Context: 

The International Monetary Fund has said that Sri Lanka is showing “tentative signs of improvement”. It has urged to reach timely restructuring agreements with its creditors, before the Fund’s first scheduled review.

More on News:

• The International Monetary Fund (IMF) Executive Board approved a nearly $3 billion bailout plan for Sri Lanka in March, of which about $333 million was to be disbursed immediately to alleviate the country’s humanitarian crisis.

What are IMF bailouts?

• In a general sense, a bailout means extending support to an entity facing a threat of bankruptcy. 
• Countries seek IMF bailouts when they are facing macroeconomic risks, currency crises and need assistance to meet external debt obligations, to buy essential imports and push the exchange value of their currencies.
• According to the IMF, factors that lead to economic crises are: 

1. 1. Inappropriate fiscal and monetary policies, which can lead to large current account and fiscal deficits and high public debt levels.
   2. An exchange rate fixed at an inappropriate level, which can erode competitiveness and result in the loss of official reserves.
   3. A weak financial system which can create economic booms and busts are among factors that lead to economic crises. 
   4. Political instability and weak institutions also can trigger crises, as can insolvent financial institutions.

How is an IMF bailout provided?

• The IMF lends money to the economies in peril in the form of Special Drawing Rights (SDRs).(SDR is a basket of five currencies — US dollar, Euro, Chinese Yuan, Japanese Yen and British Pound. )
• It can be executed in the form of loans, cash, bonds, or stock purchases.
• The lending is done through programs designed according to purpose. 

Conditions applicable to an IMF bailout

• Among the conditions laid down for a country seeking financial assistance from the IMF could be certain structural reforms, such as fiscal transparency, tax reforms and reforms in state-owned enterprises.
• Conditions for IMF lending also relate to macroeconomic variables, like monetary and credit aggregates, international reserves, fiscal balances, and external borrowing.

News Source: The Hindu