The IMF, Crises and Low-Income Countries: Evidence of Change?

Abstract

This paper assesses the policy role of the IMF in Low-Income Countries (LICs) in the wake of the global financial crisis and in response to its own claims of policy redesign and increased flexibility. The assessment focuses on the Fund's monetary and fiscal policy stance in a selection of case study countries over the period 2008−2010. The paper finds that while the IMF has allowed for modest and short-term fiscal and monetary accommodation as an immediate response to the crisis, the Fund's medium to long-term policy agenda has remained unchanged. Both theory and evidence suggest that the Fund remains committed to its pre-crisis policy priorities. Furthermore, the global financial crisis appears to have enabled the Fund to reassert its role as guardian of an orthodox macroeconomic order. These developments are particularly troublesome given that the Fund's prevailing macroeconomic framework continues to be inconsistent with the urgent development needs of LICs, where more expansionary fiscal policies and more liquidity-focused monetary policies are needed to support structural diversification, and foster sustainable and equitable growth and development.

Acknowledgment

This research was originally conducted with financial support from Eurodad, the Heinrich Boell Foundation and the Third World Network.

Notes

¹The number of new financing requests from LICs increased from 5 in 2007 to 23 in 2008 (IMF, 2009c, p. 12). In the fiscal year 2009, 12 countries received additional assistance under existing Poverty Reduction and Growth Facility (PRGF) lending programs and 10 new PRGF arrangements were approved (IMF, 2009h, p. 52). Also, exceptional interest relief was provided on all concessional loans extended by the Fund to LICs, with zero interest payments through to the end of 2011 (see IMF, 2011).

²For a detailed account of the repercussions of food and fuel crises in Least Developed Countries, see UNCTAD (2008, pp. 77−83).

³For an overview of the implications of the global financial and economic crisis for developing countries, see IMF/World Bank (2010), McCulloch & Sumner (2009), Mold et al. (2009), Naude (2009), and ODI (2009).

⁴Grabel (2010) refers to the emergence of some form of ‘productive incoherence’ in the wake of the crisis, which may have created the possibility for departures from the traditional policy prescriptions promoted by institutions like the Fund.

⁵See also Fine (2006) for a deconstruction of financial programming, with specific attention to the various stages in the evolution of the theoretical propositions informing financial programming at the Fund.

⁶ In January 2010, the Extended Credit Facility (ECF) succeeded the PRGF as the Fund's main tool for providing medium-term support to LICs. The resources for the ECF are made available through the Poverty Reduction and Growth Trust (PRGT). Through the Poverty Reduction and Growth Trust, the Fund also provides a Standby Credit Facility (SCF) and a Rapid Credit Facility (RCF) to LICs, with the former catering for short-term and the latter for emergency financing needs.

⁷Projected innovations in Blanchard et al. (2010) relate to an acknowledgment that policymakers should monitor multiple targets rather than just the inflation rate, and that they should use multiple instruments, including fiscal and exchange rate policies, apart from monetary policies. In drawing out policy implications, the policy note nevertheless remains confined to two limited topics: (1) how to combine traditional monetary policies with tools of financial regulation; and (2) how to design better automatic stabilizers as the preferred fiscal response to the crisis. For further discussion, see Van Waeyenberge et al. (2010, Section 5).

⁸It could be noted that the size of automatic stabilizers is smaller in sub-Saharan African countries because of generally lower revenue to GDP ratios, and that tax systems and public expenditure structures are not very sensitive to the cycle (Berg et al., 2009, p. 4). In particular, the average revenue-to-GDP ratio in non-oil exporting sub-Saharan African countries is 21%, compared with an average revenue-to-GDP ratio of over 40% in developed countries. In addition, a large fraction of revenue in sub-Saharan African countries is generated by indirect taxes, which tend to vary proportionately to the output gap (i.e. the elasticity with respect to the output gap being close to 1). For many sub-Saharan African countries, changes in commodity prices would have been the main driver of the fiscal outcome in 2009.

⁹In an IMF staff policy note on fiscal policy and the crisis in Sub-Saharan Africa, Berg et al. (2009, p. 6) clarify that the terms ‘expansionary fiscal policy’ and ‘fiscal expansion’ cover both cases in which automatic stabilizers are allowed to work and those in which, in addition, discretionary fiscal stimulus measures are implemented.

¹⁰For a concise critique of the Fund's understanding of what is an optimal debt-to-GDP ratio, see Chowdhury & Islam (2010).

¹¹This paper has remained confined to a discussion of the Fund's propositions regarding monetary and fiscal policy. A complete account of alternative macroeconomic policy would need, in addition, to discuss exchange rate and capital account policies; see Epstein et al. (2003).