We’ve released a new paper earlier this week assessing the effectiveness of IMF-supported loan programs in combating the crisis in emerging markets. Although it is a bit early to be evaluating these programs, “real-time” cross-country reviews are important. In today’s blog, I want to pick up a few takeaways from our latest review.
First, there is the sheer scale of the challenges the program countries, and the IMF, have faced. In Chart 1 below, each bubble is a Fund program—its size being the amount of lending and the vertical distance being the GDP loss associated with the crisis. You can see how, after a few quiet years while emerging markets boomed, the crisis hit hard: multiple simultaneous crises involving severe output crashes, and massive Fund financing. From our perspective at the IMF, it’s been quite a challenge to manage all these new programs, some of which were put in place within weeks of the crisis hitting. (click on each chart for a larger image)
Importantly compared to the past, the IMF financing has been more frontloaded, and more flexibly deployed, being used to meet funding needs in both the private and public sectors, rather than being retained in reserves (see Chart 2).
This proactive Fund financing role has succeeded in avoiding the worst of the problems seen during past crises. With only a few exceptions, we have not seen banking crises and deposit runs—hallmarks of past crises. This is quite remarkable, considering that this has been first and foremost a financial crisis in the advanced countries—the source of huge externally financed credit booms in many countries, especially in Eastern Europe. I think this success speaks to the importance countries have placed on quickly getting in place bank liquidity measures.
But it also reflects another problem that these programs have avoided: excessive exchange rate and interest rate overshooting.
And there has been a significant shift in the approach to fiscal policy, with more accommodative stances than in the past. Chart 4 shows how 2009 fiscal deficits are being allowed to expand (a downward movement in the chart) in response to falling revenues. This expansion is affordable given the initial low public debt position in most program countries (shown on the horizontal axis)—although the programs are careful to include structural fiscal measures to ensure that fiscal balances and debt do not get out of control in the medium term, as you can see from the dotted blue line curling back up and to the left during the recovery phase. Both debt and deficits are in marked contrast to the advanced countries, whose debt levels started much higher and are projected to keep rising throughout the projection period.
The accommodative stance of fiscal policy—measured by the increase in the overall fiscal deficit—across program countries tried to strike a balance between allowing deficits to widen in the face of falling revenues and ensuring that deficits did not go up so much that they damaged confidence or could not be financed. Thus, in the majority of cases, there was some form of real spending cuts, but considerably less than the “automatic stabilizer effects” from falling revenues.
Finally, in recent years the IMF has paid a lot of attention to making the policy conditions applied to the programs it supports less burdensome. The review shows both a reduction in the total number of conditions (see Chart 6) and a greater focus on core areas essential to the success of the programs—notably the financial sector—than in the past.
Of course, there’s a lot more in the paper itself. I hope that you will read it and I would be very interested in your comments. I will do my best to respond to them.