## _012909

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### Executive Summary — Purpose, Motive, and Scope
- Purpose of conditionality:
  - (i) assist members to solve balance of payments problems without resorting to measures destructive of national or international prosperity; and
  - (ii) establish adequate safeguards for the temporary use of the Fund’s general resources.
- Framework modalities used for monitoring program implementation: prior actions, quantitative and structural performance criteria, indicative targets, structural benchmarks, and program and financing assurances reviews.
- Motive for reform:
  - Criticisms that standard modalities (e.g., performance criteria and waivers) are unnecessarily burdensome, undermine ownership, and delay requests for assistance.
  - Prevalence of waivers and missed structural benchmarks questions effectiveness of current conditionality as a monitoring tool.
  - Strengthened policy frameworks in many members may warrant different forms of conditionality.
  - Chapeau paper Review of the Fund’s Financing Role in Member Countries (8/29/08 (PIN/08/13, 10/9/08)) highlighted Director interest in exploring macrostargets, up-front qualification, or review-based conditionality.
- Applicability and scope:
  - Options could be considered for all member countries, including low income members.
  - Paper focuses on monitoring modalities (not program design) and was developed with GRA facilities in mind but could apply to low income facilities where appropriate.
- Process note:
  - A subsequent paper (GRA Lending Toolkit and Conditionality: Reform Proposals (03/24/09)) identifies specific proposed reforms.
  - Executive Board decision subsequently maintained quantitative performance criteria; substantial differences between this paper and the subsequent paper are highlighted in the text.

### Options for Reform — Overview
- Three complementary approaches considered for program monitoring:
  - Review-Based Conditionality
  - Ex-Ante Conditionality
  - Hybrid Approach (combining elements of review-based and ex ante)
- These approaches could apply, as appropriate, to facilities and instruments used by low income members.
- Note: Decisions adopted by the Executive Board on 3/24/09 maintained quantitative performance criteria.

### Review-Based Conditionality — Design, Treatment of Deviations, Operational Points
- Core features:
  - Elimination of performance criteria.
  - Program would include a quantified macroeconomic framework and specified structural reforms, with a set of quantitative targets and structural benchmarks (“targets”) expected to be achieved by specified points (e.g., quarterly or semi-annually).
  - Targets similar in content to current performance criteria, including standard continuous performance criteria on trade and exchange measures.
  - Criticality test and other specified criteria under the Guidelines on Conditionality would continue to apply.
  - Prior actions could still be required as under current Guidelines.
  - Purchases still phased; each successive purchase becomes available as scheduled reviews are completed.
  - Financing assurances reviews under the Lending Into Arrears policy and Guidelines on Conditionality would not change.
- How deviations would be treated:
  - Failure to meet targets would not in itself interrupt purchases.
  - Deviations would signal the program might not be on track; completion of a review would require a Board judgment that compensating factors exist (e.g., minor or temporary failure, corrective actions taken), analogous to waivers of nonobservance under current Guidelines.
  - In case of substantial deviations and weak commitments, staff and management could decide not to propose completion of a review.
  - Board would be informed in informal country matter sessions about status of discussions; once new understandings are reached the review could be completed and purchases made.
- Operational and governance points:
  - Elimination of performance criteria would remove the need for waivers of nonobservance (and of applicability).
  - Members would avoid requesting waivers for minor deviations and reduce incentives for window dressing to meet technical performance criteria.
  - Reviews would not be open-ended; assurances regarding access to Fund resources would continue as required by Article XXX(b).
  - Presumption that reviews would be completed where applicable targets have been met and forward-looking assessment confirms supportive policies.
  - Misreporting framework would continue; staff proposes amending it to cover reporting of information on targets in absence of performance criteria.

### Advantages and Limitations of Review-Based Conditionality
- Advantages (as cited):
  - Makes transparent the central role played by program reviews, which over time have become the primary mechanism for program monitoring.
  - Codifies existing practice and recognizes that program reviews provide context for robust, real-time assessment of program implementation; reviews are forward-looking and can use a wide range of information.
  - From the member standpoint, could alleviate stigma associated with performance criteria and waiver requests and allow concentration on achieving program objectives rather than technical compliance.
- Limitations and risks:
  - Will not entirely remove perceptions of intrusiveness arising from underlying program design required for Fund support.
  - Presumption for completion of a review if all targets are met could be perceived as weaker assurance than certainty of purchase linked directly to observance of performance criteria.
  - Absence of performance criteria could make it harder for staff to take a clear position that a program is off-track, potentially enhancing concerns of political interference in decisions to complete reviews.
  - For precautionary arrangements, potential limited risk that members could make purchases during periods when data are not yet available.

### Review-Based Conditionality — Frequency, Blackout Periods, and Streamlining Measures
- Blackout periods:
  - Current test-date blackout periods typically range from four to eight weeks during which members cannot access Fund financing until data and reviews are completed.
  - Review-based approach would largely eliminate these blackout periods because program targets are not conditions for making a purchase; unavailability of data would not automatically block purchases or necessitate a waiver.
  - If data are unavailable by scheduled review date, review likely postponed and the member unable to make purchases from the original scheduled review date until data become available and review is completed.
- Frequency and linkage of reviews to purchases:
  - Under proposed approach, reviews would be required for every purchase (currently purchases can be delinked from reviews in credit tranches).
  - Current policy: in principle to have no less than four purchases in a year for arrangements in the credit tranches.
  - Potential streamlining measures:
    - Reviews could be completed on a lapse of time basis where all specified targets have been met.
    - A short letter of intent from the authorities could suffice where programs are on track and no new policy commitments are needed.
    - Consideration of semiannual purchases in the credit tranches if authorities and the Fund find more frequent reviews burdensome; semiannual purchases should not diminish availability of financing or the signaling function of a Fund arrangement.

### Box 3 — Waiver Rates and Review Frequency (selected statistics)
- Stand-By Arrangements (SBAs) since 1995:
  - Average waiver rate over this period: 13 percent for quantitative and 37 percent for structural performance criteria.
  - 81 percent of programs over 2002–07 needed a waiver at some stage during the period of their respective arrangement.
  - About 78 percent of all purchases made available in the period since 1995 were linked to reviews.
  - In drawing SBAs: 83 percent linked to completion of reviews and 17 percent linked to observance of PCs.
- Purchases Subject to Review in SBAs (average 1995–2007):
  - All: 78% linked to completion of reviews and 22% linked to observance of PCs.
  - Drawing: 83% linked to completion of reviews and 17% linked to observance of PCs.

### Ex-Ante Conditionality — Scope, Rationale, Prerequisites, and Challenges
- Scope and rationale:
  - Provide full access up-front based on strong fundamentals, policies, and an established track record of policy implementation (ex ante conditionality).
  - Could reduce perceptions of intrusiveness associated with program implementation.
  - Example cited: the SLF as a recent and significant example of an ex ante approach.
- Minimum prerequisites for ex ante conditionality:
  - Strong economic policies and fundamentals and an established track record of implementing appropriate policies.
  - The member’s reform agenda for reducing vulnerabilities is substantially completed, with relatively few remaining measures needed to resolve difficulties.
- Appropriate use cases:
  - Particularly suitable for capital account-related financing to members already in a very strong economic position with a strong record of policy implementation, where resource needs are normally quite high and front-loaded.
  - Could be applied in precautionary arrangements to provide significant upfront Fund financing as effective crisis prevention.
- Advantages:
  - Purchases would not be subject to any ex post conditionality for qualified members, directly addressing stigma associated with Fund lending.
  - Risks to the Fund likely low for highly qualified members due to strong policies and fundamentals.
- Key challenges:
  - Difficulty in defining the threshold for qualification.
  - Potential for political pressures in qualification decisions.
  - Need for the Fund to re-evaluate members’ positions over time; past arrangements under this approach were short (no longer than six months), and longer arrangements could increase Fund resource risk if member’s situation changes.

### Hybrid Approach — Design and Purpose
- Purpose:
  - For members qualifying for ex ante conditionality who wish arrangements longer than 6 months.
- Key elements:
  - Full amount available upfront in a single purchase (no phasing) as under ex ante conditionality.
  - Member’s continuing right to purchase periodically becomes subject to completion of reviews once a review date is triggered; purchase made only if review is completed.
  - Underlying program involves quantified targets assessed at periodic reviews.
- Relation to past proposals:
  - Resembles the Rapid Access Line proposal considered earlier by the Board.

### Applicability to Low Income Countries and PRGF Considerations
- Review-based conditionality could be applied to low income as well as middle income members.
  - Case for elimination of performance criteria exists in both contexts.
- For PRGF-supported programs:
  - Semi-annual frequency of reviews and disbursements under the PRGF means review-based conditionality would not entail an increase in number of reviews.
- Ex ante conditionality and hybrid option could also be considered for low income programs.
  - Relevant considerations include the longer-term growth and poverty orientation of the PRGF and the lesser degree of integration into global capital markets of PRGF countries; these issues could be addressed in the review of low income facilities.

### Consequential Policy Changes, Follow-Up, and Issues for Directors
- Consequential policy changes:
  - Staff to prepare a further paper containing proposed decisions, including consequential changes required under existing policies such as the Guidelines on Conditionality and the misreporting framework.
- Issues posed for Directors’ discussion:
  - What is the main problem of the Fund’s modalities for monitoring program implementation from members’ perspective? Is there a case to reform these modalities?
  - Do Directors agree the three complementary approaches—(i) review-based conditionality, (ii) ex ante conditionality, and (iii) hybrid approach—all have a role in the Fund’s toolkit depending on circumstances?
  - Do Directors agree these approaches will help over time to reduce the stigma associated with Fund lending?
  - Do Directors see merits in extending these proposed approaches to facilities and instruments for low income members?

### Historical Foundations and Evolution (selected points)
- Legal basis:
  - Article V, Section 3(a) requires the Fund to adopt policies that will (i) assist members to resolve their balance of payments problems in a manner consistent with the Articles of Agreement, and (ii) establish adequate safeguards for the temporary use of the Fund’s general resources.
  - Article I(v) purpose: Fund assistance and the conditions pursuant to which that assistance is provided must assist members in solving their problems without resorting to measures destructive of national or international prosperity.
  - General repurchase period in the Articles: between three and five years; Articles authorize special repurchase periods for special balance of payments problems (e.g., the SLF, SRF, and Extended Fund Facility).
- Historical modalities:
  - Early years: outright purchases primary modality; first stand-by arrangement approved in June 1952 with no performance clauses and initial right to purchase limited to six months.
  - Phasing introduced in 1956; by 1960 phasing became standard.
  - Performance criteria first used in Paraguay in 1957; by 1960 they were standard in upper credit tranche SBAs.
  - First review clause: stand-by arrangement for Brazil in 1958.
  - 1979 Guidelines on Conditionality envisaged monitoring mainly through performance criteria; reviews primarily to set performance criteria beyond the first year or to monitor where uncertainties precluded setting performance criteria.
  - 2000–2002 review: Board noted reviews had become forward- and backward-looking assessments; Board emphasized reviews should not weaken assurances to members and should normally be semi-annual.
  - Guidelines on Conditionality (Decision No. 12864-(02/102), 9/25/2002, as amended by Decision No. 13814-(06/98), 11/15/2006) underlined role of reviews and specified elements to be taken into account for completion of a review.
  - 2005 review of 2002 Guidelines focused on application and did not suggest substantive modifications to role of performance criteria or reviews.
  - 2007 IEO evaluation of structural conditionality recommended parsimony and criticality in structural conditionality; did not suggest changes to rules on performance criteria and reviews.

*Source: _012909 - Executive Summary and selected excerpts (IMF).*

### Executive Summary.......................................................................................................

### Executive Summary

### Purpose of Conditionality
- Conditionality is underpinned by the Articles of Agreement and aims to:  
  - (i) assist members to solve balance of payments problems without resorting to measures destructive of national or international prosperity; and  
  - (ii) establish adequate safeguards for the temporary use of the Fund’s general resources.  
- The conditionality framework involves setting clear and monitorable measures and targets as part of a broader strategy to achieve program objectives.  
- Current modalities for monitoring program implementation include: prior actions, quantitative and structural performance criteria, indicative targets, structural benchmarks, and program and financing assurances reviews.  
- The Framework is flexible regarding specific modalities, and different structures have been used historically.

### Motive for Reform
- Reform of conditionality is part of the broader review of Fund lending facilities (including access levels, charges and maturities, the analytical basis for Fund lending, and facilities for low income countries).  
- Criticisms of the existing framework include perceptions that standard modalities (e.g., performance criteria and waivers) are unnecessarily burdensome, undermining ownership and delaying members’ requests for assistance.  
- The prevalence of waivers and missed structural benchmarks raises questions about the effectiveness of current conditionality as a monitoring tool.  
- Strengthened policy frameworks in many members may warrant different forms of conditionality.  
- The chapeau paper: Review of the Fund’s Financing Role in Member Countries, 8/29/08 (PIN/08/13, 10/9/08) highlighted Director views favoring exploration of new approaches (macroeconomic targets, up-front qualification, or review-based conditionality).

### Options for Reform
- The paper considers three complementary options for reform of program monitoring:

  - Review-Based Conditionality:
    - Eliminate performance criteria and focus on “real-time” assessments of program implementation rather than on rigid and backward looking performance criteria.  
    - A program would still include a small set of quantitative and, where relevant, structural targets expected to be met at specific points during a Fund arrangement.  
    - Failure to meet these targets would not automatically interrupt purchases or trigger a waiver; instead deviations would signal that the program might not be on-track and completion of a review would require a Board judgment that there are compensating factors.  
    - Key advantage: allows reviews to focus on overall program objectives rather than small deviations from specific performance criteria.

  - Ex-Ante Conditionality:
    - Provide full access up-front based on strong fundamentals and policies and an established track record of policy implementation (i.e., ex ante conditionality).  
    - Could reduce perceptions of intrusiveness associated with program implementation.  
    - The Short Term Liquidity Facility (SLF) is cited as a recent and significant example of an ex ante approach.  
    - Key challenge: the Fund needs to re-evaluate the member’s position as time passes.

  - Hybrid Approach:
    - Combine elements of review-based and ex ante approaches for members qualifying for ex ante conditionality who wish to receive an arrangement of relatively longer duration (e.g., in excess of 6 months).

### Applicability and Scope
- The proposed options for reform of conditionality could be considered for all member countries, including low income members.  
- The paper focuses on options for program monitoring methods, not on the underlying design of members’ economic programs.  
- While these options were developed with General Resources Account (GRA) facilities in mind as a complement to a companion paper on the analytical framework, they could apply, as appropriate, to facilities and instruments used by low income members.

### Overview of the Existing Framework (As Framed in the Guidelines on Conditionality)
- Objectives of Fund-supported programs:  
  - (a) solving the member’s balance of payments problems without recourse to measures destructive of national or international prosperity; and  
  - (b) achieving medium-term external viability while fostering sustainable economic growth.
- Program monitoring typically uses prior actions, quantitative and structural performance criteria, indicative targets, structural benchmarks, and program and financing assurances reviews; the Guidelines provide that program implementation “may be monitored” on these bases.  
- Phased financing: purchases are phased and additional financing is linked to demonstrable actions to manage risks to the Fund.  
- Assurances under arrangements: Article XXX(b) requires arrangements to assure members of availability of Fund financing in accordance with the terms of the arrangement; arrangements and program documents must specify fully and transparently the elements to be taken into account for reviews.

### Legal and Historical Foundations
- Legal basis for conditionality: Article V, Section 3(a) requires the Fund to adopt policies that will (i) assist members to resolve their balance of payments problems in a manner consistent with the Articles of Agreement, and (ii) establish adequate safeguards for the temporary use of the Fund’s general resources (Box 1).  
- Article I(v) purpose: Fund assistance and the conditions pursuant to which that assistance is provided must assist members in solving their problems without resorting to measures destructive of national or international prosperity.  
- The general repurchase period in the Articles (between three and five years) provides guidance on the speed of adjustment; the Articles also authorize special repurchase periods for special balance of payments problems (e.g., the SLF, SRF, and Extended Fund Facility).  
- The conceptual framework has remained largely unchanged since the Fund’s inception, while the scope and modalities of conditionality (from macroeconomic to structural coverage, and from little ex post monitoring to extensive use of reviews and performance criteria) have evolved.

### Process and Limitations of This Paper
- The paper sets out initial options for reform; a subsequent paper (GRA Lending Toolkit and Conditionality: Reform Proposals (03/24/09)) identifies specific proposed reforms.  
- The Executive Board decision subsequently maintained quantitative performance criteria (substantial differences between this paper and the subsequent paper are highlighted in the text).  
- This paper addresses methods of program monitoring and does not delve into program design; prior reviews (e.g., the 2005 Review of the Guidelines on Conditionality and the 2007 IEO Evaluation of Structural Conditionality) focused on streamlining structural conditionality and raising standards of criticality and parsimony.

*Source: _012909 - Executive Summary (IMF).*

### 10.      The existing conditionality framework, however, has been subject to

### _012909 - 10.      The existing conditionality framework, however, has been subject to

### Criticisms of the existing conditionality framework
- Perception that Fund-supported programs focus on individual conditions rather than overall performance.
  - Performance criteria and structural benchmarks have become signposts of Fund-supported programs.
  - When performance criteria are not observed and waivers are requested and granted, this can have significant political costs for members and signal to markets that performance has slipped—even though the Board may assess overall performance as satisfactory and complete a review.
- Perception that Fund-supported programs impose a one-size-fits-all model and may not focus on macro-critical measures.
  - The policy places equal weight on each performance criterion even though not all may be equally critical for program objectives.
  - Under the Guidelines on Conditionality, performance criteria may also be established for monitoring program implementation and for implementation of specific provisions under the Articles of Agreement.
  - Frequent completion of program reviews without all performance criteria being met (i.e., waivers) increases the perception that not all performance criteria are critical.
- Perception that Fund-supported programs may impose a tight conditionality framework even where not needed because of a member’s strong policy framework, track record, and fundamentals.
- Overall implication: the existing framework may contribute to stigma, a sense of intrusiveness, and a perceived lack of prestige implied by Fund “tutelage”.

### Alternative conditionality modalities described as historically used or possible
- Outright Purchases
  - Rely on ex ante conditionality: Fund determines that the member has necessary policies and would adopt corrective policies as required, permitting a purchase outside the context of an arrangement (e.g., without phasing and performance criteria).
  - Early years: outright purchases were the primary modality; frequently used into the late 1960s; thereafter mainly for assistance in the first credit tranche and for emergency assistance.
  - The SLF is a more recent example of outright purchases to deliver large amounts of resources.
  - For smaller amounts, Compensatory Financing Facility, Emergency Natural Disaster Assistance and Emergency Post-Conflict Assistance also provided in the form of outright purchases.
- More Flexible Arrangement Modalities
  - Arrangements originally designed to provide members flexibility on whether and when to draw financing; early stand-by arrangements were normally approved for periods not exceeding six months and contained no performance criteria or review clauses.
  - Over time, stand-by arrangements were provided for longer periods but only with a program monitoring framework; a robust program monitoring framework with performance criteria and multiple review clauses has become standard.

### Other IFIs’ approaches to conditionality (summary from Box 2)
- World Bank
  - Adopted five Good Practice Principles for Conditionality: ownership, harmonization, customization, criticality, transparency and predictability.
  - Programmatic lending: sequence of single tranche loans framed within a medium-term policy program; agree on a limited set of critical prior actions and on triggers for the next operation; triggers are sketched in outline and are not included in the legal agreement as “conditions”.
  - Decisions to move to the next operation are based on assessment of progress against triggers.
  - Benefits: flexibility to adjust to new information; Challenges: discretion must be exercised consistently and transparently; triggers must be targeted to be consistent with the Country Assistance Strategy.
- Inter-American Development Bank (IADB)
  - Policy-Based Loan (PBL) is usually a sequence of single tranche loans within a medium-term policy program; loan release depends on compliance with specified conditions and maintenance of an appropriate macroeconomic policy framework.
  - Management judges substantial compliance; compliance affects Board decisions on subsequent loans.
  - Programmatic lending often coordinated with Fund or World Bank loans; typically no conditionality beyond that set by those institutions.
- European Union
  - Medium term balance of payments support (MTFA) for non-Eurozone EU countries: economic policy conditions guided by Convergence Program/National Reform Program; disbursements by successive installments; release based on positive evaluation of progress against specific policy criteria in a Memorandum of Understanding.
  - Macro-financial assistance (MFA) to non-member states: policy-based balance-of-payments support with conditionality verified before release of successive tranches; MFA is contingent upon orderly implementation of a respective Fund (World Bank) program and is designed to minimize cross-conditionality and streamline structural conditions, but may include specific conditionality for EU policy priorities.

### Options for reform (Section III) — overview
- Complementary reform measures intended to achieve conditionality objectives while responding to changing member needs:
  - New review-based conditionality approach where reviews are primary tool for monitoring under GRA arrangements and performance criteria would be discontinued.
  - Greater reliance on ex ante conditionality via outright purchases or arrangements with no program monitoring framework.
  - Hybrid approaches combining elements of ex ante and review-based conditionality.
  - These approaches could apply, as appropriate, to facilities and instruments used by low income members.
- Note: In a subsequent paper the conditionality proposals were revised and in the Decisions adopted by the Executive Board on 3/24/09 quantitative performance criteria were maintained.

### Review-Based Conditionality (detailed)
- Core features
  - Elimination of performance criteria.
  - Fund-supported program would include a quantified macroeconomic framework and specified structural reforms as relevant, along with a set of quantitative targets and structural benchmarks (“targets”) expected to be achieved by various points (e.g., quarterly or semi-annually).
  - Targets would be similar in content to current performance criteria, including standard continuous performance criteria on trade and exchange measures.
  - The criticality test and other specified criteria under the Guidelines on Conditionality would continue to apply.
  - Prior actions could still be required in the same circumstances as under current Conditionality Guidelines.
  - Purchases would still be phased with each successive purchase becoming available as scheduled reviews are completed.
  - Financing assurances reviews under the Lending Into Arrears policy and Guidelines on Conditionality would not change.
- How deviations would be treated
  - Failure to meet targets would not in itself interrupt purchases under the arrangement.
  - Deviations would serve as indicators that the program might no longer be on track.
  - Completion of a review would require a Board judgment that compensating factors exist (e.g., minor or temporary failure, corrective actions taken), analogous to waivers of nonobservance under current Guidelines.
  - In case of substantial deviations and weak commitments to correct slippages, staff and management could decide not to propose completion of a review.
  - Board would be informed in informal country matter sessions about status of discussions; once new understandings are reached the review could be completed and purchases made.
- Operational and governance points
  - Elimination of performance criteria would remove need for waivers of nonobservance (and of applicability).
  - Members would avoid requesting waivers for minor deviations and reduce incentives for window dressing to meet technical performance criteria.
  - Reviews would not be open-ended; assurances regarding access to Fund resources would continue as required by the Fund’s Articles of Agreement (Article XXX(b) defines a stand-by arrangement as a decision “by which a member is assured that it will be able to make purchases from the General Resources Account in accordance with the terms of the decision during a specified period and up to a specified amount.”).
  - Focus on making scope of reviews predictable and transparent.
  - Presumption that reviews would be completed where applicable targets have been met and forward-looking assessment confirms supportive policies.
  - Misreporting framework would continue to apply to inaccurate reporting; staff proposes amending the misreporting framework to cover reporting of information on targets in the absence of performance criteria.

### Advantages of the review-based approach (three cited advantages)
- First advantage
  - Makes transparent the central role played by program reviews, which over time have become the primary mechanism for program monitoring.
  - Performance criteria were originally intended to set parameters for access to the next tranche without further Board involvement; in practice the majority of purchases are tied to reviews (Box 3), reducing “automaticity” associated with performance criteria.
- Second advantage
  - Codifies existing practice and recognizes that program reviews provide context for robust, real-time assessment of program implementation.
  - Reviews are forward-looking and can use a wide range of information and discussions with authorities to agree corrective policies.
  - Performance criteria are rigid and backward looking; precision required for structural measures is often hard to apply without stripping substance.
- Third advantage (implied in text)
  - From the member standpoint, the approach could alleviate stigma associated with performance criteria and waiver requests and allow concentration on achieving program objectives rather than technical compliance.

### Box 3 — Waiver Rates and Review Frequency (selected findings and statistics)
- Summary findings for Stand-By Arrangements (SBAs) since 1995:
  - The average waiver rate (performance criteria not met over total number of performance criteria) over this period was 13 percent for quantitative and 37 percent for structural performance criteria.
  - 81 percent of programs over 2002–07 needed a waiver at some stage during the period of their respective arrangement.
  - About 78 percent of all purchases made available in the period since 1995 were linked to reviews. This ratio increases to 83 percent in drawing SBAs, reflecting greater prevalence of quarterly reviews and purchases in these cases.
- Additional numerical/contextual points preserved exactly as in the source:
  - Period references: 1995; 2002–07; period since 1995.
  - Purchases Subject to Review in SBAs (average 1995–2007): All 78% linked to completion of reviews and 22% linked to observance of PCs; Drawing 83% linked to completion of reviews and 17% linked to observance of PCs.

*Source: _012909 - 10.      The existing conditionality framework, however, has been subject to (PDF).*

### 21.      Third, the use of a review-based approach would largely eliminate the

### _012909 - 21.      Third, the use of a review-based approach would largely eliminate the

### Review-based conditionality: advantages and operational implications
- Eliminates or largely removes “blackout” periods that currently follow each test date and typically range from four to eight weeks during which members cannot access Fund financing until data showing observance of applicable performance criteria become available and, where applicable, a review is completed.
- Under current practice, to make a purchase during the blackout period a member would need a waiver of applicability of the performance criteria for which data are not available.
- For precautionary arrangements, blackout periods interrupt access even if the program is on track unless a waiver of applicability is granted.
- Under a review-based approach:
  - Program targets (unlike performance criteria) are not conditions for the making of a purchase; unavailability of data would not automatically block purchases or necessitate a waiver.
  - If data on the targets are not available by the scheduled review date, the review would likely be postponed.
  - In such cases, the member would be unable to make any purchases from the original scheduled review date until the data become available and the review is completed.
- Potential streamlining measures:
  - Reviews could be completed on a lapse of time basis under existing guidelines where all specified targets have been met.
  - Where programs are on track and no new policy commitments are needed, a short letter of intent from the authorities could suffice.
  - Consideration could be given to allowing semiannual purchases in the credit tranches if authorities and the Fund find more frequent reviews burdensome.
- Current policy reference: in principle to have no less than four purchases in a year for arrangements in the credit tranches.

### Limitations and risks of review-based conditionality
- Will not entirely remove perceptions of intrusiveness arising from underlying program design required for Fund support; review-based conditionality addresses monitoring modalities but not program design itself.
- A presumption for completion of a review if all targets are met could be perceived as a weaker assurance than the certainty of purchase linked directly to observance of performance criteria.
- The absence of performance criteria could make it harder for staff to take a clear position that a program is off-track, potentially enhancing concerns of political interference in decisions to complete reviews.
- For precautionary arrangements, the possibility that a member could make purchases during periods when data are not yet available presents a limited risk to the Fund.

### Frequency of reviews and purchase linkage
- Under the proposed approach, reviews would be required for every purchase (currently these can be delinked from purchases under arrangements in the credit tranches, which may have quarterly purchases but semi-annual reviews).
- The current policy is in principle to have no less than four purchases in a year for arrangements in the credit tranches.
- To reduce burden, reviews could be completed on lapse of time basis where targets have been met, or a short letter of intent could substitute where no new policy commitments are needed.
- If letters of intent are judged to add an unwarranted burden, consideration could be given to allowing semiannual purchases in the credit tranches.
- Semiannual purchases, when warranted by members’ circumstances, should not diminish the availability of financing or the signaling function of a Fund arrangement.

### Ex-Ante conditionality: scope, rationale, and challenges
- Ex ante conditionality provides substantial access upfront where a member’s fundamentals, economic position, and track record indicate balance of payments difficulties would be quickly self-correcting.
- Example cited: the SLF (Special Financing facility) uses an ex ante approach to provide substantial upfront access for members facing exceptional balance of payments difficulties arising from external market developments.
- Rationale:
  - If no new measures are required to resolve balance of payments difficulties and a member’s strong track record gives the Fund confidence in the member’s response to unexpected developments, phased purchases and ex post monitoring tools may not be needed.
- Minimum prerequisites for ex ante conditionality:
  - Strong economic policies and fundamentals and an established track record of implementing appropriate policies.
  - The member’s reform agenda for reducing vulnerabilities is substantially completed, with relatively few remaining measures needed to resolve difficulties.
- Appropriate use cases:
  - Particularly suitable for capital account-related financing to members already in a very strong economic position with a strong record of policy implementation, where resource needs are normally quite high and front-loaded.
  - Could be applied in the context of precautionary arrangements to provide significant upfront Fund financing as effective crisis prevention.
- Advantages:
  - For qualified members, purchases would not be subject to any ex post conditionality, directly addressing stigma associated with Fund lending.
  - Risks to the Fund are likely to be low for highly qualified members due to strong policies and fundamentals.
- Key challenges:
  - Difficulty in defining the threshold for qualification.
  - Potential for political pressures in qualification decisions.
  - Need for the Fund to re-evaluate members’ positions over time, since arrangements in the past under this approach were short (no longer than six months); as arrangements become longer, Fund resources could be at greater risk if a member’s situation changes.

### Hybrid approach (ex ante + review-based) for longer arrangements
- Designed for members qualifying for ex ante conditionality who wish arrangements longer than 6 months.
- Elements:
  - Full amount under an arrangement available upfront in a single purchase (no phasing) as under ex ante conditionality.
  - Unlike pure ex ante approach, the member’s continuing right to purchase periodically becomes subject to completion of reviews—once a review date is triggered, the purchase could be made only if that review were completed.
  - The underlying program would involve quantified targets against which performance is assessed at periodic reviews.
- This approach resembles the Rapid Access Line proposal considered earlier by the Board.

### Applicability to low income countries
- Review-based conditionality could be applied to low income as well as middle income members.
  - The case for elimination of performance criteria exists in both contexts, suggesting review-based conditionality could be desirable for both.
- For PRGF-supported programs:
  - Given the semi-annual frequency of reviews and disbursements under the PRGF, review-based conditionality would not entail any increase in the number of reviews.
- Ex ante conditionality and the hybrid option could also be considered for low income programs.
  - Relevant considerations: the longer-term growth and poverty orientation of the PRGF (compared to the shorter-term and stability-oriented focus of the SBA); and the lesser degree of integration into global capital markets of PRGF countries.
  - These issues could be addressed further in the context of the review of low income facilities.

### Consequential policy changes and follow-up
- Based on Directors’ guidance, staff would prepare a further paper containing proposed decisions, including consequential changes required under existing policies such as the Guidelines on Conditionality and the misreporting framework.

### Issues for discussion (for Directors)
- What do Directors see as the main problem of the Fund’s modalities for monitoring program implementation from the members’ perspective? Do Directors agree there is a case to reform these modalities?
- Do Directors agree that the three complementary approaches described—(i) review-based conditionality, (ii) ex ante conditionality, and (iii) hybrid approach—all have a role in the Fund’s toolkit depending on circumstances?
- Do Directors agree that these complementary approaches will help over time to reduce the stigma associated with Fund lending?
- Do Directors see merits in extending these proposed approaches to facilities and instruments for low income members?

### Historical context (Annex summary: evolution of performance criteria and reviews)
- Early modality: outright purchases with ex ante assessment of policies and no framework for performance monitoring or consultation.
- Stand-by arrangements:
  - First stand-by arrangement approved in June 1952; early arrangements contained no performance clauses and initial right to purchase limited to six months.
  - Phasing introduced in 1956; by 1960 phasing became standard.
- Performance criteria:
  - Introduced to provide objective assurances on when purchases could be made and to safeguard the Fund by allowing automatic interruption of purchases when a program was off-track.
  - First used in Paraguay in 1957; by 1960 they were standard in upper credit tranche stand-by arrangements.
- Program reviews:
  - First review clause included in a stand-by arrangement for Brazil in 1958.
  - Reviews evolved into conditionality especially after the establishment of the Extended Fund Facility in 1974 and the adoption of the Guidelines on Conditionality in 1979.
- 1979 Guidelines on Conditionality:
  - Envisaged program monitoring mainly through performance criteria; program reviews primarily to set performance criteria beyond the first year or to monitor where uncertainties precluded setting performance criteria.
- 1980s–2000s evolution:
  - Increasing use of reviews reflecting complexity of members’ problems and the growing importance of structural policies that are often difficult to quantify.
  - Board retained view that performance criteria remained critical, while reviews provided broader evaluation necessary to assess program modifications.

*Source: IMF internal paper excerpt.*

### 9. By the 2000s, reviews had come to play an important role in assessing policies from a

### _012909 - 9. By the 2000s, reviews had come to play an important role in assessing policies from a

### Role of reviews by the 2000s
- Reviews had come to play an important role in assessing policies from a forward-looking as well as a backward-looking perspective.
- Reviews became both more frequent and broader in scope, implying a shift toward greater discretion by the Fund and the possibility of less assurances to the member.
- Reviews were increasingly used for broad-based assessments of progress with various aspects of the program—reflecting the possibility that, notwithstanding observance of all performance criteria, a program could still fail to meet the broad macroeconomic targets and there could be unforeseen developments, and thus the review would not be completed.
- In certain areas, reviews were also being used for more focused policy assessments.

### Review of Conditionality (2000–2002)
- During 2000-2002, the Board conducted a comprehensive review of conditionality aimed to enhance the effectiveness of Fund-supported programs.
- The 2001 discussion noted that the role of program reviews had changed importantly over the past two decades, with reviews used for forward- and backward-looking assessment of economic policies.
- Two reasons for the change were highlighted:
  - increased uncertainty of macroeconomic relationships in a world of volatile global capital markets, making it more difficult to specify macroeconomic performance criteria for more than a brief period ahead;
  - structural policies had become more prevalent and were less amenable to assessment in terms of quantified performance criteria.
- The Board emphasized that increasing prevalence of reviews should not weaken assurances to member countries regarding the conditions under which they would continue to have access to the Fund’s resources.
- In the 2002 discussion, the Board envisaged reviews could become even more important as the use of other forms of conditionality—performance criteria and prior actions—was streamlined, while stressing the need for a clear delineation of the scope of program reviews.
- Directors reaffirmed that reviews should normally be on a semi-annual basis, while recognizing that more frequent reviews may be necessary in certain cases (particularly crisis cases).

### Guidelines on Conditionality (2002)
- The adoption of the revised Guidelines on Conditionality in 2002 was the culmination of the 2000-2002 review of conditionality.
- The main focus of the 2002 Guidelines on Conditionality was structural conditionality, with the aim of focusing and streamlining it and enhancing national ownership of policy programs.
- The 2002 Guidelines underlined the role of reviews in assessing macroeconomic policies from a forward-looking as well as a backward-looking perspective; a program review would be completed only if the Board is satisfied, based on the member’s past performance and policy understandings for the future, that the program remains on track to achieve its objectives.
- In making this assessment, the Board must take into consideration, in particular, the member’s observance of performance criteria, indicative targets, and structural benchmarks, and the need to safeguard Fund resources.
- To provide assurances, the elements of a member’s program that will be taken into account for the completion of a review should be specified as fully and transparently as possible in the arrangement.
- Decision reference: Guidelines on Conditionality, Decision No. 12864-(02/102), 9/25/2002, as amended by Decision No. 13814-(06/98), 11/15/2006.

### Review of the 2002 Conditionality Guidelines (2005)
- In 2005, the Fund reviewed the 2002 Conditionality Guidelines, which covered, inter alia, an assessment of recent experience with implementation of conditionality since the adoption of the 2002 Guidelines.
- The 2005 review focused on the application of the Guidelines, and did not suggest substantive modifications to the role of performance criteria or reviews as set out in the Guidelines.
- Reference: IMF Executive Board Discusses Review of the Conditionality Guidelines, PIN/05/52, 4/15/2005.

### Evaluation of Structural Conditionality by the Independent Evaluation Office (2007)
- In 2007, the Independent Evaluation Office (IEO) conducted an evaluation of structural conditionality.
- The IEO recommendations mainly focused on parsimony and criticality in the setting of structural conditionality, and did not suggest reforms or new directions in relation to the existing rules on performance criteria and reviews in Fund arrangements.
- Reference: Independent Evaluation Office – Evaluation of Structural Conditionality in IMF-Supported Programs, 2007.

*Source: _012909 - 9. By the 2000s, reviews had come to play an important role in assessing policies from a; Review of Conditionality (2000–2002); Guidelines on Conditionality (2002); Review of the 2002 Conditionality Guidelines (2005); Evaluation of Structural Conditionality by the Independent Evaluation Office (2007).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_012909.pdf_