Prolonged Use of IMF Loans

• Author: David Goldsbrough, Kevin Barnes, Isabelle Mateos y Lago, and Tsidi Tsikata
• Position: Deputy Director of the IMF's Independent Evaluation Office

How much of a problem is it?

The IMF's original mandate was to provide assistance to member countries in short-term crisis situations, but, in practice, a number of countries have depended on IMF support for long periods. The Philippines, for instance, was engaged in IMF-supported programs for almost 25 years over 1971-2000, and several other countries (for example, Haiti, Panama, Pakistan, and Senegal) for 20 years or more.

Such cases of prolonged involvement with IMF-supported programs raise many questions at the heart of recent controversies about the IMF's role in countries requiring a longer adjustment period. Some critics have argued that prolonged use constitutes a departure from the IMF's traditional mandate of providing temporary balance of payments support and suggests that IMF-supported programs are not effective. Others have argued that frequent recourse to IMF lending arrangements can take place for good reasons in countries with deep-seated adjustment problems and that it can be fully compatible with the IMF's mandate. This is why the IMF's Independent Evaluation Office, established in 2001, chose, as its first study, to investigate the issue of prolonged use. The report looks at the questions of what factors account for prolonged use, when it is a problem, and what can be done to ameliorate the situation.

Who are the prolonged users?

The cases mentioned above are symptomatic of the substantial rise in the past two decades of the number of prolonged users of IMF loans-defined as countries engaged in IMF-supported programs for at least 7 years out of any 10. Indeed, over 30 countries now fall into this category. During 1971-2000, 51 countries out of 128 borrowers were prolonged users at some point (Table 1). Most of the increase in prolonged use has involved low-income countries eligible for the IMF's concessional (or low interest) loans or "facilities," but, in financial terms, the bulk of commitments to prolonged users concerns the IMF's nonconcessional resources, and their expansion has been even larger (see chart). Prolonged use is also persistent in the sense that relatively few countries "graduate" from such use.

[ SEE THE GRAPHIC AT THE ATTACHED RTF ]

Our study found that prolonged users typically faced wider imbalances and more deep-seated problems than other countries receiving IMF financing. However, these characteristics need not necessarily lead to prolonged use, especially if they are well integrated into the design of adjustment programs. One therefore needs to look for additional explanations. We were able to identify three major systemic factors, combined with flaws in program design and weaknesses in governance.

The first systemic factor is a broadening of the rationale for IMF program involvement. Over time, it was accepted that many balance of payments problems, especially in the low-income countries, arose from deep-seated structural problems that required more time for adjustment. This led to an acceptance of IMF financing being provided over a longer period in low-income countries and to the establishment of the concessional facilities in the mid-1980s, with limits on the time spent under this type of...