IMF Conditionality

February 22, 2021

When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid. These policy adjustments are conditions for IMF loans and serve to ensure that the country will be able to repay the IMF. This system of conditionality is designed to promote national ownership of strong and effective policies.

Designing effective programs

Conditionality covers the design of IMF-supported programs—that is, macroeconomic and structural policies—and the specific tools used to monitor progress toward goals outlined by the country in cooperation with the IMF. Conditionality helps countries solve balance-of-payments problems without resorting to measures that are harmful to national or international prosperity. At the same time, the measures are meant to safeguard IMF resources by ensuring that the country’s balance of payments will be strong enough to permit it to repay the loan. 

The member country has primary responsibility for selecting, designing, and implementing policies to make the IMF-supported program successful. The program is described in a letter of intent, which often has a memorandum of economic and financial policies attached. The program’s objectives and policies depend on a country’s circumstances. But the overarching goal is always to restore or maintain balance-of-payments viability and macroeconomic stability while setting the stage for sustained, high-quality growth and, in low-income countries, reducing poverty.

How compliance with program conditions is assessed

Most IMF financing is paid out in installments and linked to demonstrable policy actions. This is intended to ensure progress in program implementation and reduce risks to IMF resources. Program reviews provide a framework for the IMF Executive Board to assess whether the program is on track and whether modifications are necessary. Periodic reviews combine an assessment of whether program conditions have been met with a look ahead at whether the program needs to be adjusted in light of new developments.

Policy commitments agreed with country authorities can take different forms. They include:

  • Prior actions. These are steps a country agrees to take before the IMF approves financing or completes a review. They ensure that a program will have the necessary foundation for success.
Prior Actions: Examples
Elimination of price controls
Budget consistent with fiscal framework
  • Quantitative performance criteria (QPCs). Specific, measurable conditions for IMF lending that always relate to macroeconomic variables under the control of the authorities. Such variables include monetary and credit aggregates, international reserves, fiscal balances, and external borrowing.
QPCs: Examples
Minimum level of federal government primary balance
Ceiling on government borrowing
Minimum level of international reserves
  • Indicative targets (ITs). In addition to QPCs, ITs may be set for quantitative indicators to assess progress in meeting a program’s objectives. Sometimes ITs are set instead of QPCs because of uncertainty about economic trends. As uncertainty is reduced, these targets may become QPCs, with appropriate modifications. 
Indicative Targets: Examples
Minimum level of the general government primary balance
Minimum domestic revenue collection
Minimum level of social assistance spending
  • Structural benchmarks (SBs). These are reform measures that often are non-quantifiable but are critical for achieving program goals and are intended as markers to assess program implementation.
Structural Benchmarks: Examples
Improve financial sector operations
Build up social safety nets
Strengthen public financial management

If a country misses a QPC condition, the IMF Executive Board may approve a waiver if it is satisfied that the program will still succeed. This may be because the deviation was minor or temporary or because national authorities are taking corrective actions. Missed structural benchmarks and indicative targets do not require waivers but are assessed in the context of overall program performance. The IMF’s publicly available database for the Monitoring of Fund Arrangements covers all aspects of program conditionality.

Conditionality framework continues to evolve 

IMF lending has always involved policy conditions. Until the early 1980s, IMF conditionality largely focused on macroeconomic policies. Subsequently, the complexity and scope of structural conditions increased, reflecting the IMF’s growing involvement in low-income and transitional countries, where multiple structural problems may hamper economic stability and growth. In recent years, the IMF has become more flexible in the way it engages with countries on issues related to structural reform as the conditionality system continues to evolve.

  • The IMF periodically reviews the performance of its programs. The most recent 2018 Review of Program Design and Conditionality provides a first comprehensive stocktaking of Fund programs since the global financial crisis. The 2018 review period (2011-2017) was characterized by major structural challenges for large parts of the membership, and the difficult task of tackling them was exacerbated by the persistently weak global environment. To improve program success and reduce risks, the review recommended measures to improve the realism of projections, sharpen debt sustainability analysis, enhance the quality of fiscal consolidation, and improve the tailoring of structural conditions. During the COVID-19 pandemic, many member countries had requested emergency financing assistance in the form of the Rapid Credit Facility (RCF) and the Rapid Financing Instrument (RFI). There is no ex post program-based conditionality or reviews in the RCF and RFI, with overall conditionality limited.