Authors: Akshi Sharma, Ayush Shivhare, Rishabh Ahuja, Shreya Rai


The IMF bailout packages have been the go-to for many countries on the brink of/facing an economic crisis. However, there is little consensus about the effectiveness of the bailout measures in bringing the member country out of the crisis.

The purpose of this study is to provide a review of the IMF bailout packages and their effectiveness concerning countries like Argentina, Pakistan and Greece.

We will look at various factors such as bailout effectiveness, conditionality, leadership, governance and the sustainability of the IMF policy. The research also seeks to question the policy reforms suggested by the IMF in developing economies.

While IMF’s efforts in providing short-term loans to correct the balance of payment crisis in nations have been applauded, the long-term bailout packages requiring fundamental changes in the economic structure of a country, according to a particular ideology, have been contested by several notable individuals, including Nobel laureate Joseph Stiglitz.

  1. Introduction

1.1 A Brief on International Monetary Fund (IMF)

The International Monetary Fund (IMF) was established at the United Nations Monetary and Financial Conference on 22 July 1944 as an organ under the UN System. The conference was attended by 44 nations and was held in Bretton Woods, New Hampshire, USA.

At present, 189 nations are members of the IMF.

The IMF headquarters are located in Washington D.C., U.S.A.

  • Primary Purpose

The IMF’s primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Fund’s mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.

  • Main Functions

IMF has 3 main functions which can be broadly categorized as, – surveillance, financial assistance, and technical assistance – to promote the stability of the international monetary and financial system.

  • Organizational Structure

At the top is the Board of Governors, consisting of one governor and one alternate governor from each member country, usually the top officials from the central bank or finance ministry. The Board of Governors meets once a year at the IMF–World Bank Annual Meetings.

24 of the governors serve on the International Monetary and Financial Committee, or IMFC, which advises the IMF’s Executive Board on the supervision and management of the international monetary and financial system.

The day-to-day work of the IMF is overseen by its 24-member Executive Board, which represents the entire membership and supported by IMF staff.

The Managing Director – usually a European – is the head of the IMF staff and Chair of the Executive Board and is assisted by four Deputy Managing Directors.

Kristalina Georgieva is the current MD of the IMF.

1.2 Structural Adjustment Programs (SAPS)

A structural adjustment is set of economic reforms that a country must adhere to in order to secure a loan from the International Monetary Fund and/or the World Bank.

Although SAPs are designed for individual countries, they have certain common guiding principles which include export-led growth, efficiency of the free market, privatisation and liberalisation.

Structural adjustment programs have demanded that borrowing countries introduce free-market systems along with some fiscal restraint or sometimes outright austerity. Countries are required to follow some combination of the given policies.

  • Reduce balance of payments deficits by devaluing their currency.
  • Cut public sector employment, subsidies, and other spending to reduce budget deficits.
  • Privatize state-owned enterprises and deregulate state-controlled industries.
  • Ease regulations to attract foreign investment.
  • Close tax loopholes and improve tax collection domestically

SAPs have received sharp criticism for imposing austerity policies on already poor nations. These policy measure not onlydo little to help the countries, but on the contrary make them much worse off than before.Critics argue that the burden of structural adjustments falls most heavily on women, children, and other vulnerable groups.This can be explained by the following points

  • Balancing of budgets can be done either by raising taxes, which the IMF frowns upon,or by cutting government spending, which it recommends. As a result, SAPs often result in deep cuts in social programmes like education, health and social careIt also leads to removal of subsidies designed to control the price of basic goods such as food and milk. Hence SAPs hurt the poor most, because they depend heavily on these services and subsidies.
  • Devaluation makes of currency makes the country’s goods cheaper for foreigners to buy and foreign imports more expensive. In principle, this should disincentivize the country from buying expensive foreign goods. In practice, however, the IMF actually disrupts this by rewarding the country with a large foreign currency loan that encourages it to purchase imports.
  • SAPs encourage countries to focus on theproduction and export of cash crops to earn foreign exchange. However, these commodities have notoriously erratic prices subject to the whims of global markets which can depress prices just when a country heavily invests in them.

1.3IMF Lending

It’s the responsibility of the IMF is to provide loans to member countries experiencing actual or potential balance of payment problems. This financial assistance helps countries in their efforts to rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth. Unlike development banks, the IMF does not lend for specific projects.

  • When can a country borrow from the IMF?

A country can ask the IMF for financial assistance if it is facing an actual or potential balance of payments (bop) need. This means that the country must be lacking or potentially lacking the required funds needed to meet its international payments such as imports, external debt, redemptions etc. The IMF resources provide a cushion to the country as it follows the required adjustment policies (SAPs) to correct the bop problem.

  • Process of lending

Upon request by a member country, IMF resources are usually made available under a lending “arrangement,”

 The agreement depends on the lending instrument used and the economic policies and measures a country has agreed to implement to resolve its balance of payments problem.

The economic policy program in the arrangement is formulated by the country in consultation with the IMF. The program is then presented to the Fund’s Executive Board in a “Letter of Intent” and is further detailed in the annexed “Memorandum of Understanding”.

Once an arrangement is approved by the Board, IMF resources are usually released in phased instalments as the program is implemented. Some arrangements provide very strongly performing countries with one-time up-front access to IMF resources and thus are not subject to explicit policy understandings.

  • Lending Instruments

IMF’s various loan instruments are tailored to different types of balance of payments need (actual, prospective, or potential; short-term or medium-term) as well as the specific circumstances of the country.

Low-income countries may borrow on concessional terms through facilities available under the Poverty Reduction and Growth Trust (PRGT). This was introduced to help low income countries weather the impact of the global financial crisis.

  • Non-Concessional Lending

The IMF’s instruments for non-concessional loans are

  1. Stand-By Arrangements (SBA)

Historically, the bulk of non-concessional IMF assistance has been provided through SBAs. The SBA is designed to help countries address the short-term balance of payments problems. Program targets are designed to address these problems and disbursements are made conditional on achieving these targets (‘conditionality’). The length of an SBA is typically 12–24 months and repayments are due within 3¼-5 years of disbursement. SBAs may be provided on a precautionary basis—where countries choose not to draw upon approved amounts but retain the option to do so if conditions deteriorate

  1. Flexible Credit Line (FCL)

This is for countries with very strong fundamentals, policies, and good track records of policy implementation. FCL arrangements are approved, at the member country’s request, for countries meeting pre-set qualification criteria. The length of the FCL is either one year or two years with an interim review of continued qualification after one year. Unlike SBA, disbursements under FCL are not conditional on the implementation of specific policies as the qualifying countries already have a good track record of policy implementation

  1. Precautionary Liquidity Line (PLL)

Similar to the FCL, PLL is also meant for countries with a good track record of policy implementation and sound fundamentals. The PLL countries have moderate vulnerabilities which prevent them from meeting the high FCL qualification.

They also do not require to follow policy adjustment criteria to be eligible for disbursements of funds. Duration of PLL arrangements ranges from either six months or one- to two years.

  1. Extended Fund Facility (EFF)

Helps countries address medium- and long-term balance of payments problems that require fundamental economic reforms. The use of EFF is increased substantially in the crisis period. Arrangements under the EFF are typically longer than SBAs but normally not exceeding three years at approval.

5. Rapid Financing Instrument (RFI)

 RFI was introduced to replace and broaden the scope of the earlier emergency assistance policies. It provides immediate financial assistance with limited conditionality to the member countries facing an urgent balance of payments need.

  • Concessional Lending

Three types of loans were created under the new Poverty Reduction and Growth Trust (PRGT) as part of this broader reform

  1. Extended Credit Facility(ECF)

The Fund’s main tool for medium-term support to LICs facing protracted balance of payments problems.

  1. Rapid Credit Facility (RCF)

Provides rapid financial assistance with limited conditionality to low-income countries (LICs) facing an urgent balance of payments need.

  1. Standby Credit Facility (SCF)

Provides financial assistance to low-income countries (LICs) with short-term balance of payments needs.

  1. Argentina: The Boom-and-Bust Cycle

2.1 Introduction

Argentina has a long history of economic crises. It has defaulted on its external debt (debt held by foreigners) 9 times since its independence from its colonial power, Spain, in 1816. Argentina has also entered into 21 arrangements with the International Monetary Fund (IMF) since it joined the organization in 1956. Since 1956, Argentina has experienced an economic crisis almost every decade.

The economic history of Argentina is one of the most read, owing to the ‘Argentine Paradox’, i.e., Argentina is the only country in modern history to have regressed to the ‘developing nation’ category.


2.2 Economic History

At the beginning of the 20th century, Argentina was one of the 10 largest nations by GDP. Due to its fertile grounds, Argentina was able to achieve the title of the “breadbasket of the world” with the trade-in its grains and meat amounting to 7% of the global trade volume. However, the Great Depression in the 1920s caused great damage to the meat exporting industry. Its meat exports to Europe fell by 2/3rd in volume. With the economy in peril, the political leaders initiated protectionist and nationalist policies to help revive economic growth. These policies included import substitution industrialization and support to native industries. General Peron became the country’s President in 1946 and introduced huge welfare measures for urban and rural workers. He became a national figure, loved by all. His ideology and policies still influence Argentinian politics with many centre-left and Left leaders calling themselves ‘Peronists’. The protectionist policies, however, were not able to revive the economy and the social welfare policies exacted huge costs to the budget. Argentina began to be dependant on foreign debt to fund its programs and entered into various IMF arrangements to correct its economic mistakes.

Following a decade of high inflation and stagnant output, and several failed attempts to stabilize the economy, Argentina fell into hyperinflation in 1989 when inflation reached an extreme annual rate of 3,080%.

Figure: Inflation and Unemployment

In 1991, Argentina began to follow the IMF formula for economic stabilization and development, almost indistinguishable from the so-called “Washington Consensus.” Amongst other things, the reforms included the privatization of state-owned enterprises, the deregulation of the economy, lower trade barriers and, state reform. With the implementation of the reforms, Argentina won great commendation, especially from the IMF. Also on Wall Street, Argentina had become one of the favourite emerging markets; the country was able to borrow relatively cheap in US Dollars and became the biggest issuer of emerging markets debt in the late 90s. This made the country increasingly dependent on foreign capital.

To counter the hyperinflation ‘The Convertibility Plan of 1991’ was implemented. This fixed the Argentine peso one-to-one to the US Dollar, laid the foundation for (temporary) exchange-rate stabilization. Under the currency board, Argentines could now freely convert their pesos into dollars. From then on, bank deposits and loans in dollars became widespread.

After the adoption of the Convertibility Plan, stabilization was achieved quickly, and, with the aid of structural reforms, the economy grew at an average rate of 6 percent per year through 1997.

During the 1990s, there were four successive IMF financing arrangements. The arrangements included two extended arrangements under the Extended Fund Facility (EFFs) approved in 1992 and 1998, and two Standby Arrangements (SBAs) approved in 1996 and 2000. The IMF also provided extensive technical assistance (TA) during this period, dispatching approximately 50 missions between 1991 and 2002, mainly in the fiscal, monetary, and banking areas.

2.3 Crisis of 2001

However, in the late 1990s, Argentina’s hard currency peg to the US Dollar, pro‐cyclical fiscal policies, and extensive foreign borrowing left the country unable to deal with several economic shocks. This eventually led to the outbreak of a severe currency, sovereign debt, and banking crisis.

The recession that began in the second half of 1998, however, turned out to be both prolonged and severe. It was triggered and then compounded by a series of adverse external shocks, particularly the Russian bond default and the LTCM (Long-Term Capital Management) hedge fund crisis in August-September 1998 and the devaluation of the Brazilian real in January 1999. In contrast to most other emerging market economies at the time, the Argentine economy did not enjoy a rapid recovery. Instead, the sluggishness of GDP growth fuelled concerns about the sustainability of public debt, concerns which eventually became self-fulfilling.

In late 2000, Argentina began to experience severely diminished access to capital markets. The IMF responded to this by providing exceptional financial support. However, uneven implementation of promised fiscal adjustment and reforms, worsening global macroeconomic environment, and political instability, led to the complete loss of market access and intensified capital flight by the second quarter of 2001. A series of deposit runs began to have a severe impact on the health of the banking system. In December 2001, the Argentine authorities imposed a partial deposit freeze.

With Argentina no longer in compliance with the conditions of the IMF-supported program, the IMF decided to suspend its disbursements. This meant that Argentina lost access to its last source of foreign capital. With a total amount of almost USD 22bn in 2000 and 2001, the IMF support for Argentina was larger than its support for any other country at the time. At the end of December, the country partially defaulted on USD 93bn sovereign debt; in January 2002, it formally abandoned the convertibility regime. A sharp depreciation of the peso and a full-blown banking sector crisis ensued. By the end of 2002, the economy had contracted by 20 percent since the onset of the recession in 1998, with tremendous economic and social costs to the population.

The ensuing economic crises resulted in social unrest. In December 2001, Argentina had 4 different Presidents none of whom were able to pacify the public and bring order in political, economic, and social spheres.

The economic and social impacts of the crisis were huge. While economic growth had already been negative every year since 1998, the economy contracted by 11% in 2002.  Along with the fall in GDP, the unemployment rate rose from 14.8% in 1998 to a peak of 22.5% in 2001. As a result of the deteriorating economic situation, the proportion of Argentines living below the (national) poverty line increased sharply from an already high 25.9% in 1998 to 57.5% in 2002. Partially thanks to the strong depreciation of the peso, the Argentine economy started to recover in 2002.

  • Reasons for the Crisis

While there are competing explanations as to the primary cause of the Argentine crisis, it is clear that several factors played a role in creating vulnerabilities, with changing relative importance over time. These include:

  • An excessively lax fiscal policy, particularly during times of rapid growth, in the early 90s when substantial fiscal surpluses should have been achieved as a buffer against future downturns;
  • The convertibility regime itself, which did not allow needed real exchange rate adjustment to take place through nominal depreciation;
  • Excessive and unpredictable swings in the volume of global capital flow to emerging market economies;
  • The slow pace of structural reform in some critical areas, which inhibited the ability of domestic wages and prices to adjust quickly;
  • Institutional and political factors which prevented the swift implementation of corrective measures.

Against this background, some additional factors helped trigger the crisis and exacerbate the impact of these underlying weaknesses:

  • A series of unfavourable external shocks, including the appreciation of the U.S. dollar, the Russian bond default and the LTCM crisis, the devaluation of the Brazilian real, and the global economic slowdown;
  • The impact of slow growth and high-interest rates (resulting from higher risk premia on Argentine bonds) on the prospective path of the ratio of debt to GDP;
  • In the final stage of the crisis, a weakening of prudential defences in the banking system, which contributed to the loss of confidence in the currency and complicated attempts to restore stability once the convertibility regime collapsed.

Since the crisis, many observers have raised questions about the effectiveness and quality of financing and policy advice provided by the IMF. Some critics have argued that the IMF’s main fault lay in providing too much financing without requiring sufficient policy adjustment, while others have argued that the policies recommended by the IMF actually contributed to the crisis. In either case, the collapse of the convertibility regime and the associated adverse economic and social consequences for the country has had a reputational cost for the IMF.

The IMF has admitted it made a string of mistakes that contributed to the economic implosion.

A 2004 report by the IMF’s internal audit unit concluded it failed to provide enough oversight and overestimated growth and the success of economic reforms, while it continued to lend Argentina money when its debt burden had turned unsustainable.

2.5 Arrangement of 2018

In the year 2018, Argentina was facing another economic crisis with the excessive devaluation of the peso and double-digit inflation.

To shore up the country’s ailing finances, Argentina received the biggest loan package ever from the International Monetary Fund: $57.1bn that will be disbursed over three years.

Argentina has fallen back into a crisis for the simple reason that not enough changed since the last debacle. As such, the country’s economic and financial foundations remained vulnerable to both internal and external shocks.

Although they were committed to an ambitious reform programme, Argentina’s economic and financial authorities have also made several avoidable mistakes. Fiscal discipline and structural reforms have been unevenly applied, and the central bank has squandered its credibility at key moments.

More to the point, Argentinian authorities succumbed to the same temptation that devastated their predecessors. To compensate for slower-than-expected improvements in a domestic capacity, they permitted excessive foreign-currency debt, aggravating what economists call the “original sin”: a significant currency mismatch between assets and liabilities, as well as between revenues and debt servicing.

Figure: Argentina’s External Debt

In May 2020, Argentina is once again on the cusp of registering another devastating default. Argentina’s government has said it needs to restructure $100 billion in debt, including $44 billion to the International Monetary Fund (IMF).

After elections in October 2020, the new government of the centre-left Peronist Alberto Fernández campaigned on a reorientation of Argentine economic policies and argued against the austerity measures imposed as part of the 2018 arrangement as well as the payment schedule.

The country’s economy, which was already grappling with a 2-year recession, high inflation rates, and rising levels of poverty, has been hit hard by the coronavirus pandemic, leading to a slowdown in economic activities and lockdowns.

3.Pakistan: An Unpredictable Economy

3.1 Introduction

Pakistan has been a member of the International Monetary Fund (IMF) since 1950. Due to the unpredictable nature of the economy and heavily dependent on imports, IMF has given a loan to Pakistan on twenty-two occasions since its membership, recent in 2019.

IMF lending programs are of two types: General Resource Account (GRA), and Poverty Reduction Growth Trust (PRGT). GRA is reserved for not-so-poor to wealthy countries, whereas, PRGT is for poor countries. GRA is used to give loan a on the stand-by arrangement (SRA). Economists mostly called SRA as a bail-out package. Based on these classifications, since its membership, Pakistan has been bailed-out on 13 occasions, largest in Imran Khan administration in 2019. While Pakistan’s economy typically witnesses a boom-bust cycle, over the last 10 years, its need for financial support from the IMF has coincided with the completion of a particular government’s term.

3.2 Economic History:

Pakistan joined IMF in 1950 as a newly established country was facing financial problems since its creation in 1947 from British India.

In 1958, for the first time, Pakistan went to IMF for a bailout. For this, IMF lent out US$ 25,000 to Pakistan on standby arrangement basis on 8 December 1958. Pakistan again went to IMF in 1965. This time, the IMF gave US$ 37,500 to the war-torn nation on 16 March 1965. Three years later, Pakistan again went to IMF for the third time for the balance of payment problems for which IMF gave US$ 75,000 on 17 October 1968.

In 1971, Pakistan lost its Eastern half, East Pakistan, in a war against India. This war caused huge loses to Pakistan. For which, Pakistan got loan of US$ 84,000 in 1972, US$ 75,000 in 1973 and another of US$ 75,000 in 1974 to meet its growing needs. In 1977, another standby arrangement of US$ 80,000 was made on urgent basis. Three years later, an extended facility of US$ 349,000 was reached in 1980. The Struggle of Pakistan continued, as Pakistan withdrawn another US$ 730,000 as Pakistan was already part of US cold war against the Soviet Union.

Another era was started, as democracy came back to Pakistan but old ways to handle economy poorly continued. Benazir Bhutto government withdrew US$ 194,480 as standby arrangement and another US$ 382,410 in the shape of structural adjustment facility commitment on 28 December 1988. In 1990, the government of Nawaz Sharif decided against going to IMF instead arranged donations from friendly countries like Saudi Arabia.

In 1993, Benazir Bhutto again came to power and her government again went to IMF and reached an agreement to get standby arrangement of US$ 88,000 on 16 September 1993. Poor handling of economy continued by her government as she got loan of US$ 123,200 under the extended fund facility and another US$ 172,200 were borrowed on 22 February 1994. During that period economy of Pakistan remained in poor shape and Pakistan had to go to IMF again for record third in the period of Bhutto government. Some say this was the most corrupt government in the history of Pakistan. This time Pakistan got an amount of US$ 294,690 on 13 December 1995. In 1997, Nawaz Sharif came to power. Benazir Bhutto government was sacked on the corruption charges and left economy of Pakistan in worst shape. Sharif government went to IMF on urgent basis for the first time and reached an agreement to get two amounts of US$ 265,370 and US$ 113,740 on October 20, 1997.

In 2018, Imran Khan became Prime Minister of Pakistan. From the start, Pakistan had a large balance of payment deficit and its foreign reserves were only good enough for two months. For this, they arranged friendly loans from Saudi Arabia, the United Arab Emirates and China to avoid tough IMF conditions. In 2019, when economic conditions worsened, they went to IMF for the twenty-second time and got the largest loan in history of US$ 1 billion. IMF gave loan based on conditions such as the hike in energy tariffs, removal of energy subsidy, increase in taxation, privatization of public entities and fiscal adjustments to the budget.

 3.3 Political context of Pakistan’s bailout deal with the Fund:

The backsliding of Pakistan’s economy over the past year has been swift, but it has not surprised many. A sharp depreciation in the Pakistani rupee and high fiscal deficits have resulted in higher inflation, which acts as a tax on the common man and hurts the poor the most. Foreign exchange reserves have remained low — below $10 billion for all weeks except three since the Pakistan Tehreek-e-Insaf won the elections, and Imran Khan was sworn in as Prime Minister on August 18, 2018.

IMF loans almost always come with tough conditions, and it will be difficult for Khan to sell the bailout politically. Khan has expressed himself against seeking financial support from the Fund in the past, and in the run-up to last year’s elections, he criticised the bailouts accepted by governments led by the Pakistan People’s Party and the Pakistan Muslim League (N).

In September 2013, within three months of being elected, the Nawaz Sharif government accepted a $6.6 billion loan from the Fund, to be disbursed over three years. Earlier, within a year of the PPP’s Yousaf Raza Gillani taking charge as the Prime Minister in March 2008, the IMF extended a $7.6 billion loan to Pakistan, to be disbursed over 23 months. Despite the reservations he has had in the past, Imran Khan had little choice but to negotiate with the IMF.

3.4 Economic conditions in which Pakistan entered into negotiations with the Fund

The size of Pakistan’s economy is $313 billion, and it has averaged growth of about 3.5% annually over the last 12 years. After growing at a healthy 5.2% in FY 2018 (July 1, 2017 to June 30, 2018), Pakistan’s real GDP growth is estimated to sharply power down to 3.4% in FY 2019, according to the World Bank. In 2019-20, the Bank expects the economy to slow further to 2.7%.

Inflation has more than doubled since the last year; it ruled at 8.8% in April this year ahead of Ramzan. In the last financial year, the average Consumer Price Inflation was 3.9%.

The country also stares at a twin deficit problem, with both its fiscal and current account deficits set to worsen in FY 2019. From 6.6% of GDP in FY 2018, the fiscal deficit, or excess of government expenditure over its revenues, may breach the 7% of GDP mark in FY 2019. The current account deficit, or excess of spending on imports over exports, is expected to remain high at 5.5% of GDP in this fiscal, albeit slightly lower than 6.1% of GDP in FY 2018.

The Pakistani rupee has been devalued multiple times since December 2017 and has lost almost 35% in the last 18 months.

· Urgency of the bailout for Pakistan:

After coming to power, Khan has reached out to Saudi Arabia, the United Arab Emirates (UAE), and China for help. Riyadh pledged $3 billion in the balance of payments support in October last year, and the UAE supported Pakistan with another $3 billion in December. In February this year, China extended $3.5 billion in loans and grants to bolster Pakistan’s forex reserves.

But all this has not helped in addressing the problem, which requires a medium-term structural overhaul. For the week ended May 3, 2019, the net forex reserves with the State Bank of Pakistan, the country’s central bank, were $8.98 billion, more than a billion dollars less than the $10.23 billion available with it on August 17, 2018 — the day before Khan became PM.

These forex reserves are enough to finance only about two months of imports. Pakistan’s imports in FY 2018 were $56 billion. Low forex reserves dent the confidence that the world has in a country’s ability to meet its external obligations.

·   Conditions put by the IMF on Pakistan:

The bailout conditions that the Fund imposes are part of difficult structural reforms required to put an economy on a sustained growth path. As the IMF management proceeds with formally approving Pakistan’s bailout, it will closely watch for signals to rein in the deficit in the budget for the next year.

Broadly, the IMF will expect the government to expand the tax base, do away with exemptions, and curtail special treatments, given that just about a million people out of the 208 million in Pakistan pay taxes. It will call for spending cuts and levying of user charges in the energy sector, and reducing subsidies.

The IMF will also expect Pakistan to let the rupee ‘float’ — that is, allow its value to be market-determined — and the State Bank of Pakistan to further increase policy rates to bring inflation under control.

3.5 Future Expectations

Pakistan’s record in sticking to agreements with the IMF is not encouraging. It has often failed to meet conditions such as curtailing spending and selling government stake in state-owned enterprises. IMF data suggest that Pakistan did not withdraw the entire amount originally agreed upon in the earlier bailouts. The last bailout of $6.6 billion in 2013 was, however, fully received by 2016. Pakistan needs to take bold steps to fix its economy and, as it moves in that direction, ensure that its poor do not suffer from the austerity measures that are put in place.

  1. Greece: The Troika at Work

4.1 Introduction

Since early 2010, the Eurozone has been facing a major debt crisis. The governments of several countries in the Eurozone have accumulated what many consider to be unsustainable levels of government debt, and three—Greece, Ireland, and Portugal—have turned to other European countries and the International Monetary Fund (IMF) for loans in order to avoid defaulting on their debt. Greece has been at the centre of the Eurozone debt crisis. It has the highest levels of public debt in the Eurozone, and one of the biggest budget deficits. Greece was the first Eurozone member to come under intense market pressures and the first to turn to other Eurozone member states and the IMF for financial assistance. Over recent years, the IMF, European officials, the European Central Bank (ECB), and the Greek government have undertaken substantial crisis response measures.

 4.2 The Build up to Greece’s Debt Crisis

The Greek economy fared well for much of the 20th century with high growth rates and low public debt. In fact, during the 20th century it enjoyed one of the highest GDP growth rates in the world. In 1981, under the leadership of centre-right Prime Minister Constantine Karamanlis, Greece became the tenth member of the European Economic Community. At that time, the country’s economy and finances were in good shape, with a debt-to-GDP ratio of 28% and a budget deficit below 3% of GDP. But the situation deteriorated dramatically over the next 30 years. The Greek government had pursued expansionary fiscal and monetary policies. However, rather than strengthening the economy, the country suffered soaring inflation rates, high fiscal and trade deficits, low growth rates, and exchange rate crisis.

  • Eurozone Membership

In 1992, the twelve member states of the European Economic Community sign the Treaty of Maastricht, which established the EU. In addition to a shared foreign policy and judicial cooperation, the treaty also launched the Economic and Monetary Union (EMU), paving the way for the introduction of the euro. In 1999 the euro is introduced as an accounting currency in eleven EU countries. Greece, however, is unable to adopt the euro because it fails to meet the fiscal criteria—inflation below 1.5 percent, a budget deficit below 3 percent, and a debt-to-GDP ratio below 60 percent—outlined by Maastricht.

However, in 2001 the country misrepresents its finances to join the Eurozone, with a budget deficit well over 3 percent and a debt level above 100 percent of GDP. It is subsequently made public that U.S. investment bank Goldman Sachs helped Greece conceal part of its debt in 2001 through complex credit-swap transactions. Greece’s admission into the Eurozone and its adoption of the euro made it much easier for the government to borrow. This was because Greek bond yields and interest rates declined as they converged with those of strong European Union (EU) members like Germany. While the economy boomed from 2001-2008, higher spending and mounting debt loads accompanied the growth.

  • Global Financial Crisis
Figure: Real GDP growth rates for 2009

In early 2007 the U.S. subprime mortgage market collapsed after the housing bubble burst the year prior. The U.S. crisis ultimately triggered a global banking crisis and credit crunch that lasted through 2009, felling global financial behemoth Lehman Brothers and prompting government bailouts of banks in the United States and Europe. The crisis led to the Great Recession, where housing prices dropped more than the price plunge during the Great Depression. What followed up was a crisis in the banking system of the European countries using the euro- The European Debt Crisis.

 4.3 Greece Debt Crisis

Greece became the centre of Europe’s debt crisis after Wall Street imploded in 2008. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances. The then Prime Minister George Papandreou revealed that Greece’s budget deficit will exceed 12 percent of GDP, nearly double the original estimates. The figure is later revised upward to 15.4 percent. In early 2010 Greece’s borrowing costs spiked as credit-rating agencies downgraded the country’s sovereign debt to junk status. As borrowing costs rose and financing dried up, Greece was unable to service its mounting debt. As a result Greece faced a liquidity crisis, forcing the government to seek bailout funding.

In May 2010, the International Monetary Fund, the European Central Bank and the European Commission (collectively called Troika) announced a three-year package of €110 billion (about $158 billion) in loans to Greece at market-based interest rates. Of the €110 billion, the Eurozone countries pledged to contribute €80 billion (about $115 billion) and the IMF pledged to contribute €30 billion (about $43 billion).  Germany provided the largest sum, about 22 billion euros, of the EU’s 80 billion euro portion. The bailouts came with conditions. In exchange, Greece was required to make deep public spending cuts, raise taxes and introduce fundamental changes to the public sector and labour legislation. Prime Minister Papandreou committed to austerity measures, including 30 billion euros in spending cuts and tax increases.

In February 2012, the Troika approved a second EU-IMF bailout for Greece, worth 130 billion euros ($172 billion) but with the activation being conditional on the implementation of further austerity measures and debt restructuring agreement. The deal included a 53.5 percent debt write-down—or “haircut”—for private Greek bondholders. In exchange, Greece agreed to reduce its debt-to-GDP ratio from 160 percent to 120.5 percent by 2020. Greece and its private creditors completed the debt restructuring on March 9, the largest such restructuring in history affecting some €206 billion of Greek government bonds. As a result of furthering austerity measures, a vicious cycle of unemployment was created with unemployment reaching 25.4% in August 2012. Tax revenues weakened, which made Greece’s fiscal position worse. Austerity measures created a humanitarian crisis, homelessness increased, suicides hit record highs, and public health significantly deteriorated.

Deliberations between the Eurozone finance ministers and the IMF in November 2012 resulted in a revised aid deal for Greece. The new plan allowed Greece to cut its debt-to-GDP ratio to 124 percent by 2020, rather than 120 percent, while committing it to bring its debt levels “substantially below” 110 percent by 2022.

In 2015, Greece defaulted on its debt and missed payment of €1.6 billion to the International Monetary Fund (IMF). It was the first time in history a developed nation had missed such a payment. Negotiations took place between the Syriza leadership and its official creditors. Prime Minister Tsipras bends to European creditors and presses parliament to approve new austerity measures, despite a July 5 referendum in which Greeks overwhelmingly rejected these terms. The Greek parliament adopts a suite of economic reforms as part of a new rescue package from the EU, in exchange for the 86 billion euros bailout, which is to be distributed through 2018. Unlike the previous bailouts, the IMF refused to contribute until Greece receives “significant debt relief” from creditors. Greece received its final loan from European creditors,

 Reasons for Crisis

  • The financial crisis was largely the result of structural problems that ignored the loss of tax revenues due to systematic tax evasion.
  • Greece’s productivity was much less productive than other EU nations making Greek goods and services less competitive and plunging the nation into insurmountable debt during the 2007 global financial crisis.
  • While Greece had structural issues in the form of corrupt tax evasion practices, Eurozone membership allowed the country to hide from these problems for a time but ultimately created an economic straitjacket and an enormous debt crisis evidenced by the country’s massive default.
  • Apart from this, excessive government spending and work culture issues were also some of the pertinent reasons that led to the debt crisis.

Greece, in total, now owes the EU and IMF roughly 290 billion euros ($330 billion), part of a public debt that has climbed to 180 percent of GDP. To finance this debt, Athens has committed running a budget surplus through 2060, accepts continued EU financial supervision, and imposes additional austerity measures. EU officials hail the bailout as a success, pointing to Greece’s return to growth. However, many believe that far from helping the Greek economy to get back on its feet, bailouts only served to ensure that Greece’s creditors were paid while the government was forced to scrape together paltry tax collections. Apart from this many aspects of Greece’s economy are still problematic, despite a series of austerity measures being imposed. The problem of unemployment still looms large in the country. Many of the jobs available are part-time and pay less than before the crisis. As a result, hundreds of thousands of the best and brightest have left the country. Tax evasion has gone underground as more people operate in the black economy. As a result, fewer people are paying higher taxes to receive less from the government than they did before the crisis. Banks haven’t completely recuperated, and are hesitant to make new loans to businesses. All in all, it will be a slow road to recovery.


In this study, the effectiveness of the bailout packages was assessed with respect to the 3 countries – Argentina, Pakistan and Greece and the following conclusions were drawn:

  • While many external factors and lax government policies played a major role in the Argentinian crisis, the mistakes committed by the IMF cannot be ignored. IMF’s main fault lay in providing excessive financial support to Argentina without ensuring that required policy adjustments were followed. Some critics also feel that the very policies recommended by the IMF did not help but rather contributed to aggravating the crisis.
  • Despite repeated financial support from the IMF, Pakistan’s economy has swiftly backslidden over the years. Pakistan is currently facing a twin deficit problem coupled with high inflation and sharp depreciation in rupee. The reason for the ineffectiveness of the bailouts is Pakistan’s failing record in sticking to agreements with the IMF. It has been unable to curtail spending or sell government stakes in state-owned enterprises as recommended by the IMF.
  • Greece has been facing a major debt crisis since 2010. The global financial crisis of 2008, low productivity in Greece as compared to other EU nations and widespread tax evasion prices have contributed to this crisis. Despite large EU and IMF bailouts and the imposition of austerity measures, the country is still experiencing widespread unemployment.Greece’s creditors from the IMF and the European Union continue to demand that Athens spends less than it earns, to create the surpluses needed to repay its debt.

These examples illustrate the fact that the IMF should revise its long-term lending processes to accommodate regional problems and be more effective in the long-run.


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