Chapter

ANNEX I: Some Key Extracts from the Guidelines and Supporting Documents62

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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On ownership

• The Fund will be guided by the principle that the member has primary responsibility for the selection, design, and implementation of its economic and financial policies (¶3);

• A member’s request to use Fund resources will be approved only if the Fund is satisfied that... [the program] will be carried out, and in particular that the member is sufficiently committed to implement the program (¶5);

• National ownership refers to a willing assumption of responsibility for a program of policies, by country officials who have the responsibility to formulate and carry out those policies, based on an understanding that the program is achievable and is in the country’s best interest (staff statement, ¶3);

• Judgments on the depth and breadth of national ownership...are inherently subjective and difficult, and ownership itself is likely to change and develop over time" (staff statement, ¶3).

On parsimony and criticality

• Program-related conditions ... will be applied parsimoniously (¶7);

• Conditions will be established only on the basis of those variables or measures that are reasonably within the member’s direct or indirect control and that are, generally, either (i) of critical importance for achieving the goals of the member’s program, or (ii) necessary for the implementation of specific provisions of the Articles or policies adopted under them (¶7(a));

• In general, all variables or measures that meet these criteria will be established as conditions (¶7(a));

• 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 and that the choice of conditions should be clearly focused on those goals (staff statement, ¶6);

• A judgment that a condition is of critical importance...means that if it were not implemented, it is expected that the goals will not be achieved (staff statement, ¶7);

• Conditions will normally consist of macroeconomic variables and structural measures that are within the Fund’s core areas of responsibility. Variables and measures that are outside the Fund’s core areas of responsibility may also be established as conditions but may require more detailed explanation of their critical importance (¶7(b)).

On program goals

• Fund-supported programs should be directed primarily toward the following macroeconomic goals: (a) solving the member’s balance of payments problem without recourse to measures destructive of national or international prosperity; (b) achieving medium-term external viability while fostering sustainable economic growth” (¶6).63

• (An additional goal of the PRGF is “fostering durable growth, leading to higher living standards and a reduction in poverty” (Annex to Decision No. 8759-(87/176) ESAF, as amended).)

On the relation between conditionality and ownership

• The member’s past performance in implementing economic and financial policies will be taken into account as one factor affecting conditionality (¶4).

• Conditionality, if well-designed and established through a mutually acceptable collaborative process, can promote and strengthen ownership, in particular by demonstrating the authorities’ commitment to a course of action (staff statement, ¶3);

On structural performance criteria and benchmarks

• Performance criteria will apply to clearly-specified variables or measures that can be objectively monitored by the staff and are so critical…that purchases or disbursements under the arrangement should be interrupted in cases of nonobservance (¶11(b));

• A measure may be established as a structural benchmark where it cannot be specified in terms that may be objectively monitored or where its non-implementation would not, by itself, warrant an interruption of purchases or disbursements under an arrangement. Structural benchmarks are intended to serve as clear markers in the assessment of progress in the implementation of critical structural reforms in the context of a program review (¶11(d)(ii)). Structural benchmarks may be included if they are on key components of a broader reform program that is judged to be critical (e.g., steps in a tax reform or privatization program), as long as they are applied as parsimoniously as possible (operational guidance, ¶11).

On waivers

• The Fund will grant a waiver…if it is satisfied that the program will be successfully implemented, either because of the minor or temporary nature of the nonobservance or because of corrective actions taken by the authorities (¶12).

On prior actions

• [Prior actions may be used] when it is critical for the successful implementation of the program that such actions be taken to underpin the upfront implementation of important measures, … tak[ing] into account the strain that excessive reliance upon such actions can place on members’ implementation capacity (¶11(a));

• Prior actions may be used…when a critical 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 if specified as a performance criterion (operational guidance, ¶12);

• Conditions set for the completion of future reviews are not prior actions and should not be referred to as such; rather, they are either performance criteria or benchmarks (operational guidance, ¶12);

• Prior actions…must be justified in terms of their criticality to program objectives (operational guidance, ¶12);

• In assessing the use of prior actions, staff should be guided by the experience that implementing prior actions has not been shown to increase the likelihood that other subsequent measures under the program will be successfully implemented (operational guidance, ¶12).

On clarity of program-related conditions

• In all their program documents, the authorities should clearly distinguish between the conditions on which the Fund’s financial support depends and other elements of the program (¶10); an effective means of [distinguishing] is to include tables listing all quantitative and structural performance criteria, indicative targets, prior actions and structural benchmarks (operational guidance, ¶19);

• Detailed policy matrices covering the broader agenda should be avoided in program documents such as [letters of intent] and [memoranda of economic and financial policies] unless they are considered necessary by the authorities to express their policy intentions (¶10).

On program reviews

• The elements of a member’s program that will be taken into account for the completion of a review will be specified as fully and transparently as possible in the arrangement (¶11(c)(i)), and the policy areas on which the backward-looking component of the review is to focus should be specified, to the extent possible, in the form of performance criteria, indicative targets and structural benchmarks (operational guidance, ¶13);

• [An objective is] to limit the possibility that reviews will be used to add conditionality unless clearly justified by changes in circumstances… Adding new conditionality during a review in areas previously without any conditionality would require a clear justification as to why the related measures had become critical to program objectives (operational guidance, ¶13);

• Reviews are expected to be held every six months, but substantial uncertainties concerning major economic trends or policy implementation may warrant more frequent monitoring (¶11(c)(i)).

On process

• National ownership of sound economic and financial policies and an adequate administrative capacity are crucial for successful implementation of Fund-supported programs (¶3);

• The Fund will encourage members to broaden and deepen the base of support for sound policies in order to enhance the likelihood of successful implementation (¶3);

• [t]he guidelines aim to promote ownership by ensuring that conditionality is well designed and is formulated through a mutually acceptable process led by the member (staff statement, ¶3); promotion of ownership depends in part on effective and inclusive processes of program development in which the authorities and the staff are both fully engaged (staff statement, ¶4);

• [I]n responding to a member’s request for access to Fund resources, it is expected that the initial response by the staff will be to ascertain, through dialogue, how the authorities intend to adjust policies (staff statement, ¶4); particularly in cases where the member’s administrative capacity is weak, the staff will stand ready to advise the authorities on a range of available policy options and implementation plans, and to provide technical assistance, so as to enable them to make informed choices (staff statement, ¶4);

• [T]he staff [will] pay due regard to the domestic social and political objectives, the economic priorities, and the circumstances of the member, including the causes of the balance of payments problem and the member’s capacity to implement reforms in the necessary time frame (staff statement, ¶4);

• staff should…be flexible in program design when possible to meet the authorities’ preferences (operational guidance, ¶6);

• [Program] documents will be prepared by the authorities, with the cooperation and assistance of Fund staff (¶10); [i]t is…expected that program documents…will be prepared by the authorities, with the cooperation and assistance of Fund staff (staff statement, ¶5); there is no requirement that country authorities draft [program documents], but staff should be responsive when authorities desire a greater role in the drafting of these documents (operational guidance, ¶5);

• Assessments [of potential implementation difficulties] should reflect… country-specific issues such as constitutional and political structures. Such assessments take on particular importance when implementation of key measures hinges on legislative approval or on actions by lower levels of government… In some instances, where implementation requires cooperation by several ministries, the positions of these ministries are relevant to the assessments (operational guidance, ¶8);

• [Program design] should include an assessment of technical capacity, including capacity building in the program (operational guidance, ¶9).

1

IMF Executive Board Discusses Program Design (PIN No. 05/16, 2/8/05, http://www.imf.org/external/np/sec/pn/2005/pn0516.htm) and Design of Fund-Supported Programs—Overview, Fund-Supported Programs—Objectives and Outcomes, Policy Formulation, Analytical Frameworks, and Program Design, and Macroeconomic and Structural Policies in Fund-Supported Programs—Review of Experience (11/24/04). Further work on program design in PRGF cases is ongoing, and will be brought to the Board by mid-2005.

2

Guidelines on Conditionality, Decision No. 12864-(02/102), 9/25/02, (http://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.htm).

3

IMF Discusses Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality—Progress Report (PIN 04/36, 4/7/04, http://www.imf.org/external/np/sec/pn/2004/pn0436.htm).

4

Review of the 2002 Conditionality Guidelines—Selected Issues.

5

Streamlining Structural Conditionality (9/18/00, http://www.imf.org/external/np/cond/2001/eng/091800.pdf). The PRGF, which replaced the Enhanced Structural Adjustment Facility (ESAF) in September 1999, shares some of the objectives of the new conditionality guidelines, and the cutoff date thus probably represents an artificially sharp distinction for the PRGF.

6

Staff Statement—Principles Underlying the Guidelines on Conditionality (9/25/02, http://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.htm) and Operational Guidance on the New Conditionality Guidelines (5/8/03, http://www.imf.org/External/np/pdr/cond/2003/eng/050803.htm).

7

These principles are set out in the staff statement. Ownership, tailoring, and coordination are also drivers of the Poverty Reduction Strategy Paper (PRSP) approach that underlies the PRGF.

8

Guidance quoted is drawn preferentially from the guidelines, and from the staff statement and the operational guidance in that order, reflecting the fact that the staff statement was effectively endorsed by the Board.

9

For a general review of the importance of ownership for policy change, see Killick, T., R. Gunatilaka, and A. Marr, 1998, Aid and the Political Economy of Policy Change (London, UK: Routledge). Ivanova, A., W. Mayer, A. Mourmouras, and G. Anayiotos (2003), What Determines the Implementation of IMF-Supported Programs?, IMF Working Paper 03/8, find that program implementation depends primarily on borrowing countries’ domestic political economy, with little effect from the extent and structure of conditionality.

10

Conditions can also be established to implement specific provisions of the Articles or policies adopted under them. All measures should be reasonably within the member’s direct or indirect control.

11

The statement in ¶7(b) of the guidelines that conditions will “normally” be within the Fund’s core areas should be interpreted in the context of the following sentence, which requires greater justification for conditions in noncore areas.

12

See Drazen, Allan (2002), Conditionally and Ownership in IMF Lending: A Political Economy Approach,” IMF Staff Papers, Vol. 49 (special issue), pp.36-67 on relations between conditionality and ownership.

13

In addition, the Fund may grant waivers of applicability in cases where the data necessary to monitor observance are not yet available. These are not considered further in this review, and the term “waiver” is henceforth to be read as “waiver for nonobservance.”

14

This point involves complex elements of external communication and relations with civil society that are beyond the scope of the present review. The PRS approach is of course a prime example of a process aimed at broadening ownership, and has been examined in the annual PRSP implementation reports and the Independent Evaluation Office’s evaluation of the PRGF/PRSP (7/6/04, http://www.imf.org/External/NP/ieo/2004/prspprgf/eng/index.htm). For a discussion of external communication in support of Fund-supported programs, see IMF Executive Board Discusses Integrating IMF Communications and Operations (PIN No. 05/34, 3/18/05, http://www.imf.org/external/np/sec/pn/2005/pn0534.htm).

15

The vulnerabilities category includes primarily financial sector reforms, with some public debt management; the economic management category comprises mainly reforms in the fiscal and monetary areas. For further discussion of the sectoral coverage of conditionality, see Selected Issues, Chapter III.

16

Selected Issues, Chapter III.

17

Of course, the link of growth-related conditionality to (possibly temporarily) higher growth is not without dangers, see Section IV.B.

18

Numbers of conditions are normalized using the length of the arrangement, including any extensions, except for permanently interrupted and ongoing programs, which assume an end-date equal to the last completed review (or the approval date if no review was completed) plus nine months. The number of conditions per year is reported against the year in which the arrangement was approved, even though the arrangement may stretch into later years. Averaging is done across arrangements approved in a given year, which gives equal weight to short and long arrangements. (If averaging were done across arrangements outstanding, PRGF arrangements would have a higher weight in the Fundwide averages, and Fundwide numbers of conditions would likely show a small post-guidelines decline.)

19

Numbers of prior actions are subject to measurement error in view of the policy change in 2000, whereby prior actions became subject to the misreporting policy and thus had to be accurately listed in texts of arrangements. However, any resulting bias is likely to take the form of more consistent recording of prior actions in the more recent period, and thus the observed decline may even be underestimated.

20

The cases examined were Azerbaijan, Guinea, Mauritania, Mongolia, and Tajikistan. An example of a condition judged to be broadly based would be the approval by Parliament of a privatization program, including the list of large-scale enterprises to be privatized; an example of a condition judged to be narrowly based would be the completion of a study of foreign exchange auctions. Conditions were judged to be comparable in their scope in the pre- and post-guidelines periods, except in Guinea where conditions were more narrowly based in the later period.

21

Programs in capital account crisis cases have had higher-than-average numbers of conditions, without a systematic link to the level of access and without particular reliance on prior actions, see Selected Issues, Chapter VI.

22

Selected Issues, Chapter III.

23

Track records are characterized by reference to an implementation index for structural conditionality calculated by assigning a value 0 to conditions that were not met at all, 2 to conditions that were met on time, and 1 to conditions that were met with delay, partially, or in another form than originally stipulated. A member is identified as having a relatively weak track record if its implementation index in its previous Fund-supported programs was below 1.42, the median implementation index of all Fund-supported programs over the last decade.

24

Selected Issues, Chapter V.

25

Bank conditions in this analysis do not include conditions associated with investment lending or technical assistance loans, because the relevant data are not available.

26

Of course, there are still cases of overlapping conditionality, where reforms are critical to the programs supported by both institutions. Whether conditions are appropriately harmonized in these cases is beyond the scope of this review.

27

Of the conditions cited in this paragraph, only one raised any concerns among Executive Directors at the Board meeting on the occasion when it was introduced into the program: one Director questioned whether the benchmark on reducing employment in the education sector in Tajikistan was necessary, while another thought that this condition was useful in providing a clear focus for the authorities.

28

Directors did not comment on the level of detail of these conditions at the Board meeting on the occasion when they were introduced into the program, although the benchmark on health sector employment in Macedonia elicited comments from two Directors to the effect that retrenching staff was only a cure for a symptom and that the health sector problem had to be addressed more fundamentally.

29

These boxes were introduced in mid-2001—see Streamlining Structural Conditionality—Review of Initial Experience (http://www.imf.org/external/np/pdr/cond/2001/eng/collab/071001.pdf).

30

Selected Issues, Box 5.

31

The results of this survey should be interpreted with caution, as there were only 38 respondents (a 40 percent response rate) among authorities. Moreover, the survey referred to Fund-supported programs approved during mid-2001-mid-2003.

32

An “implicit waiver rate” can be calculated for structural benchmarks that—like PCs that need to be waived—were not met on time. The implementation index is calculated as described in footnote 23.

33

The implementation index for PRGF arrangements is likely to be slightly biased downward in the most recent period, as there is still time in many of these arrangements for delayed implementation of missed measures.

34

IMF Board Discusses Modalities of Conditionality (PIN No. 02/26, 3/8/02, http://www.imf.org/external/np/sec/pn/2002/pn0226.htm).

35

The lapsed rate shown in Figure 11 includes programs that later experienced permanent interruptions (perhaps on account of PCs that were waived and later still failed to be observed) and, in the more recent period, programs that may yet experience a permanent interruption. The “true” lapsed rate—i.e., the incidence of PCs the program could have done without—would exclude both these categories. The true lapsed rate in GRA-supported programs has declined in the post-guidelines period, going from 31 percent in 1995–97 to 22 percent in 1998–2000 and 17 percent in 2001–03. The true lapsed rate in PRGF-supported programs cannot yet be calculated for the post-guidelines period, since very few post-guidelines PRGF arrangements have yet expired. But the true lapsed rate in PRGF arrangements has probably declined alongside, or even more than, the unadjusted lapsed rate, since the inclusion of ongoing programs in the post-guidelines period imparts an upward bias to the lapsed rate. For further discussion, see Selected Issues, Chapter I.

36

Selected Issues, Chapter III.

37

Selected Issues, Chapter IV.

38

In the interim guidance note, the presumption was that reforms that were macro-relevant, but not critical, would be subject to structural benchmarks rather than PCs (¶10).

39

IMF Executive Board Discusses Conditionality (PIN No. 01/28, 3/21/01, http://www.imf.org/external/np/sec/pn/2001/pn0128.htm).

40

See Selected Issues, Chapter II, for further discussion.

41

PRGF-supported programs also often cite poverty reduction as a goal, in line with the strategic orientation of the facility and its link to Poverty Reduction Strategy Papers.

42

IEO Evaluation of Fiscal Adjustment in Fund-Supported Programs (9/9/03, http://www.imf.org/External/NP/ieo/2003/fis/index.htm).

43

See Selected Issues, Chapter II, for a full discussion.

44

A similar tendency is evident in trade-related conditionality, see IMF Executive Board Reviews Fund’s Work on International Trade (PIN No. 05/49, 4/11/05, http://www.imf.org/external/np/sec/pn/2005/pn0549.htm). Although the recent study on program design confirmed the importance of macroeconomic stability for growth, it also suggested that supply-side measures are positively and significantly related to better growth performance.

45

Selected Issues, Chapter III.

46

Selected Issues, Chapter II.

47

IMF Reviews Progress on Strengthening IMF-World Bank Collaboration on Country Program and Conditionality (PIN No. 02/117, 10/9/02, http://www.imf.org/external/np/sec/pn/2002/pn02117.htm).

48

The “IMF-Bank Relations” annexes in staff reports, and the analogous “Fund Relations” note at the Bank, provide a vehicle for transparent communication to the two Boards on all of each institution’s involvement.

49

Interestingly, in some arrangements—e.g., Romania—“prior actions” have been set in advance for subsequent reviews (despite the proscription on this terminology in the operational guidance, ¶12), perhaps because the high waiver rate for PCs has called forth another instrument with perceived lower “waivability.”

51

PIN No. 02/26, op. cit.

52

The experience with floating completion points under the Heavily Indebted Poor Countries Initiative also suggests that floating tranches may not capture some benefits associated with more traditional conditionality, when the latter helps the authorities focus their efforts; see Selected Issues, Chapter IV.

53

As noted in The Modalities of Conditionality—Further Considerations (http://www.imf.org/External/np/pdr/cond/2002/eng/modal/010802.htm), however, many quantitative conditions—including fiscal deficit and net international reserves targets—are outcomes-based.

54

In addition, many conditions are set on preparation of action plans and the like, leaving substantial policy space as to what is included in the plan—e.g., preparation of a privatization program for the postal bank (Croatia, SB, 2003), or development of an action plan and timetable for introducing a commitment control system (Kenya, SB, 2003).

55

Selected Issues, Chapter VII.

56

Of course, this finding is likely to hold only for the limited range of relatively good processes examined: processes that transgressed all benchmarks would very likely yield poor results.

57

Selected Issues, Chapter V.

58

See the discussion of Romania in Selected Issues, Box 6.

59

See Selected Issues, Box 3, for a description of the mixed implementation record of GRA-supported arrangements with many PCs approved in 2003. In several of these cases, Executive Directors expressed concerns about the implementation risks to the program, and emphasized that conditionality provided important safeguards and that prior actions provided a necessary demonstration of the authorities’ commitment.

60

PIN No. 02/26, op. cit.

61

See Selected Issues, Box 7.

62

Paragraph references are to the guidelines unless otherwise noted.

63

Consistent with this, the Extended Fund Facility is intended to support “comprehensive programs that include policies of the scope and character required to correct structural imbalances in production, trade, and prices when it is expected that the needed improvement in the member’s balance of payments can be achieved without policies inconsistent with the purposes of the Fund only over an extended period” (Decision No. 5706-(78/39), 3/22/78).

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