IMF Programs Often Fail, Internal Audit Shows

by Emad Mekay

The report, issued late Tuesday by the independent evaluation office (IEO) of the International Monetary Fund is aimed at helping the IMF improve its management of the programs, under which it gives near obligatory policy advice in return for loans.

Fiscal adjustments include measures like reducing government deficits, cutting expenditures and increasing revenues.

"The fiscal component of IMF programs is a critical part of the overall programs of the fund," said Marcelo Selowsky, assistant director of the IEO, in an interview on Wednesday.

Pushed by their political masters among the Group of Seven (G7) most industrialized nations, the fund and its sister institution, The World Bank, often prescribe large fiscal contractions that they say stimulate economic activity.

Larger IMF-imposed programs have traditionally been based on controlling inflation, selling public assets, deregulating laws and liberalizing trade.

But repeated financial crises across the globe, as in Argentina and East Asia in the late 1990s, have sparked heated debate over the effectiveness of the policies of the two institutions.

Critics among civil society groups and economists say forcing such policies on borrowing and often impoverished nations leads to drastic cuts in essential social services -- such as education and health -- extra charges and loads on poor consumers, and weaken economic growth.

The IEO is appointed by the IMF but works independently. Montek Sigh Ahluwalia, a former Indian finance official, chairs the IEO, which also examined the role of the IMF in recent capital account crises in Brazil, Korea, and Indonesia.

It found that the fund failed to estimate the gravity of the three recent capital account crises and made mistakes as it handled the ensuing economic meltdown in the three countries.

The IEO survey, which covers lending programs from 1993 to 2001, found that, on average, fund programs achieved only about one-half of the projected improvement in fiscal balances.

The success rate was highest for countries in transition, including many in Central and Eastern Europe, and lowest for "non-transition" -- stable but still developing -- countries.

"Fiscal balances on average did not improve through the first two years of the arrangement ... except in the transition economies," said the report, adding, "shortfalls appear to reflect weak fiscal performance rather than very ambitious fiscal targets."

Long-term economic development, according to Selowsky, is the sole responsibility of sovereign nations but he said the fund would be "well advised" to open a dialogue with developing nations.

The report also found that measures to cut costs often were not sustained beyond a programme's first year. "Many of the fiscal measures in programs aimed at quickly reducing fiscal deficits exhaust themselves over time or become reversed," it said.

For example, raising value-added (VAT) or social security taxes when the tax base was narrow increased tax evasion. Measures to limit public sector wages were difficult to sustain beyond the program period, the document said.

Improved monitoring would help identify those reversals, it added.

The report cites many examples -- including Ecuador -- where the impact of measures like controlling spending and raising the VAT was supposed to be monitored, but the social impacts were not measured.

Conditions in the Pakistan program included a target for social and poverty-related spending, but it was not met.

And despite the "good intentions" of the Philippines program, which saw the fund's staff urge authorities "to protect programs directed at poverty reduction in implementing the cuts," the proportion of the population served by various health programs actually declined, the report says.

This, it adds, reflects the absence of clear guidelines about what critical programs must be protected.

The 156-page report also found the fund's estimates for growth exaggerated.

"Many programs are over-optimistic in projecting growth, especially when programs start from adverse situations. In particular, they are reluctant to project a slowdown in growth and very rarely project negative growth," it said.

Investment growth was often overstated in the fund's literature associated with lending programs, it added.

The report urged the fund staff to work towards projecting "realistic growth rates."

But the cautiously critical report sided with the fund on the charge that it endorses "one-size-fits-all" policies.

It says the accusation that IMF-supported programs are not flexible but force a rigid pattern of fiscal adjustments that are not sensitive enough to changing circumstances was not supported.

The report said that about two-thirds of the programs studied actually underwent revisions to the initial fiscal deficit targets by the completion of the second program review, which occurs at different times in each program.

Earlier, the office, which was set up in July 2001, criticized the fund's use of loans for prolonged periods of time, saying that they created many problems for the institution as well as for borrowing nations.