IMF Conditionality
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Purpose of conditionality
- When a country borrows from the IMF, the government agrees to adjust its economic policies to overcome the problems that led it to seek financial assistance. These policy adjustments are conditions for IMF loans and help to ensure that the country adopts strong and effective policies.
- Conditionality helps countries solve balance of payments problems without resorting to measures that harm national or international prosperity.
- Conditionality aims to safeguard IMF resources by ensuring that the country’s finances will be strong enough to repay the loan, allowing other countries to use the resources if needed in the future.
- Conditionality is included in financing and non-financing IMF programs with the aim to progress toward the agreed policy goals.
- Member countries that borrow from the IMF have primary responsibility for selecting, designing, and implementing policies to make their economic program successful.
- The program is described in a letter of intent, which typically includes a memorandum of economic and financial policies for more detailed description of the policies.
- The overarching goal is to restore or maintain balance of payments viability and macroeconomic stability while setting the stage for sustained, high-quality growth.
- For low-income countries, there is an additional objective of reducing poverty.
How conditionality is assessed and structured
- Most IMF financing is paid out in installments and linked to demonstrable policy actions.
- Policy commitments can take different forms:
- Prior actions: steps a country agrees to take before the IMF approves financing or completes a review; ensure a program has the necessary foundation for success.
- Quantitative performance criteria: specific, measurable conditions for IMF lending that always relate to macroeconomic variables under the control of country authorities (examples include monetary and credit aggregates, international reserves, fiscal balances, and external borrowing).
- Indicative targets: flexible numerical trackers set for quantitative indicators to help monitor progress; heightened uncertainty and limited capacity may justify greater use of indicative targets under certain circumstances; as uncertainty is reduced, these targets may become QPCs, with appropriate modifications.
- Structural benchmarks: reform measures that often cannot be quantified but are critical for achieving program goals and used as markers to assess program implementation.
- The IMF Executive Board conducts periodic program reviews to assess whether the program is on track or needs to be adjusted in light of new developments.
- If a country misses a quantitative performance criteria condition, the IMF Executive Board may approve a waiver if it is satisfied that the program will still succeed (for example, 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.
- MONA, the IMF’s publicly available database for the Monitoring of Fund Arrangements, covers all aspects of program conditionality.
Examples of conditionality measures
- Fiscal revenue measures
- Clearance of external arrears
- Governance reform
- Banking sector restructuring plan
- Ceiling on new public guarantees
- Ceiling on external debt
- Ceiling on public sector external arrears
- Ceiling on the general government wage bill
- Ceiling on domestic arrears
- Ceiling on government borrowing from the central bank
- Strengthen tax administration
- Improve fiscal transparency
- Improve anti-corruption and rule of law
- Reform State-Owned Enterprises (SOEs) and their governance
How the IMF’s approach has evolved
- IMF lending has always involved policy conditions; until the early 1980 s, IMF conditionality largely focused on macroeconomic policies.
- The complexity and scope of conditions increased with the IMF’s growing involvement in low-income and transitional countries, where multiple structural problems may hamper economic stability and growth.
- In 2002, the IMF issued Guidelines on Conditionality, providing high-level principles for conditionality, still applicable today.
- The IMF has become more flexible in the way it engages with countries on structural reform as its approach to conditionality continues to evolve.
- The IMF periodically reviews program performance and implementation of the Guidelines on Conditionality:
- The 2018 Review of Program Design and Conditionality provided a first comprehensive stocktaking of IMF programs since the global financial crisis and recommended measures to improve macroeconomic projections, sharpen debt sustainability analysis, and better tailor structural conditions to specific country circumstances.
- The 2024 Operational Guidance Note on Program Design and Conditionality provides updated guidance for staff on how to operationalize relevant policies.
- The 2026 Review of Program Design and Conditionality draws lessons from recent program experience to strengthen IMF-supported programs and better support countries as they navigate future challenges; the review proposes targeted reforms to make programs more realistic and better tailored to country circumstances, more flexible in responding to shocks, more focused on critical reforms, and better positioned to deliver durable outcomes.
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