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Have IMF supported programs succeeded ?
2005-07-13 08:28:50
By Theo Mushi
A recent issue of the IMF survey attempts to evaluate the objectives of these programs and how they have been formulated and if their success can be judged.
The programs have been classified according to the response to financial and economic programs of national authorities, it is noted.
IMF has responded to unsustainable current account deficits where countries have difficulties financing their current account deficit, while IMF financing helps the country reconstitute its reserves.
In capital account crises, when sizeable capital outflows force an abrupt external adjustment and a collapse of the exchange rate and economic activity, monetary and fiscal policies are geared more forwards restoring confidence and limiting adverse effects on economic activity.
The policy is not intended to promote external adjustment, since the withdraw of private financing is in effect achieving that.
In transition economies and low income countries, the IMF survey notes that although there are many differences among them, these programs share a common emphasis on macro-economic stabilization and structural transformation to enhance economic efficiency and promote sustained growth while maintaining external viability.
In areas of policy credibility and public debt sustainable external accounts are largely in balance, but programs can nevertheless helps lower interest rates and spreads.
This puts public debt dynamics on a more sustainable footing by enhancing the credibility of authorized policies.
It is stipulated by the fund that all countries should emerge from their IMF – supported programs with sustainable external positions.
It is contended by IMF that external adjustment is the first measure of success of these programs.
It is stated in the IMF survey that a country with little recourse to financing can rapidly reduce its external indebtedness and lower the likelihood of future crisis.
By contrast, a country with access to additional financing may postpone the necessary adjustment but later face a crisis that forces a much more painful adjustment.
It is noted that the key challenge is to strike a balance between adjustment and financing, and that in middle income countries programs have generally targeted and achieved current account adjustments in line with debt sustainability considerations.
The IMF survey also observes that in low-income countries, programs generally did not target sufficient external adjustment to ensure debt sustainability and the actual improvement in current account balance was even less programmed.
These programs did not aim at achieving external viability through external adjustment but instead implicitly relied on debt relief.
It is noted that the highly indebted poor country, HIPC, and enhanced HIPC initiatives, were instituted during this period but current account deficits would have been too large to stabilize debt ratios even after debt relief.
It is noted that challenges remain in predicting and understanding the implications for policy effectiveness of large capital outflows in capital account crises and in devising better models of medium term growth.
It is also observed that small budget deficits were associated with faster output growth most likely because of the boost of confidence and lower interest rates and greater availability of banking system credit for the private sector.
Ways have been suggested to improve IMF supported programs, which include a more clearly defined role of medium term debt dynamics in program design.
Also suggested is better understanding of the nexus of forces in the financial, public and external sectors in driving capital flows.
It is also proposed that greater emphasis is needed on sustaining fiscal adjustment efforts and on designing the fiscal program accordingly.
A closer alignment of structural measures with program goals is also needed.
It is concluded that in low income countries the key will be to build on the success to date in achieving macro-economic stability and higher sustained growth rates white still maintaining external viability and avoiding future debt-servicing problems.
In middle income countries, especially during capital account crises, programs need to restore market confidence rapidly to avoid abrupt and economically disruptive adjustment of the current account.
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