A country that faces a severe economic crisis may need to seek assistance from international official organizations. A bailout can help to overcome such a situation as it provides the country with the necessary funds and assists with the implementation of policies that support responsible spending. Generally, a government will only request an IMF bailout when it is confident that its internal resources are insufficient to deal with the financial problem and that there is a risk of extreme financial consequences.
The IMF offers several lending instruments for different countries to meet their specific needs and circumstances. In return for the financial assistance, bailed-out countries must commit to structural adjustment programs (SAPs). These SAPs are designed to address the root causes of a country’s crisis by increasing exports, placing constraints on domestic demand, and promoting privatization. In some cases, a bailout program also includes macroeconomic policy changes aimed at reducing the deficits of the country and improving its trading and fiscal balances.
In general, the effectiveness of IMF bailouts has been a subject of great debate. Opponents of IMF bailouts argue that they make troubled economies dependent on the organization, whereas proponents point to the importance of providing liquidity during financial crises. In addition, the research on IMF bailouts has revealed mixed results with some studies identifying positive and others identifying negative relationships between a country’s IMF-supported program and its economic performance.
A major reason for these conflicting results might be that the conditions imposed by IMF programs are often not effectively enforced. For example, Stone (2004) argued that the IMF does not seriously punish countries that violate loan conditions if they are political allies of the United States.