- Charalambos Christofides, Atish Ghosh, Uma Ramakrishnan, Alun Thomas, Laura Papi, Juan Zalduendo, and Jun Kim
- Published Date:
- September 2005
An IMF-supported program is a package of envisaged policies which, combined with approved financing, is expected to achieve certain economic objectives such as fostering macroeconomic stability and orderly external adjustment, promoting growth and poverty reduction, and reducing vulnerability to future balance of payments problems or financial crises. This paper reviews experience with specific macroeconomic and structural policies intended to achieve these objectives.1
In designing their economic program, national authorities have at their disposal a number of instruments, including the exchange rate regime, the monetary stance, fiscal policies, and structural measures. Some of the considerations behind the setting of macroeconomic and structural policies are discussed in “Policy Formulation, Analytical Frameworks, and Program Design” (see Part III of this occasional paper). This paper turns to experience, seeking to answer three broad questions for each policy instrument: Was use of the instrument geared toward achieving program objectives? Were the intended polices carried out? And what was the outcome?
Before turning to a summary of the main findings, four points are worth noting. First, by its very nature, cross-country analysis requires making generalizations—there are always exceptions, however, since individual programs must be tailored to the specific circumstances facing the member. Second, for expositional ease—and to complement the analysis of outcomes in “Objectives and Outcomes” (see Part II of this occasional paper)—the discussion in this paper is organized around the role of each individual policy instrument.2 But these various policy elements are also intended to work together, and an important consideration in program design is the complementarity of instruments and their appropriate assignment to targets. Third, policy choices and their implementation reflect deep social and institutional determinants of macroeconomic stability that are not modeled here. More generally, caution is required in interpreting the empirical findings owing to possible omitted variable bias and difficulties in establishing counterfactuals.3 Fourth, during the period under review—1995 to 2000—IMF-supported programs in low-income countries underwent important changes with the shift in 1999/2000 from the ESAF to the PRGF; most of the experience of low-income countries reported in this paper pertains to ESAF-supported programs.
With these points in mind, the main findings based on aggregate, cross-country analysis are as follows. First, up-front devaluations or shifts in the exchange rate regime are the exceptions rather than the rule under IMF-supported programs—in less than 20 percent of all programs was the regime changed in the year the program was approved. Most regime shifts involved pegging the exchange rate in transition economies (as they embarked on disinflation programs) or moving to more flexible regimes in non-transition economies (as pegs were abandoned in the face of balance of payments difficulties). Among programs that explicitly targeted disinflation, GRA-supported programs typically used the exchange rate as a nominal anchor, while PRGF-supported programs tended to use money-based stabilizations. But rates of success did not differ markedly, making it difficult to generalize about which strategy is preferable. Rather, what appears to have been of greater importance in explaining success are the supporting policies—specifically, whether the targeted fiscal adjustment was achieved.
It is also worth examining whether external adjustment came at a lower output cost in countries with more flexible regimes (because of expenditure switching) and whether countries with pegged regimes prior to the program subsequently underwent greater external adjustment as balance sheet mismatches—built up because the guarantee implicit in the peg had encouraged excessive foreign currency exposure in the precrisis period—unwound. While there is evidence that countries with more flexible regimes achieve external adjustment at lower output cost, there is little empirical relationship between pegged regimes and the subsequent adjustment of the current account being greater than programmed.
Second, programs usually target at least some tightening of the monetary stance—in order to lower inflation, promote orderly external adjustment, and, especially in capital account crises, to help stem capital outflows. Empirically, the monetary stance is tightened, though usually by not as much as is programmed, leading to higher inflation than projected. Importantly, policies set in the context of IMF-supported programs appear to enjoy greater credibility, leading to higher money demand, and thus lower inflation for a given growth rate of broad money. The empirical evidence does not support the assertion that the monetary stance was set excessively tight in IMF-supported programs leading to lower output growth.4
Third, IMF-supported programs also target at least some fiscal consolidation to promote external adjustment, underpin macroeconomic stabilization, or put the public finances and debt dynamics on a more sustainable footing. In the event, however, there are typically large slippages in the fiscal adjustment targeted for the first program year, which widen in the following year, mainly because of primary (and, to a lesser degree, interest) expenditure overruns in GRA-supported programs and a combination of primary expenditure overruns and revenue shortfalls in PRGF-supported programs.5
The failure to maintain the programmed fiscal consolidation cannot be explained by the planned current account adjustment having been achieved—fiscal consolidation was not sustained even in cases where the external adjustment fell short of expectations. Fiscal slippages undermine disinflation efforts and result in significantly higher public debt ratios than programmed. (Below-the-line operations are, however, the most important source of public debt projection errors.) Fiscal adjustment does contribute to external adjustment—but cannot explain instances in which the country undergoes substantially more external adjustment than anticipated. Empirical evidence does not indicate that fiscal policies in IMF-supported programs have had negative consequences for growth.
Fourth, structural measures in IMF-supported programs can be classified according to their primary objectives—bolstering the management of aggregate demand, enhancing the flexibility of the economy and raising efficiency (both of which serve to strengthen a country’s growth prospects), and reducing vulnerabilities to future crises. Classifying structural measures into these three categories shows some alignment between structural measures and the broad objectives of economic programs. While it is difficult to establish the impact of individual structural reforms, the evidence suggests that fiscal structural measures have been useful in underpinning fiscal adjustment and that there is a positive correlation between growth-related structural measures in IMF-supported programs and medium-term growth performance.
The paper follows the structure of this summary. Concluding remarks are presented in Section VI.