How the IMF Helps Countries Tackle Inequalities
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Pandemic impact on inequality and long-term risks
- The Covid–19 pandemic is exacerbating inequalities across the globe, potentially undermining economic and political stability.
- Even prior to the pandemic, inequalities were high and rising in many countries and recent evidence points to long-term adverse implications of pandemics for inequality, with the potential for lasting scarring, particularly for already disadvantaged groups.
- The crisis has particularly hurt low-skilled workers and informal sector workers, which disproportionately include women and youth.
- Significant disruption to education has resulted in large learning losses for children from disadvantaged families, with potentially worrying implications for their prospects.
- The pandemic accelerated long-term trends such as automation and digitalization, which can further reinforce inequality even if beneficial for productivity and growth.
- Adverse fiscal implications of the crisis will constrain governments’ ability to address these challenges, especially in low-income and fragile countries expected to experience a more protracted recovery.
- Responding requires coordinated global and national efforts to avoid undermining sustainable inclusive growth and poverty escape prospects.
IMF analysis, surveillance, and expanded topical coverage
- The IMF has substantially scaled up focus on inequality over the last decade, routinely producing analysis of inequality trends and supporting countries in policy design to tackle inequality.
- Inequality issues are now routinely addressed in multilateral and bilateral surveillance where inequality is “macrocritical” for macroeconomic stability and inclusive growth.
- Recent IMF flagship publications placing inequality at the center include: April 2021 Fiscal Monitor, October 2017 Fiscal Monitor, October 2021 Regional Economic Outlook for Sub-Saharan Africa, October 2020 Regional Economic Outlook for Asia and Pacific, and G20 Note on Enhancing Access to Opportunities.
- Since 2015, inequality focus during bilateral Article IV consultations became more systematic; the number of countries where inequality issues were central increased from 33 in 2015 to 52 by 2018.
- The range of topics expanded beyond fiscal redistribution and social spending to include: inclusive growth, inequality trends, drivers and policies; distributional implications of macroeconomic and structural reforms; regional inequality; gender inequality; and financial inclusion.
Country-level findings and policy responses (selected examples)
- Myanmar (2016): IMF staff found financial liberalization can boost growth, reduce poverty, and improve income distribution, but the poor may benefit proportionally less; recommended policies focused on disadvantaged groups, including micro-finance schemes.
- El Salvador (2019): Examined impact of financial sector reform and financial inclusion on inequality.
- Paraguay (2021): Analysis showed disproportionate adverse impacts on women, informal workers, and the services sector; government introduced two new social assistance programs and temporarily expanded an existing social protection program with strong safeguards to ensure adequate coverage of lower-income groups.
- Chile (2021) and The Bahamas (2021): Country analyses evaluated distributional impacts of Covid–19 and the role of social spending during the pandemic.
- Nigeria (2019): Analysis focused on gender inequality and showed that reducing regional and gender differences in access to education would boost productivity, decrease income inequality, narrow gender gaps in labor force participation rates and earnings, and boost long-term GDP growth.
- Sweden (2021), Spain (2020), Mexico (2019), Japan (2019), Sierra Leone (2020): Recent Article IV analyses covering gender inequality issues.
- Poland (2016): Staff discussed regional income inequality and identified policies to increase productivity in poorer eastern regions by supporting labor reallocation from agriculture to industry and services, improving educational attainment, reducing skill mismatches, scaling up public infrastructure, and facilitating labor mobility.
- Slovak Republic (2017), Ireland (2017), Mexico (2019): Additional studies on regional inequalities.
Lending, social spending, and program design
- In lending operations, the IMF has routinely emphasized protecting the poor and strengthening social spending to support inclusive growth.
- The 2019 Strategy for IMF Engagement on Social Spending embeds such focus in PRGT-supported programs through “social and other priority spending” floors and other program conditionalities.
- About 90 percent of all PRGT programs have quantitative conditionality setting a floor on social spending, which also allow for increased spending over the program’s lifespan.
- The pandemic exposed large gaps in social safety nets in many countries, especially low-income countries; IMF country teams supported governments in expanding coverage to better protect livelihoods during the pandemic.
Capacity development, collaboration, and knowledge sharing
- The IMF scaled up capacity development activities, including a new online course on Inclusive Growth (IGx) open to all free of charge, and an internal training course on the design of social safety nets accompanied by a new country-level diagnostic tool.
- An internal Inequality Advisory Group was established to facilitate knowledge sharing within the IMF and with development partners through joint seminars.
- Formal collaboration arrangements were strengthened with external partners, including World Bank, ILO, UNICEF, WFP, DFID, ADB, and CEQ, to complement the Fund’s macroeconomic focus with broader structural expertise.
- A special Covid-19 series note on gender equality and Covid-19 was prepared in collaboration with UNDP and UN Women.
- The IMF has produced more than 100 special COVID-19 series notes providing advice to member countries at the onset of the pandemic.
Financing responses and resource mobilization
- To support countries during the COVID-19 pandemic, the IMF temporarily doubled access to its emergency financing facilities (including the Rapid Credit Facility and the Rapid Financing Instrument).
- Together with other pre-existing lending arrangements (many scaled up), the IMF approved financing requests from 85 countries for the total amount of about $116 billion (as of August 9, 2021).
- The IMF provided additional support via grants for debt relief under the Catastrophe Containment and Relief Trust (CCRT) and, together with the World Bank and the G-20, initiated the Debt Service Suspension Initiative (DSSI) for low-income countries.
- The IMF allocated Special Drawing Rights (SDRs) equivalent to US$650 billion to address long-term global reserve needs, build confidence, and foster resilience and stability of the global economy.
Policy recommendations and priorities going forward
- Use enhanced financing wisely to ensure the crisis does not reverse recent gains in poverty alleviation and to avoid disruptions to investments in human capital.
- Ensure access to quality basic public services, including education, health, and social safety nets.
- Invest in traditional and digital infrastructure to create jobs and support recovery.
- Ensure transparency in the use of resources.
- Complement external financing with ambitious domestic reform agendas tailored to country circumstances to:
- Mobilize domestic revenues.
- Enhance spending efficiency.
- Promote green and inclusive growth.
- Increase tax capacity, especially in low-income countries, to attain development goals over the next decade.
- Pursue a concerted and coordinated international effort to secure recovery, ensure sustainable and resilient growth, and give everyone a fair shot at lifetime opportunities.
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