Buira: An Analysis of IMF Conditionality

A Buira et al., An Analysis of IMF Conditionality (United Nations, 2003).

“IMF conditionality was introduced in the 1950s as a means to restore members’ balance-of-payments viability, to ensure that Fund resources would not be wasted and to ensure that the institution would be able to recover the loans it extended to member countries. For several decades, until the early eighties, Fund Conditionality centered on the monetary, fiscal and exchange policies of members. Over the last 20 years, while the resources of the Fund declined as a proportion of world trade, the number of Fund programmes increased steadily, and conditi8onality underwent substantial changes, expanding the scope of conditionality into fields that previously had been largely outside its purview. As the number of conditions increased, the rate of member country’s compliance with Fund supported programmes declined, and reviewing and streamlining conditionality became inevitable” (iii).

“Conditionality is perhaps the most controversial aspect of IMF policies. Among the traditional criticisms of Fund conditionality are that it is too short-run oriented, too focused on demand management and does not pay adequate attention to its impact on growth and the effects of programmes on social spending and on income distribution” (1).

The author explores some of the literature critical of IMF conditionality. This literature is specific in its criticism of the IMF’s overreaching through the imposition of structural modifying conditions that must be met in order to secure loans. Some have argued that the model of providing short-term stabilizing funding with conditions is fundamentally flawed, and that the IMF should approach countries with recommendations as to the changes that must be made structurally to their economy only when they are approached by said countries. The history of conditionality extends back to the US’ involvement in supplying much credit to The Fund after WWII. Initially, there was no conditionality. However, the Articles of the organization were amended.

“Conditionality may be defined as a means by which one offers support and attempts to influence the policies of another in order to secure compliance with a programme of measures. It is a tool by which a country is made to adopt specific policies or to undertake certain reforms that it would not otherwise have undertaken for support. Within the context of the IMF, conditionality refers to policies a member must adopt to secure access to Fund resources. These policies are intended to help the member country overcome its external payments problem and thus be in a position to repay the Fund in a timely manner, thereby ultimately assuring the ‘revolving character’ of Fund resources” (3).

What is the nature of conditionality? Is it possibly coercive? Probably. It depends mostly on the relationship between the Fund and the country that is seeking funding. For example, a country that has much access to global financial markets will be in a relatively stronger position vis-à-vis the fund than a country that has no ready access to global finance. Additionally, if a country is facing a balance of payments crisis, it may have to rely heavily on the Fund for liquidity, and that kind of a position would put countries in a compromising position, potentially. In another way, the Fund moves well beyond its mandate as a short-term financial stability institution and becomes an organization that imposes policies that directly affect development. That is clearly the mandate of The Bank. If Fund conditionality is not coercive, at its very least it has the potential of being overly paternalistic .

In another vein: is Fund resources assured through the practice of conditionality? Other institutions who are in the business of loaning sovereigns money do not provide conditions. In addition, the size of the Fund’s reserves has not grown apace with the economy at large. The “revolving character” of the resources is thus brought into question.

On September 20, 2002, The Fund agreed to four guidelines that were designed to overhaul the process of conditionality: “national ownership of programs…parsimony in the application of conditions…tailoring the programme to the member’s circumstances… clarity as to what essential aspect of the programme must be complied with, and what additional measures are contemplated whose non-observance will not constitute a breach of the agreement and impair the country’s ability to draw Fund resources” (10).