The International Monetary Fund: Holy Grail or Poisoned Chalice?

As the global south struggles to grapple with its debt pandemic, experts question the efficacy of the IMF’s conditional lending.

By , an intern at Foreign Policy.
People take part in a protest against the government's motion to increase taxes in order to reach a credit agreement with the International Monetary Fund in San José, Costa Rica, on Sept. 30, 2020.
People take part in a protest against the government's motion to increase taxes in order to reach a credit agreement with the International Monetary Fund in San José, Costa Rica, on Sept. 30, 2020.
People take part in a protest against the government's motion to increase taxes in order to reach a credit agreement with the International Monetary Fund in San José, Costa Rica, on Sept. 30, 2020. EZEQUIEL BECERRA/AFP via Getty Images

The International Monetary Fund (IMF) this week released its updated World Economic Outlook and warned of a gloomy and more uncertain economic future. According to the report, inflation in developing economies is anticipated to reach 9.5 percent and is projected to remain higher for longer. The developing world’s debt burden, already crushing because of the COVID-19 pandemic, is getting worse due to the rich world’s efforts to tame inflation by raising interest rates. Meanwhile, there’s an energy crisis and a food crisis and a climate crisis.

“The world may soon be teetering on the edge of a global recession,” IMF economist Pierre-Olivier Gourinchas wrote in a blog post. “Multilateral cooperation will be key in many areas, from climate transition and pandemic preparedness to food security and debt distress.”

From Sri Lanka to El Salvador to Ghana, countries in the developing world were only beginning to heal from the COVID-19 pandemic when Russia’s invasion of Ukraine sent global food and energy prices skyrocketing—and helped intensify the global south’s debt problem. What’s making things worse are back-to-back hefty interest rate hikes by the U.S. Federal Reserve, a move meant to tame U.S. inflation but which essentially acts like a particularly nasty variable-rate mortgage on countries that have to pay back debts in dollars they can no longer afford.

The International Monetary Fund (IMF) this week released its updated World Economic Outlook and warned of a gloomy and more uncertain economic future. According to the report, inflation in developing economies is anticipated to reach 9.5 percent and is projected to remain higher for longer. The developing world’s debt burden, already crushing because of the COVID-19 pandemic, is getting worse due to the rich world’s efforts to tame inflation by raising interest rates. Meanwhile, there’s an energy crisis and a food crisis and a climate crisis.

“The world may soon be teetering on the edge of a global recession,” IMF economist Pierre-Olivier Gourinchas wrote in a blog post.Multilateral cooperation will be key in many areas, from climate transition and pandemic preparedness to food security and debt distress.”

From Sri Lanka to El Salvador to Ghana, countries in the developing world were only beginning to heal from the COVID-19 pandemic when Russia’s invasion of Ukraine sent global food and energy prices skyrocketing—and helped intensify the global south’s debt problem. What’s making things worse are back-to-back hefty interest rate hikes by the U.S. Federal Reserve, a move meant to tame U.S. inflation but which essentially acts like a particularly nasty variable-rate mortgage on countries that have to pay back debts in dollars they can no longer afford.

“The countries that have historically been on the periphery of the global financial system have huge vulnerabilities because they are dependent on getting other countries’ currencies in order to pay their bills,” said Stephen Nelson, an associate professor of international and comparative political economy at Northwestern University. “That is a structural inequality, deeply embedded in the international financial system.”

In theory, the IMF can act as a paramedic for distressed economies. In reality, that ambulance ride isn’t cost-free. 


How does IMF lending work?

The IMF was established alongside the World Bank in the waning days of World War II, a response to the international economic and financial meltdown of the 1930s that helped cause the conflict in the first place. The World Bank is there to provide countries with medium- to longer-term developmental aid grants—to improve infrastructure, power, sanitation, and access to clean water—that are intended to spur development. 

The IMF, on the other hand, serves as a watchdog for the international financial system. It provides countries with short-term lines of credit at below-market interest rates so they can make good on their current debt obligations and pay their creditors, a shot in the arm often referred to as a bailout. But much like lunch, there is no such thing as a free IMF loan. 

In order to maintain its solvency and ensure that countries make good on their repayments, the IMF strongly advises countries to adopt certain policies to improve their fiscal balance sheets and restore their access to capital markets. These policies, often painful, are called austerity measures. Governments that get help are urged, and sometimes required, to make painful choices such as cutting welfare benefits or fuel and food subsidies to shore up the public books—moves that accountants like but that hungry people in the streets tend to resent.

That kind of austerity is particularly harsh now that there is a hydra-headed economic crisis everywhere. In late May, the IMF told Pakistan to take concrete policy actions” including “removing fuel and energy subsidies” to achieve its program objectives and keep the spigots of IMF money open. By the end of June, the cash-strapped nation had further removed fuel subsidies to ease its fiscal deficit—leading to a 17 percent jump in consumer prices and sparking protests across the nation. Both measures were implemented against the backdrop of a growing fuel shortage and an energy crisis in the country

In Cameroon, which is currently seeking the IMF’s Extended Credit Facility, as taxi drivers protested the fuel shortage and volatile prices, the IMF’s recommendation remained the same: reduce fuel subsidies. Tunisia, which is particularly vulnerable to grain disruptions according to the World Bank, is now planning to gradually reduce its food subsidies as pressure to agree on a deal with the IMF grows. (Of course, a lot of fuel and food subsidies in lesser-developed countries disproportionately benefit the rich, who consume a lot of both, rather than the poor.)


So, has the IMF adapted to the economic needs of the global south?

Not quite, it seems.

“The IMF claims that it no longer requires austerity, but I refuse to avoid using the word,” said Jerome Phelps, the head of advocacy at Debt Justice, a U.K.-based charity organization tackling debt and global inequality issues. “Actual lending continues to require deeply regressive conditions that affect the poorest people the most in a potentially catastrophic time of spiraling food and fuel prices.”

As part of its COVID-19 relief response, the IMF extended its financial assistance to 90 countries using its Catastrophe Containment and Relief Trust and various lending facilities, including the Rapid Credit Facility and Extended Credit Facility. The programs were aimed at providing grants for debt relief as well as concessional financial assistance to low-income countries hit hard by the pandemic. In some African countries, such as Sierra Leone, Senegal, Madagascar, Mauritania, and the Seychelles, the IMF started including social spending “floors” to ensure budgetary support from recipient nations for social support, health, and education among vulnerable populations.

“Since the pandemic started, we have provided emergency financing with a strong focus on immediate fiscal support. There is no ex-post conditionality on emergency financing. Our message has been clear—spend what you need to save lives and livelihoods. Besides emergency financing, nearly all IMF-supported programs approved or augmented since March 2020 include conditionality aimed at protecting social spending,” an IMF spokesperson told Foreign Policy.

Yet analysis conducted by Oxfam revealed that 84 percent of the IMF’s COVID-19 loans encouraged—and in some cases, required—poor countries, already struggling under the global health crisis, to adopt more austerity measures. 

As part of the #EndAusterity global campaign, more than 500 organizations and academics from 87 countries have called on the IMF and national governments to stop austerity and instead support policies that advance gender justice and environmental security and reduce income inequality. The tricky part is that at some point, the piper has to be paid—and the straightest line to doing so is by mandating policies that increase countries’ appeal to foreign investors, by, for instance, raising domestic interest rates and tightening fiscal policies, neither of which is politically popular.

Experts are also encouraging the IMF to loosen its purse strings and use its Special Drawing Rights (SDRs) more to help countries in need. The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member countries. The IMF rolled out the big guns of the SDR in 2021, in the throes of the COVID-19 pandemic, which injected some much-needed liquidity into fragile economies whose own reserves were running on empty. While the IMF says an SDR allocation is “not a panacea for difficulties facing developing countries, it might just prove to be vital for countries in desperate need. 


Where to from here?

The good news is, for countries in distress, the IMF may not be the only road to redemption. Increasing numbers of governments have started engaging in bilateral deals with other countries and private lenders to pay off their sovereign debts. Sri Lanka alone is seeking $1.5 billion from its biggest financial backers: India, Japan, and China. 

China, one of the world’s largest single creditor nations, might just be the global south’s trump card.

“From what we know, China is willing to restructure and reorganize debt at relatively softer and easier terms than the IMF or other bilateral lenders,” said Peter Rosendorff, a professor of politics at New York University. “But there is a lack of transparency that is further compounded by the fact that countries are just borrowing from such a diverse source of creditors.” 

To make matters worse, the recent double-barreled hike in interest rates by the Fed has only exacerbated the debt crisis in the global south. An increase in interest rates in the United States will draw capital away from developing and emerging countries and put the U.S. dollar’s relative value even higher—making it harder for countries to service their sovereign debts, which are often denominated in hard currencies, especially the dollar. 

With tightening financial conditions and exchange rate depreciations, the debt service burden is a harsh—and for some countries—unbearable burden,” IMF Managing Director Kristalina Georgieva said in a statement.

According to the IMF, 60 percent of low-income countries are at a high risk of debt distress or are already in debt distress. Band-aids, especially ones that pull off plenty of tender skin, are not likely to be the enduring answer to that problem.

“​​Over many decades, most IMF loans have been too little, too late, with too little restructuring of the debt,” Phelps said. “Countries keep going back into the same debt crises a couple of years later—which is why we need sufficient debt restructurings now rather than waiting for more countries to end up in an appalling situation like Sri Lanka.”

Update, July 29, 2022: This article has been updated to include additional information on fuel and food subsidies as well as the IMF’s social spending floor programs in Africa. 

Anusha Rathi is an intern at Foreign Policy. Twitter: @anusharathi_

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