The IMF and the mobilisation of foreign aid

Abstract

Particularly in the context of the Millennium Development Goals, there has been much discussion of the association between the International Monetary Fund and bilateral aid flows. What role should the Fund be playing in helping to achieve the MDGs? Some observers have suggested that the Fund should seek to reduce its role in poor countries and should be minimising its own lending. They see aid donors taking on a larger role and present the IMF and aid donors as substitutes. Others envisage a much bigger lending role for the Fund. This may hint at complementarities. Although this discussion raises important policy issues there are very few studies that examine the relationship empirically. This paper attempts to help fill this gap. It explores the extent to which the IMF has had a catalytic effect on Official Development Assistance and the potential channels through which catalysis might work. It finds strong evidence of a positive association and suggests that this may have more to do with conditionality than with the provision of IMF resources. But it may not represent catalysis in the conventional sense. There is a synergy between the IMF and bilateral aid that may yet be more fully developed and exploited.

IMF Lending in Times of Crisis: Political Influences and Crisis Prevention

“…However, official development assistance (ODA) and IMF programs can appear as coordinated thanks to a catalytic effect of on-track IMF programs on aid commitments (Powell, 2003). Alternatively, bilateral donors and the IMF might jointly contribute to poor countries' financing needs (Bird & Rowlands, 2007, 2009b. Our results, however, show a slightly significant and negative correlation between the amount of foreign bilateral assistance and participation in an IMF loan agreement.…”

International institutions and credible commitment of non-democracies

“…Bird and Rowlands (2007) find strong evidence of a historically positive association between IMF involvement and bilateral foreign aid inflows. For a recent example, in September 2008, the IMF approved a US $750 million SBA to assist Georgia's recovery from the dual shocks of an armed conflict with Russia earlier in August and the global economic downturn.…”

“…Indeed, if there is a possibility that IMF lending deters foreign investments due to concerns about a country's fundamentals, it is all the more remarkable that the Ukrainian government would choose to enter an IMF agreement; it suggests that the country believed that the reform signal would overcome the signal of a weak economy. More broadly, Bird and Rowlands (2007) find that Extended Fund Facility agreements (EFF), 3 which entail reform conditions, lead to an increase in investment flows to middle income, but not poor countries. Mody and Saravia (2006) also suggest that IMF programs have positive effects when they are viewed as likely to lead to economic reforms.…”

“…Tomz (2007) shows that reputational concerns are central in sovereign lending by private creditors and correspondingly, governments often use a reputational rationale for repaying their loans. Moreover, a poor track record with one international economic organization may reduce a country's ability to secure economic assistance from other states and international organizations (Bird and Rowlands 2007;Lawrence 2003;Maggi 1999). These effects taken together could do direct damage to a country's social and economic development and strengthen domestic political opposition, both of which are significant costs for a government that wishes to stay in power.…”

Repayment versus Investment Conditions and Exclusivity in Lending Contracts

“…On the other hand, countries receiving IMF support are also likely to receive either more aid from donors, BIRD and ROWLANDS [2007], or other creditors (see the literature on catalytic finance; e.g. CORSETTI, GUIMARAES and ROUBINI [2006] and MORRIS and SHIN [2006]) because the conditionality is a positive signal of some commitment to policy reform.…”