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Institutional Illusion: The ‘Flawless Façade’ of IMF’s zero Interest Loans

The International Monetary Fund (IMF) was conceived at the United Nations Bretton Woods Conference in July 1944. It claims to enhance trade, employment, sustainable economic growth and alleviate poverty, through its economic surveillance, capacity building, and lending methods. Its credibility and significance lie unchallenged owing to its large membership of 189 states across the globe and the top tier work that it does, albeit certain short-comings. This article primarily focuses on evaluating IMF’s lending exercises with respect to its 0 interest loans (hereby – loans) and how they are executed in contradiction to IMF vision and claims. A brief analysis of IMF’s structure and lending practices will bring forth its deep-seated biases. Additionally, its criticisms through some examples would help understand the pitfalls in its working and lift the façade off its practices.

IMF – an International Institution?

The IMF, like most International Organisations, is headquartered in the United States and is dependent on its member states for funding to carry out its daily responsibilities and for giving out loans. It uses Special Drawing Right (SDR) as the unit of account for maintaining international reserves, whose value is based on a basket of five currencies namely the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. The contribution of each member entitles them to a vote share in the IMF. The United States is its largest contributor with about 82,994.2 million SDRs which warrant the US to 16.51% of vote share – also the largest. This single-handedly makes it the only veto power holding state at the IMF. Moreover, the ‘Gentleman’s Agreement’ of 1944 ensures that only a European national is at the helm of the IMF. Its board of directors has upheld this practice to date despite facing severe criticism. Apart from this highly biased representation, the IMF has also been favouring richer states by giving them an “asymmetric treatment” as observed by the auditor of the Independent Evaluation’s Office (IEO) – IMF’s own watchdog. All of these factors collectively point towards the display of regional interests of the IMF which appear to be confined to the ‘Global North’. This raises several questions over IMF’s claim to be international and benefitting all.

The Policy Fallacy

Apart from its asymmetric structure, the IMF is also lenient in macro-policy implementation in richer states as against the poorer ones. It claims to give countries facing an economic crisis some sort of a breathing room to restore conditions for a stable economy with sustainable growth and implement better policies, through its lending and policy advice functions. This also builds confidence amongst foreign investors to invest in the economy, helps the government cover fiscal deficits, stabilise inflation rates, consumption, etc. Interestingly, the ‘0 interest’ charged on these loans is marketed as a philanthropic feat of the IMF. Nevertheless, the reality is quite different. 

In giving out these loans, the IMF is known to pose draconian conditions that cause more harm than good. It requires economies to reduce government borrowing and impose higher taxes and cut spending. Furthermore, it requires them to increase interest rates to stabilise the currency. This actually reduces the aggregate output of the economy drastically, hence significantly affecting its GDP growth. Other structural policy changes such as privatisation, deregulation of imports and exports, and treating foreign lenders at par with domestic ones further damages the economy making it fragile and more dependent on the richer states. These poor macro-policy conditions coupled with the asymmetrical structure make IMF lending highly biased and inefficient.

Hundreds Rich, Billions Poor

The bias in the IMF strategy is clearly illustrated in the Greek Debt Crisis of 2010. The IMF and the European Central Bank’s rescue package of €80 billion to Greece ended up “rescuing” only the private creditors of Greece, leaving Greece with roughly 33% GDP contraction and 24% unemployment over the next five years. The Greek public debt rose from 120% to 170% of its GDP during this time. Such disastrous mismanagement of the debt crisis happened because the IMF wanted to prevent these private creditors from dumping the debt in other economies of the European Union (EU), which could trigger a “contagion” effect leading to a wider crisis. Therefore, in order to bail-out these creditors immediately, the IMF violated its policy of debt sustainability, which requires it to check that the distressed state’s debt must be sustainable (repayable) with a “high probability”. Since Greece is an EU member state, key protocols were bypassed to ‘save’ the eurozone and private creditors and the loan was disbursed without due diligence. 

On the contrary, such relaxations are never provided to poorer African nations. Instead, African governments are treated rather disrespectfully by the IMF. The IMF tries to micromanage their economies, to generate revenue to pay back the loans at the earliest, thereby disregarding any catastrophic implications their policies may have. For example, in Malawi in 2002, the IMF forced the government to sell its grain reserves just before a devastating drought which led to unheard suffering and destruction of Malawi’s economy. Such policies end up worsening the situation rather than improving them.


Amongst others, the inefficiencies enumerated above cost several states an awful lot in terms of money, lives, and resources and also contribute towards increasing the economic disparity amongst individuals, corporations, and states. IEO’s criticism of IMF’s lending practices shows that it is in a dire need of structural and policy reforms to become ‘international’ and beneficent in the true sense. Alas, several reform proposals are pending to be passed and ratified by the US Senate – yet another problem that needs to be fixed. This critique by no means aims to dismiss the significance of the IMF but to point out the inefficiencies which need to be rectified to make the system better. Unless this asymmetric structure is done away with, institutions like the IMF will never achieve their intended goal and remain under their own illusion.

Deepanshu Singal is an undergraduate student at Ashoka University with a keen interest in Economics and International Relations.

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