[stop-imf] IMF Conditionality Review Extended (fwd)

[Robert Weissman]

from Angela Wood / Bretton Woods Project (UK) awood@gn.apc.org

The IMF has extended the time period for comments on its review of
conditionality until 30th June (for papers follow link from IMF
homepage: www.imf.org).

Comments on the review can be sent to: conditionality@imf.org

Pasted below is a briefing Carrots and Sticks: A Quick Fix for IMF
Conditionality, which briefly examines whether this "streamlining"
process will make any significant difference.

Also available on the Bretton Woods Project website is our submission to
the review:
http://www.brettonwoodsproject.org/topic/adjustment/22imfcondreview-bwpc
omments.htm.

I would be pleased to receive comments and critiques of this submission
please send to awood@brettonwoodsproject.org.

best wishes,

Angela Wood
Bretton Woods Project


Briefing Note:

Carrots and Sticks: a quick fix for IMF conditionality?

What has changed regarding the IMF's use of conditionality?
The Executive Board has agreed with Managing Director, Horst Kohler,
that the application of IMF structural conditionality should be
streamlined to focus on macroeconomic reforms and those structural
reforms necessary to achieve macroeconomic targets. A more restrained
application of conditionality is envisaged for structural reforms that
are relevant but not critical.

In addition to streamlining the areas in which conditionality will be
applied, the staff will also be required to rationalise the use of
performance criteria (PC), prior actions (PAs) and structural benchmarks
(SBs). Whilst the use of the former (which governments must adhere to in
order to trigger the release of further portions of IMF loans) has
typically been relatively constrained, the use of prior actions and
structural benchmarks has increased rapidly in recent years. Now it
appears likely that the staff will insist more on prior actions whilst
reducing other elements of conditionality.

The use of more prior actions will change the nature of conditionality.
Prior actions are "up-front" conditions, that is, they must be
implemented before a country receives IMF assistance to demonstrate a
commitment (often termed "ownership") to the reform process. Whereas,
structural benchmarks and performance criteria are monitored and applied
during the course of a lending programme.

In addition, there is a concern that the IMF might rely more on the
application of codes and standards as a back door route to applying "up
front" conditionality. These are supposed to be voluntary but their
application is monitored as part of the IMF's surveillance process and
there is a danger that countries will be tacitly forced to apply them in
order to access future lending. This is the approach the US
congressional advisory committee, led by Allan Meltzer, has been
advocating.


Which conditions will be cut?
This is hard to say. What is considered "critical" has not been defined
and will be considered case by case. Trade related conditionality will
remain a central feature. Basically the IMF can continue to apply any
structural conditionality if it can justify that it is essential for
macroeconomic stability.


Does this mean less conditionality overall?
Not necessarily. The Bank and other lending institutions are expected to
coordinate better with the IMF to ensure that they pick up those areas
that the IMF is stepping away from. Thus overall, the breadth and extent
of conditionality will not necessarily change.

The Poverty Reduction Strategy process will facilitate collaboration
between the IMF and the Bank (and potentially other donors) in the case
of low-income countries, however there is no mechanism to facilitate
collaboration for the middle-income countries.

Worryingly, in cases where the World Bank is unable to deliver the
required input, IMF staff have stated that they will include these
structural elements in their programme regardless, even though they have
admitted that they often don't have the expertise to do so. It would be
more appropriate to delay reforms than to provide inappropriate advice,
even if this delays stabilisation efforts temporarily.

In addition, the IMF is also introducing governance conditionality,
focusing on budget management, anti -corruption measures and supporting
private property rights etc. The result is that in several Poverty
Reduction and Growth Facility (PRGF) programmes the number of conditions
has actually increased. Governance conditionality, which is essentially
structural in nature and often outside the sphere of the IMF's core
competencies, has not been discussed in relation to the IMF's efforts to
streamline its use of conditionality.


Will IMF reforms be different now?
The "conditionality review" did not consider whether the reforms
required by the IMF have been effective at achieving their objectives.
This is a major oversight, especially given that programmes often break
down due to political pressure because improvements are not felt quickly
enough at all levels of society, whereas hardship is often widespread
and immediate.
A 1997 IMF evaluation of reforms in the poorest countries gave an
optimistic conclusion but a close look at the findings revealed that the
IMF's core objectives - balance of payments stability and growth - had
not been achieved, whilst indebtedness had increased. In particular,
growth rates have been insufficient to address poverty concerns. It is
indefensible that the IMF continues to apply the same economic
prescriptions to address poverty concerns, which have contributed to
growing inequality in Latin America and poverty in Sub-Saharan Africa.

Impact assessments for programmes prior to implementation in order to
ascertain whether they are likely to achieve their intended objectives
and whether there will be serious unintended negative social and
environmental consequences are essential but have not been discussed in
relation to this conditionality review. These will be most useful if
programmes outcomes are monitored regularly to ensure that they are
on-track to achieve their objectives and that negative social impacts
are not larger than expected.

Since mission reports are not made public its not clear whether staff
actually monitor outcomes or whether they simply monitor the
implementation of conditions; these should be published. It is often
perceived outside the IMF that it pays more attention to the tool of
conditionality rather than the objectives of stabilisation and growth,
which are simply assumed to follow. At the very least, it would be
helpful if the IMF elaborated its rationale for its policy advice in
relation to a programme's objectives in the Letter of Intent, or other
published loan documents.


Why should the IMF bother to streamline conditionality?
Horst Kohler, is concerned that extensive and detailed conditionality
may make it impossible for a country to claim "ownership" for a
programme, which is considered essential for its success; and may strain
the country's administrative capacity.

World Bank studies have revealed that conditionality is not effective at
inducing governments to carry out reforms which they do not agree with.
Thus government "ownership" has become a key objective. However, the IMF
is only concerned to lend to countries that "own" the type of reforms
that it advocates. Those countries that "own" alternative policies are
likely to see their funding cut as the IMF moves to a more selective use
of its resources.

Whilst the IMF is concerned that governments' administrative capacities
should not be overstretched, some critics have condemned the IMF for
introducing new "process" conditions by requiring low-income countries
to produce Poverty Reduction Strategy Papers in addition to Letters of
Intent.

In addition, the review is a response to critics who have accused the
IMF of overstretching itself. Like the World Bank (See Overstretched and
Underloved, www.brettonwoodsproject.org/briefings) the IMF has taken on
many new roles and objectives in the last two decades but has not
expanded its capacity. Just in the last three years it has taken on a
poverty reduction remit with the introduction of the PRGF, is trying to
develop expertise in financial sector surveillance and restructuring
and, advise on good governance. Whilst it is important that
conditionality is refocused on core areas it is an illusion that the IMF
is cutting back its role and advice to core areas of expertise.


Will there be greater disclosure of loan conditions?
It has been agreed that Letters of Intent should make a clearer
distinction between the authorities' overall policy programme and the
part of that programme subject to the Fund's conditionality.  This will
be helpful.

In addition, the IMF should release all loan documents, for example,
PRGF documents are not made public. In the case of programme documents
such as Letters of Intent, these should be released in draft form at the
national level for public debate before they are finally agreed with the
IMF.


What are the next steps in the process?
Views on the conditionality papers
(www.imf.org/external/np/pdr/cond/2001/eng/overview/index.htm)
can be sent to the IMF at conditionality@imf.org until May 18th 2001.
These will be considered by the Board in June and a new guidelines will
be issued later in the year.


Angela Wood
Bretton Woods Project
April 2001

__ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __
The Bretton Woods Project works with NGOs and researchers
to monitor the World Bank and IMF
Tel: +44 (0)20 7561 7547
* April-May Bretton Woods Update now on:
www.brettonwoodsproject.org/update
** Subscribe free to Update by mailing:
subs@brettonwoodsproject.org