Front Matter

Front Matter

Author(s):
International Monetary Fund. Independent Evaluation Office
Published Date:
April 2008
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    Established in July 2001, the Independent Evaluation Office (IEO) provides objective and independent evaluation on issues related to the IMF. The IEO operates independently of IMF management and at arm’s length from the IMF’s Executive Board. Its goals are to enhance the learning culture within the IMF, strengthen the IMF’s external credibility, promote greater understanding of the work of the IMF throughout the membership, and support the Executive Board’s institutional governance and oversight responsibilities. For further information on the IEO and its work program, please see its website (www.ieo-imf.org) or contact the IEO at +1-202 623-7312 or at info@ieo-imf.org.

    © 2008 International Monetary Fund

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    Cataloging-in-Publication Data

    Structural conditionality in IMF-supported programs / [prepared by a team led by Ruben Lamdany and A. Javier Hamann] – [Washington, D.C.] : Independent Evaluation Office of the International Monetary Fund, 2007.

    p. cm. – (Evaluation report)

    Includes bibliographical references.

    ISBN 978-58906-702-8

    1. International Monetary Fund – Evaluation. 2. Conditionality (International relations) 3. Structural adjustment (Economic policy) I. Lamdany, Ruben, 1954- II. Hamann, A. Javier. III. International Monetary Fund. Independent Evaluation Office. IV. Evaluation report (International Monetary Fund. Independent Evaluation Office)

    HG3118.5.I58 S7783 2007

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    Contents

    The following conventions are used in this publication:

    • In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.

    • An en dash (–) between years or months (for example, 2005–06 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2005/06) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2006).

    • “Billion” means a thousand million.

    • “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

    • As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.

    • Some of the documents cited and referenced in this report were not available to the public at the time of publication of this report. Under the current policy on public access to the IMF’s archives, some of these documents will become available five years after their issuance. They may be referenced as EBS/YY/NN and SM/YY/NN, where EBS and SM indicate the series and YY indicates the year of issue. Certain other documents are to become available 10 to 20 years after their issuance, depending on the series.

    Foreword

    Against the backdrop of continuing debate over the use and effectiveness of structural conditions, the Independent Evaluation Office undertook an evaluation of the use of structural conditionality in IMF-supported programs. It focused on two distinct issues: the effectiveness of structural conditionality at bringing about lasting economic change and the impact of the 2000 Streamlining Initiative to achieve greater focus in the use of conditionality in Fund arrangements.

    The report finds that a significant number of structural conditions are very detailed, not obviously critical, and often felt to be intrusive and to undermine domestic ownership of programs. Most programs failed to explain how so many conditions, and at such a level of detail, are needed to bring about the desired long-lasting reforms. The report also finds that compliance with structural conditionality, at about 50 percent, is low compared to about 85 percent for macroeconomic conditionality. In these circumstances, it is difficult to see how structural conditionality contributes to ensuring adequate safeguards for the use of Fund resources or how it provides assurances to borrowing countries regarding the conditions under which Fund resources would be available to them—the roles envisaged for conditionality in the Fund’s Articles of Agreement.

    The evaluation finds that the average number of structural conditions in IMF-supported programs has not declined since the launching of the streamlining initiative in 2000 and remains at about 17 conditions per program year. However, progress has been made in that the composition of structural conditionality has changed, showing a significant shift toward core areas of IMF expertise, with marked declines in the share of conditions in trade and privatization and increases in tax policy, public expenditure management and financial sector issues. Yet, about one-third of structural conditions continue to fall in non-core areas. The report finds that the absence of a marked decline in the number of conditions can be attributed in part to the significant room for discretion provided by the conditionality guidelines introduced in 2002 (and the difficulty of applying in practice the criticality criterion it sets) together with the lack of clear guidance provided to staff by Management and the Executive Board.

    Improving the design of structural conditionality in IMF-supported programs remains a key challenge for the Fund. The overarching message of the report is that efforts need to concentrate on changing incentives within the institution so that programs are better tailored to countries’ technical capacities and political realities and to achieve greater parsimony in the number of conditions and greater focus on core areas of IMF expertise—the original goals of the streamlining initiative. Management and the Board need to provide new impetus to the streamlining initiative by restating their commitment to the achievement of its goals.

    Thomas A. Bernes

    Director

    Independent Evaluation Office

    Structural Conditionality in IMF-Supported Programs

    This evaluation was prepared by a team led by Ruben Lamdany and A. Javier Hamann. The evaluation was initially launched by a team led by Marcelo Selowsky, who retired in August 2006. The initial team included Philippe Hall, A. Javier Hamann, Emilio Pineda, and Luis Alvaro Sanchez-Barracaldo. Contributions were made by Nils Bjorksten, Markus Berndt, Jeffrey Allen Chelsky, Axel Dreher, Tony Killick, Thomas Reichmann, Marko Skreb, Sophie Brown, Halim Kucur, Camelia Minoiu, Roxana Pedraglio, Teresa Perez, Scott Standley, and Misa Takebe. Administrative support was provided by Arun Bhatnagar, Annette Canizares, and Jeanette Abellera, editorial assistance by Rachel Weaving, and production management by Esha Ray, Emily Ku, and Jeffrey Allen Chelsky. The report was approved by Thomas A. Bernes.

    Abbreviations

    CG

    Conditionality Guidelines

    EFF

    Extended Fund Facility

    ESAF

    Enhanced Structural Adjustment Facility

    EU

    European Union

    FSAP

    Financial Sector Assessment Program

    GRA

    General Resources Account

    HIPC

    Heavily indebted poor country

    IEO

    Independent Evaluation Office (IMF)

    IGN

    Interim Guidance Note

    LIC

    Low-income country

    MONA

    Monitoring of Fund Arrangements

    PA

    Prior action

    PC

    Performance criterion

    PEM

    Public expenditure management

    PRGF

    Poverty Reduction and Growth Facility

    PRSP

    Poverty Reduction Strategy Paper

    PSI

    Policy support instrument

    SB

    Structural benchmark

    SBA

    Stand-By Arrangement

    SC

    Structural conditionality

    SD

    Structural depth

    SOE

    State-owned enterprise

    Executive Summary

    This evaluation examines factors influencing the effectiveness of IMF structural conditionality in bringing about structural reform, and assesses the impact of the streamlining initiative launched in 2000 and of the 2002 Conditionality Guidelines. These aimed at reducing the volume and scope of structural conditionality by requiring “parsimony” in the use of conditions and stipulated that conditions must be “critical” to the achievement of the program goals.

    The evaluation finds that during the period 1995–2004 there was extensive use of structural conditionality in IMF-supported programs, with an average of 17 conditions per program/year. Most of these conditions had little structural depth and only about half of them were met on time. Compliance was only weakly correlated with subsequent progress in structural reform. Ownership of the reform program by the economic team and by the line ministries in charge of the specific measures was necessary both for compliance and for continuity of the reform. Compliance and effectiveness were higher in the areas of IMF core competency, such as public expenditure management and tax-related issues, and lower in areas such as privatization and reform of the wider public sector.

    The streamlining initiative did not reduce the volume of conditionality, partly because structural conditions continued to be used to monitor other initiatives such as donors’ support programs and the European Union (EU) accession process. But it helped to shift the composition of conditionality toward IMF core areas and new areas of basic fiduciary reform. At the same time, the IMF moved away from controversial areas where it had little impact and that largely fall within the World Bank’s areas of expertise. Nonetheless, Fund arrangements still included conditions that seem not to have been critical to program objectives.

    Recommendations include reaffirming the need to reduce the volume of structural conditionality. As a practical first step, a notional cap could be set, possibly at four or five conditions per year—half the current average for performance criteria and prior actions. The use of structural benchmarks should be discontinued and measures with low structural content should not be part of conditionality. Normally, conditionality should be restricted to the core areas of IMF expertise. In other critical areas such as the wider public sector, the IMF should play a subsidiary role to that of the World Bank, which has greater expertise in these areas. Explicit Board guidance would be needed when reforms in non-core areas are deemed critical but effective cooperation with the Bank is unlikely to crystallize in time. The Fund should develop a monitoring and evaluation framework linking conditions to reforms and goals, which would provide a more robust basis for assessing programs results. Program documents should explain how the proposed conditionality is critical to achieve explicit objectives. For PRGFs, in particular, program requests should be accompanied by an operational roadmap covering the length of the program, explaining the proposed reforms, their sequencing, and expected impact.

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