The impact of IMF conditionality on financial risk

This study investigates the impact of IMF conditionality on financial risk using a panel dataset of 131 countries from 1984 to 2019. The results show that IMF conditionality significantly increases the financial risk of recipient countries, and this finding remains robust across several robustness tests and endogeneity test. Further analysis across different risk categories indicates that IMF conditionality significantly increases foreign debt risk, international liquidity risk, debt service risk, and exchange rate risk, while having no significant effect on current account risk. Disaggregating conditionality by policy domain reveals that external debt, financial and monetary, and fiscal conditions are the primary drivers of increased financial risk. Moreover, we find that IMF conditionality significantly increases financial risk in upper-middle-income and high-income countries but insignificant in lower-middle-income countries. Mechanism analysis shows that IMF conditionality increases financial risk by increasing income inequality and reducing government spending. These findings highlight the importance of carefully evaluating and sequencing IMF policy conditions to maintain financial stability.