IMFSurvey Magazine: Policy
IMF OUTCOMES ANALYSIS
Reformed IMF Lending Has Worked Well In Crisis
By Peter Dohlman and Bikas Joshi
IMF Strategy, Policy, and Review Department
September 28, 2009
- IMF-supported programs during current crisis deemed more effective
- Upfront, large-scale financing has created room for supportive policies
- Signs of stabilization emerging, though challenges to secure recovery remain
Recent IMF-supported programs in emerging market countries are delivering the support needed to help these countries weather the worst of the global financial crisis, according to an IMF staff study.
Increased resources, supportive policies, and more focused conditionality are the main reasons for the positive impact of the programs so far.
“What this study tells us is that, with IMF support, many of the severe disruptions characteristic of past crises have so far been either avoided or sharply reduced,” IMF Managing Director Dominique Strauss-Kahn said.
The study analyzes policies and outcomes in 15 emerging market countries with IMF-supported programs. It finds that support from the IMF has enabled countries to lessen the effects of the crisis by avoiding currency overshooting and bank runs—traits of past crises. At a time when capital flows were severely curtailed, the IMF stepped in, providing large-scale financial assistance to countries in need.
IMF’s response to crisis
In response to the most severe global recession of the postwar era, the IMF has sharply increased the resources it has available to lend, from about $250 billion to $750 billion, following pledges made by the Group of Twenty leading emerging and advanced economies after the London Summit in April 2008.
As part of its efforts to support countries during the global economic crisis, the IMF also conducted a major overhaul of how it lends money by offering higher loan amounts and tailoring loan terms to countries’ circumstances.
These reforms have proved timely. The IMF has been instrumental—with its prompt financial support of affected countries—in substantially reducing tail risks and helping bring down borrowing costs for emerging markets that had spiked following the bankruptcy of Lehman Brothers (see Chart 1).
What programs have achieved
Countries that have turned to the IMF for support in this crisis were suffering from vulnerabilities that exposed them to the global retrenchment of capital and trade flows. The policy programs adopted by these countries, and financed by the IMF, aimed at restoring market confidence while addressing those underlying vulnerabilities.
The study highlights the following early results:
• While output losses have been large in countries with programs, they have not been significantly worse than in other emerging market countries with similar preexisting vulnerabilities, such as large current account deficits and credit booms. In other words, Fund support has allowed program countries to do as well as similar countries whose balance of payments did not get as badly hit.
• Adjustment of external imbalances has been more modest compared to past crises, with less compression of domestic consumption and investment, despite a much worse global environment.
• Sharp spikes in interest and exchange rates have been avoided, minimizing any negative impact on households and companies.
• With a few notable exceptions, banking crises have thus far been avoided—a remarkable achievement given that many countries entered the crisis following a credit boom financed by international capital flows.
Importance of financing
Rapid and frontloaded financial assistance on a large scale was key in supporting market confidence and avoiding sharp currency depreciations. Programs were put in place quickly—in a matter of weeks in some cases—and the size of the loan packages were aligned with the large financing needs facing countries.
Importantly, financing provided by the IMF was used more to meet the funding needs of the private sector and, where necessary, the government, and not merely to buttress central bank reserves (see Chart 2).
Policies to fight the recession
Adequate financing created space for a policy mix designed to fight the recession (see Chart 3). Unlike past crises, fiscal deficits were allowed to widen in response to slowing economic activity—although, in most cases, deficits didn’t match the full decline in revenues because of the need to ensure future fiscal sustainability.
Interest rate increases were generally modest compared to past crises, in part because inflation spikes stemming from currency depreciation were avoided this time around. Macroeconomic policies designed to help overcome the recession were backed by measures to address bank liquidity needs and protect bank deposits.
Protecting the vulnerable
The IMF has also taken steps to help governments mitigate the impact of the crisis on the most vulnerable in society. In particular, the IMF has promoted measures to protect and even increase spending on, and improve the targeting of, social safety net programs.
Listening to governments
More generally, the IMF has tried to accommodate the policy preferences of governments when putting together a program, including with respect to the choice of currency regime and the recourse to capital controls, and policies have been adapted as conditions have changed.
Program conditionality has been focused on key vulnerabilities, such as bank recapitalization and reforms to secure fiscal sustainability (see Chart 4). This restrained use of loan conditions has likely contributed to greater buy in to the programs by governments, as reflected in timely implementation of measures in most programs.
Signs of stabilization
There are already signs that economic conditions are stabilizing in many countries. Compared to prior crises, this stabilization comes at an earlier stage. Exchange rates have steadied, borrowing costs are declining, and foreign capital is flowing again.
But the recovery may take a long time. In many countries, underlying weaknesses still need to be fully addressed. In some cases, unwinding accommodative policies and implementing structural reforms will be necessary to reduce large current account deficits—a key vulnerability in this crisis—and limit public debt. Nursing banks and their balance sheets back to health, and helping companies and households rebuild confidence will require patience and determination.
With the help of the financing provided by the IMF, policymakers can make these adjustments gradually, as the global economy recovers.
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