Adjustment without accumulation: Evidence on capital formation from IMF programs

A central mandate of the International Monetary Fund (IMF) is to provide liquidity support to countries facing balance of payment difficulties. Lending programs aim to bridge financing gaps and restore trajectories for growth and stability. The IMF's core programs condition fiscal and other policy measures in return for such support, in hopes that reforms and new financing will catalyze new (especially private) investment into the economy. There is now a deep academic literature assessing the economic and social outcomes of IMF lending programs. This study adds to this literature by evaluating the extent to which IMF programs catalyze gross fixed capital formation (GFCF) in general and private capital formation in particular. An analysis of GFCF provides insight into investment channels of growth and the productivity of IMF-catalyzed capital. We leverage a novel empirical strategy, local projections difference-in-difference. Results indicate that IMF program participation typically has ambiguous or negative impacts on capital formation. These findings add to prior work on growth and investment within IMF programs. Results also support recent calls to rethink the value of fiscal consolidation for balance of payments problems.