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September 10, 2009
3:51 PM

CONTACT: Center for Economic and Policy Research (CEPR)

Dan Beeton, 202-239-1460

IMF Conditions Harmful to Vulnerable Eastern European Economies

WASHINGTON - September 10 - The International Monetary Fund (IMF) has tied pro-cyclical, contractionary economic conditions on Eastern European countries to sorely needed loans, a new report from the Center for Economic and Policy Research (CEPR) finds. The report, "The IMF's Stand-by Arrangements and the Economic Downturn in Eastern Europe: The Cases of Hungary, Latvia, and Ukraine," by Jose Antonio Cordero, closely examines IMF agreements with three countries, Hungary, Latvia, and Ukraine, and finds that in all three countries there were mistakes in economic policy that increased their vulnerability to the external shocks. The governments' responses to the downturn, along with IMF conditions for assistance, are also seen to have caused harm with pro-cyclical policies.

"Despite its claims to the contrary, the Fund continues to push pro-cyclical policies on countries badly bruised by the global recession," CEPR Co-Director Mark Weisbrot said. "In Central and Eastern Europe, it looks increasingly like a big chunk of the IMF's new money will be a transfer from taxpayers to bail out western European banks who made imprudent loans in the East."

Last week the European Union appropriated $175 billion for the IMF, surpassing last month's $108 billion contribution from the U.S. Congress in June.

In Latvia, a combination of pro-cyclical fiscal and monetary policy - supported by an IMF agreement as well as funds from the European Union - appears to have worsened the contraction following a large reversal of capital after a boom fueled by foreign credit. The decision by the Latvian government, in conjunction with the EU and the IMF, to maintain Latvia's pegged exchange rate with Euro, has made recovery much more difficult, since with the currency fixed, the only way to reduce the country's current account imbalance is through shrinking the economy, which reduces imports faster than exports and may also reduce real wages. The Latvian economy will contract by as much as 18 percent this year by some estimates (much deeper than the IMF's projection in January 2009 of -5 percent).  

In Hungary, the IMF standby arrangement included measures to bring the government deficit, as a percent of GDP, down to 3.4 in 2008, and to 2.5 in 2009, even though Hungary is now projected to undergo a sharp economic contraction of negative 6.7 percent of GDP. This pro-cyclical fiscal policy has also been accompanied by pro-cyclical monetary policy. The Fund's forecasts also indicate that it did not anticipate the severity of Hungary's contraction, with its July 2007 projection of just -1.0 percent growth for 2009. About a year before the crisis in Hungary's financial sector, the IMF wrote in its report on Hungary's economy that "the financial sector remains sound."

Ukraine was also hard hit by the world slowdown, through a sharp decline in the price of steel (a major export); and on the import side, a significant increase in the price of natural gas from Russia. Ukraine also suffered from a reversal of capital flows, threatening liquidity in the banking system, and from October 2008 to March 2009 the National Bank of Ukraine lost US$14 billion in reserves. Yet the Fund also prescribed fiscal tightening for Ukraine, where GDP is now projected to decline by 9 percent in 2009. The IMF Standby Arrangement approved in October 2008 provided for a zero fiscal balance, later relaxed to a deficit of 4.0 percent of GDP. Ukraine's total public debt is low - just 10.6 percent of GDP, so it would make sense to borrow in order to finance an expansionary fiscal policy and reduce the severity of the recession.  It is worth noting that the Fund also greatly underestimated the depth of Ukraine's recession, with its December 2008 forecast of a decline of -3.0 percent of GDP for 2009. Ukraine has also pursued a pro-cyclical (contractionary) monetary policy under the IMF agreement.


The Center for Economic and Policy Research (CEPR) was established in 1999 to promote democratic debate on the most important economic and social issues that affect people's lives. In order for citizens to effectively exercise their voices in a democracy, they should be informed about the problems and choices that they face. CEPR is committed to presenting issues in an accurate and understandable manner, so that the public is better prepared to choose among the various policy options.


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