The impact of the IMF recommendations on macroeconomic variables in the Republic of Congo: 2022 Extended Credit facility case

Details

Supervisors

Gomes, Joseph

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [60] en sciences économiques, orientation générale

Abstract

This paper examines the impact of the extended credit facility program of the IMF on Macroeconomic variables and ends up with a discussion on the current extended credit facility agreement between the IMF and the Republic of Congo to tell if the ECF can boost growth and stabilize the protracted balance of payments problems of the Republic of Congo. The international monetary fund has different loan programs to help countries to fight against protracted economic issues and financial crises, maintain economic stability and sustainable balance of payment. Mainly abbreviated as ECF, the Extended Credit Facility program of the International Monetary Fund is a form of financial aid meant to provide medium-term support to low-income countries experiencing external or fiscal imbalances. The program is applied under the supervision of the IMF which can at any time decide to halt, update, or totally change the program if the conditions are not properly applied. The benefits and appeal of the program are due to its 0% interest rate, 51/2 year grace period, and 10-year final maturity. There has been a lot of back and forth over the years about whether the program accomplishes its objectives or not. As a result, there has been a surge in research into quantifying how the ECF initiative affects macroeconomic variables. To evaluate the effectiveness of the ECF program on important macroeconomic variables we found it accurate to use GDP, Inflation rate, and the Unemployment rate as dependent variables for our panel data analysis. Thus, we considered an observation period of 26 years; from 1995 to 2021; to see how those variables have behaved over time; we have decided, through Stata, to run some fixed effects models with amount agreed, GDP and other macroeconomic variables of interest as dependents variables and see if there is a correlation between the amount agreed of the ECF and those variables in countries the program has been applied. The econometrics model used is based on panel data built with sample data of 118 countries, all members of the IMF. For our analysis, we used 3 models; All the three models are control for year and country effect. Model-1 and model-2 investigate the association between the amount agreed of the loan (ECF) program, GDP, and inflation rate. Model-1 indicates that GDP and the amount agreed between IMF and member countries are inversely associated, while model-2 indicates that inflation and the amount agreed of the extended credit facility (ECF) move in a similar direction. Unemployment is a major macroeconomic challenge that can be caused by domestic or global factors. Model-3 estimates indicate that the IMF extended credit facility (ECF) tends to enhance the unemployment rate. The empirical result shows that the relative association of the agreed amount of the loan (ECF) has a negative relationship with economic growth. Thus, we think that policymakers must adopt alternative policies to boost economic growth, curb inflation and unemployment rates, and solve their protracted balance of payment issues. Furthermore, in the discussion part of this research which is about our opinion of the current ECF agreement between the IMF and the Republic of Congo, we tried to predict through a different analysis and methodology using the same panel dataset, if the program is going to boost the economy of the republic of Congo and decrease the unemployment rates; Thus, we decided to run a second analysis, through R this time. The empirical result of the study in the discussion part shows that the two variables; amount agreed, and program treatment have different conclusion regarding the extended credit facility. The amount agreed between IMF and member countries suggests that an increase of amount agreed in thousand SDRs tends to increase GDP by a very small margin of 0.0000385. On the other side, program treatment dummy indicates that countries which did not receive loan from the IMF under the extended credit facility could grow 0.289 percent faster than those countries which received the loan under the ECF. Thus, it might be appropriate to consider that a support to the balance of payment through IMF bailout might hurt the economy rather than enhancing growth. After controlling the amount agreed and program treatment, we noticed that unemployment rate and inflation rate are the key factors that influence the economic growth of a country. The coefficient on unemployment rate has same sign as expected and thus concluded that in case of downward pressure on the balance of payment that led to the extended credit facility agreement between the IMF and member countries, special attention must be given to curb the unemployment rate in the economy. We provided new evidence that extended credit facility program from the IMF is not the right solution to solve the protracted balance of payment issues and economic crisis if the matter is analyzed by how GDP fluctuates from the amount agreed. Furthermore, after the implementation of the program, most countries tend to become dependent on the same program by contracting loan again and again through the ECF program; a repetitive move showing that the result of previous program applied have not fully been reached.