IMF review calls for 'fewer but deeper' reforms in design of loan programs

By Andrea Shalal

WASHINGTON, Sept 24 (Reuters) - The International Monetary Fund on Thursday called for targeted refinements to the design and implementation of its loan programs, including a focus on fewer but deeper reforms, to reflect the challenges of a more shock-prone global economy.

Civil society groups warned that the IMF's recommendations for changing the conditions built into loan programs could leave developing countries facing stiffer austerity measures at a time when they were already saddled with rising public debt, soaring borrowing costs, sharp drops in official development assistance and successive systemic shocks.

"The Fund had a chance to show struggling countries that it had changed ... that it would help countries weather crises without exacerbating inequality and hardship," said Nabil Abdo with Oxfam International. "Instead, it chose to double down on a model that has already caused so much damage, taking another step back towards the dark era of structural adjustment."

The IMF said the review does recommend more front-loaded and sustained fiscal adjustments, or budget cuts, because they are associated with higher chances of program success. 

But it stressed that such front-loading should occur only to the extent feasible, along with realistic steps to boost growth and adequate social spending to protect the vulnerable.

"The framework, by and large, is fine," said Rishi Goyal, deputy director of the IMF’s strategy, policy and review department.

"But because the context is changing, because there are social strains in a number of members, we need to make sure that our reforms are appropriately tailored," he said. "What this means is a clear focus on fewer but deeper reforms."

NEW TOOLS NEEDED

The IMF's review of program design and conditionality, its third since 2002 guidelines were put in place, assessed the performance of IMF-supported programs from January 2018 to December 2024 — a period that included the US-China trade war during President Donald Trump's first term, the COVID pandemic and Russia's invasion of Ukraine.

Oxfam and other groups argued during the review process that insisting on large spending cuts at the start of a program would hurt ordinary people most, resuming the harsh austerity measures that characterized IMF lending in the 1990s.

While IMF policies had proven helpful for some countries, they had also hurt public goods like healthcare in others, cutting the money that the poorest people needed, said Eric LeCompte, executive director of the Jubilee USA Network.

"We're concerned that these revisions could lead to policies with some countries that impact public services, public workers or social safety nets," he said. "A lot will depend on implementation."

The IMF's executive board backed the recommendations, which broadly call for more balanced reforms that rely on both revenue growth and fiscal consolidation, better assessment of risks and greater realism about project financing.

The IMF said the goal was to improve implementation and outcomes, not to lower standards. The review comes on the heels of changes in a joint IMF-World Bank debt framework for low-income countries, and a forthcoming review of the IMF's process for evaluating countries' economies.

Goyal said the review showed the global lender had responded quickly and flexibly to crises during the seven-year period, helping a number of countries restore stability. 

But not all countries had been able to restore medium-term stability, pointing to the need for changes in program design.

Goyal said the IMF was also introducing a medium-term structural reform tool that would identify reforms and then sequence and tailor them to ensure countries could get "more bang for their buck."

Other new tools would enhance the ability of IMF teams and staff to correct course if shocks arose, he said. 

Critics say the IMF has sometimes failed to enforce its own policies, allowing some countries such as Egypt, Pakistan and Argentina to roll from one lending program to another. 

Martin Muehleisen, a former IMF strategy chief, said he had not seen the review, but the question was whether the IMF had sufficiently insisted on program conditions being met and holding up disbursements if they were not.

"The solution does not lie in producing better frameworks. It lies in timely decisions to stop programs if success cannot be assured," said Muehleisen, now with the Atlantic Council.

(Reporting by Andrea Shalal; Editing by Edwina Gibbs and David Gregorio)