Public Information Notice: IMF Reviews Strengthening Country Ownership of Fund-Supported Programs
December 14, 2001
Strengthening Country Ownership of Fund-Supported Programs
December 5, 2001
Managing Director's Report to the International Monetary and Financial Committee (IMFC) -- Streamlining Conditionality and Enhancing Ownership
November 6, 2001
Public Information Notice: IMF Concludes Discussions on Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality
September 4, 2001
News Brief: IMF Invites Comments on Streamlining Conditionality
September 4, 2001
Public Information Notice: IMF Concludes Discussions on Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality
September 4, 2001
Strengthening IMF and World Bank Collaboration on Country Programs and Conditionality Experience
August 23, 2001
Conditionality in Fund-Supported Programs: External Consultations
July 17, 2001
Streamlining Structural Conditionality:
Review of Initial Experience
July 10, 2001
Public Information Notice: IMF Executive Board Discusses Conditionality
March 21, 2001
Key Decisions of the Executive Board Concerning Conditionality
March 21, 2001
Conditionality in Fund-Supported Programs--Policy Issues
February 16, 2001
Structural Conditionality in Fund-Supported Programs
February 16, 2001
Trade Policy Conditionality in Fund-Supported Programs
February 16, 2001
Streamlining Structural Conditionality in Fund-Supported Programs - Interim Guidance Note (382 kb pdf file)
September 18, 2000
Transcript of a press briefing on IMF Conditionality by Masood Ahmed, March 21, 2001
The Role of the IMF in Governance Issues
August 4, 1997
How Does the IMF Lend? -- A Factsheet
Pamphlet No. 45: Financial Organization and Operations of the IMF
Pamphlet No. 46: The Unique Nature of the Responsibilities of the IMF
Conditionality in Fund-Supported Programs—Overview|
Prepared by the Policy Development and Review Department
February 20, 2001
1. The Fund's conditionality has been an important element in recent proposals to reform the international financial system. In particular, the Managing Director's intention to focus and streamline conditionality and give greater scope for national ownership—a central feature of his vision for the institution—was welcomed by the International Monetary and Financial Committee at its September 2000 meeting. The staff have prepared a set of papers on conditionality as the basis for a discussion by the Executive Board; their scope and coverage is set out in Appendix to this paper. The present paper presents a brief overview of the issues: section II reviews the expansion of conditionality over the past several years, and section III discusses approaches to streamlining. Section IV presents issues for discussion.
II. Experience with Conditionality
2. Conditionality—the link between the approval or continuation of the Fund's financing and the implementation of specified elements of economic policy by the country receiving this financing—is a salient aspect of the Fund's involvement with its member countries. This link arises from the fact that the Fund's financing and policy adjustments by the country are intended to be two sides of a common response to external imbalances. Conditionality is intended to ensure that these two components are provided together: it provides safeguards to the Fund to ensure that successive tranches of financing are delivered only if key policies are on track, and assurances to the country that it will continue to receive the Fund's financing provided that it continues to implement the policies envisaged.
3. Conditionality has evolved substantially over the history of the Fund. Some element of policy conditionality has been attached to Fund financing since the mid-1950s, but the scope of conditionality has expanded, particularly since the early 1980s. In the process, tensions arose between the desire to cover aspects of policy central to program objectives and the importance of minimizing intrusion into national decision-making processes. Against this background, the 1979 Guidelines on Conditionality underscored the principle of parsimony and the need to limit performance criteria to the minimum number needed to evaluate policy implementation. They also stressed that the Fund should pay due regard to the country's social and political objectives, economic priorities, and circumstances.1
4. The period since the Guidelines—and especially the past decade—has seen a major expansion of conditionality, particularly in the structural area. While structural measures were rarely an element in Fund-supported programs until the 1980s, by the 1990s almost all programs included some element of structural conditionality. The expansion of structural conditionality was also reflected in increasing numbers of performance criteria, structural benchmarks, and prior actions (Figure 1).2
5. These changes were the result of several forces. First, the Fund has over time placed increasing emphasis on economic growth as a policy objective, with the recognition that raising growth on a sustainable basis requires strengthening the supply side through structural reforms. This emphasis is reflected in the 1974 Board decision to establish the Extended Fund Facility (EFF) to address the situation of "an economy experiencing serious payments imbalance relating to structural maladjustments...or an economy characterized by slow growth and an inherently weak balance of payments position which prevents pursuit of an active development policy."3 Growth became increasingly prominent as an objective in the 1980s, against the background of the poor growth record of the heavily indebted countries and mounting criticisms that Fund programs had focused excessively on austerity.
6. Second, the Fund became increasingly involved with different groups of countries in which structural reforms were viewed as a particularly important part of an overall policy package (Figure 2). In particular, with the establishment of the Structural Adjustment Facility (SAF) and later the Enhanced Structural Adjustment Facility (ESAF) in the 1980s, the Fund became increasingly involved in lending to low-income countries. The explicit purpose of these facilities was "the alleviation of structural imbalances and rigidities" in low-income developing countries, "many of which [had] suffered for many years from low rates of economic growth and declining per capita incomes."4
In addition, the Fund became extensively involved in assisting the transition economies after the breakdown of Communism in Europe in the early 1990s: in these countries too, major structural reforms were at the heart of the economic agenda. In both these groups of countries, both external adjustment and growth were impeded by massive structural distortions, and it was believed—especially in light of early experience—that attempting to transfer resources to these countries without tackling these distortions would be largely futile. Structural reforms were also important in the Asian crisis countries for another reason: while these countries had achieved impressive growth, serious financial sector vulnerabilities were at the root of their financial crises, so reforms aimed at addressing these vulnerabilities were key to the restoration of confidence on a sustainable basis.
7. A third factor behind the expansion of structural conditionality was an increasing awareness that the monetary and fiscal policy objectives that are key to macroeconomic adjustment often themselves depend critically on structural conditions—including the removal of extensive market distortions and the establishment of the institutional underpinnings for effective policy making in a market economy. In many cases, this awareness reflected bitter experience with macroeconomic policy adjustments that failed to take root, or had adverse side effects, due to weak structural underpinnings. As a related point, an increasing body of experience began to suggest that fiscal sustainability depends on the composition of fiscal adjustment, and more fundamentally on reforms to strengthen revenue performance and remove various drains on the budget. The need for structural reforms to underpin macroeconomic policies is partly reflected in the fact that a large share of the Fund's conditionality has been in the core areas of fiscal policy, the financial sector, and the exchange and trade system, and that these areas account for much of the increase in structural conditionality over the past decade (Figure 3). Other areas in which conditionality has expanded, public enterprise reform and privatization and social security reform, also frequently have important implications for fiscal sustainability.
8. This change in the policy content of programs has gone hand in hand
with a change in the modalities by which the Fund monitors policies.
The 1979 Conditionality Guidelines envisaged that program monitoring
would be mainly through performance criteria: a performance criterion
is a condition that must be met for the Fund's financing to continue,
unless the Board grants a waiver. The other main tool of conditionality,
program reviews, was seen mainly as an occasion to set performance criteria
beyond the first year of a program, and in rare cases to monitor policies
where uncertainties precluded the setting of performance criteria. In
recent years, however, program reviews have increased in importance
as an opportunity for both backward- and forward-looking assessments
of program implementation.
9. The increasing importance of reviews reflects, in part, greater uncertainty about key macroeconomic relationships in a world of high capital mobility; these circumstances exacerbate the difficulty of specifying a path of performance criteria a year ahead.5 It also reflects the increasing role of structural reforms, which are often difficult to characterize quantitatively or even qualitatively with sufficient precision to be suitable as performance criteria. Moreover, many key structural reforms take considerable time to implement, making it important to find some way of tracking progress toward the ultimate objective. This has been done in many cases by using a set of structural benchmarks to map out a series of steps toward an overall policy result. A structural benchmark is different from a performance criterion in that failing to achieve it would not by itself interrupt the Fund's financing. Performance relative to such benchmarks does, however, help inform the Board's assessment of progress on structural reforms during reviews and is bound, therefore, to influence the Board's decision on whether to complete a review. The increasing role of structural benchmarks is reflected in the fact that, behind the overall expansion of conditionality is a proliferation of structural benchmarks, and to a lesser extent of prior actions, compared with a much more modest increase in the number of performance criteria (Figure 4).
10. Along with this shift in monitoring techniques has come an increasing lack of clarity with regard to the boundaries of conditionality. Conditionality is that part of the authorities' policy program that is being monitored as the basis for decisions on the use of Fund resources: the defining question is, "If it's not done, can that stop the Fund's financing?" But in many cases, conditionality has been applied (or has been construed as applying) to reforms that are not really critical to the Fund's decision on whether to continue its financing. Moreover, a Letter of Intent (LOI) is often used to lay out the authorities' entire policy program; and in some cases, it even includes technical assistance advice and the policy priorities of other international financial institutions, regardless of whether the Fund has any intention to make these conditions for its financing.
11. Such murkiness on the boundaries gives the misleading impression
that conditionality is all-encompassing. In some cases, this lack of
clarity may serve the purposes of the authorities, Fund staff, and/or
other international financial institutions, by lending the Fund's imprimatur
to elements of the policy agenda whether or not they are at the core
of the Fund's concerns; but this comes at the cost of hindering the
emergence of a healthy policy debate within the country and of understanding
of the role of each international institution in the country. The lack
of clarity of the boundaries also has implications for the application
of conditionality: in particular, unless the scope of program reviews
is precisely delineated, it may not be clear, even within the Fund,
which elements of the Letter of Intent can directly affect the completion
of a review.
12. Both the increasing structural content of Fund-supported programs and the changing approach to program monitoring has taken place, at least in part, for good reasons. Nevertheless, it has prompted legitimate concerns: in particular, that the Fund is overstepping its mandate and core area of expertise, using its financial leverage to promote an extensive policy agenda and short-circuiting national decision-making processes. Moreover, the expansion of conditionality raises issues regarding its effectiveness. If conditionality is too comprehensive, it may undermine the authorities' assurances of purchase, since it increases the chance of failing to meet all conditions even when the policies that are critical to program objectives are actually on track. A proliferation of measures also has the potential to blur the Fund's focus on what is essential to ensuring that the program fulfills its purposes.
13. Concerns have also been voiced about whether recent Fund-supported programs have taken adequate account of the authorities' ability to muster political support for a multitude of policy changes at one time, as well as their capacity to implement these reforms. In some cases, these concerns may simply point to a need to provide technical assistance and/or elicit support from other international institutions, to guide the implementation of policies that are needed for the program to succeed. In other cases, however, conditionality may have been established on policies that were unlikely to be delivered, calling into question the realism of program design. In instances in which the minimum set of policies required to make a program viable may be beyond the authorities' political and administrative capacity to deliver, saying "no" may be a better choice, albeit often a very difficult one.
14. Finally, there are concerns that overly pervasive conditionality may detract from implementation of desirable policies by undermining the authorities' ownership of the program. It is the authorities who must implement policies, and it is mainly they and their citizens who live with the consequences of either action or inaction. Policies are not likely to be implemented in a sustainable way unless the authorities accept them as their own and unless the policies command sufficiently broad support within the country. Conditionality that is too pervasive may galvanize domestic opposition to the program as well as blurring the authorities' focus on what is essential. Experience suggests that the link between conditionality and program ownership is a complex one; in particular, there are cases in which high program ownership has gone hand in hand with extensive conditionality, as a government wishes to use a Fund program to strengthen its commitment to an ambitious set of domestically-owned reforms. Nonetheless, the strong likelihood that a more focused approach to conditionality will enhance country ownership is an important motivation for streamlining.
III. Streamlining Conditionality
15. The issues highlighted in the previous section set the stage for consideration of how to streamline the Fund's conditionality. Streamlining requires:
16. There are two main approaches to curtailing the scope of structural conditionality. First, a higher threshold of relevance could be applied in deciding whether a particular policy action should be covered by conditionality in a particular instance. The existing Guidelines on Conditionality prescribe that performance criteria should be limited to those needed to ensure the achievement of program objectives. In principle, this is a stricter test than, for instance, the macroeconomic relevance test applied in the context of surveillance.6 It can also be compared with the criterion established for the Fund's involvement in governance issues—which is to be "guided by an assessment of whether poor governance would have significant current or potential impact on macroeconomic performance in the short and medium term".7 But in practice, the test of macroeconomic criticality has been applied with considerable latitude. Accordingly, the Interim Guidance Note on Streamlining Structural Conditionality stresses the need to limit conditionality to those measures that are critical for the achievement of the program's macroeconomic objectives. The intention in applying a relatively strict criterion for the application of the Fund's conditionality is to change the mindset with which the staff, management, and the Board consider whether certain structural measures should be covered under conditionality, shifting from a presumption of comprehensiveness to a presumption of parsimony, and thus putting the burden of proof in each case on those who would argue for the inclusion of additional measures under conditionality.
17. A second aspect of streamlining is establishing a better division of labor with the World Bank and other involved multilateral and bilateral institutions and agencies. In the past, the Fund's cooperation with these institutions has not generally contributed to streamlining: on the contrary, in many cases policy measures important to these institutions' objectives have been included in the authorities' Letters of Intent and sometimes established as structural benchmarks or even performance criteria. Steps are now underway to establish a more efficient division of labor. Under the Poverty Reduction Strategy Paper (PRSP) framework for low-income countries supported by the Fund's Poverty Reduction and Growth Facility (PRGF), the Fund and Bank work closely together to support the implementation of a common country strategy and to focus their efforts on their respective areas of responsibility. Under this framework, the Fund will not normally establish conditionality outside its mandate and expertise except where these are essential to the country's fiscal and/or external targets. Instead, these structural and social areas will be covered by complementary World Bank-supported programs. The Bank's recent establishment of the Poverty Reduction Support Credit (PRSC) will facilitate this demarcation of responsibilities, inter alia, by better aligning the time-lines of the two institutions' financing. No such framework yet exists for middle-income countries, but greater efforts are being made to improve coordination between the Fund and the Bank in these operations, including through upstream consultation between the two staffs on emerging structural issues in individual programs. Where the Fund's conditionality still needs to cover some measures outside its core areas of competence, it is essential that the authorities receive adequate advice (from the Bank or from other relevant institutions) on how to implement the agreed measures.
18. Another important aspect of streamlining is with regard to the degree of detail with which policies are monitored. Much of the proliferation of conditionality reflects the practice of mapping out a series of steps toward a particular policy outcome, in some instances using tools of conditionality such as structural benchmarks, in others by listing the individual steps in a policy matrix. For instance, in one case the introduction of a value-added tax involved 19 structural benchmarks. In many cases, the intention has been to help guide policy implementation or to clarify the extent of progress that will be required in order to complete a review. But this degree of detail of conditionality creates the perception that the Fund is trying to micromanage the authorities' policy program, hampering their flexibility in choosing a different yet viable road to an agreed destination.
19. One solution to the perception of micromanagement would be to rely to an increasing degree on results-based conditionality: making the Fund's financing conditional on the achievement of specified outcomes—such as bank recapitalization, or improved tax enforcement, or foreign exchange market liberalization—rather than on the steps toward those outcomes. The main argument for this approach is that it would give the authorities greater flexibility in choosing the appropriate method of achieving agreed objectives. If the steps taken by the authorities fail to lead to the desired outcome, the program would need to be reassessed before the Fund's financing would be made available. Such a strategy would undermine the country's assurance of being able to draw on the Fund's resources, but would make the authorities responsible for adapting policies to changing circumstances to achieve the intended results. The Fund's traditional macroeconomic conditionality is already somewhere on the spectrum between actions- and results-based conditionality, as it involves intermediate targets—such as ceilings on central bank credit to government—whose outturns in practice reflect economic developments as well as the actions taken by the authorities.
20. While results-based conditionality may have greater applicability than at present, its main limitation is that many structural as well as macroeconomic results take considerable time to achieve. For instance, there are cases in which policy adjustments in a particular area are essential to program objectives, but are not likely to come to fruition until close to the end of the program or even later; in this instance, ex post conditionality would not safeguard the Fund's resources unless the Fund's financing were heavily back-loaded—which would bring it out of line with the country's financing needs.8 This is the motivation for basing the Fund's financing on some assessment of progress toward key policy objectives, in the context of a review.
21. This raises the issue of what guides the Fund's assessment of progress in a review. Here, there are two main models: one is to establish a series of structural benchmarks that are intended to inform the process of assessing progress at the time of a review. An alternative is a more free-form assessment, albeit based on considerations that should be discussed with the authorities ex ante. The latter approach gives the authorities greater flexibility in devising their own path toward an objective that is agreed to be essential, while also giving the Fund greater flexibility in deciding what information is relevant to its assessment of progress; its main drawback is that it gives the authorities less assurance of the conditions on which they will be able to use the Fund's resources. While recognizing this tradeoff, it is worth considering whether the current balance is the right one—or whether a more sparing use of structural benchmarks would be desirable.
22. There are two further issues in the use of structural benchmarks. First, even when an overall policy objective is critical to program objectives, there are cases in which fewer benchmarks would suffice to indicate the path that the authorities would be expected to follow: each benchmark should pertain to a policy action that, while not decisive in itself, is nonetheless a significant and representative step. Second, there is a need for greater prioritization in the areas of policy covered by structural benchmarks: conditionality should not be encumbered with structural benchmarks in cases in which the overall outcome is not critical to the program. Of course, the staff may offer useful advice in many areas (perhaps in the context of technical assistance) while eschewing any impression that the Fund's financing hinges on the authorities' acting on this advice.
23. As noted earlier, the scope of program reviews has seen substantial evolution since the 1979 Guidelines on Conditionality. It is particularly important to clarify and delineate the boundaries of these reviews. These reviews should be used for both backward- and forward-looking assessments of policies in areas that are essential to program objectives. But, there may be a need to adjust policies to achieve the objectives agreed at the start, reviews should not become an opportunity to move the goalposts. Moreover, it is important to clarify up front, to the extent possible, the areas to be covered in reviews and the basis on which policies will be assessed, otherwise reviews have the potential to be catch-all assessments of policy implementation.
24. It is also important to clarify the role of the Letter of Intent. An LOI is not a commitment to the Fund, but a statement of the policies the authorities intend to implement. In many cases, the LOI presents the full sweep of the authorities' policy program; in such cases, the Fund's financing is conditional on only some of these policies. But in many cases, there has been a blurring of the boundaries of the part of the authorities' program covered by conditionality. While in some cases this lack of clarity may have served the purposes of the authorities and the Fund staff—for instance in presenting the program to the public and the markets—it has contributed to a misleading impression that conditionality is all-encompassing. A solution would be either to limit the LOI to those policies that are being monitored by the Fund, or ensure that LOIs include a section that delineates precisely which aspects of the authorities' program actually constitute conditionality. Moreover, it may be desirable simply to end the practice of including detailed matrices of policy actions in LOIs; in most cases, the Fund's financing hinges on only a small subset of the measures in such matrices.
25. These considerations should be carried forward in revising the 1979 Conditionality Guidelines. Some elements of the Guidelines—notably the emphasis on limiting conditions to those needed to monitor policies essential to program objectives—remain appropriate although, as noted, they have not been observed. Other elements of the Guidelines—notably the circumscribed role envisaged for program reviews—should be revised to reflect the changing environment in which Fund-supported programs are framed. It is proposed that, in light of Board discussion of the present set of papers, as well as comments received from outside the institution, the staff would return with a proposal for revising the guidelines following the Spring meetings.
IV. Issues for Discussion
26. Directors may wish to focus their interventions on the following issues.
A Guide to the Conditionality Papers
27. In addition to this overview, the staff have prepared three other papers as background for the Board discussion of conditionality. The first paper is entitled Conditionality in Fund-Supported Programs—Policy Issues. It begins with a review of the principles of conditionality, including the basic purposes of conditionality, the desirable properties of any modalities for monitoring program implementation, the tools of monitoring—performance criteria, reviews, prior actions, structural benchmarks—and the relationship between conditionality and ownership. It goes on to describe the expansion of conditionality over the past decade and the reasons for this expansion. Then it discusses approaches to streamlining conditionality and enhancing ownership: narrowing the scope of structural conditionality, reducing the degree of detail, clarifying the use of tools and the boundaries of conditionality, and other steps to enhance ownership. Annexes review literature on the macroeconomic outcomes of Fund-supported programs, the effectiveness of conditionality and ownership, and various reform proposals including those that would eliminate conditionality in its present form.
28. The second paper, Structural Conditionality in Fund-Supported Programs, accounts for the expansion of structural conditionality in recent years. This paper presents factual information on conditionality drawn from the MONA database9 and a survey of a sample of mission teams, as well as a number of case studies. It examines the coverage of structural conditions across different areas of economic policies, and discusses the factors influencing the expansion of conditionality, including the pattern of collaboration with the World Bank and other institutions. It also examines the changes in monitoring practices, including the shift to greater use of program reviews and the proliferation of structural benchmarks and prior actions. Finally, it discusses factors influencing the implementation of structural reforms, noting that the data do not shown any significant relationship between the number of conditions in a program and the fraction of these conditions that are implemented.
29. The third paper, Trade Policy Conditionality in Fund-Supported Programs, focuses on a particular area of policy to which conditionality has been applied. It discusses first the role of trade policy in the design of Fund-supported programs, and then goes on to document the extent and focus of trade policy conditions, the way these conditions are monitored, and the experience with their implementation.
30. In addition, the Executive Board recently discussed a paper, Review of the Fund's Experience in Governance Issues, which sets out the evolution of the Fund's recent work in this area, including in the context of Fund-supported programs.
1 See Selected Decisions and Selected Documents of the International Monetary Fund, Twenty-Fourth Issue, Washington DC, 1999, pages 137-139.
2 In contrast, there was virtually no change in the number of quantitative macroeconomic conditions during this period.
3 See Decision No. 4377-74/114, in Selected Decisions and Selected Documents of the International Monetary Fund, Twenty-Fourth Issue, Washington DC 1999, pages 150-154.
4 The Chairman's Summing Up at the Conclusion of the Discussion on the Structural Adjustment Facility-Review of Experience, EBM/87/93, June 19, 1987 (BUFF/87/118).
5 For instance, in the area of monetary policy, the Board agreed in January 2000 to authorize an approach whereby program reviews would be used to assess whether monetary policies remained on track to achieve an inflation target. See Inflation Targeting-Implications for Conditionality (SM/99/296).
6 See Biennial Review of the Implementation of the Fund's Surveillance Policy and of the 1977 Surveillance Decision (SM/00/40), February 2000.
7 See The Role of the Fund in Governance Issues-Guidance Note, July 2, 1997. The note indicates, however, that conditionality in this area should be limited to "policy measures...that are required to meet the objectives of the program".
8 The 2000 Review of Fund Facilities found that, on the contrary, financing needs are if anything more front-loaded than the usual schedule of uniform purchases and repurchases.
9 MONA is a database recording policy conditions as well as macroeconomic assumptions for Fund arrangements. Data are submitted by mission teams at the time of program approval and at each program review. Data have been collected since 1993.