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IMF-supported Programs in Crisis: Countercyclical, not Procyclical!

This internal review examines the effectiveness of IMF-supported programs in emerging markets and low-income countries during the global financial crisis. The review finds that these programs successfully implemented countercyclical fiscal policies, expanded fiscal deficits, and prioritized social protection measures. The programs also avoided currency overshooting, banking crises, and excessive current account adjustments. Overall, the review demonstrates the importance of flexible and targeted policy measures in crisis situations.

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IMF-supported Programs in Crisis: Countercyclical, not Procyclical!

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  1. IMF-supported Programs in Crisis: Countercyclical, not Procyclical! James Roaf, IMFDeputy Chief, Emerging Market Division Strategy, Policy and Review Department Washington DC October 15, 2009

  2. Internal review of EM cases • Focus: review of programs with EMs since fall ’08 (15 SBAs) • Approach: focus on 2009; comparisons with past crises and current nonprogram EMs; robust results • Results: • Fiscal policy appropriately accommodative • Expanded fiscal deficits in 14 of 15; • Size of expansion explained by country factors • Social protection key element of programs • More focused structural conditionality • Avoided worst problems from past cases • Exchange and interest rate overshooting • Less current account adjustment and domestic demand compression • Few banking crises • Policies/outcomes similar to comparable nonprogram countries

  3. Low-Income Country Programs Review • Vast majority of low-income countries' programs were adapted to provide room for countercyclical fiscal policy in 2009. • Three-quarters of low-income country programs built in rising fiscal deficits as revenues declined. • Two-thirds provided for significant increases in budget spending. • Sixteen out of nineteen programs initiated in 2008-09 envisaged higher social spending. • As food and fuel prices soared in 2007-08, programs factored in higher inflation targets, to avoid an undue monetary squeeze. • Lower inflation targets in 2009 are not evidence of monetary tightening, but of lower commodity prices and weaker activity resulting from the global downturn.

  4. Fiscal Policy in 2009 ● Contractionary Policy ○ Expansionary Policy

  5. Fiscal Policy in 2009 ● Contractionary Policy ○ Expansionary Policy

  6. Programs adapted to falling output and revenues

  7. Programs adapted to falling output and revenues

  8. Evolution of 2009 growth forecasts

  9. GDP declines due to initial conditions, not due to programs

  10. Interest rate spikes avoided past crises Medians and interquartile ranges current programs

  11. Overall supportive fiscal-monetary policy mix Fiscal policy: median primary balance to GDP ratios in the year before crisis (2008, circle) and the crisis year (2009, dot). Monetary policy: median nominal interest rates six months before crisis (2008 H2, circle) and six month into crisis (2009 H1, dot).

  12. No currency overshooting this time current programs Medians and interquartile ranges past crises

  13. More focused conditionality Other Financial sector Monetary and exchange rate Fiscal

  14. Streamlined Conditionality in LIC Programs

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