The IMF is a global safety net for struggling economies. But it has been accused of imposing harsh conditions that may harm countries’ economic growth, especially in poorer nations. Critics like Allan Meltzer of Carnegie Mellon University argue that IMF programs introduce moral hazard and encourage overly-rapid policy adjustments. Others, including Jeffrey Sachs of Columbia University, argue that the Fund is necessary for preventing financial panics.
IMF lending helps restore investor confidence in troubled countries and facilitates a gradual adjustment of policies that address the underlying causes of crisis, such as high expenditure slippages or weak governance. The IMF also provides financing to help countries cope with shocks and promotes sustainable recovery by encouraging a country to diversify its export markets.
When a country seeks an IMF bailout, it typically faces severe macroeconomic risks, such as domestic price inflation and a plunge in the value of its currency against the U.S. dollar. In these circumstances, the IMF can play a critical role by providing temporary funding that alleviates pressure on a country’s current account balance and reduces the risk of depreciation of its currency.
Many people believe that the IMF’s commitment does not cost American taxpayers a dime, despite the fact that the United States borrows funds at one rate (Treasury bonds) and invests them in special drawing rights, or SDRs, at another (IMF loans). The difference in rates translates into a real-world loss for the United States, which should be reflected in CBO’s estimates of budget deficits and debt.