Yesterday, the IMF released an internal study reviewing “the emerging market programs put in place in response to the current financial crisis” in 15 emerging market countries. The study, entitled “Review of Recent Crisis Programs,” concludes that “[a] mix of increased resources, policy flexibility, and more focused conditionality has allowed the IMF to better support emerging market countries hit by the recent global financial crisis.” Mr. Dominique Strauss-Kahn, Managing Director of the IMF, cautioned that, despite the study’s positive assessment “[s]erious challenges remain, especially restoring sustained growth in output and employment, but there are encouraging signs of stabilization.” Last week the leaders of the G-20 released a communiqué that reaffirmed the IMF’s role “in promoting global financial stability and rebalancing growth” and applauded the IMF’s recent reform of its lending facilities.

The IMF study specifically reviews 15 Stand-By Arrangements (SBAs) granted to certain member countries including Hungary, Iceland, Latvia and Romania, andPrecautionary SBAs approved by the IMF between September 2008 and July 2009. The study also “describes the typical economic and financial effects of past crises--including currency overshooting, sharp current account contractions, and systemic banking crises--and analyzes why these outcomes have so far been avoided in most cases.” The study identifies several key factors that have helped avert past problems:

  • Large and Timely Financing Arrangements: The IMF provided large and timely financing packages to member countries impacted by the crisis that have been structured to include “support from other official creditors” and private sector involvement. The IMF study notes that official financing has in certain cases has “been used more to meet actual funding constraints of the private and public sectors, less to replenish central banks reserves.”
  • Focused and well Defined Loan Conditions: One criticism of past IMF programs, particularly after the 1998 Asian currency crisis, has been the onerous conditions imposed upon countries requesting aid. The study notes that IMF programs approved during the current crisis have imposed fewer structural conditions. The study also identifies “a sharp fall in measures outside the key areas of Fund competency and a marked increase in the share of financial sector conditions at the root of the current crisis.”
  • Country Ownership and Adoption of Country Specific Policy Responses: Recent IMF arrangements have been tailored to meet recipient countries' reform objectives, resulting in better country ownership of IMF programs and timely completion of program reviews. The IMF also has tailored its country-specific arrangements to include:
    • Broad fiscal policies tailored and adjusted to meet evolving conditions. The study notes that “[d]eficits [in the countries reviewed] were allowed to rise in response to falling revenues and, in cases where domestic and external financing was lacking, this was facilitated by channeling Fund resources directly to the budget.” Going forward, however, “countries with heavier debt burdens will need to redouble fiscal efforts to secure sustainability.”
    • Avoidance of abrupt monetary policy tightening. The study notes that “sharp spikes in interest and exchange rates have been avoided, minimizing the negative dynamics from balance sheet effects, particularly in countries where a high share of borrowing is in foreign currency.”
    • Adoption of “[p]re-emptive steps to address banking problems,” including strengthened financial sector regulation and adoption of measures designed to avoid currency and interest rate overshooting.
  • Adoption of commitments designed to sustain or expand social safety nets.

The study acknowledges that, "[d]espite early signs of stabilization, the exit from crisis and Fund programs may be prolonged," with countries like Latvia, Iceland and the Ukraine facing the greatest challenges going forward. In line with the IMF’s most recent report entitled “Crisis-Related Measures in the Financial System and Sovereign Balance Sheet Risks” which was released last week, the “study cautions that major challenges remain, including the timely unwinding of fiscal and monetary stimulus, adjustment to external competitiveness factors, and fixing bank balance sheets.”