
• Consultative fun­ctions: IMF is a center for international cooperation for the member countries. It also acts as a source of counsel and technical assistance.

7. Special Drawing Rights (SDR)

• Special Drawing Rights (SDRs) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).
• SDR is not a currency, instead represents a claim to currency held by IMF member countries for which they may be exchanged.
• The value of an SDR is defined by a weighted currency basket of four major currencies- the US dollar, the Euro, the British Pound, the Chinese Yuan, and the Japanese Yen.
• Central Bank of member countries held SDR with IMF which can be used by them to access funds from IMF in case of financial crises in their domestic market.

8. 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.
• For instance, in the case of Sri Lanka and Pakistan, both countries have witnessed domestic prices rise rapidly and the exchange value of their currencies drop steeply against the U.S. dollar.
• Such currency crises are generally the result of gross mismanagement of the nation's currency by its central bank, often under the covert influence of the ruling government.
• A rapid unpredictable fall in the value of a currency can destroy confidence is said currency and affect economic activity as people may turn hesitant to accept the currency in exchange for goods and services.
• Foreigners may also be unwilling to invest in an economy where the value of its currency gyrates in an unpredictable manner.
• In such a scenario, many countries are forced to seek help from the IMF to meet their external debt and other obligations, purchase essential imports, and also to prop up the exchange value of their currencies.

9. 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 simply represent a basket of currencies namely the U.S. dollar, the euro, the Chinese Yuan, the Japanese Yen, and the British Pound.
• 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 standby agreement, etc.
• Countries receiving the bailout can use the SDRs for various purposes depending on their individual circumstances.
• Currently, both Sri Lanka and Pakistan are in urgent need of U.S. dollars to import essential items and also to pay their foreign debt.
• So any money that they receive from the IMF is likely to go towards addressing these urgent issues.

10. IMF Lending Instruments

• The IMF's various lending instruments are tailored to different types of balance of payments need as well as the specific circumstances of its diverse.
• All IMF members are eligible to access to Fund's resources in the General Resources Account (GRA) on non-concessional terms.
• The IMF also provides concessional financial support (currently at zero interest rates through June 2021) through the Poverty Reduction and Growth Trust which is better tailored to the diversity and needs of low-income countries.
• Historically, for emerging and advanced market economies in crises, the bulk of IMF assistance has been provided through stand-by agreements (SBAs) to address the short-term or potential balance of payments problems.
• The Standby Credit Facility (SCF) serves a similar purpose for low-income countries.
• The External Fund Facility (EFF) and the corresponding Extended Credit Facility (ECF) for low-income countries are the Fund's main tools for medium-term support to countries facing protracted balance of payments problems.
• To help prevent or mitigates crises and boost market confidence during periods of heightened risks, members with already strong policies can use the Flexible Credit Line (FCL)  or the Precautionary and Liquidity Line (PLL).
• The Rapid Financing Instrument (RFI) and the corresponding Rapid Credit Facility (RCF) for low-income countries provide rapid assistance to countries with urgent balance of payments needs, including commodity price shocks, natural disasters, and domestic fragilities.

11. Why does the IMF impose certain conditions before lending money to countries?

• 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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