The IMF bailout is a type of financial support that international official organizations provide to countries facing severe economic crises. Initially, a country requests for financial support from the IMF and its staff conducts an evaluation of the economic and financial situation and financing needs of the country. Then, a program is established that outlines how the country intends to tackle its problems and what policy changes will be implemented to ensure that its economy recovers quickly and sustainable growth can be maintained.
The ultimate objective of the bailout process is to return the public budget deficit to surplus in the short term and to achieve a stable economic growth rate in the long run. However, the policy reforms imposed by the IMF often force countries to sacrifice their policy autonomy, cut public spending, increase taxes and retrench staff. These measures may lead to inactive business investment, reduced government service, a high unemployment rate and severe social instability which will affect the economic development of bailed-out countries in the long run.
Most studies on the impact of IMF bailouts find that these programs tend to have a negative effect on a recipient country’s economic performance. This negative impact is mainly attributed to the lack of effective enforcement of IMF loan conditionality, a phenomenon that has been referred to as moral hazard. In addition, the fact that these international official organizations are dominated by developed economies means that they rarely punish a country that fails to comply with their loan conditions when that country is a political ally of the major donor country.
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