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Conditionally yours: An analysis of the policy conditions attached to IMF loans

Added 02/Apr/14

Loans from the International Monetary Fund (IMF) largely come with policy change conditions attached – conditions that the IMF has played a significant role in developing. Criticisms of the excessive burden and politically sensitive nature of these conditions led to significant reviews at the IMF and the introduction of some conditionality-free facilities, although these are limited in scope. The IMF claims to have limited its conditions to critical reforms agreed by recipient governments. However, the worrying findings of this research suggest that the IMF is going backwards – increasing the number of structural conditions that mandate policy changes per loan, and remaining heavily engaged in highly sensitive and political policy areas.

Eurodad’s research found that:

  • The number of policy conditions per loan has risen in recent years, despite IMF efforts to ‘streamline’ their conditionality. Eurodad counted an average of 19.5 conditions per programme. This is a sharp increase compared to previous Eurodad research, which found an average of 13.7 structural conditions per programme in 2005-07 and 14 per programme in 2003-04.
  • The biggest IMF facilities in terms of loan totals have the heaviest conditionality. This rise is driven by exceptionally high numbers of conditions in Cyprus, Greece and Jamaica, which together accounted for 87% of the total value of loans, with an average of 35 structural conditions per programme.
  • Almost all the countries were repeat borrowers from the IMF, suggesting that the IMF is propping up governments with unsustainable debt levels, not lending for temporary balance of payments problems – its true mandate.
  • Widespread and increasing use of controversial conditions in politically sensitive economic policy areas, particularly tax and spending, including increases in VAT and other taxes, freezes or reductions in public sector wages, and cutbacks in welfare programmes including pensions. Use of these types of conditions tends to be lower in low-income countries, but is very high in some of the largest programmes. Other sensitive topics include requirements to reduce trade union rights, restructure and privatise public enterprises, and reduce minimum wage levels.

This analysis confirms the findings of other research, which shows that the IMF uses its significant influence to promote controversial austerity and liberalisation measures, with potentially severe impacts on the poorest people around the globe:

  • A report published by Development Finance International (DFI) on IMF programmes in low-income countries found that “the IMF … returned to a path of fiscal conservatism and reduced spending levels from 2010 onwards”.
  • A Center for Economic and Policy Research (CEPR) study of IMF advice in Europe found “a focus on other policy issues that would tend to reduce social protections for broad sectors of the population (including public pensions, health care, and employment protections), reduce labour’s share of national income, and possibly increase poverty, social exclusion, and economic and social inequality as a result.”

This is particularly worrying for borrowers from developing countries, who have a limited voice and a minority vote at the IMF. Agreements made in 2010 to increase – by a small amount – the votes of emerging market economies have been blocked by the failure of the US to ratify them. The US has such a large share of IMF votes that it can unilaterally veto these kinds of decisions, while European governments cling on to eight of the 24 seats* on the IMF’s executive board.

It is clear that the IMF’s role and governance needs a major overhaul. We make three recommendations:

  • First, the IMF should focus on its true mandate as a lender of last resort to countries that are facing temporary balance of payments crises. Such countries need rapid support to shore up their public finances, not lengthy programmes that require major policy changes. A far more sensible approach would be to extend the example of the IMF’s new but little used Flexible Credit Line to all IMF facilities – requiring no conditionality other than the repayment of the loans on the terms agreed.
  • Second, if countries are genuinely facing protracted and serious debt problems, then IMF lending only makes the situation worse. The development of fair and transparent debt work-out procedures should be prioritised by the international community, and at regional and national levels, to assess and cancel unpayable and illegitimate debt. However, the IMF should not be the venue for such debt work-out mechanisms: as a major creditor, they would face an impossible conflict of interest.
  • Finally, the IMF must urgently address its crisis of legitimacy, and radically overhaul its governance structure to give developing countries a fair voice and vote, and to radically improve transparency and accountability. A vital first step would be to introduce double majority voting, so that approval is needed from a majority of IMF member countries, in addition to a majority of IMF voting shares.
To read the full report, click here or on the download button below.