The International Monetary Fund (IMF) is the last resort lender to countries experiencing severe economic crises. Its role is to help stabilize these economies and restore growth. It does not lend for specific projects, but it does impose conditions on borrowing countries. These are usually a set of quantitative indicators and indicative targets that must be met by a country. Generally, these targets are measured over a specified time period.
The IMF’s conditionality has been criticized as being too harsh, especially during the global financial crisis of 2008. For example, the IMF insisted that Greece follow a strict austerity policy to cut government borrowing and open its economy to foreign investment. The result was a painful recession that pushed Greece to the edge of bankruptcy and left its citizens in dire economic circumstances.
In the past, IMF bailouts helped reduce debt ratios and improve macroeconomic stability in some countries. However, the positive effects of IMF support tend to be short-lived. When the IMF program expires, governments often move back to irresponsible spending.
Therefore, it is important that the IMF takes into account the domestic political environment when designing its programs for countries in need. It also needs to ensure that the conditions imposed are consistent with the country’s ownership of the IMF-backed program and will be sustainable in the long term. This paper uses a Markov switching regression model to identify which variables influence the decision to seek IMF intervention in Ghana and examines the medium-term consequences of IMF programs on GDP growth, inflation, debt and exchange rates.