Does signing on to an IMF package cause inflation to rise?

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Question: 

Whenever a country signs up to an IMF package, there is a sudden increase in inflation which is difficult to control. My question is why does that occur? Secondly, what is an anti-inflationary monetary policy and how does that contribute to inflation of basic goods (petrol, rice, sugar, etc.)

Answer: 

Q. Whenever a country signs up to an IMF package, there is a sudden increase in inflation which is difficult to control. My question is why does that occur?

A. Countries, usually, approach the IMF as a last resort measure after domestic policy options have been exhausted. This generally happens when a country is facing acute macroeconomic risks. Therefore, by the time a country approaches the IMF, macroeconomic risks manifest themselves in several ways including but not limited to a depreciating currency, declining growth, and surging inflation.

Q.Secondly, what is an anti-inflationary monetary policy and how does that contribute to inflation of basic goods (petrol, rice, sugar, etc.)

A. Anti-inflationary monetary policy intends to combat inflation. Central banks increase interest rates or bank reserve requirements to keep inflation at acceptable levels by increasing the cost of borrowing. Although monetary policy may not be entirely helpful in combating inflation in prices of basic goods, it attempts to stop price increases of these goods feeding into generalized inflation and expectations about inflation.

Answered by:
Anand Shankar
Ph.D. Student
Last updated on August 31, 2021