Do IMF Programs Stimulate Private Sector Investment?

IMF Working Papers, July 29, 2022

Source details

Provides new evidence on the role of IMF programs in stimulating private sector investments.
Uses detailed firm-level data on tangible fixed assets and a local projection methodology to estimate the dynamic response of firm investments to the approval of an IMF arrangement.
Distinguishes between GRA and PRGT financing and documents two financial channels: firms’ external financial dependence and firms’ sectoral uncertainty.
Employs a difference-in-differences approach exploiting firm-level characteristics to identify mechanisms.
Finds stronger stimulation of private investments for domestic firms.
Argues that a private investment transmission channel can improve understanding of factors affecting the success and effectiveness of IMF programs.

Data: detailed firm-level data on tangible fixed assets.
Estimation: local projection methodology to estimate dynamic responses of firm investments to program approval.
Identification: difference-in-differences approach exploiting firm-level external finance dependence and sectoral uncertainty.
Financing distinction: analysis separates GRA and PRGT financing in assessing investment paths and growth.

Distinguishing between GRA and PRGT financing matters for the path of firm investment and its growth.
Two financial channels are documented:
- Degree of firms’ external financial dependence.
- Firms’ sectoral uncertainty.
Firms that rely more on external finance and face more sectoral uncertainty experience a reduction in binding financial frictions following program approval and hence invest more.
Private investments are stimulated more for domestic firms.

Recognition of a private investment transmission channel can inform assessments of IMF program effectiveness.
Consideration of firm-level external finance dependence and sectoral uncertainty may improve program design and targeted support to stimulate private investment.