## ppea2019012 ## Source details **Canonical URL:** [ppea2019012](https://www.imf.org/-/media/files/publications/pp/2019/ppea2019012.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2019/ppea2019012.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2019/ppea2019012.pdf.json) --- ### Overall assessment and program success - Sample: 133 Fund-supported programs ongoing between September 2011 and December 2017: - 70 PRGT programs (including under the SCF, ECF, and 11 PSIs); - 51 GRA programs (including under the SBA, EFF, and PLL); - 1 Policy Coordination Instrument (PCI). - Consolidated (unweighted) assessment (subset with end-dates prior to end-September 2018): - Three-quarters of Fund-supported programs were at least partially successful. - GRA outcomes: - One-third assessed as successful. - One-quarter as unsuccessful. - Key determinants of success: program completion (proxy for ownership), forecast realism, and a debt operation in countries with high debt vulnerabilities. - PRGT outcomes: - About 25 percent assessed as successful. - About 50 percent as partially successful. - About 25 percent as unsuccessful. - Success factors: program completion, absence of fragilities, and, to some extent, favorable commodity prices. *Prepared by IMF staff team as presented in the 2018 Review of Program Design and Conditionality.* ### Macroeconomic baselines and growth optimism - Main finding: - Program growth assumptions were often too optimistic. - Forecast performance: - On average, growth outturns disappointed by slightly more than one percentage point over the short run and about 1½ percentage points over the medium term. - Largest forecast errors occurred for political/economic transformation countries and commodity exporters. - Drivers of forecast errors (regression/decomposition): - Disappointing trading partner growth and lower-than-expected commodity prices explain around one-quarter of short-term growth forecast errors. - For commodity exporters, drop in commodity prices contributed about one-third of the short-term forecast error. - Underestimation of the growth impact of adjustment (public and private) accounts for another quarter. - Fiscal multipliers mentioned in only around 15 percent of program request documents. - A large unexplained residual (~50 percent) remained; growth accounting pointed to lower-than-envisaged TFP growth and, for other developing countries, lower-than-projected capital accumulation. - Growth-accounting and regression evidence (selected exact results): - Trading partner growth forecast error coefficient: 0.475*** (0.102). - Oil price forecast error coefficient: 2.357*** (0.648). - Commodity price forecast error coefficient: -3.761* (2.104). - Forecast of fiscal adjustment coefficient: 0.151*** (0.0494). - Observations in regression: 2,715; R-squared: 0.122. - Recommendations: - Increase scrutiny of macroeconomic baselines; better calibrate risks, discuss downside scenarios, and develop contingency plans. - Strengthen analysis of the impact of program policies on growth, including fiscal multipliers and pay-offs from structural reforms. ### Monetary conditionality and inflation outcomes - Implementation and design: - Monetary conditionality sample reduced from 133 to 82 programs (30 GRA; 52 PRGT) after dropping programs with no monetary policy QPCs. - Quantity-based conditionality dominated: ceilings on NDA and BRM continued to dominate, particularly in PRGT arrangements. - ICCs used only in inflation-targeting countries; MPCCs mostly in countries with evolving monetary regimes; MPCCs remained limited. - Outcomes: - Inflation declined on average and modestly undershot forecasts in most programs. - Implementation rates for BRM targets somewhat lower; large NDA misses for commodity exporters. - Programs employing ICCs saw the lowest forecast errors. - Recommendation: - Review experience with ICCs and MPCCs and consider reforms to modernize the review-based monetary policy conditionality framework. ### Fiscal adjustment, composition, and social spending - Fiscal strategy and realized outcomes: - Most programs targeted growth-friendly fiscal consolidation, but realized adjustment often of lower quality than envisaged. - Around a quarter of post-GFC programs planned base-broadening tax measures; another quarter envisaged rate-raising measures combined with elimination of exemptions. - In many cases capital spending fell short of initial targets; spending cuts often coincided with shortfalls in revenue and/or grants. - Over a third of programs, mostly in low-income countries, targeted a fiscal expansion to support growth and poverty reduction. - Social spending: - Social expenditure was generally protected as a share of GDP. - More than half of programs in the 2018 RoC sample included ITs or QPCs on social and other priority spending—more than double the share in the previous RoC period. - In the PRGT and GRA, around 90 and 20 percent of programs, respectively, included conditionality on social spending. - Performance against ITs on social spending: about 70 percent met across PRGT and GRA. - Quality-of-spending gap: - Only one-quarter of programs included an SC related to social issues (excluding pension reforms). - Most SBs focused on social sector reforms; few SBs targeted protecting capital spending or improving quality/effectiveness of social spending. - Recommendations: - Use more granular fiscal conditionality where relevant (e.g., floors on capital spending, revenue performance; ceilings on current expenditure). - Prioritize SBs on social sector issues or capital investment management to ensure higher-quality adjustment. - Increase focus on assessing the social and welfare impact of program policies; strengthen data quality; early engagement with authorities; draw on international development institutions. ### Public debt, debt sustainability, and debt operations - Debt sustainability evolution: - In one-third of Fund-supported programs, debt sustainability improved, particularly where initial vulnerabilities were high. - Staff probit model results (GRA): share assessed “unsustainable” fell from about 25 percent prior to approval to around 10 percent at end-program. - Projection errors and large deviations: - Around a quarter of programs overperformed debt projections, mainly due to fiscal deficit overperformance. - Programs in the interquartile range saw debt targets missed, on average, by around 5 percent of GDP. - Debt projection errors in the upper tail: - One-sixth of the sample had projection errors averaging 18 percent of GDP in GRA cases and 32 percent of GDP in PRGT cases. - In most high-error cases, programs went off track; only around 25 percent reached completion. - Drivers of large projection errors: - Fiscal deficit slippages, exchange rate depreciation, higher real interest rates, materialization of contingent liabilities and off-budget guarantees, governance/PFM weaknesses. - Debt operations and outcomes: - About 40 percent of high-debt-vulnerability programs involved debt operations (seven GRA, six PRGT cases). - Programs involving debt operations had a higher share of program success than those without. - Timely implementation of debt operations can be more beneficial than unrealistically large fiscal adjustments; delays limited potential benefits in large/systemic economies (examples cited). - Debt operation tradeoffs: - Pros: immediate debt service relief; lower required fiscal adjustment; possible smaller negative impact on growth. - Cons: temporary loss of market access, higher risk premiums on return, potential stresses on domestic financial system; restructuring vs. reprofiling differ in scale of implications. - Collateralized debt complicates seniority and burden-sharing. - Recommendations: - Sharpen DSA tools, include more realistic macro assumptions and better assessment of debt overhang. - Improve coverage and transparency of public debt and contingent liabilities. - Review the Fund’s Debt Limits Policy (DLP), including guidance on collateralized debt. ### Structural conditionality: scope, implementation, and lessons - Trends and implementation: - Number of structural conditions increased; conditionality remained largely focused on Fund core areas. - Implementation rates: QPCs ~90 percent; SCs implementation reached 80 percent including those “implemented with delay.” - Rise in delays for SCs may have contributed to forecast errors. - Financial sector and NPLs: - Post-GFC arrangements had the highest shares of financial-sector SCs: "One out of five SCs in post-GFC arrangements are on the financial sector." - NPLs rose markedly in some advanced cases: Cyprus, Greece, Ireland, and Portugal saw NPLs rise by an average of "10½ percentage points." - NPL resolution is slow; typical cycle exceeds duration of a Fund-supported program. - Design and sequencing: - PMRs and LMRs posed public support and ownership challenges; sectoral PMRs could strain parsimony but general framework PMRs tended to be easier to design and monitor. - Longer program engagement may be required for deep structural reforms; risks include exceeding political windows and reform fatigue. - TA and collaboration: - TA per program: "0.63" FTEs for other developing countries; "0.70" FTEs for commodity producers; "0.47 full-time equivalents (FTEs) per post-GFC program." - TA prioritized to countries with lower capacity; shared/non-core areas often relied on other development partners. - Recommendations: - Prioritize and sequence reforms by criticality; apply greater realism in implementation timetables and reform payoffs. - Continue building expertise in shared areas (e.g., labor and product market reforms); enhance collaboration with other institutions. - Consider NPL resolution and related conditionality at the outset where appropriate. - Consider longer Fund engagement (e.g., longer EFFs or ECFs) in specific cases with safeguards. ### Ownership, prior actions, SMPs, and completion rates - Ownership perceptions: - Around half of MCs/RRs rated ownership as "very high" or "high"; about one third as "moderate." - Three-quarters of respondents believed program design was sufficiently flexible to accommodate external shocks. - Program completion and ownership: - Program completion was an important driver of success. - For GRA programs, program completion increases chance of success by 49 percentage points (predictive probability). - For PRGT programs, program completion increases probability of success by about 40 percentage points. - Prior actions (PAs): - Small increase in PAs in GRA programs; no change in PRGT cases. - Regression analysis shows a negative association between number of PAs at arrangement approval and completion rates. - Interpretation: abundant PAs may indicate weak ownership; PAs are not a substitute for ownership. - Staff-Monitored Programs (SMPs): - 12 SMPs during the 2018 RoC period; one-half aimed at building a track record; two-thirds of these were successful and paved the way to a UCT successor (examples: Afghanistan 2015, Chad 2013, Iraq 2016, Madagascar 2015). - SMPs were underutilized to bring existing programs back on track during the 2018 period. - Recommendation: encourage voluntary use and de-stigmatize SMPs, particularly in the GRA. - Completion rates and trends: - Share of completed programs declined; proportion of programs that went off track mid-program roughly doubled during the period. - EFF and EFF-ECF arrangements (longer duration) had higher completion rates; nearly all PSIs were completed. ### Tailoring, uniformity of treatment (evenhandedness), and access - Tailoring and evenhandedness: - Conditionality generally tailored to country needs and program objectives, but insufficient differentiation for fragile and small states. - Perceptions: Fund-supported programs generally perceived to be evenhanded, though a significant minority expressed concerns about conditionality and access decisions. - MONA database shortcomings hinder cross-country comparisons; MONA revamp scheduled for completion in 2019 noted as critical. - Fragile states: - 26 fragile states engaged in 49 programs in the sample (3 GRA; 23 PRGT-eligible). - About half of fragile state programs did not complete all reviews and went off track; fragile states had lower success rates than other countries. - Suggestion: streamline SCs and focus on strict, prioritized, gradual structural agendas reflecting capacity constraints. - Small states: - Tailoring should better support ex-ante resilience building to natural disasters; program conditionality often focused on PFM, revenue administration, financial sector, SOE reform but sometimes omitted resilience measures. - Joint IMF-WB Climate Change Policy Assessments (CCPA) cited as informative for tailoring. - Access: - Significant differences in access at arrangement approval both within the GRA and between GRA and PRGT; average GRA access at approval was 3 percent of GDP higher than PRGT cases during the period. - Regression analysis explains almost 70 percent of the variation in access decisions. - In GRA: gross financing needs, capital account crisis, and the normal access limit important; EA dummy remains important. - In PRGT: strong links with PRGT access norms and size of adjustment. - Recommendations: - Revamp MONA and produce periodic standardized Board reports to improve transparency and comparability. - Improve tailoring of SCs for fragile and small states (streamline objectives for fragile states; resilience-building for small states). - Consider increasing PRGT access norms and limits, promote blending of GRA and PRGT resources, and increase flexibility of SCF arrangements subject to PRGT self-sustainability. ### Implementation, budgetary impact, and roadmap - Implementation approach: - Update Operational Guidance Note on Conditionality; deliver ongoing/planned workstreams (e.g., MAC DSA and DLP reviews, monetary policy conditionality review); possible follow-up Board paper on longer-duration EFFs if interest. - Most proposals included in medium-term budget; COM TA and exploring longer engagement would entail additional costs. - Budgetary impact: - Not expected to be significant overall; updating the Operational Guidance Note manageable. - Expected benefits and risks: - If implemented, proposals should reduce risks to lending operations and increase likelihood of program success through improvements in forecast realism, MAC DSA tools, debt transparency, tailoring, and contingency planning. - Longer programs could increase short-term risks to revolving use of Fund resources but could reduce frequency of successor arrangements over time if successful. *Italic: Source: ppea2019012 — excerpts from the IMF 2018 Review of Program Design and Conditionality.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Overall assessment and program success - The 2018 Review of Program Design and Conditionality (RoC) is the first comprehensive stocktaking of Fund lending operations since the global financial crisis (GFC), assessing program performance between September 2011 and end-2017. - Sample: 133 Fund-supported programs ongoing between September 2011 and December 2017: - 70 programs supported by the PRGT (including under the SCF, ECF, and 11 PSIs); - 51 programs supported by the GRA (including under the SBA, EFF, and PLL); - 1 Policy Coordination Instrument (PCI). - Measured against program objectives (resolve BoP problems, achieve external viability, foster growth for GRA; significant progress toward sustainable macroeconomic position for PRGT), three-quarters of programs achieved some success. - Program completion was an important driver of success in both the GRA and the PRGT. - In the challenging environment of protracted structural problems and a persistently weak global environment, Fund-supported programs: - catalyzed additional financing; - cushioned adjustment; - supported poverty reduction and growth. ### Macroeconomic baselines and growth optimism - Finding: Program growth assumptions were often too optimistic. - Contributing factors: global projection errors in the post-GFC environment, the underestimation of fiscal multipliers, and the overestimation of structural reform payoffs. - Programs with more realistic macroeconomic frameworks were often more successful. - Lesson / policy recommendation: Increase the scrutiny of macroeconomic baselines and improve contingency planning. ### Fiscal adjustment, composition, and social spending - Most programs targeted growth-friendly fiscal consolidation, but the realized adjustment was often of lower quality than envisaged. - Social spending was generally protected as a share of GDP. - Over a third of programs, mostly in low-income countries (LICs), targeted a fiscal expansion to support growth and poverty reduction. - Lesson / policy recommendation: Use more granular fiscal conditionality to improve the composition of adjustment, and increase focus on the quality of spending. ### Public debt and debt sustainability - Debt sustainability improved in most cases where initial debt vulnerabilities were high. - Programs involving debt restructuring tended to be more successful than those without. - Nevertheless, in several programs (most of which went off track), debt overshot projections by a significant margin due to: - disappointing growth, - unexpected exchange rate depreciation, - higher fiscal deficits, - other residual factors. - Lessons / policy recommendations: - Sharpen debt sustainability analysis (DSA) tools to inform staff bottom-line judgments. - Improve the coverage of public debt to provide a more accurate picture of debt vulnerabilities. - Review the Fund’s Debt Limits Policy (DLP), including guidance on collateralized debt. ### Structural conditionality: scope, implementation, and innovations - The number of structural conditions (SCs) increased, reflecting rising structural challenges. - Conditionality remained largely focused on the Fund’s core areas of responsibility, despite rising critical reform needs in shared (e.g., labor and product market reforms) and non-core areas. - Focus on gender inequality was an important innovation. - Implementation of SCs remained relatively strong but delays increased, possibly contributing to forecast errors. - Program implementation was generally well supported by capacity development and collaboration with other institutions. - Lessons / policy recommendations: - Better prioritize SCs. - Continue to build expertise in shared areas of responsibility. - Use more realistic implementation timetables. ### Ownership, communication, and program completion - Lower program completion rates suggest increasing ownership issues as politically-complex structural challenges intensified. - Strong ownership occurred where programs: - incorporated national reform plans, - had a robust communication strategy, - had strong implementation capacity. - Engagement with Civil Society Organizations (CSOs) increased but room for improvement remains. - Lesson / policy recommendation: Apply identified good practices in reform design and implementation; improve communication to support broad public buy-in; consider greater use of Staff-Monitored Programs (SMPs) to address off-track programs. ### Tailoring, uniformity of treatment (evenhandedness), and access - Fund-supported programs were generally perceived to be evenhanded, though some stakeholders raised concerns about conditionality and access decisions. - Conditionality was generally well tailored to country needs and program objectives, but there was insufficient differentiation for fragile and small states. - Differences in access within and between the GRA and the PRGT are explained mostly by the Fund’s lending frameworks. - Lessons / policy recommendations: - Improve data dissemination on Fund-supported programs to facilitate comparisons. - Streamline SCs in fragile states and tailor SCs to resilience building in small states. - Consider increasing PRGT access limits and blending possibilities for LICs. ### Tradeoffs in program design and overarching recommendations - Important tradeoffs to re-assess: realism versus ambition; granularity versus flexibility; gradualism versus speed; parsimony versus more conditionality; in some cases, debt operations versus fiscal adjustment. - The RoC suggests moving toward: - more realism, - more granularity, - more gradualism, - more parsimony in programs, - and sharper DSAs to mitigate any bias in judgment and ensure more balanced consideration of debt operations, where warranted. - The application of these principles may justify longer Fund program engagement in some cases. - The RoC recommendations would involve limited additional costs but would require a further change in culture and approach, consistent with the IMF’s commitment to learning. *Prepared by a staff team led by Chad Steinberg and comprising Jochen Andritzky (team lead), Anna Bordon (team lead), Lone Christiansen (team lead), Balazs Csonto, Mai Farid, Souvik Gupta, Alina Iancu, Carla Intal, Kareem Ismail, Jaden Kim, Fei Liu, Wes McGrew, Paulomi Mehta, Jeta Menkulasi, Johan Molin, David Moore (team lead), Kenji Moriyama (team lead), Zsuzsa Munkacsi, Neree Noumon, Michael Perks (team lead), Adina Popescu, Faezeh Raei, Belen Sbrancia, Bahrom Shukurov, Haimanot Teferra, Rima Turk, Ke Wang, Atticus Weller, Jessie Yang, and Yang Yang. Administrative assistance provided by Merceditas San Pedro-Pribram (SPR). The work was performed under the supervision of Vitaliy Kramarenko and under the overall guidance of Petya Koeva Brooks.* ### 7. These objectives are operationalized differently under the General Resources Account ### 7. These objectives are operationalized differently under the General Resources Account (GRA) and the Poverty Reduction and Growth Trust (PRGT) ### Differences in objectives and operationalization: GRA versus PRGT - GRA programs are designed to resolve the member’s BoP problem during the program period.4 - PRGT programs (primarily the Extended Credit Facility, ECF) aim to help PRGT-eligible members with protracted BoP problems implement their economic programs and make significant progress toward a stable and sustainable macroeconomic position; they put a greater emphasis on growth and poverty reduction. - PRGT programs tend to be more catalytic: outside official support is larger than Fund support, and often entail less adjustment because financing is used to support growth and poverty reduction objectives.5 ### Solving BoP problems and successor engagements - Post-program engagement is used as a proxy for whether a member’s BoP problems are resolved during a program. - Successor program engagements are defined as a Fund-supported program that follows another Fund financial arrangement within two years. - In the GRA: - Successor programs of a signaling nature include Policy Coordination Instruments (PCIs)6 and arrangements treated as fully precautionary or involving low access.7 - Such signaling successor programs indicate the absence of an actual or large BoP need requiring Fund financing; drawing successor arrangements indicate the presence of a persistent BoP need.8 - In the 2018 RoC sample: there was an increase in the number of GRA arrangements with successor programs; 12 out of 19 were followed by programs of a signaling nature, and 7 were followed by drawing arrangements (which tended to be Extended Fund Facility (EFF) arrangements), highlighting protracted and structural BoP needs.9 - 20 GRA programs were not followed by any successor arrangement, and 13 are still ongoing. - In the PRGT: - Protracted BoP problems mean repeated use of ECF arrangements is expected. - Two-thirds of PRGT-eligible countries had at least one Fund arrangement during 2010–17; about one-half maintained program engagement with the Fund during at least six of the last eight years. - Program performance remained unchanged or improved in 77 percent of successor programs (relative to the original program). ### External viability and economic growth: indicators and outcomes - The RoC examines common flow and stock indicators across GRA and PRGT: (i) current account, including growth of import and export volumes; (ii) international reserves; (iii) growth; (iv) fiscal balance; (v) public debt and market access; and (vi) the stock of non-performing loans (NPLs) (Figure 4). - Key findings: - Adjustment in flows (current account and fiscal balance) proceeded broadly as planned; in most cases, reserve targets were met or nearly reached projected levels. - Flow improvements did not translate into stock adjustments: growth disappointed and anticipated public and private sector balance sheet adjustment—proxied by public debt and NPLs—fell short of expectations and outcomes in the 2011 RoC period. - Composition of adjustment weighed on growth and negatively impacted balance sheet repair. - External adjustment often out-performed expectations, in some cases reflecting significant import compression rather than export growth. - Import compression reflected disappointing growth outcomes; weak average export growth also reflected difficulties under fixed exchange rate regimes and currency unions. During the 2018 sample period, two-thirds of GRA program countries had non-floating exchange rates. - Fiscal adjustment targets were often met but through less growth-friendly measures than initially planned (Section III.C). ### Implementation and completion rates - Implementation rates: - Implementation rate of quantitative performance criteria (QPCs) was around 90 percent. - Implementation of structural conditions (SCs) reached 80 percent, including those “implemented with delay.”10 - This performance was broadly in line with the 2011 RoC sample. - Caveat on indicators: - There was a significant increase in the number of programs going off track, both quickly and by mid-program, not captured by the “assessed” implementation rates—potentially pointing to weaker ownership (Figure 6 and Section V).11,12 ### Bottom-line assessment: program success frameworks and results - Two separate frameworks were developed to assess program success—one for GRA, one for PRGT—each classifying programs as “successful,” “partially successful,” or “unsuccessful.” - GRA assessment criteria: - Measures include nature of post-program Fund engagement and evolution of vulnerability indicators as measures of resolving a BoP problem and achieving medium-term viability.13 - PRGT assessment criteria: - Indicators tailored to LIC objectives, including evolution of external debt vulnerabilities, social spending, capital expenditure, revenue mobilization, real GDP growth, and inflation. - Consolidated (unweighted) assessment (subset of programs with end-dates prior to end-September 2018): - Three-quarters of Fund-supported programs were at least partially successful.14 - GRA outcomes: - One-third of GRA programs are assessed as successful. - One-quarter as unsuccessful. - The remainder as partially successful. - Successful arrangements typically both reduced vulnerabilities and eliminated or significantly reduced the BoP need. - Partially successful programs accomplished one of these two objectives. - Unsuccessful arrangements typically saw persistence or deterioration of vulnerabilities and were often followed by a drawing successor arrangement. - Key determinants of success in the sample: program completion (proxy for ownership), forecast realism (Section III.A), and a debt operation in countries with high debt vulnerabilities.15 - PRGT outcomes: - About 25 percent of PRGT programs are assessed as successful. - About 50 percent as partially successful. - About 25 percent as unsuccessful. - Successful PRGT arrangements avoided a substantial deterioration in DSA ratings and achieved program targets in at least three of the five core indicators. - Partially successful PRGT programs avoided substantial deterioration in DSA ratings and achieved program targets in one or two of the core indicators. - Unsuccessful programs had DSA ratings that substantially deteriorated or remained in distress and/or met none of the program targets in the five core indicators. - Success factors in the sample include program completion (proxy for ownership), an absence of fragilities, and, to some extent, favorable commodity prices.14 ### Program success across analytical groups - Post-GFC programs fared better than commodity exporters and other developing countries. - Political/economic transformation cases had both the highest success and failure rates of all groups. *Italic: Source: ppea2019012 - 7. These objectives are operationalized differently under the General Resources Account (excerpt).* ### 15. Program success during the period was constrained by the scale of the challenges. ### 15. Program success during the period was constrained by the scale of the challenges. ### MACROECONOMIC POLICY CONDITIONALITY AND PROGRAM DESIGN — A. Growth Optimism - Overall finding: - Program success was constrained by the scale of challenges; programs may have been “risky” by design with overly optimistic baseline assumptions. - Success is relative: Fund-supported programs “performed reasonably well given the circumstances and the degree of program ambition,” and repairing the global economy after the GFC may have required more time. - Growth forecast performance: - In the 2011 RoC sample, forecasts were broadly accurate or only mildly optimistic for both program and surveillance countries. - In the 2018 RoC sample, there was a general shift toward growth optimism. - On average, growth outturns disappointed by slightly more than one percentage point over the short run and about 1½ percentage points over the medium term. - Largest forecast errors occurred for political/economic transformation countries and commodity exporters. - Program design and risk assessment: - Two-thirds of program request documents noted that macroeconomic risks were slanted to the downside. - Around 15 percent assessed risks to be broadly balanced. - Very few cases pointed to a favorable balance of risks. - Conclusion: a large majority of programs adopted an optimistic baseline; optimistic growth assumptions understated financing and adjustment required to achieve program objectives. - Drivers of forecast errors (regression and decomposition results): - Disappointing trading partner growth and lower-than-expected commodity prices explain around one-quarter of short-term growth forecast errors. - For commodity exporters, the sharp drop in commodity prices contributed about one-third of the short-term forecast error. - Staff underestimated the growth impact of adjustment (public and private), accounting for another quarter of growth projection errors. - Fiscal multipliers were only mentioned in around 15 percent of program request documents. - A large unexplained residual (about 50 percent) remained in growth forecast errors; growth accounting pointed to: - Lower-than-envisaged Total Factor Productivity (TFP) growth as a major contributor for most groups. - For other developing countries, lower-than-projected capital accumulation was an important factor. - Idiosyncratic factors (e.g., natural disasters, political transitions, conflict) also contributed in specific cases. - Data limitations in some developing countries hampered analysis and projections. - Recommendations: - Increase scrutiny of the realism of program baselines. Better calibrate risks, discuss downside scenarios, and develop contingency plans. - Strengthen the discussion and analysis of the impact of program policies on growth, including fiscal multipliers and the pay-offs from structural reforms. ### MACROECONOMIC POLICY CONDITIONALITY AND PROGRAM DESIGN — B. Monetary Conditionality - Inflation outcomes and forecast errors: - During the 2018 RoC period, most Fund-supported programs saw inflation decline and modestly undershoot forecasts, driven in large part by global trends. - On average, inflation declined in both GRA- and PRGT-supported programs and undershot projections in most programs. - Forecast errors were relatively small compared with the previous RoC period, and consistent with errors in surveillance countries. - Design and prevalence of monetary conditionality: - The 2018 RoC monetary conditionality sample: 133 Fund-supported arrangements reduced to 82 programs (30 GRA; 52 PRGT) after dropping programs with no monetary policy QPCs. - Quantity-based conditionality dominated program design: - Ceilings on monetary aggregates—net domestic assets (NDA) and base/reserve money (BRM)—continued to dominate, particularly in PRGT arrangements. - Inflation consultation clauses (ICCs) were used only in inflation-targeting countries. - Monetary Policy Consultation Clauses (MPCCs) were mostly adopted in countries with evolving monetary regimes. - ICCs were introduced in 1999. MPCCs were introduced in 2014. - Use of MPCCs remained limited despite more countries evolving towards more flexible operational targets and forward-looking policies. - Implementation and outcomes: - Observance of monetary targets was high across both GRA and PRGT programs, particularly for review-based conditionality. - Implementation rates for BRM targets were somewhat lower; there were large NDA misses for commodity exporters. - Inflation forecast errors were similar across all forms of conditionality, likely helped by global trends. - Programs employing ICCs saw the lowest forecast errors, possibly reflecting stronger initial capacity to implement monetary policy. - There were cases of significant inflation overshooting driven by major shocks (military conflict, supply-side shocks, large depreciations, embezzlement schemes) rather than failure to implement conditionality (examples cited in source). - Recommendation: - Review experience with ICCs and MPCCs and consider reforms to modernize the review-based monetary policy conditionality framework. ### MACROECONOMIC POLICY CONDITIONALITY AND PROGRAM DESIGN — C. Quality of Fiscal Adjustment - Fiscal strategy and typical measures: - Fiscal plans aimed to mitigate the contractionary impact of consolidation on growth, particularly in post-GFC and political/economic transformation programs. - Revenue measures typically focused on broadening the tax base, reducing distortions, and improving revenue administration. - Around a quarter of post-GFC programs planned base-broadening tax measures; another quarter envisaged rate-raising measures combined with elimination of exemptions. - Most developing country programs focused on domestic revenue mobilization and reforms to tax and customs administrations, and raising or introducing new taxes, particularly VAT. - Spending measures centered on improving efficiency, including reductions in current subsidy and wage bill spending, to free resources for growth-enhancing public investment, while protecting priority health and education spending. - Realized outcomes and implementation challenges: - The realized (ex post) fiscal adjustment was often of lower quality than envisaged. - In other developing countries, capital spending often fell short of initial targets; spending cuts often coincided with shortfalls in revenue and/or grants. - Revenue mobilization tended to underperform, often due to inconsistent institutional development and insufficient political will. - Where revenues overperformed (e.g., Mauritania, 2010 ECF), they were used to support infrastructure investment. - In post-GFC countries, implementation of current expenditure measures generally lagged; composition of adjustment shifted towards revenues and quicker capital expenditure cuts. - For commodity exporters, the collapse in oil prices resulted in a much larger-than-projected decline in revenue, leading to capital expenditure cuts. - Social spending: - Social expenditure was generally protected in Fund-supported programs. - More than half of programs in the 2018 RoC sample included indicative targets (ITs) or QPCs on social and other priority spending—more than double the share in the previous RoC period. - In the PRGT and GRA, around 90 and 20 percent of programs, respectively, included conditionality on social spending. - Performance against ITs on social spending was broadly satisfactory, with about 70 percent met across the PRGT and GRA. - Where ITs were not met, technical or administrative challenges and weak absorptive capacity were often cited (examples cited in source). - Social assistance spending and health and education spending were common IT elements and were broadly maintained as a share of GDP and expenditure. - For PRGT countries, real expenditure growth in these categories remained positive, on average, even under fiscal consolidation programs. - Over the longer run, protecting social spending should help support better social outcomes. *Source: IMF staff analysis in the 2018 Review of Conditionality chapter titled “Program success during the period was constrained by the scale of the challenges.”* ### 27. Nevertheless, there was limited focus on the quality of social spending, and on social ### ppea2019012 - 27. Nevertheless, there was limited focus on the quality of social spending, and on social ### Quality of social spending and social protection - Case studies indicate broad coverage of social issues in program Memoranda of Economic and Financial Policies (MEFPs), but only one-quarter of programs included a Structural Condition (SC) related to social issues (excluding pension reforms). - Most Staff Board (SB) conditions focused on social sector reforms (examples: cash transfer programs or education expenditure frameworks), with few SBs focused on: - protecting capital spending, or - improving the quality or effectiveness of social spending. - SCs on social sector issues often aimed at mitigating the impact of energy subsidy reform on the poor and vulnerable (example: Ukraine, 2014 SBA and 2015 EFF). - Authorities’ survey responses indicate scope for significant improvement in assessing the social and welfare impact of program policies. - Strengthening data quality remains key to enhancing conditionality in these areas. - The 37 program request documents in the 2018 sample that mentioned energy subsidy reform also mentioned mitigating measures to protect the poor. - Section I of the background supplement includes details of the 2018 RoC survey results on social protection and inequality issues. ### Empirical context and measurement challenges - Identifying the impact of IMF-supported programs on social spending is econometrically difficult given sometimes-large changes in key macro variables during crisis episodes. - Findings from empirical studies are mixed; some studies point to an association between IMF-supported programs and the protection of social spending (Clements, Gupta, and Nozaki, 2013; and IMF, 2017a). - The 2011 RoC noted a positive relationship in developing countries between social spending and selected social indicators such as gross secondary school enrollment rates and mortality rates for children younger than five years old. - Pension reforms were excluded from the RoC analysis, given they do not always focus on strengthening the adequacy of pension systems. The process for IMF engagement on social spending, including spending on pensions, will be discussed in the forthcoming Board paper A Strategy for IMF Engagement on Social Spending. ### Recommendations on fiscal conditionality and social spending - Use more granular fiscal conditionality where relevant for meeting program objectives, for example: - Performance Criteria (PCs) or Indicative Targets (ITs) such as a floor on capital spending or revenue performance, or ceiling on current expenditure. - Prioritize SBs on social sector issues or capital investment management to help ensure higher-quality fiscal adjustment, including higher levels of public investment. - Caveats to granularity: - More granularity could jeopardize parsimony, reduce flexibility and potentially have adverse implications for ownership. - Importance of a case-by-case approach and streamlining conditionality in other areas. - Increase focus on the quality of social spending and the impact of program policies on poor and vulnerable groups by: - Early engagement with authorities on these topics. - Continued development of Fund policy advice on sustainable social spending. - Drawing on the expertise of international development institutions, including to strengthen data quality. ### Public debt: vulnerabilities and evolution - Public debt vulnerabilities were a pervasive issue for Fund-supported programs during the period. - Advanced economies (post-GFC) faced high debt levels as a legacy of the GFC, including materialization of contingent liabilities and lower potential GDP growth. - Initial debt levels in emerging markets (EMs) and low-income countries (LICs) were much lower; LICs benefited from debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. - Many LICs experienced a large and rapid accumulation of debt during the period, driven in part by easy global financing (especially new non-concessional lending) and accelerated by the 2014 commodity price shock in commodity-producing countries. ### Evolution of public debt sustainability in programs - In one-third of Fund-supported programs, debt sustainability improved, particularly where initial vulnerabilities were high. - GRA programs: the staff statistical probit model (which does not incorporate judgment) showed a significant improvement in sustainability: - The share of programs where debt was assessed as “unsustainable” by this model declined from about 25 percent prior to approval of Fund arrangements to around 10 percent at end-program. - PRGT (LIC DSA): most programs involving countries at “high risk” or in “debt distress” (prior to approval) saw a reduction in the risk rating, although this was somewhat offset by deterioration in other PRGT cases. - Analysis of debt projection errors shows around a quarter of GRA and PRGT programs overperformed initial projections, mainly due to fiscal deficit overperformance. - In roughly one-half of arrangements, the assessment of debt sustainability did not change; in most of these cases, debt was already sustainable (GRA) or at moderate or low risk (PRGT). - Programs in the interquartile range saw debt targets missed, on average, by around 5 percent of GDP. - Main contributors to overshooting: fiscal deficit slippages, exchange rate depreciation and higher real interest rates. ### Cases with significant deterioration and drivers of large projection errors - Debt sustainability deteriorated in the upper quartile of programs; most of these went off track. - Debt projection errors in one-sixth of the sample averaged: - 18 percent of GDP in GRA cases, and - 32 percent of GDP in PRGT cases. - In the majority of these high-error cases, programs went off track, with only around 25 percent reaching completion. - GRA leading causes of deterioration included: - Fiscal slippages (examples: Serbia, 2011 SBA; Tunisia, 2016 EFF), - Lower growth (examples: Greece, 2010 SBA; Portugal, 2011 EFF), - Bank recapitalization costs (Serbia, 2011 SBA), - Assumption of SOE liabilities (Portugal, 2011 EFF), - Policy slippages (North Macedonia, 2011 PCL), - Conflict and security issues with fiscal loosening and disappointing growth (Tunisia, 2013 SBA; Ukraine, 2014 SBA), - Shocks to key trading partners (Armenia, 2014 EFF; Georgia, 2014 SBA). - PRGT drivers of downgrades included: - Conflict (Central African Republic, 2012 ECF; Yemen, 2014 ECF), - 2014 commodity price shock and natural disasters (Chad, 2014 ECF; Haiti, 2015 ECF), - Uncovering of previously undisclosed debt (Mozambique, 2013 PSI). - Recurring themes in countries with very large projection errors: policy slippages, contingent liabilities and off-budget guarantees, governance/public financial management (PFM) weaknesses. ### Public debt operations and lending policy - A clear judgment on debt sustainability is crucial for program design: - The Fund may only lend if debt is assessed to be sustainable in the medium term under the GRA and PRGT. - If debt is not sustainable, the Fund is precluded from lending unless the member takes steps to restore debt sustainability, including through either debt restructuring or the provision of concessional financing. - Under exceptional GRA access: - Public debt should be sustainable with high probability, or - If debt is sustainable but not with high probability, the Fund may lend if financing provided by sources other than the Fund improves debt sustainability and enhances safeguards to Fund resources. - Under normal access with uncertainty on debt sustainability, the Fund may rely on the catalytic approach or the member may undertake some form of debt operation. - Under exceptional PRGT access: - Countries should have a comparatively strong adjustment program and ability to repay the Fund. - Countries in debt distress or at high risk should restructure their debt or obtain debt relief to restore debt sustainability by upgrading the debt distress rating to at least moderate. - The recently reformed LIC DSF provides strong analytical underpinnings for assessing debt sustainability. - The ongoing review of the MAC DSA framework is exploring improvements to analytical tools to inform staff’s bottom-line judgment on debt sustainability. *IMF — Review of Conditionality (excerpt).* ### 33. Public debt operations tended to be associated with greater program success, but ### 33. Public debt operations tended to be associated with greater program success, but ### Debt operations and program success - Analysis focused on cases where debt vulnerabilities were high before approval of Fund arrangements (Figure 14). - In the GRA sample, 17 cases were classified as debt “unsustainable” or “sustainable but not with high probability” at program approval, based on the probit model referenced. - In the PRGT sample, 16 countries had LIC-DSA ratings either at “high risk” or in “debt distress” at program approval. - About 40 percent of these programs involved debt operations: seven GRA-supported programs and six PRGT-supported programs. - Evidence suggests programs involving debt operations saw a higher share of program success than those that did not involve debt operations. - Examples of relatively successful debt operations despite delays in small island states: Seychelles, 2009 EFF; St. Kitts and Nevis, 2011 SBA; Grenada, 2014 ECF; Jamaica, 2013 EFF. - In contrast, delays in debt operations in larger and more systemic economies limited benefits (Greece, 2012 EFF; Ukraine, 2015 EFF). ### Judgment and timing challenges - In some cases, there was reluctance to recognize that debt may not have been sustainable; judgment appeared tilted toward large fiscal adjustments and optimistic macro-frameworks in at least two high-debt cases: Greece (2010 SBA) and Ukraine (2014 SBA). - Related-EPEs challenged the initial debt-sustainability judgments in these cases (Greece: initially judged sustainable; Ukraine: initially judged sustainable with high probability). - Timely implementation of debt operations can be more beneficial than the alternative of (unrealistically) large fiscal adjustments; delays can limit potential benefits, particularly in large or systemic economies. ### Pros, cons, and design considerations of public debt operations - Pros: - Provide immediate debt service relief. - Curtail the debt-stabilizing primary balance, reducing the required fiscal adjustment. - Can minimize negative impact on growth and facilitate recovery of competitiveness where debt ratios are sensitive to the real effective exchange rate. - Cons: - Result in loss (at least temporarily) of market access and higher risk premiums once market access is regained. - Can weaken balance sheets of the domestic financial system and generate spillovers to other countries. - Scale of implications depends on type of operation: restructuring (nominal reduction in principal) tends to have larger implications than reprofiling (e.g., maturity extension). - Implementation and design lessons: - Timely implementation and specific design features can enhance benefits (example cited: Jamaica, 2013 EFF). - Debt operations need case-by-case consideration with comprehensive cost-benefit analysis. - Restructuring or reprofiling requires distributing the burden among stakeholders to best preserve or restore financial stability and economic growth. - Collateralized debt: - Presence of collateralized debt complicates seniority of claims and burden-sharing, creating uncertainty about feasibility of debt operations. - Staff is examining possible guidance on collateralized borrowing in Fund-supported programs in the context of the forthcoming Review of the Fund’s DLP. ### PRGT case studies — drivers of large debt projection errors and design lessons - Sample ranged from programs that went off track quickly (The Gambia, 2012 ECF; São Tomé and Príncipe, 2012 ECF) to those that continued to completion (Malawi, 2012 ECF; Niger, 2012 ECF; Rwanda, 2013 PSI). - Key findings: - Underlying drivers of residuals in projection errors were only partially identified. - Overoptimistic program baselines were a key factor behind projection errors in some cases. - Materialization of contingent liabilities and off-budget guarantees were recurring themes. - Conditionality evolved in response to shocks, but some programs repeatedly accommodated fiscal slippages and higher debt limits relative to revised targets. ### Structural implications for program design and conditionality - Debt sustainability and related program design issues are being considered in ongoing Fund workstreams, including the MAC DSA Review, which is developing methodologies to better assess debt overhang and the realism of program assumptions. - The Fund has flexibility to call for debt reprofiling if appropriate, especially when concessional official financing is insufficient to restore debt sustainability and meet program financing assurances. - Debt operations should be considered alongside distribution of adjustment burdens and preservation of financial stability and growth. ### Recommendations (as stated) - Sharpen debt sustainability tools, including more realistic macroeconomic assumptions and better assessments of debt overhang, to help mitigate any bias in judgment on debt sustainability and ensure more balanced consideration of debt operations, where applicable. - Consider structural conditions on improving governance arrangements for the contracting of debt and ensuring appropriate monitoring of obligations, including closer scrutiny of contingent liabilities (e.g., SOE liabilities and off-budget guarantees). - Review the Fund’s Debt Limits Policy, including examining possible guidance on collateralized debt in Fund programs. *International Monetary Fund — Review of Conditionality (excerpts from the 2018 RoC chapter on public debt operations and related findings).* ### 47. Implementation in some key structural areas proved particularly challenging: ### ppea2019012 - 47. Implementation in some key structural areas proved particularly challenging: ### Implementation challenges: LMR and PMR - Gaining public support and national ownership for LMR and PMR was difficult given "the short-term costs and the delayed benefits, and the lack of space for macro policy support to offset these costs or frontload the benefits." - In Greece and Portugal, some LMRs were reversed even before program-end. - PMRs tended to be more granular in some countries (e.g., sectoral liberalization in Greece), straining the principles of criticality and parsimony. - PMRs aimed at general frameworks over a wide range of sectors (investment codes, competition law) or at strategic sectors (mining code) tended to be more successful and easier to design and monitor (e.g., Portugal) than reforms aimed at fixing distortions in specific markets. ### Financial sector reforms (Box 1) - Post-GFC arrangements saw the highest shares of SCs on the financial sector: "One out of five SCs in post-GFC arrangements are on the financial sector." - Financial sector conditions included bank recapitalization, resolution and privatization, strengthening of supervision and regulation, and NPL resolution. - Despite stabilizing the financial sector, programs could not prevent the build-up of large NPLs that proved difficult to resolve: - Cyprus, Greece, Ireland, and Portugal saw NPLs rise by an average of "10½ percentage points," despite financial stability being a program priority. - NPLs started declining only after the end of the program for Ireland and Portugal but "remained elevated until now for Cyprus and Greece." - Factors explaining slow NPL resolution: - "NPLs evolve slowly, and a typical cycle exceeds the duration of a Fund-supported program." - "Overoptimistic macro and asset recovery forecasts lead to an underestimation of the extent of the NPL problem." - "Stabilization of the banking system is a prerequisite for NPL resolution, but often means that the issue is only tackled midway into the program." - "Strategies to resolve NPLs require complex reforms that take time to design, legislate, and implement." - "There are tradeoffs between the speed of NPL reduction and economic outcomes." - Financial sector conditionality in LICs focused on building financial stability infrastructure, with primary SC focus on banking supervision, anti-money laundering, or basic regulation, supported by TA. ### Program duration, sequencing, and engagement - Given implementation challenges, "a longer period of program engagement could be required." - Survey responses: "around one-quarter of Mission Chiefs/Resident Representatives (MCs/RRs) and Executive Directors (EDs) thought that program duration was insufficient to accomplish program objectives," while country authorities (CAUTs) noted successor programs often provided necessary policy support. - A well-paced reform agenda can prevent overstraining implementation capacity and smooth adjustment, since "some reforms weigh on growth in the short run, while paying off only later." - Risks of longer timetables: may "exceed the political window of opportunity and trigger reform fatigue." - Possible program design responses: - Drawing programs could focus on macroeconomic stabilization, with follow-up PCIs used to support medium-term structural agendas. - Serbia cited as an example of extended Fund engagement facilitating ambitious reform design and execution. - In specific cases (e.g., after a commodity price collapse in a country with limited capacity), longer Fund arrangements ("e.g., five years") could improve implementation by allowing a more realistic pace of deeper structural reforms (e.g., to diversify the economy). - Safeguards: "The risk of protracted periods of off-track programs would have to be managed carefully, with appropriate safeguards, to help ensure the revolving nature of Fund resources." - Institutional note: A "defunct arrangement" feature was introduced for the ECF in 2013, allowing termination of arrangements if no review has been completed for "18 months." Automatic termination of GRA arrangements is inconsistent with the principle of assurances that prevents the cancelation or reduction in access during the period specified in the arrangement. ### Technical assistance (TA) and collaboration - TA deployment was broadly consistent with program priorities and country needs. - TA inputs per program: - "0.63" FTEs per program for other developing countries, - "0.70" FTEs per program for commodity producers, - compared to "0.47 full-time equivalents (FTEs) per post-GFC program." - Prioritization of TA to countries with lower capacity—rather than to those with the highest number of SCs—explains the relatively weak link between TA and the number of SCs. - TA focused on core areas of Fund responsibility and was broadly aligned with the topical distribution of SCs in core areas. - Shared conditions on pensions and civil service and SOE reforms received very little Fund TA; teams relied on other development partners such as the World Bank. - Surveys indicate generally effective Fund collaboration with other institutions; MCs and RRs reported most teams collaborated effectively with the World Bank and other development partners, particularly in shared and non-core areas (examples: Tunisia, 2013 SBA; Serbia, 2015 SBA). - In some cases greater collaboration was desirable—e.g., in Greece where issues on the division of labor emerged. ### Recommendations - Identify, prioritize, and sequence reforms based on criticality, drawing on structural gaps from surveillance and TA to ensure an integrated approach. - Continue to build expertise in critical shared areas of responsibility (e.g., labor and product market reforms), and enhance collaboration with other institutions that have expertise in non-core areas. - Consider NPL resolution and related conditionality at the outset, where appropriate, recognizing: - the tradeoff between the speed of NPL resolution and economic outcomes, - the complexity of the process, - and the time needed to successfully complete reforms. - Apply greater realism in implementation timetables and estimated reforms payoffs, while considering longer Fund engagement to support structural reform agendas, including: - greater use of successor PCIs, - and, in some cases, longer duration EFF arrangements and longer initial duration ECF arrangements ("i.e., five years"), with appropriate safeguards to preserve the revolving nature of Fund resources. ### Ownership, surveys, and completion rates - Ownership is critical but difficult to measure; RoC analysis examines ownership along several dimensions using surveys, program completion rates, and case study lessons. - Survey evidence: - "Around half of MCs and RRs rated ownership as 'very high' or 'high,' while a third rated ownership as 'moderate.'" - MCs, RRs, EDs, and CAUTs overwhelmingly agreed that program quantitative performance criteria targeted appropriate macroeconomic variables and that structural reforms were consistent with national reform priorities. - A majority agreed program objectives were consistent with domestic economic and social priorities, though results were less positive than in 2011. - "Three-quarters of all respondents believed that program design was sufficiently flexible to accommodate external shocks." - Fund outreach with Civil Society Organizations (CSOs) improved but remained limited: - Improved outreach noted in successful programs (e.g., Jamaica, 2013 EFF; Rwanda, 2013 PSI and 2016 SCF). - A significant share of MCs/RRs, CAUTs, and EDs disagreed that CSOs were actively involved in program design and implementation discussions. - Around "a quarter of MCs and RRs thought the authorities had not communicated the benefits of the Fund-supported program to civil society." - Completion rates: - While conditionality implementation rates remained relatively strong, completion rates deteriorated; "the share of completed programs declined, and the proportion of programs that went off track mid-program roughly doubled during the period." - Completion rates varied slightly across the four analytical groups and more significantly across types of programs. - EFF and EFF-ECF arrangements, generally longer in duration than SBAs, had higher completion rates. - Nearly all PSIs were completed, possibly reflecting the fixed review schedule. - Perceptions of factors contributing to unsatisfactory implementation: - MCs/RRs pointed to weak capacity and lack of ownership. - CAUTs focused on unexpected developments or exogenous shocks. - Regression analysis suggests better institutional capacity was a crucial factor for program completion; political developments and external shocks were insignificant and only weakly associated with completion rates, respectively. *Source: ppea2019012 — selected pages on implementation challenges, financial sector reforms, TA, collaboration, recommendations, ownership, and completion rates.* ### 55. Prior actions (PAs) and low completion rates tend to go hand-in-hand. There was a ### Prior actions (PAs) and low completion rates tend to go hand-in-hand. ### Prior actions and completion rates - There was a small increase in PAs in GRA-supported programs and no change in PRGT cases. - Across analytical groups, political/economic transformation cases—facing difficult and urgent reforms, coupled with the lack of a track record—saw the highest number of PAs. - Evidence suggests that while PAs may have been effective in implementing a specific measure, their abundant use did not translate into higher program completion rates, but rather the opposite (Figure 18). - Regression analysis points to a negative association between PAs at arrangement approval and completion rates. - Interpretation: many PAs may indicate weak ownership; PAs are not a substitute for ownership. - Conclusion: More guidance may be needed on the application of PAs. ### Staff-Monitored Programs (SMPs) - Observation: More use of SMPs may help address the issue of off-track Fund-supported programs, particularly in the GRA. - During the 2018 RoC sample period, there were 12 SMPs: one-half were aimed at building a track record, and two-thirds of these were successful and paved the way to a Upper Credit Tranche (UCT) successor arrangement (Afghanistan 2015, Chad 2013, Iraq 2016, Madagascar 2015).62 - During this period, SMPs were not used to bring existing programs back on track, despite some notable successes in this regard during the 2011 RoC period, including in GRA countries (Djibouti 2004, Kosovo 2011). - SMPs could be a useful (currently underutilized) option for helping manage extended program interruptions, which are often associated with weak ownership and program performance. - Authorities could request an SMP to ensure monitoring of macroeconomic policies, while they build political support for critical reforms, whose delay has interrupted the program. - SMP-related documents would also provide information to the Executive Board and the public on discussions in the context of off-track programs. - There is a need to de-stigmatize SMPs. ### Case Studies: Lessons - Some important lessons stand out from case studies that cover a varying degree of ownership.63 - Key findings include: - National reform plans: - Programs that benefit from well-designed national reform plans tend to have higher completion rates. - In high-ownership cases among both GRA- and PRGT-supported programs, design (and associated discussions in staff reports) generally reflected national reform plans (e.g., Jamaica, 2013 EFF; Rwanda, 2015 PSI and 2016 SCF). - National economic program oversight committees (e.g., Jamaica, 2013 EFF) can be effective in supporting program implementation. - Conversely, where programs quickly went off track, national plans received little discussion. - Communication: - Outreach to the public supports ownership and reform implementation. - Staff reports and program documentation often do not discuss plans for communicating program strategies or measures to the public,64 though some good examples stand out. - Importance of outreach to civil society, including non-governmental organizations. - Scope exists for better integrating communication strategies into program discussions. - Track record and implementation capacity: - Continued attention to policy implementation track records and reform implementation capacity is critical to support ownership. - Where applicable, staff reports gave credit to the authorities for strong track records. - For countries without clear track records, staff reports generally considered forward-looking aspects, including the country’s administrative capacity and TA needs. - Most of the case studies related to ownership had concurrent TA, largely for implementation of fiscal and public financial management reforms. - Political economy: - No consistent pattern found between the political cycle and ownership, but additional attention to political economy risks would be prudent. - Most staff reports, especially at arrangement approval, discussed the extent of the political base for reforms, the election cycle, and risks of political or social instability. - Discussions were usually brief and did not always explicitly state the political constraints that may complicate the implementation of specific reforms. ### Recommendations (related to ownership, PAs, SMPs) - Encourage well-integrated national reform plans as an anchor for Fund arrangements. - Improve two-way communication with the broader public to support buy-in. - Encourage voluntary use of SMPs, particularly in the GRA, to ensure monitoring of macroeconomic policies, while the authorities build political support for the critical reforms, whose delay has interrupted the program. - Strengthen analysis of institutional and political capacity to deliver program objectives on a realistic timetable. - Provide additional guidance on the use of PAs and analyzing institutional and political capacity. ### Tailoring and Uniformity of Treatment (Evenhandedness) - The GoC require that Fund lending decisions be both tailored and evenhanded. Use of Fund Resources (UFR) decisions must reflect both member country circumstances and uniformity of treatment (¶¶4 and 5, IMF, 2002a). - Balancing tailoring with evenhandedness does not require identical treatment but requires that countries in similar circumstances be treated similarly. - Country circumstances vary significantly (e.g., BoP problems, track record, and implementation capacity), creating judgment calls—especially in the UFR context. - 2018 RoC surveys of MCs, RRs, EDs, and CAUTs broadly support a view that UFR decisions are mostly evenhanded, including with respect to the tailoring of conditionality and access decisions. - Nevertheless, a significant minority of respondents indicated concerns (Figure 19), resonating with issues raised previously and reported by the IEO and the G24.65 - Perceptions exist about the lack of evenhandedness of access both within the GRA and between the GRA and PRGT. - Observed and projected erosion of PRGT access limits relative to GDP and to gross financing needs could have reinforced these perceptions. - Lack of up-to-date cross-country information on conditionality and access is viewed as a constraint in monitoring and comparing programs. - MONA database: following the 2007 IEO Evaluation, IMF made MONA public. The IEO update pointed to “significant shortcomings in the usability, accuracy and replicability of the [MONA] database, which limits its value as a monitoring or tracking tool.” These issues were echoed by the Executive Board and external stakeholders. - The ongoing MONA revamp, scheduled for completion in 2019, will be critical for addressing these concerns. ### Tailoring Conditionality - Evidence suggests that conditionality was generally tailored to country needs and program objectives during the period. - Conditionality and program design typically included some tailoring to reflect members’ circumstances and the provisions of the applicable Fund facility or instrument. - Examples: - Quantitative conditionality for LICs included external debt limits to maintain debt sustainability while ensuring adequate external financing.66 - Monetary policy consultation clauses were increasingly incorporated into programs of EMs and LICs with evolving monetary policy regimes. - Analysis indicates tailoring of structural conditions across groups: - Fragile states had relatively more conditions relating to PFM and revenue administration. - Political/economic transformation programs put more emphasis on SOE reform and the financial sector (Figure 20). ### Further tailoring for fragile and small states - There appears to be scope for further tailoring in Fund-supported programs for fragile and small states.67 - Fragile states: - The “2012 Staff Guidance Note on the Fund’s Engagement with Countries in Fragile Situations” calls for a strict, prioritized and gradual structural agenda in the UFR context, reflecting capacity constraints. - Overall number and depth of SCs in fragile state programs during this period were broadly in line with the average for the overall sample (Figure 21). - While implementation rates were similar across groups, a higher proportion (about half) of fragile state programs did not complete all reviews and went off track, and fragile states also had lower success rates than other countries. - Suggestion: programs may have been hampered by an excessively expansive agenda, which failed to adequately reflect low capacity and specific sources of fragility. - Small states: - The revised 2017 Staff Guidance Note on the Fund’s Engagement with Small Developing States calls for focus on: (i) growth-friendly fiscal consolidation, particularly in heavily-indebted small states; (ii) reforms to deepen the financial sector; and (iii) reforms to build resilience to frequent and severe shocks from natural disasters. - Program conditionality in the few small state programs in the 2018 RoC period was focused on PFM, revenue administration, the financial sector, and SOE reform. - In some cases, conditionality did not include resilience building to natural disasters, despite this being a program objective or a key program risk (Solomon Islands, 2011 SCF and 2012 ECF; Grenada, 2014 ECF). - Further tailoring to support resilience building efforts is needed, informed by IMF-WB joint Climate Change Policy Assessments (CCPA).68 - Such tailoring would help build buffers, enhance disaster preparedness, strengthen institutions, and coordinate capacity building. - A Fund-supported program with resilience building as its core objective could also help catalyze climate change financing. ### Access - Access decisions should be determined by a range of country-specific factors, as well as underlying GRA and PRGT policies. - In principle, determination of levels of access to Fund resources in individual arrangements should reflect: - (i) the country’s BoP need; - (ii) program strength and capacity to repay; and - (iii) the amount of the member’s outstanding use of Fund credit and its record in using Fund resources in the past. - Differences exist in the lending frameworks of the GRA and PRGT (e.g., PRGT resources are limited69 and have access norms70 and limits71). - PRGT-eligible countries are not restricted to reliance on PRGT resources and have the right to access GRA resources on the same terms and conditions as other members. - Observations during the period: - Significant differences in access at arrangement approval, both within the GRA, and between GRA and PRGT programs. - Much larger variation in access within the GRA sample, compared to the PRGT, mostly driven by EA GRA cases (Figure 22). - Large disparity between average GRA and PRGT access levels, with access at arrangement approval in GRA program cases 3 percent of GDP higher on average than PRGT cases during the period. - Regression analysis: - Explains almost 70 percent of the variation in access decisions.72 - Pooled regressions of both GRA and PRGT programs suggest differences in access level are largely driven by Fund policies (i.e., EA policy and PRGT access norms). - Separate regressions estimated for PRGT and GRA because of differences in applicable policies. - In the GRA, gross financing needs, capital account crisis, and the normal access limit were important explanatory variables. The EA dummy remains an important driver of access, likely capturing sizeable effects of large BoP crises. - In the PRGT, strong links exist with PRGT access norms and the size of adjustment, confirming that the strength of policies matters in access decisions. - Policy clarification: - Policies regarding the access of PRGT-eligible countries to Fund financial support were clarified by the Executive Board in November 2016.73 - Reaffirmed principle: access to Fund resources should be determined on the basis of the standard criteria, including balance of payments need, program strength, and capacity to repay the Fund, informed by DSA. - Directors underscored that “access norms, as used in PRGT facilities, are neither a ceiling nor a floor on the level of access provided in PRGT-supported arrangements. Norms should help inform the assessment of access levels and should not be misconstrued as access limits or entitlements.” - Since November 2016, access levels in programs with PRGT-eligible countries have, on average, deviated by a much wider margin from the relevant norm than in the prior period, with several countries facing large BoP needs in the wake of the commodity price shocks. ### Recommendations (related to tailoring, MONA, PRGT) - Revamp the MONA database and introduce periodic, standardized reports to the Board to ensure transparency and facilitate the monitoring and comparison of programs. - Improve tailoring of SCs for fragile and small states: - For fragile states, analyze sources of fragility more systematically and streamline objectives and related SCs by focusing on short-term realistic measures, taking into account capacity constraints. - For small states, focus SCs on resilience building to natural disasters, where appropriate. - Consider increasing PRGT access norms and limits, promote blending of GRA and PRGT resources, and increase the flexibility of SCF arrangements while maintaining PRGT self-sustainability. - Note: These issues will be discussed in the forthcoming 2018-19 Review of LIC Facilities. *Italicized source attribution: ppea2019012 - Review of Conditionality (selected excerpts).* ### 67. The RoC recommendations require implementation on multiple fronts (Table 2). Staff ### Review of Conditionality — Implementation, Budgetary Impact, and Conclusions ### Implementation approach (paras 67–69) - Recommendations will be implemented by: - updating the Operational Guidance Note on Conditionality; - delivering ongoing and planned workstreams (e.g., MAC DSA and DLP reviews, and monetary policy conditionality review); - and, if there is sufficient Executive Board interest, producing a possible follow-up paper to consider longer duration EFFs to support structural reform agendas. - Staff does not see a need at this stage to update the GoC. - The cost of updating the Operational Guidance Note on Conditionality will be manageable. - Subsequent implementation will likely require a change in culture and approach, rather than significant additional investment or practices/processes. - Most other proposals (e.g., sharper MAC DSA tools, continued building of expertise in critical shared areas of responsibility, and monetary policy conditionality review) are part of ongoing or planned workstreams that are already included in the medium-term budget. - Proposals for Communication Department (COM) TA and work to explore longer Fund engagement would entail additional costs, which would need to be considered alongside other priorities within the existing budget process. ### Budgetary impact (para 68) - Budgetary impact is not expected to be significant, in the context of efforts already planned to strengthen Fund lending and policies. - Manageable cost: updating the Operational Guidance Note on Conditionality. - Ongoing/planned workstreams: included in the medium-term budget. - Additional costs: COM TA and exploration of longer Fund engagement — to be weighed within existing budget priorities. ### Expected benefits and risks (para 69) - If successfully implemented, recommendations should reduce risks to lending operations, and the Fund more generally. - Many proposals should increase likelihood of program success and reduce risks to the use of Fund resources. - Specific improvements with positive spillovers to Fund surveillance: - improve forecast realism; - MAC DSA tools; - debt transparency; - tailoring to fragile and small states; - development of contingency planning. - Better prioritization of reforms based on surveillance and TA gaps would support further integration of core functions. - Improved program design, performance, and communication would help protect the Fund’s reputation. - Longer programs could increase short-term risks to the revolving use and adequacy of Fund resources, but these could be mitigated with appropriate safeguards. - Over time, successful longer programs should reduce risks by lowering the frequency of successor arrangements. ### Conclusions on post-GFC context and program outcomes (paras 70–71) - The 2018 RoC period was dominated by persistent structural challenges requiring large-scale and long-lasting adjustment, with protracted recovery from the GFC weighing on external demand and hampering macroeconomic adjustment. - The Fund stepped up efforts to provide financial support during the difficult post-GFC period; the Fund took significant risks to support the membership, as acknowledged in staff reports accompanying most program requests. - Limited success of some Fund-supported programs is linked to the risky and uncertain environment and associated dilemmas and tradeoffs. - Program design and conditionality involve significant tradeoffs that need re-assessment based on 2018 RoC lessons: - Realism versus ambition: - More scrutiny of program baselines is required, but forecasting is imperfect; program design should tackle uncertainty through analysis of downside scenarios and contingency planning. - Less ambition could potentially undermine reform momentum. - Granularity versus flexibility: - More granular conditionality (e.g., on revenue and spending measures) could deliver higher quality adjustment but reduce program flexibility and ability to respond to shocks; may test ownership politically. - Gradualism versus speed: - Complex reform agendas amid protracted structural challenges require time, ownership, capacity building, and substantial financing— a more gradual approach may justify longer EFF arrangements. - Alternatively, disbursing programs could focus on macroeconomic stabilization with PCIs used increasingly for medium-term structural agendas. - A planning horizon longer than four years may not always work with political cycles and may increase reform fatigue. - Parsimony versus more conditionality: - Fund needs to continue building expertise on structural issues; design and tailoring of structural conditionality must be improved. - Fewer but deeper reforms may yield better results; achieving parsimony may require attaching more conditionality to critical shared and non-core areas of responsibility at the expense of non-critical traditional core areas. - Debt operation versus adjustment: - Sharper DSA tools would help mitigate bias in judgment on debt sustainability and ensure more balanced consideration of trade-offs on a case-by-case basis. ### Policy implication (para 72) - Careful weighing of tradeoffs—paying more attention to realism, granularity, gradualism, parsimony, and, in some cases, debt operation options—should improve chances of program success and mitigate risks to the Fund. ### Issues for discussion (para 73) - Do Directors agree with the overall assessment of program success? - Do Directors agree with the RoC recommendations? - How do Directors view the trade-offs and risks inherent in program design? - Do Directors agree that the Guidelines on Conditionality remain broadly appropriate, but that staff guidance should be updated in line with recommendations? - Do Directors see the need for a follow-up Board paper on a possible longer duration of EFF arrangements? ### Roadmap highlights (Table 2) - Increase scrutiny of program baselines and develop contingency plans: Macro-structural pilot initiative; Impact of structural reforms in EMDCs (RES project). - Evaluate review-based conditionality and consider possible enhancements: Possible Board Paper 2020. - Use more granular fiscal conditionality: FAD paper on expenditure conditionality; increase focus on the quality of social spending: Strategy for IMF Engagement on Social Spending. - MAC DSA Review: will propose a more robust, probabilistic, and discriminate framework, with clear bottom-line assessments; Update Guidance; Apply new LIC DSF: improved assessment of debt carrying capacity; and, more accurate methodology for predicting debt distress. - Consider structural conditions on improving governance arrangements for contracting and monitoring of debt obligations; G20 multi-pronged strategy; Continued prioritization in CD strategy: Ongoing. - Review the Fund’s Debt Limits Policy (DLP): Board Paper; DLP review, including examining possible guidance on collateralized debt: 2019/20. - Identify, prioritize and sequence reforms based on criticality; Continue to build expertise in critical shared reform areas (e.g. labor markets); Mainstream macro-structural pilot initiative; Consider NPL resolution and related conditionality at outset; Finalize work on structural reforms in EMDCs. - Greater realism in implementation timetables and reform payoffs: Proceed only if sufficient Board interest; Coordinated with 2018-19 Review of LIC Facilities. - Improve two-way communication to broader public to support buy-in: COM to draft Fund communication plans and offer TA. - Strengthen analysis of institutional and political capacity: Guidance on: (i) assessing EA4; and (ii) prior actions. - Consider increased voluntary usage of SMPs, particularly in the GRA. - Enhance transparency by facilitating monitoring/comparison of programs: Revamp MONA database and produce periodic reports to the Board. - Building Resilience in Countries Vulnerable to Large Natural Disasters: 2019. - Consider increasing PRGT access norms and limits and promote more blending of GRA and PRGT resources, while maintaining PRGT self-sustainability: Board Paper 2018-19 Review of LIC Facilities. - Improve tailoring of structural conditionality for fragile and small states; Encourage well-integrated national reform plans as a program anchor: Update Guidance 2019. - Tailoring and uniformity of treatment (evenhandedness): Update Guidance Ongoing. - Consider longer Fund engagement to support structural reform agendas: Board Papers 2019. - Ownership: Update Guidance 2019. - Public debt: Strengthen debt sustainability tools, ensuring more balanced consideration of debt operations, where applicable: 2019. - Structural conditionality and program design; Growth optimism: Update Guidance 2019. - Strengthen discussion/analysis of the growth impact of program policies. - Monetary conditionality; Quality of fiscal adjustment. *International Monetary Fund — Review of Conditionality (paras 67–73, Table 2, Appendices I–II)* ### References ### References ### Academic and research articles, books, and working papers - Afonso, António, and João T. Jalles, 2012, “Measuring the Success of Fiscal Consolidations," Applied Financial Economics, Vol. 22 (13), pp. 1053–61. - Ahuja, Ashvin, Murtaza Syed, and Kevin Wiseman, 2017, “Assessing Country Risk—Selected Approaches—Reference Note,” Technical Notes and Manuals (Washington: International Monetary Fund). - An, Zidong, João T. Jalles, and Prakash Loungani, 2018, “How Well Do Economists Forecast Recessions?” International Finance, Vol. 21 (1). - Anand, Rahul, and Purva Khera, 2016, “Macroeconomic Impact of Product and Labor Market Reforms on Informality and Unemployment in India,” IMF Working Paper No. 16/47 (Washington: International Monetary Fund). - Andres, Javier, Oscar Arce, and Carlos Thomas, 2014, “Structural Reforms in a Debt Overhang,” Banco de España, Working Paper Series No. 1421. - Andritzky, Jochen, Zsuzsa Munkacsi, and Ke Wang, “Structural Conditionality in IMF Programs” IMF Working Paper, forthcoming (Washington: International Monetary Fund). - Berger, Helge, and Stephan Danninger, 2005, “Labor and Product Market Deregulation: Partial, Sequential, or Simultaneous Reform?” IMF Working Paper No. 05/227 (Washington: International Monetary Fund). - Blanchard, Olivier, and Jordi Galí, 2010, “Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment,” American Economic Journal: Macroeconomics, Vol. 2 (2), April, pp. 1–30. - Bokan, Nikola, and Andrew H. Hallett, 2008, “The Impact of Tax and Market Distortions on the Phillips Curve and the Natural Rate of Unemployment,” Economics, Vol. 2 (2008-27), September, pp. 1–28. - Bradley, Elizabeth H., Benjamin R. Elkins, Jeph Herrin, and Brian Elbel, 2011, “Health and Social Services Expenditures: Associations with Health Outcomes,” BMJ Quality & Safety, Vol. 20 (10), pp. 826–31. - Bradley, Elizabeth H., and Lauren A. Taylor, 2013, “The American Health Care Paradox: Why Spending More Is Getting Us Less” (Philadelphia: Public Affairs). - Cacciatore, Matteo, and Giuseppe Fiori, 2016, “The Macroeconomic Effects of Goods and Labor Markets Deregulation,” Review of Economic Dynamics, Vol. 20, April, pp. 1–24. - Cacciatore, Matteo, Romain Duval, Giuseppe Fiori, and Fabio Ghironi, 2016, “Short-Term Pain for Long-Term Gain: Market Deregulation and Monetary Policy in Small Open Economies,” Journal of International Money and Finance, Vol. 68, November, pp. 358–85. - Clements, Benedict, Sanjeev Gupta, and Masahiro Nozaki, 2013, “What Happens to Social Spending in IMF-Supported Programmes?” Applied Economics, Vol. 45 (28), pp. 4022–33. - Dewatripont, Mathias, and Gérard Roland, 1995, “The Design of Reform Packages Under Uncertainty,” The American Economic Review, Vol. 85 (5), pp. 1207–23. - Edwards, Sebastian, 1989, “On the Sequencing of Structural Reforms,” OECD Economics Department Working Papers No. 70 (Paris: OECD Publishing). - Eggertsson, Gauti, Andrea Ferrero, and Andrea Raffo, 2014, “Can Structural Reforms Help Europe?” Journal of Monetary Economics, Vol. 61 (C), pp. 2–22. - Fernandez-Villaverde, Jesús, Pablo Guerrón-Quintana, and Juan Rubio-Ramirez, 2014, “Supply-Side Policies and the Zero Lower Bound,” IMF Economic Review, Vol. 62 (2), pp. 248–60. - Gupta, Sanjeev, Marijn Verhoeven, and Erwin R. Tiongson, 2002, “The Effectiveness of Government Spending on Education and Health Care in Developing and Transition Economies,” European Journal of Political Economy, Vol. 18 (4), pp. 717–37. - Guzman, Martin, José A. Ocampo, and Joseph E. Stiglitz (editors), 2016, “Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises,” Initiative for Policy Dialogue at Columbia: Challenges in Development and Globalization (New York: Columbia University Press). - Hausmann, Ricardo, Dani Rodrik, and Andrés Velasco, 2005, “Growth Diagnostics.” Manuscript, 2005. - Kugler, Adriana D., and Giovanni Pica, 2004, “Effects of Employment Protection and Product Market Regulations on the Italian Labor Market,” CEPR Working Paper No. 4216. - Larch, Martin, Kristin Magnusson Bernard, and Peter McQuade, 2016, “Fortune or Fortitude? Determinants of Successful Adjustment with IMF Programs,” OECD Journal: Economic Studies, Volume 2016. - Lusinyan, Lusine, and Dirk V. Muir, 2013, “Assessing the Macroeconomic Impact of Structural Reforms: The Case of Italy,” IMF Working Paper No. 13/22 (Washington: International Monetary Fund). - Mooney, Henry, and Constance de Soyres, 2017, “Debt Sustainability Analyses for Low-Income Countries: An Assessment of Projection Performance,” IMF Working Paper No. 17/220 (Washington: International Monetary Fund). - Munkacsi, Zsuzsa, and Magnus Saxegaard, 2017, “Structural Reform Packages, Sequencing, and the Informal Economy,” IMF Working Paper No. 17/125 (Washington: International Monetary Fund). - Murphy, Kevin M., Andrei Shleifer, and Robert W. Vishny, 1992, “The Transition to a Market Economy: Pitfalls of Partial Reform,” The Quarterly Journal of Economics, Vol. 107 (3), pp. 889–906. - Rubin, Jennifer, Jirka Taylor, Joachim Krapels, Alex Sutherland, Melissa Felician, Jodi Liu, Lois Davis, and Charlene Rohr, 2016, “Are Better Health Outcomes Related to Social Expenditure? A Cross-National Empirical Analysis of Social Expenditure and Population Health Measures,” Rand Europe, RAND Research Report 1252. - Sturzenegger, Federico, and Jeromin Zettelmeyer, 2006, “Debt Defaults and Lessons from a Decade of Crises” (Cambridge: MIT Press). - Vogel, L.ukas, 2014, “Structural Reforms at the Zero Bound,” European Commission, Economic Papers No. 537, November. ### IMF institutional publications, reviews, guidance, and reports - Independent Evaluation Office (IEO), 2007, “Structural Conditionality in IMF-Supported Programs,” Evaluation Report, Independent Evaluation Office of the International Monetary Fund (Washington: International Monetary Fund). - Independent Evaluation Office (IEO), 2013, “Recurring Issues from a Decade of Evaluation: Lessons for the IMF” (Washington: International Monetary Fund). - Independent Evaluation Office (IEO), 2018, “Structural Conditionality in IMF-supported Programs: Evaluation Update,” Independent Evaluation Office of the International Monetary Fund (Washington: International Monetary Fund). - International Monetary Fund, 2002a, “Guidelines on Conditionality” (Washington). - International Monetary Fund, 2002b, “Revised Staff Statement: Principles Underlying the Guidelines on Conditionality,” Published as an attachment to the Guidelines on Conditionality (Washington). - International Monetary Fund, 2002c, “Review of the Key Features of the Poverty Reduction and Growth Facility—Staff Analyses” (Washington). - International Monetary Fund, 2009, “Conditionality in Fund-Supported Programs – Purposes, Modalities, and Options for Reform” (Washington). - International Monetary Fund, 2012a, “2011 Review of Conditionality—Overview Paper” (Washington). - International Monetary Fund, 2012b, “Staff Guidance Note on the Fund’s Engagement with Countries in Fragile Situations” (Washington). - International Monetary Fund, 2012c, “2011 Review of Conditionality—Background Paper 3: Outcomes of Fund-Supported Programs” (Washington). - International Monetary Fund, 2014, “Revised Operational Guidance to IMF Staff on the 2002 Conditionality Guidelines” (Washington). - International Monetary Fund, 2014b, “Conditionality in Evolving Monetary Policy Regimes” (Washington). - International Monetary Fund, 2015a, “Where Are We Headed? Perspectives on Potential Output,” World Economic Outlook, Ch. 3, April (Washington). - International Monetary Fund, 2015b, “The Fund’s Lending Framework and Sovereign Debt—Further Considerations” (Washington). - International Monetary Fund, 2015c, “Crisis Program Review” (Washington). - International Monetary Fund, 2016a, “Staff Note for the G20—A Guiding Framework for Structural Reforms” (Washington). - International Monetary Fund, 2016b, “Financing for Development: Enhancing the Financial Safety Net for Developing Countries—Further Considerations” (Washington). - International Monetary Fund, 2017a, “Social Safeguards and Program Design in PRGT and PSI-Supported Programs” (Washington). - International Monetary Fund, 2017b, “Greece: Ex Post Evaluation of Exceptional Access Under the 2012 Extended Arrangement,” IMF Country Report No. 17/44 (Washington). - International Monetary Fund, 2017c, “2017 Staff Guidance Note on the Fund’s Engagement with Small Developing States” (Washington). - International Monetary Fund, 2018a, “Domestic Revenue Mobilization in Sub-Saharan Africa: What Are the Possibilities?” Regional Economic Outlook: Sub-Saharan Africa, World Economic and Financial Surveys, Ch. 2, April (Washington). - International Monetary Fund, 2018b, “Macroeconomic Developments and Prospects in Low-Income Developing Countries” (Washington). - International Monetary Fund, 2018c, “IMF Fiscal Monitor: Capitalizing on Good Times,” World Economic and Financial Surveys, April (Washington). - International Monetary Fund, 2018d, “How to Operationalize Gender Issues in Country Work” (Washington). - International Monetary Fund, 2018e, “2018 Review of Facilities for Low-Income Countries” (Washington). ### Additional references related to program design, conditionality, and country experience - Larch, Martin, Kristin Magnusson Bernard, and Peter McQuade, 2016, “Fortune or Fortitude? Determinants of Successful Adjustment with IMF Programs,” OECD Journal: Economic Studies, Volume 2016. - Mooney, Henry, and Constance de Soyres, 2017, “Debt Sustainability Analyses for Low-Income Countries: An Assessment of Projection Performance,” IMF Working Paper No. 17/220 (Washington: International Monetary Fund). - Munkacsi, Zsuzsa, and Magnus Saxegaard, 2017, “Structural Reform Packages, Sequencing, and the Informal Economy,” IMF Working Paper No. 17/125 (Washington: International Monetary Fund). - Vogel, L.ukas, 2014, “Structural Reforms at the Zero Bound,” European Commission, Economic Papers No. 537, November. *References as listed in the source document.* ### 1. Despite a moderation since 2011, perceptions of the authorities’ program ownership ### 1. Despite a moderation since 2011, perceptions of the authorities’ program ownership ### Ownership and perceptions - About half of mission chiefs (MCs) and resident representatives (RRs) rated program ownership as “high” or “very high” and about one third as “moderate”. - MCs/RRs and country authorities (CAUTs) and Executive Directors (EDs) overwhelmingly agreed that program quantitative performance criteria (QPCs) targeted the appropriate macroeconomic variables. - The vast majority of MCs/RRs and CAUTs agreed that structural reforms were consistent with national reform priorities, and that program objectives were consistent with domestic economic and social priorities; EDs were more cautious. - Roughly three-quarters of all respondents agreed or strongly agreed that program design was sufficiently flexible to accommodate external shocks. ### Flexibility and implementation capacity - A slight majority of respondents found program design sufficiently flexible to accommodate changing government priorities; approximately 15 percent disagreed or strongly disagreed and 20 to 25 percent were neutral. - 20 percent of MCs/RRs and CAUTs and more than a quarter of EDs disagreed or strongly disagreed that the program implementation timeline was consistent with the authorities’ existing technical capacity to implement reforms. - Around 20 percent of MCs/RRs disagreed/strongly disagreed that program implementation was consistent with program commitments. - Most MCs/RRs attributed unsatisfactory program implementation to weak capacity and lack of ownership; CAUTs cited unexpected developments or exogenous shocks. ### Program duration and follow-up - Roughly a quarter of MCs/RRs and EDs disagreed that the duration of their program was sufficient to accomplish its overall objectives. - More than half of MCs/RRs and CAUTs reported follow-up programs for their assigned country during the review period. - The reason most frequently cited by MCs/RRs for follow-up programs was that “the previous program was not fully implemented”; CAUTs highlighted “the need for the policy support”. ### Tailoring and uniformity of treatment - Access decisions: a significant majority of MCs/RRs and somewhat lower percentages of EDs and CAUTs agreed that Fund-supported programs struck the right balance between policy adjustment and programmed financing. - A sizable majority of all respondents agreed that financing reflected fairly countries’ balance of payments needs, program strength, and repayment capacity, though agreement was somewhat lower for EDs and CAUTs. - Conditionality: a significant minority of respondents disagreed or strongly disagreed that “Fund-supported programs have similar conditionality across countries with similar characteristics and qualifications,” indicating concerns about uniformity of treatment. - Tailoring trend: in 2011 over 90 percent of respondents to the MC, RR, and CAUT surveys agreed or strongly agreed that program design took country circumstances into account; this share declined to about three-quarters in 2018. - A similar decline was observed regarding the tailoring of program objectives with domestic economic and social priorities. - The decline may reflect challenges related to tailoring more structural programs in the 2018 sample, or the addition of “neutral” and “not applicable” responses in the 2018 surveys. ### Collaboration, social impacts, and vulnerability - Teams have generally coordinated or collaborated with development partners, particularly in Poverty Reduction and Growth Trust (PRGT) programs. - A large majority of respondents felt that Fund coordination with bilateral and multilateral donors had been effective, and that IMF policy advice was consistent with that of other international institutions. - Close to 80 percent of MCs and RRs agreed that coordination with the World Bank or other development partners helped facilitate an understanding of the social impact of consolidation measures under the program. - Social and welfare assessment gaps: - A quarter of EDs and close to 20 percent of CAUTs disagreed or strongly disagreed that program design was consistent with protecting vulnerable groups. - 20 percent of EDs disagreed or strongly disagreed that program design adequately considered distributional effects. - A comparable percentage of CAUTs disagreed or strongly disagreed that programs took into account the social costs of reform implementation. - These concerns were less pronounced among MCs/RRs. ### Outreach and engagement with civil society - Significant improvement in outreach relative to 2011, but scope remains to expand engagement with in-country civil society organizations (CSOs). - Roughly a quarter of MCs/RRs, 18 percent of CAUTs, and 16 percent of EDs disagreed or strongly disagreed that CSOs were actively involved in the design of Fund-supported programs; a third of EDs responded “don’t know”. - Around a quarter of MCs/RRs disagreed or strongly disagreed that the authorities had publicly explained the benefits of the Fund-supported program to civil society, with another 15 percent neutral. Box summary (2018 RoC outreach) - The Fund invited online comments from external stakeholders, including CSOs, followed by a conference call with Fund staff. - Stakeholder comments covered: - Shift in types of arrangements: noted move from shorter-term SBAs to longer-term EFF arrangements and encouraged exploration of drivers. - Ownership: need for clearer definition and more focused assessment of ownership. - Program design: greater attention to potential negative impacts of conditionality on public investment, inequality, and labor rights. - Gender issues: need for a more systematic approach to gender issues in program conditionality. ### Follow-up actions to the 2011 RoC and IEO findings - The 2011 RoC found programs generally succeeded in meeting objectives, adapted flexibly, and followed the Conditionality Guidelines; it included a comprehensive set of recommendations that were addressed through follow-up actions and workstreams. - Follow-up workstreams and assessments noted in the period since 2011 include, inter alia: - Engagements on fragile situations, evolving monetary policy regimes and frameworks, small states’ resilience, public debt sustainability analysis, reform of the Public Debt Limits Policy, Bank-Fund Debt Sustainability Framework for Low Income Countries, Review of the MAC DSA Framework (ongoing), Review of the Debt Limits Policy (ongoing), Jobs and Growth issues, social safeguards engagement, pilots on inequality and gender (mainstreamed), modernizing surveillance, macrofinancial surveillance, macroprudential policy, structural reforms and macroeconomic performance, governance frameworks, and collaboration with regional financing arrangements and currency unions. - The 2015 Crisis Program Review findings included: - External adjustment relied more on internal devaluation than exchange-rate adjustment, requiring ambitious structural reforms beyond typical program duration. - Fiscal deficits fell in line with targets but with greater-than-envisaged impact on output, partly due to underestimated fiscal multipliers. - Structural conditionality may need to be more extensive to support internal devaluation, but must recognize capacity limitations, risk of reform fatigue, and modest payoffs. - Private sector balance sheet weaknesses had a larger impact than anticipated; priorities included legal frameworks, out-of-court settlement, and prudential measures to incentivize debt write-offs and restructuring. - Guidelines for cooperation with RFAs and currency unions should clarify the Fund’s role (e.g., macroeconomic analysis and debt sustainability analysis (DSAs)). - Recent Independent Evaluation Office (IEO) reports and their findings relevant to RoC: - The IMF and the Crises in Greece, Ireland and Portugal (2016): programs incorporated overly optimistic growth projections; more realistic projections would clarify fiscal consolidation impacts on growth and debt dynamics. - The IMF and Social Protection (2017): IMF-supported programs almost always took account of social protection concerns, with mixed implementation success; Fund needs more realistic and effective approaches to conditionality to deliver social protection objectives. - The IMF and Fragile States (2018): IMF involvement had been quite effective despite capacity and governance challenges, but adaptation of policies and practices to fragile states’ needs had been insufficient. - Structural conditionality in IMF-supported Programs—Evaluation Update (2018): structural conditionality generally streamlined, with conditions more focused in areas of IMF expertise. ### Assessing program success — methodology (GRA-supported programs) - Program success under a GRA-supported program incorporates evidence of no balance of payments (BoP) need and of medium-term external viability after program completion. - Post-program Fund engagement is used as a proxy for resolving a BoP problem; the evolution of vulnerability indicators is considered for medium-term external viability. - For the RoC, post-program engagement is defined as the two-year period following a Fund arrangement and categorized as: - Drawing successor programs: Defined as an arrangement of a financial nature (Stand-By Arrangement (SBA) and Extended Fund Facility (EFF)), excluding those with low access, with the cut-off set at a quarter of the (annual) exceptional access (EA) threshold. - Successor programs of a signaling nature: successor engagements of a signaling nature include Policy Coordination Instruments (PCIs), and arrangements of a financial nature that are treated as fully precautionary or involve low access as defined above. - No successor program: a Fund-supported program that was not followed by another Fund arrangement or a PCI within two years of its completion or expiration. *Source: ppea2019012 - 1. Despite a moderation since 2011, perceptions of the authorities’ program ownership* ### 16. With respect to the evolution of vulnerability indicators, the RoC draws on the ### 16. With respect to the evolution of vulnerability indicators, the RoC draws on the ### Vulnerability Exercise (VE) and program success framework (GRA) - The VE is a multisectoral approach to detect risks that could make a country vulnerable to BoP pressures (Ahuja, Syed, and Wiseman, 2017); it encompasses an expansive set of indicators, as well as staff’s judgment. - VE evaluates vulnerabilities in the fiscal, external, and domestic financial sectors, as well as financial and asset pricing risks, where appropriate. - A Fund-supported program that reduces the VE final overall rating is regarded as successfully addressing macroeconomic imbalances. - Program success combines: (i) nature of post-program Fund engagement, and (ii) evolution of vulnerability indicators between program inception and program completion. - Two transition matrices (Figure 12) are used depending on post-program engagement: - BoP need post-program (Figure 12, left panel): - Programs that reduced vulnerabilities to low or lowered them from high are considered partially successful. - All remaining programs are considered unsuccessful. - No BoP need post-program (Figure 12, right panel): - Programs that ended with low vulnerabilities or reduced vulnerabilities from high to medium are considered successful. - Programs that maintained vulnerabilities at high and medium levels are considered partially successful. - Programs are considered unsuccessful only if vulnerabilities increased during the program period. - VE final overall rating labels: H (high), M (medium), L (low). ### Methodology for PRGT-Supported Programs and Policy Support Instruments (PSIs) - PRGT instruments analyzed: - ECF arrangements: assist PRGT-eligible members with a protracted BoP problem to make significant progress toward a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. Repeated use of ECF arrangements is not necessarily a sign of insufficient progress. - SCF arrangements: assist eligible members with short-term BoP needs to achieve, maintain, or restore a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. - PSI: enables PRGT-eligible members with no BoP need to secure Fund advice and policy support without a borrowing arrangement; signals policy strength to donors, creditors, and the public. - Two-step RoC approach to measure PRGT program success (Figure 13): - Stage 1: Assess external debt vulnerabilities using LIC-DSF ratings and a transition matrix (Figure 14). - A program is “unsuccessful” (red) if external public and publicly guaranteed debt sustainability risks are substantial, with the LIC-DSA rating either: (i) remaining in debt distress (“DD”); or (ii) increasing to “in DD” or high (“H”). - Programs outside the red area proceed to Stage 2. - Stage 2: Use five indicators to distribute programs into three categories: - Indicator groups: - Proxies for anti-poverty spending policy: social expenditure (health and education expenditures) and government capital expenditure. - Non-grant fiscal revenue (progress on domestic revenue mobilization). - Macroeconomic stability: inflation and real GDP growth. - Indicators are considered met when the average projection error (actual minus projected) during T+1 to T+3 has a favorable sign. T is the program approval year. - Outcome rules: - Successful: three or more indicators met. - Partially successful: one or two indicators met. - Unsuccessful: no indicator met. - LIC-DSA rating labels: DD (debt distress), H (high), M (medium), L (low). ### Data and degree of success (sample and coverage) - Program success assessed for 78 programs (Figures 15 and 16); all cases are part of the 2018 RoC sample; ongoing programs as of end-September 2018 were excluded; sample further reduced by data constraints. - GRA coverage: - 28 completed/expired GRA programs out of 52 GRA programs in the 2018 RoC sample. - 11 cases did not have VE ratings. - 13 cases were still ongoing. - PRGT coverage: - 50 completed/expired PRGT programs out of 81 PRGT programs in the 2018 RoC sample. - 23 PRGT programs were still ongoing. - GRA program success counts (Figure 15 overall): - Unsuccessful: 7 - Partially successful: 12 - Successful: 9 - PRGT performance in five core indicators (Figure 16, percent of total): - Social spending met / not met: data shown in chart (percent values presented visually in source). - Capital expenditure met / not met: data shown in chart. - Revenue (excl. grants) met / not met: data shown in chart. - Real GDP growth met / not met: data shown in chart. - Inflation met / not met: data shown in chart. ### Program success patterns by country and program characteristics - Post-GFC programs had higher success rates than commodity exporters and other developing countries (Figure 17, top left panel). - Political/economic transformation countries exhibited both the highest success and highest failure rates among groups. - At least 20 percent of programs were successful in any year of program approval (Figure 17, top right panel). - Exceptional access (EA) programs had broadly similar success rates to others (Figure 17, 2nd panel, left). - Distributions shown for: - Public Debt-to-GDP Ratio at Program Approval (Percent) by outcome bucket. - Access at Program Approval (Percent of quota) by outcome bucket. ### Success factors and statistical analysis - Small sample size (78 observations) constrains analysis; multinomial logit regressions used with partially successful as base case; combined regressions not reported due to lack of statistical significance. - Table 2 identifies explanatory variables tested (initial conditions, shocks, country characteristics, program design) and pairwise statistical significance. - Significant pairwise predictors: - GRA programs: - Completion status (1=completed, 0=off-track) is significant; coefficient for successful: 2.4**. - Growth forecast error (percent) significant for unsuccessful outcome: -1.5* (note signs as reported in table). - PRGT programs: - Completion status significant; coefficient for successful: 16.5 (significance denoted † for 0.1