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.

BibliographyGiancarlo Corsetti, P. P. (1999). What caused the Asian Financial and currency

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.

ukessays. (2007, April 4). Criticism Of The International Monetary Fund Economics Essay. Retrieved June 26, 2013, from http://www.ukessays.com/: http://www.ukessays.com/essays/economics/criticism-of-the-international-monetary-fund-economics-essay.php