Why does the IMF continue to be the final bailout bondsman, and has its relevance waned?

The International Monetary Fund (IMF) has managed 190 countries since its formation in 1944. The issues it deals with diversify from monetary to foreign exchange dealings, or fiscal challenges. Therefore, as a convention, every member state should contribute at least 1% of their GDP to strengthen the fund base of the IMF.

In reality, a lot of countries do not support the institution's efforts to strengthen its resources. This reduces its negotiating power as other financial stakeholders refuse to cooperate in the process of deciding whether to provide debt relief or not. For example, take the case of Zambia. The presence of drought and other climate externalities, combined with massive losses of jobs and a derailed health sector during the 2020 COVID crisis, hampered its economic prospects. Though an agreement was reached with the IMF that excluded the debt-restructuring aspect, it did not receive even one-tenth of the funds that were promised.

Similarly, when financially stronger countries prioritize only the health and safety of their citizens, they would not be interested in supporting the institution. Another added challenge comes in using dollars as the medium of currency exchange, thereby pressurizing the exchange rate of domestic currencies. Imagine if Kenya has to shell out 129 Kenyan shillings to get a US dollar. If fluctuations in the exchange rate occur due to the international implications of certain events, then Kenya would have even to give 145 Kenyan shillings to retain the same value of the dollar.

Critical IMF interventions

Jamaica

Between 2010 and 2013, Jamaica’s sovereign debt tallied up to 150% of its GDP. This forced the government to seek two rounds of funding from the IMF, causing widespread hatred among the public. The institution offered financial assistance using its Extended Fund Facility (2013) and Standby Arrangements (2016) after implementing its recommendations of modifying the Fiscal Responsibility Framework (2010) to include targets of cutting down the national debt-to-GDP ratio by 60% (in 2026), develop maximum connectivity by building roads, and utilize the provisions of the Bank of Jamaica Act to introduce inflation-targeting.

Concurrently, Jamaica witnessed two different governments, and there was a well-regarded consensus among politicians of all political parties as they strived together to relieve the country from further economic threats. Benefits of this move included maximum development of roadways (99%) and reduced joblessness to 7.76%.

Portugal

The Portuguese Republic underwent a period of massive crisis between 2011 and 2013 due to unstructured debt management policies, which caused fiscal deficits to occupy more than one-tenth of its GDP. Unemployment figures crossed double digits, thereby adding fuel to a degenerating economy.

The IMF offered an emergency financial package of €26.4 billion covered until 2014. Conditions include rejuvenating the banking sector by splitting public funds into those institutions that can be saved and those that cannot be rescued. Similarly, the pension sector and public wages also witnessed tremendous cuts along with privatizing their national airline and power companies.

Contrary to expectations, Portugal’s financial prospects resurged with changing administrations actively cooperating in the continuation of existing policies while reducing unemployment to 7% or less by 2024 and improving tourism prospects. Though currency fluctuations distort the national equilibrium occasionally, the government finds its way through.

Can the IMF retain its lost popular appeal?

To improve its prospects, the IMF must first lay out complete guidelines and practices that outline the things it can and will execute for its employees, member nations, and citizens of these states. They must also design the process through which the institution will plan and carry out its operations, as well as who it will consult and how third parties can interact with it.

Additionally, they must establish clear ethical frameworks and processes by drawing on international laws and regulations. Next, the IMF must understand the complexity of the challenges brought forth by its increased mandate, as well as the high likelihood of errors.

To phrase this succinctly, the IMF needs to set up an impartial system of accountability, like an outside ombudsman, that can hear complaints, spot errors, promptly rectify negative effects, and prevent recurrence.