Can participation in IMF programs facilitate sovereign debt rescheduling? The role of program size

Bai, Ye; Banerji, Sanjay; Wang, Zilong; Zhang, Wenjing

Abstract

We develop a theoretical model to explain the possible inverted U-shaped relationship between IMF loan size and the probability of sovereign debt rescheduling. Given that the IMF is a de facto senior creditor, borrowing too much from the IMF leaves a smaller total surplus for the debtor and creditor to share in the future; thus creditors and debtors have less incentive to renegotiate the debt. Empirically, we propose a new identification strategy to isolate the effect of IMF loan size. Our identification strategy is based on Bartik-style instrumental variables that combine changes in the IMF's liquidity and the country's historical average IMF loan size. Using panel data from 100 countries over the period between 1977 and 2020, we empirically demonstrate the inverted U-shaped relationship predicted by our theory. While our results confirm the positive role of IMF loans in resolving sovereign debt crises, we note that too much lending can lead to unintended adverse outcomes.

Citation

Bai, Y., Banerji, S., Wang, Z., & Zhang, W. (2024). Can participation in IMF programs facilitate sovereign debt rescheduling? The role of program size. Journal of International Money and Finance, 144, Article 103079. https://doi.org/10.1016/j.jimonfin.2024.103079

• Journal Article Type: Article
• Acceptance Date: Apr 3, 2024
• Online Publication Date: Apr 4, 2024
• Publication Date: 2024-06
• Deposit Date: Apr 25, 2024
• Publicly Available Date: Apr 26, 2024
• Journal: Journal of International Money and Finance
• Print ISSN: 0261-5606
• Electronic ISSN: 1873-0639
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 144
• Article Number: 103079
• DOI: https://doi.org/10.1016/j.jimonfin.2024.103079
• Keywords: IMF; Sovereign debt; Debt restructuring
• Public URL: https://nottingham-repository.worktribe.com/output/34106850
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0261560624000664?via%3Dihub
• Additional Information: This article is maintained by: Elsevier; Article Title: Can participation in IMF programs facilitate sovereign debt rescheduling? The role of program size; Journal Title: Journal of International Money and Finance; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.jimonfin.2024.103079; Content Type: article; Copyright: © 2024 The Authors. Published by Elsevier Ltd.