• Friday, Dec 02, 2022
  • Last Update : 10:24 am

A villain or a friend in need?

  • Published at 03:39 pm December 18th, 2019

Preliminarily, a country facing a BoP crisis has to adopt measures to address the situation, but if a country could take certain measures on its own, it might not be in a crisis

The modern age is one of global trade, and SDR (the US dollar, euro, Chinese renminbi, Japanese yen, and British pound) plays the key role of exchange transactions. Consequently, an adequate amount of SDR reserve is required for taking part in global business.

However, the Balance of Payment (BoP) crisis of a country disables such participation due to the lack of SDR reserves in repaying its essential imports, services, or external debts. Henceforth, IMF helps a country in swapping national currencies with SDR as a “lender of the last resort.” 

On the counterpart, IMF imposes conditions for providing support to overcome the BoP crisis, as well as for ensuring a successful investment, which is deemed as a painful austerity measures to some extent. Nevertheless, such conditionality is essential for surpassing the situation. 

Preliminarily, a country facing a BoP crisis has to adopt measures to address the situation, but if a country could take certain measures on its own, it might not be in a crisis. Hence, for assisting such a country, IMF provides conditionality measures as a blessing from the excellent economists. 

Moreover, hiring those economists would cost a hefty amount of money, which might not help a country efficiently during a crisis moment where IMF economists are providing affluent measurements and economic policies at almost free of cost. 

Moreover, a few scholars consider such conditionals to be obsessive measures, arguing that IMF’s conditionality might affect a country’s sovereignty. Nonetheless, IMF provides such conditions for the betterment of such states. 

Hypothetically, if the IMF does not impose any conditionality on a country, then the question which needs to be answered is: Who would provide assistance in considering the effective measures of overcoming the situation, when no one else is willing to help such a country? The answer may argue in favour of conditionals, as the IMF provides assistance as the “lender of the last resort” when everyone has lost their interest in helping that country. 

On the other hand, many argue that the liberalization of trade and imposing restrictions on imports might negatively affect the economy of a country. However, a counter argument may consider a country like Somalia, which has constantly been facing the BoP crisis since independence. 

For instance, if Somalia feels inclined to import monuments and sculptures for decorating its streets, or building more stadiums for their upcoming national events instead of conducting trade on a particular product that might help them earn foreign currency, would it be a wise idea for them? 

The answer is no, because it would be more logical for Somalia to conduct trade on a product that provides them profit, and only earning foreign currency could help Somalia overcome such situation. 

Greece could be a perfect example of the above-mentioned situation as Greece invested their borrowed money for building and decorating stadiums for Olympic 2004. As a result, once the Olympics were over, all stadiums had become useless and Greece has been facing a BoP crisis since then. 

However, considering the situation, if IMF imposes restrictions on importing decorative materials and evolves the trade of a profitable product by trade liberalization, then it might help such a country in a greater way. Therefore, it can be emphasized that IMF’s trade liberalization and trade restrictions are for the betterment of the situation, not for hurting the sovereign power of a country. Earning more profit may help such a country repay its external debts and acquire its creditworthiness again. 

Another argument exists that IMF imposes anti-inflationary measures. From the perspective of ensuring security for the foreign investors, anti-inflationary measures can be justified. If the financial risk becomes higher, foreign investors would be less likely to invest in a country, which may affect the economy of such a country in quite a frustrating manner. Thus, IMF’s anti-inflationary measures in helping a country overcome its BoP crisis can be validated. 

Furthermore, some economists may argue that taking IMF loans might result in the devaluation of national currency. Nonetheless, before questioning the IMF’s conditionality, a second thought can be given about the situation that, when a country is facing a BoP crisis, its currency is already under threat of devaluation. Therefore, IMF should not be the only one to blame since devaluation is a mere consequence of the crisis.

From an economical point of view, legal minds contend the repayment mechanism of IMF. However, IMF raises funds from its members; if they only looked for their own profit and became obsessive, IMF would undoubtedly lose its effectiveness and suffer due to the lack of cooperation from its members. Therefore, IMF never takes obsessive measures when it comes to its member states.

IMF conditionals may seem like austerity measures or attract negative impressions, as it is concerned about repayments of its fund from the borrowing state. In spite of such negative impressions, IMF conditionals provide inimitable assistance in overcoming crises, as well as in regaining creditworthiness; as such, a friend in need is a friend indeed.

Md Asif Mahbub Tanvir is a student of law.

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