Since August 2008, the IMF has dramatically increased its commitment to  lend to member countries in response to the global economic crisis, as  shown in table 1. Designing an IMF- Supported Program Is a Complex Process That Allows for Negotiated Trade-offs Among Objectives and Policies

The IMF-supported program is intended to help countries achieve  macroeconomic stability and contains objectives, targets, macroeconomic  policies, and conditions. The design of an IMF-supported program involves a  complex process, which includes the use of a macroeconomic framework,  economic judgment, and discussions between the IMF staff and country  officials regarding trade-offs among different objectives and policies. IMF-Supported Programs Are Intended to Help Countries Achieve Their Objectives in the Context of Macroeconomic Stability

An IMF-supported program is defined by its objectives and the link  between those objectives and the macroeconomic policies used to achieve  them, with the specific content of a country’s program reflecting the  country’s characteristics and circumstances. For example, IMF-supported  program objectives in low-income countries are broadly geared toward the  long-term goals of increasing economic growth and reducing poverty. In middle- and high- income countries, an IMF-supported program may include targets to  stabilize the exchange rate, raise interest rates, and tighten credit  conditions to stem the outflow of capital and restore investor confidence. Four IMF-Supported Programs Were Negotiated Based on Countries’ Circumstances

IMF-supported programs in each of the four countries we reviewed  contain different sets of objectives, targets, and conditions that reflect  each country’s individual circumstances, trade-offs, and negotiations with  IMF staff. The program in postconflict Liberia focuses on rebuilding  capacity, whereas the program in Zambia, a country with significant  natural resources, but substantial poverty, centers on increasing economic  growth. Hungary, a middle-income country, faced a risking risk of debt  default; thus, the program concentrates on restoring investor confidence  and reducing debt and expenditures. A banking and currency collapse  precipitated Iceland’s request for a program, which focuses on  recapitalizing the banks and stabilizing the currency. While IMF staff and  country officials in all four countries generally agreed with the programs  and have made progress in implementing the programs, each country has  encountered some challenges in implementing conditions or achieving  targets. Figures 2, 4, 6, and 8 show country background information for  Liberia, Zambia, Hungary, and Iceland. Macroeconomic Policies in IMF- Supported Programs Are Broadly Consistent with Findings of Academic Literature

For low-income countries, empirical evidence suggests inflation is  detrimental to economic growth after it exceeds a critical threshold, which  is broadly consistent with the inflation targets included in the IMF- supported programs we reviewed. Similarly, for middle- and high-income  countries, the academic literature identifies weaknesses in  macroeconomic policies that often precede economic crises that are  consistent with the policies in the IMF-supported programs we reviewed. Empirical Evidence Evaluating the Complex Relationship between Inflation and Growth Is Broadly Consistent with IMF-Supported Programs in Low-Income Countries

			Empirical Research Suggests a Complex Relationship between Inflation and Growth; Inflation Harms Growth above a Critical Threshold

Inflation targets are a prominent feature of IMF-supported programs in  low-income countries, but there has been considerable debate about  appropriate targets for these countries. These variables suggest a number of specific policy weaknesses  that make countries more vulnerable to crises, especially high inflation,  high public indebtedness, and an overvalued currency. Agency Comments

The Department of the Treasury provided written comments on a draft of  this report, which are reprinted in appendix III. Appendix I: Scope and Methodology

To examine the process for designing an International Monetary Fund  (IMF)-supported program, we reviewed and analyzed IMF’s public  documents and data. To examine the extent to which the findings of empirical economic studies  are consistent with the IMF’s macroeconomic policies, we reviewed IMF  documents and empirical studies.
Why GAO Did This Study

The International Monetary Fund (IMF) has significantly increased its total committed lending to countries from about $3.5 billion in August 2008 to about $170.4 billion in August 2009, as countries have been severely affected by the global economic crisis. IMF-supported programs are intended to help countries overcome balance-of-payments problems, stabilize their economies, and restore sustainable economic growth. Critics have long-standing concerns that the IMF has an overly austere approach to macroeconomic policy that does not sufficiently heed country viewpoints. To help address these concerns, the IMF recently stated that it has changed its policies, including by increasing its flexibility. GAO was asked to examine (1) the process for designing an IMF-supported program, (2) the IMF-supported programs in four recipient countries, and (3) the extent to which the findings of empirical economic studies are consistent with the IMF's macroeconomic policies. GAO analyzed IMF and recipient country documents; interviewed U.S., IMF, and foreign government officials, conducting fieldwork in four relatively large recipient countries; and analyzed published or widely cited empirical studies. GAO received written comments from the Department of the Treasury, noting its concurrence with the report's conclusions.

What GAO Found

Designing an IMF-supported lending program involves a complex, iterative process based on projections for key macroeconomic variables; discussions between IMF staff and country officials regarding program goals, policies, and trade-offs; use of economic judgment; and IMF Executive Board approval. An IMF-supported program is intended to help countries achieve their objectives in the context of macroeconomic stability. Programs in low-income countries are broadly geared toward increasing economic growth and reducing poverty, and generally strive for low inflation and sustainable levels of debt. In middle- and high-income countries, programs generally aim to stem capital outflows, restore confidence, and stabilize the exchange rate by, for example, setting targets for budget deficits and international reserves. Trade-offs among the different combinations of objectives and policies allow for negotiations between the IMF staff and country officials, reflecting what is technically feasible and politically acceptable. IMF-supported programs in the four countries GAO reviewed--Liberia, Zambia, Hungary, and Iceland--include different sets of objectives, targets, and conditions that reflect country circumstances, based on negotiations between the IMF staff and country officials. In postconflict Liberia, the program focuses on rebuilding capacity and contains a target for maintaining a balanced budget with no borrowing. In Zambia--a country negatively affected by the recent economic crisis--the IMF-supported program is designed to increase economic growth, reduce poverty, and improve governance. Hungary, which faced a rising risk of default, has a program that focuses on restoring investor confidence while reducing debt and expenditures. A banking and currency collapse in Iceland precipitated the IMF-supported program, which contains some controversial approaches to monetary policy and banking reform. All four countries are making progress but face challenges in implementing conditions or achieving targets in their IMF-supported programs. The macroeconomic policies in IMF-supported programs are broadly consistent with the findings of the empirical literature GAO reviewed, although this literature lacks precise guidance for setting policy targets. For low-income countries, empirical evidence generally suggests inflation is detrimental to economic growth after it exceeds a critical threshold, which is broadly consistent with the inflation targets included in the IMF-supported programs we reviewed. For middle- and high-income countries, the literature identified specific policy weaknesses in advance of crises, including high inflation, high public indebtedness, and low international reserves. These weaknesses are consistent with the policies upon which the IMF focuses in the 13 programs in middle- to high-income countries GAO reviewed.