Into the Woods: Understanding the Environmental Consequences of IMF Programs

By Timon Forster

In 2023, 3.7 million hectares of tropical primary forest was lost around the world, which amounts to losing almost 10 soccer fields of forest per minute. Deforestation endangers the livelihoods of millions of people, especially in emerging market and developing economies (EMDEs). The stakes could therefore hardly be higher for the international community to act.

The International Monetary Fund (IMF) – the organization tasked with monitoring the international monetary and financial system – is one institution stepping up its efforts. In 2021, its 190 member-states determined that the Fund’s mandate extends to climate change given its macro-economic consequences.

Whereas the IMF’s dominant role in the spread of structural adjustment reforms in EMDEs is widely documented, less attention has been paid to its advice on environmental issues, including forests and forest management. This is especially surprising given deforestation’s major contribution to carbon dioxide emissions. In fact, the Fund’s current Climate Change Strategy, which delves into the distinct challenges posed by mitigation, adaptation and transition management, does not mention the forestry sector in any detail.

This prompts a series of questions: How does the IMF consider environmental impact in its lending programs? What environmental consequences are associated with IMF programs in borrowing countries?

In a new technical paper published with the Task Force on Climate, Development and the IMF, Rishikesh Ram Bhandary, Kevin P. Gallagher and I seek to answer these questions. We find that the IMF rarely targets forest management; notably, only 34 out of almost 36,000 thousand conditions administered to EMDEs since 1980 include explicit advice on forest management. In addition, we conduct econometric analysis to investigate how IMF programs relate to annual tree cover loss between 2000-2020. Our estimates show that IMF loans are, on average, associated with an increase in the level of annual deforestation by 9.2 percent. These estimates imply that, over a three-year duration of an IMF program, each IMF loan is associated with a decrease in forest area of roughly the size of the Maldives.

IMF loans and the forest transition

The far-reaching consequences of IMF lending programs, and the policy reforms governments implement in exchange for financial support, are well-documented. When evaluating whether countries reduce or accelerate deforestation under the guidance of the IMF, its effects on economic growth are particularly important. There is certainly no consensus that IMF programs increase economic growth; in fact, numerous studies find that IMF programs lower economic growth. On top of that, governments approaching the Fund for financial assistance often find that they have little fiscal policy room to maneuver, which makes it more attractive for them to extract economic value from natural resources.

The growth impacts and constrained wiggle room for governments combine to make countries with IMF programs more likely to engage in deforestation. We tested this hypothesis – that IMF loans are associated with higher rates of annual tree cover loss – in a panel of EMDEs between 2000-2019, but we also examined the substantive content of policy reforms attached to loans to understand the IMF’s advice on forest management.

Analysis of IMF conditionality

Since 1980, low- and middle-income countries have implemented nearly 36,000 policy reforms attached to IMF lending arrangements. Of those, merely 34 conditions in 14 countries include explicit targets for forest management. Consistent with the Fund’s mandate, we thus document that forest management has been far from a priority in recent decades.

Yet the neglect of forest management in lending programs does not mean that governments seek to raise financial resources from forests. In fact, estimates from regression analyses indicate that an IMF program is associated with an increase in annual tree cover loss by 9.2 percent. These findings hold even after controlling for a borrowing country’s economic fundamentals and determinants of forest transitions, such as population growth.

Implications of the Fund’s climate response

To be sure, we do not argue that the IMF deliberately designs its lending programs such that they increase deforestation – indeed, we document that explicit targets of forest policy in lending programs are extremely rare. However, the estimates from the regression analysis suggest that some deforestation in EMDEs has taken place over the last two decades which may not have occurred in the absence of an IMF program.

Our findings thus point towards the need for the Fund to considerably step up its climate action if it is to make a difference and guard against nature loss. Some developments on this front are encouraging: for instance, IMF economists have recently published research on nature-related risks for macroeconomic and financial sector policies. This work is indispensable and a necessary first step for the Fund to provide advice for its members that follows best practices on forest management while ensuring country ownership. Additionally, lending programs should include an assessment on the expected effects of conditionality on deforestation. In view of the Fund’s expected review of its Climate Change Strategy in 2025, our results provide a timely, theoretically based and empirically-driven justification for revisiting the Fund’s role in forest management.

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Timon Forster is a Post-doctoral Research Fellow in International Relations at the University of St. Gallen’s School of Economics and Political Science and is a former Global Economic Governance Post-doctoral Fellow with the Boston University Global Development Policy Center.