IMF Executive Board Concludes Discussion of 2011 Review of ConditionalityPublic Information Notice (PIN) No. 12/109
September 17, 2012
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 September 5, 2012, the Executive Board of the International Monetary Fund (IMF) discussed staff papers reviewing the conditionality, design, and effects of IMF-supported programs during the period 2002-September 2011. The review consists of an overview paper and four background papers, presenting key findings on the content and application of conditionality, as well as the design and outcomes of IMF-supported programs.
The latest review of IMF conditionality is part of a process of ongoing, periodic assessments of the IMF-supported programs that is undertaken by the Executive Board and the staff. An IMF-supported program is a package of policy measures which, combined with approved financing, is intended to accomplish specific objectives such as orderly external adjustment, broad-based inclusive growth, and poverty reduction. Conditionality in IMF-supported programs aims to ensure that Fund resources are provided to members to assist them in resolving their balance of payments problems in a manner that is consistent with the IMF’s Articles and that establishes adequate safeguards for the temporary use of IMF resources. The Conditionality Guidelines stipulate that program-related conditions should be (i) of critical importance to achieve program goals, or to monitor program implementation or (ii) necessary to implement specific provisions under the IMF’s Articles of Agreement or policies under them.
This review focuses on the period 2002-September 2011, with an emphasis on the recent years.1 Following recommendations from the previous Review of Conditionality (RoC) in
2004-05, the current review conducts deeper analysis of economic outcomes of programs, the correlation between the implementation of structural conditionality and macroeconomic outcomes, the level of access and IMF financing in program design, and the role of ownership. The review examines not only the trends in conditionality in IMF-supported programs but also assesses their overall design and outcomes, relative both to objectives and to a control group of non-program countries. In particular, it evaluates important actions taken since the 2004-05 RoC, such as further efforts to streamline and focus conditionality and the shift to review-based monitoring of structural reforms following the discontinuation of structural performance criteria in 2009.
The review is based on large samples of program cases, in-depth case studies of disaggregated and homogenous groups, and the findings of ex post assessments and evaluations. In addition to earlier reviews, this RoC also builds on the Crisis Program Reviews, and similar reports undertaken since 2009. The issues addressed in these papers are consistent with the 2011 Review of Conditionality and the Design of Fund-Supported Programs-Concept Note, and the subsequent Board discussion on February 14, 2011.
Executive Board Assessment
Executive Directors welcomed the comprehensive review of conditionality. They welcomed the generally positive findings on the application of the Guidelines on Conditionality and the design and macroeconomic outcomes of Fund-supported programs, which had internalized lessons from the past. Directors noted that the design of some of the more recent high-debt crisis programs faced difficult challenges and that, as these programs are still ongoing, they will need to be considered in more detail at a later date.
Directors generally agreed that the Guidelines on Conditionality remain broadly appropriate, although their implementation could be improved in several areas. They broadly endorsed the specific proposals put forward in the papers, and welcomed the intention to modify the operational guidance note on conditionality in light of the conclusions reached today, complemented by ongoing efforts to improve debt sustainability analysis. Some Directors considered that the Guidelines themselves would benefit from an update to reflect recent trends, practices, and policy changes.
Keeping conditionality focused
Directors welcomed the findings that conditionality has become more focused, more closely aligned with program goals, and generally well-tailored to country characteristics and initial macroeconomic conditions. They observed that the growing number and depth of structural conditions in more recent GRA programs reflected more deep-rooted structural challenges and adjustment needs.
Directors underscored the need to adhere strictly to the macro-criticality criterion for setting conditionality, with close scrutiny for conditionality outside the Fund’s core areas of responsibility. Most Directors concurred that progress in streamlining conditionality should be consolidated, while a few stressed that the overriding goal in designing structural conditionality should be to achieve program objectives, including medium-term external viability. Directors also emphasized that program design should adapt flexibly and respect countries’ policy choices, while at the same time striving to maintain evenhandedness. They recognized, however, that striking an appropriate balance could be a challenge. Directors called for greater clarity on structural conditionality in program documents, particularly the adequacy of progress in structural reforms subject to review-based conditionality.
Strengthening risk diagnostics
Directors supported developing an approach for better risk diagnostics across a range of dimensions and tailoring robustness tests according to this assessment. They encouraged continued close analysis of the fiscal adjustment/growth nexus in cases with narrowing policy space, particularly where debt sustainability is a concern and could jeopardize external stability. Directors emphasized the importance of assessing debt sustainability based on realistic macroeconomic assumptions that are cross-checked against past crisis cases, and in close consultation with country authorities and institutional partners. Directors also saw room for further strengthening the discussion of systemic and contagion risks in exceptional access programs, especially where these risks have an impact on the robustness of debt sustainability. They considered that priority should be given to refining analytical tools to evaluate such risks and to analyzing spillovers and macrofinancial linkages more systematically.
Emphasizing macro-social aspects
Directors welcomed the finding that social spending has been largely protected and, in the case of programs in low-income countries, has increased. They encouraged more analysis of the social impact of policy measures in programs, in close cooperation with country authorities and institutional partners. Directors also supported, where feasible and appropriate, inclusion of policy measures to mitigate adverse short-term impacts on the most vulnerable, particularly in programs with high risks and large fiscal adjustment. In implementing these proposals, Directors stressed the need to be mindful of the Fund’s core areas of responsibility and competencies, and encouraged staff to draw on the expertise of other institutions to the extent possible.
Enhancing ownership and transparency
Directors emphasized that ownership is critical to program success. They agreed that prior actions cannot substitute for program ownership and should continue to be applied with great care, although a few Directors regarded their role as important in signaling the authorities’ commitment. While recognizing that macro-critical issues must be addressed in program conditionality and that the Guidelines on Conditionality allow conditions reasonably within the direct or indirect control of the member country, some Directors expressed concern about the use of conditionality that is outside the executive branch’s control, which in their view could undermine ownership. Directors welcomed plans to improve outreach, communication, and transparency, and to conduct a broader discussion of alternative policy options and their feasibility at the design stage, in close consultation with authorities. They generally saw merit in developing standard processes to obtain external views in the internal Fund discussions of program design.
Directors agreed that more could be done to leverage Fund surveillance and technical assistance better in program design. They broadly supported proposals to increase contingency planning for potential programs under strict confidentiality, utilizing the risk assessment matrices undertaken during Article IV consultations wherever appropriate. A few Directors considered it important to draw a line between surveillance and financial assistance.
Improving partnerships with other institutions
Directors highlighted the importance of coordination and collaboration with other international institutions, and donors where relevant, to ensure adequate financing and coherent conditionality while avoiding duplication. Noting in particular the increasing complexity of recent programs for countries that are members of a currency union, given the presence of publicly stated common policies, Directors agreed that it would be desirable to maintain a standing dialogue with relevant regional institutions on policies and procedures, including on approaches for dealing with recurrent problems. Directors expressed wide-ranging views on recent high-access programs with euroarea countries—even though these programs were beyond the scope of the review and will be considered in more detail at a later stage—given their specific features and the role of the institutions at the European Union level, particularly in co-financing. Many Directors encouraged staff to draw preliminary lessons from these cases in a timely manner, including on coordination with Troika partners and the modalities of designing programs and conditionality.
Directors noted that implementing the recommendations made in this review will likely have some budgetary implications, with a few calling for strong efforts to remain within the current budget envelope. They looked forward to a fully-costed proposal in the context of budget discussions, taking into account today’s discussions and the findings of the staff working group on jobs and growth.
1 As the Euro Area programs were initiated toward the end of the review period, the coverage of these programs is limited. For example, the Greece program, as redesigned in the new extended arrangement, is not formally part of the sample covered. The assessments in the review, nevertheless, take into account the initial implications of subsequent developments in these programs for its conclusions.