Question

IMF is also known as the “lender of last resort”. What does that mean? Please give us an example.

Answer 1

When central bank interest rates plummeted to fight the financial crisis after 2008, low investment yields in advanced economies caused many emerging markets to experience massive capital inflows, causing currencies to appreciate. Now, with rates starting to rise again, especially at the US Federal Reserve, the reverse is likely – as the dollar value rises, capital should start flowing out of these emerging markets and put downward pressure on their currencies.

This has focused attention on the resilience of the global monetary and economic system – which must step in as emerging markets face this strain – as well as the stigma many governments around the world are facing.

Recourse to the IMF is nearly always a last resort. In many countries, the stigma of needing funding from the Fund, with its associated requirements, means it is a politically difficult choice. But it remains, for now, the best options available to under-stressed economies.

As this history shows, the global financial safety net has always served poorly the emerging market economies. The conditions attached to IMF assistance mean it remains a last resort, but it is still the best place to organize a global financial safety net, as it is inclusive and promotes longer-term structural change, and has developed unrivaled monitoring and surveillance expertise that can be outsourced to regional financial arrangements.