IMF Survey: Reformed IMF Lending Has Worked Well In Crisis

IMF News, September 28, 2009

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Bibliographic details

• Authors: Peter Dohlman, Bikas Joshi IMF Strategy
• Published: September 28, 2009

Overview

• Publication: IMF Survey: Reformed IMF Lending Has Worked Well In Crisis
• Authors: Peter Dohlman and Bikas Joshi, IMF Strategy, Policy, and Review Department
• Date: September 28, 2009
• Scope: Analysis of policies and outcomes in 15 emerging market countries with IMF-supported programs during the global financial crisis.
• Key overarching conclusion: Recent IMF-supported programs in emerging market countries are delivering support needed to help these countries weather the worst of the global financial crisis.

IMF response to the crisis

• Resources increased from about $250 billion to $750 billion following pledges after the London Summit in April 2008.
• Major overhaul of lending: offering higher loan amounts and tailoring loan terms to countries’ circumstances.
• IMF Managing Director Dominique Strauss-Kahn: “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.”

Program outcomes and early results

• The IMF supported countries were able to avoid many traits of past crises, such as currency overshooting and bank runs.
• Findings highlighted by the study:
  • 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 (e.g., large current account deficits and credit booms).
  • Adjustment of external imbalances has been more modest compared to past crises, with less compression of domestic consumption and investment.
  • Sharp spikes in interest and exchange rates have been avoided, minimizing negative impacts on households and companies.
  • With a few notable exceptions, banking crises have thus far been avoided despite many countries entering 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 loan package sizes were aligned with large financing needs.
• Financing from 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.

Policies to fight the recession

• Adequate financing created space for a policy mix designed to fight the recession.
• Fiscal policy: Fiscal deficits were allowed to widen in response to slowing economic activity, though in most cases deficits didn’t match the full decline in revenues because of the need to ensure future fiscal sustainability.
• Monetary policy: Interest rate increases were generally modest compared to past crises, partly because inflation spikes from currency depreciation were avoided.
• Financial sector measures: Macroeconomic policies were backed by measures to address bank liquidity needs and protect bank deposits.

Protecting the vulnerable and program design

• IMF promoted measures to protect and even increase spending on, and improve the targeting of, social safety net programs.
• IMF sought to accommodate policy preferences of governments (e.g., choice of currency regime, recourse to capital controls) and adapted policies as conditions changed.
• Program conditionality was concentrated on key vulnerabilities such as bank recapitalization and reforms to secure fiscal sustainability; this restrained use of loan conditions contributed to greater government buy-in and timely implementation in most programs.

Signs of stabilization and outlook

• Early signs: Exchange rates have steadied, borrowing costs are declining, and foreign capital is flowing again.
• Comparative timing: Stabilization is occurring at an earlier stage than in prior crises.
• Risks and challenges:
  • Recovery may take a long time; underlying weaknesses still need to be fully addressed in many countries.
  • Unwinding accommodative policies and implementing structural reforms will be necessary in some cases to reduce large current account deficits and limit public debt.
  • Restoring bank balance sheets and rebuilding confidence among companies and households will require patience and determination.
• Role of IMF financing: Financing provided by the IMF can enable policymakers to make gradual adjustments as the global economy recovers.

Source: IMF Survey: Reformed IMF Lending Has Worked Well In Crisis — Peter Dohlman and Bikas Joshi, IMF Strategy, Policy, and Review Department, September 28, 2009.

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References

• https://www.imf.org/en/News/country-focus
• PRESS CENTER
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• Press release
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• Key issues: IMF lending
• IMF help for world’s poorest
• New rules for IMF loans
• 15 emerging market countries
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• major overhaul of how it lends money
• vulnerable in society
• conditionality
• https://www.imf.org/en/home