The Role of Budget Support in Growth and Adjustment

The use of IMF credit for budgetary financing (budget support) has surged in Extended Credit Facility (ECF) arrangements with low-income countries (LICs) post pandemic, yet its role in growth and adjustment remains understudied. This paper provides the first systematic analysis of budget support across all 100 ECFs approved since the PRGT’s inception in 2010. We develop a reduced-form model that captures how budget support affects the growth-reserves trade-off, where budget support substitutes for domestic financing and thus reduces crowding-out in domestic credit markets. The simulations are performed under wide parameter uncertainty reflecting limited evidence for LICs. Staggered difference-in-differences estimates on completed programs validate the model’s predictions, revealing average treatment effects on growth of 3.4 percentage points but 1.3 months of imports slower reserve accumulation by program end. These results fall at the upper bound of simulations, consistent with severe financing constraints in treated LICs. Budget support shows weak positive effects on fiscal and external adjustments, though not statistically robust, suggesting that it does not weaken consolidation incentives and that sustainable adjustment depends primarily on policy strength and fundamentals rather than financing modalities. Critically, budget support acts as a catalyst contingent on program completion: off-track programs experience particularly adverse growth outcomes. Findings underscore the need for careful consideration of growth-adjustment trade-offs in program design. Short-term growth support must be balanced against building external buffers with country-specific circumstances determining appropriate financing modalities.