Boughton on IMF’s new conditionality guidelines
Boughton: The review of conditionality was prompted by trips that IMF Managing Director Horst Köhler made to Africa and Latin America shortly after he took office in the spring of 2000. What struck him in a number of borrowing countries he visited was that very few country officials objected to the idea of IMF conditionality. What officials did tend to object to was the growing intrusiveness of conditionality. The IMF sometimes seemed to be telling them how to run their economies. Out of that initial impression came the idea that the IMF should find ways to make its work less intrusive and more of a cooperative venture with member countries.
Countries are willing to listen to the IMF, but they would like to have a dialogue in which there are some genuine options to choose from.
To do this, the IMF embarked on a review of almost all aspects of conditionality—how the IMF interacted with countries, how it designed and selected conditions on structural policies, and how it presented those conditions. The IMF held a number of consultations with outside groups, such as nongovernmental organizations, officials from both borrowing and creditor countries, and academics. It also held seminars in various parts of the world and put notices on its website asking people to comment on what it was doing. We were trying to take a fresh look at the way the IMF was doing business and be completely open and transparent about it.
Another idea that is not completely new but has new emphasis in the guidelines is what we call “parsimony,” or streamlined conditionality. The old guidelines tried to limit the range of policies that the IMF looked at. But, over time, the IMF started getting involved in more aspects of policymaking in countries.
We are now trying to define more precisely which policies are “fair game” for conditionality and which ones are not. If there’s a debate about whether a structural reform should or should not be a condition for an IMF loan, the burden of proof is now on the person who is making the case that it should be in—that it is essential to making the program work. Before, the burden of proof may have been on the person trying to take the condition out.
If the IMF wants to include a condition in an area where it lacks expertise, the new guidelines specify that it has to consult the World Bank, which will have primary responsibility for determining what the right condition is, how it should be monitored, and the appropriate time frame. The IMF has established a new, closer relationship with the World Bank to make conditionality work better.
The IMF is also specifying more clearly what the different types of conditions are. The most common type is a “performance” criterion—a measurable, quantitative target that the country must meet to qualify for financial assistance. For example, a performance criterion might say that a country’s monetary growth will be no higher than a certain percentage over a period of time.
There are other kinds of conditions, too: indicative targets, such as a ceiling on the inflation rate, to monitor whether the program is working properly; and structural benchmarks, which indicate the steps a country is taking to implement structural reforms, such as privatizing an industry to make it more efficient. Failure to achieve these other types of conditions would signal problems but would not necessarily interrupt IMF financing.
The IMF has also clarified which parts of a country’s reform program are, strictly speaking, subject to IMF conditionality and which are not. In other words, when a country applies for help from the IMF, it might describe wide-ranging reforms it is undertaking to use the resources provided to it. But some of these measures are not necessarily conditions. The IMF is going to make an effort under these new guidelines to distinguish what is and what is not conditionality.
We also learned that flexible timing is very important to a lot of countries. The IMF frequently lends to low-income countries with limited administrative capacity to implement a large number of reforms all at once. Expecting countries to do so, especially within a short time, is asking a lot of them. Even if a reform such as strengthening tax administration is important, it might not have to be completed by a specified date. When the main purpose of the reform is to create more efficient conditions in the economy, then it does not necessarily have to be achieved by, say, next February. So, the IMF is trying to be more flexible. That message became very clear through these external consultations.
Over the past quarter century, the IMF has been called upon to provide more than just short-term help. And that has meant getting involved with a much wider range of policies than before through more extensive conditionality. It has also meant that the IMF has had to be more disciplined to keep from being too intrusive, which was never an issue when the IMF concerned itself only with short-term problems. So a process of adaptation has come about in response to changing circumstances.
I’m sure that, as we apply the new guidelines, we will find new problems with them either because they are not clear enough or because the IMF will be drawn into new issues that we have not thought of yet. The IMF is committed to conducting a full, thorough review of the implementation of conditionality every two years.
In those reviews, the IMF will address many hard questions. Has practice been consistent with the new guidelines? Is the IMF succeeding in promoting ownership? Has it succeeded in cutting the number of conditions it is requiring countries to implement? Are the remaining conditions properly focused on achieving program goals?
From the answers to these questions, the IMF will judge whether the guidelines need to be adapted or strengthened. I’d like to believe that the guidelines are now perfect and that we’ll never have to change them again. But history suggests that they will require further adaptation over time.
When the IMF tells countries what they have to do to receive financial support, countries tend to shift that responsibility to the international community. That responsibility should be with the countries themselves. But this will take time because we are trying to change the culture within the IMF and the culture of policymaking in developing countries, and because the demands of having to solve financial crises quickly will, in many cases, have to take precedence over those longer-run goals.
Getting the new guidelines on paper was a big job, but it’s a much bigger job to actually get the benefits off the ground. The IMF is going to make a major effort to see that that happens.