Designing effective programs

Conditionality in its broad sense covers both the design of IMF-supported programs—that is, the macroeconomic and structural policies—and the specific tools used to monitor progress toward the goals outlined by the country in cooperation with the IMF. Conditionality helps countries solve balance of payments problems without resorting to measures that are harmful to national or international prosperity. At the same time, the measures are meant to safeguard IMF resources by ensuring that the country’s balance of payments will be strong enough to permit it to repay the loan. All conditionality under an IMF-supported program must be “macro-critical”—that is, either critical to the achievement of macroeconomic program goals or necessary for the implementation of specific provisions under the IMF’s Articles of Agreement.

The member country has primary responsibility for selecting, designing, and implementing the policies that will make the IMF-supported program successful. The program is described in a letter of intent(which often has a memorandum of economic and financial policies attached to it). The program’s objectives and policies depend on country circumstances. But the overarching goal is always to restore or maintain balance of payments viability and macroeconomic stability, while setting the stage for sustained, high-quality growth and, in low-income countries, for reducing poverty.

How compliance with program conditions is assessed

Most IMF financing features disbursements made in installments that are linked to demonstrable policy actions. This aims to ensure progress in program implementation and to reduce risks to the IMF. Program reviews provide a framework for the IMF’s Executive Board to assess periodically whether the IMF-supported program is on track and whether modifications are necessary for achieving the program’s objectives. Reviews combine a backward-looking assessment (were the program conditions met according to the agreed timetable?) with a forward-looking perspective (does the program need to be modified in light of new developments?). Disbursements under an IMF-supported program can take place only upon its approval, or completion of reviews, by the IMF Executive Board.

Program approval or reviews are based on various policy commitments agreed with the country authorities. These can take different forms:

• Prior actions are measures that a country agrees to take before the IMF’s Executive Board approves financing or completes a review. They ensure that the program has the necessary foundation to succeed, or is put back on track following deviations from agreed policies. Examples include the elimination of price controls or formal approval of a budget consistent with the program’s fiscal framework.
• Quantitative performance criteria (QPCs) are specific and measurable conditions that have to be met to complete a review. QPCsalways relate to macroeconomic variables under the control of the authorities, such as monetary and credit aggregates, international reserves, fiscal balances, and 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.
• Indicative targets are used to supplement QPCs for assessing progress. Sometimes they are also set when QPCs cannot because of data uncertainty about economic trends (e.g. for the later months of a program). As uncertainty is reduced, these targets are normally turned into QPCs, with appropriate modifications.
• Structural benchmarks are (often non-quantifiable) reform measures that are critical to achieve program goals and are intended as markers to assess program implementation during a review. They vary across programs: examples are measures to improve financial sector operations, build up social safety nets, or strengthen public financial management.

If a QPC is not met, the Executive Board may approve a formal waiver to enable a review to be completed, if it is satisfied that the program will nonetheless be successfully implemented, either because the deviation was minor or temporary, or because the country authorities have taken or will take corrective actions. Structural benchmarks and indicative targets do not require waivers if they are not met but are assessed in the context of overall program performance. The IMF’s database for the Monitoring of Fund Arrangements (MONA), which is publicly available, covers all aspects of program conditionality.

Conditionality framework continues to evolve

IMF lending has always involved policy conditions. Until the early 1980s, IMF conditionality largely focused on macroeconomic policies. Subsequently, the complexity and scope of structural conditions increased, reflecting the IMF’s growing involvement in low-income and transition countries, where severe structural problems hampered economic stability and growth.

In recent years, the IMF has become more flexible in the way it engages with countries on issues related to structural reform of their economies. The guidelines on conditionality were revised in 2002 following an extensive review. In March 2009, the IMF further modernized its conditionality framework in the context of a comprehensive reform to strengthen its capacity to prevent and resolve crises. The revised operational guidance to staff stipulates that structural conditions should be focused and tailored to member countries’ different policies and economic starting points. Moreover, structural performance criteria requiring formal waivers were abolished, and structural reforms are covered by reviews of overall program performance.

As part of the wide-ranging reforms of the IMF’s lending toolkit in 2009, a number of new facilities were introduced that rely heavily on ex-ante conditionality. This includes the Flexible Credit Line (FCL), which does not rely on traditional program conditionality but on rigorous pre-qualification criteria (also referred to as “ex-ante” conditionality). In situations where a full-fledged economic program is either not necessary or not feasible, the Fund can provide financial support to meet urgent balance of payments needs under the Rapid Financing Instrument (RFI) and Rapid Credit Facility (RCF). The Precautionary and Liquidity Line (PLL), introduced in 2011, combines elements of both ex-ante and ex-post conditionality.

On September 5, 2012, the IMF Executive Board discussed staff papers reviewing the guidelines on conditionality, as well as the design and effects of IMF-supported programs during the period 2002-September 2011 (with an emphasis on the recent years). The review highlights the Fund’s efforts to draw lessons from previous crises and provide better targeted and flexible lending. It finds that conditionality in programs is generally better tailored to individual country needs, more streamlined, and focused on core areas of Fund expertise. Programs have also adapted flexibly to changing economic circumstances, which has helped to achieve program objectives, and, at the same time, to safeguard social protection during crises (particularly in low-income countries).

While the review found that the IMF’s conditionality guidelines were broadly appropriate, it highlights areas where further strengthening in implementation of underlying policies might be required, including as challenges remained especially in some recent high-debt crisis programs. These areas include: (i) keeping conditionality focused; (ii) enhancing risk diagnostics underpinning program design; (iii) considering macro-social issues in IMF-supported programs; (iv) enhancing program ownership and transparency; (v) leveraging economic surveillance to increase contingency planning; and (vi) improving partnerships with other institutions.