Transcript

Monday, September 17, 2012

Speakers:
Dominique Desruelle, Deputy Director, Institute for Capacity Building
Ranil Salgado, Division Chief, IMF Strategy and Policy Department

MS. BHATT: Welcome, good morning and thank you for joining this conference call on the 2011 review of conditionality. I'll hand it over to Dominique Desruelle, who is the Deputy Director of the Institute for Capacity Development at the IMF and who was formerly with the Strategy Policy and Review Department. We also have Ranil Salgado, who is the Division Chief in the Strategy, Policy and Review Department. He is the lead author of this paper. Let me pass it over to Ranil.

MR. SALGADO: Thanks Gita. And I'd like to welcome everyone to the conference call. And also, thank you for your interest.

The Review of Conditionality was discussed by the Fund's Executive Board on September 5th. It consists of an overview paper and four background papers. And the papers will be published at noon today.

Some background. We prepare such reviews regularly about every five to seven years. Their purpose is to study how conditionality is being used in Fund-supported programs, how these programs are designed, and what effects they have. Depending on the findings, the reviews may lead to revisions in the conditionality guidelines or in associated guidance to staff.

Now this review covered nearly a ten year period starting in 2002 and ending in September 2011. Thus, the review examined 159 Fund-supported programs, 64 of them with middle income and advanced countries. These are programs under the Fund’s General Resources Account (GRA). And 95 with low income countries using concessional lending facilities or programs though our Poverty Reduction and Growth Trust (PRGT).

As we will discuss shortly, the design of some of the Fund's recent high debt programs faced serious challenges. Most of these programs are ongoing so it difficult and premature to asses them fully. The review’s observations regarding these programs are thus very preliminary and will need to be revisited in due course.

A word on process. As some of you may know, we prepared a concept note for the review in early 2011 and consulted widely with stakeholders during 2011 such as country authorities, CSOs, trade unions, parliamentarians, and academics including through the IMF website. A summary of this consultation is provided in the fourth background paper. Staff then undertook analysis of a large set of programs covered under this review using various methods and statistical techniques.

I would like to lay out the review's main take-aways and my colleague, Dominique, will discuss some of the main recommendations. So, first, on the main take-aways, the review’s findings were broadly positive for a substantial majority of programs while highlighting challenges in some recent high debt programs.

In particular, regarding conditionality, structural conditionality has become increasingly parsimonious and focused. This is important because an excessive number of conditions or the inclusion of conditions that are not clearly macro-critical may distract authorities from what is really important or could exceed the authority's implementation capacity thereby harming programming success.

Next, concerning macro-economic program design, three general points. Number one, design appeared generally even-handed and tailored to country needs. In particular, regression analysis shows that program macro-economic adjustment and access to Fund financing can be explained by a limited number of initial conditions. In line with this, countries in capital account crises were given substantially higher and more front-loaded financing than other countries.

Number two, there were good signs the Fund has learned lessons from the past. For example, the overshooting current account adjustment seen in some programs of the 1990s has been mostly avoided this time around, and where possible, ample and upfront financing to create policy space was emphasized.

Number three, design was based on unbiased projections; and flexible implementation timelines, modifications as necessary when conditions changed, and built in adjustors all supported program execution. This has helped to explain high implementation rates despite the global crisis.

Regarding program effects, while ascertaining these effects is difficult and the academic literature has not come to consensus on this, use of a statistical matching technique provided some evidence of positive effects of programs on several macro-economic variables such as inflation and fiscal balance. Also, and very importantly, our GRA-supported programs largely safeguarded priority expenditure for social protection while as we have shown in a recent study by our Fiscal Affairs Department, our PRGT-supported programs were associated with increases in social spending, spending namely for health and education.

Finally, a caveat. Despite these generally positive findings, program design and coordination in some high debt crisis programs has clearly been challenging. For example, in the Euro area, policy adjustment has necessarily had to be very ambitious given the scale of fiscal and external sustainability problems and the risk of contagion. Debt sustainability and competiveness problems require deep and protracted policy adjustment combined with large scale official financing. This being said, it is too early to fully assess these programs as they remain ongoing.

Now, I'll hand off to my colleague, Dominique.

MR. DESRUELLE: Thank you, Ranil.

So then moving from findings to recommendations. The review makes a number of recommendations for strengthening program effectiveness going forward. In particular it concludes that the conditionality guidelines, that is to say the legal documents sustaining and defining our practices in conditionality, remain broadly appropriate. However, implementation deserves to be strengthened in a number of ways. And I have six items here.

First, keeping conditionality parsimonious and focused on macro-critical issues. As noted earlier, parsimony and macro-criticality of conditionality are key requirements for program ownership and effectiveness. Thus, it is important to consolidate progress in this area. This does not necessarily mean reducing the number of conditions further, but it does mean staying focused on keeping the number of conditions to the minimum necessary and continually ensuring that all conditions are critical for program success.

Second, developing a framework for tailored robustness tests based on enhanced risk diagnostics including by cross-checking against past crisis cases and strengthening of debt sustainability assessments. Efforts in this direction can build, among other things, on the recent modernization of the Fund's framework for fiscal policy analysis and public debt sustainability which proposes a risk based approach to debt sustainability assessment for all market access countries, with the depth and extent of analysis commensurate with concerns regarding sustainability.

Such enhanced risk diagnostics would also comprise more intensive analysis of the fiscal adjustment/growth nexus, building on recent and ongoing research at the Fund and elsewhere on fiscal multipliers. There's also a need to develop better tools for analyzing spillover and contagion risks.

Third, considering macro-social issues in Fund-supported programs more consistently. Program documents could provide greater discussion of macro-social issues including the tradeoffs between short-term costs and the overall benefits of adjustment along with a discussion of efforts to mitigate these costs on jobs and inequality. Where feasible and appropriate, programs would include measures to mitigate the adverse short-term impacts on the most vulnerable, for example, through targeted transfers particularly in programs with higher risk.

Fourth, enhancing ownership and transparency through more discussion of alternative policy options, greater clarity in program documents, and new avenues to collect external views. As concerns discussion of alternative policy options, this recommendation reflects the feedback we received during the consultation process for the review that ownership sometimes suffers from insufficient discussion of policy alternatives.

Sometimes, there can be more than one way to achieve program goals and greater readiness by some teams to discuss policy options will surely support stronger ownership of programs. We also plan to develop new processes to collect and reflect on external views in the internal Fund discussion of program design.

Fifth, better leveraging surveillance, particularly for contingency planning and analysis. This recommendation reflects the finding that in a case study group of countries, slightly less than a half of initial program measures were foreshadowed in preceding Article IV reports. Increased contingency planning by Fund staff for countries at risk can help boost the value of surveillance for later program design.

Such planning can lay the analytical groundwork in advance when time is less constrained than during the design of a crisis program. The emphasis of the recent Triennial Surveillance Review on an explicit discussion of risk in surveillance goes in the same direction. This discussion can be supported by risk assessment matrices. Though not required, these matrices can help assess the probabilities and potential impacts of specific risks and serve as a focal point for considering potential measures that can mitigate their impact.

And six, improving partnerships with other institutions including in currency unions where program success can be linked to union level policies. Supranational regional entities like the European Union Institutions or European Central Bank often play critical roles in program success. For example, European Union and Euro area counterparts provided a large share of financing packages on increasingly more supportive terms.

The European Central Bank also played a crucial role as a liquidity backstop for banks in program countries. These examples show the value of building relationships and mutual understanding with regional institutions with which the Fund may collaborate in the future on financial arrangements.

Efforts also need to continue to strengthen collaboration with traditional partners such as the World Bank, regional development banks, OECD, ILO, and others to collaborate on macro-critical structural policies outside the Fund's core areas of responsibility.

On next steps, let me just say that we intend to revise the guidance on conditionality in line with the findings and recommendations of this review. To seek further input for this process, we also intend to continue our outreach efforts.

QUESTIONER: Please forgive if this comes across slightly cranky. I mean it only in the best sense but these reports are apparently important in terms they help to hold the Fund's programs to some small or large account. And I have to say, that I barely understood most of the bureaucratese that was said. That risks me overemphasizing things that may be shouldn't be and underemphasizing things that should. And I'm not sure that it's just based on my limited mental capacity. With that said, and I believe that it's not to say that there's not substance to the report. So, please don't take it that way. That said, I'm not sure I understood, Mr. Salgado said something about one of the major problems. I'm not sure I understood that.

Also let me read you a quote. He said, "large systemic risks justified the access levels," I think you were referring to the Euro area. "However, the reference to systemic risk in justifying high levels of access could have benefited from more in-depth analysis at program inception." Can you elaborate on that? It's seems as though there's a problem with implementation. Doesn't that mean that the IMF is allowing too many waivers in programs? It's being too lax? And I'm wondering what assessment has made of the DSA's accuracy, particular in the Euro area programs and recommendations or not in restructurings early on in programs.

MR. SALGADO: Sure. I'll touch on, I think, the first two issues and then Dominique will discuss the DSAs.

We had a recommendation on looking further at large systemic risks. In terms of assessing exceptional access in programs, we now have a policy that indicates that one issue which we need to examine in exceptional access cases is linked to contagion and systemic risk. And one of the things we realized in the review as well as other work we've done in the IMF, is we don't have good tools to assess contagion risk. So, one of the key recommendations in that area is we need to further develop those tools in order to understand those risks and to be able to assess the degree of exceptional access, the IMF needs to provide. Now, this is clearly important because as we have more potential programs where there can be contagion risk, and we need to ensure that we are even-handed across countries.

In terms of implementation, the review actually found that implementation has improved. One of the big changes that occurred in 2009 was in terms of our structural conditionality, the structural reforms in IMF-supported programs. We changed the type of conditionality we had from what was called structural performance criteria to structural benchmarks. That leads to more review-based conditionality where first the staff and then the Board assesses progress on structural reforms.

Now, what that meant was, when we changed, there's no simple waiver. You have to look to what extent in terms of structural benchmarks, are those benchmarks being met on time or with delay. So, we developed an implementation index which tried to measure these. And what we found is actually implementation did improve particularly through 2010 in the programs. In 2011 there was a slight deterioration in the implementation but that could also reflect that these were, as we moved through the crisis, more difficult programs with larger, say, competiveness issues or structural issues.

In terms of the DSA, I'll hand over to Dominique.

MR. DESRUELLE: Thank you. On the DSA, the discussion in this review builds up on an early analysis conducted in mid-2011 on the framework for public debt sustainability analysis. And the general thrust of that work which is taken up here in the same way is to say that we needed to move towards a stronger risk based approach to debt sustainability.

That basically means two things, identifying cases where quantitative and other information points to high risk. You could think of, for instance, as benchmarking against other cross-country experience, or benchmarking against the country's own experience in terms of the type of adjustments that need to be done. And on that basis, design more specific stress tests to look at these types of risk and what would happen if the base line assumptions that are put in the DSAs will not materialize. To get a stronger feel for different alternatives and therefore, extending it a stronger discussion of actions or policies or elements in the program design that can mitigate these risks.

QUESTIONER: Yes. And then was there consideration of whether the Fund should have considered restructuring, say in some examples, or encourage restructuring as part of the process, for example, Greece. And isn't the Greece case the one that really has stretched fund credibility? So, I'm wondering how well that was represented in this review.

MR. DESRUELLE: Thank you. Let me maybe answer your questions in opposite order, if I may. The first one having to do with how the program with Greece and other countries in the Euro area were handled in the review, and the second is the question of in which cases and how do we consider restructuring in program cases.

So, starting with the first, let me start by emphasizing the point that Ranil made in the introduction. This review covers a lot of programs over a very extensive period. The program with Greece and other euro programs are still ongoing and we are of the view it would definitely be premature to draw definite conclusions about these programs.

The coverage of these programs was limited in the review. This review of conditionality covers a period that ends in September 2011, and therefore, covers only basically the start of a few of the Euro area programs. Moreover, there's a substantial difference between this type of reviews that in a sense covers the waterfront of many different programs and tries to bring to the fore a bunch of considerations drawn from their cross-country experience and the normal review of individual programs, typically done either at quarterly or semi-annual frequencies , where one looks at what is happening, what is going on, and whether particular design elements have to be modified in light of circumstances.

Despite this limitation, the review does provide some early conclusions from the Euro area programs that more is needed to build relationships and develop mutual understandings with institutions with which the Fund may collaborate more closely and systematically in future financial arrangements. And we said a little bit about that earlier. Obviously, we'll continue to monitor developments under European programs very closely.

On the more specific question of debt restructuring, the Fund's programs with Euro area countries were designed after consideration of country constraints and policy alternatives as is done for all our programs. The approach that was taken on sovereign debt sustainability and private sector involvement in these operations was comparable to the approach that we have taken for financial support to other member countries.

And there are basically three principles here that I am going to list. The Fund provides financing in support of the members' economic policies only if the agreed policies are geared toward resolving the country's balance of payments problems. And in this context, obviously, debt sustainability is a pre-requisite.

In the vast majority of IMF-supported programs, with emerging markets and advanced economies, a combination of policy adjustment and financing from public and private sources has been sufficient to preserve sovereign debt sustainability.

In the cases where the Fund thinks that debt sustainability cannot be preserved through credible and sustainable policy adjustments, it's precluded from providing financing unless steps are taken by the sovereign to restructure debt and restore sustainability. But that decision finally rests with the sovereign.

QUESTIONER: When you say the Euro area programs are not really covered, the only that doesn't seem covered by the report is the second Greek one, right? Unless I'm missing one. My other question is about the ECB. You mentioned it here and there in the report. There's been some voices out there saying that the Troika system is not very comfortable for the Fund and that the ECB, being on the Troika, can be problematic. So, I just wanted to see if you had anything to say about that. Third question, on page 23 of the overview, you have an interesting comment that intrigued me about the Caribbean Currency Union. Could you explain what exactly was done there, was that the case that a banking regulator pledged to do something as part of a program or what were you trying to say there?

MR. SALGADO: I'll begin. The specific question first about what's covered. You are correct that the only program that is completely missing from the review is the second Greece program. But as you may know, IMF programs follow not only program approval but then program reviews where the program is adjusted over time. So, we do not cover, I think, any of the programs completely, including the first Greece program, through to its conclusion. So, that is a part of the difficulty in assessing them. For many of the other programs, for example, I mentioned in my comments earlier, we would have modifications to the program as conditions evolved. And of course, it's very difficult to assess the effects of the Euro area programs because they're still ongoing. So, I think that was the main point we wanted to make and we have a footnote early in the overview paper providing some more details.

Second, on your specific reference to page 23 in the overview paper. So, with the Eastern Caribbean Central Bank, or the Currency Union, we have programs in which there is specific conditionality but on the member countries of the ECCU, the Eastern Caribbean Currency Union. But there were assurances provided, and this is related to banking supervision and financial sector supervision. And in those cases there were letters of assurance provided by the Eastern Caribbean Central Bank.

QUESTIONER: So, the Eastern Caribbean Central Bank is also the banking regulator?

MR. SALGADO: Correct.

QUESTIONER: Okay. And my third question, please.

MR. DESRUELLE: Yes, on the Troika, let me say, this is looked into in some detail in fourth background paper of the review, with the caveat that these programs are still going on. We are still looking at the experience of program design with the Troika partners. The conclusion of that element of the review is that the Troika has been successful as a coordination and information-sharing mechanism. Overall, cooperation with euro area institution has been effective.

In a sense, there's an element of this cooperation that really reflects very long standing practices of the Fund cooperating with other institutions in program design. And typically when the main partner has been the World Bank, that obviously applies more frequently on the low-income country side, there is essentially a division of expertise and a division of responsibilities where the IMF focused on the macro-critical, the macro-structural elements. And we rely on the expertise of our partners on micro-economic elements that are important for the success of the overall policies of the countries.

Nevertheless, I think there are two initial lessons we draw in this review, where as indicated in the overview report, the value of building relationships and mutual understanding with regional institutions in good times, when there is a lot of time available to discuss our various respective approaches to financial support, so that we are better experienced to collaborate at times of crisis when time is in a sense more compressed. And the second is the importance of clearly communicating the Fund's financing principle which is basically this conditionality guidance and related issues when joining a co-financing arrangement, so that everyone knows exactly on what basis we move together.

QUESTIONER: Well, just if I could relate that with the Caribbean example. Do you feel that we are being used, for instance in the case of the euro zone to have guarantees at least, if not from the ECB but from banking regulators?

MR. DESRUELLE: I don’t think I can answer this question in specifics because we are not looking to review the design of very specific programs. But maybe, let me give you a little bit more background from another experience.

The Fund has had a lot of programs with Currency Unions in the past. You were just mentioning some programs with members of the Eastern Caribbean Currency Union. We have also had a lot of programs over the years, and still currently have, with members of the West African Economic and Monetary Union and the Central African Economic and Monetary Community.

And in these cases if you look at these programs, it's important to provide information on the set of all policies that are relevant. They include monetary and financial conditions, but there has been a long practice of the Fund working in this context. And so, in that sense from that pure conditionality and conditions perspective, there was nothing really terribly different in working with the European Institutions from a principle basis, right?

MS. BHATT: Okay. Thank you very much. We conclude this conference call.