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) 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 Approach: focus on 2009; comparisons with past crises and current nonprogram EMs; robust results Results: Results: Fiscal policy appropriately accommodative Fiscal policy appropriately accommodative Expanded fiscal deficits in 14 of 15; Expanded fiscal deficits in 14 of 15; Size of expansion explained by country factors Size of expansion explained by country factors Social protection key element of programs Social protection key element of programs More focused structural conditionality More focused structural conditionality Avoided worst problems from past cases Avoided worst problems from past cases Exchange and interest rate overshooting Exchange and interest rate overshooting Less current account adjustment and domestic demand compression Less current account adjustment and domestic demand compression Few banking crises Few banking crises Policies/outcomes similar to comparable nonprogram countries 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 Vast majority of low-income countries' programs were adapted to provide room for countercyclical fiscal policy in Three-quarters of low-income country programs built in rising fiscal deficits as revenues declined. Three-quarters of low-income country programs built in rising fiscal deficits as revenues declined. Two-thirds provided for significant increases in budget spending. Two-thirds provided for significant increases in budget spending. Sixteen out of nineteen programs initiated in envisaged higher social spending. Sixteen out of nineteen programs initiated in envisaged higher social spending. As food and fuel prices soared in , programs factored in higher inflation targets, to avoid an undue monetary squeeze. As food and fuel prices soared in , 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. 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 Contractionary Policy Expansionary Policy

Fiscal Policy in 2009 Contractionary Policy Expansionary Policy

Programs adapted to falling output and revenues

Evolution of 2009 growth forecasts

GDP declines due to initial conditions, not due to programs

Interest rate spikes avoided current programs past crises Medians and interquartile ranges

Overall supportive fiscal-monetary policy mix 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 current programs past crises Medians and interquartile ranges

More focused conditionality Other Financial sector Monetary and exchange rate Fiscal

Streamlined Conditionality in LIC Programs