[stop-imf] IMF discusses conditionality

[Robert Weissman]

http://www.imf.org/external/np/sec/pn/2002/pn0226.htm

Public Information Notice (PIN) No. 02/26  March 8, 2002

International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA



IMF Board Discusses Modalities of Conditionality

Public Information Notices (PINs) are issued, (i) at the request of a
member country, following the conclusion of the Article IV consultation
for countries seeking to make known the views of the IMF to the public.
This action is intended to strengthen IMF surveillance over the economic
policies of member countries by increasing the transparency of the IMF's
assessment of these policies; and (ii) following policy discussions in
the Executive Board at the decision of the Board.

 On January 28, 2002, the Executive Board of the International Monetary
Fund (IMF) conducted further discussions on the modalities of
conditionality as part of an ongoing review of conditionality attached
by the IMF to the use of its financial resources.

Background

The IMF is currently engaged in a process of reviewing the conditions
attached to its financing. The aim is to ensure that conditionality in
Fund-supported programs is designed and applied in a way that reinforces
national ownership and sustained implementation of country economic
reforms. To this end, the current review emphasizes the need to focus
conditionality on those policies that are critical to achieving the
macroeconomic objectives of the programs supported by the Fund and to
establish a clearer division of labor with other international
institutions, especially the World Bank. The process was initiated by
Managing Director Horst Köhler shortly after taking up his position in
May 2000 and the Executive Board discussed a series of earlier papers on
this topic in March 2001 (see Public Information Notice No. 01/28), in
July 2001 (see Public Information Notice No. 01/92), and in November
2001 (see Public Information Notice No. 01/125).

Executive Board Assessment

In the context of the discussion of the modalities of conditionality in
January 2002, Directors considered proposals for greater use of
outcomes-based conditionality and floating-tranche disbursements, and
reviewed the use of various tools of conditionality, including
performance criteria, prior actions, and program reviews guided by
indicative targets and structural benchmarks. Directors stressed the
need to apply the modalities of conditionality flexibly and to take into
account country- and program-specific circumstances, consistent with the
objective of enhancing the effectiveness of Fund conditionality through
streamlining, focusing, and enhanced ownership.

Outcomes-Based Conditionality and Floating Tranches

Directors broadly welcomed proposals to base IMF conditionality to a
somewhat greater degree on outcomes rather than on the implementation of
specified actions by the authorities. Outcomes-based conditionality
would give the authorities greater flexibility and accountability in
choosing how to achieve the desired results, which would enhance
national ownership of policy programs and reduce the degree of detail
with which the IMF monitors the implementation of reforms. Directors
noted, however, that the scope for outcomes-based conditionality is
likely to be limited by the need for timely disbursements and for
avoiding inappropriate policy actions. Moreover, when conditionality is
specified on outcomes rather than actions, the authorities are exposed
to the risk that the desired results may not be achieved notwithstanding
their own best efforts. Some Directors also cautioned against a
weakening of program focus on critical aspects of institution building.
Greater application of outcomes-based conditionality would therefore
have to be handled with care and moderation and on a case-by-case basis,
to avoid its potential disadvantages. In cases where a long time period
is needed to achieve the final outcome, some intermediate outcomes on
which disbursement will be based may be agreed between the authorities
and the Fund. A range of views was expressed on the scope for moving
toward greater use of outcomes-based conditionality, in view of these
potential disadvantages, but, on balance, Directors agreed that some
shift in this direction would be feasible and desirable, where
appropriate, particularly in the context of Poverty Reduction and Growth
Facility and Extended Fund Facility arrangements, given their
medium-term focus on structural reforms. In this connection, many
Directors stressed that the Fund should stand ready, in particular in
cases where administrative capacity is weak, to advise countries on a
range of available policy options and implementation plans so as to
enable them to make informed choices.

Directors discussed proposals for some of the Fund's financing to be
provided in floating tranches linked to the implementation of specified
structural reforms. The Fund has already used floating tranches in some
specific circumstances: in supporting debt restructuring under the Brady
Plan in the late 1980s and in triggering completion point assistance
under the Highly Indebted Poor Countries Initiative. Directors noted
that greater use of floating tranches could enhance ownership by giving
the authorities greater flexibility in choosing the timetable on which
reforms—particularly structural reforms—are implemented. Floating
tranches would, however, not be suitable for measures that must be
implemented on an agreed timetable to achieve macroeconomic or external
stabilization. Some Directors also felt that having multiple
disbursement mechanisms would unduly complicate Fund programs. In any
case, with the streamlining of conditionality to concentrate on
macro-critical measures, Directors expected that the scope for using
floating tranches will remain limited in the IMF's work.

Tools of Conditionality

Directors generally agreed that the existing conditionality toolkit
remains appropriate, with each of the tools serving a distinct and
essential role. At the same time, they noted that, in some instances,
the inappropriate use of the tools of conditionality may be symptomatic
of deeper weaknesses in program design, ownership, and selectivity,
which need to be addressed more directly rather than by restructuring
the toolkit.

Directors discussed the Fund's policy in granting waivers of
non-observance of performance criteria. They noted that waivers lend an
indispensable element of flexibility in applying performance criteria,
enabling a program to be adapted successfully in the face of unavoidable
uncertainties about macroeconomic relationships and shocks, particularly
those beyond the control of the authorities. At the same time, they
observed that waivers are often an indication of poor policy
implementation and/or a lack of realism in program design, including
failure to take account of limited implementation capacity. In this
light, Directors expressed concern that, over the past several years,
there had been an increase in the overall numbers of waivers and a
significantly higher incidence of waivers for structural performance
criteria. Directors believed that waivers should become less frequent as
conditionality is focused on measures that are critical to program
objectives, and ownership is strengthened, while stressing the need to
preserve the flexibility that waivers provide in adapting programs to
changing circumstances. Several Directors cautioned, however, against
the presumption that fewer waivers would be granted in the future,
particularly in the current environment of increased uncertainty.
Directors stressed the need to adhere more closely to the existing
policy that, in cases of significant policy slippages, waivers should be
granted only if appropriate corrective action has been taken to achieve
the objectives of the program.

Directors agreed that prior actions serve an important purpose in
underpinning the upfront execution of urgent and critical reform
measures, putting in place necessary conditions for successful program
implementation, especially in cases where Fund financial assistance is
frontloaded. At the same time, Directors broadly agreed that, like other
forms of conditionality, the use of prior actions should be streamlined
and focused on those measures needed for programs to achieve their
objectives. Directors expressed a range of views about the increasing
use of prior actions, especially as signals of the authorities'
commitment to implement the program in cases where past performance has
been unsatisfactory. Many Directors noted that experience points to only
limited usefulness of prior actions in this respect, and expressed
concern about the strain that large numbers of prior actions place on
countries' implementation capacity. These Directors were in favor of
more strictly adhering to the existing policy that prior actions should
be used sparingly. Directors considered that greater selectivity,
including some period of successful implementation before committing IMF
financing, would, in some cases, be the preferred course of action to
address instances of past poor performance. At the same time, many
Directors considered that, in cases that are less clear-cut, prior
actions remain essential tools to demonstrate country ownership and
commitment to reform.

A few Directors suggested establishing a threshold for the number of
prior actions per program. While considering the importance of not
overloading program with prior actions, on balance, however, Directors
were of the view that the number of prior actions is not as important as
to how effectively they contribute to a high quality economic program.

Directors also discussed the procedures by which the Board is informed
of prior actions envisaged in programs currently being discussed with
the authorities. They noted that a timely dialogue between Executive
Directors and staff could be helpful, particularly in cases in which
some prior actions may be contentious. They therefore asked management
and staff to make more systematic use of existing informal procedures to
keep the Board abreast of possible prior actions.

Directors noted the key role played by program reviews in the assessment
of policy implementation, particularly in establishing the
forward-looking viability of the program and in monitoring aspects of
structural reform for which performance criteria are a less effective
monitoring tool. This role has increased in recent years, in large part
as a result of greater uncertainties about macroeconomic developments as
well as the increasing importance of structural reforms. Directors
envisaged that reviews could become even more important as the use of
other forms of conditionality—performance criteria and prior actions—is
streamlined, while stressing that this evolution should go hand in hand
with a clear delineation of the scope of program reviews. Some Directors
cautioned against using program reviews to escalate conditionality, and
emphasized that performance criteria should remain the primary basis for
decisions about disbursements under the program. Directors noted that
the frequency of reviews had crept upward in recent years. In general,
they reaffirmed the existing policy that reviews should normally be
semiannual, while acknowledging that, in certain cases, there may be
reasons for more frequent reviews—notably in crisis cases, given the
rapid pace of changing events and the scale of Fund resources committed.
Several Directors stressed that, in cases where reviews are delayed,
even though performance criteria have been observed, it is important
that the reasons for the delay are clearly understood by the parties
involved, and that the Executive Board is informed.

To improve clarity and transparency, Directors stressed the importance
of ensuring that the nature and boundaries of the Fund's conditionality
are presented clearly in all Fund documents. In this connection, they
welcomed the proposal to include in all staff reports on the use of Fund
resources a single standardized table showing all the elements of
conditionality that will be applied in a given case. Some Directors also
expressed interest in periodic reviews of the application of
conditionality.

Next Steps

As the next step in a series of discussions that have taken place over
the past year, the Executive Board will distill the lessons from the
review of conditionality, including from real-time assessments of the
coverage of conditionality in each country case. The outcome of the
January 28, 2002 discussion of the modalities of conditionality, as well
as of the other discussions forming part of the conditionality review,
will factor into the Fund's reassessment of its Guidelines on
Conditionality, which is tentatively scheduled to take place by the time
of the 2002 Annual Meetings.

In parallel to the present review of conditionality, Directors
encouraged staff to continue with work reviewing the program design to
determine whether improvements are warranted and feasible based on
experience with IMF-supported programs under various circumstances. They
saw such work as essential in bringing analysis and experience to bear
in enhancing the success of Fund-supported programs. In this connection,
Directors also noted the importance of further progress with the
operationalization of IMF-World Bank cooperation on program design.

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