IMF Conditionality
When a member country is seeking a loan from the IMF, it agrees to implement policy measures that will enable it to resolve its balance of payments problems. These measures are known as “conditionality” and they also serve as a guarantee that the country will be able to repay the IMF. In recent years, the IMF has streamlined conditionality in order to promote national ownership of strong and effective policies. |
What is conditionality and why is it necessary?
Conditionality in its broad sense embraces both the design of IMF-supported programs—that’s to say, the underlying macroeconomic and structural policies—and the specific tools used to monitor program implementation to ensure the achievement of the goals outlined by the country in cooperation with the IMF. It is aimed at helping member countries solve balance of payments problems without resorting to measures that may put national or international prosperity in jeopardy while at the same time establishing adequate safeguards for the use of IMF resources. All conditionality under an IMF-supported program must be either critical to the achievement of program goals or for monitoring implementation, or necessary for the implementation of specific provisions under the IMF Articles of Agreement.
Conditionality may take the form of ex ante conditionality (that’s to say, pre-set rigorous qualification criteria) and/or ex post conditionality (that’s to say., monitoring of program implementation). For the former, if member countries meet well-defined qualification criteria, they may have access to IMF financing without being subject to traditional ex post conditionality. In setting program-related ex post conditionality, the IMF is guided by the principle that the member has primary responsibility for the selection, design, and implementation of its policies, in pursuit of program objectives. In these cases, the member country’s forward-looking policy program is described in a letter of intent(which often has a memorandum of economic and financial policies attached to it) that accompanies the country’s request for IMF financing. The objectives of a program and the types of policies involved depend on country-specific circumstances. However, the overarching goal is to restore or maintain balance of payments viability and macroeconomic stability, while setting the stage for sustained, high-quality growth.
How is compliance with program conditions assessed?
Most IMF financing features phased disbursements and the linking of additional financing to demonstrable policy actions. This aims to ensure progress in program implementation and to reduce risks to the IMF. Program monitoring in these cases relies on different tools:
• Prior actions are measures that a country agrees to take before the IMF’s Executive Board approves financing or completes a review. Such measures ensure that the program has the necessary foundation to succeed, or is put back on track following deviations from the agreed policies. Prior actions could include, for example, adjustment of the exchange rate to a sustainable level, elimination of price controls, or formal approval of a government budget consistent with the program’s fiscal framework.
• Quantitative performance criteria (QPCs) are specific conditions that have to be met for the agreed amount of credit to be disbursed. QPCstypically refer to macroeconomic policy variables such as monetary and credit aggregates, international reserves, fiscal balances, or external borrowing. For example, a program might include a minimum level of net international reserves, a maximum level of central bank net domestic assets, or a maximum level of government borrowing. QPCs may be supplemented with indicative targets. These are often set for the later months of a program, and are then turned into QPCs,with appropriate modifications, as economic trends firm up.
• Structural Performance criteria are measures that are critical for successful implementation of the economic program. These vary widely across programs but could, for example, include measures to improve financial sector operations, reform social security systems, or restructure key sectors such as energy.
• Inflation consultation clauses are another category of conditionality used in countries with an inflation targeting framework. They are designed so that if an inflation band is not observed, the member cannot draw unless a consultation with the Board has been completed.
• Another important monitoring tool is the program review, which provides a framework for the Executive Board to assess whether the IMF-supported program is broadly on track and whether modifications are necessary for achieving the program’s objectives. Reviews are used to assess the economic policies underlying a program from a backward-looking (that’s to say, assessing the observance of all established conditionality) and foreword-looking (that’s to say., modifying the program in light of new developments) perspectives.
How has conditionality evolved in recent years?
IMF lending has involved policy conditions from the very beginning. Up to the early 1980s, IMF conditionality largely focused on macroeconomic policies. Subsequently, the complexity and scope of the structural conditions attached to IMF loans increased significantly. This broadening and deepening of conditionality reflected in part the IMF’s growing involvement in low-income and transition countries, where structural problems hampering broader economic stability and growth were particularly severe.
In 2000, the IMF concluded an extensive review of conditionality—a consultative process that also involved consultations with stakeholders outside the IMF—aimed at enhancing the effectiveness of IMF-supported programs. This review recognized that successful economic policy programs must be founded on strong country ownership. Accordingly, the IMF has been striving to focus more sharply and be more clear about the conditions attached to its financing, and to be flexible and responsive in discussing alternative policies with countries requesting financial assistance. Revised guidelines on conditionality, which take these objectives into account, were adopted by the IMF’s Board in September 2002. The IMF’s Executive Board reviewed the application of the new guidelines in March 2005, concluding that substantial progress had been made and encouraging the staff to further these efforts.
In 2007, the IMF’s Independent Evaluation Office (IEO) completed an assessment of structural conditionality in IMF-supported programs. The report provided impetus to the ongoing effort to make conditionality even more focused and relevant. In light of the IEO’s finding that the number of structural conditions has not declined and that some conditions were not critical for the achievement of program goals, the IMF’s Executive Board called for strengthened efforts to achieve parsimony by focusing on criticality and providing rigorous justification for conditions.
The management implementation plan in response to the Board-endorsed IEO recommendations was discussed by the Executive Board in May 2008. The plan calls for sharpening the application of the 2002 Guidelines on Conditionality by requiring better justification of criticality, establishing explicit links between goals, strategies and conditionality, and enhancing program documents. The plan also entails the upgrading of MONA—a database with information on the conditionality in IMF-supported programs—to improve program monitoring and making it available to the public.
In March 2009, the IMF modernized its conditionality framework in the context of a comprehensive reform to strengthen its capacity to prevent and resolve crises. The new framework ensures that conditions linked to disbursements of IMF financing are sufficiently focused and adequately tailored to the varying strengths of members’ policies and fundamentals. This is to be achieved by making greater use of pre-set qualification criteria (ex-ante conditionality) and making more flexible the modalities of traditional (ex-post) conditionality. In addition, structural reforms are now monitored in the context of program reviews, rather than through the use of structural performance criteria, which will be discontinued in all IMF arrangements, including those for low-income countries.