Reformed IMF Lending Has Worked Well In Crisis

• Author: Peter Dohlman/Bikas Joshi
• Position: IMF Strategy, Policy, and Review Department

Increased resources, supportive policies, and more focused conditionality are the main reasons for the positive impact of the programs so far.

"What this study tells us is that, with IMF support, many of the severe disruptions characteristic of past crises have so far been either avoided or sharply reduced," IMF Managing Director Dominique Strauss-Kahn said.

The study analyzes policies and outcomes in 15 emerging market countries with IMF-supported programs. It finds that support from the IMF has enabled countries to lessen the effects of the crisis by avoiding currency overshooting and bank runs-traits of past crises. At a time when capital flows were severely curtailed, the IMF stepped in, providing large-scale financial assistance to countries in need.

IMF's response to crisis

In response to the most severe global recession of the postwar era, the IMF has sharply increased the resources it has available to lend, from about $250 billion to $750 billion, following pledges made by the Group of Twenty leading emerging and advanced economies after the London Summit in April 2008.

As part of its efforts to support countries during the global economic crisis, the IMF also conducted a major overhaul of how it lends money by offering higher loan amounts and tailoring loan terms to countries' circumstances.

These reforms have proved timely. The IMF has been instrumental-with its prompt financial support of affected countries-in substantially reducing tail risks and helping bring down borrowing costs for emerging markets that had spiked following the bankruptcy of Lehman Brothers (see Chart 1).

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What programs have achieved

Countries that have turned to the IMF for support in this crisis were suffering from vulnerabilities that exposed them to the global retrenchment of capital and trade flows. The policy programs adopted by these countries, and financed by the IMF, aimed at restoring market confidence while addressing those underlying vulnerabilities.

The study highlights the following early results:

* While output losses have been large in countries with programs, they have not been significantly worse than in other emerging market countries with similar preexisting vulnerabilities, such as large current...