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what is imf and why does imf give loans to countries who are facing economic crises like pakistan

by moeedrajpoot

what is imf?

and why does IMF give loans to countries that are facing economic crises like Pakistan

Imf is an international organization  consisting of 190 members countries ALL these together try to stabilize the global economy

Any country can apply for membership by fulfilling the requirements. These requirements include information on the economy and an amount due called a quota subscription.

The richer the country, the more money it has to pay for subscriptions.

To monitor and support an economy, the IMF does three things:

Tracking of economic and financial matters. It looks at how a country is performing and what risks it faces, such as trade disputes following Brexit uncertainty in the UK and the economic impact of militant violence in Pakistan.
Suggestions are given to member countries on how they can improve their economies.
Short-term loans and financial assistance to countries in distress.
These loans are made possible by the quota subscription of member countries.

In 2018, Argentina received the largest loan in IMF history of $57 billion.

The IMF has a total of $1 trillion to lend to member countries

What are the objectives of the IMF?

The IMF is often considered the ‘last resort’ for obtaining loans. The last hope of any country affected by an economic crisis is the IMF.

Harvard University economist Benjamin Friedman says that determining the impact of the IMF is difficult because it is impossible to know “whether its intervention made things better or worse in a country and what the alternative might have been.”

In 2002, Brazil received an IMF loan before defaulting on its debts. His government soon managed to revive the economy and he paid off all his debt two years ago.

What is the criticism of the IMF?

The IMF sometimes imposes strictures on member countries when lending, which has been criticized as being overly onerous.

These include reducing government debt, reducing corporate taxes and opening up the country’s economy to foreign investment.

When Europe’s economic crisis hit in 2009, Greece was hit the hardest.

In order to receive aid from the IMF, Greece had to make significant changes to its economy.

Critics say Greece’s strict austerity policy at the insistence of the IMF has harmed both the country’s economy and society.

Why was the IMF created?

The IMF came into existence in 1944 as a result of the Bretton Wood Conference held in the United States.

During the Second World War, 44 countries from around the world participated in this conference, including Great Britain, the United States, and the Soviet Union.

At this conference, world economic issues were discussed as well as creating a stable exchange rate system and reviving the economy of war-affected European countries.

To fulfill these objectives, the World Bank and the IMF came into existence.

The members of the IMF agreed on a fixed exchange rate regime which was to be maintained until 1970.

How does the IMF lend to a country?

  • First, a member country requests financial assistance from the IMF
  • The country’s government and IMF staff discuss the economic and financial situation and the amount of the loan
  • The country’s government and the IMF agree on economic policies, after which the IMF agrees to lend to the country.

IMF conditionality refers to the policy measures that a country has to take in order to receive a loan
The policy program is presented to the IMF’s board, but the system can be accelerated under emergency financing
The Executive Board approves the loan, after which the IMF monitors policy actions
When the country’s economic and financial situation improves, the loan amount is returned to the IMF to make it available to other member countries.

Unlike development banks, the IMF does not lend for a specific project. Its purpose is to provide financial support to countries in economic crises. In such a way, the implementation of policies for economic stability and production is ensured

An economic crisis in a country can be caused by a balance of payment crisis (i.e. an imbalance in payments) in which a country does not have enough money to pay off its foreign debt or to buy imports.

Or else a financial crisis may arise due to a large deficit in income and expenditure. According to the IMF, these crises can reduce production, increase unemployment, decrease incomes, and create an atmosphere of uncertainty. In the event of a severe crisis, the risk of default (bankruptcy) increases and debt restructuring becomes inevitable

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