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IMF Survey Vol.31, No.18 October 2002
Article

Independent Evaluation Office report: Prolonged use of IMF resources can undercut domestic policies and IMF credibility

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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Prolonged use of IMF resources has expanded considerably over the past two decades—one-third of current users can be categorized as prolonged users. The report points out that this expansion is in part a reflection of conscious decisions by the international community to expand the IMF’s mandate to assist low-income countries to deal with their deep-rooted balance of payments problems, but extended use is also significant among users of the IMF’s general resources.

Why the increase in prolonged use?

The expansion of prolonged use is accounted for by three sets of factors, some of which reflect deficiencies in the way IMF policies are formulated or implemented.

  • Country-specific factors. Prolonged users are typically countries facing large and deeply rooted economic difficulties when they first come to the IMF. These difficulties often take longer to solve than the short- to medium-term horizon of IMF arrangements.

  • Institutional factors, both systemic and internal to the IMF. The international community’s decision to expand the mandate of the IMF to include assisting low-income developing countries facing structural, deep-seated balance of payments imbalances is one factor explaining expansion in prolonged use. The report argues that, while this decision might be justifiable under the circumstances, its implications for program design and the appropriate time frame of IMF involvement were not adequately recognized until relatively recently. The role that IMF lending arrangements play in providing a “seal of approval”—which is necessary for the flow of many other sources of financing, including debt restructuring—is another factor contributing to prolonged use. So is the increasingly blurred boundary between surveillance and lending activities, which leads to a crowding out of surveillance.

  • Program-related factors. Deficiencies in program design and implementation can lead to the persistence of balance of payments problems, which encourage prolonged use. Some specific design flaws identified in the study are excessive optimism in macroeconomic projections, insufficiently prioritized and sometimes poorly designed conditionality, and underestimation of the importance of ownership and of capacity constraints.

When is prolonged use a problem?

Even when prolonged use can be justified by the circumstances, it can have significant adverse implications, both for prolonged users and for the IMF, that have not been adequately recognized. For countries, prolonged use gives the IMF an excessive presence in policy formulation, which can hinder the development of robust domestically driven policy formulation processes. Furthermore, in some cases, the expectations of continued IMF financial support may have reduced incentives to act decisively to address long-term adjustment problems.

There are also negative effects on the IMF. The direct financial impact has been limited to date, but the phenomenon clearly reduces the revolving character of IMF resources. There is also some evidence that prolonged use weakens the credibility of the seal of approval provided by IMF-supported programs.

Recommendations

The report concludes with a series of specific recommendations, including:

  • The Executive Board should adopt an explicit definition of prolonged use to ensure an automatic triggering of due diligence procedures designed to avoid prolonged use. The IMF should also be more willing to refrain from providing support where programs have a low probability of success. It should also outline more explicit “exit” strategies for prolonged user cases.

  • The IMF should seek to reduce the reliance on its lending arrangements as a “gatekeepe”R by seeking to offer the international community a broader mix of tools, including strengthened surveillance, to deliver seals of approval to donors and creditors.

  • To strengthen program design and implementation through enhanced ownership, the IMF should move toward a situation where the normal procedure is for the authorities to have the initial responsibility for proposing a reform program as the starting point for negotiations.

  • Programs should be more selective in content with greater emphasis on fostering key institutional changes and on assessing and strengthening implementation capacity.

  • Internal IMF governance should be strengthened through more systematic ex post assessments of programs and more opportunities to step back and reconsider the overall strategy, including through strengthened surveillance, in prolonged use cases.

In an Executive Board meeting on September 20, Directors generally expressed support for the analyses and recommendations of the report, noting that some recent initiatives, such as the revision to conditionality guidelines, were already moving in the same direction. They welcomed the IMF’s management decision to establish a task force to study the policy and operational implications of the IEO’s recommendations. The task force will report to the Board early next year with specific proposals for implementation.

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