International Monetary Fund Programs Research Articles

Social protection and the International Monetary Fund: promise versus performance

BackgroundCountries in the Global South are currently facing momentous economic and social challenges, including major debt service problems. As in previous periods of global financial instability, a growing number of countries have turned to the International Monetary Fund (IMF) for financial assistance. The organization has a long track-record of advocating for extensive fiscal consolidation—commonly known as ‘austerity’—for its borrowers. However, in recent years, the IMF has announced major initiatives for ensuring that its loans support social spending, thus aiding countries in meeting their development targets and the Sustainable Development Goals. To assess this track record, we collected spending data on 21 loans signed in the 2020–2022 period, including from all their periodic reviews up to August 2023.ResultsWe find that austerity measures remain a core part of the organization’s mandated policies for its borrowers: 15 of the 21 countries studied here experience a decrease in fiscal space over the course of their IMF programs. Against this fiscal backdrop, social spending floors have failed to live up to their promise. There is no streamlined definition of these floors, thus rendering their application haphazard and inconsistent. But even on their own terms, these floors lack ambition: they often do not foresee trajectories of meaningful social spending increases over time, and, when they do, many of these gains are eaten up by soaring inflation. In addition, a third of social spending floors are not implemented—a much lower implementation rate from that for austerity conditions, which the IMF prioritizes. In several instances, where floors are implemented, they are not meaningfully exceeded, thus—in practice—acting as social spending ceilings.ConclusionsThe IMF’s lending programs are still heavily focused on austerity, and its strategy on social spending has not represented the sea-change that the organization advertised. At best, social spending floors act as damage control for the painful budget cuts: they are instruments of social amelioration, underpinned by principles of targeted assistance for highly disadvantaged groups. Alternative approaches rooted in principles of universalism can be employed to build up durable and resilient social protection systems.

The unintended consequences of IMF programs: Women left behind in the labor market

AbstractDespite societal progress toward achieving gender equality, women remain disadvantaged across all walks of life. We examine how pressures by the International Monetary Fund (IMF) for austerity and liberalization policies affect women’s economic empowerment in developing countries. Focusing on labor market outcomes, we expect that IMF programs increase the gender unemployment gap. This effect will hold regardless of existing societal gender norms, reflecting that women work in less ‘crisis-proof’ jobs. In contrast, we believe that prevailing societal gender norms will adversely impact women’s ability to remain in the labor force, resulting in widening gender labor force participation gaps. Relying on a dataset covering 128 developing countries between 1992 and 2018, we confirm these expectations. Our findings underscore how, during economically turbulent times, policy demands of the Fund can amplify existing gender inequalities.

Who adjusts? Exchange rate regimes and finance versus labor under IMF programs

AbstractWho adjusts under International Monetary Fund (IMF) programs and why? In this paper, I demonstrate that labor groups adjust when there is a fixed exchange rate regime and international financial groups are strong enough to defend the peg. In that case, the Fund substitutes currency devaluation with lowering labor costs via labor market reform. Lower wages are used to increase competitiveness and support exports. In other words, the Fund makes labor ‘cheaper’ through its labor market reform when money cannot be made ‘cheaper’ due to strong international financial interests. To test this theory, I use a mixed-method approach. I complement the case comparison of Latvia and Hungary in 2008–two very similar cases except for their exchange rate regime and the influence of international finance on their economy–with a large-N study using a global sample of IMF borrowers over the years 1989 and 2014. The paper shows that international organizations such as the IMF might amplify the voice of the strong (financial interests) while making the ‘weak’ (labor groups) weaker via their conditionality.

Investigating the Impact of IMF Programs on the Bank of Ghana and the Ghanaian Economy

The International Monetary Fund (IMF) has played a pivotal role in shaping the economic policies of developing countries, including Ghana. This study aims to investigate the impact of IMF programs on the performance of the Bank of Ghana and the Ghanaian economy. Employing a quantitative research design, the study utilizes secondary data from reputable sources such as the World Bank, IMF, and the Bank of Ghana. Regression analysis is conducted to establish the relationship between IMF programs and the performance of the Bank of Ghana, as well as their impact on the overall Ghanaian economy. The findings of this study will significantly contribute to our understanding of the effectiveness of IMF programs not only in Ghana but also in other developing countries. Moreover, it will offer valuable insights into the key factors influencing the success of IMF programs in shaping the Ghanaian economy and the performance of the Bank of Ghana. Additionally, practical recommendations will be provided for policymakers, the Bank of Ghana, and other stakeholders to enhance the effectiveness of IMF programs in Ghana.

Are IMF programs raising greenhouse gas emissions in the Global South?

Abstract Are International Monetary Fund (IMF) programs raising greenhouse gas emissions in the Global South? I argue powerful actors structure markets in ways exacerbating climate change. This works through the IMF’s imposition of market coercion—specifically, currency devaluation, global openness and fiscal pressures from austerity. Countries respond to these conditions through extractivist strategies and productive growth to increase exports. To investigate this relationship, I use instrumental variables and difference-in-difference analyses for 130 countries between 1980 and 2018. Results show emissions increase from structural lending conditions but not when conditions afford borrowers more flexibility. This effect takes several years to manifest. While there is no single sector responsible for this change, agriculture, land-use changes and, to some extent, industry, have notable emission effects following an IMF program. Global South emissions are partly rooted in imposed austerity which raises important political questions about the climate crisis, development and international finance.

International Monetary Fund programmes and the glass cliff effect

AbstractWe analyse the impact of International Monetary Fund (IMF) programmes on appointing women leaders in ministerial positions. We hypothesize that women leaders are selected after an incumbent government starts an IMF programme to shift accountability to them during political and economic turmoil. This political manoeuvring of appointing women to leadership positions during a crisis is known as the ‘glass cliff’ effect. We demonstrate substantial evidence for such a ‘glass cliff’ effect using data covering all IMF programmes from 1980 to 2018. Our evidence shows that women are more likely to be appointed to austerity‐bearing ministerial positions under IMF programmes but not in positions of authority during negotiations with the IMF. This effect is more pronounced when a country displays worse societal gender norms, a higher level of corruption and a government facing a deeper economic crisis. Importantly, we verify that neither women's leadership nor a higher share of women in government predicts a balance of payments crisis triggering an IMF programme. In other words, women leaders do not govern worse; they are appointed to leadership positions in precarious, crisis‐ridden conditions.

Reforming State-Owned Enterprises (SOES) to Facilitate the Economic Recovery of Sri Lanka

The economic downturn and escalating debt levels prompted Sri Lanka to seek assistance from the International Monetary Fund (IMF), resulting in the formulation of the 17th IMF program. This program, aimed at fiscal consolidation and restructuring, designates SOEs as a pivotal element in the nation's economic recovery strategy. This policy brief addresses the imperative need for reforming State-Owned Enterprises (SOEs) in Sri Lanka. A historical overview reveals the evolution of Sri Lanka's SOEs, from their establishment during World War II to a surge in numbers in the 1980s. Despite their vital role in the economy, SOEs have faced operational inefficiencies, financial struggles, and governance issues, leading to a privatization policy in 1988. The document explores international experiences in SOE reform, drawing insights from successful models in Singapore, China, and India. Current policy measures in Sri Lanka encompass various reform strategies, such as corporatization, restructuring, and commercialization, focusing on enhancing financial transparency and accountability. The establishment of the State-Owned Enterprise Restructuring Unit (SRU) reflects a commitment to effective implementation, with international support from entities like the International Finance Corporation (IFC). In conclusion, the path to economic recovery in Sri Lanka hinges on the successful transformation of SOEs, ensuring financial viability, transparency, and sustainable growth.

The impact of austerity on children: Uncovering effect heterogeneity by political, economic, and family factors in low- and middle-income countries

Which children are most vulnerable when their government imposes austerity? Research tends to focus on either the political-economic level or the family level. Using a sample of nearly two million children in 67 countries, this study synthesizes theories from family sociology and political science to examine the heterogeneous effects on child poverty of economic shocks following the implementation of an International Monetary Fund (IMF) program. To discover effect heterogeneity, we apply machine learning to policy evaluation. We find that children's average probability of falling into poverty increases by 14 percentage points. We find substantial effect heterogeneity, with family wealth and governments' education spending as the two most important moderators. In contrast to studies that emphasize the vulnerability of low-income families, we find that middle-class children face an equally high risk of poverty. Our results show that synthesizing family and political factors yield deeper knowledge of how economic shocks affect children.

Trade Liberalization, IMF Conditionality, and Policy Substitution in Developing Countries

AbstractSubstantial tariff reductions and increased usage of non‐tariff measures (NTMs) have been key dynamics of global trade policy in recent decades. We use highly disaggregated data on applied most favored nation tariffs, NTMs, and trade to investigate how International Monetary Fund (IMF) conditionality as a form of external pressure to reduce tariffs contributed to this dynamic in developing countries. Our results show that structural adjustment programs (SAPs) effectively lowered tariffs without increasing the usage of NTMs. A typical three‐year program containing tariff conditionality decreased tariff rates in the range of 2.0 to 3.8 percentage points in total. Furthermore, IMF programs reduced NTM initializations significantly. We also show that tariff conditionality was more effective in initiating tariff cuts for countries without previous greater globalization efforts than being a “catalyst” for ongoing liberalization efforts.

Why cronies don’t cry? IMF programs, Chinese lending, and leader survival

Many countries in the Global South have increased their exposure to Chinese debt in recent years. With the COVID-19 pandemic and the US interest rate hike, many countries have struggled to meet their debt repayment obligations. As a result, they have turned to the International Monetary Fund (IMF) for emergency assistance. We argue that the involvement of the Fund wipes out much of the political benefits of China loans for executive leaders of borrowing countries. IMF conditionality requires countries to increase fiscal transparency, which threatens the viability of kickback schemes and increases the likelihood that corrupt leaders will be called out on their misdealing. As a result, we expect corrupt leaders with China debt to leave office earlier when they try to address debt defaults with IMF loans than when they avoid them. Using survival analysis on a dataset of 115 developing countries between 2000 to 2015, we find that leaders indebted to China that go under an IMF program leave office earlier compared to when they do not go under an IMF program. In line with our argument, this effect is strongest in more corrupt regimes. Our argument and analysis contribute to understanding international finance’s political economy, specifically how mixing creditors can be politically risky for leaders.

Government Ownership of IMF Conditionality Programs: Conceptualization, Measurement, and Validation

Abstract The shifting emphasis on performance evaluation and accountability in the context of financial lending or foreign-aid arrangements sponsored by international organizations (IOs) has brought to the fore the question of government ownership of reforms. While the concept of ownership has featured highly in academic and policy debates over the effects of IO conditionality, it arguably remains theoretically elusive, ill-identified, and under-specified. In this article, we focus on International Monetary Fund (IMF) programs and define government ownership with respect to the counterfactual level of de jure structural reforms that would be achieved in the absence of IMF conditionality. We then use the synthetic control method to identify continuous levels of ownership as a function of a treatment effect on treated compliers and operationalize the concept of ownership over external- and financial-sector conditionality across a restricted sample of uninterrupted IMF arrangements (1980–2014). Furthermore, we probe the criterion and construct validity of our measure with respect to known determinants, proxies, and outcomes of ownership. We argue that ours is a reliable, replicable, valid, robust, and systematic measure of ownership that can help better identify and estimate the indirect relationship between program design and policy implementation.

Sovereignty Intrusion: Populism and Attitudes toward the International Monetary Fund

Abstract The global populist backlash is considered threatening to the multilateral order, but its impact on individual attitudes toward international organizations, like the International Monetary Fund (IMF), is understudied. We bridge insights from research on the IMF and populism to develop a theoretical framework centered on three propositions. We argue that populist individuals should be more prone to blame the IMF for economic problems than non-populists, but that this effect is highly conditional on sovereignty intrusion, escalating when an IMF program exists and as the program becomes more onerous. In contrast, IMF scapegoating by populist politicians should be largely ineffective. Analyzing survey data from across the European Union and an original survey experiment in Greece, we find support for each contention. The paper advances understanding of the partisan politics of the IMF and shows that the implications of the populist wave for international order are more complex than often assumed.

INTERNATIONAL POLITICAL ECONOMY AND IMF: EXAMINING THE EFFECTS OF EXTENDED FUND FACILITY (EFF) ON THE GOVERNANCE STRUCTURE OF PAKISTAN

The International Monetary Fund (IMF) is a global financial organization that offers financial support to nations with economic difficulties. There are serious worries about the efficacy of IMF Program conditionality on debtor countries due to the IMF's growing influence through the Extended Fund Facility Program and their performances in developing countries. The conditionality of the International Monetary Fund (IMF) Program is examined in this research in relation to Pakistan's economic governance. Due to its long-term reliance on IMF resources, Pakistan presents an intriguing case study. The influence of IMF conditionality on Pakistan's economy's governance structure and key economic indicators is examined in this study using a broad framework of qualitative elements. The study's findings demonstrate that there is consistently uncertainty in the governance structure and the execution of policy decisions in IMF lending schemes. Due to this deterioration, the country was unable to meet its macroeconomic objectives, such as reducing poverty and controlling inflation, Future perspectives on the research findings recommend that Pakistan's economic policy makers concentrate on their other sources of economic strength rather than solely relying on the IMF Program.

Doing more with less: The catalytic function of IMF lending and the role of program size

Financial assistance provided by the International Monetary Fund (IMF) is supposed to unlock other financing, acting as a catalyst for private capital flows. The empirical evidence of the presence of such a catalytic effect has, however, been mixed. This paper shows that a possible explanation for the rather inconclusive empirical evidence to date is the neglect of the size of an IMF program. Applying a novel identification strategy to account for endogenous selection into (large) adjustment programs, and using a comprehensive data set spanning the years 1990-2018, we show that the catalytic effect of IMF financial assistance is weakened – and potentially reversed – if the size of a program exceeds a certain level. We argue that large IMF financial assistance coupled with the IMF’s preferred creditor status can lead to a crowding-out of private investors by increasing their loss in the event of default. Our findings add to the debate on the optimal size of Fund-supported programs and can also inform the broader policy discussions on the adequacy of IMF resources.

PIDE Commentary: On the 23rd IMF Programme for Pakistan


 
 
 
 
 International Monetary Fund (IMF) issued a staff report on the seventh and eighth reviews of the extended arrangement under the Extended Fund Facility (EFF) on September 1, 2022. As per the review report, the authorities of Pakistan are allowed to draw USD 1.1 billion, keeping in view the measures taken by authorities to address fiscal and external challenges. The IMF board has also approved the extension of the EFF till June 2023 along with extra Special Drawing Rights (SDR) of 720 million and that brings the total access under the EFF to about USD 6.5 billion. The review report has also identified some priority measures to be considered by the Pakistani authorities, such as the implementation of an approved budget, marketdetermined exchange rate policy, proactive and prudent monetary policy, the expansion of the social safety net, and structural reforms related to the performance of state-owned enterprises (SOEs) and governance. The set of measures that have been identified contains both short-term and medium-term measures to promote long-term growth. In this regard, the Pakistan Institute of Development Economics (PIDE) has also been working extensively to identify the measures that are necessary to remove the bottlenecks in the economy to improve productivity and increase growth. Therefore, the objective of this document is twofold, i.e., a commentary on the measures suggested by the review report, and what other measures should be part of the programme.
 
 
 
 

Monetary, fiscal, and structural drivers of inflation in Ethiopia: new empirical evidence from time series analysis

AbstractThis study empirically investigates the drivers of inflation in Ethiopia using monthly data over the period July 1998 to September 2020. It explores short‐run and long‐run effects of domestic and external determinants of inflation—including demand‐side, supply‐side, and structural factors—using the cointegration and vector error‐correction methodology. Four measures of inflation are considered: cereals, food, nonfood, and all‐items Consummer Price Index (CPI) inflation. A key contribution to the existing literature is the investigation of the role of the fiscal sector in modeling inflation, a topic that has been neglected in the existing studies on inflation in Ethiopia. The empirical results show that disequilibria in the monetary sector, grains sector, and food markets have long‐run effects on inflation. In the short run, inflation is driven by structural factors (notably, cereal output gaps and imported inflation) as well as demand‐side factors (notably, money growth and public sector borrowing). The results hold when analysis is limited to the high growth period from 2005 onward, following the end of the International Monetary Fund (IMF) program in the country. The evidence provides valuable insights in the context of ongoing macroeconomic policy reforms in Ethiopia.

The Political Economy of Chinese Debt and International Monetary Fund Conditionality

Abstract Developing and emerging market economies have increased their debt exposure to China in recent years. Despite its initial promise, many borrowers of Chinese loans face difficulties in meeting these loan obligations. Under what circumstances do Chinese borrowers in debt distress turn to the International Monetary Fund (IMF)? Our starting point is that Chinese loans are tied into projects that promise to generate sufficient revenue to repay these loans. We expect that governments turn to the IMF for bailout funding when a severe shock erodes the value of the underlying loan collateral, requiring mobilizing revenues and implementing austerity measures. Without alternative financing options, the IMF becomes the most viable option to weather financial distress. We expect governments to accept a ‘whatever-it-takes’ number of loan conditions. Using cross-country time-series analysis for up to 162 countries between 2000 and 2018, we show that defaults on Chinese debt trigger IMF programs only when a country experiences a severe adverse shock. Countries tapping the IMF also accept a greater number of loan conditions. From a policy perspective, current financial distress in borrowing countries underscores the urgency to design and deploy targeted governance reform measures beyond program safeguards and loan conditions to mitigate the built-up of macro-financial vulnerabilities, independent of where the money is coming from.

Partisanship, protection, and punishment: how governments affect the distributional consequences of International Monetary Fund programs

How do governments allocate the burden of adjustment of reform programs sponsored by international financial institutions? While the political economy literature is ripe with theoretical arguments about this issue, we have a limited empirical understanding of the distributional effects of these programs, except for a few informative case studies. We argue that governments allocate adjustment burdens strategically to protect their own partisan supporters while seeking to impose adjustment costs upon the partisan supporters of their opponents. Using hitherto under-explored individual-level Afrobarometer survey data from 12 Sub-Saharan African countries, we employ large-N analysis to show that individuals have consistently more negative evaluations and experiences of IMF structural adjustment programs when they supported opposition parties compared to when they supported the government party. Partisan differences in evaluations are greater when governments have greater scope for distributional politics, such as in the public sector and where programs entail more quantitative performance criteria, which leave governments discretion about how to achieve IMF program targets. Negative evaluations are also more prevalent among ethnically powerless groups compared to ethnically powerful groups. These results emphasize the significant role of borrowing governments in the implementation of IMF-mandated policy measures. They also stress the benefits of reducing the number of IMF conditions in limiting the scope for harmful distributive politics.

“Keep the Receipts:” The Political Economy of IMF Austerity During and After the Crisis Years of 2009 and 2020

Abstract In 2009, the International Monetary Fund (IMF) reformed its lending arrangements and conditionality. Thereafter, it has pursued “parsimony,” emphasizing headline fiscal adjustments rather than detailed budgetary changes. This paper analyzes the extent to which these reforms have resulted in changes to the overall austerity required by IMF agreements. We create a new variable measuring the level of fiscal consolidation required in each IMF program from 2001 through 2021 the IMF Fiscal Adjustment Indicator (IMF FAI). We explore whether IMF austerity eased after the financial crisis and the later COVID-19 pandemic. We also estimate the economic and political determinants that help explain varying levels of IMF austerity across IMF programs during this period. We find that IMF conditions were less austere for the years of 2009 and 2020, but quickly returned to their previous levels, echoing the IMF’s advice to “keep the receipts” during crises. However, these temporary relaxations were not statistically significant, pointing to overarching continuity. We find that countries that were granted relatively more lenient conditionality were found to be those with closer relations with major shareholders of the IMF: Western Europe and the United States. In contrast, countries with close diplomatic relations with China face higher IMF austerity.

IMF trade forecasts for crisis countries: Bias, inefficiency, and their origins

External sector surveillance and stabilization are core missions of the International Monetary Fund (IMF). Since 1992, the IMF approved over 600 crisis country loan programs, conditional on reforms and performance targets that are contingent on IMF crisis assessments and recovery forecasts. The literature evaluating IMF crisis forecasts has primarily focused on GDP, inflation, and fiscal budgets, but IMF programs often originate with the balance of payments crises. Our evaluation of IMF imports/exports/exchange rates in crisis countries reveals a surprising dichotomy: import forecasts are largely efficient and unbiased, while exports and exchange rate forecasts exhibit substantial biases and inefficiencies. We show forecast errors in the full sample are driven by deeply flawed IMF forecasts for LICs in crisis. Fixed exchange rate LICs (predominantly African franc zone countries) receive systematically inefficient import forecasts. Exchange rate forecasts for LICs with flexible exchange rates are so inefficient that they cannot outperform a naïve random walk, and over 30 percent of the forecasts cannot match the exchange rate’s directional movement during the first year of the recovery. Examining the sources of biases and inefficiencies, we highlight effects of conditionality and geopolitics that were not fully accounted for in IMF forecasts, specifically those relating to arrears (domestic and foreign), fiscal finance (balance and credit limits), policy reforms (trade and government), (civil) wars, and elections.