Public Spending Under IMF Programs: Evolution, Trends, and Future Challenges

The IMF working paper examines the evolution of expenditure policy conditionality in IMF-supported programs, focusing on key areas such as social assistance, energy subsidies, pensions, health, education, and wage bill management. It highlights regional trends, declining conditionality in some areas, and the need for a balanced approach that ensures fiscal sustainability while safeguarding social outcomes.

Researh by Emine Hanedar and Zsuzsa Munkacsi, published by the International Monetary Fund (IMF), provides an in-depth examination of expenditure policy conditionality in IMF-supported programs. Conducted by the IMF's Fiscal Affairs Department and the Strategy, Policy, and Review Department, the research evaluates how conditions tied to public spending have evolved. Analyzing 105 IMF programs approved between 2002 and July 2021, the study identifies approximately 1,400 expenditure policy conditions and assesses their effectiveness in fostering macroeconomic stability. By leveraging data from the IMF's Monitoring of Fund Arrangements (MONA) database, the paper offers valuable insights into how expenditure policy conditionality is designed and its broader implications for economic governance.

The Evolution of Expenditure Policy Conditionality

IMF-supported programs play a crucial role in assisting member countries facing balance-of-payment difficulties, helping to restore macroeconomic stability through financial support linked to specific conditions. Conditionality, consisting of quantitative performance criteria and structural benchmarks, is a core component of these programs, ensuring that recipient countries implement fiscal and structural reforms. Over the years, expenditure policy conditionality has evolved in response to shifting economic challenges and policy priorities. A key finding of the paper is the gradual decline in expenditure policy conditionality since 2002, particularly in pension and civil service reform conditions, which have decreased by 60% and 50%, respectively. However, energy subsidy reforms and social assistance measures remain dominant, accounting for 35% and 24% of total conditions, respectively. Other expenditure policy areas, including civil service reforms (17%), pension reforms (14%), and health and education spending (10%), have seen varying degrees of emphasis depending on regional and economic contexts.

Regional Trends and Policy Focus

The paper highlights significant regional differences in expenditure policy conditionality, with Sub-Saharan Africa experiencing the highest number of conditions due to the sheer volume of IMF-supported programs in the region. Emerging and developing economies in Europe, Latin America, the Middle East, and North Africa have also been subject to extensive expenditure-related conditions. Energy subsidy reforms have been particularly prevalent in the MENAP region, reflecting fiscal sustainability concerns, while social assistance measures have been prioritized in low-income countries to address poverty alleviation. The research finds that while some expenditure-related conditions are explicitly defined as structural benchmarks, others are included as indicative targets, particularly in social spending areas. The IMF often sets minimum spending floors for social assistance programs to protect vulnerable populations, but challenges arise when these conditions are not accompanied by sufficient technical support or government capacity.

Key Areas of Expenditure Policy Conditionality

The study examines six major expenditure policy areas subject to IMF conditionality: social assistance, energy subsidies, pension spending, health spending, education spending, and wage bill management. Social safety net conditionality is designed to ensure that programs are adequately funded and effectively targeted. In countries with high poverty levels, the IMF incorporates structural benchmarks that require governments to develop or expand cash transfer programs and improve targeting mechanisms. For instance, Mali's 2013 Extended Credit Facility (ECF) included conditionality aimed at scaling up social safety nets while maintaining fiscal sustainability. Energy subsidy reforms, another dominant area of conditionality, are often implemented through prior actions or structural benchmarks. These reforms typically involve gradually reducing subsidies while providing compensatory measures for low-income households. The IMF has emphasized a phased approach to subsidy reform, as seen in programs across the MENAP region, where energy price distortions have historically led to significant fiscal imbalances.

Public pension reforms are another critical area of expenditure policy conditionality, particularly in countries facing demographic shifts and fiscal pressures. Common measures include increasing retirement ages, modifying benefit structures, and expanding the contribution base. Greece's 2010 program introduced pension freezes and means testing, while Portugal's 2011 IMF-supported program raised the retirement age to 66 to enhance fiscal sustainability. Wage bill conditionality, which addresses excessive public sector employment costs, is frequently used in IMF programs. Typical measures include hiring freezes, payroll audits to eliminate ghost workers, and broader civil service reforms. Ghana and Tunisia, for example, have implemented wage bill ceilings under IMF programs to contain rising fiscal pressures.

Balancing Fiscal Sustainability and Social Outcomes

The paper emphasizes that the IMF designs expenditure policy conditionality based on the principle of macro-criticality, ensuring that conditions focus on policies that have a significant impact on economic stability. Fiscal sustainability, spending adequacy, and spending efficiency are the three primary factors guiding expenditure policy engagement. While the IMF seeks to ensure that public spending supports equitable growth, it also recognizes the trade-offs between fiscal discipline and social outcomes. The research suggests that well-designed expenditure policy conditionality should be parsimonious, meaning that conditions should be kept to a minimum and focus on the most critical areas. Furthermore, successful implementation of expenditure policy conditions depends on strong government commitment, institutional capacity, and adequate technical assistance from the IMF.

The IMF's evolving approach to expenditure policy conditionality underscores the need for a balanced strategy that promotes economic stability while safeguarding essential public services. While energy subsidy reforms and social safety nets remain at the forefront of IMF-supported programs, other expenditure policies, such as health and education, receive comparatively less attention. The research concludes that future IMF-supported programs should place greater emphasis on designing expenditure policies that align with long-term economic growth objectives while ensuring fiscal responsibility. By providing a detailed analysis of past programs, the paper offers valuable insights for policymakers seeking to design effective expenditure measures in IMF-supported programs, ensuring that conditionality remains an effective tool for promoting sustainable economic development.