Abstract
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper analyzes empirically the economic factors associated with the approval of a Fund financial arrangement with a member country. It specifies two alternative probit models that determine the probability that a financial arrangement will be approved for a given country in a given year. The analysis distinguishes between the observable factors likely to induce a country to seek financial assistance from the Fund and the government policy actions most closely associated with the Fund’s decision whether to approve an arrangement. The estimates, based on the most comprehensive data set compiled to date for this purpose (annual observations on major economic variables for 91 developing countries over 1973-1991), indicate a reasonably well-identified set of economic factors that are quantitatively important as determinants of the likelihood that a Fund financial arrangement will be approved for a country in any given year.
As regards the economic variables that induce a country to seek a Fund arrangement, the estimates corroborate earlier work suggesting that a low level of international reserve holdings or low per capita GDP are likely to be important determinants of the country’s decision. In addition, however, the results provide a measure of the quantitative importance of other factors that have received less attention in earlier studies as determinants of a country’s interest in seeking an arrangement. These include a high ratio of external debt service to export earnings, overvaluation of the real exchange rate, weak growth of real per capita GDP, a low rate of domestic investment, and experience in implementing an adjustment program under a previous Fund arrangement. The paper finds that policy measures to enhance fiscal revenues, to reduce government expenditures, to tighten domestic credit, and to adjust the exchange rate are significant in increasing the probability of Fund approval of an arrangement. The results appear to be empirically robust, since estimated equations that incorporate the factors outlined above are able to predict correctly a large proportion (over 80 percent) of the events of approval or non-approval of a Fund financial arrangement for the sample of 1,516 (country-year) observations.
The conclusions of the paper should not be interpreted to suggest that the event of approval of a financial arrangement is mechanically predictable on the basis of observable economic factors alone, since the discussions that lead up to a Fund arrangement with a country are often complex and time-consuming. But the empirical results suggest that approval is at least partly explainable and predictable by a limited number of the observable economic factors that the analysis posits as likely determinants of the “demand for” and “supply of” a Fund arrangement. Thus, although judgment and experience will remain essential ingredients in identifying countries that could potentially become candidates for a Fund arrangement, the empirical results suggest that systematic empirical analysis of probit equations along the lines considered here might provide useful supplementary information.