![]() Present, prospective, or potential balance of payments needĮx-post, and ex-ante (prior actions) if needed A country’s return to economic and financial health ensures that IMF funds are repaid so that they can be made available to other member countries. This process can be expedited under the IMF’s Emergency Financing Mechanism.Īfter its Executive Board approves a loan, the IMF monitors how members implement the policy actions underpinning it. Once the terms are agreed upon, the policy program underlying an arrangement is presented to the IMF’s Executive Board in a “Letter of Intent” and detailed in a “Memorandum of Understanding.” The IMF staff makes a recommendation to the Executive Board to endorse the country’s policy intentions and offer financing. In most cases, a country’s commitments to undertake certain policy actions, known as policy conditionality, are an integral part of IMF lending. Typically, a country’s government and the IMF agree on a program of economic policies before the IMF lends to the country. Then, the country’s government and IMF staff discuss the economic and financial situation and financing needs. The same is true for certain urgent and immediate needs covered by emergency financing instruments.įirst, a member country in need of financial support makes a request to the IMF. Countries that maintain a commitment to sound policies may be able to access resources with no or limited conditionality. In low-income countries, IMF lending is also typically meant to catalyze financial support from other donors and development partners. IMF lending also aims to protect the most vulnerable population via policy conditionality. Because IMF lending usually is accompanied by a set of corrective policy actions, it signals that appropriate policies are being put in place, encouraging the return of private investors. IMF financing facilitates a more gradual adjustment. For example, if investors are unwilling to provide new financing, the country may suffer a painful compression of government spending, imports, and economic activity. ![]() Without timely IMF financing, a country’s adjustment process may be more abrupt and difficult. A country facing severe capital outflows may need to restore investor confidence by addressing the problems that led to capital flight -perhaps interest rates are too low, the budget deficit and debt are growing too fast, or the banking system is inefficient or poorly regulated. ![]() ![]() For example, a country facing a sudden drop in the price of key exports may need financial assistance while moving to strengthen its economy and diversify its exports. Policy adjustments will vary depending on the country’s circumstances. IMF lending gives countries breathing room to adjust policies in an orderly manner, paving the way for a stable economy and sustainable growth. The IMF responded with unprecedented financial assistance to help countries protect the most vulnerable and set the stage for economic recovery.Ĭrises can take many different forms. The COVID-19 pandemic was an example of external shock affecting countries across the globe. Even countries with sound fundamentals can be severely affected by economic crises and policies elsewhere. With globalization, sudden changes in market sentiment can result in capital flow volatility. ![]() Both are common causes of crises, especially for low-income countries. Political instability and weak institutions also can trigger crises.Įxternal factors include shocks ranging from natural disasters to large swings in commodity prices. They can be domestic, external, or both.ĭomestic factors include inappropriate fiscal and monetary policies, which can lead to large current account and fiscal deficits and high public debt levels an exchange rate fixed at an inappropriate level, which can erode competitiveness and result in the loss of official reserves, and a weak financial system, which can create economic booms and busts. The causes of crises are varied and complex. ![]()
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