The Future of the IMF: Tough loan conditions and stability around the globe

The IMF has played a major role in stabilizing the global economy. Click to enlarge.

On July 5, 2011, Christine Lagarde took over as Managing Director
of the International Monetary Fund (IMF). The former French finance minister takes the helm at a time when the organization is being called on to lend support to an ever-growing number of emerging and developed countries around the world. Between 2004 and 2007, many countries paid off their loans to the IMF, but starting in 2008, the global financial crisis and rising inflationary pressures on emerging countries reversed that trend. 

The largest IMF loan agreements in the past 18 months have been with the countries at the center of the European debt crisis: Greece, Ireland, and Portugal. Each country’s agreement with the IMF stipulates that certain lending conditions must be met in order to obtain financing. These funds are disbursed in installments as needed—just last week, the IMF approved the release of 3.2 billion Euros to Greece, stating that Greece was making progress instituting reforms that will put the country on more solid financial footing.

The global financial crisis has also put the economies of many emerging markets in jeopardy. In January 2011,

Amidst turmoil, Mexico turned to the IMF to boost market confidence. Click to enlarge.

the IMF increased its credit line to Mexico to a record $72 billion, from the original $48 billion pledged in a 2009 agreement. The extension of the credit line reflects the IMF’s evaluation that Mexico is pursuing the right policies for long-term economic stability. Mexico has not yet needed to tap into the IMF credit line, but by securing funds the country was able to boost market confidence in the ability of the economy to endure the recession brought about by the global economic downturn. Colombia and Poland were granted similar agreements with the IMF in early 2011, although neither has actually drawn any of the funds to date.

In addition to the problems caused by the global financial crisis, many emerging countries are facing trouble financing their imports due to high inflation. Rapidly rising food and fuel prices have a disproportionately negative impact on emerging countries where these costs represent a significant portion of domestic consumption, as well as imports. High domestic inflation, slowing economic growth, and high unemployment have all contributed to growing civil unrest in these countries.

This turmoil has been especially visible in the Middle East; however, no countries in the region have yet requested IMF financing. Egypt had reached a tentative agreement with the IMF for a $3 billion credit line in June 2011, but later the government announced that they had decided not to accept the funds. An unwillingness to accept stringent IMF loan conditions is most likely the reason for the change of heart.

The IMF continues to be heavily involved in helping both developed and emerging countries cope with the fallout from the global economic downturn. As the IMF’s global lending expands to unprecedented levels, it will be the leadership of Mme Lagarde that leads the organization in its efforts to promote global financial stability.