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IMF-supported Programs in Crisis: Countercyclical, not Procyclical! James Roaf, IMF Deputy Chief, Emerging Market Division Strategy, Policy and Review Department Washington DC October 15, 2009 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 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. Fiscal Policy in 2009 CEPR Paper Afghanistan Armenia Belarus Bosnia and Herzegovina Burkina Faso Burundi Central African Republic Congo, Republic of Costa Rica Côte d’Ivoire Djibouti El Salvador Gabon Gambia, The Georgia Ghana Grenada Guatemala Haiti Hungary Iceland Kyrgyz Republic Latvia Liberia Malawi Mali Mongolia Mozambique Niger Pakistan Romania São Tomé and Príncipe Senegal Serbia, Republic of Seychelles Sierra Leone Tajikistan Tanzania Togo Ukraine Zambia ● ○ ● ● ● ● ● ● ○ ● ● ● ● ○ ● ● ○ ● ○ ● ● ● ○ ○ ● ● ○ ● ● ● ○ ● ○ Latest ○ ○ ○ ○ ○ ● ○ ○ ○ ○ ○ ○ ○ ● ○ ● ● ○ ○ ○ ○ ○ ○ ○ ● ○ ○ ○ ○ ● ○ ○ ○ ○ ○ ● ○ ○ ○ ○ ○ ● Contractionary Policy ○ Expansionary Policy Fiscal Policy in 2009 CEPR Paper Afghanistan Armenia Belarus Bosnia and Herzegovina Burkina Faso Burundi Central African Republic Congo, Republic of Costa Rica Côte d’Ivoire Djibouti El Salvador Gabon Gambia, The Georgia Ghana Grenada Guatemala Haiti Hungary Iceland Kyrgyz Republic Latvia Liberia Malawi Mali Mongolia Mozambique Niger Pakistan Romania São Tomé and Príncipe Senegal Serbia, Republic of Seychelles Sierra Leone Tajikistan Tanzania Togo Ukraine Zambia ● ○ ● ● ● ● ● ● ○ ● ● ● ● ○ ● ● ○ ● ○ ● ● ● ○ ○ ● ● ○ ● ● ● ○ ● ○ Latest ○ ○ ○ ○ ○ ● ○ ○ ○ ○ ○ ○ ○ ● ○ ● ● ○ ○ ○ ○ ○ ○ ○ ● ○ ○ ○ ○ ● ○ ○ ○ ○ ○ ● ○ ○ ○ ○ ○ ● Contractionary Policy ○ Expansionary Policy Programs adapted to falling output and revenues Figure 14. Revisions to overall fiscal balance projections (and program targets) for 2009 (percent of GDP, ranked by size of deficit projection) Oct 2008 WEO projection 0 -2 -4 -6 -8 -10 Latest WEO projection -12 Source: Staff estimates. Non-program average Program average BLR GTM HUN CRI SRB BIH PAK SLV MNG ROM UKR GEO ARM LVA ISL -14 Programs adapted to falling output and revenues Figure 14. Revisions to overall fiscal balance projections (and program targets) for 2009 (percent of GDP, ranked by size of deficit projection) Oct 2008 WEO projection 0 -2 -4 -6 -8 -10 Original program target Latest WEO projection -12 Revised target (latest review) Source: Staff estimates. Non-program average Program average BLR GTM HUN CRI SRB BIH PAK SLV MNG ROM UKR GEO ARM LVA ISL -14 Evolution of 2009 growth forecasts Growth Forecasts for 2009 (unweighted averages) 6.0 4.0 Emerging & Developing economies 2.0 Advanced countries 0.0 -2.0 WEO Consensus Forecasts -4.0 -6.0 Program countries -8.0 Apr-2008 Jul-2008 Oct-2008 Nov-2008 Jan-2009 Apr-2009 Jul-2009 Oct-2009 Real GDP growth in 2009 GDP declines due to initial conditions, not due to programs Growth outturns and initial vulnerabilities 10 5 0 -20 -15 -10 -5 0 5 10 -5 -10 -15 Programs Nonprograms -20 Fitted real GDP growth in 2009 1/ 1/ The fitted regression on real GDP includes current account deficit, fiscal deficit, external debt, public debt, and reserves (all actuals, as of 2007). Interest rate spikes avoided Nominal policy rates, percent 60 50 40 past crises 30 20 Medians and interquartile ranges 10 0 t-12 current programs t-9 t-6 t-3 t t+3 t+6 t+9 t+12 Overall supportive fiscal-monetary policy mix Policy mix Fiscal policy tightening 4 3 2 Non-program countries 1 Past crises 0 -1 -2 Program countries -3 -4 0 10 20 30 Monetary policy tightening 40 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). No currency overshooting this time Nominal effective exchange rates 110 100 90 80 current programs Medians and interquartile ranges 70 60 past crises 50 40 30 t-12 t-9 t-6 t-3 t t+3 t+6 t+9 t+12 More focused conditionality Structural conditions in IMF programs (Average per program year) 20 15 Other 10 Financial sector Monetary and exchange rate 5 Fiscal 0 1995-2002 2002-07 Current programs Streamlined Conditionality in LIC Programs Average Number of Conditions per Review 12 2001-04 9 6 2005-07 2008-09 3 0 Sources: MONA database; and IMF Staff estimates.