IT appears that the IMF is becoming less rigid in its loan terms in the changed circumstances. In a statement on October 22, its managing director, Mr Dominique Strauss-Kahn, said that although policy conditions will still be attached to the loans, the conditions will this time be fewer and more targeted.

His remarks came in the context of Article IV discussions the Fund has been holding with new customers which include Pakistan.

The principal instrument of lending in a crisis situation is usually the stand-by arrangement, which is designed for dealing with short-term balance-of-payments problems, but not necessarily with shortages of liquidity. The IMF has long been thinking about a special short-term liquidity instrument.

And on October 29, it announced the creation of such a short-term liquidity facility for countries battered by the global financial crisis. The IMF executive board approved the creation of the emergency tool “to establish quick-disbursing financing for countries with strong economic policies that are facing temporary liquidity problems in the global capital markets”, the Fund said in a statement.

Recently, Strauss-Kahn told his staff that “conditionality has to be defined as what is needed to achieve the goals of the programme... it should not attempt to fix the world.” The IMF must “address the needs” of the member countries “not the agenda we have.” Although the statement is a pointer to the fact that the IMF is softening its terms for advancing credit in certain categories, not much has been officially revealed.

The Economist says that the IMF has been rethinking its approach on the issue of conditionalities in recent years. “It now aims to impose policy prescriptions only when absolutely critical to a programme’s success. Details emerging from the talks with Iceland suggest these guidelines are being followed: there appear to be no punitive strings attached. That will help the IMF dispel concerns that it is too rigid in its ideology.”

So, a member country should expect the IMF support to come with “austere striongs” attached and defence and development expenditure may be among the casualties. Neither the army nor the general public will be happy, the Economist said. Pakistan, in a sense, may feel less pinch of the conditions for it has already withdrawn almost all the subsidies — an important ‘harsh’ measure the IMF imposes to begin with.

Another loan instrument which was modified in September this year is Exogenous Shocks Facility (ESF) which aims to meet the needs of low-income member countries for rapid shock assistance. An exogenous shock is an event that has a significant negative impact on the economy and that is beyond the control of the government. That could include commodity price changes (including oil and food), natural disasters, and conflicts and crises in neighbouring countries that disrupt trade. The changes in the ESF will make it faster to access, easier and more flexible to use, and capable of providing more financing. The changes should become effective shortly.

Experience shows that the countries in need of a bailout do not like to go to the IMF as a first option even when it looks to be the only option as is the case with Pakistan. The German foreign minister, while on a visit to Islamabad, was too frank to say that Pakistan urgently needed an IMF loan to avert a default. “A loan in six months or six weeks will not help. It needs to come in six days.” He has promised to help Pakistan in getting IMF facility. The countries are in a state of dither because an IMF bailout is considered a stigma and the finance bureaucracy tries all options before approaching the IMF. For the politicians in power, it means a loss of face.

Over the years, the IMF has developed various loan instruments, or “facilities,” that are tailored to address the specific circumstances of the member states. Low-income countries may borrow at a concessional interest rate through the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF). But loans offered under Stand-By Arrangements (SBA) (which Pakistan is seeking) are non-concessional and are designed to help countries tide over short-term balance of payments problems. These loans have consumed the greatest amount of IMF resources. Their length is 12-24 months, and repayment is normally expected within 2¼-4 years.

Except for the PRGF and the ESF, all loans are subject to the market-related interest rate, known as the “rate of charge.” The amount that a country can borrow from the Fund is a multiple of the country’s IMF quota. In exceptional circumstances, some loans may exceed the access limits.

In recent years, most of the loans have been granted under the PRGF. The interest rate levied on PRGF and ESF loans is only 0.5 per cent and is to be repaid over a period of 5½-10 years.

The IMF’s new customers are Pakistan, Hungary, Iceland and Ukraine. Iceland has already got loan sanctioned. It is also providing confidential policy advice to governments in emerging and developing economies on how to adapt to the effects of the West’s current financial turmoil.

Until the late 1990s, the IMF had plenty of work. But its chief clients, the emerging economies, later took measures to end their troubles and embarked on the path of higher growth and progress. So, the IMF was left with few customers and after its ‘disastrous’ role in 1997 crisis many countries avoided taking its help.

Earlier this year the IMF board voted to cut staff and sell off about an eighth of its gold reserves (some 400 tonnes) to meet expected future funding shortfalls. Now it has found a big customer in Pakistan after Turkey. The bursting of the financial bubble in the United States has come as a blessing to the IMF as it has brought it back into business.

The IMF has currently $255 billion in its kitty to advance as loans to the crisis-hit countries. It can also obtain funds from the countries that may be reluctant to act on their own — as with the Japanese and Nordic contributions to the Iceland package. Pakistan first sought emergency cash help from Saudi Arabia, the US and then China. Iceland tried to work out a deal with Russia. It was only after these attempts failed that they approached the IMF.

In April, the IMF reformed the formula by which it allocates votes and financial contributions according to economic size, reserves and other measures of the member countries. China’s share of votes will now increase to 3.81 per cent but it is still far short of its weight in the world economy. There is a growing body of opinion that the world needs a new lender of last resort — a role that IMF has failed to perform for being under the influence of the western powers.