IMF
BAILOUTS - ECONOMY
News:
Pakistan To Seek Larger
Bailout Package of Over $8 Billion From IMF
What's
in the news?
●
Cash-strapped Pakistan is planning to make
a formal bailout package request to the International Monetary Fund (IMF) under
the Extended Fund Facility (EFF),
which facilitates a longer and larger package.
Key
takeaways:
●
It is expected that Pakistan, which has been in economically bad shape for years, may
request for enhanced quota like it did in 2008 when it secured 700 percent of
its quota during the Pakistan Peoples Party (PPP) government.
●
The other possibility is to augment the
EFF through a climate finance instrument,
as Pakistan qualifies for it due to the worst climate degradation in the last
few years.
●
According to the sources, the IMF's review
mission is in Pakistan for the completion of the second review under the $3 billion standby arrangement (SBA)
programme and the release of the third and last tranche of USD 1.1 billion.
IMF
Bailouts:
●
Bailout means extending support to an
entity facing a threat of bankruptcy.
Lending:
●
The IMF lends money to countries in the
form of Special Drawing Rights (SDRs).
○
Special Drawing Rights (SDRs) is a basket
of five currencies, US dollar, Euro, Chinese Yuan, Japanese Yen and British
Pound.
●
The bailout can be executed in the form of
loans, cash, bonds, or stock purchases.
Reasons
for Bailout:
Countries seek IMF
bailouts for the following reasons.
●
To resolve macroeconomic risks.
●
To solve currency crises.
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To meet external debt obligations.
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To buy essential imports.
●
To push the exchange value of their
currencies.
Conditions:
The countries are
expected to meet following conditions for the IMF bailout.
●
Structural
reforms such as fiscal transparency, tax reforms.
●
Reforms in state-owned enterprises.
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Reforms in macroeconomic variables like
monetary and credit aggregates.
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Reforms in international reserves.
●
Reforms in fiscal balances and external
borrowing.
Go
back to basics:
Other
Lending Instruments of IMF:
●
The IMF’s various lending instruments are
tailored to different types of balance of payments need as well as the specific
circumstances of its diverse.
●
All IMF members are eligible to access the
Fund’s resources in the General
Resources Account (GRA) on non-concessional terms.
●
The IMF also provides concessional financial support (currently at zero interest rates
through June 2021) through the Poverty Reduction and Growth Trust which is
better tailored to the diversity and needs of low-income countries.
●
Historically, for emerging and advanced
market economies in crises, the bulk of IMF assistance has been provided
through Stand-By Arrangements (SBAs)
to address short-term or potential balance of payments problems.
●
The Standby
Credit Facility (SCF) serves a similar purpose for low-income countries.
●
The Extended
Fund Facility (EFF) and the corresponding Extended Credit Facility (ECF) for low-income countries are the
Fund’s main tools for medium-term support to countries facing protracted
balance of payments problems.
●
To help prevent or mitigate crises and
boost market confidence during periods of heightened risks, members with
already strong policies can use the Flexible
Credit Line (FCL) or the Precautionary and Liquidity Line (PLL).
●
The Rapid
Financing Instrument (RFI) and the corresponding Rapid Credit Facility (RCF) for low-income countries provide rapid
assistance to countries with urgent balance of payments needs, including from
commodity price shocks, natural disasters, and domestic fragilities.