The IMF bailout is an international economic rescue program that enables troubled countries to finance their short-term financial needs and restore investor confidence in their banking system. Normally, a country will request assistance from the IMF and World Bank only after all other sources of financing have been exhausted. The effectiveness of IMF bailouts depends on the ability of these international organizations to enforce strict conditionality. This is especially challenging since major member countries have a strong influence over the IMF and the World Bank and often pressure them to soften the conditions attached to their loans.
In exchange for IMF financing, debtor countries usually agree to implement a set of structural reforms that can improve their overall economic performance. These policies are called structural adjustment programs (SAPs). SAPs may include devaluing currencies, increasing or decreasing export subsidies, lowering or eliminating tariffs, raising interest rates, and reducing government spending. In addition, they normally involve the privatization of state-owned enterprises and freeing up domestic financial markets.
The academic literature has provided mixed findings regarding the impact of IMF bailouts on bailed-out countries. Some studies identify positive relationships while others find negative ones. In the latter case, researchers have argued that the IMF’s policy prescriptions are too harsh and may worsen the economic situation of participating countries. Moreover, these policy prescriptions are not based on the country’s specific economic situation and cultural background and could lead to moral hazard. To address these issues, scholars have proposed a new approach to IMF bailouts – the so-called “performance-based aid.” This approach would link the amount of money allocated and disbursed to bailed-out countries to their relative economic performance.
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