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Partial victory: the IMF abolishes one conditionality type
27 March 2009
After years of pressure from Southern governments and civil society this week the IMF Executive Board announced it will no longer approve any Structural Performance Criteria attached to the Fund’s programmes. This measure will take effect on 1 May. This is good news and many Eurodad allies and members have contributed to it. However, this is not the end of the struggle as not all types of IMF conditionality have been axed and countries will have to take up front measures to get Fund finance.
The Fund will still attach two other types of structural conditions, as well as macroeconomic conditions. But the door is now open to continue what the Fund has called the “modernisation” of its conditionality. There is much to be done. And civil society will be pushing for more of these announcements in the next few months.
What types of conditions have been abolished?
On 24th March the Executive Board of the IMF approved what they call a “major overhaul of the IMF’s lending”, including:
- increased access to IMF resources;
- a new flexible credit line (FCL), assuring some qualified countries (mostly advanced and emerging economies) of large and upfront access to Fund resources with no ongoing (ex post) conditions,
- adapting and simplifying cost and maturity structure for its lending, and modernising IMF conditionality.
IMF Managing Director Dominique Strauss-Kahn said that “these reforms represent a significant change in the way the Fund can help its member countries—which is especially needed at this time of global crisis.” He added that “more flexibility in our lending along with streamlined conditionality will help us respond effectively to the various needs of members.”
The Board’s decision this week has put an end to what the Fund calls “Structural Performance Criteria”. In explaining their decision, the Fund acknowledges that “in the past, IMF loans often had too many conditions that were insufficiently focused on core objectives.” Structural Conditions impose on recipient governments the reform of key structural aspects of their economy in exchange for IMF’s finance. They go well beyond the Fund’s core macroeconomic business, to issues such as tax rates, banking regulation, commodity prices and even institutional reform. Since the 1990s, Structural Conditions also spread to areas which are considered to be outside Fund expertise, such as state-owned enterprise reform and privatization, social policies, or regulatory reform. This marked a clear shift from macroeconomic factors to microeconomic structural interventions. Performance Criteria are binding conditions that need to be met during the implementation of the programme so subsequent instalments of IMF finance will be released – these conditions are different from “Prior Action”, which are reforms or actions that need to be met before any funds start to be disbursed.
In the past few months the IMF has started to shift from ex post conditionality – applied during the programme implementation – to ex ante conditionality – funds are only channelled to countries the IMF considers to be “strong performers” who undertake reforms up front. This is the approach of the new Short-Term Liquidity Facility created in autumn 2008. The decision to phase out Structural Performance Criteria and focus on Structural Prior Actions is also a move in a similar direction. The downside, obviously, is that only countries that are able to fulfil the designated prior conditions have access to the funding under such approach. The other weakness is that the Fund is de facto strengthens the “eligibility” phase or criteria, whereby “stronger performers” have easier access than those who are not considered to be as such.
In their own words: “This modernisation is to be achieved in two key ways. First the IMF will rely more on pre-set qualification criteria (ex-ante conditionality) where appropriate rather than on traditional (ex post) conditionality as the basis for providing countries access to Fund resources.” Thus, “the implementation of structural policies in IMF-supported programs will from now on be monitored in the context of program reviews, rather than through the use of structural performance criteria. While structural reforms will continue to be integral to Fund-supported programmes where needed, their monitoring will be done in a way that reduces stigma, as countries will no longer need formal waivers if they fail to meet a structural reform by a particular date.”
A “major” or a “modest” overhaul?
Calling these set of reforms a “major overhaul” is probably an overstatement. We welcome it but consider it modest. However, modest steps in the right direction can be followed by bolder ones. Just eight months ago, the IMF Executive Board endorsed some of the recommendations of the report of the IMF Independent Evaluation Office on Structural Conditionality but refused the IEO’s recommendation to cap the Structural Conditions to three or four per loan. This week’s agreement, even though it does not include a cap, is a step to decrease the burden of Structural Conditions. What has happened during these eight months that changed the Executive Board’s stubbornness? This question goes without an answer: the spread of the financial crisis – or should we say the increased awareness on the magnitude and spread of the crisis – is mounting pressure on the need for change, and, more specifically, on the need to reform the IMF. The IMF is now in the spotlight and needs to deliver.
What do we want to see next?
Although the decision taken this week by the Board is welcomed, there is still a long way to go on IMF reform
. The Fund needs to step up the efforts started this week by:
- Sharply decreasing the average number of structural conditions per loan, including targets and a timeline to properly assess progress;
- Including a commitment to stop attaching sensitive economic policy reforms in their structural conditionality – including privatisation and liberalisation;
- Ensure that before they recommend a course of action, the impacts of a range of options on poor people have been thoroughly explored by conducting country-led Poverty and Social Impact Analysis (PSIA).
This announcement is not revolutionary. But it may open the door to further change to what the Fund calls further “modernisation” of their conditionality, and what we CSOs call “breaking the grip on low-income countries”. The world’s eyes are on the IMF as the G20 London summit approaches and extra money is channelled towards the institution. Civil society groups will be watching calling for a far deeper transformation of the Fund if that is to be the case.
Key links:
“Critical Conditions: the IMF maintains its grip on low-income governments” by Eurodad, April 2008 http://www.eurodad.org/uploadedFiles/Whats_New/Reports/Critical_conditions.pdf
“An IEO Evaluation of Structural Conditionality in IMF-Supported Programs”, by IMF IEO, December 2007: http://www.ieo-imf.org/eval/complete/eval_01032008.html
“IMF Revamps its Lending”, March 2009: http://www.imf.org/external/pubs/ft/survey/so/2009/NEW032409A.htm