IMF Survey: IMF Support Helping Restore Growth but Key Risks Ahead

IMF News, April 15, 2011

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Published: April 15, 2011

Crisis assessment and overall findings

IMF financing during the 2007–09 global economic crisis helped stabilize economies when access to financial markets was seriously curtailed.
The study encompassed 29 countries with IMF-supported programs.
Since the start of the crisis, the IMF committed more than $250 billion in loans to its member countries.
Almost all countries with IMF-supported programs are seeing a return to growth.
The study finds ongoing risks: many countries need further fiscal consolidation, job creation is lagging behind the recovery, and political will to implement difficult reforms is flagging.
A second group of countries that sought IMF support in 2010–11 (including Greece and Ireland) face significant challenges: further fiscal consolidation to reduce high public debt will be needed for years, and reforms to improve growth potential will require strong social cohesion and national unity.

Country groups, timelines, and program waves

First wave of countries seeking IMF assistance (2008–mid-2009): Armenia, Belarus, Bosnia & Herzegovina, Costa Rica, El Salvador, Georgia, Guatemala, Hungary, Iceland, Latvia, Mongolia, Pakistan, Romania, Serbia, Seychelles, Sri Lanka, and Ukraine.
Second wave of countries seeking IMF assistance (late 2009–2011): Angola, Antigua and Barbuda, Dominican Republic, Greece, Iraq, Jamaica, Maldives, Moldova, Honduras, Ireland, Kosovo, and Macedonia.
Separately, Flexible Credit Lines (FCL) were granted to Colombia, Mexico, and Poland.

Program design, flexibility, and policy approach

Programs were designed to support countries’ efforts to absorb the shock; policies were customized rather than one-size-fits-all.
Program design was more flexible than in past crises:
- Programs were adjusted to allow automatic stabilizers to operate in full and to permit more government spending where output collapsed faster than expected (examples: Hungary, Latvia, Ukraine).
- Some programs incorporated capital controls to allow more time for adjustment (Iceland is the most prominent example).
- The IMF respected countries’ exchange rate choices and advised on policy design consistent with countries’ chosen regimes (example: Latvia retained its peg to the euro while pursuing strong adjustment).
The IMF’s fiscal policy approach during the crisis was pragmatic:
- Where fiscal space existed (low and sustainable public debt), large fiscal accommodation was encouraged.
- In other cases, immediate fiscal consolidation was advised to maintain market credibility.
- The analysis found fiscal deficits were set consistently with country-specific conditions.

Effectiveness measures and comparative differences with past crises

Effectiveness was assessed against country needs: stabilizing economies and avoiding excessive adjustment were primary goals for many first-wave countries.
Compared with past crises, the recent cases exhibited:
- Less severe fiscal adjustment,
- Less overshooting of exchange rates,
- Fewer acute banking sector problems,
- Less inflation.
Large-scale IMF financing enabled countries to avoid severe compression of domestic demand and imports; the contraction would have been much worse without financing from the IMF, the European Union, and other partners.
Severe banking sector outcomes (bank runs, full-blown collapses) were generally avoided; notable exceptions with major banking problems included Iceland and Ireland.
The European Bank Coordination Initiative helped roll over debt and convinced parent banks to maintain exposure in crisis-hit countries.

Social spending and protection of vulnerable groups

The IMF worked to protect and even increase social spending to shield vulnerable groups.
In Costa Rica, social spending increased by over 3 percentage points of GDP in 2009 and 2010 despite a substantial decline in fiscal revenues.
In Iceland, automatic stabilizers were allowed to operate with few limits in 2009, allowing the extensive social safety net to cushion vulnerable groups.
"Our new study reveals that social spending as a share of total public spending increased in almost all IMF-supported programs."
The increase in social spending was largest in countries with the lowest initial share of social spending.

Key challenges and risks ahead

High public debt levels in some countries (examples cited: Hungary and Greece); some countries (example: Ireland) now face debt sustainability questions due to decisions to rescue banking systems.
Long adjustment processes will be needed to restore fiscal sustainability and market credibility.
For central and eastern European countries nearing program expiry:
- The main challenge is to avoid reform fatigue and implement measures to restore growth and jobs.
- With prior growth fueled by unsustainable credit booms, these countries must shift toward exports as a driver of future growth.
For advanced European cases under joint programs with the European Union and the European Central Bank:
- Success is defined as ensuring sustainable growth and jobs, improving competitiveness, restoring public finance sustainability, and regaining market credibility.
- Credible national implementation and an adequate regional framework at the European level are key.

Notable success stories and examples

Latvia: significant adjustment that avoided extreme outcomes while retaining exchange rate peg.
Romania and Latvia: examples of countries that turned economies around with political and social perseverance.
Iceland and Ireland: experienced major banking problems, but broader program efforts helped avoid full-blown systemic collapses in many other countries.

IMF Survey interview, April 15, 2011 — Strategy, Policy, and Review Department study covering IMF-supported programs (29 countries); IMF committed more than $250 billion in loans during the 2007–09 global economic crisis.