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IMF-Supported Macroeconomic Policies and the World Recession: A Look at Forty-One Borrowing Countries

IMF-Supported Macroeconomic Policies and the World Recession: A Look at Forty-One Borrowing Countries

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The paper examines IMF agreements with the countries Afghanistan, Armenia, Belarus, Bosnia and Herzegovina, Burkina Faso, Burundi, The Central African Republic, Republic of the Congo, Costa Rica, Côte d’Ivoire, Djibouti, El Salvador, Gabon, The Gambia, Georgia, Ghana, Grenada, Guatemala, Haiti, Hungary, Iceland, Kyrgyz Republic, Latvia, Liberia, Malawi, Mali, Mozambique, Mongolia, Niger, Pakistan, Romania, São Tomé and Príncipe, Senegal, Republic of Serbia, Seychelles, Sierra Leone, Tajikistan, Tanzania, Togo, Ukraine, and Zambia.
The paper examines IMF agreements with the countries Afghanistan, Armenia, Belarus, Bosnia and Herzegovina, Burkina Faso, Burundi, The Central African Republic, Republic of the Congo, Costa Rica, Côte d’Ivoire, Djibouti, El Salvador, Gabon, The Gambia, Georgia, Ghana, Grenada, Guatemala, Haiti, Hungary, Iceland, Kyrgyz Republic, Latvia, Liberia, Malawi, Mali, Mozambique, Mongolia, Niger, Pakistan, Romania, São Tomé and Príncipe, Senegal, Republic of Serbia, Seychelles, Sierra Leone, Tajikistan, Tanzania, Togo, Ukraine, and Zambia.

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Published by: Center for Economic and Policy Research on Oct 05, 2009
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Devastated by hurricanes in 2004 and 2005, the first of which caused damage estimated at 200
percent of GDP, Grenada signed a PRGF agreement in the spring of 2006. Since Grenada is part of
the Eastern Caribbean Common Union, which limits flexibility on monetary policy, the IMF-
supported program focuses on fiscal and structural policies.

Fiscal policy targets a primary budget surplus by 2010. At the second review, GDP growth
projections are substantially reduced from prior projections, from 3.6 percent to 1.6 percent in 2008
and from 4.2 percent to 1.6 percent for 2009. The primary balance (excluding grants), while allowed
to rise slightly from the original targets, still aims to decrease the deficit from 6.0 percent of GDP in
2008 to 2.2 percent in 2009. This entails expenditures decreasing from 34.2 percent of GDP in 2008
to 30.4 percent in 2009. At the most recent review, GDP growth projections are reduced again, from
1.6 percent to 0.3 percent in 2008 and from 1.6 percent to –0.7 percent in 2009. The primary
balance is adjusted, however it still entails a reduction from –7.5 percent in 2008 to –4.4 percent in
2009. Total expenditures are thus projected to decline even further in 2009 to 26.7 percent of GDP.
The fiscal policy prescribed in this agreement is therefore pro-cyclical.

Reaching the targeted primary surplus (originally projected) was to be attained through both revenue
and expenditure measures. On the revenue side, the program calls for implementing a Value Added
Tax, which after numerous delays, is set to be implemented in February 2010.

Containing expenditures was also a key component of the agreement. Originally, the authorities
intended “to keep wages constant in real terms through 2008, thereby reducing the wage bill by
about 1¼ percentage points of GDP.”1

Since the government had “maintained a freeze on public

sector positions since 2000”2

wage increases make up the extent of increases in the wage bill. The
wage discussions, however were delayed, resulting in savings of 0.4% of GDP. At the third review,
the agreement called for “freezing wages for public service workers.”3

In the second half of 2008, in
response to fiscal slippage in the first half of the year, numerous measures were taken, including
limiting capital expenditures to just 2.8% of GDP (pre-hurricane levels) and “Bringing forward to
September 20 the date after which no new commitments for nonessential expenditure items can be
made”.4

Because public-sector wages were programmed to fall as a percentage of GDP, and because
even the nominal increases were delayed, Table 1 shows contractionary policy for this sector.

Although “most of the privatization and divestiture occurred in the 1990s,”5

the agreement calls for
further divestiture in order to finance the deficit and pay down the debt. However, in light of the
global recession, some of these plans will be delayed.

Throughout the term of the PRGF, Grenada has been exploring a concessional loan from the
Export-Import Bank of China to fund a large joint project, in the range of 7 to 12 percent of GDP.
Even though “authorities estimate that the unemployment rate was around 25 percent in 2008
(based on preliminary data from the Country Poverty Assessment), and they project that it will rise

1

IMF 2006, 15.

2

Ibid., 67.

3

IMF 2009b, 10.

4

IMF 2009, 7.

5

IMF 2006, 69.

Center for Economic and Policy Research, October 2009 • 36

significantly in 2009,”6

the “program’s ceiling on bilateral concessional borrowing does not

accommodate this loan.”7

6

IMF 2009b, 4.

7

Ibid., 11.

IMF-Supported Macroeconomic Policies and the World Recession • 37

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