Cutting trees to balance budgets: the IMF’s role in deforestation

Safeguarding biodiversity and achieving long-term climate change targets such as net-zero emissions are expensive. For instance, stopping global biodiversity loss is estimated to require an additional US$ 600-800 billion per year. Against this background, it is hardly surprising that international financial institutions (IFIs) like the International Monetary Fund (IMF), the World Bank, and regional development banks are increasingly expected to support environmental sustainability. Yet while IFIs have been upgrading their toolkits to better support their member-states in achieving national climate goals, the ecological consequences of their operations remain poorly understood. This paper investigates the implications of lending programs by the IMF, the intergovernmental organization that provides short-term loans to member-states facing a balance-of-payments crisis, for global deforestation. We first show that the IMF rarely targets forest management; in a quantitative text analysis of 35,915 conditions administered to low- and middle-income countries in the last four decades, only 34 pertain explicitly to forest management. Second, we investigate the impacts of IMF programs on annual tree cover loss between 2000 and 2020. Estimates from two-way fixed effects models show that IMF programs are, on average, associated with an increase in annual deforestation by 9.2%. What can explain the association between IMF programs and increased deforestation? For one, evaluations of IMF programs show that these interventions rarely increase economic growth, which in turn can lead governments to exploit their natural resources, including forests. Further, and extending work on the political economy of deforestation, we suggest that if countries face a balance-of-payments crisis and negotiate financial assistance with the Fund, their forest transition may be interrupted or delayed. Consistent with this, additional analyses indicate that our baseline effects are driven by fiscal policy and external sector reforms, suggesting IMF borrowers seek to consolidate fiscal spending, potentially on environmental protection, and extract economic value from natural resources. Taken together, our study thereby demonstrates that understanding national-level environment-related outcomes requires greater attention to international-level determinants.