The IMF bailout is a macroeconomic lifeline for countries facing financial crisis. Borrowing countries benefit from the Fund’s pooled resources—a dollar of borrowing from the IMF’s creditor members leverages four dollars in other financing—and from its program design and conditionality. Creditor members get fair compensation in the form of interest rates that are much lower than those they would face in private capital markets, and the IMF also administers trust funds that provide even more affordable, concessional, financing to its poorest members.
For countries that have been hit hard by economic challenges, IMF loans help to stabilize their currency and market stability. They provide breathing room to pursue fundamental reforms—which can help these economies avoid future crises. But IMF lending, particularly when backed by the U.S. government, creates a moral hazard that encourages governments to adopt unsustainable policies and reduces pressure for reform. That’s why the IMF’s new managing director, Horst Kohler, has focused on early warning and prevention and has endorsed a major change to its lending practices, reducing the amount of detailed policy measures required for a country to receive Fund support.
The IMF is now at a turning point, but it’s important to remember that the institution was created for countries in need and should not be transformed into an instrument of political considerations by its largest shareholders—principally the United States. As Congress prepares to consider the President’s request for more IMF funding, it is important to make clear that the US should only provide additional taxpayer funds if the Fund can show that it has made real progress toward reform.