Unhealthy conditions: IMF loan conditionality and its impact on health financing

Added 28 Nov 2018
The International Monetary Fund (IMF) practice of attaching policy conditions to its loans for crisis-hit countries continues to trigger outrage and protest. This report investigates the conditions attached to the IMF loans for 26 country programmes that were approved in 2016 and 2017. In at least 20 of those countries, people have gone on strike or taken to the streets to protest against government cutbacks, the rising cost of living, tax restructuring and wage bill reforms pushed by IMF conditionality.

They have good reasons to complain. The fact that the IMF imposes reforms undermines sovereignty, democratic decision-making and ownership for reforms in affected countries. The type of reforms that the IMF imposes through programme conditionality affects governments’ ability to provide public services, their capacity to fulfil their human rights obligations towards citizens, and ultimately impacts on people’s living conditions.

This new Eurodad study on IMF conditionality assesses first how intrusive IMF programmes are. We took a thorough look at the IMF’s conditionality databases, as well as at relevant programme documents, in order to assess how many conditions the IMF is actually imposing. We counted the conditions for loans approved in 2016/17 and compared the findings with our previous study that covered IMF programmes approved in 2011 to 2013.

We found that the number of IMF conditions is increasing. This finding stands in stark contrast to IMF’s own stated intentions of streamlining conditionality, and focusing on macro-critical conditionality.

• The average number of structural policy conditions per loan is 26.8 conditions for 26 countries, including those in reviews. The programmes approved in 2011 to 2013 had only 19.5 conditions per loan. In addition, this research also counted quantitative conditionalities, which previous Eurodad research did not. These accounted for, on average, an additional 8.7 quantitative conditions per programme.

• Conditionality can significantly increase after a programme has been approved, due to conditionalities added during reviews. Even countries that start with modest conditionality requirements can be confronted with a high conditionality burden in less than two years following loan approval, caused by ‘conditionality escalation’.

• The IMF is increasingly using ‘hidden’ forms of conditionality. Besides the explicit conditionality that appears in databases and annexes to loan documents, the IMF bundles conditionality. Policy measures embedded in the narrative of IMF programme documents are de facto conditionality even though they are not explicitly so.

• The largest IMF facilities in terms of loan volume continue to have a large number of conditions attached. The two main types of IMF programme – Extended Fund Facility and Stand-By Agreement – account for 83 per cent of the total value and have an average of 30.3 conditions per loan.

Looking at the type of conditions, the study finds that the IMF programmes continue to be pro-cyclical and oblige borrowers to implement austerity: 23 out of 26 programmes are conditional on fiscal consolidation. The majority of borrower countries are forced to restrict their spending and/or increase their taxes as a result of the loans, contradicting IMF claims that its programmes do not emphasise fiscal contraction. Shrinking fiscal space constrains the ability of governments to deliver on their development commitments and human rights obligations.

Comparing cases over time, we found that the majority of countries in our 2016/2017 sample were repeat borrowers from the IMF. This suggest that programme conditionality has in most cases been ineffective, perhaps even counterproductive, when it comes to restoring long-term debt sustainability. From this, we can conclude that IMF programme design is based on overly optimistic views on debt sustainability. Most of the countries that faced payment difficulties would have been better off restructuring their unsustainable debts in order to create fiscal space, instead of requesting IMF bailout loans that came with harsh austerity conditions attached. 

In a second step, this research identified knock-on effects of IMF conditionalities on health system financing and access to health services. The adjustment measures potentially directly affecting healthcare are those mandating budget cuts and public sector employment reductions. Budget constraints as a consequence of loan conditionality risk compromising a country’s capacity to scale up public investment to provide essential health services, while public employment reductions have a heavy impact on the health sector and the enjoyment of the rights to health.

Eurodad’s research found:

• In the absence of debt relief, countries struggle to finance health services; debt service costs as a share of the total budget are higher than health spending in eight of the countries studied. Rapidly growing debt service costs threaten to crowd out health spending.

• In many countries, for instance Chad and Gabon, austerity measures have sparked cuts in the health sector, which has had a grave impact on health service delivery and health personnel. This has reduced access to health services for the population as out-of-pocket payments have increased.

• Long periods of austerity risk causing protracted underinvestment in social services. For instance, in Guinea and Sierra Leona – which are both emerging from crippling health crises brought on by the Ebola epidemic – the current programmes call for wage bill freezes or reductions.

• All low-income countries face challenges in terms of raising sufficient resources for health systems to reach the essential requirements for universal health coverage (UHC). However, the social spending floors that are part of IMF programmes, and that are supposed to shield vulnerable groups, are at levels below what is needed to  guarantee basic healthcare.

A fundamental change in approach is needed. This report makes the following recommendations:

• Creating fiscal space through debt restructuring must be the first option when countries face a protracted debt problem, instead of lending with conditionality. The IMF’s debt sustainability assessments should be complemented with independent Human Rights Impact Assessments (HRIA), in order to assess debt burdens and their implications on countries’ abilities to finance internationally agreed development goals and to fulfill their human rights obligations. These HRIA, conducted before approving loans and designing programmes, should guide the IMF and its Member States’ policy choice towards debt restructuring, or borrowing from the IMF, or a combination of both.

• The IMF should respect democratic ownership and stop applying conditions to loans other than the repayment of the loan on the terms agreed. In this respect, the IMF should extend the use of instruments such as the Flexible Credit Line and Precautionary and Liquidity Line, and remove the remaining ex ante conditionality attached to them. Requiring no conditionality other than the repayment of the loans on the terms agreed is a far better model to deal with temporary balance of payment and liquidity needs.

To read a summary version of the report please click here.