Normally, when a country requests financial assistance from the International Monetary Fund (IMF), its debt problems are severe. The decision to request help from the IMF is based on an endogenous choice by government, and it requires giving up some level of solvency autonomy in exchange for financial aid. Once the IMF provides its support, the recipient countries are forced to undertake a series of economic policy reforms aimed at returning budgets to surplus and improving corporate governance. Typically, these include privatizing industries and credit control, raising or decreasing real interest rates, lowering or eliminating subsidies, reducing public expenditure and retrenchment, opening financial markets to foreign investment and lowering tariffs, among others.
The policy conditionality imposed by the IMF has been highly controversial, especially with respect to moral hazard. Prominent economists such as Joseph Stiglitz have publicly criticized the IMF for creating excessive moral hazard, which is defined as the incentive for creditors to lend more to bailed-out governments when their risk-taking behavior is encouraged by the IMF’s lending practices and policy recommendations.
Moreover, the IMF’s bailout policies are overly rigid as they fail to take into consideration the different economic status, business environment and culture of recipient countries. Consequently, these tough policies impose an unnecessarily burdensome fiscal burden on the recipient nations and may further worsen their fragile economies in the long run. This article explores the impact of IMF bailout on a country’s economic growth, macroeconomic stability and debt vulnerability management through an in-depth analysis of Ghana’s experience with the IMF.
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