## _072314

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### EXECUTIVE SUMMARY — Purpose and scope
- Aim: provide broad guidance on the operational implications of the 2002 Conditionality Guidelines and the key principles underlying the design of conditionality in Fund-supported programs.
- Five inter-related principles highlighted:
  - national ownership of programs
  - parsimony in program-related conditions
  - tailoring of programs to country circumstances
  - effective coordination with other multilateral institutions
  - clarity in the specification of conditions
- Operational issues grouped into three areas:
  - program discussions with the authorities and program design
  - the design of conditionality
  - the presentation of conditionality in Board papers
- Intended use: an aid to the implementation of the guidelines (not a comprehensive guide), to be used in conjunction with other operational guidance notes (e.g., jobs and growth issues and debt sustainability analysis).
- Revision policy: will continue to be revised on a periodic basis, especially following regular reviews of the conditionality guidelines.
- Date on document: July 23, 2014

### Background and evolution
- Origins and milestones:
  - 2000-02 comprehensive review culminating in adoption of the conditionality guidelines on September 25, 2002.
  - 2002 Guidelines replaced the 1979 Guidelines and the Interim Guidance Note on Streamlining Structural Conditionality of September 18, 2000.
- Revisions and focal points over time:
  - 2003: initial issuance of guidance note.
  - 2005: emphasized importance of ownership and enhanced guidance on design of conditionality.
  - 2008: strengthened parsimony by emphasizing criticality and requiring rigorous justification.
  - 2010: reflected reform discontinuing performance criteria for structural measures in all Fund arrangements effective on May 1, 2009, and greater reliance on a review-based approach to monitor structural reforms.
  - 2014 revision: focused on conditionality related to macro-social (jobs and growth) issues, leveraging surveillance and technical assistance, improving partnerships with other institutions (particularly RFAs), and added guidance on review-based monetary policy conditionality.

### Key principles and program design responsibilities
- Core design principles reiterated:
  - conditionality should be limited to variables and measures that are critical to achieve program goals, critical for monitoring program implementation, or necessary for implementing specific provisions under the Articles of Agreement.
  - where feasible and appropriate, adverse effects of program measures on the most vulnerable should be mitigated.
- Division of responsibility:
  - primary responsibility for program design lies with the member’s authorities to promote ownership.
  - country authorities are responsible for drafting LOI, MEFP, and TMU; staff should assist and cooperate in drafting.
  - Fund retains responsibility for maintaining conditionality and program quality.
- Implication: allowing more time for program formulation may be necessary to support ownership and drafting responsibilities.

### Operational guidance for staff during program discussions and preparation
- Staff roles and practices:
  - seek authorities’ views early and accommodate their preferences and policy choices where possible, consistent with resolving balance–of-payments problems, macroeconomic stability, and other program goals.
  - follow preparation and review processes that facilitate reflection on links between program goals, strategies, and conditionality.
- Practical steps and considerations:
  - build program goals on issues identified in previous engagements (Article IV consultations, technical assistance missions, staff visits, ex-post assessments, FSAP reports, bilateral meetings).
  - identify goals as specifically as possible; treat goals extending beyond the program period in context of successor arrangements or surveillance.
  - conduct increased contingency planning for countries at risk under strict confidentiality.
  - undertake outreach with regional or other institutions not used to working with the Fund to build mutual understanding ahead of coordination.
  - identify reform strategies early, including specific structural measures critical to achieving program goals; consider timing and sequencing and calibrate to the business cycle.
  - allow program modifications as new information and firmer authority views emerge during preparation and review.
  - emphasize flexibility to accommodate ownership, implementation capacity, and member circumstances—recognizing constraints when time pressures are high.
  - use preparation process to ensure conditionality is parsimonious and well matched to tightly specified program goals, with regard to likely effects on growth, employment, and—where relevant—income distribution.
  - sketch reform strategy and indicate anticipated structural conditionality as early as possible (including in Policy Consultation Meetings).
  - where conditionality touches non-core measures, require strong justification and detailed explanation of criticality; draw on other institutions’ expertise as appropriate.
  - enhance program risk analysis, including in-depth debt sustainability assessments—particularly for market-access countries seeking or having exceptional access or other high-scrutiny situations.
  - in PRGT-supported programs, program requests should be explicit on how they advance poverty reduction and growth objectives and cross-reference existing poverty reduction strategies where relevant; include mitigation measures for adverse impacts on the most vulnerable where feasible and appropriate.
  - Policy Notes (PNs) for program discussion missions should, when possible, outline the authorities’ views and initial proposals and the proposed staff response, including options and rationale for criticality of proposed conditionality; if staff cannot report authorities’ views, this should be made clear in the PN.
- Purpose: define early the contours of the program, including links between program goals, reform strategies, and supporting conditionality, while preserving essential flexibility.

### Ownership, outreach, and implementation assessments
- Broadening support:
  - staff should assist members in broadening support for sound policies through participatory processes and transparent engagement.
  - PRSPs are required in ECF (and PSI)-supported programs; low-income country instruments are designed to support policies rooted in country-owned strategies aimed at poverty reduction and growth.
  - staff assistance can include seminars, training, meetings with interest groups and civil society, and media engagement, with sensitivity to authorities’ views on staff contact with domestic groups and possible need to seek prior agreement.
  - resident representatives can be useful in providing such assistance.
  - broadening political support may require allowing more time for program formulation.
- Implementation risk assessment:
  - PNs should include explicit assessments of potential implementation difficulties, including challenges to broader ownership and country-specific issues (constitutional and political structures).
  - special attention when implementation depends on legislative approval or actions by lower levels of government (e.g., sub-national fiscal adjustment, SOE reforms).
  - when implementation requires cooperation by several ministries, their positions are relevant to assessments.
  - where appropriate, approval by the responsible decision-making entity (cabinet, Parliament, sub-national bodies) may be specified as prior actions.
  - if doubts exist about implementation after approval, the measure should be made a prior action.

### Assessment of technical capacity in PNs and staff reports
- PNs should include an assessment of technical capacity, including capacity building in the program.
- PNs and staff reports should explicitly:
  - identify key capacity weaknesses;
  - explain how those weaknesses may affect the ultimate design of the program;
  - highlight the measures under the program to build capacity in those areas.
- Papers could elaborate on the needed focus of technical assistance and training, and the possible modalities.
- Footnote: "A member needs to have the capacity to implement a Fund-supported program; particularly, program conditionality may not be established in areas in which the member still needs to build implementation capacity."

### Collaboration with other multilateral institutions and RFAs
- Consult with staffs of other multilateral institutions early in program design, especially on critical areas outside the Fund’s core expertise.
- PNs should provide details of coordination in areas of overlap, including delineation of analytical responsibilities (lead agency principle).
- Maintain dialogue with RFAs to build mutual understanding on country and regional developments and policies.
- Where the RFA provides financing:
  - staff should understand timing and phasing of RFA disbursements as these could be important parameters for the Fund-supported program;
  - reach mutual understandings on policy objectives and program design to remove or minimize inconsistencies if the RFA plans its own program with macroeconomic or structural conditionality.
- Key constraints and responsibilities:
  - The Fund should continue to make its own judgment on when and under what terms to provide financing.
  - Conditionality under the Fund-supported program should be guided by the conditionality principles (see paragraphs 15-16) and not aim to parallel RFA conditionality.
  - The Fund cannot delegate the monitoring of conditionality to RFAs.
  - Under the Fund’s Articles of Agreement, the Fund can only provide its general resources to individual countries, and not to RFAs.
- Footnote: RFA defined as a regional financing mechanism.

### Designing conditionality: criticality, scope, parsimony, and expertise
- Program-related conditions generally must be:
  - critical to the achievement of program goals, or
  - critical to monitoring implementation of the program, or
  - necessary to the implementation of specific provisions under the Articles of Agreement or policies developed there under.
- Criticality judgment: if a condition is not implemented, goals would not be achieved or program monitoring would not be possible.
- All critical measures generally must have conditionality associated with them to allow interruption of purchases or disbursements if the program is off track or information is insufficient for monitoring.
- Staff must avoid setting conditions on measures that are desirable but not critical for achieving program goals or monitoring implementation.
- Applicability across core and non-core areas:
  - criticality applies to all measures—core Fund areas or outside them, whether or not covered by another agency’s conditionality.
  - focus should be primarily on core Fund competencies.
  - for non-core but critical measures: require detailed explanation of criticality and strong justification; draw on advice of other multilateral institutions or bilateral donors as appropriate.
  - if necessary expertise is unavailable, approving a Fund-supported program exposes the Fund to reputational and financial risk; the Fund may face choosing between those risks or not supporting the authorities’ program.
- Principles of parsimony and ownership:
  - apply parsimony and criticality to all program-related conditions.
  - refrain from introducing donor-requested conditionality if not critical.
  - donor-driven indispensable measures should be clearly identified in the staff report with criticality justified.
  - authority-requested non-critical conditions could be addressed in LOI/MEFP, distinguishing them from conditions tied to Fund financing.

### Prohibition on cross-conditionality and independent Fund judgment
- Cross-conditionality (making Fund resource use directly subject to rules or decisions of other organizations) is prohibited under the Fund’s Guidelines on Conditionality.
- The Fund cannot delegate its responsibility to assess whether conditions for use of its resources have been met.
- If the Fund assesses conditions have not been met, it will not disburse, irrespective of judgments by RFAs or other organizations.
- Conversely, if the Fund believes conditions have been met but others disagree, the Fund may still be unable to allow use of its resources if delays by other institutions raise financing assurance issues.

### Level of detail, scope of reviews, and timing of conditionality
- Conditions should provide authorities clarity on measures on which access to Fund resources depends.
- Balance required: highly detailed conditions may guide authorities but risk being perceived as micromanagement; decisions on detail are case-by-case.
- Reviews contain backward- and forward-looking components:
  - backward-looking: focus on quantitative performance criteria, indicative targets, and structural benchmarks where possible;
  - forward-looking: assess prospects for achieving program objectives and may modify objectives/measures as new information arrives.
- Original program documents should describe uncertainties that could require additional or modified conditionality during reviews.
- Conditionality beyond the first year of a multi-year program will normally be set in the context of reviews.
- Conditions added during reviews should be anchored on the initiating program document; new reform-area conditions require clear justification of criticality.
- The last program review may serve for stocktaking and preliminary assessment of program goals and implementation experience.

### Review-based approach to structural conditionality
- Since May 1, 2009, monitoring of structural reforms is conducted through reviews; structural conditions are assessed in a program review and take the form of structural benchmarks or prior actions.
- Structural performance criteria are no longer used.
- Reviews are the primary tool for monitoring structural elements; programs should include a specified agenda for critical structural reforms, if relevant.
- Structural benchmarks:
  - should be critical for achievement of program objectives, directly or as key components of broader critical reforms;
  - failure to meet a structural benchmark does not automatically interrupt a purchase or disbursement; deviations are indicators that the program may be off track and completion of the review requires a Board judgment of compensating factors.
  - in case of substantial deviations and weak commitments to correct slippages, staff and management could decide not to propose completion of a review.

### Review-based approach to monetary policy conditionality
- Traditional monetary policy conditionality used two standard quantitative performance criteria (PCs):
  - a floor on net international reserves (NIR) to ensure external sustainability;
  - a ceiling on net domestic assets (NDA) to avoid excessive credit expansion.
- In evolving monetary regimes, single-digit inflation, financial innovation, and deepening have increased non-observance of monetary targets; no statistical correlation observed in a low inflation context between reserve money target deviations and inflation deviations.
- A review-based approach to assess monetary policy is an option, especially as countries adopt more flexible and forward-looking frameworks emphasizing policy interest rates and inflation targets or objectives.
- NDA targets may still remain useful in addressing country-specific risks or circumstances where a review-based approach might be appropriate.

### Implementation of review-based monetary conditionality: ICCs and MPCCs
- Inflation Consultation Clauses (ICCs):
  - Applied in inflation-targeting countries where:
    - central bank has a track record of commitment to low inflation;
    - central bank has the technical capacity (and tested models) to forecast inflation over an 18-24 month horizon;
    - clear empirical measures of well-anchored inflation expectations are available;
    - transmission mechanism from interest rates to prices is well understood.
  - Approach includes:
    - periodic (usually quarterly) reviews assessing current inflation against forecast and inflation outlook;
    - an ex ante understanding, when deviations from targeted inflation path by a pre-specified margin occur, on timely remedial monetary policy response between Fund staff and authorities;
    - a NIR floor to maintain external sustainability and safeguard the use of Fund resources;
    - a mechanism to deal with country-specific risks.
  - Under ICC:
    - an inflation target and a tolerance band around a central inflation target guide assessments during reviews;
    - a consultation is triggered when inflation falls outside the band:
      - consultation with the Executive Board if actual inflation falls outside an outer band;
      - informal consultation with Fund staff if actual inflation falls outside an inner band.
    - If an Executive Board consultation is triggered under the ICC, access to Fund resources would be interrupted until such consultation takes place.
  - Note: "Some recent Fund-supported programs have only had a single band."
- Monetary Policy Consultation Clauses (MPCCs):
  - Considered for countries with evolving monetary policy frameworks that have minimal fiscal dominance, relatively low and stable inflation, and a good track record of monetary policy implementation supported by central bank technical and institutional development, or that are committed to substantially strengthening the policy framework.
  - Under MPCC:
    - monetary policy conditionality includes a quantified macroeconomic framework with a set of (quarterly or semiannual) monetary aggregate or inflation targets normally within a single tolerance band, assessed during program reviews;
    - deviations from the band trigger a consultation with the Fund’s Executive Board as part of the general review process, focusing on assessment of monetary policy stance and program track, reasons for deviations and compensating factors, and proposed remedial actions if needed.
    - When consultation is triggered, access to Fund resources would be interrupted until it takes place and the relevant program review is completed.
    - Programs would include a NIR floor, as a PC, to maintain external sustainability and safeguard Fund resources.
    - Indicative targets related to monetary policy (e.g., on NDA or net credit to government) could be included to address country-specific risks such as external stability or fiscal dominance concerns.
    - If MPCC selects inflation as the central target variable, a narrower inner band could be used as an early warning mechanism triggering an informal consultation with Fund staff.
- The adoption of a review-based monetary conditionality could be supported by structural benchmarks where policy implementation track record or institutional set-up gaps exist.
- Footnote: NDA ceilings, when maintained, require clarity on the relationship between NDA and inflation targets in the staff report.

### Prior actions: purpose, constraints, and timing
- Prior actions may be specified to be completed before the scheduled date of a Board discussion to approve an arrangement, complete a review, or grant a waiver when upfront implementation is critical to achieve program goals or monitor implementation, including when there are significant doubts that the measure would be implemented at a later date.
- Conditions set for completion of future reviews are not prior actions and should be classified as either quantitative performance criteria or structural benchmarks.
- Prior actions are to be applied parsimoniously and must be justified in terms of their criticality to program objectives.
- Prior actions are often used in cases of countries with weak track records of implementation to ensure minimum implementation standards, but staff must be mindful that prior actions may be implemented without genuine ownership and that implementation may be nominal or temporary.
- Normal practice: "all prior actions must be carried out at least five working days before the Board discussion to which they relate."

### Waivers of quantitative performance criteria
- A waiver may be granted for nonobservance of a quantitative performance criterion if the Fund is satisfied that the program will nevertheless be successfully implemented—i.e., that it will achieve its goals—either because of:
  - the minor or temporary nature of the nonobservance; or
  - corrective actions taken by the authorities.
- Cases where the Fund considers that a performance criterion is no longer critical (because circumstances have changed or the Fund previously erred in the design of conditionality) could be treated as cases where the deviation would be considered "minor" in terms of its impact on program goals.

### Outcomes-based conditionality
- Program-related conditions may be set on targets and objectives as well as on actions, but outcomes chosen as conditions must still be reasonably under the control of the authorities to avoid undue use of waivers due to exogenous shocks.
- Outcomes-based conditionality should be designed to minimize the risk that targeted outcomes are achieved by means of policies that would undermine program goals (example: achieving higher revenue by increasing import tariffs).
- Even when conditions cannot be applied to outcomes, conditions can be formulated so they may be met by implementing various measures.
- "Contingent adjustors to quantitative targets could also be used to address selective exogenous developments (such as a shortfall of projected external aid) to avoid undue use of waivers."

### Implementation timetables and floating tranches
- Implementation timetables should be realistic but appropriately ambitious; avoid pressing for overly ambitious timetables, which have been a major reason for frequent waiver requests.
- Floating tranches:
  - Allowed as a device in conditionality design.
  - Availability contingent on implementation of a specific measure or measures with no fixed date attached; other purchases/disbursements remain tied to test dates.
  - May enhance ownership by giving authorities flexibility in choosing reform timetables, especially where timing uncertainty exists or upfront timing commitment is undesirable.
  - Measures attached to floating tranches should satisfy two criteria:
    - They must strengthen the external position over the medium term to warrant release of additional Fund resources.
    - They must increase the balance of payments need in the short term—otherwise the program would be underfinanced without the measure, or overfinanced with it.
  - Examples of measures that could satisfy these criteria include trade liberalization and debt restructuring needs.
  - Structural reforms appropriate for floating tranche conditionality are not expected to occur in many cases but should be considered when criteria are met.

### Presentation in Board papers and Bank–Fund collaboration
- Board papers should clearly explain the choice of conditionality, particularly judgments of criticality supporting inclusion of structural measures.
  - Program goals and strategies adopted to achieve them should be set out as clearly as possible; at approval of a new arrangement, the staff report should lay out links between program goals, reform strategies, and corresponding structural conditionality (one option is a separate text table).
  - Staff reports need to indicate what is expected in subsequent review(s) and specify critical future actions as structural benchmarks to make scope of review predictable and transparent.
  - Staff reports for program reviews should update on objectives of the structural reform agenda, strategies adopted, and assess whether structural elements have been implemented successfully.
- Conditions outside Fund core areas:
  - May be established but require detailed explanations of criticality and strong justification, reflecting a presumption that non-core measures are less likely to pass the test.
  - Staff reports should indicate which institution or donor provided expert advice; if external expertise is relied upon, related risks must be transparently reported.
- Staff assessment of potential implementation difficulties:
  - Staff reports should candidly discuss concerns about ownership and related risks to implementation and convey the rationale for proceeding when doing so.
- Identification and distinction of program conditions:
  - Program conditions should be clearly identified and distinguished from other measures in program documents and staff reports.
  - Effective practice: include tables in the LOI/MEFP listing all quantitative performance criteria, indicative targets, prior actions and structural benchmarks; measures that are not conditionality should be listed separately as the authorities' reform agenda.
  - Status of all past performance criteria, indicative targets, prior actions, and structural benchmarks should be reported, with detailed discussion for unmet or delayed conditions.
  - Staff reports should include clear justifications for waivers of performance criteria.
- Bank–Fund and other collaboration:
  - Program staff reports must discuss collaboration with other multilaterals, in particular the World Bank, where applicable.
  - Relevant information related to the Bank should be in the annex on Bank-Fund collaboration, but pertinent information on collaboration with other institutions, including RFAs, should be included in the main staff report.
  - Staff reports should discuss how Bank- and Fund-supported programs have been coordinated (for example, where the Fund macro framework has been modified to accommodate Bank-supported reform programs).
  - Monitoring responsibilities of multilateral institutions or RFAs should be clearly delineated, with the Fund bearing ultimate responsibility for establishing and monitoring its conditionality.

### Appendix I: Illustration of criticality of program structural conditionality (selected entries)
- Prior actions (illustrative examples based on Ghana PRGF program):
  - Adoption of budget to limit fiscal deficit to 9.4 percent of GDP in 2009. Implemented. Rationale: "A first step toward fiscal and debt sustainability (¶18)."
  - Adoption of measures yield at least 1.0 percent of GDP to offset projected expenditure overruns in the 2009 budget. Implemented. Rationale: "To preserve macroeconomic stability and avoid crowding out private sector credit (¶24)."
  - Selective public sector hiring freeze, with exemptions mainly limited to health and education trainees. Implemented. Rationale: "To strengthen control of the high and growing public payroll (¶46)."
  - Reinstatement of automatic bi-weekly price adjustments for petroleum products. Implemented. Rationale: "To eliminate energy subsidies (¶52)."
- Structural benchmarks (timing and rationale examples):
  - Complete comprehensive reviews of zero-rated VAT items and the nature and scope of tax exemptions and discretionary waivers. Timing: End-Sep. 2009. Rationale: "Strengthen revenue mobilization as part of the fiscal consolidation strategy (¶32)."
  - Cabinet approval of a modernization strategy for revenue administration. Timing: End-Dec. 2009. Rationale: "Strengthen revenue mobilization as part of the fiscal consolidation strategy (¶35)."
  - Review of the effectiveness of the existing budget information management system, and decision on whether it should be modernized or replaced. Timing: End-Dec. 2009. Rationale: "Strengthen monitoring and control of budget execution (¶42)."
  - Steps to strengthen oversight and control of public service recruitment and staffing. Timing: End-Sep. 2009. Rationale: "To strengthen oversight and control of the high and growing public payroll (¶45-47)."
  - Establish institutional responsibility for the restructuring, commercialization, or liquidation of subvented agencies. Timing: End-Dec. 2009. Rationale: "To promote fiscal savings by rationalizing subvented agency numbers (¶48)."
  - Adoption and launch of program to strengthen communication of framework for inflation targeting and disinflation over program period. Timing: End-Dec. 2009. Rationale: "To support the disinflation program (¶58)."

*Source: REVISED GUIDANCE NOTE ON CONDITIONALITY 2014 (EXECUTIVE SUMMARY), July 23, 2014; Revised Guidance Note on Conditionality 2014 — Sections 23–32 and Appendix I.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Purpose and scope
- Aim: provide broad guidance on the operational implications of the 2002 Conditionality Guidelines and the key principles underlying the design of conditionality in Fund-supported programs.
- Five inter-related principles highlighted:
  - national ownership of programs
  - parsimony in program-related conditions
  - tailoring of programs to country circumstances
  - effective coordination with other multilateral institutions
  - clarity in the specification of conditions
- Operational issues grouped into three areas:
  - program discussions with the authorities and program design
  - the design of conditionality
  - the presentation of conditionality in Board papers
- Intended use: an aid to the implementation of the guidelines (not a comprehensive guide), to be used in conjunction with other operational guidance notes (e.g., jobs and growth issues and debt sustainability analysis).
- Revision policy: will continue to be revised on a periodic basis, especially following regular reviews of the conditionality guidelines.
- Date on document: July 23, 2014

### Background and evolution
- Origins:
  - 2000-02 comprehensive review culminated in adoption of the conditionality guidelines on September 25, 2002.
  - The 2002 Conditionality Guidelines replaced the 1979 Conditionality Guidelines and the Interim Guidance Note on Streamlining Structural Conditionality of September 18, 2000.
- Periodic reviews of experience with the guidelines are conducted.
- Revisions and focal points over time:
  - 2003: initial issuance of guidance note.
  - 2005: emphasized importance of ownership in program success and enhanced guidance on design of conditionality.
  - 2008: strengthened efforts to achieve parsimony by emphasizing criticality and requiring rigorous justification of conditionality.
  - 2010: reflected reform discontinuing performance criteria for structural measures in all Fund arrangements effective on May 1, 2009, and greater reliance on a review-based approach to monitor structural reforms.
  - 2014 revision: focused on conditionality related to macro-social (jobs and growth) issues, better leveraging surveillance and technical assistance in program design, improving partnerships with other institutions (particularly RFAs), and added guidance on the review-based approach to monetary policy conditionality in countries with inflation-targeting frameworks or evolving monetary policy regimes.

### Key principles and program design responsibilities
- Core design principles reiterated:
  - conditionality should be limited to variables and measures that are critical to achieve program goals, critical for monitoring program implementation, or necessary for implementing specific provisions under the Articles of Agreement.
  - where feasible and appropriate, adverse effects of program measures on the most vulnerable should be mitigated.
- Division of responsibility:
  - primary responsibility for program design lies with the member’s authorities to promote ownership.
  - country authorities are responsible for drafting LOI, MEFP, and TMU; staff should assist and cooperate in drafting.
  - Fund retains responsibility for maintaining conditionality and program quality.
- Implication: allowing more time for program formulation may be necessary to support ownership and drafting responsibilities.

### Operational guidance for staff during program discussions and preparation
- Staff roles and practices:
  - seek authorities’ views early and accommodate their preferences and policy choices where possible, subject to consistency with resolving balance–of-payments problems, macroeconomic stability, and all other program goals.
  - follow program preparation and review processes that facilitate reflection on links between program goals, strategies, and conditionality.
- Practical steps and considerations:
  - build program goals on issues identified in previous engagements (Article IV consultations, technical assistance missions, staff visits, ex-post assessments, FSAP reports, bilateral meetings).
  - identify goals as specifically as possible and treat goals extending beyond the program period in the context of potential successor arrangements or surveillance.
  - conduct increased contingency planning for countries at risk under strict confidentiality to lay analytical groundwork for later program design.
  - undertake outreach with regional or other institutions not used to working with the Fund to build mutual understanding ahead of program coordination.
  - identify reform strategies early, including specific structural measures critical to achieving program goals; consider timing and sequencing of reforms and calibrate to the business cycle.
  - allow modifications to program design as new information and firmer authority views emerge during preparation and review.
  - emphasize flexibility to accommodate ownership, implementation capacity, and member circumstances—recognizing flexibility will be constrained when time pressures are high.
  - use the preparation process for program approval or review to ensure conditionality is parsimonious and well matched to tightly specified program goals, with due regard to likely effects on growth, employment, and—where relevant—income distribution.
  - sketch reform strategy and indicate anticipated structural conditionality as early as possible in the process (including in Policy Consultation Meetings).
  - where conditionality touches non-core measures, require strong justification and detailed explanation of criticality; draw on other institutions’ expertise as appropriate.
  - enhance program risk analysis, including in-depth debt sustainability assessments—particularly for market-access countries seeking or having exceptional access or other high-scrutiny situations.
  - in PRGT-supported programs, program requests should be explicit on how they advance the country’s poverty reduction and growth objectives and cross-reference existing poverty reduction strategies where relevant; include mitigation measures for adverse impacts on the most vulnerable where feasible and appropriate.
  - Policy Notes (PNs) for program discussion missions should, when possible, outline the authorities’ views and initial proposals and the proposed staff response, including options and rationale for criticality of proposed conditionality; if staff cannot report authorities’ views, this should be made clear in the PN.
- Purpose: define early the contours of the program, including links between program goals, reform strategies, and supporting conditionality, while preserving essential flexibility.

### Ownership, outreach, and implementation assessments
- Broadening support:
  - staff should assist members in broadening support for sound policies through participatory processes and transparent engagement.
  - PRSPs are required in ECF (and PSI)-supported programs; low-income country instruments are designed to support policies rooted in country-owned strategies aimed at poverty reduction and growth.
  - staff assistance can include seminars, training, meetings with interest groups and civil society, and media engagement, with sensitivity to authorities’ views on staff contact with domestic groups and possible need to seek prior agreement.
  - resident representatives can be useful in providing such assistance.
  - broadening political support may require allowing more time for program formulation.
- Implementation risk assessment:
  - PNs should include explicit assessments of potential implementation difficulties, including challenges to broader ownership and country-specific issues (constitutional and political structures).
  - special attention when implementation depends on legislative approval or actions by lower levels of government (e.g., sub-national fiscal adjustment, SOE reforms).
  - when implementation requires cooperation by several ministries, their positions are relevant to assessments.
  - where appropriate, approval by the responsible decision-making entity (cabinet, Parliament, sub-national bodies) may be specified as prior actions.
  - if doubts exist about implementation after approval, the measure should be made a prior action.

*Source: REVISED GUIDANCE NOTE ON CONDITIONALITY 2014 (EXECUTIVE SUMMARY), July 23, 2014.*

### 10.      PNs should include an assessment of technical capacity, including capacity building in

### _072314 - 10.      PNs should include an assessment of technical capacity, including capacity building in

### Assessment of technical capacity in PNs and staff reports
- PNs should include an assessment of technical capacity, including capacity building in the program.
- PNs and staff reports should explicitly:
  - identify key capacity weaknesses;
  - explain how those weaknesses may affect the ultimate design of the program;
  - highlight the measures under the program to build capacity in those areas.
- Papers could elaborate on the needed focus of technical assistance and training, and the possible modalities.
- Footnote: "A member needs to have the capacity to implement a Fund-supported program; particularly, program conditionality may not be established in areas in which the member still needs to build implementation capacity."

### Collaboration with other multilateral institutions
- Staff should consult, as needed, with staffs of other multilateral institutions involved in the country early in program design, especially on critical areas outside the Fund’s core areas of expertise.
- PNs should provide details of coordination in areas of overlap, including a clear delineation of analytical responsibilities (in line with the lead agency principle).
- Continued close communication is essential to adapt coordination as the Fund-supported program is implemented.

### Collaboration with Regional Financing Arrangements (RFAs)
- Maintain a dialogue with RFAs to build mutual understanding on country and regional economic developments and appropriate policies.
- Where the RFA provides financing:
  - staff should understand the timing and phasing of RFA disbursements as these could be important parameters for the Fund-supported program;
  - reach mutual understandings on policy objectives and program design to remove or minimize inconsistencies if the RFA plans to set its own program with macroeconomic or structural conditionality.
- The Fund should continue to make its own judgment on when and under what terms to provide financing.
- Conditionality under the Fund-supported program should be guided by the conditionality principles (see paragraphs 15-16) and not aim to parallel RFA conditionality.
- The Fund cannot delegate the monitoring of conditionality to RFAs.
- Under the Fund’s Articles of Agreement, the Fund can only provide its general resources to individual countries, and not to RFAs.
- Footnote: An RFA is broadly defined as a financing mechanism through which a group of countries in a region pledges financial support to members that are experiencing, or might experience, a liquidity shortage or balance-of-payments difficulties.

### Designing conditionality: criticality and scope
- Program-related conditions generally must be:
  - critical to the achievement of program goals, or
  - critical to monitoring implementation of the program, or
  - necessary to the implementation of specific provisions under the Articles of Agreement or policies developed there under.
- Criticality judgment: if a condition is not implemented, goals would not be achieved or program monitoring would not be possible.
- All critical measures generally must have conditionality associated with them to allow interruption of purchases or disbursements if the program is off track or if information is insufficient for monitoring.
- Staff must avoid setting conditions on measures that are desirable but not critical for achieving program goals or monitoring implementation.

### Applicability across core and non-core areas; expertise and risk
- The criticality criterion applies to all measures—core Fund areas or outside them, whether or not covered by another agency’s conditionality.
- Focus of conditionality should be primarily on core Fund competencies.
- For non-core but critical measures:
  - require more detailed explanation of criticality and a strong justification;
  - Fund will, to the extent possible, draw on advice of other multilateral institutions, particularly the World Bank, or bilateral donors that can provide expertise.
- If necessary expertise is unavailable or inadequate, approving a Fund-supported program exposes the Fund to reputational and financial risk; the Fund may face choosing between those risks or not supporting the authorities’ program.

### Principles of parsimony and ownership
- Staff should apply the principles of parsimony and criticality to all program-related conditions.
- Refrain from introducing donor-requested conditionality if it is not critical for program success or monitoring.
- If a donor-driven reform measure is indispensable to securing financing and program success, it should be clearly identified in the staff report with its criticality justified.
- Conditions requested by authorities that are not critical could be addressed in the LOI/MEFP, with a clear distinction between conditions tied to Fund financing and other elements of the authorities’ reform agenda.
- Important to consider additional conditions countries may face in relationships with other institutions.

### Prohibition on cross-conditionality and independent Fund judgment
- Cross-conditionality (making Fund resource use directly subject to rules or decisions of other organizations) is prohibited under the Fund’s Guidelines on Conditionality.
- The Fund cannot delegate its responsibility to assess whether conditions for use of its resources have been met.
- If the Fund assesses conditions have not been met, it will not disburse, irrespective of judgments by RFAs or other organizations.
- Conversely, if the Fund believes conditions have been met but others disagree, the Fund may still be unable to allow use of its resources if delays by other institutions raise financing assurance issues.

### Level of detail and scope of reviews
- Conditions should be formulated to provide authorities clarity on measures on which access to Fund resources depends.
- Highly detailed conditions may guide authorities but risk being perceived as micromanagement; balance required on a case-by-case basis.
- Reviews have backward- and forward-looking components:
  - backward-looking: focus on quantitative performance criteria, indicative targets, and structural benchmarks where possible;
  - forward-looking: assess prospects for achieving program objectives and may modify objectives/measures as new information arrives.
- Original program documents should describe uncertainties that could require additional or modified conditionality during reviews.
- Conditionality beyond the first year of a multi-year program will normally be set in the context of reviews.
- Conditions added during reviews should be anchored on the initiating program document; new reform-area conditions require clear justification of criticality.
- The last program review may serve for stocktaking and preliminary assessment of program goals and implementation experience.

### Review-based approach to structural conditionality
- Since May 1, 2009, monitoring of structural reforms is conducted through reviews; structural conditions are assessed in a program review and take the form of structural benchmarks or prior actions.
- Structural performance criteria are no longer used.
- Reviews are the primary tool for monitoring structural elements; programs should include a specified agenda for critical structural reforms, if relevant.
- Structural benchmarks:
  - should be critical for achievement of program objectives, either directly or as key components of broader critical reforms;
  - failure to meet a structural benchmark does not automatically interrupt a purchase or disbursement; deviations are indicators that the program may be off track and completion of the review requires a Board judgment of compensating factors.
  - In case of substantial deviations and weak commitments to correct slippages, staff and management could decide not to propose completion of a review.

### Review-based approach to monetary policy conditionality
- Traditional monetary policy conditionality used two standard quantitative performance criteria (PCs):
  - a floor on net international reserves (NIR) to ensure external sustainability;
  - a ceiling on net domestic assets (NDA) to avoid excessive credit expansion.
- In evolving monetary regimes, single-digit inflation, financial innovation, and deepening have increased non-observance of monetary targets; no statistical correlation observed in a low inflation context between reserve money target deviations and inflation deviations.
- A review-based approach to assess monetary policy is an option, especially as countries adopt more flexible and forward-looking frameworks emphasizing policy interest rates and inflation targets or objectives.
- NDA targets may still remain useful in addressing country-specific risks or circumstances where a review-based approach might be appropriate.

### Implementation of review-based monetary policy conditionality: ICCs and MPCCs
- Inflation consultation clauses (ICCs):
  - Applied in inflation-targeting countries where:
    - central bank has a track record of commitment to low inflation;
    - central bank has the technical capacity (and tested models) to forecast inflation over a 18-24 month horizon;
    - clear empirical measures of well-anchored inflation expectations are available;
    - transmission mechanism from interest rates to prices is well understood.
  - Approach includes:
    - periodic (usually quarterly) reviews assessing current inflation against forecast and inflation outlook;
    - an ex ante understanding, when deviations from targeted inflation path by a pre-specified margin occur, on timely remedial monetary policy response between Fund staff and authorities;
    - a NIR floor to maintain external sustainability and safeguard the use of Fund resources;
    - a mechanism to deal with country-specific risks.
  - Under ICC:
    - an inflation target and a tolerance band around a central inflation target guide assessments during reviews;
    - a consultation is triggered when inflation falls outside the band:
      - consultation with the Executive Board if actual inflation falls outside an outer band;
      - informal consultation with Fund staff if actual inflation falls outside an inner band.
    - If an Executive Board consultation is triggered under the ICC, access to Fund resources would be interrupted until such consultation takes place.
  - Note: "Some recent Fund-supported programs have only had a single band."
- Monetary policy consultation clauses (MPCCs):
  - Considered for countries with evolving monetary policy frameworks that have minimal fiscal dominance, relatively low and stable inflation, and a good track record of monetary policy implementation supported by central bank technical and institutional development (especially capacity to analyze monetary conditions), or that are committed to substantially strengthening the policy framework.
  - Under MPCC:
    - monetary policy conditionality includes a quantified macroeconomic framework with a set of (quarterly or semiannual) monetary aggregate or inflation targets normally within a single tolerance band, assessed during program reviews;
    - deviations from the band trigger a consultation with the Fund’s Executive Board as part of the general review process, focusing on:
      - assessment of monetary policy stance and program track;
      - reasons for deviations and compensating factors;
      - proposed remedial actions if needed.
    - When consultation is triggered, access to Fund resources would be interrupted until it takes place and the relevant program review is completed.
    - Programs would include a NIR floor, as a PC, to maintain external sustainability and safeguard Fund resources.
    - Indicative targets related to monetary policy (e.g., on NDA or net credit to government) could be included to address country-specific risks such as external stability or fiscal dominance concerns.
    - If MPCC selects inflation as the central target variable, a narrower inner band could be used as an early warning mechanism triggering an informal consultation with Fund staff.
- The adoption of a review-based monetary conditionality could be supported by structural benchmarks where policy implementation track record or institutional set-up gaps exist.
- Footnote: NDA ceilings, when maintained, require clarity on the relationship between NDA and inflation targets in the staff report.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_072314.pdf*

### 23.      Use of prior actions. A critical measure may be specified as a prior action to be completed

### 23.      Use of prior actions. A critical measure may be specified as a prior action to be completed

### Prior actions: purpose and constraints
- Prior actions may be specified to be completed before the scheduled date of a Board discussion to approve an arrangement, complete a review, or grant a waiver when upfront implementation is critical to achieve program goals or monitor implementation, including when there are significant doubts that the measure would be implemented at a later date.
- Conditions set for the completion of future reviews are not prior actions and should be classified as either quantitative performance criteria or structural benchmarks.
- Prior actions are to be applied parsimoniously and must be justified in terms of their criticality to program objectives.
- Prior actions are often used in cases of countries with weak track records of implementation to ensure minimum implementation standards, but staff must be mindful that prior actions may be implemented without genuine ownership and that implementation may be nominal or temporary.
- Normal practice: "all prior actions must be carried out at least five working days before the Board discussion to which they relate."

### Waivers of quantitative performance criteria (paragraph 24)
- A waiver may be granted for nonobservance of a quantitative performance criterion if the Fund is satisfied that the program will nevertheless be successfully implemented—i.e., that it will achieve its goals—either because of:
  - the minor or temporary nature of the nonobservance; or
  - corrective actions taken by the authorities.
- Cases where the Fund considers that a performance criterion is no longer critical (because circumstances have changed or the Fund previously erred in the design of conditionality) could be treated as cases where the deviation would be considered "minor" in terms of its impact on program goals.

### Outcomes-based conditionality (paragraph 25)
- Program-related conditions may be set on targets and objectives as well as on actions, but outcomes chosen as conditions must still be reasonably under the control of the authorities to avoid undue use of waivers due to exogenous shocks.
- Outcomes-based conditionality should be designed to minimize the risk that targeted outcomes are achieved by means of policies that would undermine program goals (example: achieving higher revenue by increasing import tariffs).
- Even when conditions cannot be applied to outcomes, conditions can be formulated so they may be met by implementing various measures.
- Note: "Contingent adjustors to quantitative targets could also be used to address selective exogenous developments (such as a shortfall of projected external aid) to avoid undue use of waivers."

### Implementation timetables and floating tranches (paragraphs 26–27)
- Implementation timetables should be realistic but appropriately ambitious; staff should avoid pressing for overly ambitious timetables, which have been a major reason for frequent waiver requests.
- Floating tranches:
  - Allowed as a device in conditionality design.
  - Availability contingent on implementation of a specific measure or measures with no fixed date attached; other purchases/disbursements remain tied to test dates.
  - May enhance ownership by giving authorities flexibility in choosing reform timetables, especially where timing uncertainty exists or upfront timing commitment is undesirable.
  - Measures attached to floating tranches should satisfy two criteria:
    - They must strengthen the external position over the medium term to warrant release of additional Fund resources.
    - They must increase the balance of payments need in the short term—otherwise the program would be underfinanced without the measure, or overfinanced with it.
  - Examples of measures that could satisfy these criteria include trade liberalization and debt restructuring needs.
  - Structural reforms appropriate for floating tranche conditionality are not expected to occur in many cases but should be considered when criteria are met.

### Presentation in Board papers (paragraphs 28–32)
- Board papers should clearly explain the choice of conditionality, particularly the judgments of criticality supporting inclusion of structural measures.
  - Program goals and strategies adopted to achieve them should be set out as clearly as possible; at approval of a new arrangement, the staff report should lay out links between program goals, reform strategies, and corresponding structural conditionality (one option is a separate text table).
  - Staff reports need to indicate what is expected in subsequent review(s) and specify critical future actions as structural benchmarks to make scope of review predictable and transparent.
  - Staff reports for program reviews should update on objectives of the structural reform agenda, strategies adopted, and assess whether structural elements have been implemented successfully.
- Conditions outside Fund core areas:
  - May be established but require detailed explanations of criticality and strong justification, reflecting a presumption that non-core measures are less likely to pass the test.
  - Staff reports should indicate which institution or donor provided expert advice; if external expertise is relied upon, related risks must be transparently reported.
- Staff assessment of potential implementation difficulties:
  - Staff reports should candidly discuss concerns about ownership and related risks to implementation and convey the rationale for proceeding when doing so.
- Identification and distinction of program conditions:
  - Program conditions should be clearly identified and distinguished from other measures in program documents and staff reports.
  - Effective practice: include tables in the LOI/MEFP listing all quantitative performance criteria, indicative targets, prior actions and structural benchmarks; measures that are not conditionality should be listed separately as the authorities' reform agenda.
  - Status of all past performance criteria, indicative targets, prior actions, and structural benchmarks should be reported, with detailed discussion for unmet or delayed conditions.
  - Staff reports should include clear justifications for waivers of performance criteria.

### Bank–Fund and other collaboration (paragraph 32)
- Program staff reports must discuss collaboration with other multilaterals, in particular the World Bank, where applicable.
  - Relevant information related to the Bank should be in the annex on Bank-Fund collaboration, but pertinent information on collaboration with other institutions, including RFAs, should be included in the main staff report.
  - Staff reports should discuss how Bank- and Fund-supported programs have been coordinated (for example, where the Fund macro framework has been modified to accommodate Bank-supported reform programs).
  - Monitoring responsibilities of multilateral institutions or RFAs should be clearly delineated, with the Fund bearing ultimate responsibility for establishing and monitoring its conditionality.

### Appendix I: Illustration of criticality of program structural conditionality (selected entries)
- Prior actions (illustrative example based on Ghana PRGF program):
  - Adoption of budget to limit fiscal deficit to 9.4 percent of GDP in 2009. Implemented. Rationale: "A first step toward fiscal and debt sustainability (¶18)."
  - Adoption of measures yield at least 1.0 percent of GDP to offset projected expenditure overruns in the 2009 budget. Implemented. Rationale: "To preserve macroeconomic stability and avoid crowding out private sector credit (¶24)."
  - Selective public sector hiring freeze, with exemptions mainly limited to health and education trainees. Implemented. Rationale: "To strengthen control of the high and growing public payroll (¶46)."
  - Reinstatement of automatic bi-weekly price adjustments for petroleum products. Implemented. Rationale: "To eliminate energy subsidies (¶52)."
- Structural benchmarks (timing and rationale examples):
  - Complete comprehensive reviews of zero-rated VAT items and the nature and scope of tax exemptions and discretionary waivers. Timing: End-Sep. 2009. Rationale: "Strengthen revenue mobilization as part of the fiscal consolidation strategy (¶32)."
  - Cabinet approval of a modernization strategy for revenue administration. Timing: End-Dec. 2009. Rationale: "Strengthen revenue mobilization as part of the fiscal consolidation strategy (¶35)."
  - Review of the effectiveness of the existing budget information management system, and decision on whether it should be modernized or replaced. Timing: End-Dec. 2009. Rationale: "Strengthen monitoring and control of budget execution (¶42)."
  - Steps to strengthen oversight and control of public service recruitment and staffing. Timing: End-Sep. 2009. Rationale: "To strengthen oversight and control of the high and growing public payroll (¶45-47)."
  - Establish institutional responsibility for the restructuring, commercialization, or liquidation of subvented agencies. Timing: End-Dec. 2009. Rationale: "To promote fiscal savings by rationalizing subvented agency numbers (¶48)."
  - Adoption and launch of program to strengthen communication of framework for inflation targeting and disinflation over program period. Timing: End-Dec. 2009. Rationale: "To support the disinflation program (¶58)."

*Revised Guidance Note on Conditionality 2014 — Sections 23–32 and Appendix I.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_072314.pdf_