Most Countries Worse Off After IMF Agreement – US Think Tank

Weeks before Jamaica completes its application for a US$1.2-billion standby agreement with the International Monetary Fund (IMF), a United States think tank has issued a dire warning about the latest impact of the fund on developing countries.

While making no direct reference to Jamaica’s negotiations with the fund, the Centre for Economic and Policy Research (CEPR) yesterday released a discussion paper in which it argues that 31 of 41 of countries with current IMF agreements have been subjected to harmful monetary and fiscal policies.

That has been a fear of many Jamaicans since the Government announced plans to resume a borrowing relationship with the IMF.

However, Prime Minister Bruce Golding and Finance Minister Audley Shaw have sought to allay the fears by arguing that the IMF has changed since its ‘one size fits all’ stance of the 1970s and 1980s.

Golding and Shaw have further argued that the IMF no longer ‘prescribes the pills’ but allows countries to develop their ‘individual prescriptions’ to cure their ills.

However, that view is not shared by the CEPR which claims that recent IMF prescriptions have exacerbated economic slowdowns in some countries.

“More than a decade after the Asian Economic Crisis brought world attention to major IMF policy mistakes, the IMF is still making similar mistakes in many countries,” CEPR co-director and lead author of the discussion paper, Mark Weisbrot, said.

Overly optimistic forecasts

“The IMF supports fiscal stimulus and expansionary policies in the rich countries, but has a much different attitude towards low- and middle-income countries,” Weisbrot said.

Yesterday, CEPR said that while it could not comment directly on the Jamaican situation, it has found that in some cases the IMF has relied on overly optimistic growth forecasts – significantly underestimating the impact of the world recession on borrowing countries.

“Quite often, the negotiations aren’t as transparent as they could be, so I’m not too familiar with what the IMF is putting on the table for Jamaica or what it is saying publicly,” Dan Beeton, information officer at CEPR, told The Gleaner.

Beeton also scoffed at claims of a new-look IMF.

“Really, it is more of the same old IMF. It is time for the fund to re-examine the criteria, assumptions and economic analysis that it uses to prescribe macroeconomic policies in developing countries,” added Beeton.

The CEPR paper comes at a time when Shaw and other finance ministers from the more than 170 IMF member countries are meeting in Istanbul, Turkey, for the IMF/World Bank annual general meeting.

Shaw is slated to return to the island this week to complete the preparation of the medium-term macroeconomic framework which will form the basis of Jamaica’s request for the standby agreement.

Jamaica’s letter of intent should be with the fund before the end of this month with an agreement expected to be in place by November.

www.jamaica-gleaner.com

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5 Responses to Most Countries Worse Off After IMF Agreement – US Think Tank

  1. wmurray says:

    The Center for Economic Policy Research reaches seriously misleading conclusions about the pro-cyclicality of policies in IMF-supported programs, relying on faulty analysis and often inaccurate information. The main point of this report is that growth forecasts were too optimistic when programs were designed, leading to excessively tight fiscal and monetary policies. Reality is quite the opposite.

    In virtually all programs, fiscal targets were quickly and substantially relaxed once the extent of the crisis became apparent. Monetary and fiscal policies have deliberately sought to offset the fall in global demand.

    Here are a few facts from our published internal reviews of IMF-supported programs with low-income and emerging market countries:

    ● IMF growth forecasts were consistently more pessimistic—and not, as noted in the CEPR study, overly optimistic—when compared to market consensus;

    ● Policies were quickly adapted–i.e., relaxed–in Fund programs to the rapidly deteriorating global growth outlook;

    ● Fiscal policy in 2009 will be expansionary in all but one of the 15 emerging market Stand-by Arrangements covered by our study;

    ● That said, the degree of fiscal accommodation across emerging market programs varies with countries’ initial fiscal positions: the degree of accommodation is lower, when fiscal vulnerabilities are larger.

    ● Importantly, the degree of fiscal accommodation in IMF-supported programs is of the same order of magnitude as that observed in non-program emerging market countries.

    ● The CEPR study fails to acknowledge that large and upfront financing, together with a supportive macroeconomic policy mix, has allowed most emerging market countries under IMF-supported programs to avoid costly currency overshooting and widespread banking problems–the hallmark of past crises.

    ● Significantly, the avoidance of currency overshooting has not required large interest rate hikes as seen in the past.

    ● Contrary to the impression conveyed by the CEPR report, the vast majority of low-income countries’ programs were adapted to provide room for countercyclical fiscal policy.

    ● Not only did three-quarters of low-income country programs build in rising fiscal deficits as revenues declined, but two-thirds provided for significant increases in budget spending. Also, as food and fuel prices soared in 2007-08, programs factored in higher inflation targets, to avoid an undue monetary squeeze.

    ● Lower inflation targets in low-income countries are not evidence of monetary tightening, as alleged in the CEPR report, but of lower commodity process resulting from the global downturn.

    Additional comments on just some of the critical weaknesses in the CEPR report (more on request):

    CASE STUDY HUNGARY

    The punch line is that fiscal and monetary policies are too tight in Hungary (and everywhere else where the Fund is active). This per se is a legitimate point for debate, of course — one can reasonably disagree about the correct stance of macro-policies during crisis.

    On Fiscal Policy

    The critical weaknesses in the CEPR report

    ● Fails to mention that Hungary’s public debt level and dynamics were unsustainable before the crisis (it mentions only a high government deficit in 2006),

    ● Also fails to acknowledge that the crisis in Hungary started because the government could no longer place its bonds. Attempting to fight this by issuing even more bonds seems not necessarily a success-inspiring strategy

    ● Gives a misleading impression that the fiscal targets under the program had been revised out of fear that they would otherwise have been missed — rather than because the old targets seemed no longer appropriate in light of the deteriorating growth outlook (page 10)

    ● Gives a misleading impression that the fiscal responsibility law was somehow part of the IMF program (page 8) and a major factor in imposing pro-cyclical fiscal policies

    On Monetary Policy

    The critical weaknesses in the CEPR report:

    ● Gives the misleading impression that monetary policy is subject to IMF conditionality. Fact is that policy rates are decided exclusively by the Hungarian central bank (although the IMF has largely agreed with the decisions taken)

    ● Fails to acknowledge that high policy rates may have been necessary to prevent a disorderly exchange rate depreciation, and therefore to avoid harm for the balance sheets of FX-indebted households and corporations. In fact, the article acknowledges fear of excessive depreciation as a legitimate concern (page 10), but fails to make the connection that precisely this concern may have motivated the monetary policy stance

    ● Misses that the domestic policy rate is arguably a minor factor for credit growth and domestic demand when two-thirds of loans are in FX.

    Other weak points include:

    ● the complaint that in June 2007 the IMF had forecasted a real contraction for 2009 of only 1 percent rather than 6.7 percent (page 1) — in other words, that the IMF did not accurately foresee the timing and depth of the global financial crisis 18 months in advance (the author surely did)

    ● The complaint that the IMF had somehow mis-characterized the financial sector as “sound” in 2007 (page 8). In fact, the IMF still considers the financial sector as sound: there has not been a single bank default, banks have (with one minor exception) done without public sector capital support, and non-performing loans are still moderate in spite of a severe recession (although bound to increase).

    ● An almost complete failure to discuss the program’s financial stability component — and therefore half of the program. The lone exception is a passing reference to the government loan to OTP (page 11), where the author seems unsure about whether this is a good or bad thing (he also fails to mention that two other banks also got government loans). The capital enhancement fund, bank guarantee fund, the European bank coordination initiative, the central bank’s FX swaps, the bank resolution and remedial action framework, the changes to the institutional and organizational structure of banking supervision — none of this is mentioned, beware of discussed.

    Factual Errors:

    ● Executive summary: the fiscal target for 2009 corresponding to a 6.7 percent GDP contraction is 3.9 percent, not 2.5 percent.

    ● Background, page 2: the fiscal responsibility law does not prevent the deficit to rise about 3 percent. It is not formulated in terms of the deficit, but in terms of the real debt stock

    ● Background, page 3: the Prime Minister resigned in March 2009, not the President

    ● Page 4: the exchange rate depreciation did NOT go far enough (and did not last long enough) to severely affect the balance sheets of households and firms. NPLs at end-June were still a relatively modest 4.8 percent. Reasons why a sharp exchange rate depreciation was avoided included arguably the central bank’s interest defense and the IMF’s FX liquidity support, allowing the central bank to intervene in the FX spot market and to temporarily replace the FX swap market, and the government to make FX loans to banks without foreign parent

    ● Page 8: again the Fiscal Responsibility Law is misrepresented. Specifically, the author misses that 2010 and 2011 is a transitional period during which the real debt stock reducing prescriptions do not yet apply (this starts only in 2012). Hence, the FRL has little to nothing to do with the fiscal stance during this crisis.

    ● The target before the May fiscal deficit revision was 2.9 percent, not 3.0 percent.

    ● Page 10, bottom: the modest rise in NPLs so far relates mostly to the recession, not the exchange rate.

    ● Page 11: OTP has the option of obtaining (Tier II) capital from the EBRD, not funding.

    ● Page 12, second paragraph: GDP is projected to contract by 6.7 percent this year, not 5.0 percent.

    Finally, some Hungarians may take issue with being characterized a “Eastern European country” (rather than Central European).

    CASE STUDY LATVIA

    This report highlights the social impact of the current downturn. However, it should have recognized the efforts being made by the authorities, with assistance from the Fund, to protect vulnerable groups. The Fund has worked closely with them to ensure they have sufficient resources to expand social safety nets, based on the recommendations of the World Bank.

    The central tenet of the report is that the Fund was behind the decision to retain the existing exchange rate peg. This is not correct. The published staff report for the request of the new SBA discusses the various options considered by Fund staff. The preferred option of the authorities, EC and key program partners was to retain the existing peg, and the option of accelerated euro-ization at a depreciated rate was ruled out. Feasibility and national ownership are desirable features of any adjustment strategy, but not taken into account in the CEPR report. Against this background, the Fund decided to support the exchange rate peg.

    The report proposes the introduction of capital controls (page 18). However, they are likely to be infeasible, as they would be incompatible with Latvia’s obligations under the EU treaty, and would be easy to circumvent given Latvia is such an open economy.

    CASE STUDY UKRAINE

    The description in the CEPR paper of events in Ukraine misses several important points, and the analysis of the policies under the Fund program is flawed.

    On Fiscal Policy

    The program started out with a balance budget target for 2009. Contrary to what is implied in the paper, however, this was not imposed by the Fund, but a target that was strongly supported by the authorities, in particular the Minister of Finance at the time.

    The paper fails to recognize that the main reason behind the originally relatively tight fiscal stance was that, due to the reversal of international capital flows and the collapsing domestic economy, Ukraine could not finance a large deficit.

    It should also acknowledge that the fiscal parameters of the program are moving targets and under continuous review. The original program indicated explicitly that given the uncertainties on economic prospects and the availability of financing, fiscal targets would be adjusted as needed. Accordingly, as GDP and revenue projections were revised downward, the fiscal target was loosened repeatedly.

    At present the program accommodates an 8.6 percent of GDP deficit in 2009 (not 4 percent as mentioned in the paper), excluding bank restructuring which adds another 2.8 percent of GDP. This is equivalent to a 2½ percent of GDP increase in the cyclically-adjusted structural fiscal balance.

    Moreover, Fund resources were channeled to the budget to enable the fiscal expansion, since financing constraints would still have not allowed the government to finance such a large deficit.

    Finally, the assertion in the paper that because total public debt was low the fiscal stance should be looser ignores the upward pressures on the debt burden stemming from the recapitalization needs of the banking system; the sharp depreciation of the Ukrainian currency; and the contraction of GDP.

    On Monetary Policy

    In its discussion of monetary policy, the paper fails to acknowledge that at the outset of the crisis, Ukraine faced very high inflation (of around 25 percent) and heavy pressures on the exchange rate. Under these circumstances, a significant monetary loosening could have had serious adverse effects, including in light of large balance sheet exposures on the part of banks and households.

    That said, the assertion in the paper that monetary policy has been tight in Ukraine is debatable. While the program initially did include a modest interest rate increase, this increase was quickly reversed by the authorities and interest rates have been barely positive in real terms for most of the program period. At the same time the exchange rate depreciated sharply, implying a significant loosening of monetary conditions. Finally, from the start of the program, the authorities provided abundant liquidity support to the banking system to the tune of 9 percent of GDP. In addition, they purchased government securities worth 2 percent of GDP, thus providing monetary stimulus.

    The paper also fails to recognize that base-money growth has been far below the ceilings under the IMF program—i.e. the program allowed for higher money growth than materialized. This reflects inter alia the authorities’ forex interventions. Finally, it does not mention that the money supply has grown significantly relative to the size of the economy.

    See: http://www.imf.org/external/np/sec/pr/2009/pr09319.htm

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  4. dbeeton says:

    The IMF’s response appears to refer to two different CEPR papers, both the “IMF-Supported Macroeconomic Policies and the World Recession: A Look at Forty-One Borrowing Countries” [http://www.cepr.net/index.php/events/events/imf-supported-macroeconomic-policies-and-the-world-recession/], released in October, and the paper, “The IMF’s Stand-by Arrangements and the Economic Downturn in Eastern Europe: The Cases of Hungary, Latvia, and Ukraine” [http://www.cepr.net/index.php/publications/reports/imf-hungary-latvia-ukraine/], released in September. In fact, most of the IMF’s statement actually seems to refer to the September paper, as the page numbers cited correspond to that paper, and not the October paper, even though it was the October paper that was the subject of the news articles in which the IMF’s response was quoted.

    The IMF states that in our paper we “reached seriously misleading conclusions relying on faulty analysis and often inaccurate information.” Yet we have been very conservative in our choice of criteria for what constitutes pro-cyclical policy. For example, in some borrowing countries -eight of which are mentioned in the IMF’s “Review of Recent Crisis Programs” [http://www.imf.org/external/pp/longres.aspx?id=4366] — the budget deficit has increased because of lost revenue – even though the government is, from the point of view of the structural deficit, adopting a pro-cyclical stance.[2] And we praised the Fund for its positive contributions to counter-cyclical policy globally through Special Drawing Rights (SDR) expansion.

    Regarding the “often inaccurate information” the IMF claims we used in the paper, it should be readily apparent that almost all of the source material for the paper came from the IMF itself. CEPR understands that the IMF’s views may differ from the arguments presented in the papers, but rejects the claims that the analyses were flawed.

    As the IMF response is quite detailed and lengthy, we are only responding to some of the IMF’s criticisms below. Anyone who interested in our full response to issues raised by the IMF, may read it on CEPR’s web site.[3]

    CEPR’s Response to IMF Criticism:

    The IMF states, “The main point of this report is that growth forecasts were too optimistic when programs were designed, leading to excessively tight fiscal and monetary policies. Reality is quite the opposite.”

    CEPR: The paper does not concentrate on the erroneous IMF projections on GDP growth. It rather concentrates on the fact that, in several countries, the stand-by arrangements insisted on fiscal restraint and tight monetary policy, even though it was clear that the world was entering a severe recession.

    IMF: “IMF growth forecasts were consistently more pessimistic and not, as noted in the CEPR study, overly optimistic when compared to market consensus…”

    CEPR: We compared the projections to what actually happened; they were over-optimistic, in many cases enormously so. Growth projections in the IMF agreements were not as pessimistic as they should have been, especially considering the substantial falloff in external demand and tightness in international credit and capital markets.

    IMF: “Contrary to the impression conveyed by the CEPR report, the vast majority of low-income countries’ programs were adapted to provide room for countercyclical fiscal policy.”

    CEPR: In several cases program adjustments were made only after the program reviews were finished. This means that several months, or more, passed before the contractionary policies were revised. On the other hand, CEPR found that 14 out of the 31 countries that applied pro-cyclical fiscal policies also applied pro-cyclical monetary measures. In seven of the 31 countries, only pro-cyclical monetary policies were implemented. In many cases, a tight monetary policy may be harmful and/or reduce the favorable effects of countercyclical fiscal policy.

    IMF: “Lower inflation targets in low-income countries are not evidence of monetary tightening, as alleged in the CEPR report, but of lower commodity process resulting from the global downturn.”

    CEPR: None of the CEPR documents that the IMF response refers to used inflation targets as a sign of either pro-cyclical or counter-cyclical monetary policy.

    IMF: “Importantly, the degree of fiscal accommodation in IMF-supported programs is of the same order of magnitude as that observed in non-program emerging market countries.”

    CEPR: The IMF support should enable the countries under IMF programs to pursue more counter-cyclical macroeconomic policy.

    IMF: “The CEPR study fails to acknowledge that large and upfront financing, together with a supportive macroeconomic policy mix, has allowed most emerging market countries under IMF-supported programs to avoid costly currency overshooting and widespread banking problems–the hallmark of past crises.”

    CEPR: The loans do help in some cases, the CEPR analysis does not deny that; our argument is that pro-cyclical macroeconomic conditions should not be attached to the program.

    IMF: “Contrary to the impression conveyed by the CEPR report, the vast majority of low-income countries’ programs were adapted to provide room for countercyclical fiscal policy.”

    CEPR: This is not necessarily true in the agreements that were effect in 2008 or in early 2009, again, when economies were slowing or shrinking. At the time the stand-by arrangement was signed, several programs insisted on fiscal restraint and tight monetary policy, even though it was by then clear that a world recession was underway. The CEPR (October 2009) document recognizes that adjustments were made later, but the pro-cyclical measures included in the initial program had already had a harmful effect on the economy.

    In regards to the IMF’s criticisms of the September paper:

    On Hungary:

    IMF: “[The CEPR paper] gives a misleading impression that the fiscal targets under the program had been revised out of fear that they would otherwise have been missed — rather than because the old targets seemed no longer appropriate in light of the deteriorating growth outlook (page 10)”

    CEPR: This means that original targets and/or projections missed the severity of the recession; either way, the initial policies were mistaken.

    IMF: “Other weak points include … the complaint that in June 2007 the IMF had forecasted a real contraction for 2009 of only 1 percent rather than 6.7 percent (page 1) — in other words, that the IMF did not accurately foresee the timing and depth of the global financial crisis 18 months in advance (the author surely did)”

    CEPR: The IMF projection (just –1 percent GDP growth for 2009) appeared in the November 2008 Request for Stand-By Arrangement.[4] The IMF didn’t have to foresee the complete depth of the contraction, but even by June 2007, yes, CEPR did see a serious U.S. recession coming that would affect these economies.

    IMF: “[The CEPR paper]gives a misleading impression that the fiscal responsibility law was somehow part of the IMF program (page 8) and a major factor in imposing pro-cyclical fiscal policies”

    CEPR: The CEPR document does not say or suggest that the law was part of the program with the IMF. But we know that the IMF is not shy about opposing policies that go counter to their views. Also, the “Passage of the fiscal responsibility law” was included as a proposed element of the “Structural Conditionality Under the Program for 2008.” [5, 6]

    According to the IMF: “Other weak points include”:

    “An almost complete failure to discuss the program’s financial stability component — and therefore half of the program. The lone exception is a passing reference to the government loan to OTP [Hungary’s largest bank] (page 11), where the author seems unsure about whether this is a good or bad thing (he also fails to mention that two other banks also got government loans). The capital enhancement fund, bank guarantee fund, the European bank coordination initiative, the central bank’s FX swaps, the bank resolution and remedial action framework, the changes to the institutional and organizational structure of banking supervision — none of this is mentioned,…”.

    CEPR: The document’s goal was not to examine or summarize every aspect of the IMF program; it was instead to identify pro-cyclical policies, and to highlight some elements of the financial crisis. In this regard, comments on OTP were important, as this was Hungary’s largest bank, had seen an important decline in stock value, bought other banks in Eastern Europe, and had borrowed heavily in foreign currency. Reference to this particular bank seems completely justified.

    The IMF claims that there are “Factual Errors”:

    “Executive summary: the fiscal target for 2009 corresponding to a 6.7 percent GDP contraction is 3.9 percent, not 2.5 percent.”

    CEPR: The IMF completely misses the point here. The original projection was for the fiscal deficit, as a percent of GDP, to go from 3.4 in 2008 to 2.5 in 2009. The argument in CEPR’s document is that this reduction of the deficit seems inappropriate because it may have contributed to the contraction expected for Hungary’s economy at the time the report was being written (6.7 percent, as opposed to just 1.0 percent before the deficit reduction was attempted). These figures appear in the CEPR document, Table 1, page 7. Also see page 8, paragraph 5 of the same document.

    IMF: “Background, page 2: the fiscal responsibility law does not prevent the deficit to rise about 3 percent. It is not formulated in terms of the deficit, but in terms of the real debt stock.”

    CEPR: The CEPR document argues that the fiscal responsibility law (FRL) reduces the government’s possibilities to stimulate the economy by means of public spending. The FRL indicates, in Section 18, Article 1: “The value of the adjusted and consolidated primary expenditure … budgeted for 2009 shall not exceed the value budgeted for 2008 …” But the law also refers to 2010 and 2011; Section 18, Article 2, indicates: “For the years 2010 and 2011, the Government shall submit a Budget Bill that assures that the budgeted value of the adjusted primary expenditure total … in real terms, increases over the value budgeted for the previous year … by no more than fifty percent of the expected growth rate of the gross domestic product in real terms.” Finally, Section 18, Article 5 indicates that in 2010 and 2011 the value of the fiscal deficit “decreases as compared to the prior year.”[7]

    IMF: “Background, page 3: the Prime Minister resigned in March 2009, not the President”

    CEPR: This is correct, but does not change the argument about political instability.

    CASE STUDY LATVIA

    IMF: “This report highlights the social impact of the current downturn. However, it should have recognized the efforts being made by the authorities, with assistance from the Fund, to protect vulnerable groups. The Fund has worked closely with them to ensure they have sufficient resources to expand social safety nets, based on the recommendations of the World Bank.”

    CEPR: The media has reported difficulties that Latvia has faced in meeting fiscal targets that are required to receive the next tranche of resources from the European Union, the IMF, and Sweden.[8] Pressure on Latvia to apply more spending cuts has also been reported, even though the Prime Minister has argued that “too many budget cuts … might actually harm Latvia… and increase social tensions.”[9] Reductions in wages in education sector and pension payments have also been reported,[10] and in June the Latvian Health Minister resigned on the argument that budget cuts would undermine the country’s health care system.[11]

    IMF: “The central tenet of the report is that the Fund was behind the decision to retain the existing exchange rate peg. This is not correct. The published staff report for the request of the new SBA [Stand-By Arrangement] discusses the various options considered by Fund staff. The preferred option of the authorities, EC [European Commission] and key program partners was to retain the existing peg, and the option of accelerated euro-ization at a depreciated rate was ruled out. Feasibility and national ownership are desirable features of any adjustment strategy, but not taken into account in the CEPR report. Against this background, the Fund decided to support the exchange rate peg.”

    CEPR: The CEPR document does not suggest that the IMF encouraged the decision to maintain the peg. But it does argue that the IMF has supported the decision to maintain the peg, which is exactly what the IMF comment above states. On the other hand, in the past, the Fund has clearly opposed and refused to provide lending for policies they consider inappropriate, even when governments were very much in favor of such policies.

    CASE STUDY UKRAINE

    IMF: “The description in the CEPR paper of events in Ukraine misses several important points, and the analysis of the policies under the Fund program is flawed.

    “The program started out with a balance budget target for 2009. Contrary to what is implied in the paper, however, this was not imposed by the Fund, but a target that was strongly supported by the authorities, in particular the Minister of Finance at the time.”

    CEPR: As noted above, the CEPR document does not indicate that policies were imposed by the IMF.

    IMF: The paper fails to recognize that the main reason behind the originally relatively tight fiscal stance was that, due to the reversal of international capital flows and the collapsing domestic economy, Ukraine could not finance a large deficit.

    CEPR: The IMF program could have helped the Ukraine economy face (or mitigate) the reversal of international capital flows, without necessarily applying a “tight fiscal stance.” The application of fiscal tightness during a downturn is definitely pro-cyclical.

    IMF: “It should also acknowledge that the fiscal parameters of the program are moving targets and under continuous review. The original program indicated explicitly that given the uncertainties on economic prospects and the availability of financing, fiscal targets would be adjusted as needed. Accordingly, as GDP and revenue projections were revised downward, the fiscal target was loosened repeatedly. ”

    CEPR: Yes, and that is acknowledged in the CEPR document. But, as noted above, fiscal policy was still pro-cyclical for a certain amount of time.

    IMF: “At present the program accommodates an 8.6 percent of GDP deficit in 2009 (not 4 percent as mentioned in the paper), excluding bank restructuring which adds another 2.8 percent of GDP. This is equivalent to a 2½ percent of GDP increase in the cyclically-adjusted structural fiscal balance.”

    CEPR: As indicated in Table 4 in the CEPR document, the general budget deficit was projected at 4.0 percent of GDP, excluding banks’ recapitalization. The same table indicates that, with banks’ recapitalization included, the deficit would be 9.0 percent of GDP. The source for these figures is the First Review Under the Stand-By Arrangement, dated May 2009, but published June 2, 2009,[12] so there is no error in the CEPR (September 2009) document.

    Still, excluding bank recapitalization, the projected budget deficit was originally 0.0; this means that deficit spending was only allowed if it was directed at bank recapitalization. Actual government spending capability is thus better described by an overall balance which excludes recapitalization.

    Finally, funds aimed at bank recapitalization need not translate into credit to the private sector, and this may be one of the reasons behind the low rates of credit growth in real terms (-26.8 percent, but later revised to -8.6 percent, as illustrated in Table 4, CEPR document).

    IMF: “The paper also fails to recognize that base-money growth has been far below the ceilings under the IMF program i.e. the program allowed for higher money growth than materialized. This reflects inter alia the authorities’ forex interventions. Finally, it does not mention that the money supply has grown significantly relative to the size of the economy.”

    CEPR: The projection for 2009 stated that broad money and credit to the private sector would grow at negative rates in real terms. Thus, even though base money was growing relative to the size of the economy (but see below), the actual use of money was not showing the same behavior.

    As for the argument that base money grew “significantly relative to the size of the economy,” that will be easier when GDP is falling. In addition, the fact that broad money and credit to the private sector was falling in real terms may be an indication that monetary policy was not really as flexible as the IMF claims.
    ________________________________________

    [1] “New Report Crucifies IMF For Mismanaging The Crisis.” The Business Insider, October 6, 2009. http://www.businessinsider.com/blame-the-imf-for-the-crisis-2009-10
    [2] See http://www.cepr.net/documents/publications/imf-response-2009-10.pdf for more detail on these issues.
    [3] See http://www.cepr.net/index.php/publications/reports/cepr-responds-to-the-imfs-reply/ for the full response.
    [4] “Hungary: Request for Stand-By Arrangement –Staff Report; Staff Supplement; and Press Release on the Executive Board Discussion.” IMF Country Report No. 08/361; p. 28, Table 1.
    [5] “Hungary: Request for Stand-By Arrangement –Staff Report; Staff Supplement; and Press Release on the Executive Board Discussion.” IMF Country Report No. 08/361, November 2008, Table 2, p. 48. http://www.imf.org/external/pubs/ft/scr/2008/cr08361.pdf
    [6] The Letter of Intent also includes the approval of the fiscal responsibility law (by end December 2008) as a structural benchmark. See “Hungary: Letter of Intent, and Technical Memorandum of Understanding,.” November 4, 2008, p. 4, item 11. http://www.imf.org/external/np/loi/2008/hun/110408.pdf
    [7] “Act of 2008 on Fiscal Responsibility.” Ministry of Finance Portal, Hungary, December 29, 2008. http://www1.pm.gov.hu/web/home.nsf/frames/english
    [8] See for example “Banks brace for Latvia’s collapse.” In Telegraph, October 5, 2009. http://www.telegraph.co.uk/finance/financetopics/financialcrisis/6263039/Banks-brace-for-Latvias-collapse.html
    [9] See “Stern Warning on Latvia Budget Agreement.” In Baltic Reports, October 5, 2009. http://balticreports.com/?p=2478
    [10] “Wide –scale cuts in salaries and social benefits.” In eironline – European Industrial Relations Observatory. http://www.eurofound.europa.eu/eiro/2009/07/articles/lv0907019i.htm
    [11] “Latvian Health Official Resigns Over Cuts.” New York Times, June 17, 2009. http://www.nytimes.com/2009/06/18/business/global/18lat.html
    [12] “Ukraine: First Review Under the Stand-By Arrangement: Requests for Waivers of Nonobservance of Performance Criteria, and Rephasing of Purchases Under the Arrangement – Staff Report; Staff Supplement; Press Release on the Executive Board Discussion.” IMF Country Report No. 09/173, May 2009, p. 27, Table 1.

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