A. Use of Fund Resources—The Legal Framework

8. Fund resources are provided to members to assist them in resolving their BoP problems, in a manner consistent with the Articles of Agreement and subject to adequate safeguards for the temporary use of Fund resources (UFR).³ Article V, Section 3(b)(ii) specifies the conditions governing a member’s use of the Fund’s general resources, which include the requirement that the member represents that it has a need because of its BoP, or its reserve position or developments in its reserves (see Box 3). Under the Articles, a BoP need is a need arising from a member’s balance of payments or its reserve position or developments in its reserves.⁴ The Conditionality Guidelines provide that Fund-supported programs should be directed primarily towards the following macroeconomic goals: (i) solving the member’s BoP problem without recourse to measures destructive of national or international prosperity and (ii) achieving medium-term external viability while fostering sustainable economic growth. IMF-supported programs also help to restore or catalyze support from other creditors and donors. Article V, Section 3(a) requires the Fund to adopt policies on the use of General Resources Account (GRA) resources that will assist members in solving their BoP problems in a manner consistent with the Articles and establish adequate safeguards to ensure that the Fund is repaid. In this regard, among the policies the Fund has adopted are those on access, phasing, conditionality, full program financing, external arrears, debt sustainability, misreporting, safeguards assessments, post-financing assessments, repurchases and overdue financial obligations.

• Conditionality. Beyond reserve tranche purchases,⁵ the Fund is precluded from making its resources available in the absence of conditionality, i.e., in the absence of assurances that: (a) the resources will be used to resolve—rather than delay the resolution of—the member’s BoP problem, and (b) the member will be in a position to repay the Fund in accordance with the relevant maturity schedule.⁶ Conditionality has both ex ante and ex post elements: (i) any request to access Fund resources is approved only if the Fund is satisfied with the content of the member’s policies and the capacity and commitment to implement them; and (ii) any subsequent disbursement is approved based on whether the policy understandings reached with the member (which must be specified in a “Fund arrangement”) are met. Conditionality, therefore, serves the important function of providing the member country with a policy commitment tool that helps overcome time consistency problems, giving confidence that the authorities will implement the policies necessary to address the member’s BoP difficulties.⁷ Conditionality is at the heart of IMF lending, and the Fund’s practices and policies in this regard have evolved over time. The next chapter offers comprehensive guidance on the design of conditionality.

• Phasing and access: Financing under Fund arrangements is typically “phased,” with the member receiving additional tranches of financing as its BoP needs unfold over time and as it meets additional or incremental conditions. This phasing helps to reduce risks to the Fund by linking financial exposure to the member’s actions to solve its BoP problem and strengthen its position to repay the Fund.⁸ Program reviews provide a framework for the IMF Executive Board to assess whether the program is broadly on track and whether modifications are necessary.⁹ Moreover, access to Fund resources is subject to limits, exceptional access policy and norms (in the case of the PRGT) policies to ensure adequate safeguards to Fund resources (sections E and F provide further guidance).

• Debt sustainability is a prerequisite for medium-term viability, the success of the program, and safeguarding Fund resources. It is required for all Fund financing and is assessed using Board-approved debt sustainability frameworks (MAC-DSA or LIC-DSF).

• Overdue financial obligations. The Fund cannot lend to members with overdue financial obligations to the IMF.¹⁰

9. UFR requirements are operationalized differently under the General Resources Account (GRA) and the Poverty Reduction and Growth Trust (PRGT). All IMF members are eligible to request Fund financing in the GRA.¹¹ The IMF also provides concessional financial support through the PRGT, with eligibility to these resources being limited to a subset of IMF members, specifically, low-income countries (LICs).^12,13 While there are similarities between GRA- and PRGT-supported programs, important distinctions exist. For example, GRA-supported programs are designed to resolve the member’s BoP problems, that is, the policy measures needed for this purpose should be undertaken during the program period. In contrast, the purpose of programs supported by the Extended Credit Facility (the primary instrument in the PRGT) is to help PRGT-eligible members with protracted BoP problems to make significant progress towards a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth (see Box 2).

10. Access to Fund resources requires the presentation of a BoP need. Article V, Section 3(b)(ii) specifies that a member may use the Fund’s GRA only to the extent that it has a BoP need, arising from “its balance of payments or its reserve position or developments in its reserves” (see Box 4 for elaboration on legal concept of BoP need, and Box 5 for economic quantification of BoP need). This broad definition of BoP need has proven to be sufficiently flexible to enable the Fund to provide financing in a variety of situations over time. Access to PRGT resources is also subject to the presence of a BoP need over the course of the program. In the PRGT, while the general principles for financing are similar to those under the GRA, the legal basis and framework are different. Under the PRGT instrument, the purpose of PRGT financing looks not only to the BoP of eligible members but also to the achievement or maintenance of stable and sustainable macroeconomic positions consistent with strong and durable growth and poverty reduction (Section I, paragraph 1(a) of the PRGT Instrument).

11. It should be noted that while it is not necessary for an actual BoP need to exist when an arrangement is approved, an actual BoP need is required to make a purchase under the GRA, and for all non-ECF PRGT disbursements. Under both GRA and PRGT, the presence of an actual BoP need is not necessary for the approval of a Fund arrangement. Thus, unless otherwise specified in an individual facility, e.g., the SLL which requires that the BoP need be potential at the time of approval of an arrangement, a Fund arrangement may also be approved based on a prospective or potential BoP need. However, a purchase in the GRA requires a member’s representation of an actual BoP need (Article V, section 3(b)(ii)). The same rule applies for PRGT disbursements, except in the case of Extended Credit Facility (ECF), where the presence of a protracted BoP problem entails a financing need over the course of the arrangement, though not necessarily at the time of approval or individual disbursements.¹⁴

12. As a complement to Fund-supported programs, the newly established Resilience and Sustainability Trust (RST) acts as a third pillar of the IMF lending toolkit, by focusing on longer term structural challenges.¹⁵ Operationalized in October 2022, resources from the RST are expected to help address qualifying longer-term structural challenges, initially those associated with climate change and pandemics preparedness. The RST provides loans to eligible members in order to enhance their economic resilience and sustainability by (i) supporting policy reforms that reduce risks associated with longer-term structural challenges facing the member and (ii) augmenting policy space and financial buffers to mitigate the risks arising from such longer-term structural challenges-thereby contributing to the member’s prospective BoP stability.¹⁶ RST loans provide general BoP support and are not earmarked for specific projects but used to address a range of BoP needs including (i) covering any shorter-term BoP/fiscal needs directly associated with the implementation of RST-supported policy reforms, (ii) increasing policy space for fiscal spending and reforms associated with qualifying longer-term structural challenges and (iii) augmenting longer-term buffers to strengthen the member’s ability to face shocks linked with qualifying structural challenges.¹⁷ Access to resources under RST is subject to qualification criteria, including for the member country to have a concurrent Upper Credit Tranche (UCT)-quality IMF-supported arrangement or instrument (“UCT program”) under an SBA, EFF, FCL, PLL, SCF, ECF, or PCI with at least 18 months remaining prior to expiry.¹⁸

B. Diagnosing BoP Problems and Setting Program Objectives

13. The causes of BoP problems are varied and complex, and can be domestic, external, or both. Domestic factors could include inappropriate fiscal and monetary policies that can lead to buildup of large imbalances over time, e.g., in the form of fiscal and current account deficits. An exchange rate kept at an inappropriate level can erode competitiveness and lead to persistent current account deficits and depletion of reserves. Political instability and/or weak institutions can also trigger crises when vulnerabilities abound. External factors include natural disasters, commodity price shocks, or spillovers from other countries. BoP problems can manifest in the country’s current account (weak exports, rising imports, decline in remittances), or in the capital and financial account, when a country faces a reduction in financing. Often interaction of multiple factors is at play, such as:

• Large terms of trade shocks (e.g., commodities shocks in 2008, 2014/15, and 2021/22).

• Large and persistent fiscal and current account deficits due to inappropriate macroeconomic policies, structural factors, and/or large developmental needs, particularly in LICs.

• Government debt vulnerabilities and difficulties in budget financing, e.g., due to large financing needs that cannot be met at affordable rates (e.g., Ghana 2023 ECF, Argentina 2022 EFF, Ecuador 2020 EFF, Argentina 2018 SBA; Greece 2012 EFF; Iraq 2005 and 2007 SBAs; and Jamaica 2013 EFF).¹⁹

• Overvalued exchange rates and large current account deficits (e.g., Ethiopia 2019 ECF-EFF; Angola 2018 EFF; Egypt 2016 EFF).

• External imbalances due to oversized financial sectors (Cyprus 2013 EFF; Iceland 2008 SBA).

• Natural disasters (e.g., Haiti 2010 ECF; Nepal 2015 RCF; Samoa 2013 RCF), geopolitical developments (e.g., Ukraine 2014 and 2022), and outbreak of contagious diseases (e.g., provision of emergency financing RFI/RCF to more than 70 countries in the aftermath of the COVID-19 pandemic, and in the aftermath of other contagious disease outbreaks as in Guinea 2014 RCF; and augmentation of access to Liberia 2012 ECF and Sierra Leone 2013 ECF; Liberia 2015 RCF).

• Deposit runs, sudden capital stops, confidence crises: investors and/or depositors may lose confidence in a country’s policies and prospects leading to asset sales, capital flight, or deposit runs (e.g., Argentina 2018 SBA; Brazil 2002 SBA; Iceland 2008 SBA; Ireland 2010 EFF; and Latvia 2008 SBA).

• While not necessarily posing imminent BoP problems, longer-term structural challenges such as those associated with climate change could also give rise to BoP needs, e.g., owing to the need for additional fiscal spending or capital imports to facilitate climate transition. Not addressing such challenges could have adverse consequences for the member’s prospective BoP stability.

14. Documents requesting a Fund arrangement/financing should include an in-depth diagnosis of the BoP problem to underpin the envisaged package of policy adjustment and financing. In Policy Notes (PN) and Staff Reports (SR), staff should prominently discuss the underlying factors, e.g., domestic vulnerabilities, and external shocks, that have caused (or may cause) BoP problems. The depth and emphasis of discussion would depend on country circumstances and aspects relevant for the country’s external stability. Use of Fund’s external sector assessment tools is strongly encouraged in analyzing and quantifying the extent of external imbalances (e.g., extent of misalignment of the exchange rate and current account from levels implied by fundamentals).²⁰ Staff may find it useful to discuss the imbalances by focusing on economic sectors (government, household, corporate, financial), their linkages and/or on the interplay of exogenous shocks and domestic policy imbalances.

15. Analysis of the BoP problems should be linked to a discussion of the nature of the BoP need to inform the choice of financing modalities and duration of adjustment needed. A BoP need can be categorized as either (i) actual BoP need that the member is presently facing (a need that has materialized) i.e., exists in the current period; (ii) prospective –projected to arise in the future, including under the baseline macroeconomic scenario of the Fund-supported program; or (iii) potential – may arise under an alternative, typically downside, macroeconomic scenario, but is not expected under the baseline scenario. An actual need may also be urgent, specifically when the failure to address the external financing gap would result in an immediate and severe economic disruption. In addition, a BoP need can be short-term, which for the purposes of the SCF is a need expected (or in the case of a potential BoP need that would be expected) to be resolved within two years, and in any case in less than three years. In contrast, a BoP problem is considered to be protracted²¹ if the resolution of underlying macroeconomic imbalances would be expected to last three years or more.²² The nature of BoP need is a key component in determination of financing instrument and relatedly the duration of adjustment, as discussed in Section C.

C. Identifying Program Objectives

16. Guided by the primary goal to address the country’s BoP problems, ²³ staff should develop specific program objectives that will in turn guide quantitative and structural conditionality. The specification of objectives should draw closely on the analysis of the causes of BoP problems, and aim to address the key macroeconomic imbalances, structural weaknesses, and governance vulnerabilities. While broad objectives are useful for communicating the high-level messages, staff should strive to define narrower operational objectives that provide a measurable link to conditionality and adjustment policies. Table 2 provides some examples.

^{Table 2.}

Examples: Linking the Causes of BoP Problems to Program Objectives and Conditionality

Note. Examples are hypothetical and illustrative and are not intended as one-size-fits-all policy advice.

^{Table 2.}

Examples: Linking the Causes of BoP Problems to Program Objectives and Conditionality

Nature and Cause of BoP Problem	High-Level Objective	Operational Objective	Conditionality Example
Actual – reserves depleted by persistent trade deficits and overvalued exchange rate	Rebuild external buffers and improve competitiveness	Greater exchange rate flexibility	Quantitative Performance Criteria (QPC) on Net International Reserves (NIR) to encourage build up reserves; Limits on central bank FX interventions to encourage adjustment through exchange rate flexibility
Prospective – difficulty in meeting government’s large FX financing needs	Reduce deficit and government financing needs and smooth it over time	Bring debt to GDP and gross financing needs to below prudent thresholds	QPC on primary fiscal deficit; Use of debt-related conditionality as appropriate (see Debt)
Potential – reserves could drop below prudent levels in the face of external shocks that lead to nonresident deposits withdrawals	Improve resilience to external shocks	Increase foreign currency liquidity buffers in the banking system	Introduce/increase reserve requirement for foreign currency deposits

Note. Examples are hypothetical and illustrative and are not intended as one-size-fits-all policy advice.

View Table

^{Table 2.}

Examples: Linking the Causes of BoP Problems to Program Objectives and Conditionality

Nature and Cause of BoP Problem	High-Level Objective	Operational Objective	Conditionality Example
Actual – reserves depleted by persistent trade deficits and overvalued exchange rate	Rebuild external buffers and improve competitiveness	Greater exchange rate flexibility	Quantitative Performance Criteria (QPC) on Net International Reserves (NIR) to encourage build up reserves; Limits on central bank FX interventions to encourage adjustment through exchange rate flexibility
Prospective – difficulty in meeting government’s large FX financing needs	Reduce deficit and government financing needs and smooth it over time	Bring debt to GDP and gross financing needs to below prudent thresholds	QPC on primary fiscal deficit; Use of debt-related conditionality as appropriate (see Debt)
Potential – reserves could drop below prudent levels in the face of external shocks that lead to nonresident deposits withdrawals	Improve resilience to external shocks	Increase foreign currency liquidity buffers in the banking system	Introduce/increase reserve requirement for foreign currency deposits

Note. Examples are hypothetical and illustrative and are not intended as one-size-fits-all policy advice.

17. Importantly, in helping the authorities design a Fund-supported program, objectives should be formulated in discussion with them, and their preferences and policy choices should be accommodated, subject to consistency with resolving BoP problems, macroeconomic stability and all other program goals.²⁴ To the extent possible, program objectives should be aligned with the authorities’ own reform plans (e.g., national reform plans and PRGS country strategy²⁵) including on growth, labor market, and distributional targets, subject to consistency with the overarching objective of resolving the BoP problems. This would help to maximize program ownership and increase chances of program success (see discussion of structural conditionality).

18. Staff should also draw on issues identified in previous discussions with the authorities, where relevant. Staff should consider issues raised in previous Article IV consultations, technical assistance missions, staff visits, ex-post evaluations, Financial Sector Assessment Programs, and bilateral meetings. These issues may represent a subset of the authorities’ broader policy agenda and longer-term goals, or intermediate steps toward those goals, and should be identified as specifically as possible. In the context of PRGT lending, it is expected that goals that extend beyond the program period would be addressed in the context of a potential successor arrangement or in some other dialogue with the authorities, such as in the context of surveillance.

19. Staff should also consider whether specific governance-related conditions are called for. Under the Fund’s 2018 Framework for Enhanced Fund Engagement on Governance to determine whether reforms to address governance vulnerabilities should be a condition for the use of the Fund’s resources, the Fund will assess (i) the severity of governance vulnerabilities; and (ii) whether addressing the identified vulnerabilities is of critical importance for achieving the goals of the member’s program. Arrangement approval and/or program reviews could be suspended or delayed if there is a reason to believe that poor governance could have significant macroeconomic implications threatening the successful implementation of the program or puts in doubt the purpose of the use of Fund resources. In the case of delayed approval or review, measures to at least begin to address governance/corruption issues should be in place before the resumption, including through specific conditionality.²⁶

D. Choosing the Instrument or Facility

20. The choice of instrument or facility should reflect the nature of BoP problems, the underlying use of GRA and/or PRGT resources, and the appropriate conditionality standard:

• GRA and PRGT instruments/facilities. All Fund members are eligible to access the Fund’s resources in the GRA under the Articles of Agreement. All members requesting access to Fund financial support from the GRA are required to meet the provisions of the Articles of Agreement as well as policies adopted thereunder, including to safeguard the temporary use of the Fund’s general resources. A subgroup of the membership is also eligible for concessional financial support under the PRGT. The PRGT eligibility framework—introduced in 2010 and evolving since—includes transparent and rules-based criteria to guide decisions on the eligibility of countries to access the Fund’s concessional facilities.²⁷ These members are eligible, but not obliged, to use such concessional financing. Given the financial advantages of concessional financing, staff should continue to advise PRGT-eligible members to seek financing under the PRGT facilities up to the applicable access limits. If the size of the BoP need exceeds the access limits of the PRGT, or if the member prefers to access or is presumed to blend GRA resources, consideration of a request for support from the GRA would be based on the relevant policies governing access to the GRA, including those that pertain to program strength, capacity to repay the Fund, and debt sustainability. The Fund has noted that for PRGT-eligible members with weak capacity to service non-concessional debt, GRA financing—with higher interest rates and shorter maturities—may not be suitable relative to concessional financing under the PRGT.²⁸ This concern over capacity to service debt is addressed under Fund policy through a rigorous assessment of capacity to repay, and applies to all members of the Fund.²⁹ Members that are presumed blenders can access PRGT resources only in a blend with GRA resources. Those PRGT-eligible members that are presumed to blend are expected to mix PRGT and GRA resources with a 1:2 ratio subject to a cap on PRGT resources of 145 percent of quota per arrangement and to the overall limits on access to PRGT resources. See Annex W for relevant considerations and restrictions.

• The nature of the BoP problem and the duration of adjustment needed. If a country is facing serious medium-term BoP problems because of structural weaknesses or experiences protracted BoP problems (in the PRGT context), the resolution of underlying macroeconomic and structural imbalances would normally be expected to take three years or more. In a country with a short-term BoP need, the adjustment is expected to be resolved in two years. The duration of the expected adjustment period should guide the choice of the financing instrument.

• Borrowing under Fund-supported programs must meet upper credit tranche (UCT) standards.³⁰ Programs meet the UCT-conditionality standard when they are designed to provide substantial justification that a member’s BoP problems are being addressed and resolved, and adequate confidence to the Fund that the improvements in resolving such BoP difficulties will allow the member to repay Fund resources by the time repurchases fall due.³¹ A systematic process of ex post assessments is in place to help ensure that prolonged use of Fund resources does not reflect failures in the design and implementation of programs (see Annex F).Some financing instruments (FCL, SLL) do not support programs with ex post conditionality and make available resources to assist members to solve their BoP difficulties where the members meet stringent qualification criteria (i.e., ex ante conditionality).³²

21. To determine the appropriate facility for a particular country case, the following rules of thumb can be a useful guide (see Figure 1):

• If a country faces a short-term BoP problem that involves an actual BoP need, it could be supported under the SBA or SCF.

• If a country faces an urgent BoP need, emergency financing via an RFI or RCF (or a blend of both for PRGT-eligible countries meeting the blending criteria) could be used, subject to meeting all relevant qualification criteria, when (i) the member has an urgent BoP need that is expected to be resolved within one year without major policy adjustment being necessary, or (ii) such adjustment is necessary but the country is unable to design or implement a UCT-quality program (or bring such a program back on track) due to the urgent nature of the BoP need such as where it would take time to put in place an arrangement.

• If a country faces a protracted BoP problem or a serious medium-term BoP problem, it could be supported under the EFF or ECF (the latter for PRGT eligible members), which feature a longer repayment period, and longer program engagement—to help countries implement medium-term structural reforms.³³

• If a country faces a potential short-term BoP need, then SBA or SCF could be used on a precautionary basis, with actual disbursements/purchases, if or when an actual BoP need arises.³⁴ An FCL, SLL or PLL arrangement treated as precautionary could also be considered if the member meets the qualification criteria. There is no list of members that pre-qualify for PLL, SLL or FCL, and if a member is interested in PLL, SLL or FCL, staff should follow the established procedures to initiate a confidential qualification assessment process.³⁵

• If a country does not need Fund financial support, and is seeking to signal commitment to an economic reform agenda with intensive monitoring by the Fund that can also help unlock financing from other creditors, it could be supported under a signaling non-financing instrument (PCI).

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Choice of Lending Instrument

Citation: Policy Papers 2024, 004; 10.5089/9798400264849.007.A001

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22. For countries that are not in a position to implement a UCT-quality standard program—informal arrangements can pave the way for a full-fledged Fund-supported program.³⁶ Staff-monitored programs (SMPs) — informal agreements between a member and Fund staff — can be used to establish or reestablish a track record of policy implementation to pave the way toward a Fund arrangement (or bring an arrangement back on track) where the authorities cannot implement a UCT-quality program. Under the HIPC Initiative, SMPs can also be used as an instrument to build a track record toward the decision point.³⁷ A track record is normally understood to demonstrate a member’s commitment and adequate capacity to implement economic policies, including credible data submission, that are consistent with the stated objectives of the member’s economic program as assessed by staff, and thereby provide a good basis to progress to a Fund financial arrangement. SMPs have been predominantly used by low-income fragile and conflict affected states that typically have limited institutional and policy implementation capacity. SMPs may be used by members receiving support under the RFI/RCF that need to build track record requirements towards a UCT Fund arrangement or for repeat use of emergency financing, but they should not be used for signaling purposes—a practice discontinued in 2003.^38,39 SMPs are also a useful option for helping manage extended program interruptions. Off-track programs are often associated with weaker ownership and performance, and an SMP can ensure continued monitoring of macroeconomic policies while authorities build political support for critical reforms, the delayed implementation of which may have interrupted the program. SMP-related documents also provide information to the Executive Board and the public on development in off-track programs.

23. In 2022, the IMF Board approved an amendment to the policy on SMPs that allows for limited Executive Board involvement. The amendment gives the Executive Board an additional role in an SMP to opine on the robustness of a member’s policies to meet their stated objectives under an SMP and monitoring its implementation. To differentiate from regular SMPs, such SMPs are called “Program Monitoring with Board Involvement” or “PMBs”. Their use is only available to those (requesting) members who, in addition to seeking to build or rebuild a track record for a Fund arrangement that supports a UCT-quality program, would benefit from limited Executive Board involvement because of either (i) an ongoing concerted international effort by creditors or donors to provide substantial new financing or debt relief in support of the member’s policy program or (ii) significant outstanding Fund credit under emergency financing instruments at the time new emergency financing is received.⁴⁰ The PMB supports members in designing, implementing, and monitoring policies under often complex circumstances.⁴¹

24. Members that do not have a need for Fund financing, may choose the non-financing instrument, the Policy Coordination Instrument (PCI). The PCI is available to all Fund members to assist countries in formulating and implementing a macroeconomic policy program. The instrument aims to promote a close dialogue with members at regular frequencies and require institutional and policy implementation capacities adequate for carrying out a UCT quality program, which is one distinguishing feature of the PCI relative to the SMP (see ¶22).⁴² It could also help catalyze support from other sources. Moreover, the PCI could be used concurrently with an SBA and/or SCF arrangement, or with an RFI/RCF, if a BoP need arises once a PCI is underway. The PCI is also a qualifying UCT-quality instrument for purposes of an RSF arrangement. As of October 2023, the PCI has been used concurrently with the RFI/RCF in four countries and with the SBA/SCF (Senegal) and RSF (Rwanda). ⁴³

25. Use of Resilience and Sustainability Facility (RSF) support. Operationalized in 2022, the purpose of the RSF is to provide the RST-eligible members with longer-term financing to strengthen economic resilience and sustainability by (i) supporting policy reforms that reduce macro-critical risks associated with climate change and pandemic preparedness, and (ii) augmenting policy space and financial buffers to mitigate the risks arising from such longer-term structural challenges. To qualify for an RSF arrangement, inter alia eligible members will need (i) a package of high-quality reform measures addressing one or more of the qualifying longer-term structural challenges (e.g., climate change or pandemic preparedness); (ii) have (or request) a concurrent “UCT program” under an SBA, EFF, FCL, PLL, SCF, ECF, or PCI with at least 18 months remaining prior to expiry; and (iii) have sustainable debt and adequate capacity to repay the Fund.⁴⁴

E. Determining the Level of Access to Fund Resources

26. Access considerations. Under existing policies, the key criteria that governs decisions on access to Fund resources in individual country cases are:⁴⁵

• The member’s actual or potential need for Fund resources, taking into account other sources of financing and the desirability of maintaining a reasonable level of reserves. See Box 4 for guidance on estimating this.

• The member’s capacity to repay the Fund, which takes into account the strength of its adjustment program including the extent to which it will lead to a strengthening of the member’s BoP by the time that repurchases/disbursements begin to fall due. This, inter alia, takes into account the member’s policy plans, adjustment effort, commitment to implement the program, institutional capacity, and country circumstances such as vulnerabilities, imbalances, and debt sustainability (Figures 2 and 3).

• The amount of outstanding Fund credit and the member’s track record of past use, which also factors into a judgment on the appropriate scale of further use of the Fund’s resources.

All else being equal, higher access would generally be associated with a stronger program, stronger track record of policy implementation, and stronger capacity to repay. These criteria are broad and making them operational involves substantial judgment, even more so when access is requested on a precautionary basis, in which case the starting point is the risk of a plausible adverse scenario that takes into consideration the above factors.

27. Access to Fund resources would typically be less than total financing needs, given the Fund’s catalytic role in attracting non-Fund financing. In determining access, guided by access criteria, staff should strike the balance between the need for policy adjustment, financing from other sources, and residual IMF financing. As shown in the 2018 RoC, PRGT-supported programs are typically more catalytic— mobilizing other official and private flows—and entail less policy adjustment as financing is used to support growth and poverty reduction objectives. GRA-supported programs are expected to catalyze non-Fund financing (to promote burden sharing and avoid accumulation of non-restructurable super-senior debt) and those aiming to address short-term BoP problems may envisage a more adjustment-heavy mix (see Box 4).

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How Should Financing Gaps be Closed?

Illustrative Stylized Considerations

Citation: Policy Papers 2024, 004; 10.5089/9798400264849.007.A001

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Illustrative Considerations in Determining the Adjustment Package

Citation: Policy Papers 2024, 004; 10.5089/9798400264849.007.A001

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28. Documents for UFR should include a table of Gross Needs and Sources of External Financing and demonstrate the need for and the role of Fund resources. The table facilitates diagnosis, prescription, and communication of policies, and helps shed light on the causes of vulnerabilities by sector and type of flows. A sufficiently detailed table could usefully include sources of financing needs arising from the external current account deficits, debt service needs by the government and private sector, and by type of creditor (e.g., multilateral, bilateral, or bond repayments) to provide a clear picture of financing needs. On the financing sources, sufficient detail needs to be provided on the sources of financing broken down by the type of creditors (e.g., multilateral, bilateral, and private sector) and by the type of the instruments (e.g., FDI flows, portfolio debt flows, and loans). Such detailed breakdown is a crucial input in clearly showing the vulnerabilities arising from financing needs by different sectors, and assessing the realism of financing assumptions (are rollover rates realistic? Are inflows from the private or public creditors realistic?). When the main source of BoP gap is the fiscal financing gap, and the program is extended for budgetary support, demonstrating the link between budgetary financing needs and the BoP need is particularly important. In such cases, either the fiscal accounts table needs to provide adequate details on the financing of the deficit (broken down by domestic and external financing), or a separate “gross fiscal financing needs and sources” should be provided. See Ghana 2023 ECF (Tables 5 and 2c) and Ecuador 2022 Sixth Review EFF (Tables 3 and 5) for examples of “gross external financing needs and sources” and “gross fiscal financing needs and sources.”

29. Access limits (Figure 4). Individual amounts approved under Fund arrangements and emergency assistance is determined on a case-by-case basis by application of access policy criteria. In addition, access to Fund resources is also guided by access limits, access norms in the case of PRGT, and special procedures for higher access. Overall access limits to financing in the GRA and under the PRGT take the form of annual and cumulative limits, which do not cap the access but act as a threshold for triggering the application of higher scrutiny under Exceptional Access (EA) policies, which entail meeting substantive criteria and procedural requirements including early Board consultations. The appropriateness of access limits is reviewed regularly including most recently in March 2023 with respect to the GRA. The current GRA annual access limit, defined as the sum of past and future scheduled purchases/disbursements in any 12-month period, is 145 percent of quota (temporarily raised to 200 percent of quota through March 2024); the cumulative access limit, defined as the sum of total outstanding purchases/disbursements (net of scheduled repurchases/repayments) at any point in time (including any purchases/disbursements made available but not drawn in the context of a current arrangement), is 435 percent of quota (temporarily raised to 600 percent of quota through March 2024). The PRGT annual and cumulative access limits were left unchanged at 145/435 percent of quota, respectively. Access above either the GRA or PRGT limits is subject to meeting provisions and procedures set in the EA Framework.⁴⁶ In the case of PRGT, there are also access norms.⁴⁷ Norms provide guidance on what may constitute an appropriate level of access under certain PRGT facilities, but they should not be misconstrued as access limits or an entitlement. To gauge the potential Fund access under a contemplated arrangement against the annual and cumulative access limits, the staff could use the What-IF tool developed by Finance department.

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Annual and Cumulative Access Limits (as of March 2023)

Citation: Policy Papers 2024, 004; 10.5089/9798400264849.007.A001

Note. Please see IMF website for factsheets for information on terms for various financing instruments and facilities (e.g., SBA, EFF, RFI, FCL, PLL, SLL, SCF, ECF, RCF).1/ See pg. 21 of Temporary Modification to the Fund’s Annual and Cumulative Access Limits (Policy Paper No. 2023/005, March 6, 2023).2/ See Table 2 and Box 1 in 2023 Handbook of IMF Facilities for Low-Income Countries for a summary of norms, limits, and procedural safeguards. The PRGT lending framework has high access procedural safeguards, which are applied when a financing request entail proposed access such that i) access to PRGT resources over any 36-month period would exceed 240 percent of quota (“flow trigger”), or ii) aggregate exposure to the PRGT, net of repayments, would exceed 300 percent (“stock trigger”).3/ See Policy Safeguards on High Combined Credit to the GRA-PRGT (PS-HCC), 2020 and Boxes 2a-b in 2023 Handbook of IMF Facilities for Low-Income Countries.

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30. The EA framework is an important element of the Fund’s risk management framework, which requires application of careful scrutiny to high-access cases. EA criteria and related procedures for high levels of financing from the GRA were initially introduced in 2002 in response to concerns about the predictability of conditions under which EA would be extended, as well as the need for higher scrutiny given to Fund lending decisions that entailed very high levels of access. These criteria and procedures seek to provide greater confidence that EA remains limited to cases where members experience an exceptional balance of payments need, and that member will be able to overcome their BoP difficulties, and ultimately, Fund resources will be repaid, and borrowers will not be faced with debt service challenges in situations where they have accumulated a large stock of non-restructurable debt. There are two EA policy frameworks and a framework for enhanced scrutiny for high combined access relevant here: an EA framework for access to GRA resources, an EA framework for access to PRGT resources and a framework applying to any Fund member with high combined access to GRA and PRGT resources. See Annex K for details on procedures and substantive criteria in GRA, PRGT and combined cases.⁴⁸

F. Reviews and Phasing

31. Most arrangements involve the provision of Fund resources in installments (Phasing). Access would normally be phased as evenly as possible throughout the arrangement period, but frontloading may be appropriate taking into account different factors, including the timing of member’s BoP needs, the member’s policies, timing of key reforms, the external economic environment, the sequencing of financing from other sources, and the desirability of maintaining a reasonable level of reserves, and provided that there are adequate safeguards in place to Fund resources – see Annex C for further details. Broadly speaking, phasing is expected to be correlated with adjustment and reform – i.e., front-loaded access would be expected to be associated with front-loaded reforms, since reform implementation provides safeguards for the use of Fund resources.⁴⁹ Another key consideration for uneven phasing is how to incentivize the authorities to stay the course of policies and maintain the program on track The phasing of access approved at arrangement request can also be modified during the course of the arrangement in the context of reviews, whereby developments in policies and timing of BoP needs are taken into consideration.⁵⁰

32. A program review will be completed only if the Executive Board is satisfied, based on the member’s past performance and policy understandings for the future, that the program remains on track to achieve its objectives. In making the backward-looking assessment, the Executive Board will take into consideration, in particular, the member’s observance of conditionality (discussed in section III), which should be specified as fully and transparently as possible in the arrangement.⁵¹ The forward-looking components of reviews include assessing the prospects of achieving the program objectives, based on the latest available information, setting conditionality beyond the first year of a multi-year program, and modifying program objectives or conditionality as new information becomes available, e.g., if additional adjustment is needed owing to changes in economic conditions, or to augment access in the face of a new shock. Lastly, the last program review can be used to take stock and, where possible, provide a preliminary assessment of stated program goals and their achievement and of the experience with program implementation.⁵² Staff should apprise the authorities about any subsequent post-financing assessment (PFA) at the time of the access discussions as well as the last review, when applicable. See Annex I on PFA.

33. Reviews also provide the framework to set and/or modify conditionality (more in section III). Conditionality is generally expected to cover the 12 months following program approval/review or through end-program whichever comes sooner. Every effort should be made to include performance criteria initially for as much of each 12-month period of a Fund GRA arrangement as possible. However, it may not always be possible to establish in advance one or more quantitative performance criteria for each 12-month period of the arrangement because of substantial uncertainties about major economic trends and normal time lags between the completion of program discussions and Executive Board discussion. Quantitative performance criteria (alongside supporting structural benchmarks) should normally be included initially which would govern purchases over a period of at least six months of an arrangement. Indicative targets would normally be included at the outset for that part of each 12-month period of an arrangement for which performance criteria are yet to be established.⁵³ Conditions added during reviews should be anchored upon the program initiating document and those added in new reform areas would require a clear justification as to why the related measures had become critical to achieving program goals.

34. Reviews are expected to be held every six months but could be more frequent in some circumstances. Pursuant to streamlining proposals supported by the Board,⁵⁴ most programs are designed with a semi-annual review cycle. However, if a member is particularly vulnerable and risks to the program strategy are acute due to substantial uncertainties concerning major economic trends or policy implementation, staff could consider more frequent (quarterly) monitoring.⁵⁵ It is also possible to change the review frequency from semi-annual to quarterly if unforeseen risks emerge during the program or for programs with a poor track record. It should be noted that the PRGT instrument requires availability dates for the disbursements to not be phased more than 6 months apart. This rule does not apply to the interval between approval of the ECF (and SCF) arrangement and the first review, which may be spaced more than 6 months apart if circumstances so warrant.⁵⁶

35. Moreover, subject to conditions, combined reviews can be considered when there have been delays in completion of reviews but the program is on track with respect to the most recent review and sufficient corrective action has been taken to offset the nonobservance of the conditions for earlier reviews. Arrangements can also be extended, including to add additional reviews, subject to conditions. Extensions can be approved for the purposes of rephasing to change the amounts of financing associated with specified reviews and/or change the number or timing of disbursements and reviews. See Annex B for details on and cases where such program modifications are warranted.

36. Financing assurances. The Fund’s policy on financing assurances requires that arrangements can only be approved (and reviews can only be completed) when the program is fully financed. This means that donors and official creditors have furnished assurances that they will provide the necessary support (through new loans and/or refinancing) to meet the program financing requirements on terms consistent with the member’s return to external viability. In the event the Fund is providing financial assistance to a member that has outstanding sovereign external payments arrears to private creditors or that, by virtue of the imposition of exchange controls, has outstanding non-sovereign external payments arrears, the financing assurances review determines whether adequate safeguards remain in place for the further use of the Fund’s resources in the member’s circumstances and whether the member’s adjustment efforts are undermined by developments in creditor-debtor relations. ^57,58 Specifically, SRs at arrangement approval and each review should confirm that (i) firm commitments of financing are in place for the first 12 months following approval of the arrangement and program reviews, and (ii) good prospects are in place that there will be adequate financing for the remaining arrangement period. The above general policy for financing assurances was amended in March 2023 for cases where UCT financing is confronted by “exceptionally high uncertainty”. Where specific conditions are met and procedural safeguards are followed, the policy allows for UCT financing where official bilateral creditors provide an upfront credible and specific assurance covering what is needed to restore debt sustainability under a baseline scenario, and an upfront assurance to provide the necessary financial support to restore debt sustainability in a second stage once the exceptionally high uncertainty abates.⁵⁹ Staff must also determine that the member country has the capacity to repay the Fund based on the totality of circumstances, including medium-term projections of the BoP and the provision of a set of indicators of the capacity to repay the Fund. The application of the policy requires assessing that the country case meets the five specific criteria defining “exceptionally high uncertainty” under the policy, namely that (i) it originates from an exogenous shock outside of authorities’ control; (ii) the shocks’ impact on the economy depends on events fundamentally outside of the control of the authorities’ economic policies; (iii) there are severe and continuing BoP needs that are difficult to assess; (iv) it is difficult to establish a single “central” scenario or the situation involves adverse tail risks where impacts continue beyond the usual program timeframe; and (v) standard upfront debt write-downs are impaired by the lack of a sufficiently central scenario (see ¶13 in Policy Paper No. 2023/007 for details). Additionally, in view of the risks of engaging in UCT lending under exceptionally high uncertainty, the policy entails procedural safeguards (see IMF PR23/78 and ¶18 in Policy Paper No. 2023/007), including an early consultation with Executive Directors about engagement under exceptionally high uncertainty to determine whether these circumstances are present and whether the Fund is prepared to accept the risks that a UCT arrangement would entail.

37. If a program goes off track, staff should consider a range of procedural options to inform the Board and help bring the program back on track. In cases of major delays in the completion of a review, the Managing Director will inform Executive Directors in an appropriate manner.⁶⁰ To bring programs on track, both for GRA and PRGT-supported program, staff should explore with the authorities the merits of starting an SMP. The voluntary use of SMPs can help ensure monitoring of macroeconomic policies, while the authorities build political support for the critical reforms, whose delay has interrupted the program.⁶¹

G. Diagnosing and Managing Risks to Programs—Realism

38. Macroeconomic realism matters for program success. Optimistic growth assumptions, partly driven by an underestimation of the impact of policy adjustment and overestimation of structural reform payoffs, understate the financing and adjustment required to achieve program objectives, with consequences for program implementation and success (2018 Review of Program Design and Conditionality). In addition, unrealistic financing assumptions in programs, could lead to underestimation of needed adjustment and give rise to distortionary and undesirable financing measures. Accordingly, both domestic and external financing should be cross-checked for realism, to avoid incurrence of domestic arrears, financial repression, a deepening sovereign-financial sector nexus under the program, and pressure for monetary financing. Various tools are available to staff to achieve more realistic baseline projections (see Annex X on realism tools):

• Tools provided in debt sustainability frameworks (DSFs). Tools embedded in DSFs are intended to gauge the realism and sensitivity of baseline program projections. They should ideally be used early on as part of the iterative process of producing the baseline macroeconomic framework. They allow assessing, inter alia, the realism of the planned fiscal adjustment, the consistency between fiscal adjustment and growth assumptions under a range of plausible fiscal multipliers and demonstrate the historical and future drivers of debt dynamics. DSFs also provide numerous stress tests to gauge the sensitivity of debt projections and financing needs to changes in assumptions under a range of scenarios. In this context, staff should discuss prominently in program documents the realism of baseline growth projections by leveraging, at a minimum, (i) the fiscal adjustment and growth realism tool under the SRDSF and LIC DSF; (ii) the real GDP growth and output gap realism tools under the SRDSF; and (iii) the realism tool assessing the consistency between public investment and growth under the LIC DSF.⁶² In cases where the tools flag large differences from cross-country or the country’s historical experience, staff should systematically provide explanations as to why the flags triggered do not signal overoptimism.⁶³ The discussion could be developed in the “Outlook and Risks” section of PNs and SRs and will be required for Fund arrangement requests and program reviews with a significant growth deviation relative to previous projections.⁶⁴ For PRGT program countries, the LIC DSF framework requires long term (20-year) growth projections, which should be discussed jointly with the World Bank and covered in the “Outlook and Risks” with due consideration given to the country’s stage of development, exposure to natural disasters, and resource extraction activities (where relevant).

• Other tools. Depending on data availability and country circumstances, staff is strongly encouraged to use additional tools to improve the realism of baseline projections. These could include forecast evaluation tools to identify potential forecast biases and flag projections that warrant further scrutiny (e.g., country forecast performance tool, the country data annex, and the Debt-Investment-Growth model and its extensions to assess the macroeconomic effects of public investment scaling-ups).⁶⁵ Another possibility is to report findings from counterfactual analyses to help motivate operational advice.

39. Program risks and mitigating measures should be given prominence in program documents.⁶⁶

• Qualitative discussions. Program documents are expected to present the key external and domestic risks—including political and implementation risks—along with their likelihood, impact, and potential policy responses. These could be developed in the “Outlook and Risks” section of program documents and highlighted in the cover memo and the “Staff Appraisal” section. Staff is also strongly encouraged to include a Risk Assessment Matrix (RAM) in program PNs and SRs to highlight key risks that could materially alter the baseline path, assess their likelihood of realization, and their economic impact should they materialize.⁶⁷

• Discuss downside scenarios. In addition to qualitative discussions, it can often be helpful to quantify the impact of key risks to illustrate potential financing implications and develop an adequate policy response. Staff can quantify risks to select key variables (e.g., growth, debt, inflation, financing needs) arising in the case of no-reform or adverse shock scenario, as relevant to the country. Such scenarios, whether elaborate or narrowly focused, are effective tools for communication of risks with the authorities, Management, and the Board, and illustrate the magnitude of potential offsetting contingency measures needed in case risks materialize. See examples of the use of adverse/downside scenarios in Ukraine 2014 (1st review, Box 2), Morocco 2020 (2nd review, paragraph 10), Pakistan 2016 (9th review, Box 3) and Guinea 2018 (1st review, Figure 13). Where UCT financing is confronted by exceptionally high uncertainty (see also ¶36), fully elaborated baseline and downside scenarios are required and these need to be sufficiently separated to generate confidence that the Fund-supported program solves the member’s BOP problem and restores medium-term external viability, notwithstanding the exceptionally high uncertainty about the ongoing shock (e.g., Ukraine 2023, Box 1, Annex V, and related discussion).

• Develop Contingency Plans (CPs). Similar in nature to adverse scenarios but often more encompassing, CPs are recommended to be included in program PNs where appropriate and subject to strict confidentiality.⁶⁸ Given uncertainty around program baselines, the broad goal of continency planning is for staff and authorities to reach understandings on a set of policy responses for contingencies. Such understandings can be as broad or as specific as warranted depending on the risks and country circumstances, but in any case, would be expected to cover the main pressure points and potential responses. This collaborative process places authorities in a stronger position to consider a range of options in a timely manner, should risks materialize. While program reviews typically function as an ex-post mechanism to address changed circumstances relative to initial projections, CPs allow staff to think ex ante about possible shifts in the program strategy. As such, CPs are not intended to identify a precise response to a particular future scenario with defined triggers, but rather are a risk-management tool to identify pressure points and a set of possible responses.

  • Downside scenario. CPs should ideally outline a relevant adverse scenario based on a set of domestic and external shocks, and elaborate how key program variables/targets/objectives— including financing gaps, external position, and public debt—would be impacted.⁶⁹ There can be situations where the uncertainty of the adverse scenario is very high (especially if driven by non-economic factors such as conflict), so a partial equilibrium adverse scenario (including qualitative factors) can be used instead of a fully-fledged adverse macro scenario. Shocks could be applied to growth, fiscal revenues, commodity prices, export volumes, remittances, FDI, debt and portfolio inflows, rollover assumptions for short-term debt, and deposit outflows.⁷⁰ The adverse scenario should discuss key transmission channels of shocks. It could be passive (i.e., effects of recommended policy responses are not reflected in the scenario) or active (i.e., policy responses are embedded in the scenario) depending on country circumstances.

  • Policy response. CPs should discuss potential policy responses to achieve recalibrated program targets/objectives in the adverse scenario and restore stability. These can range from focused measures to a comprehensive package of policies that could be deployed should risks to program targets materialize. Such planning can mitigate resorting to less favorable policy measures at difficult times (e.g., cutting capital spending to meet program fiscal targets).⁷¹ If a package of measures needed to achieve the program objectives in an adverse scenario is not economically, politically or socially feasible or advisable, additional financing (from the IMF, provided that robust safeguards are in place, or other sources, including through debt operations) may be needed. For countries vulnerable to currency runs and sudden stops to capital flows, CPs should consider merits of FX intervention and CFMs that could temporarily restore stability to allow time for an appropriate set of policies to be implemented (see further discussion in ¶65 and ¶66 on the Fund’s institutional view (IV) on Liberalization and management of Capital Flows). Temporary monetary financing of fiscal deficits could also be considered with appropriate safeguards.

  • Applicability, communication, and examples. In general, CPs would be recommended for UCT-quality Fund-supported programs (new and ongoing) based on country needs, risks, and capacity constraints. Country teams should get in touch with the senior reviewer in the Strategy, Policy, and Review (SPR) Department early on to reach an understanding on the need for and depth of CPs, taking into consideration capacity constraints and other factors such as access level, capacity to repay, likelihood of adverse scenario, and risks to debt sustainability. CPs are expected to be discussed in a box in the PN or included as an Annex, where appropriate. Discussions with the authorities on the CPs will be relayed to Management and reviewers—with appropriate confidentiality—in back-to-office reports and/or the SR cover memo to management. In the communication with the authorities, strict confidentiality on needs-to-know basis should be maintained. Leaks can damage confidence or undermine the effectiveness of certain measures (e.g., premature disclosure of outflow CFM measures may trigger further capital flight).

A. Basis, Purpose, and Principles of Conditionality

40. As noted in section II, the basis and purpose of conditionality is to assist members in resolving their BoP problems while safeguarding Fund resources. Conditionality—any program-related condition—is intended to ensure that Fund resources are provided to members to assist them in resolving their BoP problems in a manner that is consistent with the Fund’s Articles and that establishes adequate safeguards for the temporary use of the Fund’s resources. Conditionality can be established either on an ex-ante basis in the form of eligibility criteria, or an ex-post basis in the form of agreed actions to be taken, the latter being the focus of this guidance

Note.⁷²

41. The Guidelines on Conditionality (GoC) establishes the principles that should guide the Fund in designing and setting conditionality. Moreover, an accompanying staff statement further elaborates on the principles underlying the Guidelines on Conditionality. Priority is to be accorded to the text of the GoC, with further elaboration being found in the staff statement on the underlying principles:⁷³

• National ownership and capacity to implement programs. National ownership and sound economic and financial policies and an adequate administrative capacity are crucial for successful implementation of Fund-supported programs. The member has the primary responsibility for the selection, design and implementation of its economic and financial policies. 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 successful implementation. The Staff statement accompanying the conditionality guidelines also clarifies that ownership along with the member’s adequate administrative capacity for the implementation of the Fund-supported program is a key determinant of success. Judgments on the depth and breadth of ownership are inherently subjective and difficult, and ownership itself can change over time. The guidelines also note that the need for ownership implies selectivity: approval of the use of Fund resources depends on the Fund’s assessment that the member is sufficiently committed to successful implementation.

• Parsimony. The Conditionality Guidelines provide that conditionality should be parsimonious and should relate to matters reasonably within the member’s direct or indirect control. Conditionality must also be “critical”: it should be established on the basis of those variables or measures that are generally, either (i) of critical importance for achieving the goals of the member’s program or to monitor its implementation; or (ii) necessary for the implementation of specific provisions of the Articles of Agreement or policies adopted under them.⁷⁴ Leaving aside conditions necessary for implementation under the Articles, 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. The principle of parsimony pertains to all program-related conditions including performance criteria, indicative targets (ITs) or structural benchmarks (SBs) (see Section II.E).

• Tailoring to member circumstances. The GoC provide that in helping members devise economic and financial programs, the Fund will pay due regard to the member’s domestic social and political objectives, economic priorities, and circumstances including the causes of their BoP problems and administrative capacity to implement reforms. They also provide that conditionality and program design will reflect the provisions of the facility under which the Fund’s financing is being provided. The causes of BoP difficulties and emphasis to be given to various program goals may thus differ among members and the appropriate financing, the specification and sequencing of policy adjustments and the time required to correct the problem will reflect those and other differences in circumstances (GoC ¶4, see also discussion in Section II).

• Coordination. Often the Fund works with other multilateral institutions to provide consistent and effective assistance to members. However, the Fund is fully responsible for the establishment and monitoring of all conditions attached to the use of its resources. There will be no cross-conditionality, under which the use of the Fund’s resources would be directly subjected to the rules or decisions of other organizations. When establishing and monitoring conditions based on variables and measures that are not within its core areas of responsibility, Fund staff will, to the fullest extent possible, draw on the advice of other multilateral institutions, particularly the World Bank. The Fund’s policy advice, program design, and conditionality should strive, in so far as possible, to be consistent with that of other institutions and integrated within a coherent country-led framework. The lead agency approach should be applied flexibly to accommodate areas of overlapping responsibility and different country circumstances (GoC ¶8). When appropriate, staff may also draw upon the work and advice of other multilateral institutions.

• Clarity. As discussed in the Staff statement accompanying the conditionality guidelines, conditionality should be transparently distinguished from other elements of the authorities’ program both in staff reports and in the member’s program documents. While program documents may set out the authorities’ broad policy agenda for national or international audiences, such documents as well as staff reports should clearly specify the parts of the agenda that constitute understandings on which continued access to Fund resources depends. In addition, PCs should apply to clearly specified variables that are objectively monitorable. Staff should also ensure that prior actions are unambiguously defined and easily verifiable to reduce the risk of misreporting.

B. Assessing Technical, Institutional, and Political Capacity

42. Conditionality timetables should balance ambition with the members’ technical and institutional capacity. While the authorities should be free to set demanding timetables where they consider them helpful in driving their agenda forward, the staff should not press for overly ambitious plans. Staff often faces constraints in accurately assessing implementation capacity and political priorities. Indeed, overly demanding timetables have been a reason for frequent requests for waivers, with the caveat that program design should be ambitious and not dilute the UCT-quality standard. Conversely, programs involving substantial use of weak conditionality related to the publication of reports or development of action plans represent a low bar, and program design should involve more meaningful reforms where necessary and possible. Well-tailored conditionality with appropriate prioritization would not undermine the strength of the Fund-supported program—on the contrary, it helps focus the members’ limited capacity on the most critical measures. In line with the Executive Board’s call to strengthen the analysis of institutional capacity, PNs and staff reports should include an assessment of technical and institutional capacity, including any necessary capacity building proposed within the program.⁷⁵ Such assessments inevitably require significant judgment drawing on a range of possible resources. The World Bank’s Country Policy and Institutional Assessment (CPIA) index provides a well-established resource for IDA-eligible countries, though this could be complemented by other tools, if necessary. Box 5 provides a (non-exhaustive) list of capacity assessment tools. Use of Third-Party Indicators (TPIs) should follow established best practice and support a candid, robust, and well-documented discussion with the authorities.⁷⁶

43. Further to the Board’s endorsement of 2018 RoC recommendation to strengthen the analysis of political capacity, staff should also assess any potential political implementation difficulties. An assessment of political capacity aims to get a sense of the authorities’ commitment to implement the Fund-supported program in the existing domestic political environment. It can help inform program design and the setting of conditionality to facilitate the achievement of program objectives, for example, by minimizing the chances of public backlash. Since it depends on political environment, the authorities’ political capacity is a more fluid concept than institutional or technical capacity, with significant variation across countries. For these reasons, it is very difficult to identify or develop a single indicator of political capacity. Nonetheless, staff assessments will require the application of significant judgment, and may need to be updated periodically, to reflect political developments.

44. Notwithstanding the need for a case-by-case approach, the assessment of potential political implementation difficulties should consider the following issues:

• The strength of the authorities’ mandate for action/reform. Capacity to implement adjustment or reform is likely to be stronger for governments that have secured a large electoral majority, or where there is a strong cross-party support for action, as is sometimes the case for countries facing a deep economic crisis. In contrast, a fragile cross-party coalition is likely to have less political capital for deep reforms. Staff should consider the extent to which adjustment and reform could meet resistance due to strong vested interests, or the role of national or cultural identify and societal perceptions of fairness, with respect to economic conditions, policies, and reforms.

• The modalities of reform and the need for coordination across different parts and levels of government. Assessments should consider whether implementation of key measures hinges on legislative approval or actions by lower levels of government (e.g., fiscal adjustment by sub-national governments or reforms in state-owned enterprises with significant autonomy), rather than on executive actions alone. Even if a broad consensus for reform exists, such coordination may significantly lengthen the time horizon for implementation.

• The ambition of adjustment and reform. Staff should put program policies in appropriate context. For example, it is useful to consider how the proposed adjustment compares to historical adjustment episodes in the country and in peer countries. Similarly, for structural reform, it may be helpful to consider whether such reforms have been attempted before, and the nature and strength of likely opposition, including susceptibility to legal challenge and reversal.

• The timing of proposed adjustment and reforms – both in terms of the political and economic cycles. The risks for implementation tend to increase as reforms become more backloaded. Fund analysis suggests that structural reforms are more likely to be implemented in the first year (“honeymoon” period) of a program, and that conversely, implementation is much weaker in the final year of a program.⁷⁷ At the same time, adjustment and some types of reforms (e.g., labor market) are likely to be more contractionary in a downturn, which may argue for a slower implementation and/or careful sequencing (see section III). In practice, flexibility on timing and pace of implementation is limited in crisis situations.

• The quality of communication. As noted above, strong communication of program policies that builds a broad consensus can increase political capacity for implementation. On the other hand, poorly communicated policies and lingering uncertainty about the potential costs and benefits across different parts of the population can undermine implementation.

45. A detailed assessment of institutional capacity and the authorities’ commitment to the Fund-supported program should be included in the program risks section of SRs. Based on the staff assessments, PNs and SRs should explicitly mention technical, institutional, and or potential challenges vis-à-vis the authorities’ commitments on program implementation. Those challenges should be discussed in the section covering program risks—including how the challenges might interact with other risk factors (e.g., economic outlook, availability of financing)—along with how program design mitigates such risks. Risk mitigation could involve measures to build capacity in key areas, including through technical assistance or training. Where there may be a case that the government has a limited ability to implement an agreed economic program owing to a lack of political support or where elections may lead to a shift in the government, the IMF Board may need adequate safeguards from opposition parties that would provide assurances that the economic program can be implemented in the event of a change of government in the course of a program (see Annex M on Political Assurances). For SRs, staff should be careful to ensure that the discussion of risks to the program (or specific measures) does not undermine the credibility and implementation of the program.

C. Scope of Conditionality

46. As noted above, staff should apply the principle of parsimony by ensuring that any program-related conditions are judged to be critical. Generally, all critical measures must have conditionality associated with them because the Fund needs to be able to interrupt purchases or disbursements if the program is off track, or if sufficient information is not being provided to adequately monitor program implementation. In judging that a condition is critical, staff affirms that, other things being equal, the expectation is that the condition will not be eliminated later. Staff must avoid setting conditions on measures that may be desirable but that are not critical. Conditions that are not critical but that the authorities would still like to showcase could be addressed in the Letter of Intent (LOI) or MEFP. In such cases, there should be a clear distinction between these other elements of the authorities’ reform agenda and the conditionality upon which Fund financing is contingent (see Annex S for further info on LOI/MEFP and other program documents).

47. Conditions should only be established on variables or measures that are reasonably within the member’s direct or indirect control. Conditions should be formulated with clarity and should be objectively monitorable. The GoC explicitly note that program-related conditions may be set on targets and objectives (outcome-based conditionality) or taking actions/refraining from taking actions (actions based conditionality). All conditionality must be reasonably within the control of the authorities. Moreover, outcomes-based conditionality should be designed to minimize the risk of situations in which targeted outcomes are achieved by means of policies that would undermine the achievement of program goals, such as reaching an intermediate outcome-based target of higher revenue by increasing import tariffs.⁷⁸ Even when conditions cannot be applied to outcomes, there may be scope to formulate them in a way that allows flexible implementation, via a variety of actions.

48. Program conditions should focus on core areas of Fund responsibility. As noted earlier, the Fund is fully responsible for the establishment and monitoring of all conditions attached to the use of its resources, i.e., there will be no cross-conditionality. When establishing and monitoring conditions based on variables and measures that are not within its core areas of responsibility, the Fund will, to the fullest extent possible, draw on the advice of other multilateral institutions, particularly the World Bank. The Fund’s policy advice, program design, and conditionality should strive to be consistent with that of other institutions and, whenever possible, integrated within a coherent country-led framework.

49. Conditionality should normally be assessed, modified, and set in the context of program reviews.⁷⁹ As noted in section II, the backward-looking component of reviews assesses performance and focuses on policy areas which should be specified as prior actions (PAs), quantitative performance criteria (QPC), indicative targets (ITs), and structural benchmarks (SBs). PCs and ITs for the main economic and financial indicators should be defined simply and clearly in a Technical Memorandum of Understanding (TMU) attached to the LOI. Requests and reviews should set QPCs for at least two reviews ahead for GRA supported-programs (with ITs covering subsequent reviews occurring over the 12-month period), and 12 months ahead for PRGT-supported programs. Conditionality beyond the first year of a multi-year program will normally be set in the context of subsequent reviews. Conditions can be set for specific test dates or on a continuous basis (i.e., continuous PC).⁸⁰ Conditionality can be modified in the context of the forward-looking aspect of reviews, which provide the opportunity to assess prospects for achievement of program objectives and the appropriateness of measures as new information becomes available. Conditionality is set at the time of approval of the arrangement and updated at the time of program reviews. Conditionality should normally be set (or modified) by the Board before the test date. For the establishment (or modification) of post-dated PCs (i.e., PCs for which the test date would already have passed at the time of Board consideration of the review in which the establishment or modification is proposed), the program documents would have to be signed and circulated to the Board along with the staff report before the test date, and no information on implementation of the so established conditionality would be available at the time of the Board meeting. Conditions added during reviews should be anchored on the arrangement approval documents and new added reform areas would require a clear justification of their criticality to achieving program objectives.⁸¹ Finally, staff could use the final program review for stocktaking and to provide a preliminary assessment of achievement of the stated program goals and program implementation. More detail on the specific modalities of conditionality are below:

• PAs. A PA is a critical measure specified to be completed before the scheduled date of a Board discussion to approve an arrangement, complete a review, or grant a waiver. PAs can be set if upfront implementation of measures is critical to achieving program goals or monitoring implementation, and there is significant doubt about implementation at a later date. PAs could include Parliamentary approval of measure, but this requires careful consideration of possible implications. There should be no ‘silent’ or ‘implicit’ PAs, i.e., steps that members agree to take before the program is considered by the Executive Board that are not reflected in program documentation. With respect to the implementation of PAs, the Executive Board has established a normal practice that all PAs must be carried out at least five working days before the Board discussion to which they relate. PAs are often used prominently in cases where a country has a weak track record of implementation and are useful to ensure a minimum implementation standard. However, staff should be mindful of the possibility that PAs may be implemented without genuine ownership such that its impact is nominal or temporary.⁸²

• QPCs. A QPC is a numerical indicator whose observance or implementation is established as a formal condition for the making of purchases or disbursements under a Fund arrangement. Performance criteria will apply to clearly specified variables or measures that can be objectively monitored by the staff and are so critical for the achievement of the program goals or monitoring implementation that purchases or disbursements under the arrangement should be interrupted in cases of nonobservance. QPCs are typically set as ceilings or floors on macroeconomic variables considered critical for achievement of program goals or monitoring implementation. A determination of what is critical could be formed based on assessments of policy credibility and space, whereby a specific QPC may not be needed where policy discipline has been demonstrated as strong, or where a slippage under a plausible scenario would not undermine program objectives. Fiscal QPCs typically include fiscal balances or financing, limits on external debt (where applicable), and non-accumulation of arrears (see below). Monetary policy conditionality in Fund-supported programs would typically include a floor on net international reserves (NIR) aimed at ensuring external sustainability, and a ceiling on net domestic assets (NDA) aimed at ensuring future sustainability by avoiding excessive credit expansion (for countries with inflation targeting or evolving policy frameworks, section II.E discusses other forms of monetary policy conditionality). QPCs are often subject to program adjustors that reflect known deviations from projections for reasons outside the authorities’ immediate control (see Box 6).

• Waivers may be granted for nonobservance of a QPC if the Fund is satisfied that the program will nevertheless be successfully implemented (see Annex A on waivers of nonobservance and applicability). Specifically, the non-observance must be assessed to be minor or temporary, or the authorities should have taken corrective actions for a waiver to be granted. In cases where staff judges that the QPC is no longer critical (either because circumstances have changed or because it previously erred in the design of conditionality) and is satisfied that the program will be successfully implemented, it is possible to deem the deviation to be minor.

• ITs. Variables may be established as ITs when they cannot be established as QPCs because of substantial uncertainty about economic trends, or to assess the member’s progress in meeting the objectives of a program in the context of a program review. As uncertainty is reduced, these targets will normally be established as QPCs.

• Structural benchmarks (SB). Under the review-based approach, all programs should include a specified agenda for critical structural reforms, in the form of SBs or PAs, with performance primarily monitored through reviews. A member’s failure to implement a structural benchmark would not, by itself, warrant an interruption of purchases or disbursements. Rather, deviations serve as an indicator that the program may be off-track. Completion of the review would then require a judgment that program objectives are being achieved. In case of substantial deviations from structural commitments and weak policy commitments to correct slippages, staff and management could decide not to propose completion of a review; an informal country matters session could be used to inform the Board about the status of discussions with the member’s authorities.

• Other. Reviews are also the primary tool for monitoring program progress in the following areas:

  • Financing assurances review. As discussed in ¶35, the Executive Board will conduct a financing assurances review to ensure that program is fully financed.

  • Monetary policy conditionality. For countries with inflation-targeting or evolving monetary policy frameworks, monetary policy conditionality may be designed as a review-based consultation (rather than in the form of QPCs). See section II.E for more details.

• Safeguard assessments. Safeguards Assessments are diagnostic reviews of central banks control and governance functions aimed at mitigating the risks of misuse of Fund resources and misreporting of program monetary data under Fund arrangements. As a rule, staff should aim to complete a safeguards assessment prior to Executive Board approval of a new arrangement but no later than the first review under the arrangement.^{83 84} Once the first review under the program has passed, subsequent staff reports should highlight the status of assessment and, if not completed, reasons for its delay. Safeguards assessments are conducted for each new arrangement; however, an update assessment would not be required for (i) successor arrangements where an assessment was completed no more than 18 months prior to the approval of the successor arrangement; or (ii) central banks with a strong track record, if the previous assessment was completed within four years and no substantial issues were identified then or during subsequent monitoring. Safeguards assessments are not conducted for members with FCL or SLL arrangements, on the grounds that qualifying countries have strong institutional arrangements in place. However, limited safeguards procedures, focused on discussions with external auditors of central banks are conducted (see Annex I in Safeguards Assessments: Review of Experience (IMF, 2022)). While safeguards assessments relate to the borrowing members’ central banks, a separate fiscal safeguards review may be required in some cases involving direct budget financing (see section II). Staff reports should include a summary of safeguards issues for as long as Fund credit remains outstanding, including: (i) the status of safeguards assessments; (ii) any significant recommendations, including on legislative amendments; (iii) problems in obtaining access to data; and (iv) deviations from commitments relating to safeguards recommendations. Safeguards assessments recommendations may be incorporated into conditionality or structural measures under the member’s program (see below). Close cooperation and coordination between FIN, other functional departments, and area departments is essential for the effective conduct of the safeguards process. FIN should be informed of any safeguards issues, including logistical issues such as the timing of new arrangements and reviews.

D. Program Development: Engagement and Communication

52. The promotion of ownership depends in part on an effective process of engagement between Fund staff and the authorities during program development and design. In responding to a member’s request for access to Fund resources, staff should initially aim to ascertain, through dialogue, how the authorities intend to adjust policies. This leads to an iterative process toward understandings on mutually acceptable means of achieving the program goals, while not losing sight of domestic social and political objectives, economic priorities, and the circumstances of the member, including the causes of the BoP problem and the member’s capacity to implement reforms in the necessary time frame. Particularly 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 as appropriate, to enable the authorities to make informed choices. It is also expected that program documents, including Letters of Intent, will reflect the authorities’ own policy goals and strategies, with the cooperation and assistance of Fund staff. Countries receiving concessional financial support from the PRGT must have in place a strategy for reducing poverty while supporting strong economic growth.⁸⁷

53. The 2018 RoC recommended improving two-way communication with the public to broaden support for program policies and reforms, and ultimately for successful program implementation. Results of a survey undertaken for the review pointed to a more favorable view of Fund outreach, possibly reflecting Fund efforts to deepen engagement with Civil Society Organizations (CSOs). Despite this progress, a significant share of survey respondents disagreed that CSOs were actively involved in program design and implementation discussions. As such, staff is strongly recommended as best practice to develop a robust communication strategy to support a request for a Fund-supported program, including with CSOs, as it helps strengthen ownership, especially in the case of politically-complex structural challenges.⁸⁸ Such strategies could include (i) how to help authorities create a communication strategy of key controversial reforms and (ii) the Fund team engaging through various channels and with different audiences. Staff should fully integrate a communication strategy into program discussions, particularly where reforms require sizable political capital, have substantial distributional impact, or are likely to fail or be reversed if not well communicated. Staff teams should support the authorities’ efforts to engage in a transparent participatory process, make themselves available to give seminars, provide training, meet with various stakeholders, and engage the media. In doing so, staff should be aware of the authorities’ views on staff contact with domestic groups and, if necessary, seek prior agreement. Resident representatives could be particularly useful in providing this assistance. Broadening political support for policies may require allowing more time for program formulation. Countries should also seek CSO inputs during the preparation of their national development plan, targeting the appropriate level of consultation for broad ownership.⁸⁹

54. For programs involving deep and politically difficult reforms, staff should ensure there is a well-crafted communication strategy that is developed in consultation with COM. Although deeper structural reforms (e.g., subsidies, pension, health care systems, or large-scale tax reform) could produce substantial medium- and long-term gains in economic welfare, they can involve short-term costs and distributional effects. Communications of such reforms will need to convincingly argue for the specific mix, time horizon, offsetting measures to protect vulnerable groups, while explaining key trade-offs and alternatives.⁹⁰ In addition to promoting transparency and disclosure, communication should be proactive, harnessing new technologies, using multiple channels, and tailored to different audiences (see Stankova, 2019). Communication strategies also depend on the scope of impact of the proposed reforms (entire population vs. specific groups) and can build on the greater public awareness established during normal times.⁹¹

55. The 2018 RoC recommended continued attention to track record building and reform implementation capacity as critical to support ownership. The 2018 RoC noted that, where appropriate, SRs should give credit to the authorities for solid track records. For countries without clear track records (e.g., in new programs), staff reports generally consider forward-looking aspects, including the country’s administrative capacity and TA needs. Moreover, when a country is not yet capable of implementing a Fund-supported program, or a previous program went off track, SMPs can be used to help the authorities to build a track record of policy implementation.⁹² While the historical use of SMPs has been biased toward PRGT-eligible countries, most of which are classified as FCS, the use of SMPs to re-build an off-track GRA-supported program could also be considered. While building a track record, Fund TA could play an essential role in enhancing implementation capacity, thereby fostering ownership.⁹³

E. Monetary and Exchange Rate Conditionality

56. In setting monetary and exchange rate conditionality, staff should assess:

• The size of domestic and external imbalances. Staff’s assessment should be informed by clear empirical measures of inflation and, where available, inflation expectations, an informed view on the extent of the misalignment of the exchange rate, and adequacy of reserves. It should be made clear which kind of inflation (and also output) expectations are to be used to inform the assessment: either projections by Fund staff (WEO projections), data from the authorities (national surveys or based on models) or other experts (e.g., consensus forecasts). Moreover, helping the country authorities to collect/estimate/model their own inflation expectation measures could be beneficial and part of the Fund’s advice, involving CD activities if necessary. As noted in section I, an assessment of external imbalances, in particular, the misalignment of the real effective exchange rate and its impact importantly on domestic demand (imports) and competitiveness, should be informed by the various tools in the Fund’s external sector assessment toolkit.⁹⁴ In the presence of multiple exchange rates, an informed view about the extent of misalignment should be formed based on a variety of indicators, including the extent that transactions take place at various rates, but also the signaling value and expectation forming aspects of various rates. An incorrect assessment of the exchange rate misalignment in a program, could lead to overvalued exchange rates, inadequate import adjustment, drains on reserves (due to unwarranted efforts to support a misaligned exchange rate) and undermine the reserve accumulation goals. The Integrated Policy Framework also provides valuable insights for policymakers on when and how to deploy multiple tools with special attention to their interactions, country-specific characteristics, initial conditions, and the nature of the shocks.

• The monetary policy anchor and framework. Staff should identify the countries’ monetary policy framework (i.e., inflation-targeting, money-targeting, exchange rate anchor, or some “other” nominal anchor) and both the de facto and de jure exchange rate regimes.⁹⁵ Staff should also ascertain if the authorities have any intentions to change the monetary policy framework/exchange rate regime and assess the readiness and capacity of the authorities to implement such changes.⁹⁶ A less developed monetary policy framework could represent a key structural domestic factor linked to inappropriate fiscal and monetary policies and their interactions, which can lead to BoP issues (see Unsal, Papageorgiou, and Garbers, 2022 for a potential metric to this end). The assessment would help determine the precise modalities of monetary and exchange rate conditionality (see below).

• The effectiveness of monetary policy. Staff should consider the credibility of the monetary policy framework and the strength of the transmission mechanism. Relevant factors include: the degree of fiscal dominance, the track record of a commitment to low inflation, the extent of exchange rate pass-through to inflation, the technical capacity to monitor, analyze, and forecast monetary conditions, and, where applicable, the commitment to strengthen the monetary policy framework. Staff should draw on surveillance and TA to evaluate any structural gaps in the monetary policy framework or institutions.

• The current monetary policy stance. Staff should assess the monetary policy stance, with reference to, for example, the output gap, real interest rates, the neutral interest rate, money growth, and private sector credit growth.

57. Monetary and exchange rate program objectives typically include: (i) delivering a real effective exchange rate level that broadly aligns with fundamentals; (ii) building adequate foreign exchange reserves; and (iii) ensuring low and stable inflation. The relative importance of these objectives will vary, depending on specific country circumstances, particularly the nature and scale of BoP problems and the countries’ policy frameworks and their effectiveness.

58. Monetary and exchange rate objectives should, in turn, determine the focus of monetary and exchange rate policy conditionality. For example, monetary policy conditionality can play an indirect role in meeting fiscal objectives in countries where fiscal dominance is an issue by limiting monetary financing and/or including measures to strengthen the monetary policy framework and central bank independence.⁹⁷ Moreover, where appropriate, conditionality could include the unification of multiple exchange rates (e.g., (Dominican Republic, 2003 SBA), the size and pace of exchange rate adjustment (Argentina 2022 EFF, 5th and 6th Review), FX market reforms to improve price discovery, and increasing exchange rate flexibility Ukraine 2008 SBA).

59. Decisions on the scale, mechanism, and pace of programmed monetary and exchange rate adjustment should weigh the tradeoffs with output and financial stability. Staff should be mindful of the fact that central banks can have different monetary policy objectives, and some may (not) include low inflation alongside reducing output gap and/or financial stability (among others). Staff should also be mindful of the overall policy mix and links to fiscal policy and conditionality. Monetary and exchange rate adjustment should consider the impact on public and private balance sheets.

F. Fiscal Policy Conditionality

69. Fiscal policy conditionality should reflect the general fiscal policy objectives of the program, building upon national reform plans and recognizing the social and distributional implications of the proposed policies.¹¹⁰ The four elements of a comprehensive and internally consistent fiscal policy program agenda include: (i) a clear fiscal policy anchor; (ii) a well-motivated discussion of the size and speed of adjustment consistent with prevailing political economy considerations; (iii) specific and high-quality supporting measures; and (iv) appropriate supporting structural reforms. The following discussion provides guidance on weaving these interdependent building blocks together into an overarching fiscal strategy.

G. Debt-Related Conditionality

80. Debt sustainability is a key requirement for Fund lending. Under the Articles of Agreement, the Fund may only make its general resources available to members to assist them in resolving their BoP problems in a manner that establishes adequate safeguards for their temporary use.¹³⁸ As recognized in the GoC, Fund-supported programs are designed to help a member to solve its BoP problems and to restore it to medium-term external viability. Debt sustainability is a key safeguard for Fund lending. It is a prerequisite for medium-term external viability and therefore for the success of the program and for providing safeguards that the Fund will be repaid. A Fund-supported program in the Fund’s GRA is designed to restore the member to medium-term external viability and resolve the BoP problem within the program period. On the other hand, the purpose of programs supported by the ECF is to help PRGT-eligible members with protracted BoP problems implement their economic programs and make significant progress toward a stable and sustainable macroeconomic position.¹³⁹

81. A clear assessment on debt sustainability is required and essential for program design. If debt is unsustainable (i.e., the Fund determines that debt sustainability cannot be preserved through credible and sustainable policy adjustment), the Fund is precluded from providing financing unless steps are taken to address the member’s debt problems in a manner that restores sustainability.¹⁴⁰ These steps could themselves restore sustainability (e.g., the provision of new concessional financing or the completion of a debt operation) or, where upfront restoration of sustainability is not feasible, could provide the Fund with the requisite assurances that the member is on track to restore sustainability. Two types of assurances are possible under this latter scenario: (i) where grants or highly concessional financing is sought from donors, assurances can be sought directly from the donors as to the amount and timing of the contribution; or (ii) where the financing involves rescheduling-—a change in contractual terms—-the form of assurances depends on the nature of creditors, whether Paris Club or non-Paris Club official creditors, or private creditors.¹⁴¹

82. However, there is a higher bar for exceptional access (EA) lending. For GRA EA, public debt must either be sustainable with high probability for the Fund to proceed with approval of an arrangement, or if debt is sustainable but not with high probability under the baseline, the Fund may lend where financing provided by sources other than the Fund during the program period on a scale and terms such that the policies implemented with program support and associated financing, although it may not restore sustainability with high probability, improves debt sustainability and sufficiently enhances the safeguards for Fund resources.¹⁴² Where the member’s debt is assessed to be unsustainable ex ante, exceptional access will only be made available where the financing being provided from sources other than the Fund restores debt sustainability with a high probability.¹⁴³ For PRGT EA, enhanced safeguards under the PRGT (which requires additional scrutiny of debt vulnerabilities in high access cases) and policy safeguards for combined high GRA-PRGT exposure (i.e., the PS-HCC framework), detailed discussions on criterion 2 regarding debt sustainability under the PRGT EA, enhanced safeguards under the PRGT and criterion 2 on debt sustainability under the PS-HCC framework are found in Chapter 1 of the 2023 LIC Handbook.

83. To inform the judgement on debt sustainability, teams should conduct a rigorous assessment using the Fund’s established analytical frameworks. The Fund’s approach to debt sustainability analysis (DSA) differentiates between market-access countries (MACs), that typically have significant access to international capital markets, and low-income countries (LICs), which meet their external financings needs mostly through concessional resources. The assessments of public and external debt sustainability are conducted in the context of both program design and reviews and are performed using standardized templates.

H. Financial Sector Conditionality

114. Financial sector conditionality in IMF-supported programs should vary depending on the financial stability challenges. In cases where countries are in (or on the verge of) a banking crisis, conditionality should focus on crisis management, with urgent measures to stabilize and restructure the banking system. Given the high cost of banking crises¹⁶⁰ conditionality should aim to ensure that insolvent and undercapitalized banks are recapitalized or resolved before the end of the program. Strengthening the bank resolution framework upfront is a precondition to this restructuring occurring in an orderly fashion. In addition, strengthening financial supervision and regulation as well as the financial safety net would enhance financial sector resilience going forward. Banks can be also affected by other program measures, for instance, fiscal adjustment or sovereign debt restructuring. Program measures for the financial sector can be drawn from Article IV consultations, FSAPs, TA or lessons from past programs.¹⁶¹ In programs focused on more structural problems, longer-term improvements in regulation and supervision could be the objective. Conditionality in Fund-supported programs for LICs may also focus on building financial stability infrastructure to promote financial deepening and inclusion, without creating risks to financial stability. Therefore, the primary focus of structural conditionality (SCs) is often on banking legislation to strengthen the regulatory, resolution, and anti-money laundering frameworks, supported by TA to build capacity.

I. Structural Conditionality

131. The selection and prioritization of individual structural conditionality should be based on staff’s assessment of criticality for program success, drawing on a range of country-specific and cross-country resources. Staff should clearly explain how the proposed structural conditionality will help achieve program objectives and assist in the resolution of the member’s BoP problem. In evaluating which potential reforms could be critical to program success, staff should consider structural gaps or weaknesses identified in prior Fund surveillance, TA reports, or external analyses (e.g., OECD reports).¹⁸⁷ This could also leverage research on reforms identified as having a high pay-off for countries in similar situations.¹⁸⁸ For example, for emerging market economies, the largest productivity payoffs tend to be associated with reforms that improve market functioning.

132. Making a clear judgment on whether a measure is critical to program success requires an assessment of the potential economic impact of different reforms, including:

• Growth and employment implications. Staff should pay attention as much as possible on how the structural conditions impact economic growth, specifically how the proposed reforms help alleviate structural impediments to sustained and inclusive growth. Care should be taken in assessing structural reform payoffs, since benefits often take longer than expected to materialize and depend on an uncertain economic recovery.¹⁸⁹ As noted in section (III), while considering the trade-off between ambition and realism, PNs and SRs should apply conservative assumptions, and clearly distinguish between short-, medium- and long-term effects on growth and employment.

• Facilitation of external rebalancing. Since external rebalancing is at the core of IMF-supported programs, staff should also pay due attention to how structural conditionality can help maintain and restore rebalancing and resilience. Culiuc and Kyobe (2017) show that, inter alia, better selected structural indicators are associated with higher responsiveness and resilience of the economy to exports to external shocks, with the kind of reforms that matter varying by country income level and circumstances.

• Distributional consequences. Staff should also discuss the possible distributional impact of reforms and program design options to protect the vulnerable.¹⁹⁰

• Fiscal effects. PNs and SRs should clearly lay out the fiscal implications of reforms, bearing in mind the difficulty of phasing out offsetting fiscal measures once introduced, including after conclusion of the program.

133. Country-specific economic circumstances also factor into an evaluation of the potential economic impact of reforms:¹⁹¹

• Stage in the economic cycle. The larger a country’s output gap, the more the member’s program should prioritize structural reforms that will support growth in both the short and longer term, notably infrastructure investment, which could yield potentially larger fiscal multipliers in times of economic slack.¹⁹²

• Scope for macroeconomic policy. Monetary and fiscal policy can offset possible negative effects of structural reforms e.g., reforms that aim to foster competition or reduce subsidies could be accompanied by measures to strengthen social safety nets to mitigate the impact on the vulnerable. Where budget constraints are binding, or looser monetary policy is not available, to the extent possible, consideration could be given to sequencing reforms to favor low- to no-cost measures with positive demand effects (e.g., reducing product market entry barriers), or budget-neutral reform packages (e.g., an increase in infrastructure spending financed by a reduction in energy subsidies).

• Type of shock/program context. The type and sequencing of structural conditionality should be tailored to the shock. For instance, informal staff-level guidance during the COVID-19 pandemic suggested that programs introduce or bring forward reforms that address specific consequences of the pandemic, notably measures to broaden coverage of existing social programs or beef up the corporate insolvency regime.

134. Consistent with the 2022 MIP concerning growth and adjustment under Fund-supported programs, attention is needed to include structural conditionality with adequate depth.¹⁹³ The depth of structural conditionality refers to the degree of structural change they would bring if implemented, and on the durability of that change. The depth of structural conditionality can be categorized into three groups, i.e., low-, medium- and high-depth structural conditionality as explained below. While the MIP stressed “greater attention to supporting deep, more growth-oriented structural reforms,” it should be noted that higher depth does not automatically imply higher quality or a greater difficulty of implementation. That said, higher depth structural conditions would generally require stronger commitment and buy-in from all stakeholders.

• Low-depth: This category includes measures that are necessary steps but would not, by themselves, bring about any meaningful economic changes. They may serve as steppingstones for significant reforms, e.g., diagnostic studies and action plans.

• Medium-depth: This category includes measures that are sufficient to deliver a meaningful impact, but the impact would be short-lived. They include one-off measures that can be expected to have an immediate and possibly significant effect on growth, the fiscal position, etc., but that would need to be followed by other measures for this effect to be lasting. Examples include budget approval or one-time change in energy tariff rates as compared to a permanent change of institutionalizing an automatic tariff adjustment (Andritzky et al., 2021).

• High-depth: This category includes measures that, by themselves, would bring about important and long-lasting changes in the institutional environment. Successful implementation of a high-depth structural conditionality would imply high likelihood of related structural reform goal being accomplished. Most of the conditions in this category entail legislative changes (e.g., approval, adoption, or enactment of legislation by a parliament). Examples include reforms involving permanent institutional changes often involving legislative changes such as a change in the Central Bank Act, or reforms with long-lasting impacts such as civil service reforms, SOE reforms, and privatization (Andritzky et al. (2021)). That said, it should be acknowledged that high-depth reforms to submit or approve legislation may not necessarily translate into actual implementation, underlying the importance of ex post monitoring. In the event implementation stalls, additional structural conditionality (including via prior actions) could be considered.

Notwithstanding the examples provided above, a given structural condition may also be classified as having a different depth depending on countries due to different country-specific circumstances (e.g., capacity, resources, and political constraints). The ultimate judgment of depth would lie with the country teams, considering country circumstances.

135. Staff should consider factors affecting implementation:

• Political context.¹⁹⁴ As noted above, staff should assess specific challenges to program implementation as well as other country-specific issues such as political structures if key reform measures hinge on legislative approval or on actions by lower levels of government rather than on executive actions alone. In some instances, where implementation requires cooperation among several ministries or parties, the positions of these ministries or parties are relevant to the assessment.

• Administrative and capacity constraints, and technical assistance. Staff should assess technical capacity, identifying key capacity constraints, explain how they may affect program implementation, and identify measures to build capacity where needed, including technical assistance and training needs. Staff should also indicate the modalities of the relevant CD, such as proposed timing and its linkage to structural conditionality.¹⁹⁵ As emphasized in Box 5, staff should be guided by the experience and knowledge derived from the CD engagement, including via regular discussions with CD providers, which can help to evaluate state capacity and the binding constraints that confront specific reforms that may form the basis of program conditionality.

• Legal issues. Staff should consider any potential legal implementation risks to the reforms, such as their constitutionality or potential legal challenges.

• Required collaboration with other institutions. Staff should consider the extent to which the Fund has available expertise in proposed reform areas, and options for collaboration with other institutions, where necessary. See Annex T for further detail.

136. Finally, staff should consider the potential interactions between different reforms and, in conjunction with the authorities, develop an overall plan for packaging, sequencing, and communicating structural conditionality. Given the factors identified above, staff should assess how the packaging, sequencing and communication of reforms can maximize their economic impact and minimize implementation risks:

• Packaging. Structural reforms could be combined with fiscal or monetary policies or other complementary or enabling structural reforms. The choice depends on political economic considerations that could ease the implementation of a specific structural reform by compensating or offsetting negative short-term effects on the economy or stakeholders.

• Sequencing. The ordering of reforms and the speed of execution should be discussed and factored into proposed program design, with possible implications for program length and financing requirements. For example, product market reforms (PMRs) aimed at reducing barriers to entry can have a positive short-run effect on growth, while labor market reforms (LMRs) reducing excess job protection can have a negative short-run employment effect.

• Communication. The scope for building broad-based support and ownership through transparency, active communications, and involvement of different stakeholder groups should also be discussed.

137. PNs should present a clear and comprehensive assessment of the proposed structural conditionality, ideally using an evaluation matrix. Given the broad range of potential evaluation criteria needed to determine the prioritization, depth, packaging and sequencing of conditions, staff is encouraged to organize and present its assessment in an evaluation matrix (see Figure 5 and Table 3) and use it as a planning tool to ensure a comprehensive assessment of structural conditionality from all relevant aspects. Such a matrix would also provide a transparent overview for each reform area (e.g., labor market reforms, product market reforms, etc.) and could be included in the PN or country engagement strategy.¹⁹⁶ Alternative matrices for different reform options in a certain area can serve the discussion on the pros and cons (and inevitable trade-offs) of different reforms and design options, implementation risks. This discussion should also draw on the current literature.¹⁹⁷ PN should also include an annex table mapping (whenever possible) structural benchmarks with CD findings and planned CD from the Fund and other multilateral organizations that would support the reform implementation.

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Evaluation Criteria for Structural Reforms

Citation: Policy Papers 2024, 004; 10.5089/9798400264849.007.A001

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138. Even if not using the evaluation matrix, PNs for a new Fund arrangement request and at each review should indicate for each structural condition its depth and rationale for inclusion in the program. Depth and rationale should be added to the typical structural conditionality table. The column setting out the assessed depth of structural conditionality should not be included in staff reports. In principle, it is neither necessary nor feasible that all SCs be high-depth, and in some cases (e.g., FCS) there may be few structural conditions of high depth at a given point in time. Nor should high/low depth of structural conditionality be interpretated as meaning high/low quality, it should rather reflect the degree of proximity to achieving the structural reform goals. The ultimate judgement of the depth of a structural conditionality would lie with the country teams who are in a better position than others to assess country-specific conditions, although they should explain clearly and effectively any such judgements.

139. Staff reports should include a concise discussion of the criticality of the structural conditionality for program success, which were developed in collaboration with the authorities, along with the proposed packaging, sequencing, and communication of reforms. While the discussion can be less extensive than in the PN, the staff report should discuss the key considerations behind the choice, prioritization, packaging, sequencing, and communication of reforms, with reference to the various implementation risks, and proposed CD support. While political capacity risks should be discussed candidly, with due attention to authorities’ view, staff should take care to ensure that the assessment does not itself undermine the authorities’ ability to implement the program and therefore the credibility of the program.

^{Table 3.}

Evaluation Matrix for Structural Reform Options

^{Table 3.}

Evaluation Matrix for Structural Reform Options

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^{Table 3.}

Evaluation Matrix for Structural Reform Options

Coordination and Collaboration with Other IFIs/RFAs

141. The extent of in-house expertise is one of the factors to be considered to determine the extent of collaboration with other institutions.²¹⁶ Table 4 provides a general classification of policy areas of expertise which are core, shared, or non-core from the Fund’s perspective, although this classification is not binding:²¹⁷

• Core areas of Fund expertise. For structural issues that are critical to program success and where the Fund has in-house expertise, analysis and policy advice can be developed in-house. Thereby, staff should leverage the Fund’s TA and cross-country experience, particularly with respect to policy lessons.

• Areas of shared expertise or non-core areas. For structural issues that are critical to program success but where Fund expertise is lacking, staff should draw on expertise from other organizations (e.g., the OECD on product markets, the ILO and OECD on labor markets, and the World Bank on the structural aspects of the health and education sectors, and infrastructure needs), including seeking advice how Fund staff can monitor implementation of the structural conditionality, and leverage on their CD findings and planned CD activities to ensure durability of structural reforms.²¹⁸

142. Cross-conditionality, under which the use of the Fund’s resources would be directly subject to the rules or decisions of other organizations, is prohibited under the Fund’s Guidelines on Conditionality.²¹⁹ The Fund cannot delegate its responsibility in establishing or assessing whether the conditions for the use of its resources have been met. When Fund resources are committed to a Fund-supported program in collaboration with other institutions and the Fund assesses that the conditions have not been met, it will not disburse, irrespective of the judgments reached by other institutions. Conversely, in cases where the Fund makes an assessment that the conditions have been met, but its judgment is not shared by other organizations, the Fund may not be in a position to allow use of its resources, however, if delays in disbursements by other institutions raise financing assurances issues, i.e., the program is not fully financed.

^{Table 4.}

Classification of Structural Conditions by Subject

Note: Font color indicates area of Fund responsibility: core, shared, non-core.

^{Table 4.}

Classification of Structural Conditions by Subject

Category	Description
Fiscal	Revenue administration (incl. customs) Expenditure measures (incl. arrears clearance) Debt management
PFM/RA	Revenue measures Budget preparations Expenditure auditing Fiscal transparency Inter-governmental relations
Central bank	Central bank operations, auditing, transparency, and financial controls Exchange systems and restrictions/MCPs, FX interventions and FX market
Financial sector	Financial sector legal reforms, regulation, and supervision Restructuring and privatization of financial institutions
Pension and civil service reform	Pension reform Health and education sector reforms Civil service and public employment reforms (incl. wages) PRSP development and implementation
SOE reform	Public enterprise reform (excl. financial sector) Public enterprise pricing and subsidies Privatization
Social	Other social sector reforms
Other macro-structural	Labor market reforms (excl. public sector) Product market reforms (excl. financial sector) International trade policy (excl. customs) Statistics Governance (incl. anti-corruption) Natural resource and agricultural policies (excl. public enterprises and pricing)

Note: Font color indicates area of Fund responsibility: core, shared, non-core.

View Table

^{Table 4.}

Classification of Structural Conditions by Subject

Category	Description
Fiscal	Revenue administration (incl. customs) Expenditure measures (incl. arrears clearance) Debt management
PFM/RA	Revenue measures Budget preparations Expenditure auditing Fiscal transparency Inter-governmental relations
Central bank	Central bank operations, auditing, transparency, and financial controls Exchange systems and restrictions/MCPs, FX interventions and FX market
Financial sector	Financial sector legal reforms, regulation, and supervision Restructuring and privatization of financial institutions
Pension and civil service reform	Pension reform Health and education sector reforms Civil service and public employment reforms (incl. wages) PRSP development and implementation
SOE reform	Public enterprise reform (excl. financial sector) Public enterprise pricing and subsidies Privatization
Social	Other social sector reforms
Other macro-structural	Labor market reforms (excl. public sector) Product market reforms (excl. financial sector) International trade policy (excl. customs) Statistics Governance (incl. anti-corruption) Natural resource and agricultural policies (excl. public enterprises and pricing)

Note: Font color indicates area of Fund responsibility: core, shared, non-core.