IMF Study Examines How Budget Support Shaped Recovery in Poor Nations

A new IMF study finds that budget support in low-income countries helped boost economic growth by easing financing pressures and reducing reliance on domestic borrowing, especially after the COVID-19 pandemic. However, the research warns that stronger short-term growth often came at the cost of slower foreign exchange reserve accumulation, creating a key trade-off for policymakers.

A new study by the International Monetary Fund (IMF) has found that its budget support programs helped many low-income countries achieve stronger economic growth during crises, especially after the COVID-19 pandemic. The research, conducted by IMF economist Alexander Zaborovskiy, examined 100 IMF-supported programs approved between 2010 and 2024 under the Extended Credit Facility (ECF), the Fund's main lending tool for low-income economies.

The paper comes at a time when many developing countries are struggling with rising debt, weak growth, food and fuel inflation, and shrinking foreign exchange reserves. According to the study, IMF financing directed toward government budgets became a crucial lifeline for countries facing severe financial pressure after the pandemic.

Budget Support Became Common After the Pandemic

Traditionally, IMF loans were mainly used to strengthen central bank reserves and stabilize currencies. But the study shows that the IMF increasingly allowed countries to use its resources directly for government spending, including budget financing.

Before the pandemic, around 57 percent of IMF-supported ECF programs included budget support. After 2020, that figure jumped sharply to about 85 percent.

The paper says this shift was driven by the extraordinary economic stress facing poorer countries. Governments saw revenues collapse during the pandemic while debt burdens, import bills, and social spending needs increased rapidly. In many cases, countries had little choice but to seek external financing to avoid deeper economic crises.

The study also found that budget support was especially common in fragile and conflict-affected states, frontier economies, and countries using fixed exchange rate systems or currency unions.

How Budget Support Helps Economies

The research explains that budget support can help economies by reducing pressure on domestic banks and financial markets. In many low-income countries, governments borrow heavily from local banks to finance deficits. This reduces the amount of money available for businesses and households and pushes up borrowing costs.

When IMF financing is used for budget support, governments can reduce domestic borrowing. This frees up credit for the private sector and helps improve financial conditions.

According to the paper, this creates two major benefits. First, more credit becomes available to businesses and households. Second, lower government borrowing reduces pressure on interest rates and overall financing costs.

Using economic modelling, the study estimates that IMF budget support equal to around 1.8 percent of GDP could increase economic growth by between 1.6 and 3.4 percentage points.

Faster Growth Comes With Trade-Offs

While budget support helped boost growth, the study warns that it also slowed the accumulation of foreign exchange reserves.

Countries receiving budget support often used part of the financing to support spending and imports, which reduced the pace at which reserves could grow. The research estimates that reserve accumulation lagged by around 1.3 months of imports by the end of completed IMF programs.

The paper describes this as a "growth-reserves trade-off." In simple terms, countries gained stronger short-term growth but built smaller financial buffers against future shocks.

The study says policymakers must carefully balance these competing goals, especially since many low-income countries remain vulnerable to external crises, commodity price swings, and global financial instability.

Strong Reforms Still Matter Most

The IMF paper stresses that budget support alone cannot guarantee economic success. The strongest results were seen in countries where IMF-supported programs stayed on track and reforms were properly implemented.

Countries that completed IMF programs generally experienced stronger growth outcomes. By contrast, countries whose programs went off track often faced worsening economic conditions because expected financing did not fully materialize.

The paper highlights Armenia and Chad as examples in which IMF-supported budgetary financing helped economies recover after severe crises. Armenia rebounded after the global financial crisis damaged exports and remittances, while Chad recovered from a major oil price shock that hit government revenues.

Despite the positive growth effects, the study found only weak evidence that budget support alone improved fiscal balances or external accounts. The author concludes that long-term economic stability still depends mainly on broader reforms, sound policies, and strong institutions rather than financing tools alone.

The study argues that IMF budget support has become an increasingly important part of crisis management in low-income countries. However, it warns that there is "no free lunch," as short-term growth support must always be balanced against the need to build economic resilience for the future.