An IMF bailout refers to the process by which a government seeks financial assistance from international official organizations. The purpose of this process is to return the public sector budget to surplus in the short term and maintain sustainable economic growth in the long term. However, this goal can be difficult to achieve due to the fact that there are various factors that affect the outcome of the bailout.
In order to receive funding from the IMF, a country must agree to the terms and conditions of the bailout program. These terms and conditions are known as structural adjustment programs (SAPs). SAPs consist of a broad range of policies, including increasing exports, decreasing domestic demand, placing constraints on government spending and encouraging privatization.
While the IMF has a lot of experience in implementing such programs, many studies have found that these aid packages often have negative effects on the economy. For example, Dreher (2006) found that participating countries’ economic performance suffered after their participation in an IMF program. This is mainly due to the fact that the IMF’s policies force recipient countries to sacrifice their policy autonomy, increase taxes and retrench staff in order to return budgets to surplus. This leads to inactive business investment, poorer government service and severe social instability, all of which damage the economic development of bailed-out countries in the long term.
Nevertheless, research into this area is still in its infancy. Some key issues that need to be explored include the effectiveness of IMF bailout conditionality, moral hazard and corporate governance.