Global Policy Forum

Watchdog Faults IMF Loan Conditions


By Abid Aslam

Inter Press Service
January 6, 2008

The International Monetary Fund (IMF) continues to burden its borrowers with superfluous demands despite efforts to streamline loans, an internal watchdog has found.

"Progress had been made in better aligning IMF conditionality to its core areas of responsibility and expertise, but about one-third of conditions continued to reach outside these areas," said Tom Bernes, director of the fund's Independent Evaluation Office. The findings seem bound to fuel criticism that the IMF has arrogated unto itself the power to set terms beyond its formal mandate. In particular, evaluators are urging the fund to ease or jettison demands that borrowers transfer public services and enterprises to private owners. Requiring governments to sell off utilities, health and educational institutions, or national industries is a contentious business. In some borrowing countries, security forces have clashed with citizens concerned about job losses and price hikes for basic goods and services. Yet, according to the evaluators, the IMF staff has succeeded in ensuring that loan conditions increasingly reflect core concerns about macroeconomic stability. Rather, the sprawl -- some call it "mission creep" -- is largely the fault of the agency's wealthy shareholders.

Donor countries impose conditions with little relevance to the IMF's remit, evaluators found. Instead, terms are designed to enable donors to track their own, separate aid programmes and to ensure borrowers meet their benchmarks for debt relief or for entry into the European Union. The extraneous conditions often are detailed and intrusive, some going as far as dictating legislative proposals to borrowing countries' parliaments. In consequence, an initiative launched in 2000 to reduce the volume and scope of conditions has had little impact. The effort, and guidelines issued two years later, required that demands be made sparingly and be limited to those considered critical to programme goals.

"The streamlining initiative did not reduce the volume of conditionality, partly because structural conditions continued to be used to monitor other initiatives such as donors' support programmes and the European Union accession process," the evaluation office said in a report released late last week. The new evaluation of loans between 1995 and 2004 found that the number of structural conditions in IMF-supported programmes came to an average of about 17 a year. The figure did not change after 2000. "Overall, the analysis underscores that achieving the objectives of parsimony and criticality remains an important challenge for the fund, and greater efforts are needed in this direction," said Bernes.

Wealthy IMF members' appetite for binding borrowers' hands appears to be proving counter-productive. "Most of these conditions had little structural depth and only about half of them were met on time," the report said. "Compliance was only weakly correlated with subsequent progress in structural reform." "Compliance and effectiveness were higher in the areas of IMF core competency, such as public expenditure management and tax-related issues, and lower in areas such as privatisation and reform of the wider public sector," it added. Evaluators recommended limiting the number of conditions to four or five a year. "The use of structural benchmarks should be discontinued and measures with low structural content should not be part of conditionality. Normally, conditionality should be restricted to the core areas of IMF expertise," the report said. Anything else, it added, should be left to the fund's sibling, the World Bank. Additionally, monitoring and evaluation must be improved to "provide a more robust basis for assessing programme results".

Development experts long have said governments and voluntary organisations in poor countries are overwhelmed by heavy-handed conditionality, whether in exchange for the IMF's budget support or as the price of bilateral finance. Dictation from abroad also has been said to undermine locals' sense that aid efforts and structural reforms are theirs in the first place. "Ownership of the reform programme by the economic team and by the line ministries in charge of the specific measures was necessary both for compliance and for continuity of the reform," the report said. Added the evaluators: "Programme documents should explain how the proposed conditionality is critical to achieve explicit objectives." This would help to ensure that conditions remain true to the fund's mission and that borrowers are kept securely on board. Especially in the case of concessional financing provided to poor countries through the fund's Poverty Reduction and Growth Facility, they said, "programme requests should be accompanied by an operational roadmap covering the length of the programme, explaining the proposed reforms, their sequencing, and expected impact." IMF managers and staff, in written responses to the report, invoked a need to improve understanding of conditionality among outside critics. This would be a good idea, the evaluations office said, but: "To do so effectively will require greater clarity from the Executive Board and in operational guidance than currently exists."

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