In the wake of the escalating India-Pakistan conflict, the IMF has taken center stage once again with its approval of a substantial bailout package for economically distressed Pakistan. This latest arrangement is the fourth and largest such bailout by international official organizations after the $57 billion IMF-backed package for Argentina during their severe debt crisis, the $120 billion bailout backed for Greece in 2010 and the $20 billion IMF-backed rescue of South Korea at the time of Asian financial turmoil.
The IMF claims that its bailout programs are designed to tackle the root causes of a country’s financial problems, such as improving governance and transparency, strengthening the financial system, and restoring economic competitiveness. However, a review of the empirical literature on IMF bailouts finds that the effectiveness of these programs is mixed. Moreover, some studies suggest that the IMF’s policies may actually worsen economic performance in bailed-out countries by creating moral hazard among investors.
Moral hazard is created when lenders have an incentive to lend money to debtors even though they have a low chance of defaulting, and this can lead to excessive lending. The IMF’s conditions for bailouts often require that bailed-out countries reduce government borrowing, cut corporate taxes, and open their economies to foreign investment. These conditions have been criticised as being overly harsh and damaging to bailed-out countries’ economy and society. Furthermore, several studies have found that the design and enforcement of bailout conditionality is highly political. For example, Stone (2004) argues that the IMF never punishes countries that fail to meet bailout conditions, particularly those that are political allies of the US.