Why are IMF Bailouts Considered the Recipes for Disaster?

IMF Bailouts: The Recipes for Disaster by Ayesha Irfan

IMF Bailouts: The Recipes for Disaster | Daily Writeup | Opinions

The following article, Why are IMF Bailouts Considered the Recipes for Disaster?, is written by Ayesha Irfan, a student of Sir Syed Kazim Ali. Moreover, the article is written on the same pattern, taught by Sir to his students, scoring the highest marks in compulsory subjects for years. Sir Kazim has uploaded his students’ solved past paper questions so other thousands of aspirants can understand how to crack a topic or question, how to write relevantly, what coherence is, and how to include and connect ideas, opinions, and suggestions to score the maximum.

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A nation’s economic stability dictates its political power and global prominence in a world that is changing quickly. However, an economy in crisis breaks a nation. Likewise, countries like Pakistan approach the International Monetary Fund’s (IMF) doorstep with the aim of economic assistance. For instance, the $6 billion IMF bailout package for Pakistan was approved in 2019 to address the country’s external and fiscal imbalances. Therefore, these collapsed economies are blind to the fact that they are heading into a dangerous debt swamp that will only end in disaster. Undoubtedly, IMF bailouts provide short-term assistance to economies in need by stabilizing unstable economies, averting the total collapse of the financial system and, temporarily, stabilizing the currency’s value. However, to be fair, the fact that these bailouts have a detrimental social, political, and economic effect on countries, making them one of the most impacting surefire recipes for disaster. Economically, these bailouts, by keeping the country mired in a cycle of dependency and unwavering commitment to structural adjustments, stop the country’s long-term economic stability and amplify poverty and inflation. Politically, these bailouts undermine a country’s sovereignty, meddle in internal affairs, and threaten national interests. Furthermore, in a social sense, these bailouts cut nations’ all social welfare spending, keeping them impoverished. Nevertheless, the governments of the affected countries can improve the situation by enacting laws on the improper use and management of IMF bailouts and trade restrictions; they can also restructure the economy through institutional changes. This article thoroughly analyses how IMF bailouts lead to disaster and suggests ways for governments to resurrect their economies.

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Before jumping towards the maxim, it is imperative to understand the IMF and its relation with a country’s economic stability. A significant financial organization under the United Nations, the International Monetary Fund seeks to promote prosperity and sustainable growth for each of its 190 member nations. To do this, it supports economic policies that advance monetary cooperation and financial stability, which are necessary to raise productivity and overall economic well-being of the struggling nations. However, economic growth and IMF bailouts have a complicated and contentious relationship. Specific experts contend that by furnishing essential financial assistance and executing structural adjustments, IMF bailouts can stabilize a nation’s economy and foster expansion. Some argue that requirements like austerity measures imposed on IMF bailouts might impede economic growth and worsen social inequality.

Moving ahead, it is acceptable to state that IMF bailouts give short-term support to a struggling economy by providing the government money and keeping the national currency stable. By doing this, the economy may be kept from collapsing entirely, and trust may be restored. For instance, the situation of Greece, which received numerous bailouts from the IMF and other international creditors during its debt crisis, is an illustration of how an IMF bailout can temporarily help an economy in need. The success of IMF bailouts has been questioned because they frequently come with requirements such as structural reforms and austerity measures that can be challenging for the recipient nation to carry out and have unfavourable long-term effects.

To be fair, the fact that these bailouts have a detrimental social, political, and economic effect on a country makes them one of the most impacting surefire recipes for disaster. In Pakistan, according to the estimated outcome of the Bureau of Statistics, a 1% increase in IMF fees results in a 0.3764 % decrease in government borrowing. This can happen due to the requirements imposed on countries receiving loans from the IMF, which frequently call for the implementation of structural changes and austerity measures that might not be optimal for the country’s long-term economic stability. These steps increase financial hardship and reliance on outside aid rather than encouraging sustainable growth.

Additionally, the IMF’s unwavering commitment to structural adjustment impacts the state’s economy, which may result in long-term economic instability. According to Maleeha Lodhi, the World Bank and the IMF can deviate from customs and modify state-issued loan quotas. That is absurd. This can occur due to the conditions placed on nations receiving loans from the IMF, which frequently require adopting austerity measures and structural adjustments that are not ideal for the nation’s long-term economic stability. Instead of promoting sustainable growth, these actions exacerbate financial hardship and dependency on foreign external assistance.

Not only these but numerous research studies and publications contend that IMF bailouts may cause inflation and poverty in the nations they are intended for. Following the global financial crisis, the IMF and austerity politics have increased countries’ inflation and slowed their economic growth. For instance, IMF bailouts are merely one of the reasons why inflation in Pakistan has hit a 48-year high, claims Nadeem F. Paracha. Therefore, IMF bailouts destroy a nation’s ability to grow economically and sustain itself.

Politically, IMF bailouts pose a risk to national interests because a state might not comply with IMF requirements. Instead, they impede a state’s ability to make decisions for its betterment. For example, despite the threat to national interests posed by higher unemployment, Indonesia opened its retail trade to foreign investors under IMF conditions. Therefore, this led to political unrest in the country.

Moreover, IMF bailouts undermine a country’s sovereignty by taking away its political freedom. “There is nothing that a country should shun more than taking out foreign loans.” When Ulysses Grant visited Japan in August 1879, he confided in Emperor Meiji in this manner. For instance, the IMF-mandated, “Extremely precarious recovery is not stopping the Thai government from cutting its fiscal deficit.” Therefore, these bailouts plunged a nation into a political quagmire and enslavement.

Socially, IMF bailouts cut the budget for social welfare. To enable the nation’s necessary fiscal adjustment and guarantee debt sustainability, it lowers the country’s social welfare budget through requirements like implementing the FY24 budget and hindering vital social spending. For instance, Kenyans are dying of AIDS as a result of the debt trap created by IMF loans, as they lack the funds for necessary medical care. Therefore, these bailouts impede social welfare initiatives.

Moreover, these bailouts do not worsen a nation’s poverty rate. Instead, they intensify poverty and inflation in a country. Maleeha Lodhi said that many nations, including Kenya, South Africa, Pakistan, and others, continue to perish despite IMF bailouts. These all demonstrate that the IMF’s bailouts are an assured recipe for disaster.

Last but not least, IMF bailouts are unable to address the core social problems in many nations. Instead, they exacerbate social inequality and turbulence. Stiglitz claims that bank governors and finance ministers run the IMF and have formulated policies that benefit their own financial community. Hence, all of these allegations demonstrate that the IMF bailouts have had more negative economic, social, and political effects than positive ones.

However, these issues could be resolved in several ways, including by enacting sensible trade, monetary, and fiscal policies, putting in place measures to stop corruption and improper use and management of foreign aid, maintaining institutional economic stability, and keeping an eye on projects that use aid. For instance, the International Monetary Fund has increased its growth prediction for India, stating that the nation will continue to proliferate in 2023 and 2024 due to factors like the promotion of exchange rate stability, international payment systems, a forum for monetary system cooperation, policy advice and financing for developing nations, and the reduction of poverty and economic stability.

In a nutshell, one of the most significant surefire recipes for disaster is that these bailouts have a negative social, political, and economic impact on a nation. Economically speaking, these bailouts halt the nation’s long-term economic stability and increase poverty and inflation by trapping it in a cycle of reliance and unwavering commitment to structural adjustments. Politically, it threatens national interests, erodes a nation’s sovereignty, and meddles in domestic matters. Socially, it also reduces social welfare spending, maintains poverty in countries, and ignores the main social issues. Despite helping those nations facing economic crises, IMF bailouts have not produced meaningful results, showing that nations are headed for disaster.

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