The IMF provides financial support to member countries under a variety of policies and lending instruments (see Table 8.1). Most forms of IMF financing are made conditional on the recipient country’s adopting policy reforms to correct the underlying problems that gave rise to its need for support.

During FY2003, the Executive Board concluded a comprehensive, two-year review of conditionality (that is, the conditions related to IMF-supported programs) and approved new guidelines for the design and implementation of conditionality in IMF-supported programs. The new guidelines aim to streamline and focus IMF conditionality to promote the success of member countries’ reform programs.

In the context of this major review of conditionality, the Board emphasized the need to establish a clear division of labor with other international institutions, especially the World Bank. In September 2002, Directors discussed the progress made on strengthening IMF-World Bank collaboration on country programs and conditionality under a new collaboration framework for the two institutions.

Also in September 2002, the IMF’s Independent Evaluation Office (IEO) issued an evaluation report on the prolonged use of IMF resources by some member countries. Subsequently, the Board discussed the conclusions of a staff task force set up to make recommendations on how issues raised in the report might best be addressed.

New Conditionality Guidelines

To ensure continued effectiveness, the IMF regularly reviews developments in conditionality (see Box 4.1). In September 2002, the Board adopted new guidelines to encapsulate ongoing efforts to streamline and focus IMF conditionality. (The guidelines can be found on the IMF website.) An important objective of the new guidelines is to enhance country ownership and improve the prospects for sustained implementation of Fund-supported programs, most importantly by concentrating the IMF’s policy conditions on areas that are critical to their success. The wholehearted implementation of these guidelines has also been identified in the IEO evaluation report on prolonged use of IMF resources as one of the key steps in avoiding the failure of Fund-supported programs.

The guidelines emphasize the need to focus conditionality on policies that are critical to achieving the macroeconomic objectives of Fund-supported programs. They also aim to establish a clearer division of labor with other international institutions, especially the World Bank. The guidelines are based on an increasing recognition of the importance of several interrelated principles:

• national ownership of policy reforms;

• parsimony in the application of program-related conditions;

• tailoring of programs to the member’s circumstances; and

• clarity in the specification of program-related conditions.

The new guidelines introduce specific criteria for deciding whether conditions are appropriate in each case. Structural conditionality is regarded as an important element of Fund-supported programs, as long as it is critical to achieving the objectives of the program.

The guidelines also spell out the roles of different types of program-related conditions, including performance criteria, structural benchmarks, and prior actions. A note by IMF staff providing additional explanation and context for the conditionality guidelines was released along with the guidelines.

An essential aspect of the IMF view of conditionality is that the member country will take primary responsibility for its own policies, and that documents setting out the country’s reform agenda will be drafted by the authorities with the cooperation and assistance of Fund staff. The Board agreed during the course of its review that properly designed conditionality can complement and reinforce national ownership.

Strengthening IMF-World Bank Collaboration

In September 2002, the Progress Report on Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality, prepared jointly by the staffs of the IMF and the World Bank, was discussed by the Board.

The progress report examined the experience with collaboration in relation to a Guidance Note issued in April 2002 (see Box 4.2). The report highlighted a survey of staff in the two institutions—World Bank country directors and IMF mission chiefs—examining their experience of collaboration. The survey found that, although collaboration was seen as satisfactory with no major problems indicated in most cases, a number of institutional factors were impeding fully effective collaboration—such as differences in working structures, time frames for achieving goals, and lending arrangements and instruments. These results con- firmed the need for continued efforts to strengthen collaboration.

In their discussion, Directors reaffirmed that close collaboration is indispensable for providing effective support to member countries, and forms an integral part of efforts to streamline and focus conditionality to enhance national ownership of reform programs. The move to strengthen collaboration in country programs is taking place against the background of progress achieved in a number of other areas, including the PRGF/HIPC framework and systematic joint analytic work such as that being done in the Financial Sector Assessment Program (FSAP) and Report on the Observance of Standards and Codes (ROSC) exercises.

The central principles of collaboration on country program design and conditionality, Directors noted, clearly designate one of the two institutions as a lead agency in particular policy areas and systematic information sharing between the two institutions. At the same time, they considered it essential that each institution retain ultimate responsibility for its own lending decisions.

The Guidance Note on Operationalizing Bank-Fund Collaboration in Country Programs and Conditionality was beginning to play a positive role in strengthening collaboration, Directors observed, while noting the limited basis for assessing progress at this stage.

Effective collaboration with the World Bank is critical for the success of efforts to streamline and appropriately focus IMF conditionality, Directors emphasized: it is needed to ensure that important measures are adequately covered as the IMF applies conditionality more sparingly outside its core areas. At the same time, Directors generally considered that structural measures that do not fall in the core areas of the IMF, but are critical for macroeconomic stability, should remain part of the IMF’s conditionality.

For the low-income countries, Directors noted that the PRSP process provides a natural framework for ensuring collaboration between the staffs of the two institutions in support of a country-led strategy for addressing poverty and fostering sustainable growth. For middle-income countries, collaboration has been more varied and based on a less formal approach, depending in part on the circumstances of the country, and stronger efforts are needed to ensure an effective approach in these cases also.

Looking forward, Directors encouraged the staff of both institutions to move ahead on the basis of the Guidance Note and the approach set out in the progress report, subject to another review no later than the end of 2003. They stressed that the views of the country authorities need to be taken into account in evaluating the effectiveness of collaboration, and they also suggested seeking input from donors, as well as a wider sample of IMF and World Bank staff.

Prolonged Use of IMF Resources

In March 2003, the Board concluded its discussions on prolonged use of IMF resources, based on the report of the IMF’s Independent Evaluation Office (IEO) and the conclusions of a staff task force (see Box 4.3).

Directors appreciated the work of the task force as a key step in following up on the IEO’s candid and comprehensive analysis. Thorough implementation and review of the measures proposed by the task force—along with timely attention to the IEO’s future reports—would be critical to ensure that the work of the IEO makes its maximum contribution to enhancing the listening and learning culture within the IMF.

In their March discussion, Directors generally reaffirmed their observations during the Board’s discussion of the IEO report, in September 2002, regarding the extent and nature of problems posed by the prolonged use of IMF resources. Under proper circumstances, most Directors agreed, long-term IMF financial engagement could be an appropriate response to help member countries address deep-seated problems that, by their nature, required many years to resolve. These problems have been particularly prevalent in low-income countries and countries in transition. Directors also observed, however, that at times prolonged use can be associated with inadequate progress in dealing with a country’s key economic problems, and that, in some cases, prolonged use and the associated policy conditionality can hinder the development of domestic institutions.

The financial implications of prolonged use for the IMF’s regular resources and for PRGF resources also were a possible concern. Directors broadly endorsed a number of measures aimed specifically at cases of prolonged use while stressing that attention should also focus on improving the prospects for successful implementation of all IMF-supported programs. This would be achieved through the adoption of policies and procedures that promote better program design and strong local ownership, along with accountability for outcomes. In that context, Directors also supported the recommendation that Board decisions on the provision of IMF financial support be transparently based on candid assessments by the staff of the risks and constraints involved.

The strategy outlined by the task force received the Board’s broad support. This would entail:

• the rigorous implementation of IEO recommendations to improve surveillance, conditionality, and program design (including the need for greater realism in program objectives and assumptions);

• additional measures to strengthen “due diligence” for prolonged users (including more systematic ex post assessments) and enhance information for decision making; and

• further substantive consideration of issues raised by the IEO in the context of future discussions on surveillance, program design, and the role of the IMF in low-income countries.

As for the priority accorded by the IEO and the task force to making surveillance more effective, Directors felt the diligent implementation of the conclusions of the recent surveillance review (see Chapter 2) would be key to identifying economic weaknesses and building domestic support for sound policies. Directors stressed the need for the staff to combine clarity and candor with a recognition of the social and political realities that shape economic policy; to complement sound advice on economic objectives with discussions of alternative ways of achieving those objectives; and to reach out more broadly, including to legislative bodies.

In addition, Directors noted that the linkage of some forms of donor assistance to the existence of an IMF-supported program, and the IMF’s catalytic role with respect to private financing sources, can result in pressures for IMF lending decisions that contribute to prolonged use. In that context, Directors confirmed the conclusions of their recent discussion on mechanisms for signaling the IMF’s assessment of members’ policies (see Chapter 2).

Systematically monitoring the timely implementation of the various elements of this strategy, in the context of the IMF’s reviews of conditionality, would be important, Directors stressed.