This chapter reviews the evolution of the IMF’s financial engagement and policy support in LICs over the past quarter-century.1 While program engagement constitutes the most intensive interaction a member country may have with the IMF, it is just one end of a much broader spectrum of engagement through which the Fund can support capacity building and policy formulation. In fact, IMF financial and policy support is framed by a broader role that encompasses surveillance of economic policies (notably, the regular Article IV consultation), provision of technical assistance to support policy development and institution-building, and on-the-ground representation in most program countries by Resident Representatives.
The Origins of IMF Engagement
Prior to the mid-1970s, in a context of broadly satisfactory growth, inflation, and external performance, developing countries were expected to access IMF financial support in the same manner as richer countries. IMF-supported programs were designed to stabilize imbalances over a relatively short period of time, typically 12 to 24 months, and on nonconcessional financing terms.2 With the advent of the oil price shocks and the sharp terms of trade movements of the late 1970s and early 1980s, however, it became increasingly clear that the IMF’s traditional mechanisms for engagement were no longer appropriate (Figure 2.1).
Number of Low-Income Countries with an IMF Facility in Place, and New Concessional Commitments
Source: IMF staff calculations.Note: Each bar shows one facility per country, based on the length of use in the year and new commitments for countries eligible for IMF concessional financing (78 countries until 2009, and 72 countries afterwards).1For countries with concurrent Policy Support Instrument and short-term financing, only the latter is counted: Senegal, 2008–12; Mozambique, 2009–10; and Tanzania, 2009–10 and 2012.2Including blends.Number of Low-Income Countries with an IMF Facility in Place, and New Concessional Commitments
Source: IMF staff calculations.Note: Each bar shows one facility per country, based on the length of use in the year and new commitments for countries eligible for IMF concessional financing (78 countries until 2009, and 72 countries afterwards).1For countries with concurrent Policy Support Instrument and short-term financing, only the latter is counted: Senegal, 2008–12; Mozambique, 2009–10; and Tanzania, 2009–10 and 2012.2Including blends.Number of Low-Income Countries with an IMF Facility in Place, and New Concessional Commitments
Source: IMF staff calculations.Note: Each bar shows one facility per country, based on the length of use in the year and new commitments for countries eligible for IMF concessional financing (78 countries until 2009, and 72 countries afterwards).1For countries with concurrent Policy Support Instrument and short-term financing, only the latter is counted: Senegal, 2008–12; Mozambique, 2009–10; and Tanzania, 2009–10 and 2012.2Including blends.After rising by 12 percent per year from 1970 to 1980, commodity prices dropped sharply in the early 1980s. Faced with a collapse of exports and government revenues, many LICs responded by increasing their external borrowing (Figure 2.2). With commodity prices remaining low, the large current account and fiscal deficits resulted in a rapid buildup of debt burdens, in many cases exacerbating already-existing problems of low savings, overvalued exchange rates, high government spending, and heavily regulated economies. With many official creditors willing to provide loans, including support for the countries’ domestic industries, the 41 LICs that would later be considered for comprehensive bilateral and multilateral debt rescheduling saw their total indebtedness increase from $60 billion in 1980 to $105 billion in 1985 and $190 billion in 1990. Many began to build up external payments arrears, or were able to avoid doing so only through debt rescheduling under the auspices of the Paris Club of official sector lenders.
Economic Performance of Low-Income Countries
Source: IMF staff calculations using data from the IMF, World Economic Outlook database.Note: The sample is composed of 75 low-income countries (LICs). FDI = foreign direct investment.Economic Performance of Low-Income Countries
Source: IMF staff calculations using data from the IMF, World Economic Outlook database.Note: The sample is composed of 75 low-income countries (LICs). FDI = foreign direct investment.Economic Performance of Low-Income Countries
Source: IMF staff calculations using data from the IMF, World Economic Outlook database.Note: The sample is composed of 75 low-income countries (LICs). FDI = foreign direct investment.In this context, the IMF’s relatively short-term programs proved to be inadequate to address entrenched structural issues, and, in any case, the heavy external indebtedness of many LICs precluded their borrowing from the Fund on the usual nonconcessional terms. The IMF therefore responded by introducing new facilities designed specifically for LICs: the Structural Adjustment Facility (SAF) in 1986, followed by the Enhanced Structural Adjustment Facility (ESAF) one year later. These facilities were designed to provide medium-term support through three successive annual programs. The financial support under the SAF and ESAF was provided on concessional terms,3 funded by proceeds of earlier sales of IMF gold as well as grants from donors administered by the ESAF. The new facilities were based on the concept of protracted balance of payments needs in LICs. This indicated that the resolution of balance of payments problems would take place over a number of years due to the need to build institutional capacity and reduce dependence on aid.
The countries that sought support under the SAF and ESAF usually had worse initial conditions than LICs that did not seek medium-term support from the IMF (Figure 2.3). SAF- and ESAF-supported countries typically had accumulated deep-seated economic problems over an extended period, and came to the IMF in circumstances of persistently weak growth, often chronically high inflation, and fragile external positions. In the five years prior to the introduction of the SAF (1981–85), real per capita growth in subsequent ESAF countries averaged −1.1 percent, compared with 0 percent in non-ESAF developing countries. Savings rates in subsequent ESAF countries were half the average of other developing countries, and these countries had larger budget deficits, higher inflation, higher levels of external debt, more distorted foreign exchange systems, faster population growth, and more adverse social indicators.
Economic Performance of ESAF and Non-ESAF Low-Income Countries, 1981–85
(In percent)
Sources: IMF, World Economic Outlook, International Financial Statistics databases; and World Bank.Note: ESAF = Enhanced Structural Adjustment Facility.Economic Performance of ESAF and Non-ESAF Low-Income Countries, 1981–85
(In percent)
Sources: IMF, World Economic Outlook, International Financial Statistics databases; and World Bank.Note: ESAF = Enhanced Structural Adjustment Facility.Economic Performance of ESAF and Non-ESAF Low-Income Countries, 1981–85
(In percent)
Sources: IMF, World Economic Outlook, International Financial Statistics databases; and World Bank.Note: ESAF = Enhanced Structural Adjustment Facility.The core objectives of the ESAF were to promote external viability and higher output in a balanced manner by reducing domestic and external imbalances, mobilizing external resources, and improving resource allocation. The weak economic performance and structural characteristics of those countries that requested IMF and World Bank support were seen as necessitating a wide range of policy changes and reforms that became known as the “Washington Consensus” (Williamson, 1990). Policy reforms typically encompassed attempts to streamline the public sector, reform and privatize public enterprises, reform or abolish marketing boards, and liberalize price controls and exchange and trade systems. Financial sector policies were often aimed at constraining credit growth, particularly to the public sector, while enhancing the role of market mechanisms in allocating credit.
Initially, IMF-supported programs in LICs had no explicit goal of poverty reduction. Moreover, there was not a systematic effort to assess the impact of Fund-supported programs on the poor. However, over time IMF-supported programs did begin to pay greater attention to the social dimensions of adjustment.4 Many of the structural reforms themselves were instituted with the expectation that they would help to reduce poverty. Increases in agricultural producer prices and reforms of marketing boards, for example, sought to contribute to both higher production and the redistribution of economic rents back to poor farmers. Reduced inflation was also seen as supporting the poor, since they typically paid a disproportionate share of the inflation tax. Where policies involved social costs, many programs made provision for compensation schemes and safety nets. In countries such as Bolivia, The Gambia, Senegal, and Uganda, where adjustment involved retrenchment of employment in the public sector, programs built in severance pay and/or retraining programs. In countries such as Bangladesh, Mozambique, and Sri Lanka, where subsidies on consumer items were reduced or abolished, programs often sought to introduce targeted compensation though such initiatives as income supplements and food distribution schemes.
Given the scale of the debt problems in many LICs, the restoration of external viability was difficult and arduous to achieve without comprehensive debt relief. However, prior to 1987, official creditors that accounted for the large majority of LIC debt had not supported any write-down in the value of their claims (Box 2.1). With support under the SAF and ESAF, countries were able to demonstrate adherence to a comprehensive stabilization framework, and on this basis could represent the need for external support in the form of debt relief. Once this principle that a reduction in the present value of the debt would be essential to restore sustainability was established, countries were able to request a series of increasingly concessional debt reschedulings with IMF support.
The fall of the Berlin Wall in 1989 and the dissolution of the Soviet Union in 1991 led to a rapid increase in the membership and work of the IMF.5 The Fund played a significant role in supporting structural transformation in the countries of the former Soviet bloc as they transitioned from central planning to market-driven economies. (See Box 2.2 for the case of Georgia.) This was a difficult process, as the introduction of market mechanisms took place against a backdrop of price instability and a substantial decline in recorded output. Of the former Soviet Union countries, Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova, and Uzbekistan became eligible for support from the IMF’s concessional financing window, as did Albania, Bosnia and Herzegovina, and the former Yugoslav Republic of Macedonia in the Balkans.
While the ESAF had some success in supporting fiscal discipline and reducing external imbalances, the initial impact on growth was disappointing. Average real GDP per capita fell by 0.3 percent per year in the early 1990s in countries with ESAF programs. In part this reflected an unfavorable external environment for many LICs. During the late 1980s and early 1990s, most SAF/ESAF-supported countries saw a sizable deterioration in their terms of trade. The countries for which tea, coffee, or cocoa was the principal export—almost one-third of all ESAF users—suffered from a 60 percent drop in world beverage prices between 1986 and 1992. Other nonfuel commodity prices weakened from 1988 through the advanced economy recession of 1991–93. A number of countries continued to suffer from political instability, which also undermined growth. (See Box 2.3 for the case of Rwanda.)
Debt Relief
The initial approach of the international community to the debt problems that began to emerge in many low-income countries (LICs) during the early 1980s was to provide nonconcessional rescheduling of the debts falling due through the Paris Club, combined with the extension of new loans from official bilateral and multilateral creditors. As the decade unfolded, however, it became increasingly clear that these approaches were not addressing the fundamental issues of solvency.
The series of increasingly concessional terms for rescheduling debt flows began with the Toronto terms in 1987. When they failed to restore external sustainability, the Paris Club introduced the Naples terms in 1994, under which the debt stock could be written down by two-thirds. However, traditional debt relief mechanisms still left the multilateral debts untouched and in many cases, even after Naples stock relief, debt levels remained elevated.
The Heavily Indebted Poor Countries (HIPC) Initiative was therefore launched in 1996 to provide comprehensive debt relief, and multilateral lenders including the IMF and World Bank began providing debt relief where necessary to reduce a country’s debt burden to sustainable levels. However, initial progress was slow and insufficient in the view of nongovernmental organizations campaigning for comprehensive debt relief. In 1999, a review of the HIPC Initiative led to faster, deeper, and broader debt relief and strengthened the links between debt relief, poverty reduction, and social policies.
In 2005, to help accelerate progress toward the United Nations Millennium Development Goals, the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI). The MDRI allowed for 100 percent relief on eligible debts by three multilateral institutions—the IMF, the World Bank, and the African Development Fund—for countries completing the HIPC Initiative process. In 2007, the Inter-American Development Bank also decided to provide additional (“beyond HIPC”) debt relief to the five HIPCs in the Western Hemisphere.
By 2012, 36 countries had received debt relief under the HIPC Initiative, and total debt relief committed under the initiative amounted to around US$128 billion in nominal terms, of which about US$51 billion was under the MDRI (Figure 2.1.1).
Post-Decision-Point Debt Stock of Heavily Indebted Poor Countries at Different Relief Stages
(In billions of U.S. dollars in end-2010 present value terms)
Sources: World Bank; and IMF staff estimates.Note: HIPC = Heavily Indebted Poor Countries; MDRI = Multilateral Debt Relief Initiative.Post-Decision-Point Debt Stock of Heavily Indebted Poor Countries at Different Relief Stages
(In billions of U.S. dollars in end-2010 present value terms)
Sources: World Bank; and IMF staff estimates.Note: HIPC = Heavily Indebted Poor Countries; MDRI = Multilateral Debt Relief Initiative.Post-Decision-Point Debt Stock of Heavily Indebted Poor Countries at Different Relief Stages
(In billions of U.S. dollars in end-2010 present value terms)
Sources: World Bank; and IMF staff estimates.Note: HIPC = Heavily Indebted Poor Countries; MDRI = Multilateral Debt Relief Initiative.IMF Engagement in Georgia
After the breakup of the Soviet Union in 1991, Georgia was beset by political instability and regional unrest, which was compounded by economic crisis. The country suffered a severe decline in output, hyperinflation, and a disintegration of public infrastructure. With the support of the IMF and World Bank, the authorities began to implement a comprehensive stabilization and structural reform program in mid-1994 aimed at halting hyperinflation, strengthening public finances, and establishing the necessary economic conditions for the resumption of economic growth (Figure 2.2.1).
IMF Arrangements in Georgia
(GNI per capita in current U.S. dollars)
Source: IMF staff calculations.Note: GNI = gross national income; PRGF = Poverty Reduction and Growth Facility; SBA = Stand-By Arrangement; SCF = Standby Credit Facility; STF = Systemic Transformation Facility.IMF Arrangements in Georgia
(GNI per capita in current U.S. dollars)
Source: IMF staff calculations.Note: GNI = gross national income; PRGF = Poverty Reduction and Growth Facility; SBA = Stand-By Arrangement; SCF = Standby Credit Facility; STF = Systemic Transformation Facility.IMF Arrangements in Georgia
(GNI per capita in current U.S. dollars)
Source: IMF staff calculations.Note: GNI = gross national income; PRGF = Poverty Reduction and Growth Facility; SBA = Stand-By Arrangement; SCF = Standby Credit Facility; STF = Systemic Transformation Facility.In the decade that followed, Georgia was largely successful in attaining its stabilization goals under a number of IMF programs. Hyperinflation came to an end, and GDP, which had contracted severely from 1991 to 1994, started growing again in 1995. However, progress in many areas remained slow as policymakers were unable or unwilling to implement many of the structural and revenue measures. Widespread tax evasion undermined attempts to improve revenue mobilization, and program implementation was hampered by pervasive corruption, political fragmentation, and low institutional capacity.
Following the “Rose Revolution” of 2003, the new political leadership had strong ownership of the reform agenda and put in place polices that transformed the Georgian economy. Engagement with the IMF deepened, and the period that followed saw improved economic growth and strengthened revenue performance. With the support of IMF technical assistance, the revenue administration was reorganized and tax policy streamlined. The resulting increase in the tax-to-GDP ratio was significantly higher than expected and compared to country peers. Structural reforms paved the way for modernization of the economy with a more efficient public sector, and an economic and legal environment more conducive to entrepreneurship. The new government undertook forceful measures to fight corruption, restored the financial and technical viability of the electricity sector, and launched an ambitious privatization program. IMF technical assistance also played an important role in the monetary, financial, and statistical areas (Figure 2.2.2).
With per capita income now well above the relevant threshold, Georgia recently graduated from access to concessional IMF financing. The Fund can still play an important role in Georgia by providing policy advice and supporting the completion of the adjustment process, while recently approved precautionary financial support helps guard against external vulnerabilities.
In the latter half of the 1990s, however, the external environment improved for all LICs, and for the first time the growth performance of LICs in longer-term IMF-supported programs equaled that of nonprogram LICs. Nevertheless, at 1.6 percent per year, average per capita growth in the late 1990s remained lower than what was needed in many countries to achieve significant reductions in the poverty rate and improvements in social indicators, including health and education. Furthermore traditional debt relief mechanisms through the Paris Club, though increasingly concessional, were proving unable to restore debt sustainability even in well-performing LICs, suggesting that a new approach was necessary.
Strengthened Focus on Poverty Reduction
In 1999, after more than two years of internal and external debate, the IMF replaced the ESAF with the Poverty Reduction and Growth Facility (PRGF) (Table 2.1). This was part of a broader overhaul of the international development architecture—called for by many nongovernmental organization campaigners, LICs themselves, and development practitioners—that put country ownership and poverty reduction squarely at the center. As part of this reform, it was envisaged that the overall macroeconomic framework for PRGF arrangements would be drawn from a country’s own poverty reduction strategy, as set out in its Poverty Reduction Strategy Paper. Conditionality would be more selective and focused on actions that are critical to achieving the program’s macroeconomic objectives (Box 2.4). Fiscal targets would make appropriate allowance for increases in public expenditure to support a country’s Poverty Reduction Strategy.
Evolution of Eligibility for IMF Concessional Financing
Evolution of Eligibility for IMF Concessional Financing
| Entrants | Graduates | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 1995 | Eritrea | Azerbaijan | Congo, Rep. of | St. Kitts and Nevis | Dominican Republic | Philippines | ||||
| 1996 | Bosnia and Herzegovina | |||||||||
| 1997–98 | ||||||||||
| 1999 | Moldova | |||||||||
| 2000 | China | Equatorial Guinea | Egypt | |||||||
| 2001–02 | ||||||||||
| 2003 | Papua New Guinea | Timor-Leste | Uzbekistan | Macedonia, FYR | Bosnia and Herzegovina | |||||
| 2004–09 | ||||||||||
| 2010 | India | Pakistan | Sri Lanka | Albania | Angola | Azerbaijan | ||||
| 2011 | ||||||||||
| 2012 | South Sudan | |||||||||
Evolution of Eligibility for IMF Concessional Financing
| Entrants | Graduates | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 1995 | Eritrea | Azerbaijan | Congo, Rep. of | St. Kitts and Nevis | Dominican Republic | Philippines | ||||
| 1996 | Bosnia and Herzegovina | |||||||||
| 1997–98 | ||||||||||
| 1999 | Moldova | |||||||||
| 2000 | China | Equatorial Guinea | Egypt | |||||||
| 2001–02 | ||||||||||
| 2003 | Papua New Guinea | Timor-Leste | Uzbekistan | Macedonia, FYR | Bosnia and Herzegovina | |||||
| 2004–09 | ||||||||||
| 2010 | India | Pakistan | Sri Lanka | Albania | Angola | Azerbaijan | ||||
| 2011 | ||||||||||
| 2012 | South Sudan | |||||||||
IMF Engagement in Rwanda
The 1994 conflict in Rwanda, which killed 800,000 people and displaced about 2 million, also inevitably had consequences for development and resulted in a “lost decade” for growth, with GDP declining by1.4 percent per year on average over 1990–2000. The IMF reengaged in Rwanda in 1995 and has had continuous program engagement ever since (Figure 2.3.1).
IMF Arrangements in Rwanda
(GNI per capita in current U.S. dollars)
Source: IMF staff calculations.Note: CFF = Compensatory Financing Facility; ECF = Extended Credit Facility; ESAF = Enhanced Structural Adjustment Facility; EPCA = Emergency Post-Conflict Assistance; GNI = gross national income; PSI = Policy Support Instrument; SAF = Structural Adjustment Facility.IMF Arrangements in Rwanda
(GNI per capita in current U.S. dollars)
Source: IMF staff calculations.Note: CFF = Compensatory Financing Facility; ECF = Extended Credit Facility; ESAF = Enhanced Structural Adjustment Facility; EPCA = Emergency Post-Conflict Assistance; GNI = gross national income; PSI = Policy Support Instrument; SAF = Structural Adjustment Facility.IMF Arrangements in Rwanda
(GNI per capita in current U.S. dollars)
Source: IMF staff calculations.Note: CFF = Compensatory Financing Facility; ECF = Extended Credit Facility; ESAF = Enhanced Structural Adjustment Facility; EPCA = Emergency Post-Conflict Assistance; GNI = gross national income; PSI = Policy Support Instrument; SAF = Structural Adjustment Facility.During the period from 1995 to 2006, efforts were directed to rebuilding the country and restoring the functioning of the state. Rwanda undertook an impressive national rehabilitation plan with the strong support of the international community. Alongside the crucial objective of reestablishing national peace and dialogue, the macroeconomic agenda focused on institutional capacity-building for growth and poverty reduction. The IMF supported the implementation of structural reforms in key areas such as strengthening the National Bank of Rwanda, establishing a public revenue authority in 1998, and introducing a value-added tax in 2000.
By 1999, economic activity had recovered to its 1993 level, while inflation had been drastically reduced and official reserves reconstituted. The progress continued in the 2000s with debt relief obtained under the completion point of the Heavily Indebted Poor Countries Initiative in 2005, and with education and health spending experiencing significant upward trends. Results from the latest household expenditure survey show that robust economic growth led to a fall in the poverty headcount ratio from 56.7 percent in 2005/06 to 44.9 percent in 2010/11.
Rwanda has recently transitioned from IMF financing to a nonfinancial relationship (using the Policy Support Instrument), under which the authorities envisage strengthening domestic revenue mobilization to offset a gradual decline of external grants, and promoting economic diversification.
IMF Program Conditionality
All IMF programs involve conditionality, the purpose of which is to safeguard the Fund’s resources by ensuring that the program is successful—that is, the borrowing country’s balance of payments improves sufficiently that the country is able to repay the loan. Until the early 1980s, IMF conditionality tended to be limited and focused on macroeconomic policies. However, as the Fund became increasingly involved in low-income countries and transition economies in the late 1980s and 1990s, the complexity and scope of structural conditions increased. IMF programs sought to address the severe structural problems that were seen as hampering economic stability and undermining the potential for growth. The number of prior actions, performance criteria, and indicative targets in IMF-supported programs increased correspondingly.
In the 2000s, however, the IMF sought to return to a more focused approach to conditionality. The 2002 guidelines, introduced following a major review, entrenched the principal of parsimony in the use of conditions, and reaffirmed that member countries have primary responsibility for selecting, designing, and implementing the policies that will make the IMF-supported program successful. All conditionality under an IMF-supported program must be “macro-critical”—that is, critical to the achievement of the program’s macroeconomic program goals—and must be tailored to a country’s individual circumstances.
In 2007, the IMF moved away from setting conditions on the size of the government wage bill. This departure reflected the institution’s view that the use of medium-term expenditure frameworks and strengthened budget and payroll systems would gradually obviate the need for such ceilings. Program design focused on overall spending and priority spending, leaving specific decisions on spending allocations to country authorities.
In March 2009, the IMF further modernized its conditionality framework. Structural performance criteria, which required formal waivers for a review to be completed if they were not met, were abolished. Structural reforms are now assessed by reviews of overall program performance, and more IMF-supported programs make use of ex ante conditionality. This approach emphasizes achievement of the underlying objectives of the reforms, while giving countries more room for maneuver in how the reforms are implemented.
Against a backdrop of rising public pressure in developed countries to increase and improve financial support to low-income countries, creditors also resolved to make greater efforts to restore debt sustainability and fiscal space in LICs by providing comprehensive debt relief. Under the Heavily Indebted Poor Countries (HIPC) Initiative, multilateral debt could for the first time be written down, including debts owed to the IMF itself. To ensure that debt relief was put to good use, a country had to establish a successful track record under IMF-supported programs, and have a Poverty Reduction Strategy in place through a broad-based participatory process.
The new architecture coincided with a period of unusually favorable global trends. Together with strengthened macroeconomic policymaking in LICs and a more supportive aid environment, this led to GDP growth in most LICs at levels not seen since the 1970s. Other macroeconomic indicators also improved considerably during this period. From 2003 to 2005 compared to the 1980s and 1990s, government revenues as a percentage of GDP were 5 percent higher, foreign direct investment (FDI) as a share of GDP doubled, and the reserve coverage of imports increased by 50 percent. Most importantly, the improved macroeconomic performance began to feed through to significant progress in poverty reduction in many countries. Moreover, several countries moved to low-access PRGFs, as financing needs declined, while continued program engagement was sought to support macroeconomic policies and catalyze donor flows to help boost growth and reduce poverty. Progressively, countries started to graduate from IMF concessional support.
In 2005, the IMF approved the Multilateral Debt Relief Initiative (MDRI) to provide significant further debt reduction beyond the HIPC Initiative, and the Fund also established two new modes of engagement: (1) the Policy Support Instrument (PSI) to provide policy support and signaling for “mature stabilizers,” that is, those countries that had attained external and domestic macroeconomic stability such that they no longer needed continuous Fund financial assistance; and (2) the Exogenous Shocks Facility (ESF) to provide rapid assistance in the event of an exogenous shock for countries without a PRGF arrangement in place.
The Global Financial Crisis and the IMF’s Response
The supportive external environment that had characterized the mid-2000s came to an end in 2007–08. A surge in food and fuel prices weakened trade balances and official reserves positions for most LICs except oil exporters. This prompted the need for increased social spending to mitigate the impact on the poorest, for whom food costs already constituted a large proportion of expenditure. The food and fuel crisis had just begun to abate when the collapse of Lehman Brothers heralded the escalation of the global financial crisis.
While the crisis originated in the advanced economies, it was soon transmitted to LICs through several major channels: demand for their exports dropped, foreign exchange markets grew more volatile, trade finance and other forms of credit tightened, and FDI and remittance flows slowed. The global gloom and uncertainty cast a chill over domestic investment as well. Global GDP growth, which had been running at 3–4 percent in the mid-2000s, fell below 1 percent (Figure 2.4).
Real GDP Growth, 1980–2012
(Median, in percent)
Source: IMF staff calculations using data from IMF, World Economic Outlook database.Note: LICs = low-income countries.Real GDP Growth, 1980–2012
(Median, in percent)
Source: IMF staff calculations using data from IMF, World Economic Outlook database.Note: LICs = low-income countries.Real GDP Growth, 1980–2012
(Median, in percent)
Source: IMF staff calculations using data from IMF, World Economic Outlook database.Note: LICs = low-income countries.The IMF responded to the crisis by advocating and supporting a vigorous countercyclical fiscal response in many LICs. This largely reflected the improved macroeconomic position of LICs themselves. Official reserves in the typical low-income country were about double their level at the start of earlier crises. Inflation rates, fiscal deficits, current account deficits, and external debt levels stood at about half of where they were at the start of earlier crises (Figure 2.5). During earlier crises, such as in 1982 and 1991, LICs had cut their fiscal deficits. In 2009, the typical LIC increased its fiscal deficit by 2.7 percent of GDP. Real spending rose 7 percent. While more than half of the financing needs resulting from the higher fiscal deficits were met from domestic sources, external creditors also stepped in to provide large amounts of concessional and other financing.
Real Per Capita Growth and Fiscal Indicators
(In percent)
Sources: IMF, World Economic Outlook database; and IMF staff estimates.Note: LICs = low-income countries; LHS = left-hand scale; RHS = right-hand scale.1Previous crises are 1975, 1982, and 1991.Real Per Capita Growth and Fiscal Indicators
(In percent)
Sources: IMF, World Economic Outlook database; and IMF staff estimates.Note: LICs = low-income countries; LHS = left-hand scale; RHS = right-hand scale.1Previous crises are 1975, 1982, and 1991.Real Per Capita Growth and Fiscal Indicators
(In percent)
Sources: IMF, World Economic Outlook database; and IMF staff estimates.Note: LICs = low-income countries; LHS = left-hand scale; RHS = right-hand scale.1Previous crises are 1975, 1982, and 1991.The IMF itself was able to play a significant role in providing this external financing and policy support thanks to a major overhaul of its facilities. The evolution of the Fund’s support instruments for LICs had left some gaps in the toolkit, and also created a number of overlaps (Table 2.2). The three major missing elements were (1) fully flexible short-term financing, since use of the ESF–High Access Component (HAC) was limited to shocks with exogenous causes; (2) a concessional precautionary instrument; and (3) flexible emergency financing. Emergency assistance was available for LICs under three different instruments: Emergency Natural Disaster Assistance (ENDA) for LICs hit by natural disasters; the ESF–Rapid Access Component (RAC) for LICs affected by exogenous shocks; and Emergency Post-Conflict Assistance (EPCA) for LICs emerging from conflict. But the Fund lacked a streamlined tool to provide rapid emergency assistance for urgent balance of payments needs, irrespective of their cause. Moreover, access levels had severely eroded over the preceding decade, and access policies were not consistent across instruments. These factors had contributed to an increasing number of LICs reverting once more to Stand-By Arrangements (SBAs), which are nonconcessional and thus generally not an appropriate form of financing for LICs.
Evolution of the IMF’s Concessional Facilities
The RCF and SCF reduced overlaps and closed gaps between facilities.
Exogenous Shocks Facility–Rapid Access Component.
Exogenous Shocks Facility–High Access Component.
Evolution of the IMF’s Concessional Facilities
| Medium-term support | Short-term support1 | Nonfinancial support | |||||
| 1986 | Structural Adjustment Facility (SAF) | Emergency Natural Disaster Assistance (ENDA) | Emergency Post-Conflict Assistance (EPCA) | ||||
| 1987 | Enhanced Structural Adjustment Facility (ESAF) | ||||||
| 1988 | |||||||
| 1989 | |||||||
| 1990 | |||||||
| 1991 | |||||||
| 1992 | |||||||
| 1993 | |||||||
| 1994 | |||||||
| 1995 | |||||||
| 1996 | |||||||
| 1997 | |||||||
| 1998 | Poverty Reduction and Growth Facility (PRGF) | ||||||
| 1999 | |||||||
| 2000 | |||||||
| 2001 | |||||||
| 2002 | |||||||
| 2003 | |||||||
| 2004 | |||||||
| 2005 | Exogenous Shocks Facility (ESF) | Policy Support Instrument (PSI) | |||||
| 2006 | |||||||
| 2007 | |||||||
| 2008 | ESF-RAC2 | ESF-HAC3 | |||||
| 2009 | Extended Credit Facility (ECF) | Rapid Credit Facility (RCF) | Standby Credit Facility (SCF) | ||||
| 2010 | |||||||
| 2011 | |||||||
| 2012 | |||||||
The RCF and SCF reduced overlaps and closed gaps between facilities.
Exogenous Shocks Facility–Rapid Access Component.
Exogenous Shocks Facility–High Access Component.
Evolution of the IMF’s Concessional Facilities
| Medium-term support | Short-term support1 | Nonfinancial support | |||||
| 1986 | Structural Adjustment Facility (SAF) | Emergency Natural Disaster Assistance (ENDA) | Emergency Post-Conflict Assistance (EPCA) | ||||
| 1987 | Enhanced Structural Adjustment Facility (ESAF) | ||||||
| 1988 | |||||||
| 1989 | |||||||
| 1990 | |||||||
| 1991 | |||||||
| 1992 | |||||||
| 1993 | |||||||
| 1994 | |||||||
| 1995 | |||||||
| 1996 | |||||||
| 1997 | |||||||
| 1998 | Poverty Reduction and Growth Facility (PRGF) | ||||||
| 1999 | |||||||
| 2000 | |||||||
| 2001 | |||||||
| 2002 | |||||||
| 2003 | |||||||
| 2004 | |||||||
| 2005 | Exogenous Shocks Facility (ESF) | Policy Support Instrument (PSI) | |||||
| 2006 | |||||||
| 2007 | |||||||
| 2008 | ESF-RAC2 | ESF-HAC3 | |||||
| 2009 | Extended Credit Facility (ECF) | Rapid Credit Facility (RCF) | Standby Credit Facility (SCF) | ||||
| 2010 | |||||||
| 2011 | |||||||
| 2012 | |||||||
The RCF and SCF reduced overlaps and closed gaps between facilities.
Exogenous Shocks Facility–Rapid Access Component.
Exogenous Shocks Facility–High Access Component.
The 2009 reforms created a new architecture of concessional facilities aimed at providing more flexible and tailored support to meet the diverse needs of LICs. The Extended Credit Facility (ECF) replaced the PRGF as the main tool for addressing protracted balance of payments problems. The Standby Credit Facility (SCF) was created to provide support to LICs with short-term balance of payments needs, akin to that provided under SBAs, with the possibility of using it on a precautionary basis. The Rapid Credit Facility (RCF) was created to provide rapid low-access financing with limited conditionality to meet urgent balance of payments needs, widening the scope of emergency assistance to cover needs arising from domestic factors and streamlining existing emergency instruments used by LICs (ENDA, EPCA, and ESF-RAC) under one facility. The PSI was kept largely unchanged.
Interest rates were reduced to zero on all concessional facilities as a temporary measure in response to the crisis—a measure that has been extended through end-2014. Access levels were doubled, and new access limits and norms were designed to ensure consistency across the three facilities.6 Other modalities were made more flexible, including the debt limit policy and structural conditionality.
In addition, the international community endorsed a financing package to more than double the IMF’s concessional lending capacity to SDR 11.3 billion ($17 billion) for the period from 2009–14. Most of the additional subsidy resources were mobilized from the Fund’s internal resources, including those linked to gold sales, but they also include new bilateral contributions. Also, the general and special SDR allocations agreed upon during the height of the crisis provided more than SDR 8 billion ($12 billion) to bolster LICs’ foreign exchange reserves and help alleviate financing constraints during the crisis.7
With the new architecture and financing in place, the IMF was able to quadruple disbursements to LICs in 2009 and support their countercyclical fiscal policies. As a result, countries were able to maintain their planned increases in expenditures and preserve valuable social spending at a time when it was most necessary. Unlike in advanced economies, where per capita income fell, per capita income growth remained positive in LICs.
In contrast to previous crises, the post-2009 recovery in LICs has been swift and synchronized with the rest of the world, reflecting strong export demand from trading partners. While advanced economies still account for a large share of LICs’ trading partners, a number of fast-growing emerging markets have played an increasing role in supporting growth in LICs. In addition to the usual trade channels, through which higher growth in emerging markets contributes to a rise in demand for LIC exports, some emerging markets have become major contributors to LIC growth more recently through remittances, FDI, and other financial linkages. Driven also by strong growth in domestic demand, real GDP growth for the median LIC is projected to grow at around 6 percent over the next five years, following the strong performance in 2011–12.
However, despite this strong growth performance, vulnerabilities remain elevated in LICs, suggesting the potential need for continued strong IMF support over the medium term. Though LICs started to rebuild policy buffers as their recovery began in 2010, progress on this front has halted and even been partially reversed over the past two years. As a result, many LICs have more limited fiscal space and larger current account deficits than prior to the crisis.
To summarize, over the course of the last quarter-century the IMF has had intensive program engagement with a significant proportion of LICs, as well as nonprogram engagement through surveillance and technical assistance with many more. Over this same time frame most LICs have made solid, if at times uneven, progress in liberalizing and diversifying their economies. The next chapter attempts to assess the role of the IMF in this process, and proposes new techniques to advance the existing methodologies for estimating program impact.
See IMF (1993, 1998) and Boughton (2012), on which this chapter draws, for more comprehensive treatment.
Nonconcessional financing terms comprised a floating Special Drawing Right (SDR) interest rate and a short grace period and maturity.
A fixed interest rate of 0.5 percent, with repayments over 10 years and a grace period of 5½ years.
In part this was a response to external analysis that emphasized the social costs of adjustment. See Cornea, Jolly, and Stewart (1987).
In the course of three years IMF membership increased from 152 to 172 members.
Access limits determine the maximum amount of assistance the Fund can provide to each country, while access norms provide an indication of the usual amount of assistance each country could expect to receive, which could be increased or decreased if merited by a country’s individual program or needs.
An SDR allocation effectively increases members’ international reserves, since it represents a potential claim on hard currency, thereby allowing members to reduce their reliance on more expensive domestic or external debt for building reserves.
