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A Review of IMF-Supported Lending Programs

The IMF’s Review of Program Design and Conditionality provides a deep look into the design of 133 IMF-supported lending programs in operation between September 2011 and December 2017. This review is the first major stocktaking of IMF programs since the Global Financial Crisis, a period of unexpectedly slow economic growth.

Programs as shock absorbers

Countries often come to the IMF when they already face major threats to economic or financial stability. Hence, IMF programs serve as “shock absorbers,” enabling countries to meet immediate financial needs and significantly cushion economic distress. IMF programs also catalyze additional financing from the markets, other official lenders, and donors. This helps protect the countries’ economies from even greater disruption.

The review found three-quarters of IMF programs were successful or partially successful in achieving their objectives, such as resolving balance of payment problems and fostering economic growth. Social spending was generally protected as a share of GDP. Over a third of IMF programs, mostly in low-income countries, targeted fiscal expansion to support growth and poverty reduction.

In line with its commitment to be a learning institution, the Fund will draw on the lessons from the review to amend program design in the future.

Lessons learned and way forward

The review also identified several factors that potentially inhibited programs from fully reaching their objectives. Overoptimistic economic forecasts reduced a program’s chances of success; accordingly, the review recommends using a more conservative approach to economic forecasts and providing deeper analyses of the impact that policies under the program could have on economic growth. More extensive contingency planning should also be included when designing programs.

Public debt is a case in point. Debt sustainability improved in most cases where debt vulnerabilities started out high. In some programs, however, debt exceeded the Fund’s initial projection by considerable margins. Fund policies are already in place to deal with unsustainable debt in Fund-supported programs. While any debt restructuring needs to be considered on a case-by-case basis, more careful diagnosis is essential—this means sharper tools for the IMF’s debt sustainability analysis are needed to reduce any bias in judgement when assessing debt.

The review finds many programs applied fiscal adjustments that were less growth-friendly than initially envisaged. Fiscal adjustment tended to be achieved by cutting public investment, possibly curtailing future growth, rather than by lowering current spending or raising revenue. To be a more useful guide for the government’s fiscal policy, an IMF program could set more granular targets, like a floor for critical public investments.

Tackling structural challenges to bolster growth prospects

Fund-supported programs could also do more to tackle deep-rooted structural challenges to improve a country’s long-term growth prospects. Comparing structural conditionality attached to programs with the recommendations found in preceding IMF surveillance reports, we found that programs generally kept closer to reforms that fell within the Fund’s traditional areas of expertise. We also found that conditionality in fragile and small states should be better tailored to these countries’ specific challenges.

Where critical for achieving program goals, conditionality may also need to go beyond traditional domains, such as fiscal and monetary policy, suggesting that the Fund will need to build more expertise, for example, in labor and product market reforms. We will also continue to collaborate with partner institutions in areas where we do not have expertise. As reforms in some of these areas could take longer to implement and yield results, the Fund could consider extending the program duration of arrangements under the Extended Fund Facility in exceptional cases to five years, alongside appropriate safeguards.

The importance of ownership

IMF-supported programs tended to be most successful when country authorities had strong ownership of the specified course of action. To foster this commitment, the IMF needs to put itself into the shoes of country authorities more often. A better understanding of domestic institutional and political capacities can avoid aiming at unrealistic targets. Also, tying programs in with national reform plans will make it easier for country authorities—and their citizens—to stay the course.

Effective communication with the public is often an underappreciated aspect of successful program implementation. The review recommends greater public information and engagement. If a program goes off-track, the Fund should strive to remain involved—for instance, by encouraging countries to use Staff-Monitored Programs that will help maintain the country’s track record in collaborating with the Fund.

In line with its commitment to be a learning institution, the Fund will draw on the lessons of the review to improve program design in the future. Moreover, the Fund will continue to conduct regular reviews of its conditionality.