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International Monetary Fund. Independent Evaluation Office
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Keywords:
IMF programs; growth optimism; austerity bias; structural conditionality; debt sustainability; fiscal policy; exchange rate policy; PRGT program; debt operation; IMF support; reviews IMF policy; program objective; Fiscal consolidation; Real effective exchange rates; Structural reforms; Global; Middle East and Central Asia; West Africa; Sub-Saharan Africa; Caribbean; Europe
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Abstract

IMF Lending Arrangements: September 2008-March 2020

Appendix

Table A1.

IMF Lending Arrangements: September 2008-March 2020

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* Indicates GRA-PRGT blended arrangements.

Completion delayed or program extended but not completed (Pakistan 2008).

Cancelled.

Figure A1
Figure A1

Distribution of Program Approvals: 2008–16

Sources: MONA database; IEO staff calculations.
Table A2

Composition of the Evaluation Sample

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Armenia and Georgia have both GRA and PRGT programs.

Following the definition used by the 2018 ROC, “off-track programs” refer to programs where at least two reviews were completed and at least two reviews were not completed at the end of the program and “quickly off-track programs” refer to programs where at most one review was completed and at least two reviews were not completed at the end of the program.

Crisis programs include the programs approved during 2008–09 in response to the GFC (Angola, Armenia, Belarus, Bosnia and Herzegovina, Costa Rica, Dominican Republic, El Salvador, Georgia, Guatemala, Hungary, Latvia, Mongolia, Pakistan, Romania, Serbia, Sri Lanka, and Ukraine) and fve euro area programs arranged in response to the European debt crisis (Cyprus (2013), Greece (2010, 2012), Ireland (2010), Portugal (2011)).

Data Conventions

For analytical purposes, the following conventions are used to define the program period in the cross-country analysis unless otherwise indicated:

  • ▸ Convention 1. If the program is approved in the last quarter of year t, the following year t+1 is counted as the first year (T) of the program; otherwise year t is the first year.

  • ▸ Convention 2. If the program is fully completed in the first quarter of year t, the previous year t-1 is considered as the last year (T+E) of the program; otherwise, year t is the last year.

  • ▸ Convention 3. For off-track programs, the last year of the program is determined based on the date of the last completed program review while applying Convention 2 above.

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Statement by the Managing Director

On the Independent Evaluation Office Report on Growth and Adjustment in IMF-Supported Programs Executive Board Meeting August 30, 2021

I welcome the report of the Independent Evaluation Office (IEO) on Growth and Adjustment in IMF-Supported Programs, including the background papers and country case studies. The report offers valuable analysis and recommendations and comes at a very opportune time, as Fund lending is at an all-time high. I agree with the overall assessment, which is broadly consistent with staff’s 2018 Review of Program Design and Conditionality (ROC). I also broadly agree with the recommendations, which will be an important input into the ongoing review of the operational guidance note on conditionality, expected to be finalized in 2022.

I am pleased with the IEO conclusion that there is no evidence of a consistent bias towards excessive austerity in IMF-supported programs during the evaluation period. I also agree with the finding that Fund-supported programs have yielded growth benefits relative to a counterfactual of no Fund engagement and that stabilization and reforms implemented in the program context boosted post-program growth performance. I welcome the IEO’s finding that fiscal multiplier assumptions were broadly in line with the guidance given to staff and the empirical literature. I should add in this respect that, as seen in some programs, macro-financial considerations may affect growth outcomes directly or condition the size of fiscal multipliers, and the composition of an adjustment path can affect growth outcomes. Thus, staff should continue striking a balance between the general guidance and consideration of country-specific policy circumstances.

I acknowledge the IEO’s assessment that the limited use of exchange rate adjustment as a tool in a program context may suggest that there could be greater scope to use exchange rate policy as a means to facilitate adjustment while supporting growth and resilience to adverse shocks. I would like to emphasize nevertheless that there is no one-size-fits all approach, with the need for a case-by-case assessment of individual country circumstances. In some cases, the use of the exchange rate is not possible due to regional currency arrangements, large negative spillover risks, and ultimately national decisions on the exchange rate regime, which the IEO also acknowledges.

I also take note of the IEO’s finding that successful debt operations can contribute to progress in lowering debt trajectory and restoring growth. While I agree in general with the need to avoid “too little and too late” debt restructurings, I would also like to emphasize that the Fund has a duty of neutrality, as also mentioned by the IEO, and has a limited role in debt restructuring operations. I am pleased to say that the impact and consequence of debt operations on growth and market access is already captured as one of the relevant economic risks in recent IMF/World Bank work, while the new MAC DSA guidance note would cover macro projections and realism issues.

Response to IEO Recommendations

Recommendation 1. Attention to growth implications of IMF-supported programs should become more thorough, systematic, realistic, and sensitive to social and distributional consequences.

I support this recommendation, with some qualifications.

I broadly concur with this recommendation. In particular, I agree with the need for more thorough discussion on growth issues in IMF-supported programs (both GRA and PRGT), and I would highlight that staff reports for program requests and reviews should—and many already do—discuss the growth strategy on a case-by-case basis, if critical to the program success.

In this context, I would echo the IEO’s message that the ongoing revisions to the operational guidance note on conditionality will provide an opportunity to update guidance on program design and conditionality, based on the findings of the 2018 ROC regarding over-optimistic growth assumptions and of this IEO evaluation.

At the same time, while it is important to support economic adjustment and reforms for sustained growth over the medium term (e.g., fiscal balance targets or debt sustainability), growth cannot be placed above or on par with the core objective of Fund lending of helping members resolve their balance of payments problems, according to our Articles of Agreement. The focus needs to be on how we can provide further guidance on the role of Fund-supported programs in fostering sustainable growth, taking into account the quality of growth.

While I support the sub-recommendation to discuss fiscal multiplier assumptions, I would stress the need for a flexible application of tools, as fiscal multipliers are often difficult to assess ex ante, and even harder during crises.

I also concur with the sub-recommendation to pay more consistent attention to contingencies for growth shortfalls. In this regard, I would like to emphasize the importance of a case-by-case approach to developing contingency plans, depending on country circumstances. Importantly, program reviews already discuss key program risks, including growth shocks, and allow for program modifications in response to unforeseen shocks. Finally, in some cases, contingency discussions with the authorities need to be confidential to avoid adverse market reactions.

Finally, I agree with strengthening the monitoring of key social and distributional metrics where feasible. I would, however, also note that limited data availability— particularly in countries with a large informal sector and weak household-level data—and possible budgetary implications for the Fund may limit a broader application to all programs. While some country teams already examine distributional consequences of adjustment and reform policies, a more systematic incorporation of such assessments in program design would require specialized staffing.

Recommendation 2. IMF-supported programs should pay greater attention to supporting deep, more growth-oriented structural reforms with more effective capacity development support and more effective collaboration with partners in areas outside the Fund’s core mandate and expertise.

I support this recommendation.

I agree with focusing more on growth-oriented structural reforms, effective capacity development (CD) and collaborating with partners such as the World Bank. I concur with a more effective collaboration with partners in areas outside the Fund’s core mandate and expertise, including the World Bank. I would emphasize that staff— in program cases in particular—typically collaborate closely with World Bank counterparts on a range of topics, including structural fiscal issues and social support to financial development. I am pleased to state that avenues for further cooperation are being pursued in the context of the ongoing MIP for IMF Collaboration with the World Bank on Macro-Structural Issues. As the IEO correctly implies, expanding SC beyond the Fund’s core expertise should recognize the need for Fund conditionality to be independently verifiable and monitorable by Fund staff, which also requires inhouse expertise, while cross-conditionality (linking the use of Fund resources to the rules and decisions of other organizations) is disallowed.

I would also note that the Board-endorsed recommendations of the 2018 ROC called for SC to be parsimonious, also reiterated by the IEO, and better prioritized in line with program objectives. The 2018 IEO evaluation update of SC in IMF-supported programs also found the SC in core Fund expertise to be associated with better implementation. I would thus caution against veering too far out of areas of the Fund’s core mandate and expertise.

I agree that the Fund could revisit how CD support is integrated with program design and implementation, with the aim to promote deeper and more successful reform efforts in a program context. I look forward to the ongoing IEO evaluation of IMF CD, including how the coordination of Fund-supported programs and CD activities could be improved further, as well as the next strategic review of IMF CD work in 2023. I would note that the benefits of more effective CD in Fund-supported programs also depend on the country’s implementation capacity. For a fuller picture, the costs associated with CD activities would also need to be fully reflected in the IEO report.

Recommendation 3—The Fund should continue to invest in building a toolkit of models and monitors that can be applied as a basis for analysis of the adjustment-growth relationship and assessing growth-related developments in the program context.

I support this recommendation.

I support further developing and refining our toolkit of models. A number of such models (DIG, DIGNAR, new RES model, and FAD’s SDG financing model that “endogenizes” growth) are already available for both program and surveillance purposes. Moreover, an ongoing ICD initiative on Modernizing Financial Programming Toolkit (“FP 2.0”) aims to build a tractable modeling toolkit and to design user-friendly ways to apply the modeling tools, calibrate baseline projections, reflect expected growth impacts of policy measures, and build risk scenarios. I agree that teams should be encouraged to make use of the available modeling resources and the new models on a case-by-case basis; further investment in the RES structural reform database could be indeed helpful.

Table 1

The Managing Director’s Position on IEO Recommendations

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The Acting Chair’s Summing Up

Independent Evaluation Office—Growth and Adjustment in IMF-Supported Programs Executive Board Meeting 21/84 August 30, 2021

Executive Directors welcomed the comprehensive report of the Independent Evaluation Office (IEO) on Growth and Adjustment in IMF-Supported Programs, noting that it comes at an opportune time, as many member countries are seeking Fund support to close external gaps exacerbated by the pandemic, while building sustainable growth. They acknowledged that the overall assessment is broadly consistent with and complements staff’s 2018 Review of Program Design and Conditionality (ROC). Directors welcomed that the IEO did not find evidence of a consistent bias toward excessive austerity in Fund-supported programs during the evaluation period and the finding that programs yielded growth benefits relative to a counterfactual of no Fund engagement. They also welcomed the Managing Director’s broad support for the IEO findings and recommendations, while noting qualifications in some areas.

Directors broadly agreed with Recommendation 1 that attention to growth implications of Fund-supported programs should become more thorough, systematic, realistic, and sensitive to social and distributional consequences, while reiterating that the core objective of Fund lending is to help members resolve their balance of payment (BOP) problems without resorting to measures destructive of prosperity, as mandated by the Articles of Agreement. While it was also emphasized that growth is fundamental to sustainably resolving BOP problems, there was also recognition of macroeconomic adjustment and sustainable policies as a pre-condition for sustainable and balanced growth. Directors regretted that growth outcomes have often fallen short of program projections and concurred on the need to improve the realism of forecasts but also to pay greater attention to growth outcomes in IMF-supported program design. In this context, they considered that the findings of the IEO evaluation together with the ROC should provide important input to the ongoing review of the operational guidance note on conditionality. A number of Directors also saw merit in reviewing the 2002 Conditionality Guidelines to further clarify the balance between stabilization and growth considerations.

Directors agreed with the need to carefully discuss fiscal multiplier assumptions, while calling for a flexible application of tools, as multipliers are often difficult to estimate and depend on country-specific circumstances. They also recommended paying more attention to contingencies for growth shortfalls, taking into account country specificities and the potential need for confidentiality to avoid adverse market reactions. Directors agreed with strengthening the monitoring of key social and distributional aspects wherever possible, including by working with relevant partners such as the World Bank. Some Directors also encouraged a more systematic assessment of distributional considerations in programs.

Directors broadly concurred with Recommendation 2 that Fund-supported programs pay greater attention to supporting deep, more growth-oriented structural reforms, with more effective capacity development (CD) support and more effective collaboration with partners— such as the World Bank—in areas outside the Fund’s core mandate and expertise. They reiterated the need to keep structural conditionality parsimonious and prioritized in line with program objectives, and generally cautioned against veering too far out of core areas.

Directors concurred on the need to assess how CD and surveillance could be better integrated with program design and implementation and looked forward to the conclusions of the ongoing IEO evaluation of Fund CD. While looking forward to the Management Implementation Plan for IMF Collaboration with the World Bank on Macro-Structural Issues, a few Directors encouraged staff and management to propose concrete steps on this matter and to review the experience with World Bank-Fund collaboration in Fund-supported programs.

Directors agreed with Recommendation 3 that the Fund continue to invest in building a toolkit of models and monitors that can be applied as a basis for analysis of the adjustment-growth relationship and assessing growth-related developments in the program context. They welcomed the set of already available models and encouraged staff teams to make use of them on a case-by-case basis and adapt them to better reflect country-specific circumstances. Directors agreed that investing in the Research Department’s structural reform database would be helpful.

Directors agreed with the need to avoid “too little and too late” debt restructurings, but they stressed that the Fund has a duty of neutrality, which leaves the design of the restructurings to debtors and their creditors. At the same time, some Directors noted that, in practice, the Fund’s debt sustainability analysis provides the Fund with an analytical basis for timely and effective engagement. While a number of Directors considered that there could be greater scope to use exchange rate policy in Fund-supported programs to facilitate adjustment while supporting growth, Directors reiterated the need for a case-by-case assessment of individual country circumstances respecting national decisions on the exchange rate regime. A few Directors saw scope to use the Fund’s Integrated Policy Framework to better inform exchange rate discussions between staff and the authorities in a program context.

In line with established practice, management and staff will carefully consider today’s discussion when formulating the Management Implementation Plan for Board-endorsed recommendations, including approaches to monitoring progress.

2

See Annex for the full list and the composition of programs included in the evaluation sample as well as the data conventions used to determine program duration.

3

See Kim and others (2021) for technical details about the classification of program objectives.

4

This chapter draws on Kim and others (2021) and country case studies prepared for the evaluation.

5

Crisis programs refer to GRA programs arranged in response to a global or major regional crisis. Specifically, crisis programs include GRA programs approved during 2008–09 in response to the GFC (18 programs in total) and five Eurozone programs arranged in response to the euro area crisis (see Table A1 in Annex 1 for further details). Some other programs have also taken place in the context of BOP crises (e.g., Ukraine 2014 and 2015) but where the source has been internal imbalance rather than an exogenous shock. Their experience has typically followed a similar pattern of adverse growth outcomes.

6

This metric does not distinguish between the later years of a multi-year program and the years after the program has been concluded. Thus, the empirical results are not always fully consistent with those discussed in the section “Growth and Adjustment Outcomes Relative to Projections,” which are based on the data for program periods only.

7

Some programs in the evaluation sample went quickly of track; as a result, no observations are available for program outcomes under the conventions used to determine program duration for analytical purpose (see Annex 1). Comparison is based on annual averages over the program period. See Kim and others (2021) for further technical details.

8

Baseline projections at program approval assume full program implementation, implying that less than full program implementation could ex post lead to optimism bias. Similarly, ex post data revisions including GDP rebasing could be a source of optimism bias by itself and by affecting modeling errors in program design.

9

See Kim and others (2021) for detailed discussion of the estimation of growth benchmarks and related empirical findings. The benchmark is not intended to be a counterfactual (e.g., growth outcome that would have prevailed with no Fund engagement).

10

The remaining two GRA programs with negative and significant growth deviations are Ukraine (2014) and Suriname (2016), both of which went off track. Sierra Leone (2013) is the only PRGT program indicated with a negative and significant growth deviation.

11

For instance, Ismail, Perrelli, and Yang (2020) find for a large panel sample of 170 countries for the period of 2003–17 that large fiscal adjustments (one-half standard deviation or more above the sample average) are associated with higher growth optimism in surveillance and non-concessional program forecasts.

12

The variance decomposition results reported in Kim and others (2021) show that modeling errors related to fiscal multipliers explain 30 percent of sample variation in growth forecast errors (after country and vintage fixed effects) in GRA programs other than crisis programs while little in crisis and PRGT programs.

14

See Appendix V in Kim and others (2021) for a select literature review of empirical studies on the growth impact of IMF-supported programs.

15

See Kim and others (2021) for greater technical detail.

16

Note that a country may have a positive ATE even though output may contract during the program because the counterfactual in the absence of stabilization measures and financial support would have been an even deeper economic downturn.

17

Bas and Stone (2014) find for a sample of 104 countries over 1970–2008 that the average growth impact of IMF-supported programs is on the order of 1.4–3.5 percentage points and rises steadily with the cumulative number of years under programs, that is, for longer-term IMF engagement. Bal Gündüz (2016) reports an average growth impact of 0.4 percentage points for PRGT programs in 55 LICs over 1980–2010 and finds that the growth impact rises to 1.5–3.5 percentage points in LICs facing substantial imbalances or large exogenous shocks. For programs with 66 LICs over 1989–2008, Bird and Rowlands (2017) report a significant growth impact of 1.0–1.7 percentage points for concessional programs up to two years after approval but negative effects for non-concessional programs.

18

Quality of SC refers to the depth and growth orientation of SC. Depth is the degree of structural change that a SC would bring about if implemented. Growth orientation describes whether the SC is intended primarily for enhancing growth and economic efficiency that would help the economy adapt better to changes in economic conditions. Depth and growth-orientation scores are constructed based on descriptive information on SCs in the MONA database. See IMF (2019b) and Kim and Lee (2021) for further discussion.

19

In PRGT countries, Fund engagement itself is viewed as the most critical factor that helps boost donor confidence. This may explain generally smaller differences in growth gains between low and high SC scores (ASCI and ASCID) in PRGT programs than in GRA programs in Figure 13.

20

The results do not distinguish between GRA and PRGT programs since the regression sample is relatively small with 54 programs at most due to the limited availability of post-program data since many programs were completed only recently or followed by successor programs in less than a year or two. The regression sample is further limited by programs that quickly went of track for which no valid annual data are available for program outcomes. See Kim and others (2021) for further detail.

21

Since all three SC scores shown in Figure 14—i.e., SCI, ASCD*SCI, and ASCG*SCI where ASCD and ASCG stand for the average depth and growth-orientation scores respectively—are considered simultaneously in the post-program potential growth regressions, the coefficient of SCI captures the effect of SC implementation when all SCs are of the lowest depth and growth orientation. Thus, the negative coefficient of SCI suggests that implementing too many low-quality SCs could harm growth. See Kim and others (2021) for further discussion.

22

This chapter draws on Kim and others (2021) and country case studies prepared for the evaluation.

23

In the empirical analysis, the output gap is constructed as a percentage deviation of (projected) real GDP from the log-linear trend in real GDP over the 10-year period prior to program approval.

24

See Kim and others (2021) for the estimation results and related discussions.

25

See Kim and others (2021) for a fuller discussion on nonlinear fiscal reactions and their implications.

26

To approximate the information available to country authorities and Fund staff at the time of projection, actual data used to construct growth and fiscal adjustment forecast errors are real time data as recorded in the WEO vintages matched with program years, rather than the latest data from the most recent WEO vintage. See Kim and others (2021) for further technical details.

27

This chapter draws on Gupta (2021), Kim and others (2021), and country case studies prepared for the evaluation.

28

Strictly speaking, the estimated coefficient of fiscal adjustment should be considered as a proxy for the fiscal multiplier because in the regression analysis fiscal adjustment is measured by the change in the fiscal primary balance and not the change in the structural primary balance. Kim and others (2021) discuss in greater detail the growth regressions.

29

See Batini and others (2014), Gupta (2021), IMF (2017) and the references therein. IMF (2017) found that estimated fiscal multipliers in Sub-Saharan Africa tend to be lower than those typically identified in advanced or emerging market economies.

30

Unlike in the regression analysis for fiscal multiplier assumptions in program projections, the focus here is to establish a causal effect of fiscal adjustment on growth. In this respect, it is important to allow a longer horizon than a year for fiscal adjustment to affect growth. Moreover, the use of cross-section data—that is, program period averages—helps to average out the cyclical component in the primary balance measured on an annual frequency and bring the resulting average primary balance closer to the structural primary balance. See Kim and others (2021) for further discussion.

31

For example, fiscal multiplier assumptions were not mentioned in the program documents of Egypt, Honduras, Latvia, Malawi, Pakistan, Romania, Senegal, Tunisia, and Ukraine.

32

Social benefits are current transfers to households, which may be paid in cash or in kind, to provide for needs arising from events such as sickness, unemployment, retirement, housing, or family circumstances.

33

The effects of IMF-supported programs on education and health spending have been widely debated in the literature. Some studies argue that austerity measures and particularly conditionality on the wage bill have lowered such spending (Ooms and Hammonds, 2009; Rowden, 2009). In contrast, Clements, Gupta, and Nozaki (2013) show that spending in the education and health sectors increased at a faster pace in countries supported by IMF programs than in other developing countries. Similar results are found by IMF (2017).

34

The 2017 IEO evaluation on The IMF and Social Protection found that social and other priority spending floors in IMF-supported LIC programs were generally not very useful for safeguarding social protection expenditures in part because of the difficulties of establishing a useful measure.

35

Chapter 7 of this report provides a fuller assessment of SCs and reforms in IMF-supported programs, including the impact of IMF capacity development support. The assessment of fiscal SCs provided here is based on the classifications and score indexes developed by the IEO (Kim and Lee, 2 0 21).

36

Fiscal transparency includes publication of financial statements of public institutions including state-owned enterprises. It also includes publication of details of infrastructural project costs/bids, publication of arrears and budget execution reports, passing and presentation of fiscal responsibility laws, and asset disclosures of cabinet members.

37

In 2018, the IMF adopted a new framework on governance (IMF, 2018a) that calls for greater attention to be paid to strengthening public financial systems and enhancing fiscal transparency in surveillance, program, and CD work. Staff are now producing detailed governance diagnostic reports for an increasing number of (mostly program) countries.

38

See Chapter 7 for a fuller assessment of the relationship between IMF CD support and overall SC implementation in the program context.

39

Based on the literature, a growth-friendly fiscal outcome is defined as a program where fiscal adjustment relies more on revenue increases than expenditure cuts.

40

While IMF policy advice on social spending often centers on targeting mechanisms based on means testing, IMF (2019d) noted that the appropriate use of targeted and universal transfers depends on country preferences and circumstances and should be consistent with fiscal and administrative constraints.

41

This chapter draws on Kim and Lee (2021) and country case studies prepared for the evaluation.

42

The spike in 2017 in the average number of SCs in GRA programs is explained mainly by the fact that one of the three GRA programs approved in 2017 had an exceptionally large number of SCs (80 in total).

43

Depth of an SC is assessed based on the methodology developed by the IEO’s evaluation of structural conditionality (IEO, 2007) and data put together in the 2018 ROC (also see footnote 18 for the definition of depth). An example of a high depth SC would be “Parliamentary approval of the revised PFM legislation” (Grenada 2014 ECF). An example of a medium depth SC would be “Install the new IT software at the central server site (NAIS) and commence testing” (Albania 2014 EFF). An example of a low depth SC would be “Start posting on the central bank website the national accounts and CPI data, as well as detailed methodological information, and a calendar of upcoming data releases” (The Gambia 2012 ECF). See Kim and Lee (2021) for further details.

44

Implementation status is not provided in the MONA database for SCs in program reviews that were never completed.

45

Frontier LICs include Bangladesh, Bolivia, Côte d’Ivoire, Ghana, Kenya, Mongolia, Mozambique, Nigeria, Papua New Guinea, Senegal, Tanzania, Uganda, Vietnam, and Zambia. Other LICs that have issued at least one international bond are the Republic of Congo, Ethiopia, Honduras, and Rwanda. See IMF (2015b).

46

Specifically, the results of multivariate fractional logit analysis show that the relationship between IMF TA and SC implementation is statistically insignificant in both GRA and PRGT programs and continues to be negative in the latter.

47

The SRI is constructed based on assessment of reforms in domestic finance (regulation and supervision); external finance (capital account openness); trade (tariffs); product market (regulation in electricity and telecommunication sectors); labor market (job protection legislation); and composite worldwide governance indicator. Each sector contains multiple sub-indicators which are scored between 0 and 1, and the aggregate reform index of each sector is obtained as an average of sub-indicator scores. See IMF (2019e) for further details.

48

The allocation of Fund CD resources has been guided by multiple considerations and not just country needs or capacity. The annual CD prioritization exercise reflects the membership’s views on priorities for Fund work, individual members’ requests for CD services, and Board decisions on the Fund’s budget (IMF, 2019f). As such, there may be a trade-off between allocating CD resources to countries with the lowest capacity and allocating CD resources where it is likely to be effective. The upcoming IEO evaluation on “The IMF and Capacity Development” will take up these issues in greater detail.

49

This chapter draws on Bal Gündüz and Darius (2021) and country case studies prepared for the evaluation.

50

Tsangarides (2012) and Therrones (2020).

52

This analysis uses a three-way regime classification of fixed, intermediate, and flexible regimes. This broad classification is based on the IMF’s AREAER data in which regimes are classified into 10 categories (from 1 for no legal tender to 10 for free floating). The first three regimes in the AREAER (no legal tender, currency board, conventional peg) are mapped into the fixed regime, the final two categories (floating, free floating) are mapped into the flexible regime, and the rest is mapped into the intermediate regime. See Bal Gündüz and Darius (2021) for further technical details on the mapping.

53

These six instances are Armenia, Egypt, Georgia, Jamaica, Malawi, and Sri Lanka. However, Armenia, Egypt, Malawi, and Sri Lanka subsequently shifted back to intermediate regimes. Only Georgia and Jamaica still maintain a floating currency (since 2013 and 2017, respectively). Indeed, several countries had more than one regime transition during the program, leaving the number of programs with enduring regime transitions at 12 in the evaluation sample.

54

GRA program countries in the top quartile that had a U.S. dollar peg are Antigua and Barbuda, Djibouti, El Salvador, Grenada, Iraq, Jordan, and St. Kitts and Nevis.

55

Exchange rate pass-through to inflation (ERPT) affects the extent to which nominal exchange rate changes translate into real exchange rate adjustments, and ERPT itself is influenced by the monetary policy regime (Taylor, 2000). Maintaining low and stable inflation reduces ERPT, which in turn helps to sustain low inflation and stabilize inflationary expectations. Evidence in the literature suggests that the ERPT in developing countries ranges between 0.1 and 0.5.

56

Bal Gündüz and Darius (2021) reports that in other GRA programs, REER depreciation of more than 10 percent was associated with significantly higher growth than the benchmark.

57

The depreciation of the euro against the U.S. dollar contributed to NEER depreciation in Benin but far less in Senegal due to different composition of trading partners.

58

In many crisis programs, internal devaluation itself proved hard to achieve and the desired recovery in growth and exports did not materialize (IMF, 2015b; IEO, 2016). Difficulties in restoring competitiveness through internal devaluation was confirmed by the ex-post assessment for Greece’s 2010 program (IMF, 2013c) and Portugal’s 2011 program (IMF, 2016). More recent evidence also suggests that the output costs of external adjustment via internal devaluation were higher than anticipated in some euro area countries during 2010–14 (Lambertini and Proebsting, 2019).

59

The staff’s exchange rate assessments are taken from the IMF country reports at program approval or the latest Article IV consultation report prior to program approval.

60

This chapter draws on Erce (2021) and country case studies prepared for the evaluation.

61

The recent modifications of the MAC DSA framework expanded the battery of analytical tools to increase the robustness of sovereign risk analysis with broader debt coverage, improve the framework’s capacity to predict sovereign stress, and enhance transparency in exercising judgment (IMF, 2021).

62

A notable exception in this regard is Jamaica (2013) where staff’s analysis of direct and indirect (through the exchange rate) effects of the debt operation on growth contributed to a milder restructuring as being judged to be sufficient to restore debt sustainability.

63

IMF (2020a) indicates that the increasingly diverse creditor base and debt instruments (especially collateralized debt) can complicate and lengthen the process of debt restructuring. Trebesch (2019) suggests that political instability, weak institutions, and strategic government behavior influence delays in completing restructurings more than creditor characteristics.

64

The analysis in this section is based on the data for 10 programs with debt operations, excluding Barbados (2018) which is an ongoing program and The Gambia (2017) where GDP rebasing in 2018 affected actual debt ratios significantly and thus skewed their comparison with program projections. Given the small sample size, evidence on adjustment and growth outcomes of the programs with debt operations could be sensitive to idiosyncratic outliers.

65

These results are consistent with the literature. For example, Reinhart and Trebesch (2016) show that the macroeconomic situation of debtors improves significantly after debt relief operations, but only if these involve principal write-offs. Cheng and others (2018) find that more generous restructurings involving principal relief are associated with an acceleration of GDP growth, a reduction in poverty and inequality, and a drop of subsequent aid flows. See Erce (2021) for a more extensive literature review on the growth consequences of debt operations.

66

This finding is consistent with an earlier review of sovereign debt operations within IMF-supported programs which noted that they often took place long after Fund staff had assessed debt to be unsustainable and failed to durably re-establish market access (IMF, 2013b).

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Cover Growth and Adjustment in IMF-Supported Programs
Growth and Adjustment in IMF-Supported Programs
Author:
International Monetary Fund. Independent Evaluation Office
ISBN:
9781513594477
ISSN:
2617-670X
Publication Date:
09 Sep 2021
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781513594477.017
Pages:
115
Figure A1

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