- Charalambos Christofides, Atish Ghosh, Uma Ramakrishnan, Alun Thomas, Laura Papi, Juan Zalduendo, and Jun Kim
- Published Date:
- September 2005
This paper reviews experience with programs supported by the General Resources Account (GRA)—Stand-By Arrangements (SBAs) and Extended Fund Facility (EFF) arrangements—as well as those supported by concessional facilities—the Enhanced Structural Adjustment Facility (ESAF) and the Poverty Reduction and Growth Facility (PRGF)—over the period 1995–2003.1 It differs from earlier studies in three important respects.2 First, it takes explicit account of the evolution of the design and purpose of IMF-supported programs over the past decade. Second, it seeks new insights by comparing programs supported by GRA resources and those supported by concessional facilities; as elaborated below, there are important differences, particularly as regards external adjustment and output growth. Third, it goes beyond traditional flow balance of payments measures of external adjustment to consider the impact of the adjustment effort on external debt dynamics.
Like previous studies, this paper has to grapple with unknowable counterfactuals—that is, how would the economy have performed (in terms of external adjustment and other macroeconomic objectives) in the absence of IMF support. As discussed below, it is difficult to solve the identification problem convincingly, particularly for low-income countries that may undertake successive IMF-supported programs. Accordingly, the approach taken in this paper is to examine performance under recent IMF-supported programs—and to try to understand the reasons behind it—rather than attempting the finer distinction of whether IMF support was responsible for the outcomes.
This paper begins (Section II) by characterizing the nature and objectives of different types of IMF-supported programs. Individual differences aside, the paper finds that there are three main groups of programs. First, there is the traditional current account adjustment problem that gives rise to the “classical” IMF-supported program.3 Second, and more recently, are the so-called capital account crisis programs, where the abruptness and magnitude of the reversal of capital flows have pervasive consequences for current account dynamics and for macroeconomic performance more generally. The third set comprises the early programs in transition economies and programs in low-income countries—the latter supported by PRGF arrangements since 2000 (and by ESAF arrangements before then). The transition and low-income countries obviously differ in many respects. Nevertheless, they share a common logic in that the structural transformation of the economy and the promotion of growth and of poverty reduction are key objectives, with the need to maintain external viability acting as an overarching constraint. Indeed, some measures adopted—for instance, liberalizing import restrictions—may themselves widen the current account deficit but also contribute to removing economic distortions and placing the economy on a more sustainable path for growth and the balance of payments.
The paper reveals a number of novel results, especially in relation to the differences in economic adjustment between GRA- and PRGF-supported programs. In particular, Section III casts the discussion of external adjustment in terms of medium-term debt sustainability rather than just the flow balance of payments. A useful metric in this regard is the external debt-stabilizing current account balance. In GRA-supported programs, consistent with considerations of debt sustainability, there is a positive relationship between the external adjustment targeted (and achieved) and the initial level of external debt. At the same time, these programs are characterized by current account improvements that, on average, are sharper than anticipated for the program’s first year; in about one-fourth of the cases, the current account balance exceeds the debt-stabilizing balance despite a relatively low initial level of external debt. Moreover, the sharp adjustment in the first year of the program is subsequently reversed, so that the cumulative difference between the actual and programmed current account position largely disappears over a three-year period. In addition to rapid adjustment in the current account balance, these economies experienced a V-shaped growth pattern. These patterns are particularly pronounced in capital account crises, where the external adjustment and output contraction were typically much more than envisaged under the program because of the larger capital outflows than expected.
IMF resources typically finance the replenishment and accumulation of gross reserves, which, on average, increase by more than the financing provided by the IMF. By adding to reserves and helping to restore confidence, such financing nevertheless contributes to limiting vulnerabilities. IMF financing is small in relation to the member’s total financing requirement—typically about 10 percent—which is expected to be financed by flows from the private and official sectors. As noted above, however, in some cases, this projected financing does not materialize and a sharper programmed adjustment of the current account balance results. Nevertheless, perhaps because the IMF will only support the authorities’ economic program if it considers the policies to be appropriate, countries undertaking external adjustment in the context of an IMF-supported program grow about 1 percentage point a year faster than countries making the same current account adjustment without an IMF-supported program; these results are subject to a number of econometric qualifications, including possible selection bias.
The typical low-income program displays a strikingly different pattern to the GRA-supported program, with relatively little current account adjustment but an increase in growth during the program, partly attributable to improved macroeconomic stability. In contrast to GRA-supported programs, in the low-income countries, current account deficits were, on average, larger than projected—a divergence that increases with the time horizon. The positive relationship between external adjustment and initial external debt ratios characteristic of the GRA sample is not apparent for the low-income countries and the actual and programmed current account deficits exceed those consistent with stabilizing the initial external debt ratios. The implied increases in external debt ratios, however, were largely offset by additional debt relief, moderating the debt buildup.
Beyond external viability, IMF-supported programs typically target a number of other macroeconomic objectives such as reducing inflation and raising growth, which are considered in Section IV. While the counterfactual is difficult to establish, the evidence suggests that, under their IMF-supported programs, member countries have been largely successful in lowering inflation and maintaining price stability thereafter. GRA-supported programs have generally succeeded in restoring real GDP growth to precrisis levels but, consistent with the classic adjustment paradigm, are not associated with higher long-run growth rates. By contrast, a majority of members with PRGF-supported programs in the 1990s have seen a marked improvement in their real GDP growth performance.