New Rules of Engagement for IMF Loans
IMF Survey online - April 13, 2009
approach aims to remove stigma of borrowing
- Reform does away
with "hard" structural conditionality
- New focus on objectives rather than specific actions
As part of a wide-ranging reform of its lending practices announced in March, the IMF has redefined the way it engages with countries on issues related to structural reform of the economy.
Structural reforms refer to changes in the underlying makeup of an economy, such as fiscal systems, social safety nets, and measures to improve competitiveness and strengthen the financial sector.
“We arrived at these reforms by listening to our membership, consulting with a variety of stakeholders, and reviewing past experiences,” John Lipsky, the IMF’s First Deputy Managing Director, said. “These reforms will pave the way for countries to work more effectively with the Fund on crisis prevention and crisis resolution.”
As part of its lending reform package, the IMF also announced the creation of a flexible credit line (FCL), a type of insurance policy for strong performers, mainly emerging market countries. Access to the FCL is restricted to countries that meet strict qualification criteria. But once a credit line has been approved, a country can draw on it without having to meet specified policy goals, as is normally the case for IMF loans. Mexico has applied for a $47 billion precautionary credit line under the FCL.
When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid in the first place. These loan requirements are known in IMF jargon as “conditionality.” In most Fund programs, the loan money is paid out in tranches that depend on the country implementing the requirements set out in the loan according to a specific timetable.
A country’s progress in implementing the loan conditionality is monitored through reviews carried out by the IMF’s Executive Board. There are two types of conditionality:
• macroeconomic conditions, which may include criteria for containing inflation, reducing budget deficits and public debt, or strengthening the central bank’s reserves, and
• structural conditions, which may include measures to strengthen banking supervision, reform the tax system, improve fiscal transparency, and build up social safety nets.
In the past, the IMF has been criticized by some governments and civil society organizations for demanding too many reforms in exchange for financial assistance. In 2007, a study of IMF lending by the Independent Evaluation Office (IEO) found that “a significant number of structural conditions are very detailed, and often felt to be intrusive and to undermine domestic ownership of programs.”
The IMF’s new lending framework focuses on the underlying objectives of a country’s structural reform program rather than on specific actions that need to be adopted according to a specific deadline. The new framework will apply to all the IMF’s loan programs, including those with low-income countries. It requires the IMF’s Executive Board to assess how much progress a country is making on implementing its structural reform agenda, based on key actions agreed with the country at the outset of the program that will serve as benchmarks.
Under the previous approach, formal waivers were needed to access new loan tranches every time a country failed to comply with structural loan conditions, known as structural performance criteria. This sent a signal to the markets and the public that reforms had gone off track, even if there were good reasons for the delays. For these reasons, structural performance criteria came to be seen as a key source of stigma attached to borrowing from the IMF.
How it will work in practice
Reviews will provide the primary tool for monitoring performance on the structural reform agenda. If the IMF’s Executive Board concludes, on the basis of a review, that the country is successfully implementing the policies have been agreed, and that program objectives are being met, the country will gain access to the next tranche of its loan.
Starting May 1, structural performance criteria will be discontinued for all IMF loans, including for programs with low-income countries. Structural reforms will continue to be part of IMF-supported programs, but only when they are seen as critical to a country’s recovery. And the monitoring of these policies will be done in a way that reduces stigma, because countries will no longer need formal waivers if they fail to implement an agreed measure by a specific date.
New rules of engagement
The IMF is hoping that its new lending framework will overcome the lingering mistrust that has marred its relations with some countries, particularly after the Asian crisis in the 1990s, and that countries in need of help to overcome what has been billed as the worst economic crisis since the Great Depression will no longer hesitate to approach the IMF.
“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,” said IMF Managing Director Dominique Strauss-Kahn in announcing the changes. “More flexibility in our lending along with streamlined conditionality will help us respond effectively to the various needs of members. This, in turn, will help them to weather the crisis and return to sustainable growth.”
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