The IEO has released its report “Growth and adjustment in IMF-supported programmes”, which assesses how well IMF-supported programmes have helped to sustain economic growth, while delivering adjustment needed for external viability.
It focuses on the IMF financing arrangements over the period 2008-19, under both the General Resources Account (GRA) and the Poverty Reduction and Growth Trust (PRGT).
While the evaluation does not assess the experience during the Covid-19 pandemic, its lessons have become even more relevant as many countries now face strong headwinds to growth as they seek IMF support for achieving durable recoveries.
Structural reforms: IMF says more work needed
The report noted that in Jordan, Pakistan, and Tunisia, Fund staff underestimated the complexity of the political transition and the impact of intervening political, security-related and regional shocks.
At the same time, country officials wanted to show hope to sustain political support for challenging reforms. The consequence was a disconnect between optimistic growth projections and actual outcomes.
It further stated that several case studies emphasise that staff had unrealistic expectations regarding the feasibility and growth payoffs of reforms.
In Jordan, Pakistan, and Tunisia, case studies highlight the need for more cautious assumptions on feasibility and growth payouts of structural reforms.
Fund staff underestimated the complexity of the political transition and the impact of intervening political, security-related and regional shocks. The consequence was a disconnect between optimistic growth projections and actual outcomes.
This gap also reflected “the need to show hope,” which was also advocated by country officials seeking to sustain political support for challenging reforms.
In Pakistan (2013), the exchange rate was managed heavily as a contribution to inflation control in the 2008 Stand-By Arrangement (SBA) and 2013 Extended Fund Facility (EFF), allowing a gradual appreciation of the real effective exchange rate; the loss of competitiveness was eventually reversed by a sharp market-driven depreciation ahead of the 2019 EFF.
The report noted that in some cases, particularly earlier in the evaluation period (e.g., Grenada 2010, Jamaica 2010, and Pakistan 2008), authorities felt that staff was too inflexible in insisting on front-loading of fiscal adjustment that was hard to sustain.
Specifically, program reviews adapted fiscal targets due to weaker growth outcomes or fiscal overruns in many programs, including Bangladesh, Cameroon, Grenada, Latvia (where Fund staff sought less fiscal consolidation than the authorities), Mongolia, Pakistan (not in the first review but in subsequent reviews), Romania, Senegal, and Ukraine.
Program reviews were also combined and/or extended to provide the authorities more time to take corrective policy actions after policy slippages in a range of programs, including Bangladesh, Ghana, Honduras, Jordan, Malawi, Mongolia, Pakistan, Tunisia, and Ukraine.
In Pakistan progress was made in power sector reforms in the 2013 EFF after failure in this area in the 2008 SBA, it added.
By contrast, Pakistan (2008 SBA) is a case in which limited political support undermined critical tax reform implementation.
Despite massive IMF TA and program extensions to allow more to time to unlock the VAT reform, the tax reform failed to be implemented before the program expired in 2011 due to lack of political support.
As the VAT reform remained politically infeasible, another program in 2013 sought revenue mobilization via a combination of several incremental reforms (e.g., scaling back tax exemptions, broadening the tax base, increasing goods and services taxes, and improving tax administration) and achieved partial success.
Several case studies (e.g., Ghana, Grenada, Jamaica, Jordan, and Pakistan) highlight the challenges of adjusting adequately the volume and pace of structural reforms to the countries’ capacity and circumstances, as well as, building political and social consensus.
Ambitious reform agendas often stretched the available absorption capacity, resulting in implementation delays.
In this regard, country officials were generally very appreciative of the Fund’s extensive technical assistance support, but commented that while helpful, the provision of IMF TA was not a full substitute for domestic implementation capacity.
Pakistan (2008) programs paid little attention to structural issues outside the area of the Fund’s core expertise and took a hands-off approach by relying on other agencies for Structural Conditions (SC) implementation and follow-up.
