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, Review of 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, including:
• 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 this result.
• 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 balance sheets.
1 Armenia, Belarus, Bosnia & Herzegovina, Costa Rica, El Salvador, Georgia, Guatemala, Hungary, Iceland, Latvia, Mongolia, Pakistan, Romania, Serbia, and Ukraine.
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