The Effect of IMF Programmes on Economic Growth in Low Income Countries: An Empirical Analysis

Abstract

Using an LIC-specific participation model, we adopt a propensity score matching (PSM) methodology to compare economic growth performance in countries with and without IMF programmes over the period 1989-2008. Concessional programmes are found to have had a generally positive effect on economic growth for up to two years after agreements were signed. The effects are contingent on other factors including overall initial economic conditions, recent prior growth performance, aid dependency, debt, IMF resources, recent history of IMF engagement and time period. We examine the implications of the results as the IMF considers how best to support the Sustainable Development Goals.

Why Do Countries Request Assistance from International Monetary Fund? An Empirical Analysis

“…The International Monetary Fund (IMF), established in 1948, is an independent international organization. The IMF is a cooperative of 190 member countries, working on a mission of providing financial assistance to member countries, when needed, to tackle balance-of-payment problems, restore stability, and sustainable economic growth (Bird and Rowlands 2017). The purpose of the IMF is outlined in its Article of Agreement (Iseringhausen et al 2019):…”

“…There is extensive literature investigating the main drivers of the IMF lending program. Poor macroeconomic conditions and distorted current account balance are the prime reasons for a country to choose the IMF program (Joyce 1992;Knight and Santaella 1997;Bird and Rowlands 2017). In addition, mismanagement of fiscal and monetary policies can lead to large economic imbalances, e.g., large current account deficit and high level of external and public debt (Bird 2007).…”

“…The existing literature on the effectiveness of IMF program does not differentiate between countries based on their income level. Bird and Rowlands (2017) observed that most studies do not distinguish between low-and middle-income countries, even though there are substantial reasons to believe that the conditions under which they select IMF program are different. Therefore, we tried to identify the effectiveness of IMF program by differentiating between these categories.…”

“…Therefore, impact of compliance with conditionality is quantitatively small on economic growth (Dreher 2006;Dollar and Svensson 2000). Bird and Rowlands (2017) interpret that the scope of successful implementation decreases when countries with sound policies negotiate a fund program with the IMF because it may instead reduce market confidence which thereby reduces economic growth. Mehdiabadi et al (2020) argued that the banking system constitutes an essential element of the economic growth and macroeconomic stability.…”

IMF-Supported Programs and Income Convergence in Low-Income Countries

“…From a theoretical perspective, IMF's concessional assistance to eligible low-income countries (LICs), which is provided through the Poverty Reduction and Growth Trust (PRGT), 2 could promote growth through several channels: managing aggregate demand, raising aggregate supply, and a catalytic effect by facilitating additional private capital inflows and donor assistance. Recent empirical work supports these viewpoints (see Bird andRowlands, 2017 andCrystallin, 2014). However, while a positive impact of IMF-supported programs on economic growth may be a necessary condition to ascertain program effectiveness, it is insufficient to ensure that the growth effect of such programs is pro-poor in a macroeconomic sense.…”