Chapter

CHAPTER 4 IMF Lending Policies and Conditionality

Author(s):
International Monetary Fund
Published Date:
September 2001
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The IMF provides financial support to member countries under a variety of policies and lending instruments (“facilities” see Table 4.1). Most forms of IMF financing are made conditional on the member adopting policy reforms to address the balance of payments problem that gave rise to the request for IMF support.

Table 4.1IMF Financial Facilities
Repurchase (Repayment) Terms3
Credit FacilityPurposeConditionsPhasing and Monitoring1Access Limit1Charges2Obligation

schedule

(years)
Expectation

schedule

(years)
Installments
Credit Tranches and Extended Fund Facility4
Stand-By Arrangements (1952)Short-term assistance for countries with balance of payments difficulties of a short-term characterAdopt policies that provide confidence that the member’s balance of payments difficulties will be resolved within a reasonable periodQuarterly purchases (disbursements) contingent on observance of performance criteria and other conditionsAnnual: 100% of quota; cumulative: 300% of quotaBasic rate plus surcharge (100 basis points on amounts above 200% of quota; 200 basis points on amounts above 300%)53¼–52¼–4Quarterly
Extended Fund Facility (1974)Longer-term assistance to support members’ structural reforms to address balance of payments difficulties of a long-term characterAdopt 3-year program, with structural agenda, with annual detailed statement of policies for the next 12 monthsQuarterly or semiannual purchases (disbursements) contingent on observance of performance criteria and other conditionsAnnual: 100% of quota; cumulative: 300% of quotaBasic rate plus surcharge (100 basis points on amounts above 200% of quota; 200 basis points on amounts above 300%)54½–104½–7Semiannual
Special Facilities
Supplemental Reserve Facility (1997)Short-term assistance for balance of payments difficulties related to crises of market confidenceAvailable only in context of regular arrangement with associated program and with strengthened policies to address loss of market confidenceFacility available for one year; frontloaded access with two or more purchases (disbursements)No access limits; access under the facility only when access under associated regular arrangement would otherwise exceed either annual or cumulative limitBasic rate plus surcharge (300 basis points rising by 50 basis points a year after first disbursement and every 6 months thereafter to a maximum of 500 basis points)2–2½1–1½Semiannual
Contingent Credit Line (1999)Precautionary line of defense that would be made readily available against balance of payments difficulties arising from contagionEligibility Criteria: (1) absence of balance of payments need from the outset, (2) positive assessment of policies by the IMF, (3) constructive relations with private creditors and satisfactory progress in limiting external vulnerability, (4) satisfactory economic programResources approved for up to one year. Small amount (5%–25% of quota) available on approval but not expected to be be drawn. Presumption that one-third of resources are released on activation, with the phasing of the remainder determined by a postactivation reviewExpected access: 300%–500% of quotaBasic rate plus surcharge (150 basis points rising by 50 basis points at the end of the first year and every 6 months thereafter to a maximum of 350 basis points)2–2½1–1½Semiannual
Compensatory Financing Facility (1963)Medium-term assistance for temporary export shortfalls or cereal import excesses. (A provision for use in cases of other contingencies was eliminated in 2000)Available only when a member has an arrangement with upper credit tranche conditionality, or when its balance of payments position is otherwise satisfactoryTypically disbursed over a minimum of 6 months in accordance with the phasing provisions of the arrangement55% of quotaBasic rate3¼–52¼–4Quarterly
Emergency AssistanceQuick, medium-term assistance for balance of payments difficulties related to:None, although postconflict assistance can be segmented into two or more purchases made available in exceptional casesGenerally limited to 25% of quota, though larger amounts can be made available in exceptional casesBasic rate3¼–5Not applicableQuarterly
(1) Natural disasters (1962)(1) To help finance recovery efforts and support economic adjustment programs after natural disasters(1) Reasonable efforts to overcome balance of payments difficulties
(2) Postconflict (1995)(2) To help establish macroeconomic stability in the aftermath of civil unrest, political turmoil, or international armed conflict(2) Focus on institutional and administrative capacity building to pave the way toward an upper credit tranche arrangement or PRGF
Facility for Low-Income Members
Poverty Reduction and Growth Facility (1999)



(Replaced the Enhanced Structural Adjustment Facility)
Longer-term assistance for deep-seated balance of payments difficulties of structural nature; aims at sustained poverty-reducing growthPRGF-supported programs are based on a Poverty Reduction Strategy Paper (PRSP) prepared by the country in a participatory process, and integrating macroeconomic, structural, and poverty reduction policiesSemiannual (or occasionally quarterly) disbursements contingent on observance of performance criteria and reviewsExpected: first-time users, 90%; others, 65% of quota. Maximum 140% of quota; exceptional 165% of quota0.5% a year5½–10Not applicableSemiannual

The IMF’s lending is financed from the capital subscribed by member countries; each country is assigned a quota that represents its financial commitment. A member provides a portion of its quota in foreign currencies acceptable to the IMF—or in SDRs—and the remainder in its own currency. An IMF loan is disbursed or drawn by the borrower purchasing foreign currency assets from the IMF with its own currency. Repayment of the loan is achieved by the borrower repurchasing its currency from the IMF with foreign currency. See Box 6.1 on the IMF’s Financing Mechanism.

The basic rate of charge on funds disbursed from the General Resources Account (GRA) is set as a proportion of the weekly interest rate on SDRs and is applied to the daily balance of all outstanding GRA drawings during each IMF financial quarter. In addition to the basic rate plus surcharge, an up-front commitment fee (25 basis points on committed amounts up to 100% of quota, 10 basis points thereafter) is charged on the amount that may be drawn during each (annual) period under a Stand-By or Extended Arrangement. The fee is, however, refunded on a proportionate basis as subsequent drawings are made under the arrangement. A one-time service charge of 0.5 percent is levied on each drawing of IMF resources in the General Resources Account, other than reserve tranche drawings, at the time of the transaction.

For purchases made after November 28, 2000, members are expected to make repurchases (repayments) in accordance with the schedule of expectations; the IMF may upon request by a member amend the schedule of repurchase expectations if the Executive Board agrees that the member’s external position has not improved sufficiently for repurchases to be made.

Credit tranches refer to the size of purchases (disbursements) in terms of proportions of the member’s quota in the IMF; for example, disbursements up to 25 percent of a member’s quota are disbursements under the first credit tranche and require members to demonstrate reasonable efforts to overcome their balance of payments problems. Requests for disbursements above 25 percent are referred to as upper credit tranche drawings; they are made in installments as the borrower meets certain established performance targets. Such disbursements are normally associated with a Stand-By or Extended Arrangement. Access to IMF resources outside of an arrangement is rare and expected to remain so.

Surcharge introduced in November 2000.

The IMF’s lending is financed from the capital subscribed by member countries; each country is assigned a quota that represents its financial commitment. A member provides a portion of its quota in foreign currencies acceptable to the IMF—or in SDRs—and the remainder in its own currency. An IMF loan is disbursed or drawn by the borrower purchasing foreign currency assets from the IMF with its own currency. Repayment of the loan is achieved by the borrower repurchasing its currency from the IMF with foreign currency. See Box 6.1 on the IMF’s Financing Mechanism.

The basic rate of charge on funds disbursed from the General Resources Account (GRA) is set as a proportion of the weekly interest rate on SDRs and is applied to the daily balance of all outstanding GRA drawings during each IMF financial quarter. In addition to the basic rate plus surcharge, an up-front commitment fee (25 basis points on committed amounts up to 100% of quota, 10 basis points thereafter) is charged on the amount that may be drawn during each (annual) period under a Stand-By or Extended Arrangement. The fee is, however, refunded on a proportionate basis as subsequent drawings are made under the arrangement. A one-time service charge of 0.5 percent is levied on each drawing of IMF resources in the General Resources Account, other than reserve tranche drawings, at the time of the transaction.

For purchases made after November 28, 2000, members are expected to make repurchases (repayments) in accordance with the schedule of expectations; the IMF may upon request by a member amend the schedule of repurchase expectations if the Executive Board agrees that the member’s external position has not improved sufficiently for repurchases to be made.

Credit tranches refer to the size of purchases (disbursements) in terms of proportions of the member’s quota in the IMF; for example, disbursements up to 25 percent of a member’s quota are disbursements under the first credit tranche and require members to demonstrate reasonable efforts to overcome their balance of payments problems. Requests for disbursements above 25 percent are referred to as upper credit tranche drawings; they are made in installments as the borrower meets certain established performance targets. Such disbursements are normally associated with a Stand-By or Extended Arrangement. Access to IMF resources outside of an arrangement is rare and expected to remain so.

Surcharge introduced in November 2000.

In FY2001, the IMF took steps to update its lending policies and revisit its policy conditionality. Specifically, it made efforts to:

  • restructure its regular lending facilities to allow the IMF to support more effectively its members’ efforts to resolve crises, and also to prevent crises arising from contagion, and to help ensure a more efficient use of IMF financial resources;
  • streamline its policy conditionality to increase its effectiveness and promote strong country ownership of IMF-supported programs; and
  • reaffirm its role in promoting good governance in member countries.

Chapters 3 and 5 discuss other important IMF efforts to refocus its work to enhance its overall effectiveness, and Chapter 6 covers other developments in IMF financial operations and policies during FY2001.

Review and Reform of IMF Facilities

During the financial year, the Executive Board approved some important changes in the IMF’s financial facilities. In March 2000, the Board initiated a general review of IMF financial facilities, eliminating a number of little used or obsolete facilities and seeking ways to better adapt the remaining lending instruments to changes in the global economy. In November 2000, the Board concluded its review and agreed on several measures to sharpen the focus of IMF lending on crisis resolution and prevention and to make more efficient use of IMF resources. Among other actions, the Board:

  • made the terms of the Contingent Credit Line (CCL) facility more attractive to potential users. The CCL offers countries with sound economic policies a precautionary line of credit that can be quickly activated to help them counter contagion effects on their economies from financial crisis elsewhere;
  • approved measures to encourage early repayment of IMF loans and discourage excessive use of IMF funds. These measures will reduce reliance on the IMF as a source of longer-term financing and free up funds for use by other members; and
  • strengthened its monitoring of countries’ economic policies after conclusion of IMF-supported programs, particularly in cases where there is substantial credit outstanding to the IMF. This provides additional safeguards for IMF funds and helps preserve the achievements of IMF-supported programs.

Contingent Credit Lines (CCLs)

The CCL was conceived in 1999 as a precautionary line of defense to help protect countries pursuing strong policies in the event of a balance of payments need arising from the spread of financial crises. In meetings in September and November 2000, the Board acknowledged that changes were needed to make the CCL more attractive to potential users. Directors agreed on the following modifications of the facility:

  • Monitoring arrangements for members that had strong track records on policies and that qualified for the CCL would be less intensive than for members under other IMF arrangements. Accordingly, in its request for a commitment of CCL resources, the member should present a quarterly quantified framework to guide its macroeconomic policies that would be a basis for monitoring, but there would be no need for a detailed definition of program targets. Also, while the initial consideration of the member’s eligibility should include an assessment of its structural program and the progress expected under that program, formal structural benchmarks would not be necessary. Finally, in appropriate cases, the midterm review of arrangements with CCL resources could be completed on a lapse-of-time basis (without formal discussion by the IMF’s Executive Board). Between reviews, staff and management would remain in close touch with the member and inform the Board if there were concerns that slippages in the member’s policies might make it vulnerable to crises. The Board agreed that the IMF must continue to have the means to make a member exit formally from the CCL—primarily in the form of the limited (one-year) commitment period under the CCL and the midterm review.
  • A member approved for a CCL could request financing at any time, which would lead to a special “activation” review by the Board. In September 2000, Directors agreed to simplify the conditions for completing the activation review to assure members using the CCL of greater automaticity in the disbursement of resources. The activation review would be divided into an “activation” review and a “postactivation” review. The former would be completed quickly and would release a predetermined, large amount of resources—normally a third of the total commitments—and the member would be given the strong benefit of the doubt as to any required policy adjustments. In the postactivation review, phasing and conditionality would be specified for access to the remaining resources.
  • One formal condition for the completion of the activation review would be eliminated. Under the original policy, the Board had to agree that “up to the time of the crisis, the member has successfully implemented the economic program that it had presented to the Board as a basis for its access to CCL resources.” This condition was intended to guard against the possibility that the member’s own policies had contributed to the buildup of its balance of payment difficulties. The Board agreed to omit this as a separate condition because this possibility would not be consistent with the member’s difficulties being judged to be largely beyond its control (a separate condition for the activation review).
  • The overall rate of charge and the commitment fee on CCL resources was reduced. The initial surcharge was lowered from 300 basis points to 150 basis points (half of the surcharge under the Supplemental Reserve Facility, or SRF). The surcharge would then rise with time, to a ceiling of 350 basis points. The commitment fee on the CCL (and other large arrangements) was reduced by replacing the prevailing flat commitment fee of 25 basis points with a new schedule—to be applied to all IMF arrangements—of 25 basis points on amounts up to 100 percent of quota, and 10 basis points for amounts in excess of 100 percent of quota. This structure recognizes the importance of fixed costs in setting up an arrangement.

To allow for a meaningful period of experimentation with the revised facility, the Board extended the sunset clause on the CCL until November 2003. The Board will conduct its next review of the CCL in November 2002. As of the end of FY2001, no member had requested an arrangement under this facility.

Expectation of Early Repayment of Loans

In their review of ways to ensure the efficient use of IMF resources, Executive Directors agreed that prolonged use following the resolution of a balance of payments problem should be addressed through the introduction of time-based repurchase expectations. These would come into force before the standard repurchase (or repayment) obligations. For Stand-By Arrangements, members would be expected to begin repayments 2¼ years after each purchase and complete repurchases after 4 years, while repurchase obligations would continue to span 3¼ to 5 years. Under the Extended Fund Facility (EFF), members would begin repurchases after 4¼ years, as at present, but expected repurchases would be completed in 7 years, rather than 10 years under the obligation schedule. The new early repurchase expectations apply to all purchases in the credit tranches and under the EFF made after November 28, 2000.

The design of IMF-supported programs will be guided by the requirement that the member should be able to meet repurchase obligations. The member’s ability to meet the repurchase expectations would signal as a general rule a stronger-than-expected improvement in its external position.

Members may request an extension of repurchase expectations at any time. Should a member fail to meet a repurchase expectation not extended by the Board, its right to make further drawings, including under ongoing arrangements, would be automatically suspended.

The Board agreed to review the operation of early repurchase expectations by November 2005.

Surcharges on Heavy Use of IMF Credit

To discourage unduly large use of IMF resources, the Board agreed in September 2000 to introduce surcharges on credit outstanding above a threshold level in the credit tranches and under the Extended Fund Facility. The use of credit above 200 percent of quota would carry a surcharge of 100 basis points above the regular rate of charge, and the surcharge would rise to 200 basis points for credit outstanding above 300 percent of quota.

The level-based surcharge applies only to the amount of credit above each threshold, not to the total amount of outstanding credit. Credit outstanding at the time the policy changes were made effective (November 28, 2000) would be “grandfathered” so that surcharges would not apply. Credit outstanding under the SRF or a CCL is also exempt from the new surcharge because these facilities have their own system of graduated charges (see Table 4.1).

Emergency Assistance

Directors agreed that financing made available as emergency assistance for natural disasters or for countries emerging from conflicts would not be subject to the level-based surcharge, nor be taken into account for the purpose of calculating the surcharge applicable to other resources. They also agreed that resources available under both types of emergency assistance should not feature time-based repurchase expectations. These decisions were put into effect by establishing emergency assistance as a special policy distinct from the IMF’s other general lending.

In addition, the IMF made efforts to put its emergency postconflict assistance on concessional terms. These efforts were welcomed by the Joint Session of the International Monetary and Financial Committee and the Development Committee in their April 2001 communiqué.

Compensatory Financing Facility

The Compensatory Financing Facility (CFF) was reviewed and streamlined in early 2000. In November 2000, Directors agreed that drawings under the CFF should be subject to the same repayment expectations that govern lending under Stand-By Arrangements: 2¼–4 years. They would not, however, be subject to the level-based surcharge nor counted toward outstanding obligations that give rise to that surcharge.

Extended Fund Facility

During the review of IMF facilities, the Executive Board underscored that arrangements under the Extended Fund Facility (EFF) would be granted only in cases that fully meet the terms and spirit of the 1974 decision establishing the EFF. These would be cases where there is reasonable expectation that the member’s balance of payments difficulties were relatively long term, for example, because of limited access to private capital and a need for a strong structural program to deal with the entrenched institutional or economic weaknesses. The Board agreed that extended arrangements should generally not be formulated on a precautionary basis. While the EFF remains available to all members meeting the eligibility criteria, it was seen as especially appropriate for countries graduating from the Poverty Reduction and Growth Facility and for transition countries that did not have access—or sufficient access—to capital markets.

Post-Program Monitoring

The Board decided that enhanced post-program monitoring, with more formal involvement of the Board, was important in certain cases to provide an early warning of policies that could call into question a member’s continued progress toward external viability. To that end, Directors agreed that there should be a presumption that when a member’s credit outstanding at the end of an arrangement exceeds 100 percent of quota, management would be expected to recommend to the Board an enhanced monitoring of economic developments until credit falls below this threshold. The Board’s discussions of post-program monitoring papers would be summarized in a Public Information Notice (PIN) when the member agreed to such publication. The member could also allow publication of the post-program monitoring papers on a voluntary basis.

Review of Conditionality in IMF-Supported Programs

The IMF extends financing to a member country with balance of payments difficulties on the condition that the country has put in place a program of policy adjustments to address its external payments problem. Conditionality gives the country assurance that it will continue to receive IMF financing as long as it carries out the policies or achieves outcomes envisaged in the program. At the same time, conditionality safeguards the revolving character of the IMF’s resources by extending financing only if the country concerned is committed to policy adjustments that, by improving its external position, will enable it to repay the IMF.

Conditionality has evolved over the course of the IMF’s history. Until the 1980s, policy conditions were limited mainly to macroeconomic variables, but beginning in the late 1980s the scope of conditionality began to broaden. This reflected, in part, an increasing emphasis on economic growth as a goal of IMF-supported programs, but also the IMF’s expanding involvement in countries where severe structural problems were impeding the achievement of a sustainable balance of payments position.

The expanding scope of conditionality has raised concerns that excessively broad and detailed policy conditions may undermine a country’s “ownership” of a policy program, which is essential for the program’s successful implementation. Moreover, extensive conditionality may strain a country’s administrative capacity, thus undermining the implementation of truly essential policies. These concerns prompted the Managing Director of the IMF to give high priority to streamlining and more sharply focusing IMF conditionality and to strengthening national ownership. In September 2000, he issued to IMF staff an Interim Guidance Note on Streamlining Structural Conditionality in IMF-Supported Programs (see Box 4.1), which set out general principles to be revisited in 2001 in light of experience and Board discussions.

In March 2001, the Executive Board discussed the general principles and issues related to conditionality. Directors agreed that conditionality remained indispensable but that it had to be streamlined and focused to give greater scope for national ownership, while ensuring that the essential objectives of IMF-supported programs—including safeguarding the IMF’s financial resources and their revolving character—were achieved.

Box 4.1Interim Guidance Note: Streamlining Structural Conditionality in IMP-Supported Programs, September 2000

  • This note has been prepared by an Inter-Departmental IMF Working Group on streamlining structural conditionality in IMF-supported programs. The general principles set out below are preliminary and will be reviewed in early 2001 in light of the initial experience and the Executive Board’s discussion of the forthcoming papers on “The Experience with Structural Conditionality in Fund-Supported Programs” and “Ownership, Conditionality, and Policy Implementation.”
  • The Reform Task Force in its interim report on “The Future Role of the Fund” recommends that IMF programs should henceforth be formulated on the “presumption that structural conditionality will be limited to a core set of essential measures that are macro-relevant and in the Fund’s core area of responsibility, with a broader approach requiring justification based upon the specific country situation.”1 The report further notes that “the Fund may continue to advise on a broader range of structural reforms in some cases, but they would not generally be part of conditionality.”
  • This note outlines some principles to assist staff in determining the appropriate scope of structural conditionality in Fund arrangements in the general resources account, as well as in arrangements under the Poverty Reduction and Growth Facility (PRGF). These principles are inevitably fairly general and will need to be applied judiciously on a case-by-case basis. However, they should be seen as establishing a general presumption that structural conditionality in Fund-supported programs should be selective and justified by the program’s overall macroeconomic objectives. This should not weaken the quality of Fund-supported programs; rather, it should help strengthen conditionality and ownership in those areas that are critical for the program’s success.
  • The authorities’ policy commitments in the structural area are laid down in a member country’s Letter of Intent (LOI) or the Memorandum on Economic and Financial Policies (MEFP). Implementation of these policy commitments is monitored through performance criteria, structural benchmarks, prior actions, or in the context of program reviews. The form of monitoring depends on the importance of certain structural reforms for the program’s objectives as well as the nature of the measures involved. Applying performance criteria requires that specific measures can be clearly and unambiguously defined, and that these measures in and of themselves are sufficiently important to warrant holding up the arrangement in cases of noncompliance. Structural benchmarks too are applied to individual, well-defined measures, but they do not assign the same weight to these measures as do performance criteria; rather they serve as markers in the assessment of progress with the implementation of reforms in a given area. Finally, reviews provide a framework for an assessment of structural reforms against established benchmarks or of reforms that are either less critical or characterized by a series of smaller steps, which may be of moderate significance individually and have to reach a critical mass to signify progress. Reviews provide considerable scope for judgment and, hence, flexibility to the Fund, but they imply less clearly defined assurances for the borrowing country regarding the conditions under which purchases can continue.
  • Sometimes, the authorities and/or staff find the LOI a useful vehicle to set out the authorities’ broader policy agenda for either national or international audiences. In these instances, only part of the LOI may constitute firm policy commitments under the program in the form of performance criteria or benchmarks. In such cases, review clauses need to indicate clearly the areas that will be covered by program reviews. The principles outlined in the following paragraphs focus on structural reforms that constitute policy commitments in the sense that they are subject to some form of monitoring under the program. Issues related to the broader coverage of structural measures in LOIs or MEFPs are briefly discussed in paragraph 12.
  • Fund conditionality should cover only structural reforms that are relevant for a program’s macroeconomic objectives. There are, however, no clear rules for classifying structural reforms according to their macroeconomic relevance. While all Fund-supported programs ultimately seek to achieve medium-term external viability together with strong and sustainable growth, the conditions that determine what needs to be done to achieve these objectives vary considerably across programs. For example, in recent financial crises, the overriding goal of Fund-supported programs was to restore market confidence, ensure orderly external adjustment, address the weaknesses that had made these countries vulnerable to a crisis, and create the conditions for growth to be resumed. In the transition economies, completing the transformation into a competitive market economy while restoring or maintaining stable macroeconomic conditions has been the key challenge. PRGF arrangements seek to promote poverty reduction by removing impediments to strong, sustainable growth and a viable external position. While macroeconomic relevance needs to be established on a case-by-case basis, it will be important to make this assessment explicit in program documents.
  • Not all structural reforms that meet the macroeconomic relevance test will typically be subject to program conditionality. In order to determine which reforms should be covered, it is useful to distinguish between structural reforms that are essential or critical for the program’s macroeconomic objectives and reforms that are macroeconomically relevant but do not have the same degree of importance. Distinguishing between the two is obviously a matter of judgment. One way to do so is to ask the question: If the reforms in question were not carried out, would achievement of the program’s macroeconomic objectives, including the restoration of sustainable growth, be seriously jeopardized, regardless of progress in other areas? If the answer is no, the reforms in question may be macroeconomically relevant but are probably not critical.
  • Structural reforms that are critical for the achievement of the program’s macroeconomic objectives will generally have to be covered by Fund conditionality. If measures can be identified that are specific, well-defined, and monitorable, and mark important steps in the whole reform process, they would likely be subject to performance criteria or prior actions. For structural reforms that are critical for a program’s macroeconomic objectives but are defined by a series of individual small steps that have to reach a critical mass, monitoring would typically rely on benchmarks and/or program reviews, with review clauses highlighting the relevant area.
  • If certain structural reforms are critical for the program’s success but outside the Fund’s core areas of responsibility, the Fund will have to seek assistance from the World Bank or another institution to provide input in designing and monitoring the reform measures and, if necessary, give technical advice on implementation to the country. In these cases, the Fund would still bring these measures under its own conditionality and decide on the adequacy of implementation on the basis of assessments provided by the World Bank or other relevant institution.2
  • Structural reforms that are relevant—but not critical—for the program’s macroeconomic objectives and within the Fund’s core areas of responsibility may be subject to conditionality. Whether such reforms should be included and in what form they should be monitored is a matter of judgment and depends on their relative importance for the program’s objectives and the nature of the measures involved. However, the presumption would be that structural performance criteria would not be used in these cases, and that prior actions or structural benchmarks would be used sparingly and would require justification. In most instances, structural policy commitments to the Fund that fall into this category would be monitored in the context of reviews as part of an overall assessment of progress under the program.
  • If structural reforms meet the macroeconomic relevance test but are neither critical nor in the Fund’s core areas of responsibility, Fund conditionality would generally not apply. If these measures are covered by the World Bank, the Fund may, and in many cases would, take note of the Bank’s assessment of progress with implementation in forming a judgment on the country’s adjustment effort.3
  • The general principles outlined above focus on structural conditionality, i.e., policy commitments to the Fund in the structural area that are subject to some form of monitoring under the program. As noted in paragraph 5, however, LOIs or MEFPs may include the authorities’ broader policy agenda. In these cases, review clauses need to delineate the areas that are covered by Fund conditionality beyond those covered explicitly by performance criteria. The breadth as well as the level of detail of the measures covered by LOIs or MEFPs should continue to be determined by what is most useful in each country context. Nevertheless, in some cases, MEFPs containing large and detailed policy matrices have raised concerns about excessive intrusiveness of Fund conditionality. Such detailed matrices should be avoided unless they are considered necessary by the authorities to express their policy commitment or by the staff to monitor policy implementation.
1Core areas of responsibility include “macroeconomic stabilization, monetary, fiscal and exchange rate policy, including the underlying institutional arrangements and closely related structural measures; and financial sector issues, including the functioning of both domestic and international financial markets.”2In the case of PRGF-supported arrangements, the respective areas of responsibility of the IMF and the World Bank will be delineated in the Poverty Reduction Strategy Paper. It is intended that the IMF would “not apply conditionality in areas outside the Fund’s mandate and expertise, with the possible exception of measures that are critical to the country’s fiscal and/or external targets” (see Key Features of PRGFSupported Programs (SM/00/193, 8/17/00, para. 18). It is recognized, however, that changes at the World Bank—in particular, the development of the Poverty Reduction Support Credit—and the nature of the World Bank’s current lending operations in specific countries will affect how quickly it will be possible to move in this direction. In the interim, PRGF conditionality may cover additional measures that are critical for the program’s objectives.2In the case of PRGF arrangements, it is envisaged that the Fund will take into account the World Bank’s assessment in all areas for which the Bank has responsibility under the PRSP (or Interim PRSP).

Areas of Consensus

Directors agreed that the widening scope of conditionality in recent years reflected, in part, the increasing emphasis on economic growth as a policy objective. This emphasis was driven by the view that demand management alone could not address the pressing economic problems of member countries. Moreover, the IMF had been intensively supporting countries in increasingly varied economic situations—including low-income and transition countries, where the correction of sometimes massive structural distortions and weaknesses in governance was seen as fundamental to addressing macroeconomic and external imbalances. More recently, the IMF had supported programs to deal with capital account crises stemming in large part from structural weaknesses in countries’ financial sectors. Addressing these weaknesses was an essential element of the policy response, intended both to achieve a sound medium-term position and to help restore market confidence.

The broadening scope of IMF-supported programs had been accompanied by changes in the way the IMF monitored policy implementation. In particular, the IMF had increasingly relied on program reviews in monitoring policy performance. Structural benchmarks were being used extensively to map out steps in the implementation of particular structural policies. Prior actions—policy actions taken by the authorities before approval of an IMF arrangement or before the completion of a program review—had also become increasingly important in program monitoring.

In discussing the growing scope and detail of structural conditionality, some Directors felt that IMF conditionality had generally remained focused on its core areas of responsibility, while other Directors noted that the application of some conditionality outside these areas raised concerns that the IMF was overstepping its mandate and expertise. They also cited concerns that IMF-supported programs sometimes short-circuited national decision-making processes and failed to take adequate account of the authorities’ ability to muster public support for the policies envisaged, and of their administrative capacity to carry out these policies. Considering that national ownership was essential to the successful and sustained implementation of a program of economic policies, Directors underscored the importance of avoiding ill-focused or unduly intrusive conditionality that could detract from national ownership. Concerns were also raised about the application of conditionality consistent with the IMF’s existing guidelines, including uniformity of treatment of members. In addition, the boundaries of conditionality had become blurred, owing to the increasing use of structural benchmarks and Letters of Intent, which spell out the details of a country’s overall reform program. This had made it more difficult for both the IMF and outsiders to ascertain exactly which policy measures the IMF’s financing was conditioned upon.

Directors agreed that the aim should be to leave the maximum scope for countries to make their own policy choices, while ensuring that the IMF’s financing was provided only if those policies essential to the purposes of the IMF continued to be implemented.

Directors therefore supported the broad thrust of the Managing Director’s Interim Guidance Note on Streamlining Structural Conditionality. This note indicated that structural reforms critical to achieving a program’s macroeconomic objectives would generally have to be covered by IMF conditionality; a more focused and parsimonious application of conditionality was envisaged for structural reforms that were relevant—but not critical—to the program’s macroeconomic objectives. While these principles need to be intepreted carefully on a case-by-case basis, they shift the presumption of coverage from one of comprehensiveness to one of parsimony—thus requiring a stronger burden of proof for the inclusion of specific structural measures as conditions in an arrangement, particularly where these measures are outside the IMF’s core areas. Directors also agreed that the appropriate coverage and content of conditionality were likely to differ, depending on countries’ circumstances, as well as between programs supported by different IMF facilities.

A clear division of labor and enhanced cooperation with other international agencies—especially the World Bank—was an important element of the streamlining. Directors welcomed the progress made in this direction with regard to low-income countries supported by the Poverty Reduction and Growth Facility.

The Executive Board endorsed the change in the role of program reviews over the past two decades. These reviews were now being used for both forward-and backward-looking assessments of countries’ economic policies. They reflected, first, the increased uncertainty of macroeconomic relationships in a world of volatile global capital markets, which made it more difficult to specify macroeconomic performance criteria for more than a brief period ahead. Second, the reviews reflected the growing prevalence of structural policies, which were less suitable for assessment based on simple quantified performance criteria. At the same time, Directors underscored the importance of ensuring that the increasing prevalence of reviews did not unduly weaken assurances to member countries about the conditions under which they would continue to have access to IMF resources.

Directors agreed that structural benchmarks, which had become an increasingly important tool of conditionality, were useful in tracking progress in implementing structural reforms that take time to come to fruition. As such, benchmarks did not constitute formal conditions for IMF financing but were a tool of program monitoring. At the same time, Directors saw a need for structural benchmarks to be used more sparingly, by limiting each benchmark to an important and representative step toward a policy outcome. This would also help avoid the impression of micromanagement.

As to Letters of Intent, Directors shared the view that they should distinguish more clearly between the authorities’ overall policy program and the part of the program subject to IMF conditionality. They agreed that the Letters of Intent should either focus only on those aspects of policy covered by conditionality or, in cases in which the authorities wished to use the Letters of Intent to present their broad policy agenda, should indicate clearly which elements of the program constitute IMF conditionality.

Issues Requiring Further Consideration

The following issues, the Executive Board agreed, would need to be revisited in the period ahead:

  • The approach to streamlining proposed in the Interim Guidance Note on Streamlining Structural Conditionality left open the question of where to draw the line between measures critical to program objectives and those relevant but not critical. Most Directors favored interpreting this criterion rather narrowly, while others, favoring a broader interpretation, were concerned that some recent programs might have gone too far in eliminating conditionality related to important elements of structural reform.
  • Most Directors considered that any application of conditionality outside the IMF’s core areas of responsibility and expertise should be limited to measures critical to a program’s achievement of its macroeconomic objectives. Others, however, maintained that measures relevant to these objectives might also be included. The Board agreed that care would need to be taken to ensure that the authorities received adequate advice—from the World Bank or other agencies—to guide implementation of any measure outside the IMF’s core areas to be included under IMF conditionality. Limiting the IMF’s conditionality to its core areas, while ensuring that measures critical to program objectives are carried out, would also require further progress in developing a framework for coordination with the World Bank and other agencies.
  • On program design, Directors saw a need for further consideration of the pace and sequencing of structural reforms, and for continuing work to adapt conditionality to the implementation capacity of the country.
  • In considering the extent to which the IMF should and could be more selective in providing financial support for programs suffering from weak country ownership, Directors agreed that the IMF should limit its financing in such cases, since conditionality could not compensate for a lack of program ownership. A number of Directors noted, however, that this principle was difficult to apply, because the costs for the country of the IMF holding back support might be large and because of the difficulty of assessing the level and breadth of ownership. In this connection, it was suggested that prior actions could be a helpful tool to test country ownership, especially in cases where past performance had been weak. Directors also stressed that the IMF had to continue to take part in member countries’ institution-building efforts, including by providing technical assistance.
  • Directors expressed a range of views on the scope for greater use of “results-based” conditionality, under which IMF financing would be provided only after certain key policy outcomes had been achieved. A number of Directors thought this approach would give countries greater flexibility in choosing the best means of achieving desired results. At the same time, the point was made that a wholesale move to results-based conditionality would create tensions with the need to synchronize policy implementation with IMF financing, unless financing were significantly more back-loaded.

In the latter regard, Directors discussed the role of standards and codes in specifying desired policy outcomes in IMF-supported programs. Standards and codes could be a useful element in program design, and members’ adherence to best practices in several areas could limit the need for specific conditionality to safeguard program objectives. The application of standards and codes in IMF-supported programs, however, would need to respect their voluntary nature.

Next Steps

At its April 2001 meeting, the International Monetary and Financial Committee reaffirmed that the main goal of streamlining was to make conditionality more efficient, effective, and focused, without weakening it, and welcomed the progress to date. The process of streamlining conditionality will continue in the coming months, and will benefit from input received from outside the IMF. This external input will take the form of comments solicited from the public on a set of papers on conditionality (posted on the IMF website in February) and from seminars, to be held in the summer of 2001, in which country officials, academic experts, and representatives of other organizations will offer their views on IMF conditionality. In addition, the Board will take into account a staff review of the experience to date with applying the Interim Guidance Note on Streamlining Structural Conditionality.

The objective is to ensure that the IMF’s guidelines on conditionality reflect the new realities and give due emphasis to the need for streamlining. Until the completion of this review, Directors agreed, the Interim Guidance Note would continue to apply.

Review of Experience with Governance Issues

In July 1997, the Executive Board approved a Guidance Note on the Role of the IMF in Governance Issues. The note was prepared in recognition of the importance of good governance for economic efficiency and growth. It called for greater attention by the IMF to issues of governance, such as the quality of public resource management and the transparency and stability of the economic and regulatory environment.

In February 2001, the Board reviewed the IMF’s experience in governance issues and concluded that the 1997 Guidance Note remained generally appropriate. Directors welcomed the proactive role of the IMF, and the World Bank, in increasing their attention to governance as a key element influencing economic performance. This heightened involvement was facilitated by the growing consensus in the international community on the importance of good governance at the national level.

The Board reaffirmed that the IMF’s involvement in governance is founded on its mandate to promote macroeconomic stability and sustained noninflationary growth through surveillance, programs of financial support, and technical assistance. Directors stressed that the IMF should exercise judgment and sensitivity as it moves forward, keeping in mind the need for evenhandedness and country ownership in improving governance. The IMF’s involvement should be limited to economic aspects of governance that could have a significant macroeconomic impact. In this regard, many Directors called for further efforts to apply the test of macroeconomic relevance more explicitly, and encouraged staff members to do additional analysis and research on how to apply this test more meaningfully across the IMF membership.

Directors supported the IMF’s initiatives to promote good governance for all members plus specific measures to address particular instances of poor governance and corruption. Prevention should be the centerpiece of the IMF’s governance strategy, Directors agreed. They were encouraged by the IMF’s progress in developing and applying its instruments to promote good governance—policy advice, technical assistance, and dissemination of codes and best practices aimed at strengthening institutions and systems and the functioning of markets. Directors agreed that the IMF should continue to respect the voluntary nature of members’ participation in many components, including standards and codes. In this regard, they emphasized the critical importance of timely and well-targeted technical assistance to help relieve constraints on institutional capacity.

Directors agreed that in some instances the IMF would have to use specific remedial measures in order to achieve the macroeconomic objectives of a members’ reform program and to safeguard the IMF’s resources. Governance issues with macroeconomic significance should also continue to be raised in the context of IMF surveillance.

Many Board members saw merit in the IMF’s approach of applying judgment within relatively broad boundaries. Such an approach allowed the IMF to be appropriately involved in cases that more precisely defined boundaries might rule out. A number of Directors, however, preferred to set narrower boundaries for involvement in specific instances of poor governance, to reduce the risk of mission creep and to ensure a focus on the IMF’s core areas of expertise. Directors generally agreed on the need to retain some flexibility and to exercise judgment and stressed that the rationale for such action in each case should be laid out clearly for the Board’s consideration.

Addressing governance issues in areas outside the IMF’s core responsibilities was a complex matter. In some cases, complementary governance-related measures were vital and Directors underlined the importance of seeking the involvement of—and collaborating closely with—other international organizations that have the relevant expertise. When the multilateral organization with the relevant expertise was unable to provide input, under established procedures IMF staff might need to be involved in the short term. Several Directors cautioned, however, that the IMF should avoid getting drawn into these areas given its own resource constraints and possible lack of relevant expertise.

Directors generally believed that the IMF should explore ways to pay more attention to the two-sided nature of corruption, including following up in country consultations on the status of implementation of OECD-led initiatives to combat bribery of foreign public officials, and on similar initiatives.

Directors stressed that the approach to conditionality in governance-related areas should be consistent with the approach to conditionality in general. They also agreed that further reviews of the IMF’s experience with governance should be integrated into future reviews of surveillance, technical assistance, and conditionality.

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