Mains Marathon

Approach:

• Briefly introduce the IMF’s Extended Fund Facility (EFF) and its purpose.
• In the body, explain how the EFF supports countries with structural economic challenges, and critically evaluate its effectiveness in promoting long-term fiscal stability.
• Conclude suitably.

Introduction:

The Extended Fund Facility (EFF) is a medium- to long-term lending instrument of the International Monetary Fund (IMF) aimed at supporting countries facing deep-rooted structural economic challenges such as persistent fiscal deficits, inflation, and financial sector weaknesses.

Body:

Role of EFF in Supporting Countries With Structural Challenges:

• The EFF provides extended-duration financing (3-4 years) with larger fund access and longer repayment periods than standard IMF facilities.
• It targets structural reforms in areas like tax rationalisation, subsidy restructuring, public financial management, and governance improvements.
• EFF-supported programmes involve a comprehensive policy package encompassing fiscal consolidation, monetary stability, and institutional strengthening.
• Egypt (2016) received EFF support for currency devaluation, energy subsidy reforms, and improving inflation targeting; while inflation initially stabilized, long-term results were mixed due to policy reversals.
• Pakistan (2019, 2023, 2024 and 2025) used EFF for fiscal adjustment, energy pricing reforms, and debt sustainability.
  • However, weak implementation and political instability limited progress.
• Sri Lanka (2023) adopted EFF assistance to address external debt, improve tax collection, and enhance governance amid a severe balance of payments crisis.
• The EFF promotes macroeconomic stability, builds foreign exchange reserves, and helps restore investor confidence in structurally weak economies.

Effectiveness in Promoting Long-Term Fiscal Stability:

• EFF’s success hinges on domestic policy ownership, continuity in governance, and transparent implementation of agreed reforms.
• In Greece (2012), despite fiscal consolidation under EFF, severe austerity led to economic contraction and public backlash.
• Critics argue EFF conditionalities, often involving fiscal austerity measures(like- reducing budget deficits), can potentially lead to reduced social spending, aggravating inequality and poverty during adjustment periods.
• IMF’s 2021 internal review noted that while EFF countries improved debt and inflation metrics, inclusive growth and job creation often lagged.
• Effective EFF programmes combine flexible design, targeted social protection, and local capacity-building to ensure reform sustainability.

Conclusion:

The EFF remains a vital tool for stabilising economies with structural weaknesses. However, its long-term impact depends on credible reform implementation, domestic institutional strength, and balanced conditionalities that safeguard social equity alongside fiscal discipline.