Front Matter

Front Matter

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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Review of the 2002 Conditionality Guidelines

March 2005

Tessa van der Willigen, Alun H. Thomas, Tubagus Feridhanusetyawan, Uma Ramakrishnan, Steffen Reichold, James P. Walsh, and Juan Zalduendo

Contents

  • Review of the 2002 Conditionality Guidelines
  • Review of the 2002 Conditionality Guidelines—Selected Issues
  • IMF Executive Board Discusses Review of the Conditionality Guidelines

International Monetary Fund

© 2005 International Monetary Fund

ISBN Number: 1-58906-491-7

Disclaimer: The views expressed in this report are entirely those of IMF staff authors and should not be attributed to the International Monetary Fund, its Executive Board, or its management. These documents have not been formally edited.

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INTERNATIONAL MONETARY FUND

Review of the 2002 Conditionality Guidelines

Prepared by the Policy Development and Review Department

In consultation with other Departments

Approved by Mark Allen

March 3, 2005

Executive Summary

The 2002 Guidelines on Conditionality are built on the principles of national ownership, parsimony and clarity in the application of conditions, tailoring to country circumstances, and coordination with other multilateral institutions. These principles are intended to reinforce each other in securing more effective program design and implementation, and thus in enhancing support to members and better safeguarding Fund resources.

The record

Since the Fund revised its conditionality guidelines in 2002 (and starting with the “streamlining” initiative of 2000), substantial changes appear to have been made in pursuit of national ownership, parsimony, and clarity:

• The coverage of structural conditionality has shown major shifts, consistent with a greater focus on critical measures. Conditionality has shifted out of noncore areas, and toward economic management in programs supported by the Poverty Reduction and Growth Facility (PRGF) and vulnerabilities in programs supported under the General Resources Account (GRA). Conditionality is also now less dispersed across sectors, and shows stronger links to initial economic conditions. Conditions whose criticality is neither obvious nor convincingly explained still exist, but seemingly not in large numbers.

• Numbers of structural conditions have not shown much of a decline. Numbers have declined somewhat in PRGF-supported programs, but not in GRA-supported programs. Numbers are, however, a crude metric, and need to be seen in the context of the increased focus noted above. Specification of conditions at high levels of detail contributes to holding up numbers of conditions, as does a tendency—in GRA-supported programs—to set more conditions in programs with members with relatively weak track records.

• Conditions have become much clearer. Program-related conditions are now almost always transparently distinguished from the rest of the authorities’ program. Vaguely-specified program review clauses are rare, and reviews are rarely used to introduce entirely new conditionality.

Although it is too soon to gauge whether, since the advent of the guidelines, Fund support has contributed to better economic outcomes, some improvement is also evident in program implementation:

• Fund-supported programs experience fewer permanent interruptions, although temporary interruptions and average review delays have not declined.

• Waiver rates for structural performance criteria (PCs) have not declined (and have even risen in GRA-supported programs), but implementation of waived PCs has improved. The latter is consistent with a greater focus on critical conditions, although waivers continue to be used to provide policy space ex post, in particular with respect to the timing of implementation.

Streamlining structural conditionality

There is some scope for further progress in streamlining the coverage of structural conditionality. In particular, greater care could be taken to set structural benchmarks only in critical areas, and to set out program strategies more clearly in staff reports.

The shift in coverage of conditionality away from growth- and efficiency-related reforms is not without risks. Whether this shift represents early evidence of “reform gaps” will have to be assessed when program outcomes are known.

There may be a case for setting fewer structural conditions at a high level of detail. While detailed specification may be perceived as micromanagement, it is also conducive to clarity, and thus not necessarily to be resisted. But renewed scrutiny—including by the Executive Board—of the numbers and detail of conditions would be helpful.

The tendency to provide policy space—including flexibility on timing—ex post suggests that there may be scope for improving the ex ante formulation of structural conditions. This would give the member stronger assurances of the availability of Fund financing in defined conditions, and reduce the waiver rate and thereby strengthen credibility. Specifically:

  • Care should be taken not to set overambitious timetables for implementation. In cases of particular uncertainty, the Fund could experiment with foreshadowing conditions, leaving precise dates to be specified at a later stage.
  • Floating tranches could be used in a limited set of cases. Clarifying the criteria for their use would help ensure that this possibility is considered when the criteria are met.
  • More conditions could be formulated to provide policy space ex ante.

Process, ownership, and conditionality

Process is a difficult area. The staff appears to be making serious efforts to follow good processes of program development, but it is clear that good processes do not guarantee strong implementation, and that some aspects of good processes are idiosyncratic. In very few cases have the authorities expressed an interest in writing the first draft of the letter of intent, but this does not at all mean that they are not actively involved in program design. More scope for process improvements probably exists in the proactive development of policy options by the staff.

It will remain difficult to gauge ownership, but substituting conditionality for ownership is not the answer. Assessing risks when ownership is divided presents special challenges. In the face of these difficulties, there is a tendency to set many conditions—especially prior actions and PCs—in cases of ownership doubts. In some of these cases, greater selectivity and judicious use of staff-monitored programs might be preferable.

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