Critique of IMF Loan Conditionality
Transcript of Critique of IMF Loan Conditionality
Critique of IMF Loan Conditionality
What is Conditionality?
Conditionality is most often associated
with aid money. International
organizations, such as the International
Monetary Fund (IMF) and World Bank, or
individual countries can use conditionality
when lending money to another country. The
donor country requires that the country
receiving the funds adhere certain rules
directing the use of funds (Investopedia,
2013).
Conditionality in its broad sense covers
both the design of IMF-supported programs—
that is, the macroeconomic and structural
policies—and the specific tools used to
monitor progress toward the goals outlined
by the country in cooperation with the IMF
(IMF, 2013).
Over time, the IMF has been subject to a
range of criticisms, generally focused on
the conditions of its loans. The IMF has
also been criticized for its lack of
accountability and willingness to lend to
countries with bad human rights record.
On giving loans to countries, the IMF makes
the loan conditional on the implementation
of certain economic policies. These
policies tend to involve:
Reducing government borrowing -
Higher taxes and lower spending
Higher interest rates to stabilize
the currency.
Allow failing firms to go bankrupt.
Structural adjustment.
Privatization, deregulation, reducing
corruption and bureaucracy.
The problem is that these policies of
structural adjustment and macro-economic
intervention often make the situation
worse.
For example, in the Asian crisis of 1997
(Giancarlo Corsetti, 1999), many countries
such as Indonesia, Malaysia and Thailand
were required by IMF to pursue tight
monetary policy (higher interest rates) and
tight fiscal policy to reduce the budget
deficit and strengthen exchange rates.
However, these policies caused a minor
slowdown to turn into a serious recession
with higher unemployment.
In 2001, Argentina was forced into a
similar policy of fiscal restraint. This
led to a decline in investment in public
services which arguably damaged the
economy.
Exchange Rate Reforms
When the IMF intervened in Kenya in the
1990s (ukessays, 2007), they made the
Central bank remove controls over the flows
of capital. The consensus was that this
decision made it easier for corrupt
politicians to transfer money out of the
economy (known as the Goldman scandal).
Critics argue this is another example of
how the IMF failed to understand the
dynamics of the country that they were
dealing with - insisting on blanket
reforms.
The economist Joseph Stiglitz has
criticized the more monetarist approach of
the IMF in recent years. He argues it is
failing to take the best policy to improve
the welfare of developing countries saying
the IMF "was not participating in a
conspiracy, but it was reflecting the
interests and ideology of the Western
financial community."
Free Market Criticisms of IMF
As well as being criticized for
implementing 'free market reforms' others
criticize the IMF for being too
interventionist. Believers in free markets
argue that it is better to let capital
markets operate without attempts at
intervention. They argue attempts to
influence exchange rates only make things
worse - it is better to allow currencies to
reach their market level (Mutume, 2001).
Lack of Transparency and involvement
The IMF have been criticised for imposing
policy with little or no consultation with
affected countries.
Jeffrey Sachs, the head of the Harvard
Institute for International Development
said:
"In Korea the IMF insisted that all
presidential candidates immediately
"endorse" an agreement which they had no
part in drafting or negotiating, and no
time to understand. The situation is out of
hand...It defies logic to believe the small
group of 1,000 economists on 19th Street in
Washington should dictate the economic
conditions of life to 75 developing
countries with around 1.4 billion people.
(Khor, 1998)"
Faced with strong criticism for its
expansive and erroneous use of
conditionality, and in the wake of a
financial crisis, the International
Monetary Fund (IMF) approved in 2002 a set
of guidelines to inform its use of
structural conditionality. The
Conditionality Guidelines committed the
Fund to reduce the overall number of
conditions attached to Fund lending and
ensure that those attached respected and
were drawn from nationally developed
poverty plans in recognitions that
developing country ownership is
instrumental for successful development
(Pereira, April 2008).
The IMF’s own Independent Evaluation Office
(IEO) issued a study in January 2008 which
concluded that the Fund dramatically
increased both the number of structural
conditions and their intrusiveness in
recipient countries’ domestic affairs.
The IMF Conditionality Guidelines and their
limited view of ownership is having serious
social consequences. The Fund continues to
push for privatisation and liberalisation
of poor nations’ economies, interfering
with decisions which should be freely taken
by countries according to domestic
priorities and needs. In Mali the IMF and
the World Bank forced the reform and
privatisation of the cotton sector despite
opposition. The reforms went ahead and now
cotton farmers face an even harder future.
A quarter of all IMF structural
conditionality still promotes privatisation
and liberalisation reforms, which have
proven to be highly sensitive and often
have had disastrous consequences for the
poor.
Copper mining in Zambia perfectly
illustrates this point. The IMF backed the
privatization of the complex copper mining
sector and introduced fiscal reforms to
attract transnational corporations. Many of
the reforms were far from the IMF field of
expertise. This process has yielded far
less poverty
reduction and respect for environmental
standards than was predicted (Pereira,
April 2008).
The practice of attaching conditions to
grants and loans has been widely criticised
for being ineffective, undermining
ownership and imposing inappropriate policy
choices. Civil society, academics and
southern governments agree that
conditionality is an infringement on
national sovereignty and has not been
effective in inducing economic policy
reform. But even the World Bank and the
International Monetary Fund – the world’s
leading advocates of economic policy
conditions – agree that conditionality has
failed to create incentives for policy
reform.
The IMF holds the global monopoly on
assessing countries’ macroeconomic health,
which in developing countries is measured
by being “on-track” with an IMF programme,
typically a Poverty Reduction and Growth
Facility (PRGF). Thus, IMF conditionality
hardly ever is contested by other donors,
which perceive it as a scarce and necessary
service for their own disbursement
decisions. Moreover, the technical
complexity of macroeconomic policies which
the IMF addresses has also often dissuaded
civil society groups from voicing criticism
of the Fund’s measures (Pereira, April
2008).
The Fund attaches two different types of
policy conditions to its loans in poor
countries – quantitative and structural.
Quantitative conditions are macroeconomic
targets determining, for example, the level
of fiscal deficit a government is allowed
to run up or the permitted level of
domestic credit. Structural conditions, on
the other hand, push for institutional and
legislative policy reforms within
countries. They include, for example, trade
reform, price liberalisation and
privatisation.
IMF Conditionalities for the Least
Developed Countries
The controversial issue of the Fund’s
conditionality originates from Article V
(“Operations and Transactions of the
Fund”), Section 3 of the Fund’s Articles of
Agreement, which broadly presents the
conditions governing use of the Fund’s
resources. Briefly, Section 3(a) states
that the Fund: “shall adopt policies on the
use of its general resources (…) and may
adopt special policies for special balance
of payments problems, that will assist
members to solve their balance of payments
problems in a manner consistent with the
provisions of this Agreement and that will
establish adequate safeguards for the
temporary use of the general resources of
the Fund.”
This means that, prior to the release of
any financial resources to its members, the
Fund requires that certain constraints,
widely known as “conditionalities”, are
imposed in the form of compliance with both
Fund rules and Fund-suggested (practically
mandated, in the case of poor countries)
policy guidelines and adjustments. These
“monitoring techniques” provide the
framework with which the Fund ensures
solvency safeguards while targeting
temporary balance of payments’ problems.
By acknowledging the existence of two broad
types of structural reforms, the Fund
tacitly admits the existence of double
standards with regard to conditionalities.
The first cluster, based on the Fund’s core
areas of expertise, tackles macroeconomic
scenarios via policies that aim to ensure
stabilization of exchange rate practices,
as well as reduce balance of payments and
financial or monetary problems. Such
policies could also include measures such
as tax reform, fiscal responsibility,
banking and monetary reforms and exchange
rate flexibility.
The second cluster, involving a much
enlarged scope of Fund conditionality,
advocates “policies aiming more generally
at improvements on the economy’s underlying
structure – its efficiency and flexibility
– to foster growth, and facilitate
adjustment to exogenous shocks.”5 This is
where the Fund arrogates to itself the
right to engage in much broader reforms
including trade liberalization, pricing and
marketing, labour market reorganization and
generic institutional or regulatory
changes.
This enlarged scope of Fund involvement,
through its conditionalities, should be
urgently reviewed and circumscribed by the
Fund’s existing legal provisions and
guidelines. For instance, the mandate to
establish “adequate” solvency safeguards
should not be interpreted as giving the
Fund an unlimited mandate to prescribe all-
encompassing structural reforms on a Fund
member.6
A restrictive interpretation of the Fund’s
mandate is supported by the IMF Guidelines
on Conditionality7, which emphasize that
conditionality objectives must be strictly
related to resolution of balance of
payments problems, in conformity with the
Fund’s Articles and in a manner that
establishes “adequate” safeguards for the
use of Fund resources. In other words,
“adequate solvency safeguards” to address
balance of payments problems should not
extend to trade, labour and regulatory
policies.
This crucial distinction between Fund
“demands” and “suggestions” is not resolved
by other language regarding Fund
conditionalities. While ownership of and
capacity to implement a programme is
acknowledged to be the sole responsibility
of a member country, the Fund is supposed
to only be guided, but not bound by the
same principle of ownership.
This wording ensures that the Fund is
shielded from external criticism on legal
grounds, since sole responsibility is borne
by the borrowing government. The same
guidelines provide unlimited scope for the
Fund to apply conditionalities even though
a borrowing least developed country might
have different policy preferences and
priorities, e.g. with regard to trade and
poverty reduction policies. Hence,
“adequate safeguards” allows the Fund to
demand reforms even though they are not
supported by the Fund’s own core mandate.
Such conclusion is further buttressed by
Paragraph 8 of the same Guidelines,
asserting that the Fund “is fully
responsible for the establishment and
monitoring of all conditions attached to
the use of its resources” and, even more
candidly under the “Principles Underlying
the Guidelines on Conditionality”, which
state that the “need for ownership implies
selectivity: approval of the use of Fund
resources depends in particular on the
Fund’s assessment that the member is
sufficiently committed to successful
implementation”
With regard to Fund trade policy
conditionalities in low-income countries,
proper regard to social and political goals
as well as the specific circumstances of
members has not been given, contrary to the
spirit of Paragraph 4 of the Guidelines.
This is especially relevant for the one
size fits all approach or policy reform
homogeneity characteristic of Highly
Indebted Poor Countries (HIPC)11 and PRGF
programmes, including trade policy reforms;
such policy conditionalities also seem
insensitive to the challenges of correct
policy sequencing, particularly for low-
income borrowing countries (Guilherme,
2008).
As correctly acknowledged by key Fund
documents, trade policy conditionalities
have little to do with the Fund’s
traditional mission or areas of expertise,
and represent an obvious deviation from the
Fund’s “core” legal mandate to provide
assistance to countries with balance of
payments problems. Instead of focusing on
exchange rate issues, balance of payments
concerns or financial and monetary
analysis, the Fund has turned to trade
policy reforms, streamlining trade policy
administration, government revenue,
governance and customs administration
reforms, all pushed through on the basis of
dubious efficiency improvement claims.
Finally, it should be emphasized that
imposition of cross-conditionalities by the
Fund is prohibited; nevertheless, in the
recent past, the Fund has made specific
requests for the least developed countries
to undertake unilateral commitments towards
further trade liberalization within the WTO
or via regional trade agreements,
drastically restricting a least developed
country’s sovereign right to pursue its own
interests. As the Fund demands that its
conditionalities not be subject to
decisions taken by countries in other
multilateral frameworks, it seeks to be
“primus inter pares”, relegating other
international organizations and commitments
to “secondary status”.
Notwithstanding the ongoing debate on
coherence, it appears doubtful that lending
arrangements with IMF member countries have
complied with existing Fund rules. Such
deviation from the core mandate of the Fund
also raises the likelihood of resource
misallocation and failure to provide proper
oversight of the international economy.
Case Study: Cameroon
The Fund continues to push for
privatisation and liberalisation of poor
nations’ economies, interfering with
decisions which should be freely taken by
countries according to domestic priorities
and needs. Among the loans approved during
last three years, almost a quarter of all
conditions required policy reforms related
to privatising or liberalising. This
represents virtually no change with regards
to the share of privatisation and
liberalisation related conditions found in
loans approved between 2003 and
2004. Out of the PRGFs approved during the
last three years, the vast majority of
countries assessed by Eurodad – 16 out of
20 countries – had liberalisation or
privatisation conditions. However, some of
the countries bear a much higher
privatisation burden than others. In Benin,
seven out of the thirteen conditions in
2005 required privatising state-owned
enterprises in the infrastructure,
telecommunications and cotton sectors. And
in Cameroon six out of the fifteen
conditions attached to their PRGF in 2006
contained some sort of privatisation in the
telecommunications, postal and airline
sectors, one condition required price
liberalisation and subsidy removal for the
national oil company SONARA, and two
conditions required restructuring of the
public postal enterprise. According to the
Fund’s arguments, privatisation should lead
– amongst other effects – to increased
transparency and good governance in the
sectors privatised. Unfortunately, the
privatisation process of the Cameroon’s
airline company shows that expected
benefits in theory do not always translate
into reality (Pereira, April 2008).
In September 2007 a joint delegation of the
International Monetary Fund (IMF) and the
World Bank arrived in Cameroon to discuss
the implementation of the three-year
economic programme signed between the two
institutions and the Cameroon government.
The meetings were expected to handle
technical issues on the execution of the
public investment budget, the
implementation of the fiscal reforms and
progress in the privatisation process –
particularly focusing on financial sector
reform with emphasis on the privatisation
of Crédit Foncier. Not content with the
push made to the financial sector, the
joint delegation was also reported to have
successfully mounted pressure on President
Paul Biya, to re-launch the privatization
process of the Cameroon Airlines, Camair,
which the President had put on hold. Local
newspapers reported that the offer from the
First Delta Air Services-led consortium had
finally been selected. However, the
privatization process was halted following
a late submission of a better offer from an
US group, Valiant Airways. This group was
strongly backed by the US Ambassador to
Cameroon and the Prime Minister. Later it
was found that the bidder, Valiant Airways,
was a fake and that the company was unknown
to the American Federal Aviation Authority
and other international organisations.
Since the privatization started in February
2005, Camair’s debt and losses have
mounted. In general the privatization
project has been cast in shadows. The
attempt to privatise Cameroon Airlines
clearly shows that processes leading up to
privatisation are not necessarily
respectful of minimum good governance
standards, unless regulatory measures
intended to ensure transparency are in
place. Once again, pressure from the IMF to
privatise may have not yield the expected
results but may have worsened the company’s
situation.
Case Study: Mali
Bypassing ownership: imposed cotton sector
privatisation in Mali Mali is one of the
world’s poorest countries and its economy
is heavily reliant on the cotton sector.
Since the 1990s, the World Bank and the IMF
have pressed for the privatization of the
Malian cotton sector and liberalisation of
its pricing system, tying cotton prices to
world market values. These reforms
coincided with a period when the cotton
prices were, and still are, heavily
distorted by heavy subsidised production in
developed countries. In 2005 Malian
President Amadou Toumani Touré opposed the
reforms and spoke out against Bank and Fund
conditions. He said “true partnership
supposes autonomy of beneficiary countries
in requesting aid and in determining its
objectives… Often programmes are imposed on
us, and we are told it is our programme…
People who have never seen cotton come to
give us lessons on cotton… No one can
respect the conditionalities of certain
donors. They are so complicated that they
themselves have difficulty getting us to
understand them. This is not a partnership.
This is a master relating to his student.”
According to the World Bank and the IMF the
reform was expected to improve management
and increase cotton prices while decreasing
the cost of farm inputs. The results could
not have been gloomier. Data from the World
Bank for 2005-06 cotton sales show that
farmers were producing at a loss. The
immediate impacts were a collapse of
households’ purchasing power and increasing
poverty and food insecurity. Long term
effects include migration and price falls
in the cereal sector as a consequence of
farmers switching crops. The Oxfam study
Kicking the habit: How the WB and the IMF
are still addicted to attaching economic
policy conditions to aid predicts economic
losses of 2 to 4% of Mali’s GDP. The
reforms supported by the World Bank and the
IMF, occasionally by means of
crossconditionality – identical conditions
imposed by both institutions - have
endangered the farmers’ livelihoods and
Mali’s poverty reduction strategies more
broadly. A villager from Wacoro complained
that “before, at harvest time, a part of
the income was given to the women. But this
year, that was not the case. On the
contrary, the livestock we have accumulated
over many years had to be sold to enable us
to cover our food costs, in particular the
purchase of cereals. As a result, we have
almost nothing left in terms of savings to
protect us from the difficult times to
come.”
Some bilateral donors are currently backing
the introduction of support funds, having
realised the importance of the cotton
sector and the impact of its highly
volatile prices. This fund should help to
compensate price differences from one year
to the other. Several donors support this
initiative; however, the World Bank and the
IMF remain in an uncomfortable silence.
Case Study: Zambia
Zambian mining: toughening the tax regime
Back in the 1990s, the World Bank insisted
that as a condition on their finance that
the state-owned Zambia Consolidated Copper
Mines (ZCCM) should be privatized. The IMF
backed the privatization of ZCCM through
the three-year ESAF (Enhanced Structural
Adjustment Facility) and one-year SAF
(Structural Adjustment Facility) Loans
approved in 1995.30 Subsequently ZCCM was
chopped into several smaller companies and
sold to private investors between 1997 and
2000.
Ahead of privatisation, the Washington-
based IFIs advised the Zambian government
that, in order to bring in investment, the
country should make itself attractive by
developing an “investor-friendly”
regulatory regime. The World Bank and the
International Monetary Fund then used
Zambia’s dependence on their funding and
debt relief to withdraw many of the
controls that the state had previously
established on company behaviour. The IFIs
continued imposing conditions even when the
privatisation deals were done, including
one-sided “development agreements” granting
tax exemptions to foreign investors and all
sorts of benefits not normally granted in
the national legal framework. In its 2004
PRGF agreement with Zambia, the IMF
required the government to “define a policy
for the granting of tax concessions.” The
consequence of this condition was that
royalties raised by the Central Government
represented just 0.2% of their revenues.
This deadly combination has prevented the
increase of the profits in the Zambian
mining sector translating into an increase
in the standards of living of the
population in these areas.
As a result of the privatization formal
employment has decreased. Several
structural adjustment programs have also
affected the informal sector. Additionally
the communities of the Copperbelt now face
acid rain, heavy metals pollution, silting
and other environmental problems which not
only affect peoples’ health, but also their
capacity to grow their own food.
Conclusions and Recommendations
The Fund has failed to implement its ownConditionality Guidelines. Even after the2005 review, which showed limited progressin implementing the Guidelines, the Fundhas not taken further steps to address thisfailure and streamline conditions. One ofthe main conclusions of the 2005 review wasthat: “numbers of structural conditionshave not shown much of a decline.” Beyondthe numbers, the principles of ownershipand tailoring to national circumstancesshould entail refraining from placing
controversial conditions which may behighly sensitive for some nationalconstituencies and may lead to domestictensions and social unrest. On this front,the Conditionality Guidelines are toolimited. The CG defines the principle ofownership as the “willing assumption ofresponsibility for a program of policies,by country officials who have theresponsibility to formulate and carry outthose policies.” The Fund considersownership is sufficient when there isenough “buying” by country officials ofpolicy reforms designed by Fund economists.This deviates from the concept of genuineownership as understood by civil societygroups and recipient governments, whichwould require recipient governments andtheir citizens to take the lead indesigning and prioritizing policy reforms.
The IMF’s limited view of ownership ishaving serious social consequences. In Mali
the IMF and the WB forced the reform andprivatisation of the cotton sector despiteopposition. The reforms went ahead and nowcotton farmers face an even harder future.A quarter of all IMF structuralconditionality still promotes privatisationand liberalisation reforms, which haveproven to be highly sensitive and oftenhave had disastrous consequences for thepoor. Altogether, a third of the Fund’sstructural conditions contain some sort ofsensitive policy reforms – includingprivatisation and liberalisation, but alsoregressive reforms to the taxation systemsor strict ceilings on national expenditureswhich may constrain the government’sability to invest in much needed basicservices.
Copper mining in Zambia perfectlyillustrates this point. The IMF backed theprivatization of the complex copper miningsector and introduced fiscal reforms to
attract transnational corporations. Many ofthe reforms were far from the IMF field ofexpertise. This process has yielded farless poverty reduction and respect forenvironmental standards than was predicted.The Fund cannot afford to continue turninga blind eye to reality and implementingjust a few incremental measures to reformits conditionality policy. The Fund’sstrategy so far has yielded poor results,aggravating the institution’s generaldifficulties. If the IMF is serious aboutundertaking a broader and deeper reformwhich is to culminate in an agreement onthe Fund’s mandate and corporate governancebefore the end of this year, and increasinglegitimacy among its membership, it willhave to serious address conditionality asone of its most dangerous Achilles heels.
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crisis. New York: Federal Reserve Bank of New York.
Guilherme, R. S. (2008). IMF Conditionalities for the Least Developed Countries. Policy Brief No. 19.
IMF. (2013, April 2). IMF Conditionality. Retrieved June 26, 2013, from http://www.imf.org: http://www.imf.org/external/np/exr/facts/conditio.htm
Investopedia. (2013, January 1). Conditionality. Retrieved June 26, 2013, from http://www.investopedia.com/terms/c/conditionality.asp: http://www.investopedia.com/terms/c/conditionality.asp
Khor, M. (1998, December 4). IMF policies make patient sicker. Retrieved June 26, 2013, from http://www.twnside.org.sg/: http://www.twnside.org.sg/title/sick-cn.htm
Mutume, G. ( 2001, Mar 18). Criticism of IMF gets louder. Retrieved June 26, 2013, from http://www.twnside.org: http://www.twnside.org.sg/title/louder.htm
Pereira, N. M. (April 2008). The IMF maintains its grip on low-income governments.Brussels: European Network on Debt and Development.
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