Why does the International Monetary Fund ask borrowing governments to reduce budget deficits?

The International Monetary Fund (IMF) is a specialized agency of the United Nations that works to secure international monetary cooperation and stabilize currency exchange rates.1

When the IMF provides loans to countries experiencing balance-of-payments deficits, it requires borrowing governments to implement specific macroeconomic adjustments, often referred to as "conditionality". The requirement to reduce budget deficits is intended to help these nations reestablish their balance-of-payments equilibrium. By reducing government spending or increasing taxes—a practice known as austerity—these adjustments aim to decrease imports and increase exports. This shift is designed to enable the country to earn sufficient foreign exchange to repay its foreign debts, including the loans provided by the IMF.23

While these measures are intended to restore financial stability, they are a subject of significant debate. Critics argue that such conditions can be overly uniform, potentially reducing economic growth and causing severe hardship for the most vulnerable populations in borrowing countries.4