In a world where economic crises are common, many people believe that the IMF is needed to prevent financial meltdowns. However, it is important to understand that the current structure of the Fund makes the United States’ participation in the Fund a costly proposition. When the United States pledges funds to the IMF, it commits to loan those funds if the IMF is called upon to do so; the Fund then invests the funds in a variety of securities or loans them directly to members. This process has added more than $4 billion to the United States’ national debt, according to the Congressional Budget Office (CBO).
The Fund is often described as a lender of last resort—an institution that provides money to solvent banks threatened by a crisis and thereby contains investor panic and prevents the collapse of global financial markets. But this traditional approach has serious flaws. The IMF only provides funds to its members once their foreign currency reserves are dangerously low and monetary and fiscal policy options have become dire. By then, investor confidence has been destroyed, exports are collapsing, and a country can no longer meet its external obligations or prop up the exchange rate of its currency.
To avoid this problem, the IMF needs to return to the more limited role that it has always played in the developing world: a lender of first resort to help members regain market stability after an economic shock, with conditions on loans intended to ensure that the lending is used well and does not damage the interests of other international creditors. This model would also make it easier for the IMF to support countries in need of assistance by providing them with concessional financial support through the Poverty Reduction and Growth Trust and by promoting debt relief from official and private lenders.
