Chapter 26. Conditionality: the Fund Answers
- International Monetary Fund
- Published Date:
- February 1996
DEFENSE OF THE FUND’S CONDITIONS by officials of many members and by officials of the Fund was inevitable. Beginning with the 1976 Annual Meeting, when conditionality was first disputed, several Governors from industrial and more developed primary producing members emphasized the need for “strict conditionality.” What was becoming a North-South polarization on a number of topics relating to the international monetary system was reflected in comments about the Fund’s conditionality. Supporting Mr. Witteveen’s call for shifting emphasis from financing external deficits to adjustment through changes in internal economic policies, Phillip Lynch was blunt. Developing countries especially needed to adjust to reduce their balance of payments deficits. If the international aid that they received was used only to finance their payments deficits and not to reallocate their domestic economic resources in response to higher costs for energy, that aid would have been largely frittered away. In the long term, private financial institutions and donor countries would “lose their enthusiasm for providing aid on such a basis.” Developing countries had to realize that “the capacity of the industrial countries to aid the development process—whether through the international lending institutions or in other ways—has been weakened by the circumstances.”1
By the time of the 1977 Annual Meeting, several Governors of industrial members were adamant that adjustment was essential and that use of the Fund’s resources ought to be subject to conditions sufficient to bring about such adjustment. W. Michael Blumenthal, Secretary of the Treasury under President Jimmy Carter, stressed that current account positions had to be brought into line with sustainable capital flows and that financing by the Fund should support programs that would correct the payments problems of borrowers, not postpone their resolution. “It is not a matter of whether the Fund attaches conditions, but what kind.”2 Robert Boulin, expressing his disappointment that progress toward balance of payments adjustment had been very little and less than expected, regarded appropriate domestic policies in particular as essential to a restoration of external equilibrium and stressed that the supplementary financing facility then being proposed ought to have “adequate” conditions.3
Hans Apel also wanted conditionality to be strict. The officials of the Federal Republic of Germany, he stated, trusted the Fund’s ability to take due account of any member’s particular economic situation. There was no reason to believe that in negotiating with borrowers the Fund would impose policy conditions that countries would find impossible to meet. He advocated, in fact, that instead of distributing the general quota increase under the Seventh General Review evenly over all four credit tranches, those tranches whose use was tied to stricter conditionality be expanded more than proportionately.4
Denis W. Healey, then Chairman of the Interim Committee, seeking a compromise position, suggested further discussions in the Executive Board and in the Interim Committee of the conditions attached to drawings from the Fund. He noted that it was no good increasing the Fund’s resources, as was then being considered, if those who needed them most were unable to accept the conditions for their use.5
REPLIES OF MR. WITTEVEEN AND OTHER FUND OFFICIALS
In his concluding remarks at the 1977 Annual Meeting, and in the other public speeches early in 1978 prior to his leaving the Fund, Mr. Witteveen also undertook to defend the Fund’s conditionality. At the 1977 Annual Meeting, he explained that when officials of a member approached the Fund for a drawing in the higher credit tranches—and under the proposed supplementary facility—the member was usually in a very difficult external payments situation. Such a situation had to be remedied whether the member drew on the Fund or not. Indeed, the availability of finance from the Fund allowed the member to make the necessary adjustments less abruptly and with less adverse impact on its own economy and fewer adverse effects on other countries. For these reasons, the basic principles of conditionality had to remain an integral part of the Fund’s operations.6
Just prior to his departure from the Fund, Mr. Witteveen, in May 1978, again spoke at length about conditionality.7 The Fund’s conditionality was not a quid pro quo for its financial assistance; on the contrary, it was “an essential complement” to the assistance the Fund provided. Without conditionality, financial assistance could not be used to its maximum potential advantage, and without assistance, the process of adjustment would be much more painful. Conditionality was based on the simple premise that, except in a few situations, it was unwise and, in the end, not even feasible to finance balance of payments deficits over a protracted period without taking corrective measures. It was essential to counter the belief that the Fund’s conditionality involved policy measures that countries in balance of payments difficulties could otherwise do without; no country could use reserves or borrow indefinitely to finance sizable deficits.
The components of conditionality, Mr. Witteveen emphasized, were inevitably controversial. Control of inflation and the effectiveness of monetary policy, such as the responsiveness of savings to higher interest rates, the efficacy of exchange rate depreciation in inducing changes in trade flows, and the responsiveness of farmers to price incentives were debated among economists. Dealing with inflation and balance of payments difficulties necessarily meant cutting back, at least temporarily, on real incomes; there were understandable fears on the part of each sector of a society that it might have to assume a disproportionate share of the burden of this cutback. Such matters were highly charged politically.
With regard to the criticism that the Fund’s conditions were too severe, Mr. Witteveen pointed out that all too many members came to the Fund only when their economic situations had become desperate. It had become common for members to perceive the Fund as “the lender of last resort,” approaching it only when all alternative sources of financing had been exhausted. Under such circumstances, it was inevitable that corrective measures were severe. Such situations made the Fund’s conditionality appear harsh. The initial purpose of a stand-by arrangement—as a precautionary device to assure the availability of financing—had been lost sight of. Members should come to the Fund at an earlier stage of their difficulties.
To answer the criticism that Fund staff were controlling the economies of members, Mr. Witteveen pointed out that the performance criteria in the economic policy programs supported by the Fund usually related to the broadest possible economic aggregates that sufficed for the achievement of balance of payments adjustment. The Fund avoided taking a view on the appropriate distribution of the burden of adjustment as between the various sectors of an economy. For example, if an improvement in the government budgetary position was an ingredient of the program, as was frequently the case, the performance criterion related to the extension of bank credit to the government rather than to specific measures to increase revenues or cut expenditures. Similarly, performance criteria did not give specific prices for individual commodities but dealt rather with overall prices, like exchange rates and interest rates.
In justifying the Fund’s emphasis on exchange rate depreciation, Mr. Witteveen emphasized that under the Second Amendment of the Articles of Agreement that had come into effect in the previous month, members were obliged to ensure that their exchange rates were not set at levels that would impede effective balance of payments adjustment; the Fund was required to oversee the observance by each member of this obligation. Beyond this obligation an exchange rate change was the simplest and least painful of the alternative measures to revitalize a foreign trade sector of a country when its domestic prices and costs were substantially out of line with those in trade partners or competitor countries. The alternative of domestic deflation alone was far more costly in output and employment. The alternative of restrictions on trade and payments might hold down imports but did little to encourage exports; indeed, it served to discourage them insofar as it raised the input costs of exporters without increasing their returns. Attempts to overcome this difficulty by subsidizing exports, together with restrictions on imports, resulted over time in an excessively complex system of controls and subsidies and induced producers to try to obtain administrative favors rather than to develop markets, improve products, or reduce costs. A realistic exchange rate, moreover, was not merely an instrument for balancing the external accounts but also a powerful instrument of development policy. By appropriately pricing capital goods which developing countries import, a correct exchange rate encouraged the substitution of labor for capital and thus helped to promote employment, one of the most important policy objectives of developing countries.
Mr. Witteveen also explained how the Fund management and staff viewed the controversial subject of cuts in the budget for subsidies on basic food items. When such subsidization was done through the government budget, he said, the Fund usually pointed out to the officials of members the budgetary problems that such subsidies could create, but accepted their continuation if they were an important part of the social program of the government and it was clearly understood that the burden of such a subsidy was being borne by some sector of society. Experience had shown, moreover, that when other prices were rising, low prices for basic foods were a disincentive to their production so that output remained low. It might be preferable therefore to eliminate subsidies and raise wages.
Additional Replies to Criticism
There were a number of further replies, usually expressed informally, to the mounting criticism of the Fund’s conditionality. Many regarded the criticism as unfair. Often, cabinet ministers and other high-level officials genuinely saw the need to take strong policies, but since such policies were unpopular, they found it politically expedient publicly to blame the Fund for these policies. The Fund was thus made the whipping boy, performing the role as a service to members in the interest of appropriate policies. Defenders of the Fund’s policies realized too that some officials of developing members were voicing criticism from which they might otherwise have refrained because in the political circumstances of a North-South dialogue developing members were eager to have a unified position that differed from that of officials of industrial members.
Fund officials had replies to other criticism, too. They elaborated Mr. Witteveen’s point that it was neither desriable nor feasible for a member to finance balance of payments deficits over an unduly protracted period without reducing or eliminating the underlying causes of the deficits. If these deficits were merely suppressed by resorting to restrictions or if they were merely financed, they were likely to reappear, perhaps in a more acute form, thus compounding the severity of the required adjustment measures. That the principal determinants of the balance of payments difficulties were exogenous did not diminish the need for taking corrective measures. The fundamental question of whether adjustment was required did not depend on the identification of the causes of the payments imbalance but on whether the imbalance was temporary and self-reversing within a reasonable time. If the imbalance was soon reversible, adequate temporary financing was all that was required. But if the imbalance was not transient and self-reversing, there was no alternative to adjustment.
A further defence was that the staff did not rely on any particular model or standard approach. Indeed, given the number of Fund members, with their widely differing economic structures and systems, stages of development, and problems, it would be impossible to envisage a single model of adjustment that could apply to all. Fund officials especially emphasized that the conditions that the Fund was applying in 1977 and 1978 reflected crises: relatively harsh conditions had to be used when members had few, if any, alternative means of finance and came to the Fund as lender of last resort. Such conditions could not be taken as a guide in less desperate circumstances. Defenders of the Fund’s conditionality believed, too, that underuse of the Fund’s resources was attributable not to the Fund’s conditionality but primarily to the ready availability of other sources of finance.
There were still other defenses of the Fund’s conditionality. A stable economy and a sustainable balance of payments position were prerequisites to economic growth. Use of credit ceilings did not necessarily reflect belief in monetarist doctrines but rather served as neutral aggregate indicators of economic performance. While the Fund gave due recognition to the relationship between monetary factors in a member’s economy and developments in its balances of payments, its approach took into account all facets of economic policies bearing on the supply of, and demand for, the member’s economic resources. It was Fund policy to leave decisions on the details of the execution of policy measures (for example, how credit should be rationed, specific tax and subsidy measures applied, and where public expenditures should be reduced) to the authorities of the member concerned. To do otherwise would involve the Fund directly in microeconomic policy measures closely related to the member’s social and political choices.
Another important defense of the Fund’s conditionality was the success attained with previous stabilization programs. A study by the Fund staff of the performance of net foreign assets, prices, and the level of economic activity resulting from adjustment programs supported by stand-by arrangements in the upper credit tranches in 1963–72, for instance, concluded that the vast majority of programs had been successful. Programs which failed did so mainly because of fiscal problems, and, in particular, because the limits on credit expansion to the public sector had not been observed. Admittedly, an increasing number of the programs implemented from 1973 to 1977 did not achieve their objectives. Lack of success, however, arose not from use of the wrong type of programs but rather from insufficient stabilization efforts or from uncontrollable factors affecting the member’s balance of payments, such as the recession of 1975, the sharp declines in prices of many primary commodities, and higher prices for oil.8
The various defenses notwithstanding, the conditions associated with use of the Fund’s resources remained a prime issue in international discussions, and in accordance with Mr. Healey’s suggestion at the 1977 Annual Meeting, in 1978 the Executive Board undertook to review the entire subject.
POSITIONS OF EXECUTIVE DIRECTORS FROM DEVELOPING MEMBERS
The review by the Executive Board of conditions on stand-by arrangements in the upper credit tranches got under way in 1978, following a formal request by the members of the Interim Committee at their tenth meeting in April. This was the first broad review of the policies governing use of the Fund’s resources that the Executive Directors had undertaken since 1968. The 1978 review went on intermittently for eight months, until March 2, 1979 when a new Executive Board decision was taken.
For nearly a year, the Executive Directors reviewed the Fund’s experience with the application of conditionality. They discussed the objectives of financial programs, the policies and the criteria that the Fund had been using, and the many criticisms and defenses of the Fund’s policies.
Shortly after the review started, J. de Larosière succeeded Mr. Witteveen as Managing Director. When the Governors again assembled in Washington, for their Thirty-Third Annual Meeting, September 25–28, 1978, Mr. de Larosière made clear his position on this controversial subject. He very much wanted to help the non-oil developing members in the troubled world economy, but at the same time he stressed that the Fund had to apply meaningful conditions. He also stated that the Fund must act fairly and evenhandedly.9 The subject of conditionality was now so sensitive that most Governors from industrial members refrained from commenting on it at the 1978 Annual Meeting, although Hans Matthöfer did emphasize that German officials insisted on an element of “reasonable conditionality.” Any weakening of conditionality, he thought, would harm both the Fund and borrowing countries by discouraging private and official lenders.10
The difficult task of working out new policies was left to the Executive Directors. To some extent, the views expressed by the Executive Directors had already been voiced by their Governors at the 1976 and 1977 Annual Meetings. But additional points were brought out as well in the discussions.
The nine Executive Directors elected exclusively by developing members emphasized how the world economic environment of 1978 had changed since the last review of policies on use of resources and the general feeling of dissatisfaction and distrust among officials of developing members with the application by the Fund of its conditionality. They stressed, however, that developing members were not opposed to conditionality as such; on the contrary, they had always supported conditionality because it served a useful and necessary role in their efforts to stabilize their economies. Problems existed not because of the existence of conditionality, but because the application of conditionality in the previous few years had been wrong. Conditionality seemed to involve the Fund’s requesting an excess of policy measures in an attempt to obtain a swift and complete reorientation of economies. Furthermore, the standards used in applying conditionality were not uniform among members, nor were the conditions that the Fund applied flexible or well understood. The Executive Directors from developing members were convinced, too, that the lack of requests from developing members for use of the Fund’s resources was almost entirely attributable to the Fund’s conditionality.
They favored the change proposed by the management and staff that stand-by arrangements be granted for two-year or even three-year periods instead of the customary one-year period and that greater use be made of review clauses. These clauses required a periodic review of the member’s economic situation before it could draw further, as had been done in the stand-by arrangement approved for the United Kingdom in 1969.11 The staff suggested that review clauses might also be used for other members. But Executive Directors elected by developing members were not at all certain that they favored this idea. In fact, the review clause technique was not used even for the United Kingdom in the stand-by arrangement of 1977, as was seen in Chapter 24.
The Executive Directors elected by developing members also welcomed recognition by the management and staff that a longer time for balance of payments adjustment was needed. To support their argument, they cited the position taken by Mr. Matthöfer at the 1978 Annual Meeting that the Federal Republic of Germany needed ample time to rid itself of its chronic trade surpluses. Mr. Matthöfer had stated explicitly that “an economy which for more than two decades became accustomed to produce external surpluses cannot easily adjust to current account equilibrium. As everywhere, structural changes take time and organizational imagination.”12 Officials of developing members argued that if the Federal Republic of Germany needed time for adjustment, developing members certainly did.
Several Executive Directors argued for even more changes in the Fund’s conditionality than the two proposed by the management and staff, Mr. Kharmawan, for example, wanted the Fund to drop performance criteria relating to the budget of a member. He argued that a country’s budget was an especially sensitive document and the product of compromises between many ministries, setting out the government’s economic priorities. The Fund “ought not to meddle” in those compromises and priorities. Eduardo Mayobre (Venezuela), as well as Mr. Kharmawan, objected to prior conditions for a stand-by arrangement as the staff paper suggested. Such prior conditions would undo the liberalization in force for the past ten years of stand-by arrangements in the first credit tranche. Mr. Mayobre also wanted a considerable reduction of performance criteria and a change in their orientation. When it negotiated with officials of a member government, the staff should not go into policies outside direct control of the government, such as wage and price policies. Balance of payments adjustment programs should give more weight to the general trend of the economy and less to the attainment of particular quantitative monetary targets. Ceilings on external debt should take into account the significant difference between long-term and short-term debt. Mr. Mayobre argued, too, for a close involvement of the Executive Board in the application of the Fund’s policies to particular countries by having the Executive Board set up specific guidelines and constraints.
Mr. Kafka observed that the complaint most frequently heard was that the Fund’s balance of payments adjustment programs neglected social and political, as against economic, factors. A related but rarely voiced complaint, he thought, was that the Fund used “an almost medieval bargaining technique in negotiating programs,” that is, it tried to extract maximum concessions from members though it should aim at offering a member various choices on how to obtain balance of payments adjustment. He also believed that coordination by the management and staff was inadequate to ensure that the programs used in different members were sufficiently similar. The style of negotiation and the tone in which reports were written differed even within a given area department; yet style and tone had a lot to do with members’ reactions to the Fund’s conditions and with the reactions of outside lenders.
Mr. Al-Atrash believed that the impression of toughness of the Fund’s conditionality was attributable to its being so far reaching. Conditionality, as currently applied, was not confined only to ceilings on net domestic credit expansion and to measures in trade and exchange; it included measures involving wages, interest rates, and domestic prices, especially restructuring and decontrolling some prices. He agreed, too, with Mr. Mayobre and others that the Executive Board ought to have a larger role in the application of conditionality to individual members. As it was, conditions were not approved ex ante by the Executive Board, that is, before the program was finalized; they were determined by the management and staff and approved only ex post by the Executive Board through its approval of the final standby arrangement.
Samuel Nana-Sinkam (Cameroon) felt that the letters of intent had a contractual flavor which many developing members did not like. They were inclined to fear that if they could not keep their economic policy undertakings, they would be regarded as breaking their international obligations. In effect, their “track record” would have been tarnished.
Others observed that credit squeezes in the private sector of the economies of developing countries were hard on domestic enterprises. As a result, large foreign multinational companies with ready access to credit abroad were likely to gain larger footholds in the manufacturing industries of developing countries. Often the Fund’s conditionality meant that members had to take domestic measures to cope with balance of payments deficits deriving from external factors. Not all balance of payments deficits were attributable to inappropriate domestic policies, yet the Fund’s conditionality implied that they were.
Festus G. Mogae (Botswana) and other Executive Directors believed that an initial depreciation of the exchange rate received undue emphasis. He expressed doubt about the effectiveness of exchange rate depreciation, particularly in developing countries that exported primary commodities. He and others contended in particular that staff reports did not always sufficiently explain how the “appropriate exchange rate” for a member was determined.
POSITIONS OF EXECUTIVE DIRECTORS FROM INDUSTRIAL AND DEVELOPED MEMBERS
Most Executive Directors appointed or elected by industrial members and by more developed primary producing members wanted to retain conditionality fairly much in its existing form but were open to suggested changes. Generally, they believed that when a member made purchases from the Fund in the upper credit tranches, it had to do so in support of fairly specific financial policies that gave substantial assurance to the Fund that the member would achieve a viable balance of payments position within a reasonable time.
They defended their views with a number of specific arguments. Messrs. Pieske and Gerhard Laske (Federal Republic of Germany) stressed that conditionality had been central to the Fund’s activities for more than two and a half decades and that it was difficult to conceive of an alternative. The concept of balance of payments adjustment incorporated in the principles of conditionality was, in their view, “appropriate and workable.” Moreover, the Fund’s experience with conditionality had been good and amply justified continuing with the well-tested practices of the past. The European Community had followed the Fund in devising policies to promote balance of payments adjustment in its own members. Messrs. Pieske and Laske, like many other members of the Executive Board, believed strongly that it was not so much the Fund’s conditionality as the ready availability of nonconditional funds from other sources, particularly from the international credit and capital markets, that explained the limited use of stand-by arrangements in upper credit tranches when balance of payments deficits were widely prevalent. They believed, too, that the seeming harshness of the Fund’s conditions was due largely to the tardiness with which members approached the Fund. The solution was not to change the Fund’s conditions but to encourage members to come to the Fund at an early stage of their external payments problems when adjustment measures could be less demanding.
Sam Y. Cross (United States), too, suggested that the Fund, by and large, had been acting correctly. He stressed that it was essential to maintain the institutional integrity of the Fund and the World Bank, with the Fund concentrating on balance of payments financing for relatively short-term adjustment and the Bank on other forms of financing for economic development on a longer-term basis. Therefore, while Fund assistance and adjustment programs supported by stand-by arrangements might be made for a little longer period than one year and could perhaps extend to three years, stand-by arrangements should not extend too far into the future.
In a separate statement, Mr. Cross also explained the position of the U.S. Government on performance criteria in stand-by arrangements. Such criteria should be broad, aiming at correcting an economy and avoiding intervening in members’ decisions on how to allocate expenditures. Also, while the U.S. Government in no way wanted to dilute or subordinate the fundamental objectives of economic stabilization and balance of payments adjustment intended by the financial programs that the Fund supported by stand-by arrangements, it considered other objectives important as well. Programs for balance of payments adjustment should foster in the country concerned a broader base of productive investment and employment. They should help productive activities which could lead to a better allocation of productive resources and meeting of basic human needs, such as those for food and shelter.
Bernard J. Drabble (Canada), observing that much of the use of the Fund had taken place through low conditional channels, such as the oil facility, the compensatory financing facility, and drawings in the first credit tranche, argued that any comprehensive assessment of conditionality should include appraisal of the contribution low conditional resources had made to the adjustment process. Most of the so-called harshness of conditionality arose, he believed, because members delayed until they were in dire straits before requesting Fund assistance.
Mr. Dini also supported appropriate conditionality but believed that the financial programming techniques used by the Fund needed to be improved. They were biased toward rapid balance of payments adjustment at the expense of growth and employment. Would it not be possible, he asked, to devise a balance of payments measure similar to the concept of the full-employment balanced budget, in which medium-term external equilibrium was defined in such a way as to include potential economic growth?
Mr. Wahl pointed out that slowdowns in economic growth were unfortunately unavoidable when a member was faced with serious payments disequilibria. He stated that the French authorities favored enlarging the amount of money the Fund could make available when conditions were being satisfied. Pendarell Kent (United Kingdom) also favored this suggestion so that conditionality would not be too high for “meager assistance,” but supported the existing characteristics of conditionality as reflecting long years of experience.
A few members of the Executive Board vigorously supported the Fund’s conditionality as it had been applied. Noting that a number of members had developed “an allergy” to the Fund’s conditionality, Mr. Schneider believed that the Fund’s conditionality was only what a country should do anyway sooner or later, with or without the help of the Fund, if it wanted to restore a viable payments position. Conditionality was more than just a safeguard for the temporary use of the Fund’s resources. It was an “indirect trade-off” for creditor members who placed a portion of their reserves at the disposal of the Fund at low interest rates in the hope that this contribution would enhance the international adjustment process. Mr. Schneider stressed especially that drawings changed the reserve positions of members in the Fund. In effect, when a member used the Fund’s resources, it was using the reserves of another member. This use had to be temporary and had to be conditional. The Fund was not “a lending institution.”
Masanao Matsunaga (Japan) took the view simply that without conditionality, there “need be no Fund,” as unconditional assistance was available from the private banking community. Mr. Whitelaw agreed and made the further point that if conditionality was weakened, the case against higher charges on Fund resources would be correspondingly weakened. He still favored as low charges as possible.
In general, most Executive Directors from industrial and more developed primary producing members were willing to accept two-year stand-by arrangements, or occasionally three-year arrangements, as proposed by the staff, if they did not become the norm. They also preferred continuing the use of performance criteria to substituting review clauses and stressed the need for a more active policy of providing information to a wider public about the Fund’s conditionality. Such explanations would, they believed, be the most effective way to reduce the heavy criticism to which the Fund was subjected.
NEW GUIDELINES ESTABLISHED
After these extensive discussions, the Executive Board, on March 2, 1979, adopted a decision which set forth new guidelines on conditionality.13 Several guidelines were not new. Rather they clarified practices and policies that had gradually emerged in the Fund’s operations since 1968. Nevertheless, some were sharpened, a few features were added to accommodate the views of developing members, and the Executive Directors were given closer participation in the negotiating process.
While the one-year stand-by arrangement remained the norm, stand-by arrangements for up to three years could be approved. Phasing and performance clauses were to be omitted in stand-by arrangements that did not go beyond the first credit tranche, but included in all other stand-by arrangements, although these clauses would be applicable only to purchases beyond the first credit tranche. The major liberalization of the 1968 review was thus reaffirmed. Limits on performance criteria were emphasized. They were normally to be confined to macroeconomic variables and those necessary to implement specific provisions of the Articles. Explicit provision was made for preconditions. The Managing Director could ask a member to adopt some corrective measures before he recommended that the Executive Board approve the stand-by arrangement, but he was to keep the Executive Directors informed of the progress of negotiations with the member.
Members were to be encouraged to come to the Fund for assistance before their payments difficulties became acute and they needed to undertake drastic reforms. The Fund was to help members identify impending economic difficulties. To take account of criticism that the Fund neglected relevant considerations when it devised adjustment programs, the Fund was to pay due regard to domestic social and political objectives, economic priorities, and circumstances of members, including the causes of their balance of payments problems. The Managing Director was to coordinate staff work to ensure nondiscriminatory treatment of members. Significantly, the word “nondiscriminatory” replaced the Fund’s customary word “uniform.”
Should a member be unable to formulate an essential feature of a program as a performance criterion at the beginning of a program year because of substantial uncertainties over major economic trends, the Fund might review the situation and, if appropriate, revise the performance criteria. But the member was to be guarded against the possibility that such a review would amount to a total renegotiation by a provision specifying that the Managing Director would inform Executive Directors of the subject matter of the forthcoming review.
The decision also made it explicit that stand-by arrangements are not international agreements and therefore language with a contractual connotation was to be avoided in stand-by arrangements and letters of intent.14 This provision met the criticism that some creditors interpreted failure to observe performance criteria as a serious departure from agreed international rules of behavior.
A few Executive Directors elected by developing members regarded the March 1979 decision as a new approach. They thought that the staff would have to offer members alternative programs for the achievement of balance of payments adjustment. Most Executive Directors and staff, however, viewed the guidelines as a restatement of past policy. Some regarded such a restatement as favorable: the conditionality that the Fund had been applying was correct and was vindicated by the new guidelines. Others regarded the restatement of past policy unfavorably: they had hoped for “constructive, positive change.” They criticized, for example, the customarily used performance criteria as too simple and the balance of payments tests as too mechanical, precluding deeper assessment of exchange rate policy. They questioned the need for, and the value of, placing limits on new foreign borrowing on the grounds that Fund assistance should be aimed at re-establishing a member’s creditworthiness so as to enable it to borrow abroad and not at preventing such borrowing. In any event, when members came to the Fund for financial resources as a last resort, other lenders had usually already stopped lending to the country anyway, so that there was no need for the Fund to limit the incurrence of additional debt.
Thus, the decision of March 1979 by no means laid to rest arguments and debates about conditionality, even within the Fund itself. Moreover, in the circumstances of 1973–78, when many developing members were able to borrow from private commercial banks, there was yet another problem concerning requests for use of the Fund’s resources. To some extent, only members unable to raise money from private sources were requesting aid from the Fund. Consequently, something of a stigma attached to use of the Fund: the authorities of some members without access to private markets feared that a request for use of the Fund’s resources might be construed by outside lenders as an inability of the member to secure funds elsewhere. Use of the Fund thus might reduce rather than enhance a member’s creditworthiness.
Conditionality would certainly require much rethinking in the near future.15
Statement by the Governor of the World Bank for Australia, Summary Proceedings, 1976, pp. 182–84.
Statement by the Governor of the Fund and the World Bank for the United States, Summary Proceedings, 1977, p. 66.
Statement by the Governor of the Fund for France, Summary Proceedings, 1977, p. 80.
Statement by the Governor of the World Bank for the Federal Republic of Germany, Summary Proceedings, 1977, p. 94.
Statement by the Governor of the Fund for the United Kingdom, Summary Proceedings, 1977, p. 62.
Concluding Remarks by the Managing Director, Summary Proceedings, 1977, pp. 215–16.
Financing the LDCs: The Role of Public and Private Institutions,” an address by the Managing Director at the 1978 Euromarkets Conference in London, May 8, 1978; published in IMF Survey (Washington), Vol. 7 (May 22, 1978), pp. 145–50.
This study was published as Thomas M. Reichmann and Richard T. Stillson, “Experience with Programs of Balance of Payments Adjustment: Stand-By Arrangements in the Higher Credit Tranches, 1963–72,” Staff Papers, International Monetary Fund (Washington), Vol. 25 (June 1978), pp. 293–309. A short article on this subject covering 1973–75 is that of Thomas M. Reichmann, ‘The Fund’s Conditional Assistance and the Problems of Adjustment, 1973–75,” Finance & Development (Washington), Vol. 15 (December 1978), pp. 38–41. Later studies by the staff of Fund-supported stabilization and adjustment programs undertaken in the 1970s include Donal J. Donovan, “Real Responses Associated with Exchange Rate Action in Selected Upper Credit Tranche Stabilization Programs,” Staff Papers, Vol. 28 (December 1981), pp. 698–727 and his “Macroeconomic Performance and Adjustment Under Fund-Supported Programs: The Experience of the Seventies,” Staff Papers, Vol. 29 (June 1982), pp. 171–203.
Opening Address by the Managing Director, Summary Proceedings, 1978, pp. 19–20.
Statement by the Governor of the World Bank for the Federal Republic of Germany, Summary Proceedings, 1978, p. 34.
See History, 1966–71, Vol. I, pp. 348–51.
Statement by the Governor of the World Bank for the Federal Republic of Germany, Summary Proceedings, 1978, p. 32.
E.B. Decision No. 6056-(79/38), March 2, 1979, Selected Decisions of the International Monetary Fund and Selected Documents, (hereafter referred to as Selected Decisions), Tenth Issue (Washington, April 30, 1983), pp. 20–23.
Discussion of this point can be found in Joseph Gold, The Legal Character of the Fund’s Stand-By Arrangements and Why It Matters, IMF Pamphlet Series, No. 35 (Washington: International Monetary Fund, 1980).
Shortly after the end of the period described here, public as well as internal discussion of the Fund’s conditionality became even more common. See, for example, Sidney Dell, On Being Grandmotherly: The Evolution of IMF Conditionality, Essays in International Finance, No. 144, Princeton University (Princeton, New Jersey, 1981), and Bahram Nowzad, The IMF and Its Critics, Essays in International Finance, No. 146 (Princeton, New Jersey, 1981).