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

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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
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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

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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.

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Fiscal Policy in 2009
? Contractionary Policy ? Expansionary Policy
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Fiscal Policy in 2009
? Contractionary Policy ? Expansionary Policy
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Programs adapted to falling output and revenues
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Programs adapted to falling output and revenues
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Evolution of 2009 growth forecasts
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GDP declines due to initial conditions, not due
to programs
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Interest rate spikes avoided
past crises
Medians and interquartile ranges
current programs
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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).
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No currency overshooting this time
current programs
Medians and interquartile ranges
past crises
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More focused conditionality
Other
Financial sector
Monetary and exchange rate
Fiscal
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Streamlined Conditionality in LIC Programs