Chapter

II. The 2002 Guidelines on Conditionality

Author(s):
Tubagus Feridhanusetyawan, Alun Thomas, Tessa Van der Willigen, Uma Ramakrishnan, S. Reichold, Juan Zalduendo, and James Walsh
Published Date:
September 2005
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9. The key purpose of conditionality is to ensure that Fund resources are used to assist a member in solving its balance of payments problem, thus providing adequate safeguards for the temporary use of these resources, and to provide assurances to the member of access to Fund resources. To provide its resources to a member, the Fund must be confident that policies are such that these resources will be used in accordance with its purposes, and that they will be repurchased or repaid. At the same time, in order to embark on a course of action that may hold together only in the presence of Fund support, the member needs to be assured that it will have access to Fund resources in defined circumstances.

10. The 2002 guidelines emphasize national ownership of policies, parsimony in conditions, tailoring policies to circumstances, coordination with other multilateral institutions, and clarity in the specification of conditions.7 These principles are intended to reinforce each other in securing more effective program design and implementation, thus benefiting members and better safeguarding Fund resources. As foreshadowed in the issues paper, the present review focuses on ownership, parsimony, and clarity. Coordination with the World Bank was recently reviewed, as noted above; and tailoring of programs to circumstances cannot be addressed without knowledge of program outcomes.

11. This section briefly reviews key elements of the guidelines. In implementing the guidelines, the staff is guided also by the staff statement and the operational guidance note, and therefore the paper draws also on these documents.8 References are to the guidelines unless otherwise stated. An annex provides the relevant excerpts from all three documents.

12. National ownership of Fund-supported programs is a basic principle underlying the guidelines. Absent ownership, a program is less likely to be implemented. Moreover, it is impossible in practice to write conditions in a way that guards entirely against the risk of purely nominal implementation (e.g., laws being passed, but not enforced), and without ownership, implementation is less likely to be genuine and consistent and may also later be reversed, putting gains made under the Fund-supported program at risk.9 The guidelines note that the need for ownership implies selectivity: use of Fund resources can be approved only if the Fund is satisfied that the member is sufficiently committed to implement the program. Thus the Fund must make judgments on ownership; but the staff statement also recognizes that such judgments are difficult.

13. The guidelines state that conditionality should be used parsimoniously; in general, conditions should be applied only to measures critical to the success of the program, but they should also be applied to all such measures.10 As explained in the staff statement (¶6), “parsimony means that program-related conditions should be limited to the minimum necessary to achieve the goals of the Fund-supported program or to monitor its implementation ….” The criticality criterion was a key innovation of the 2002 guidelines: the interim guidance note of 2000 permitted conditions to be placed on measures in the Fund’s core areas that were merely macro-relevant. The narrowing of this criterion from relevance to criticality was a major topic of discussion in the Executive Board’s review of conditionality during 2000–02.

14. The criticality criterion applies to all measures—whether they are in the Fund’s core areas or outside, or whether they are or are not covered by another agency’s (e.g., the World Bank’s) conditionality. Measures critical to the success of the Fund-supported program should be included as conditions because the Fund needs to be able to interrupt its own lending if a critical element of the program goes off track. Of course, the independence of Fund conditionality from Bank conditionality in no way reduces the importance of effective collaboration between the two institutions or of the “lead agency” concept: the Fund looks to the Bank’s analytical work in formulating any conditionality that may be required in those areas where the Bank is the lead agency. Recognizing that conditions that are critical to the success of Fund-supported programs are more likely to be in the Fund’s core areas than outside, the guidelines suggest that conditions outside these areas may require more detailed explanation of their critical importance.11

15. Program goals are key to the guidelines’ definition of criticality. Targeting conditions to relatively narrow goals leaves greater scope for the authorities to design related, but broader, goals and policies, thereby fostering overall ownership. The guidelines state that Fund-supported programs will target external stability, in both the short and medium term, and that external sustainability should be pursued while fostering sustainable growth. In addition, the policy on the PRGF makes poverty-reducing growth an explicit goal of PRGF arrangements. In GRA-supported programs, growth can of course be a key aid to sustainability; but measures that would be aimed solely at increasing growth but would have no impact on external sustainability, while laudable, should not be made conditions of GRA-supported programs.

16. Although conditionality should not be substituted for national ownership, it need not be completely independent of it. The staff statement explains that conditionality can promote and strengthen ownership, in particular by demonstrating the authorities’ commitment to a course of action—although conditions that are less than fully owned by the authorities should be the exception rather than the rule.12 The guidelines themselves state that the member’s past performance in implementing conditionality shall be taken into account as one factor affecting conditionality. To be sure, there is a tension here with the principle of criticality; but in cases where the Fund has greater confidence in implementation, fewer conditions may suffice to secure adequate safeguards for Fund resources.

17. The guidelines specify rules for the use of performance criteria and structural benchmarks that are intended to support the principles of parsimony and clarity. Both structural performance criteria (PCs) and structural benchmarks (SBs) are monitoring tools for reforms that are critical to the success of the program. PCs are to be chosen when the measures to be monitored are objectively monitorable and are so critical that purchases or disbursements should be interrupted in case of nonobservance. SBs are more appropriate when judgment must be exercised in deciding if the measures have been taken, or where nonimplementation would not, by itself, warrant an interruption of purchases or disbursements. In the latter case, SBs serve as clear markers in the assessment of progress in the implementation of critical reforms. Like other conditions, SBs are to be used parsimoniously.

18. Waivers for nonobservance of performance criteria may be granted for a number of reasons.13 Waivers may be granted if the deviation is minor, temporary, or corrective actions have been taken, as long as the Fund is satisfied that the program will be successfully implemented. While the waiver policy in the guidelines does not explicitly allow for cases where the Fund considers that a measure is no longer critical (whether because circumstances have changed or because it judges that it previously erred), these could be cases where the Fund remains satisfied that the program will be successfully implemented, and the deviation in such cases can be considered “minor” in its impact on program objectives.

19. The guidelines allow critical upfront measures to be made prior actions, although these too should be used parsimoniously. The operational guidance clarifies that prior actions may be used either when a measure needs to be implemented immediately in order to achieve program goals, or when there are significant doubts that the measure would be implemented later. In the latter case, the likelihood that the relevant measures will be implemented absent prior actions may be judged to be too low for the program to proceed: indeed, the authorities should be given the chance to demonstrate their commitment to these measures through early implementation. The operational guidance also reminds staff that implementing prior actions has not been shown to increase the likelihood that subsequent measures under the program will be successfully implemented, and notes that prior actions must be justified in terms of their criticality to program objectives; in other words, they must not be arbitrary “litmus tests,” introduced solely for the purpose of testing ownership.

20. As emphasized in the staff statement, clarity is another major principle underlying the guidelines. Indeed, as noted above, it is a basic principle of Fund arrangements that members should know the conditions under which they will have access to Fund resources. Program-related conditions must therefore be clearly specified and transparently distinguished from other measures in the authorities’ program. Similarly, the guidelines circumscribe the scope and lay out the expected frequency of reviews, under which the Fund assesses whether the program is broadly on track and whether modifications are necessary. Reviews inevitably entail an exercise of judgment by the Fund, thereby creating uncertainty for members as to the continued availability of Fund resources.

21. Finally, the staff statement emphasizes that programs should be formulated through a mutually acceptable process led by the member. It makes clear that, in response to a member’s request for use of Fund resources, the staff will ascertain how the authorities intend to adjust policies, and, particularly in cases where the member’s administrative capacity is weak, stand ready to advise the authorities on a range of available policy options. It is expected that program documents will be prepared by the authorities, with the cooperation and assistance of Fund staff, although the staff statement clarifies that there is no requirement to this effect. The operational guidance further emphasizes the importance of assessing potential implementation difficulties—including when implementation hinges on legislative approval, actions by lower levels of government, or cooperation by several ministries—as well as technical capacity. More generally, the guidelines state that the Fund will encourage members to seek to broaden and deepen the base of support for sound policies in order to enhance the likelihood of implementation.14

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