The FINANCIAL — On December 7, 2015, the Executive Board of the International Monetary Fund (IMF) concluded a review of program design and outcomes of Fund-supported programs undertaken during and following the global financial crisis.
The review provides an updated assessment of 32 programs financed from the Fund’s general resources account (GRA) for 27 countries between September 2008 and June 2013. Drawing on lending instruments totaling SDR 420 billion (about US$577 billion), the Fund supported Euro Area countries as they built firewalls against financial contagion; emerging economies and small states as they addressed the collapse of trade and financing flows in 2008–09; and MENA economies as they implemented reforms after the 2011 Arab Spring, according to IMF.
The period covered by the review allowed it to reflect outcomes for up to two years or more of program performance for each arrangement. In addition, it compared outcomes in recent program cases with those in comparator economies that did not require Fund financial support, and provided comparisons with the experience of countries during earlier Fund-supported programs.
In 2014, the International Monetary Financial Committee (IMFC) requested a follow-up review of Fund-supported program with a view to improve Fund advice and future Fund arrangements. The first such review took place in 2009, followed by updates in 2010–12.
Executive Board Assessment
Executive Directors welcomed the updated assessment of the design and outcomes of Fund-supported programs undertaken following the global financial crisis. They concurred that by boosting confidence and providing resources, alongside other global efforts, Fund-supported programs helped limit the damage and chart a path through the global financial crisis.
Directors noted that Fund financial support helped allow the necessary adjustment to be more gradual and shielded a range of emerging market countries and small states from the collapse of global trade and financing flows. They also saw programs as helping countries gain needed time to address deeper-rooted problems, start unwinding macroeconomic imbalances and repairing balance sheets, and, in the euro area, strengthen firewalls and develop a banking union. Directors noted that programs supported reforms and confidence in Middle Eastern and North African countries after the 2011 Arab Spring.
Directors welcomed efforts to learn from program outcomes when designing later programs. They recognized changes in program design that included moving to a slower, albeit still appropriate, pace of fiscal consolidation in some programs; strengthened efforts to achieve internal devaluation; enhanced incentives for debt restructuring to address private debt overhangs; and sovereign debt restructuring where necessary in some later and successor programs.
With nominal exchange rate adjustment largely precluded as a policy choice in many of the crisis program cases, Directors recognized that efforts to rebuild competitiveness through internal devaluation proved difficult to achieve within a short period. They noted that the difficulty owed in part to domestic rigidities that take time to address, as well as to weak growth and low inflation in partner countries. In this regard, some Directors underlined the need to take into account prevailing external conditions that could hamper the authorities’ efforts, while a few others pointed to measures within the authorities’ control, such as promoting flexible markets and structural reforms. A few Directors also pointed out that unit labor cost reductions could have an impact on external competitiveness and should be analyzed further. A number of other Directors considered that the contractionary impact of internal devaluation, large fiscal consolidation, and structural reforms may have been larger than envisaged. A few Directors also noted that greater attention is warranted regarding the implications for program design of the impact of imbalances within a currency union on the needed internal adjustment or demand compression in program countries within the union. Going forward, Directors observed that programs designed around internal devaluation should recognize the need to sustain reforms over extended periods, which may require more and longer-term financing either from the Fund or other institutions, together with strong ownership and a high level of implementation capacity.
Directors concurred that programs generally succeeded in strengthening fiscal balances with a view to reducing public debt ratios over time. They welcomed the attention given to output and employment in program objectives, noting that in some programs with large fiscal consolidations, the negative short-term effects on output can be sizable, reflecting larger-than anticipated fiscal multipliers, as well as other factors weighing on activity. In such cases, a more gradual pace of consolidation could be desirable while maintaining a credible adjustment path that restores confidence and reaches a sustainable and resilient position in due time. A few Directors noted that a more gradual fiscal adjustment could require additional official financing. A number of Directors also considered that more timely debt operations may be needed where public debt is high and unsustainable. A number of other Directors, however, cautioned that the likely effects of debt restructuring should be studied further, with the desirability of such operations assessed on a case-by-case basis. A number of Directors looked forward to considering options for reforming the Fund’s exceptional access framework.
Directors noted that structural reforms took on particular importance in recent programs seeking to foster adjustment and address structural impediments to growth. Some Directors observed that the extent of reforms in some programs may have resulted in reform fatigue, and accordingly underlined the importance of more focused structural conditionality. While noting that the near-term growth dividend of reforms have fallen short of expectations, a number of Directors stressed that this should not be an argument for postponing essential reforms. Directors underlined the need for prudent assumptions on the near-term growth payoffs from structural reforms, and looked forward to further analysis on reform prioritization and assessing reform payoffs.
While noting that policies to repair balance sheets in crisis circumstances could help foster recovery, Directors recognized that progress proved slow, reflecting potential fiscal costs and gaps in insolvency and foreclosure frameworks. Directors called for programs to focus at an early stage on legal frameworks and out-of-court settlement options, prudential measures to incentivize debt write-offs and restructurings, and the creation of markets or institutions to handle distressed debts. Directors called for proactive and sustained steps to build frameworks that can avert the build-up of risks ahead of crises.
Directors highlighted the importance of close collaboration on program design and monitoring between regional financing partners and the Fund. Many Directors supported establishing operational guidelines that build upon the G-20 principles for cooperation between the Fund and regional financing arrangements (RFAs), and noted that the forthcoming Board discussions on the international monetary and financial system and global financial safety nets will also provide valuable inputs. In this context, a few Directors suggested a separate staff assessment of Fund collaboration with RFAs, including euro area institutions. Directors noted that differences across regional arrangements may preclude across-the-board recommendations for collaboration between the Fund and RFAs. A number of Directors emphasized that the guidelines should ensure clear rules for various partners, safeguard the Fund’s responsibilities, and ensure that cumulative conditionality is macro-critical and in line with national implementation capacity. Directors also noted that where changes in currency union-wide policies are important for program success, the Fund should provide advice through surveillance as warranted. Some Directors considered that the Fund could also seek commitments on union-wide policies if necessary for program success or financing assurances.
Directors noted that the various issues raised will need further work and analysis. They considered that it would be useful to draw together the lessons from the different reviews of crisis programs to guide future Fund operations and the Fund’s response to future crises. Directors looked forward to the forthcoming IEO review on the IMF and the euro area crisis.