Speech

Opening Remarks by Shigemitsu Sugisaki
Deputy Managing Director of the International Monetary Fund
At the International Policy Dialogue
Berlin, Germany, June 11, 2001

1. I am very pleased to be with you here today. The Development Policy Forum of the German Foundation for International Development and the International Monetary Fund have for several years been organizing important policy dialogues. I would like to thank Ms. Kochendörfer-Lucius for organizing, with the IMF, another policy dialogue, this time on a topic that is at the heart of the IMF's current work. The IMF is now moving to streamline and focus its conditionality in order to make it more effective while providing maximum scope for countries' own policy decision making. A key element of the work on conditionality that is now in progress is to consult with those outside the IMF—including policy-makers in countries that receive our financing—both on the existing practice of conditionality and on our current reform plans. We expect this Policy Dialogue to be a useful and constructive part of this consultation process; the conclusions will be communicated to our Executive Board as part of the input for their further consideration of these issues.

2. In reviewing conditionality, one must first consider what conditionality is expected to achieve, and how it came to take its present form and scope. The intended purpose of conditionality is rooted in the IMF's Articles of Agreement: the IMF is "to give confidence" to its member countries by making financing available to them "under adequate safeguards, thus providing them with the opportunity to correct maladjustments...without resorting to measures destructive of national or international prosperity". The IMF's financing is thus intended to support countries' own efforts to tackle the problems they face. Under conditionality, successive installments of the Fund's financing are provided if and only if the country's own efforts are continuing as envisaged—thus providing safeguards to the Fund that its financing serves its intended purpose and is repaid in a timely manner, and assurances to the country that it will continue to receive this financing under agreed conditions.

3. The IMF's lending has typically involved some policy conditions ever since the 1950s, but the nature and scope of these conditions has changed considerably in the past two decades. Originally, the only conditions were those related to the broad thrust of monetary and fiscal policies, such as the exchange rate, international reserves, domestic credit expansion, and the government deficit. But in the 1980s and 1990s, conditions related to structural measures—including tax and expenditure reforms, financial sector reforms, public enterprise restructuring and privatization, central bank management, trade and exchange rate systems, and in some cases prices and marketing arrangements—became a common feature of IMF-supported programs.

4. Several factors lie behind this change. Since the 1980s, there has been greater emphasis on growth as an objective of Fund-supported programs. Growth offers the means of raising living standards and in many cases fundamental difficulties in activating growth lie at the root of external imbalances. There has also been the realization that growth is often hampered by distortions in the functioning of the economy. Moreover, it has been increasingly apparent, from the experience of many countries, that the effectiveness of monetary and fiscal policies in promoting macroeconomic stability depends on structural factors such as the efficiency of the public sector and the state of the financial system. The Fund has also increasingly been working with countries in which structural reforms were a central part of the policy agenda—notably the formerly centrally planned economies and the poorest countries. In the East Asian financial crisis of 1997-98, the IMF was called upon to help economies that had enjoyed high rates of economic growth but whose Achilles' heel was their financial systems; reforms designed to rebuild sound financial systems thus had a central place in these countries' programs.

5. While the experience suggests that there were valid reasons for conditionality to focus increasingly on the structural side, this broadening in focus has also raised some pressing concerns. At times, both our capacity to give advice and the countries' capacity to implement reforms may have been stretched too thin. Very broad and detailed conditionality may also have the unintended effect of galvanizing opposition to needed reforms. More generally, it has become evident that economic policies, however well-designed, can take root only if they are owned by the country itself. The need for conditionality must thus be met in a way that also respects the need for ownership: the national authorities must take the lead in the design of policies and these policies need to be strongly supported within the country.

6. We are therefore moving towards a more focused approach to conditionality to increase its effectiveness while giving maximum scope for national ownership. The main thrust was presented last September in an Interim Guidance Note from the Managing Director, Mr. Köhler, to IMF staff; this spring, it was endorsed by our Executive Board and by the International Monetary and Financial Committee, representing the member countries.

7. Under this approach, policy reforms that are critical for a program to achieve its macroeconomic objectives will be included under conditionality, while conditionality is to be applied more sparingly to structural measures that are relevant but not critical, particularly outside our core areas of responsibility. As an illustration, the IMF's previous program for Mozambique included a structural benchmark related to protection of the domestic cashew nut processing industry; such protection acts as a tax on raw cashew production which lowers the incomes of farmers and agricultural workers and hampers the country's exporting capacity. But our present program with Mozambique does not include any conditions related to cashew, as we judged that this was not critical to the program's macroeconomic objectives. As this example illustrates, drawing this line involves some difficult judgements; such judgements need to be made on a case-by-case basis, drawing lessons that can be carried forward.

8. This approach is starting to show results. For instance, in our recent program with Latvia, structural conditionality has been winnowed down to 4 structural benchmarks focused on requirements for fiscal and financial stability. Similarly, for Madagascar, several conditions that were specified in previous programs have been eliminated, and conditionality now focuses on expenditure management and customs data. Peru's recent standby arrangement contains no structural conditions, even though the government is carrying out structural reforms in a number of areas of its own accord. Streamlining is not moving ahead uniformly but needs to be adapted to the circumstances of individual countries.

9. At the same time, we are addressing some important policy issues related to the application of conditionality. These issues include the appropriate degree of detail with which conditionality is established and the need to clarify the boundaries of what is covered by conditionality. Some steps in this direction have already been decided: Letters of Intent are to distinguish more explicitly between the IMF's conditionality and the rest of the authorities' policy programs; the scope of program reviews is to be delineated as clearly as possible; and structural benchmarks are to be used more sparingly. Some issues, such as the scope for results-based conditionality, will need to be considered further.

10. Another set of issues concerns the need for conditionality to match countries' implementation capacity. This is partly a matter of realism in designing programs, putting priority on those elements that are most important. It also underscores the importance of helping countries to strengthen their capacity, which is one of the key motivations for the IMF's technical assistance efforts.

11. Clearly, this is work in progress, and our Executive Board will be returning three times to discuss these issues before the year is out. In a narrow sense, this work is aiming toward a review of the IMF's Conditionality Guidelines, which date from 1979. We will need to consider how these Guidelines would need to be revised to bring them more closely into line with current realities while also giving due emphasis to the need for streamlining.

12. In a broader sense, though, the main goal is not to revise our guidelines but to change our practice as it affect countries and their citizens. We are aiming to show meaningful results during the remainder of this year, which will bring lasting changes in the way the IMF supports the efforts of its member countries. We look forward to your deliberations during the next two days, which will help guide us toward this goal.