IMF lending and private sector investment decisions

Financial support by the IMF aims to create breathing room for countries hit by crises and provide a seal of approval that appropriate policies are adopted, helping improve future prospects during periods of heightened risks. This column examines how IMF lending arrangements may impact a firm’s investment decisions. The authors find that lending from the General Resource Account increases investment significantly in the years after programme approval, and that firms that are more dependent on external finance, those that are more subject to uncertainty, and domestically owned firms invest more following the approval of a programme. The effect of lending from Poverty Reduction and Growth Trust on firm investment is much more muted and short-lived.