IMF Loans, also known as International Monetary Fund Loan, has answered the prayers of many nations, and it continues to do so. What exactly makes the loan important? Read on to find out more.
About the IMF
The International Monetary Fund, established in 1944 after World War II, is an intergovernmental organization that performs the role of fostering the stability of the international monetary system. It also facilitates international trade, promoting sustainable growth, and reducing global poverty.
The IMF comprises 189 countries.
Over the years, the IMF has experienced rapid growth, and now, it offers loans to member nations to help them fight crises and payment problems.
But just like everything else in this world we occupy, the International Monetary Fund Loan (IMF Loan) has its critics, supporters, and even economists have a thing to say about it.
What experts are saying about the IMF?
Supporters of the IMF say they love the concept behind IMF because it offers help when a crisis arises in member nations and help to heal or reform backward economies. However, critics have said the IMF Loan is complete rubbish as it replaces national autonomy and aggravates economic problems. Economists say the loan creates a moral hazard on national scales, which we would get to in the disadvantages down below.
What loans do they give?
The IMF, unlike other development banks, does not lend money for specific projects. Its loans are to help countries tackle their shortage of foreign exchange problems and stabilize their economies.
IMF gives two types of loans to its member countries – non-concessional loans and concessional loans.
The concessional loans attract very low and, in some cases, zero interest rates; they are for low-income countries. The non-concessional loans attract market-based interest rates.
There are several mechanisms used for IMF Loans. However, the two commonly used are the Extended Fund Facility and Standby Arrangements. For the Standby Arrangements, they only allow member countries to borrow money over one or two years, and repayments made between three to five years. For the former, the Extended Fund Facility, countries can borrow for three to four years and make repayments in about five to ten years.
What are the conditions for getting a loan?
Before the IMF can grant its loan, the interested government has to agree to adjust its economic policies to solve the problem that caused it to seek financial help.
They also serve as safeguards to ensure the country pay back the IMF loans. Conditions vary, mostly dependent on the economic policies of the lending country. Some common terms include:
1. Elimination of price controls
2. Budget consistency with the fiscal framework
3. A minimum level of federal government primary balance
4. A ceiling on government borrowing
5. A minimum level of international reserves
6. Minimum domestic revenue collection
7. A minimum level of social assistance spending such as subsidies
8. Improve financial sector operations
9. Build up social safety nets
10. Strengthen public financial management
How do countries get loans from IMF?
Countries that are member states of the IMF can access IMF loans for its balance of payment needs upon request. On request, the IMF will discuss with the country’s government to access the financial situation and needs.
The country seeking the loan and the IMF have to agree on economic policies before the IMF approves the lending. Depending on the policy conditionality of the IMF, the country will have to meet some pre-conditions, send a letter of intent, and a detailed Memorandum of Understanding to The Fund’s Executive Board.
Once an understanding has been reached on policies and financing the package, the Fund’s Executive Board grants the country access to IMF resources.
Merits of the IMF
1. Fills Deficit Gaps: An IMF loan is often beneficial to countries with a balance of payments deficit, to fill in the gap.
2. Offers Loans to its Member Nations: Perhaps its most beloved function is the loan’s ability to bail out member nations at crucial times. The IMF may decide to attach conditions such as specific economic policies that governments have no choice but to follow to access its loans.
3. Technical Assistance and Support: The loan providers counsel and advise countries trying out a new economic policy.
4. Global Financial Stability and International Monetary Co-Operation: The loans help maintain financial balance in the global market.
5. Economic Growth: It does not only rescue the economies of countries and dills deficit gaps, but it also helps to stimulate economic growth.
What are the shortcomings of IMF Loans?
The IMF loans have undeniably been helpful to many, but it does still suffer criticism because it:
1. Creates Moral Hazard: Many nations make the mistake of drawing up unsustainable budgets because they believe they would be able to get an IMF loan. Skeptics say it is no different from the moral hazard created by government bailouts of major banks.
2. Barely any Intervention or Too Much of it: IMF sometimes does too much or too little time, and most people dislike it for that. Critics accuse the IMF of only help free-market countries. Free-market supporters blame the IMF and say it is too much of an interventionist.
3. Rich Countries Control The Organization: The rich countries decide in the IMF. They determine which country can borrow and the conditions attached to the loans. Developing countries are merely onlookers in the scheme.
4. Unfavorable IMF Conditionalities: Countries can only access IMF loans if they agree to meet IMF conditions. These conditions increase poverty in borrowing countries and are damaging to the masses, such as the removal of subsidy.
5. Unlevel Playing Field: One of the conditions for IMF loans is for countries to remove trade barriers and quotas, which gives room for foreign goods and services. Local businesses cannot cope with international companies in a free market economy.
The IMF, tasked with promoting sustainable growth and reducing global poverty, has generated mixed results, recording both successes and failures. The IMF loan has succeeded in some countries (the Asian financial crisis of 1997-1998) and failed in others (mostly the low-income countries).
Critics point out to its unfavorable conditionalities, such as fiscal austerity, privatization, trade liberation, open capital markets, and high-interest rates, which have failed massively in developing countries.
The IMF, in recent years, has reformed their loan conditionalities and developed several loan initiatives targeted at supporting low-income countries.