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Conditionality

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Public Information Notice (PIN) No. 01/92
September 4, 2001

International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes Discussions on Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 27, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the
Discussions on Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality.

Background

The IMF is currently engaged in a process of reviewing the conditions attached to its financing. The aim is to ensure that conditionality in Fund-supported programs is designed and applied in a way that reinforces national ownership and sustained implementation of country economic reforms. To this end, the current review emphasizes the need to focus conditionality on those policies that are critical to achieving the macroeconomic objectives of the programs supported by the Fund and to establish a clearer division of labor with other international institutions, especially the World Bank. The process was initiated by the Managing Director shortly after taking up his position in May 2000 and the Executive Board discussed a series of earlier papers on this topic in March 2001 (see Public Information Notice 01/28).

More recently, on July 25, 2001 the IMF's Executive Board reviewed the initial experience with streamlining structural conditionality and considered issues related to the coordination of program conditionality with the World Bank. It also took the opportunity to consider comments on conditionality from outside the institution, which had been solicited through the IMF's website and under a program of external seminars. This discussion was based on a set of three papers.

1. Streamlining Structural Conditionality-Review of Initial Experience examines the overall trends in structural conditionality in Fund-supported programs during the first six months since the Interim Guidance Note on Streamlining Structural Conditionality was issued to IMF staff in September 2000. It shows that there has been a greater concentration of conditions in the Fund's core areas of responsibility and expertise in these more recent programs. There has also been some reduction in the number of conditions in programs supported by the Fund's Poverty Reduction and Growth Facility (PRGF), but the number of Stand-By Arrangements (SBAs) approved during this period is too small to draw any meaningful trends. The paper discusses the factors that have influenced the focusing and prioritization of conditionality in various country cases.

2. Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality. This paper reviews the developments in both the IMF and the World Bank's operations that have led to an increased need for collaboration both in the design of their support for country programs and in establishing and monitoring the conditions attached. It was prepared jointly by the staffs of the two institutions and was also discussed by the Bank's Executive Board. The key message of the paper is that enhanced collaboration on conditionality will strengthen program design, but only if there is enhanced staff cooperation throughout the country program cycle.

3. Conditionality in Fund-Supported Programs-External Consultations. This paper summarizes the proceedings of three seminars, held in Berlin on June 11-12, in Tokyo on July 10, and in London on July 23-24. It also reviews the main themes of the comments received from outside the IMF in response to a call for comments in response to the staff papers discussed by the Executive Board on March 7, 2001. The full text of these comments was also conveyed to Executive Directors and posted on the IMF website.

Executive Board Assessment

Executive Directors discussed a number of considerations related to streamlining and focusing the Fund's conditionality as part of the Fund's ongoing review of conditionality. In particular, they reviewed the initial experience with streamlining structural conditionality; examined issues involved in coordinating conditionality with the World Bank; and considered the feedback received in external consultations.

Review of Initial Experience

Directors reviewed the experience with the application of the Interim Guidance Note on Streamlining Structural Conditionality issued to the staff in September 2000. While noting that the shortness of the period and the limited number of cases considered precludes drawing firm conclusions, they considered this review to be useful in highlighting the factors that will shape further progress in streamlining. Directors welcomed the change in practices that had become apparent following management's Guidance Note, with staff systematically raising questions related to the proper focus of Fund conditionality in program discussions. They encouraged staff to continue with the careful implementation of the Guidance Note, building up experience with its application in various country circumstances, while learning from past cases and taking into account further guidance received at today's Board meeting.

Directors reaffirmed that the purpose of streamlining or refocusing conditionality is to enhance the success and effectiveness of programs by concentrating on those conditions that are critical to achieving the program's macroeconomic objectives, while taking adequate account of national decision-making processes and the administrative capacity to implement reforms. They stressed that the number of conditions is only one, imperfect, indicator of the extent of such progress, which needs to be viewed in conjunction with evidence on the application of conditionality in specific country cases, and the impact of conditionality on performance.

Directors agreed that the discussion and feedback from the real-time assessments of new Fund-supported programs brought to the Executive Board would continue to be a key instrument for refining the balance in the scope and detail of Fund conditionality, and to discuss the role played by the World Bank in each case. They welcomed the focus on the coverage of conditionality in each case, and looked forward to the continuation of this process, including by providing a more detailed explanation of the rationale for the inclusion or exclusion of particular reform measures. Several Directors suggested that valuable insights could also be provided by ex post assessment of programs, to see how streamlined conditionality had worked in practice.

Directors noted that progress in streamlining and refocusing conditionality differed considerably across groups of countries. To a large extent, they saw this differentiated approach as appropriate, reflecting the adaptation of conditionality to the circumstances of individual countries and to the specific objectives of the programs they were undertaking with the support of the Fund. A number of Directors indicated that the appropriate scope of conditionality could usefully be related to the different time horizons and objectives of programs supported by different Fund facilities, and suggested that this issue be taken up in future work by the staff.

Directors observed that the significant differences between the experience under arrangements supported by the Poverty Reduction and Growth Facility (PRGF) and those supported by the Fund's General Resources Account also reflected different arrangements for coordination with the World Bank. For PRGF-supported programs, a division of labor had been established under which the Fund's conditionality outside its core areas of responsibility and expertise would normally focus on measures deemed to be critical to the country's macroeconomic, including external, objectives. This division of labor had permitted a noticeable reduction in the number of conditions in PRGF-supported programs, and a concentration of measures in the Fund's core areas. Under Stand-By Arrangements (SBA), where no formal framework exists, the experience was more mixed and the small number of cases makes it difficult to draw conclusions. No particular trend toward fewer conditions is evident in the handful of new programs, although there is some indication of an increased concentration in the Fund's core areas. In some SBAs, it had been possible to use conditionality more sparingly, while in other cases a larger number of conditions had been justified to provide adequate safeguards for the Fund in view of weak past performance, or to provide markers for the authorities to establish a credible track record of policy implementation with a view to regaining market confidence. Some Directors questioned whether including a large number of conditions in a program is an appropriate response to such situations. In this light, some Directors argued that the Fund should be more selective in providing financial support to countries, particularly in cases in which there is a weak track record or an insufficient commitment to the program.

Directors agreed that those measures that are critical to achieving the program's macroeconomic objectives should continue to be included in Fund conditionality, with a number of Directors stressing the need for strong justification when including measures outside the Fund's core areas of responsibility and expertise. Some Directors cautioned against applying this criterion too narrowly, noting that in some cases criticality might be difficult to define ex ante, and that there is a risk that important areas of reform would not be properly covered.

Collaboration with the World Bank

Directors welcomed the review of IMF and World Bank collaboration on country programs and conditionality, prepared jointly by the two staffs. They reaffirmed the three principles for collaboration set out in the 1998 agreement between Bank and Fund managements: clarity about responsibility, early and effective consultation, and separate accountability. They generally welcomed the proposals to strengthen implementation of these principles, although some Directors expressed concerns that this would complicate the negotiations of programs with the Bank and Fund. In discussing issues related to cross-conditionality, several Directors considered that there would be cases wherein, in practice, a country would need to comply with conditions established by both institutions in their respective areas in order to receive financing from either, thus increasing the conditionality attached to the Fund's financing.

Most Directors agreed that, to clarify the delineation of responsibilities, it would be useful to adopt for each policy area the practice of identifying one institution as the "lead agency" responsible for designing and monitoring conditionality. They also agreed that, in the future, Board documents should transparently and systematically set out the staff views of the lead agency on the various issues and conditionalities as an input into Board discussions. A number of Directors, however, cautioned against loading Fund program documents with information that is not relevant to the core objectives of the program. They also stressed that the concept of the lead agency would need to be implemented with some flexibility to take account of country circumstances and the substantial areas of joint work between the two institutions.

Directors also noted the importance of strengthened and more systematic coordination between the Fund and the World Bank to secure the benefit of the complementary areas of expertise of the two institutions. They generally welcomed the proposal of information sharing through the more effective use of inputs from the World Bank in connection with Article IV consultations, and of inputs from the Fund in connection with the Bank's Country Assistance Strategies, economic and sector work, and programmatic lending.

Directors stressed that the policy advice, program design, and conditionality supported by the Bank and Fund need to be consistent, and most Directors agreed that, wherever possible, they should be integrated within a coherent country-led framework. Many Directors emphasized that such an integrated view should aim to ensure that there is an overall streamlining and focusing of conditionality from both institutions and not simply a shifting of responsibility from the Fund to the Bank.

Several Directors cautioned that the proposed coordination mechanisms between the Fund and the Bank would need to be implemented in a way that reflects the separate accountability of each institution. Directors stressed that, within any overall framework, each institution must retain ultimate accountability for its own lending decisions and for safeguarding its resources. In this regard, they agreed that any conditionality that is critical for the success of the Fund-supported program would continue to be specified in the Fund's own arrangement. It was recognized, however, that the need for assurances that the Fund-supported program is fully financed calls for a close working relationship with all multilateral and bilateral lenders active in a given country, in particular in cases where no other financing is available.

Directors agreed that the application of the proposed approach would need to reflect the circumstances of individual countries. A comprehensive approach is likely to be appropriate in those low-income countries embarked on the PRSP process and in relation to assistance under the HIPC Initiative, given these countries' extensive reform needs and the consequent extensive and long-lasting involvement of both the Fund and the World Bank. In middle-income countries, a more differentiated approach would be needed, recognizing the diversity of country characteristics, and the nature of the operational support being provided by the Bank and/or the Fund. Countries with extended programs of policy-based support from both institutions would likely benefit from a more structured approach to ensure better coherence of Fund- and Bank-supported programs. In other countries, where either institution has a more limited or episodic intervention, collaboration arrangements would need to be less formal and take account of the need for a prompt institutional response to countries' needs.

A number of Directors cautioned that, in operationalizing the proposed approach, care should be taken to avoid institutional rigidity and bureaucratization, and to prevent the approach from leading to an increase in conditionality. Some Directors also suggested the establishment of a joint Fund-Bank body, to provide a forum for effective collaboration on middle-income countries. Directors agreed to review progress on Fund-Bank collaboration in this area again in a year's time.

Feedback from External Consultations

Directors welcomed the extensive comments and suggestions on conditionality received from outside the Fund, including the comments on the papers posted on the Fund's website, and the proceedings of seminars held in Berlin, Tokyo, and London. They agreed that these external consultations should continue as the Fund's review of conditionality proceeds and welcomed the plans for further seminars, including in developing countries.

In reviewing the external feedback, Directors noted the general support for the present move to streamline and focus conditionality on the Fund's core areas of expertise, coupled with a general caution that flexibility in application is also required. Contributors to these consultations also stressed the need for national ownership of reform programs, in light of the political economy of reform; the need for greater attention to the sequence and pace of policy implementation; the importance of a clear and coherent strategy for assistance from the international community, including the Fund and multilateral development banks; the scope for results-based conditionality, and the need for clarity and even-handedness in the use of prior actions, waivers, and other modalities of conditionality. These insights will provide valuable guidance on many of the issues that are part of the Fund's review of conditionality. Several Directors requested additional staff work on understanding the nature and complexity of country ownership, and examining how the Fund's interventions could most effectively reinforce ownership as a basis for effective program implementation.

Next Steps

Finally, Directors stressed that the review of conditionality is an ongoing process, and discussed the steps that lie ahead. They noted that the work would need to proceed simultaneously on two main tracks: policy discussion by the Board, and implementation by the staff of the approach set out in the Interim Guidance Note, as informed by the real-time assessments on the occasion of individual country discussions in the Board. The Board will return to its discussion of conditionality in the fall, focusing on issues related to ownership and to the modalities by which Fund financing is linked to policies, including the use of prior actions, waivers, program reviews, and results-based conditionality. Early in 2002, the Board will also take stock of the lessons from the real-time assessments of conditionality. This will provide further insight into: the factors to be taken into account in assessing which policy measures are critical to program objectives; the application of conditionality to measures that are relevant but not critical, and to measures outside the Fund's core areas of responsibility and expertise; and the experience with strengthened Fund-Bank collaboration. Meanwhile, the staff will continue to work to refocus conditionality, also ensuring that letters of intent make a clear distinction between the authorities' overall policy program and the part of that program that is subject to the Fund's conditionality. The staff will also work with the World Bank to operationalize the approach to coordination between the two institutions discussed above in light of the guidance from the two Boards. This work program is aimed toward consideration of how to revise the Fund's guidelines on conditionality by the time of the spring 2002 meetings.





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