IMF-Supported Programs Help Countries
Weather the Worst of the Global Crisis, Says Internal Review
Press Release No. 09/319
September 27, 2009
A mix of increased resources, policy flexibility, and more focused
conditionality has allowed the International Monetary Fund (IMF) to better
support emerging market countries hit by the recent global financial crisis,
said an internal IMF review released today. In an analysis of 15 countries1,
Recent Crisis Programs, the IMF said that the Fund-supported programs
are delivering the kind of policy response and financing needed to help cushion
the blow from the worst crisis since the 1930s.
“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,” IMF Managing Director Dominique Strauss-Kahn said.
“Serious challenges remain, especially restoring sustained growth in output and
employment, but there are encouraging signs of stabilization. The governments
and peoples of the countries concerned deserve the credit for these efforts.”
The study describes the typical economic and financial effects of past
crises--including currency overshooting, sharp current account contractions, and
systemic banking crises--and analyzes why these outcomes have so far been
avoided in most cases. Key factors this time include rapid provision,
large-scale, and front-loaded IMF financing channeled to sectors facing the
tightest financing constraints; accommodative macroeconomic policies; emphasis
on protecting the financial sector from liquidity squeezes; more focused
conditionality; and stronger country ownership. The study notes that outcomes
and policies in program countries are broadly similar to those of non-program
emerging market countries, once controlling for pre-existing vulnerabilities,
such as current account deficits and credit booms.
“It is clear that this new generation of programs incorporate the lessons
of the past,” IMF Director of Strategy, Policy, and Review Reza Moghadam
said, “While it is certainly too early to draw firm conclusions, this
assessment is useful in providing real-time feedback to country authorities, IMF
staff, partner institutions and policymakers elsewhere, so that we can continue
to learn and improve further.”
Among the factors that have helped avoid past problems are:
Large and timely financing:The Fund was able to
quickly mobilize large financing packages for countries hit by the financial
turbulence of late 2008. Almost all have entailed exceptional access--beyond the
normal limits--to Fund resources, with more front-loaded disbursements.
Financing packages have included support from other official creditors, enabling
risk sharing. Private sector involvement has also been sought in a number of
European programs. Importantly, official financing has been used more to meet
actual funding constraints of the private and public sectors, less to replenish
central banks reserves.
More focused conditionality:recent programs carry
fewer structural conditions than previous arrangements. The study found a sharp
fall in measures outside the key areas of Fund competency and a marked increase
in the share of financial sector conditions at the root of the current crisis.
However, structural conditions typically rise over time as crises deepen and
vulnerabilities shift--so this aspect will require continued close monitoring.
Stronger Country Ownership: the programs show
differences in design across countries (with respect, for example, to the choice
of currency regimes), reflecting the need to tailor support to each country’s
particular reform agenda--the failure to do this has been a criticism of past
IMF support. Compliance has been better and completion of program reviews
timely, suggesting strong country ownership of programs supported by the Fund.
Policy responses tailored to country circumstances,
• Accommodative fiscal policy: fiscal policy in most cases has been
accommodative and adjusted to evolving conditions. Deficits were allowed to rise
in response to falling revenues and, in cases where domestic and external
financing was lacking, this was facilitated by channeling Fund resources
directly to the budget. Going forward, countries with heavier debt burdens will
need to redouble fiscal efforts to secure sustainability.
• Avoidance of abrupt monetary policy tightening: sharp spikes in
interest and exchange rates have been avoided, minimizing the negative dynamics
from balance sheet effects, particularly in countries where a high share of
borrowing is in foreign currency. As a result, the real exchange rate adjustment
needed to support lower current account deficits can hopefully be achieved in a
more gradual and less stressed environment.
• Pre-emptive steps to address banking problems: the general
avoidance of banking crises in program countries thus far is remarkable, given
that in many cases, especially in Central and Eastern Europe, banking systems
entered the crisis after an externally-financed credit boom. The study argues
that various factors—strengthened financial sector regulation in advance,
avoidance of currency and interest rate overshooting, and emergency program
measures including liquidity provision and deposit insurance—have contributed to
• Commitments to sustain or expand social safety nets: these have
been undertaken by authorities in all program countries, with some shifting from
higher spending to better targeting over time. Given the importance of
protecting the most vulnerable groups, this is another aspect requiring
continued close monitoring.
While concluding that the worst outcomes have so far been avoided in most
cases and that early stabilization has been achieved, the study cautions that
major challenges remain, including the timely unwinding of fiscal and monetary
stimulus, adjustment to external competitiveness factors, and fixing bank
Belarus, Bosnia & Herzegovina, Costa Rica, El Salvador, Georgia, Guatemala,
Hungary, Iceland, Latvia, Mongolia, Pakistan, Romania, Serbia, and Ukraine.