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

James Roaf, IMFDeputy Chief, Emerging Market Division Strategy, Policy and Review Department

Washington DC

October 15, 2009

Internal review of EM casesInternal review of EM cases FocusFocus: review of programs with EMs since fall ’08 (15 SBAs): review of programs with EMs since fall ’08 (15 SBAs) ApproachApproach: focus on 2009; comparisons with past crises and current : focus on 2009; comparisons with past crises and current

nonprogram EMs; robust resultsnonprogram EMs; robust results ResultsResults: : Fiscal policy appropriately accommodativeFiscal policy appropriately accommodative

Expanded fiscal deficits in 14 of 15; Expanded fiscal deficits in 14 of 15; Size of expansion explained by country factorsSize of expansion explained by country factors

Social protection key element of programsSocial protection key element of programs More focused structural conditionalityMore focused structural conditionality Avoided worst problems from past casesAvoided worst problems from past cases

Exchange and interest rate overshootingExchange and interest rate overshooting Less current account adjustment and domestic demand Less current account adjustment and domestic demand

compressioncompression Few banking crisesFew banking crises

Policies/outcomes similar to comparable nonprogram countriesPolicies/outcomes similar to comparable nonprogram countries

Low-Income Country Programs Low-Income Country Programs ReviewReview

Vast majority of low-income countries' programs were Vast majority of low-income countries' programs were adapted to provide room for countercyclical fiscal policy in adapted to provide room for countercyclical fiscal policy in 2009. 2009. Three-quarters of low-income country programs built in Three-quarters of low-income country programs built in

rising fiscal deficits as revenues declined.rising fiscal deficits as revenues declined. Two-thirds provided for significant increases in budget Two-thirds provided for significant increases in budget

spending. spending. Sixteen out of nineteen programs initiated in 2008-09 Sixteen out of nineteen programs initiated in 2008-09

envisaged higher social spending.envisaged higher social spending. As food and fuel prices soared in 2007-08, programs As food and fuel prices soared in 2007-08, programs

factored in higher inflation targets, to avoid an undue factored in higher inflation targets, to avoid an undue monetary squeeze. monetary squeeze. Lower inflation targets in 2009 are not evidence of Lower inflation targets in 2009 are not evidence of

monetary tightening, but of lower commodity prices and monetary tightening, but of lower commodity prices and weaker activity resulting from the global downturn.weaker activity resulting from the global downturn.

Fiscal Policy in 2009Fiscal Policy in 2009

● Contractionary Policy ○ Expansionary Policy

CEPR Paper Latest

Afghanistan ● ○ Armenia ○ ○ Belarus ● ○ Bosnia and Herzegovina ● ○ Burkina Faso ● ○ Burundi ● ● Central African Republic ● ○ Congo, Republic of ● ○ Costa Rica ○ ○ Côte d’Ivoire ○ Djibouti ● ○ El Salvador ● ○ Gabon ● ○ Gambia, The ● ● Georgia ○ ○ Ghana ● ● Grenada ● ● Guatemala ○ Haiti ○ ○ Hungary ● ○ Iceland ○ Kyrgyz Republic ○ ○ Latvia ● ○ Liberia ○ Malawi ● Mali ● ○ Mongolia ● ○ Mozambique ○ ○ Niger ○ ○ Pakistan ● ● Romania ● ○ São Tomé and Príncipe ○ ○ Senegal ● ○ Serbia, Republic of ● ○ Seychelles ● ○ Sierra Leone ● Tajikistan ○ Tanzania ○ ○ Togo ○ Ukraine ● ○ Zambia ○ ○

Fiscal Policy in 2009Fiscal Policy in 2009

● Contractionary Policy ○ Expansionary Policy

CEPR Paper Latest

Afghanistan ● ○ Armenia ○ ○ Belarus ● ○ Bosnia and Herzegovina ● ○ Burkina Faso ● ○ Burundi ● ● Central African Republic ● ○ Congo, Republic of ● ○ Costa Rica ○ ○ Côte d’Ivoire ○ Djibouti ● ○ El Salvador ● ○ Gabon ● ○ Gambia, The ● ● Georgia ○ ○ Ghana ● ● Grenada ● ● Guatemala ○ Haiti ○ ○ Hungary ● ○ Iceland ○ Kyrgyz Republic ○ ○ Latvia ● ○ Liberia ○ Malawi ● Mali ● ○ Mongolia ● ○ Mozambique ○ ○ Niger ○ ○ Pakistan ● ● Romania ● ○ São Tomé and Príncipe ○ ○ Senegal ● ○ Serbia, Republic of ● ○ Seychelles ● ○ Sierra Leone ● Tajikistan ○ Tanzania ○ ○ Togo ○ Ukraine ● ○ Zambia ○ ○

Programs adapted to falling Programs adapted to falling output and revenuesoutput and revenues

-14

-12

-10

-8

-6

-4

-2

0

ISL

LVA

AR

M

GE

O

UK

R

RO

M

MN

G

SLV

PA

K

BIH

SR

B

CR

I

HU

N

GT

M

BLR

Pro

gram

aver

age

Non

-pro

gram

aver

age

Oct 2008 WEO projection

Latest WEO projection

Figure 14. Revisions to overall fiscal balance projections (and program targets) for 2009 (percent of GDP, ranked by size of deficit projection)

Source: Staff estimates.

Programs adapted to falling Programs adapted to falling output and revenuesoutput and revenues

-14

-12

-10

-8

-6

-4

-2

0

ISL

LVA

AR

M

GE

O

UK

R

RO

M

MN

G

SLV

PA

K

BIH

SR

B

CR

I

HU

N

GT

M

BLR

Pro

gram

aver

age

Non

-pro

gram

aver

age

Original program target

Revised target (latest review)

Oct 2008 WEO projection

Latest WEO projection

Figure 14. Revisions to overall fiscal balance projections (and program targets) for 2009 (percent of GDP, ranked by size of deficit projection)

Source: Staff estimates.

Evolution of 2009 growth forecastsEvolution of 2009 growth forecasts

Growth Forecasts for 2009(unweighted averages)

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Apr-2008 Jul-2008 Oct-2008 Nov-2008 Jan-2009 Apr-2009 Jul-2009 Oct-2009

WEOConsensus Forecasts

Emerging & Developing economies

Program countries

Advanced countries

GDP declines due to initial conditions, GDP declines due to initial conditions, not due to programsnot due to programs

-20

-15

-10

-5

0

5

10

-20 -15 -10 -5 0 5 10

Fitted real GDP growth in 2009 1/

Re

al G

DP

gro

wth

in 2

00

9

1/ The fitted regression on real GDP includes current account deficit, fiscal deficit, external debt, public debt, and reserves (all actuals, as of 2007).

Growth outturns and initial vulnerabilities

Programs

Nonprograms

Interest rate spikes avoidedInterest rate spikes avoided

Nominal policy rates, percent

0

10

20

30

40

50

60

t-12 t-9 t-6 t-3 t t+3 t+6 t+9 t+12

current programs

past crises

Medians and interquartile ranges

Overall supportive fiscal-monetary policy mixOverall supportive fiscal-monetary policy mix

Policy mix

-4

-3

-2

-1

0

1

2

3

4

0 10 20 30 40Monetary policy tightening

Fis

ca

l po

licy

tig

hte

nin

g

Program countries

Non-program countries

Past crises

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).

No currency overshooting this timeNo currency overshooting this time

Nominal effective exchange rates

30

40

50

60

70

80

90

100

110

t-12 t-9 t-6 t-3 t t+3 t+6 t+9 t+12

current programs

past crises

Medians and interquartile ranges

More focused conditionality More focused conditionality

Structural conditions in IMF programs (Average per program year)

0

5

10

15

20

1995-2002 2002-07 Current programs

Other

Financial sector

Monetary and exchange rate

Fiscal

Streamlined Conditionality in LIC Streamlined Conditionality in LIC ProgramsPrograms

0

3

6

9

12

2001-042005-07

Average Number of Conditions per Review

2008-09

Sources: MONA database; and IMF Staff estimates.