The Articles of Agreement of the International Monetary Fund (IMF) propose that one of the fundamental objectives of the IMF should be to make the pooled resources of its members temporarily available to other member states in order to address any balance‐of‐payments disequilibria. To ensure the loans that they provide to members are repaid, the IMF also asks borrowers to enter into a programme. These programs usually specify performance criteria for key macroeconomic variables, such as ceilings on the fiscal deficit, the central bank’s lending to government, as well as a floor on net international reserves.
Programs supported by the IMF consist of six broadly defined phases: inception, blueprint, negotiation, approval, monitoring, and completion. The monitoring phase is the longest and most important phase, because this is the period during which the borrowing member gets access to most of the funds and the IMF staff ensure that the borrowing member country implements policies necessary to meet the objectives of the program.
An extensive amount of research has attempted to examine the impact of IMF‐supported programs on key macroeconomic variables. These surveys usually find that IMF‐supported programs tend to lead to an improvement in the overall balance of payments but have no statistically significant impact on inflation and real economic growth. Many of these studies do not take into account the effects of compliance of the countries in the IMF programs. When compliance is taken into account (measured by sustained access to Fund credit), IMF‐supported programs lead to improvements in the current account, real output, and a reduction in the inflation rate.
Programs supported by the IMF can also have an impact on the borrowing country through enhancing economic agents’ confidence in government policies and/or the sustainability of these policies. A rise in the credibility of announced policies should reduce the output cost of lowering inflation. To test the credibility effect of IMF‐supported programs, previous researchers have attempted to evaluate whether, by reassuring investors, IMF financing can help the country to attract other funds. The evidence on the subject to date has been mixed. Some authors report that IMF financing is positively associated with increased lending from other public sources and enhances the willingness of countries to participate in external debt rescheduling programs and attracts private capital flows. The existence of a program also lowers the expected probability of loan defaults and, therefore, the average spread over the London Interbank Offered Rate.
About the author(s)
Winston Moore is the Chief Economic Consultant at Antilles Economics.
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