Five Lessons from a Review of Recent Crisis Programs

IMF Blog, July 11, 2016

Source details

Author: Vivek Arora
Date: July 11, 2016
Scope: Review of the IMF’s experience with 32 programs approved during the five or so years after the crisis in 2008.
Context: IMF lending increased to unprecedented levels after the global financial crisis, with programs across the euro area, Africa, Asia, the Middle East, and emerging economies in Europe. The IMF reviewed individual programs and conducted cross-country reviews, most recently December 2015.

IMF programs helped avert a meltdown of the global economic system and played a part in avoiding outcomes feared at the outset (for example, a repeat of the Great Depression or cascading crises).
The IMF adapted its program design as the crisis unfolded.

Key finding: Nominal exchange rates did not move much in recent crisis cases compared with historical episodes.
Evidence:
- Real effective exchange rates adjusted by only 12 percent across program cases, compared with around 48 percent historically.
- The typical IMF program period is described as a three to four- year period.
Contributing factors for limited nominal exchange rate movement:
- Currency union membership (the euro area).
- Managed exchange rates.
- Concerns about impact of large depreciation on households and corporations with foreign-currency borrowing.
Policy implication:
- If the exchange rate is not available as an adjustment tool, prepare for longer programs with more financing.
- Internal devaluation requires large macroeconomic (especially fiscal) adjustment and deep-seated, sustained structural reforms, and may take longer than a typical program to achieve.

Key findings:
- Fiscal adjustment is necessary to reduce public debt and restore sustainability; pace matters, as does composition.
- Rapid consolidation can, by driving down GDP, actually raise the debt-to-GDP ratio in the short term.
Observations:
- Despite fiscal adjustment, debt-GDP ratios rose more than expected in Armenia, Bosnia-Herzegovina (2009), Greece (2010), Iceland, Ireland, Latvia, Maldives, Portugal, and Romania.
- As contractionary effects became evident, IMF advised slowing the pace of consolidation in Armenia, Greece, Hungary, Latvia, Portugal, and Ukraine.
Policy recommendations:
- Build support for and implement complementary measures to support growth when consolidating.
- In cases of implausibly large required fiscal adjustment, consider substantive and early debt restructuring where contagion concerns (for example, absence of firewalls) are limited.
- Pay special attention to social safety nets and poverty; include social protection in conditionality and protect social benefit spending.

Key findings:
- Structural reforms were more prominent in crisis-era programs and were generally implemented well.
- Implementation was patchier in programs with more numerous reforms or those continuing for a long time, possibly indicating “reform fatigue.”
- The boost to potential growth from structural reforms was more modest than expected in the short term.
Policy recommendation:
- Continue to support structural reforms, but be realistic about short-term payoffs and authorities’ capacity to implement.

Key findings:
- Private balance sheets (household, corporate, and financial debt) were central to the crisis and had larger-than-expected negative effects on public finances and growth.
- Countries were only partially successful in preventing vicious feedback loops associated with excessive debt.
Causes of worse-than-expected outcomes:
- Patchy implementation.
- Delayed debt resolution/restructuring.
- Evolving crisis dynamics.
Policy recommendation:
- Take early action to enhance debt resolution frameworks and strengthen bank supervisory and regulatory capacity.

Key findings:
- Euro area programs highlighted how Fund interaction with regional financing arrangements and currency unions differs from prior practice.
- Joint program design with regional arrangements provided regional expertise and financing benefits.
Considerations:
- Institutional frameworks and practices differ across arrangements globally.
- Programs with members of a currency union must address union-wide policies that influence individual members and may require political agreement among all members.
- Where union-wide policy changes were important, the IMF generally sought them through commitments or surveillance advice.
Policy recommendation:
- Develop clearer, more concrete guidelines for future IMF collaboration with regional financing arrangements, recognizing differences across arrangements.

Outcomes since programs:
- The worst outcomes were largely avoided.
- Declines in output were cushioned and in many cases reversed.
- Imbalances were reduced and financial systems stabilized.
- The euro area gained time to mobilize political support to build firewalls and a crisis management framework.
- Emerging economies and small states managed abrupt declines in global trade and financing flows.
- Confidence in Middle Eastern and North African economies was shored up after the 2011 Arab Spring.
Forward-looking note:
- The durability of gains must still stand the test of time.
- Practical priority: ensure program design remains agile and focused on members’ needs by drawing lessons in real time and responding to them.

Vivek Arora, July 11, 2016 — Five Lessons from a Review of Recent Crisis Programs

从近期危机规划审查中吸取的五个经验教训; iMFdirect博客; 2016年7月11日
- 从近期危机规划审查中吸取的五个经验教训; iMFdirect博客; 2016年7月11日 (Markdown version)
- 从近期危机规划审查中吸取的五个经验教训; iMFdirect博客; 2016年7月11日 (PDF)
IMF Policy Paper: Crisis Program Review, November 9, 2015
- IMF Policy Paper: Crisis Program Review, November 9, 2015 (Markdown version)
- IMF Policy Paper: Crisis Program Review, November 9, 2015 (PDF)