IMF survival instincts: risk exposure and the strength of loan conditionality

The International Monetary Fund (IMF) provides loans to governments in distress when they commit to market-liberalizing policy conditions. While some governments are asked to make sweeping and costly reforms, others access emergency funds with relative ease. Previous work has attributed this variety in conditionality to the characteristics of borrowing governments; this paper instead examines how the IMF's overall risk exposure determines the strength of conditionality and punishments for non-compliance. As the global lender of last resort the goal of the IMF is to preserve financial stability, but it must also ensure its own solvency and survival. I argue that when a greater share of outstanding loans is owed by high-risk borrowers, the IMF strengthens its conditionality and enforcement to protect itself from default. Using a new index of the IMF's total risk exposure and several indicators of conditionality strength and punishment, I demonstrate that the IMF changes its lending behavior based on its risk exposure. During periods of high-risk exposure, the IMF requires more policy conditions, larger fiscal adjustments, and is more likely to suspend or terminate loans for non-compliance. These findings illustrate how the IMF's interest in self-preservation shapes emergency sovereign lending, and contributes to ongoing debates about how self-interests influence the policy outputs of international organizations.