Conditionality as an Instrument of Borrower Credibility
IMF Policy Discussion Papers, February 1, 1997
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- Conditionality as an Instrument of Borrower Credibility
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Bibliographic details
- Authors: Pierre Dhonte
- Published: February 1, 1997
- Series: IMF Policy Discussion Papers
- DOI: https://doi.org/10.5089/9781451974423.003
Executive summary and central argument
- Fund member countries that adopt market-friendly policies often encounter a credibility problem—market-friendly policies are not effective in stimulating private investment as long as there remains a significant risk of policy reversal.
- The root of this risk lies in the discretionary policy-making authority of governments.
- Committing to a program with the Fund, and endorsing its conditionality, is one instrument available to governments to overcome this difficulty.
- The paper develops this interpretation of conditionality and indicates some of its operational implications for Fund programs.
Key findings
- Market-friendly policies fail to stimulate private investment when significant risk of policy reversal remains.
- Discretionary policy-making authority of governments is identified as the root cause of credibility problems.
- Endorsing IMF conditionality within a Fund program can serve as a commitment device to enhance borrower credibility.
Operational implications for Fund programs
- Conditionality can be interpreted and applied as an instrument to reduce perceived policy reversal risk.
- Fund program design should account for the credibility-enhancing role of conditionality when engaging with member countries that face discretionary policy-making challenges.
Subject, keywords, and classification
- Subject: Credit ratings, Money
- Keywords: Conditionality/Credibility, Credit ratings, financing, Fund, Fund arrangement, Fund program, Global, market, market credibility, options vis-à-vis market participant, PDP, policy, policy framework underpinning IMF conditionality practice, renewed appreciation
Content in this bundle
- Conditionality as an Instrument of Barrower Credibility - PPAA/97/2