## 2011 Review of Conditionality and the Design of Fund-Supported Programs — Concept Note

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### Introduction
- The Fund conducts regular assessments of conditionality, with the next formal review planned for 2011.
- Since the previous review completed in 2004-05, key changes include:
  - Conditionality has been streamlined, focused, and better tailored to countries’ policy performance.
  - Discontinuation of structural performance criteria (SPCs) in March 2009 and a shift towards review-based monitoring of structural performance.
  - Introduction or revamping of facilities and instruments under the General Resource Account (GRA) and the Poverty Reduction and Growth Trust (PRGT), and more systematic use of ex-ante conditionality.
  - The global financial crisis increased arrangements and complicated program design and implementation because of unexpected shocks and spillover effects from major advanced countries.
- Proposed scope and approach:
  - Focus on assessing the impact of recent changes and developments.
  - Broad approach covering explicit conditionality and overall program design.
  - Cover all forms of Fund-supported programs meeting the standards of upper credit tranche conditionality (matching scope of earlier reviews).
  - Study more systematically a broader set of program indicators (e.g., prior actions and indicative targets — notably related to social protection — in addition to QPCs, SBs, and PCs).
  - Early evaluation of the shift to review-based assessments and of how recent changes to IMF policies (including access to IMF financing) affected the balance between adjustment and financing.
  - Proactive engagement with external stakeholders on views of conditionality.

### Earlier assessments of conditionality
- The 2004-05 review:
  - Covered program design and application of conditionality; examined Fund-supported programs approved during 1995-2000 (with data through 2003).
  - Separate papers examined application of the Conditionality Guidelines in arrangements approved from 2001 through mid-2004 (with data through mid-2004).
- Main conclusions of the 2004-05 review:
  - On program design:
    - Fund-supported programs were tailored with macroeconomic and structural policies generally formulated in line with program objectives and country circumstances.
    - In middle-income countries, external adjustment was generally geared towards achieving medium-term debt sustainability, but was sharper and more abrupt than indicated by circumstances in a number of cases.
    - In low-income countries, program objectives were often to place the economy on a more sustainable long-term path for growth and the balance of payments, rather than an immediate improvement in the current account balance.
  - On formal aspects of program conditionality:
    - Coverage of structural conditionality had shifted towards critical measures, and program-related conditions had become clearer, but the number of structural conditions had not decreased much.
    - Fund-supported programs experienced fewer permanent interruptions.
    - Waiver rates had not declined, but implementation, measured as the number of waived PCs that were eventually met, had improved.
    - Conditionality could not substitute for program ownership in order to achieve program objectives.
- Post-2004 developments and reforms:
  - Operational guidance note on conditionality revised after 2004-05 review.
  - Independent Evaluation Office (IEO) evaluation in 2007 found streamlining shifted conditionality toward core IMF areas but did not reduce overall volume; some conditionality was not critical for program goals.
  - Further revisions emphasized parsimony and criticality; reaffirmed five interrelated principles from the 2002 Conditionality Guidelines: national ownership, parsimony, tailoring to country circumstances, effective coordination of multilateral institutions, and clarity in specification of conditions.
  - In 2009, SPCs were discontinued in all Fund-supported programs; monitoring moved to a review-based approach to enhance flexibility, tailor conditionality to countries' policy performance, reduce SPC-related stigma, while preserving safeguards.
- Recent Fund analyses:
  - For low-income countries: structural conditionality became more streamlined; program design showed increased flexibility accommodating larger fiscal and current account deficits; emphasis placed on strengthening social protection.
  - For emerging market countries: macroeconomic policies were supportive with accommodative fiscal stances adapted to evolving conditions; larger and more frontloaded financing packages created room for policy accommodation in GRA-supported programs; initial program conditionality was more focused and observance better, suggesting improved country ownership.
  - Trends indicated a decline in the number of structural conditions and conditionality becoming more focused on core IMF areas.

### Key issues for the forthcoming review
A. Content and application of program conditionality
- Proposed empirical coverage:
  - Quantitative and qualitative assessment of conditionality in Fund-supported programs approved during 2002-10, with emphasis on recent years.
  - Examine content, evolution, and breakdown of conditionality by policy area (fiscal, monetary, exchange rate, financial, other structural policies), by country-income groups, by instrument/facility type, and by level of access.
  - Assess consistency of conditionality with program goals and alignment with the five principles from the 2002 Guidelines.
- Dimensions to be analyzed:
  - Quantitative performance criteria (QPCs), structural performance criteria (SPCs), structural benchmarks (SBs), prior actions (PAs), indicative targets (ITs), and the qualification criteria for the Flexible Credit Line (FCL).
  - Special focus on PAs and ITs following March 2009 revisions and discontinuation of SPCs.
  - ITs’ role in informing Executive Board reviews and assessing emphasis on social protection and changes in public wage bill ceiling policy.
- Data sources and methods:
  - Statistical analysis using the revamped Monitoring of Fund Arrangements (MONA) database tracking all formal conditions, staff macroeconomic forecasts, and program implementation.
  - Country case studies including Ex-Post Evaluations and Ex-Post Assessments.
  - Surveys and structured interviews with country authorities, the Executive Board, mission chiefs, donors, and other external stakeholders; staff proposes country authority survey coordination with Executive Director’s offices.

B. Program design and implementation
- Areas of exploration:
  - How program design addressed country-specific needs while remaining consistent with Fund policy.
  - Whether the balance between adjustment and financing (including in exceptional access cases) supported sustainable economic recovery, promoted growth, and reduced unemployment.
  - Whether programs adapted to evolving country circumstances while maintaining evenhandedness across membership.
  - How program design incorporated macro-financial linkages and international spillovers.
  - Specific issues: composition of fiscal adjustment; accounting for social impact of planned policy measures; treatment of the 2009 Special Drawing Rights (SDR) allocation in program design.
- Assessment of implementation:
  - Examine whether recent conditionality policy changes improved implementation through streamlining, ownership, and flexibility.
  - Explore relationship between initial program design, conditionality, and subsequent flexibility and implementation.

C. Outcomes of Fund-supported programs
- Macroeconomic outcomes to be analyzed (compared with relevant comparators by income groups, instrument/facility type, level of access, or macro-economic conditions):
  - GDP growth
  - Inflation
  - Current account balance
  - Fiscal balance
  - Reserves coverage
  - Money growth
- Social outcomes:
  - Direct assessment is difficult due to data lags; will explore via intermediate indicators such as public expenditure in priority areas.
- Crisis-period focus:
  - Analyze contribution of flexibility in program design during the recent crisis period to improving outcomes.
  - Compare outcomes across programs with different objectives (e.g., adjustment to capital account crises, traditional current account crises, protracted balance-of-payments needs typical of low-income or transition countries).

### Issues for discussion (questions posed to Executive Directors)
- Do Directors agree with the general approach presented, including coverage of nature and content of conditionality, program design, implementation, and macroeconomic outcomes? Are other general areas to be addressed?
- What other issues and questions should be addressed concerning application of IMF conditionality, program design and implementation, or macroeconomic outcomes?
- Views on types of facilities and instruments to include in the review.
- Views on outreach to external stakeholders, the Board, and staff, including proposed surveys.
- Other concerns or issues the review should examine.

*Source: 2011 Review of Conditionality and the Design of Fund-Supported Programs — Concept Note*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_012111.pdf_