Critique
of IMF Loan Conditionality
What
is Conditionality?
Conditionality
is most often associated with aid money. International organizations, such as
the International Monetary Fund (IMF) and World Bank, or individual countries
can use conditionality when lending money to another country. The donor country
requires that the country receiving the funds adhere certain rules directing
the use of funds (Investopedia, 2013) .
Conditionality
in its broad sense covers both the design of IMF-supported programs—that is,
the macroeconomic and structural policies—and the specific tools used to
monitor progress toward the goals outlined by the country in cooperation with
the IMF (IMF, 2013) .
Over
time, the IMF has been subject to a range of criticisms, generally focused on
the conditions of its loans. The IMF has also been criticized for its lack of
accountability and willingness to lend to countries with bad human rights
record.
On
giving loans to countries, the IMF makes the loan conditional on the
implementation of certain economic policies. These policies tend to involve:
·
Reducing government borrowing - Higher
taxes and lower spending
·
Higher interest rates to stabilize the
currency.
·
Allow failing firms to go bankrupt.
·
Structural adjustment. Privatization,
deregulation, reducing corruption and bureaucracy.
The
problem is that these policies of structural adjustment and macro-economic
intervention often make the situation worse.
For
example, in the Asian crisis of 1997 (Giancarlo Corsetti, 1999) , many countries such
as Indonesia, Malaysia and Thailand were required by IMF to pursue tight
monetary policy (higher interest rates) and tight fiscal policy to reduce the
budget deficit and strengthen exchange rates. However, these policies caused a
minor slowdown to turn into a serious recession with higher unemployment.
In
2001, Argentina was forced into a similar policy of fiscal restraint. This led
to a decline in investment in public services which arguably damaged the
economy.
Exchange
Rate Reforms
When
the IMF intervened in Kenya in the 1990s (ukessays, 2007) , they made the Central bank remove
controls over the flows of capital. The consensus was that this decision made
it easier for corrupt politicians to transfer money out of the economy (known
as the Goldman scandal). Critics argue this is another example of how the IMF
failed to understand the dynamics of the country that they were dealing with -
insisting on blanket reforms.
The
economist Joseph Stiglitz has criticized the more monetarist approach of the
IMF in recent years. He argues it is failing to take the best policy to improve
the welfare of developing countries saying the IMF "was not participating
in a conspiracy, but it was reflecting the interests and ideology of the
Western financial community."
Free
Market Criticisms of IMF
As
well as being criticized for implementing 'free market reforms' others
criticize the IMF for being too interventionist. Believers in free markets
argue that it is better to let capital markets operate without attempts at
intervention. They argue attempts to influence exchange rates only make things
worse - it is better to allow currencies to reach their market level (Mutume, 2001) .
Lack
of Transparency and involvement
The
IMF have been criticised for imposing policy with little or no consultation
with affected countries.
Jeffrey
Sachs, the head of the Harvard Institute for International Development said:
"In
Korea the IMF insisted that all presidential candidates immediately
"endorse" an agreement which they had no part in drafting or
negotiating, and no time to understand. The situation is out of hand...It
defies logic to believe the small group of 1,000 economists on 19th Street in
Washington should dictate the economic conditions of life to 75 developing
countries with around 1.4 billion people. (Khor, 1998) "
Faced
with strong criticism for its expansive and erroneous use of conditionality,
and in the wake of a financial crisis, the International Monetary Fund (IMF)
approved in 2002 a set of guidelines to inform its use of structural
conditionality. The Conditionality Guidelines committed the Fund to reduce the overall
number of conditions attached to Fund lending and ensure that those attached
respected and were drawn from nationally developed poverty plans in
recognitions that developing country ownership is instrumental for successful
development (Pereira, April 2008) .
The
IMF’s own Independent Evaluation Office (IEO) issued a study in January 2008
which concluded that the Fund dramatically increased both the number of
structural conditions and their intrusiveness in recipient countries’ domestic affairs.
The
IMF Conditionality Guidelines and their limited view of ownership is having
serious social consequences. The Fund continues to push for privatisation and
liberalisation of poor nations’ economies, interfering with decisions which
should be freely taken by countries according to domestic priorities and needs.
In Mali the IMF and the World Bank forced the reform and privatisation of the cotton
sector despite opposition. The reforms went ahead and now cotton farmers face
an even harder future. A quarter of all IMF structural conditionality still
promotes privatisation and liberalisation reforms, which have proven to be
highly sensitive and often have had disastrous consequences for the poor.
Copper
mining in Zambia perfectly illustrates this point. The IMF backed the
privatization of the complex copper mining sector and introduced fiscal reforms
to attract transnational corporations. Many of the reforms were far from the
IMF field of expertise. This process has yielded far less poverty
reduction
and respect for environmental standards than was predicted (Pereira,
April 2008) .
The
practice of attaching conditions to grants and loans has been widely criticised
for being ineffective, undermining ownership and imposing inappropriate policy
choices. Civil society, academics and southern governments agree that
conditionality is an infringement on national sovereignty and has not been
effective in inducing economic policy reform. But even the World Bank and the
International Monetary Fund – the world’s leading advocates of economic policy
conditions – agree that conditionality has failed to create incentives for
policy reform.
The
IMF holds the global monopoly on assessing countries’ macroeconomic health,
which in developing countries is measured by being “on-track” with an IMF
programme, typically a Poverty Reduction and Growth Facility (PRGF). Thus, IMF conditionality hardly ever
is contested by other donors, which perceive it as a scarce and necessary
service for their own disbursement decisions. Moreover, the technical
complexity of macroeconomic policies which the IMF addresses has also often
dissuaded civil society groups from voicing criticism of the Fund’s measures (Pereira,
April 2008) .
The
Fund attaches two different types of policy conditions to its loans in poor
countries – quantitative and structural. Quantitative conditions are
macroeconomic targets determining, for example, the level of fiscal deficit a
government is allowed to run up or the permitted level of domestic credit.
Structural conditions, on the other hand, push for institutional and
legislative policy reforms within countries. They include, for example, trade
reform, price liberalisation and privatisation.
IMF Conditionalities for the Least
Developed Countries
The
controversial issue of the Fund’s conditionality originates from Article V
(“Operations and Transactions of the Fund”), Section 3 of the Fund’s Articles
of Agreement, which broadly presents the conditions governing use of the Fund’s
resources. Briefly, Section 3(a) states that the Fund: “shall adopt policies on
the use of its general resources (…) and may adopt special policies for special
balance of payments problems, that will assist members to solve their balance
of payments problems in a manner consistent with the provisions of this
Agreement and that will establish adequate safeguards for the temporary use of
the general resources of the Fund.”
This
means that, prior to the release of any financial resources to its members, the
Fund requires that certain constraints, widely known as “conditionalities”, are
imposed in the form of compliance with both Fund rules and Fund-suggested
(practically mandated, in the case of poor countries) policy guidelines and
adjustments. These “monitoring techniques” provide the framework with which the
Fund ensures solvency safeguards while targeting temporary balance of payments’
problems.
By
acknowledging the existence of two broad types of structural reforms, the Fund
tacitly admits the existence of double standards with regard to
conditionalities. The first cluster, based on the Fund’s core areas of
expertise, tackles macroeconomic scenarios via policies that aim to ensure
stabilization of exchange rate practices, as well as reduce balance of payments
and financial or monetary problems. Such policies could also include measures
such as tax reform, fiscal responsibility, banking and monetary reforms and
exchange rate flexibility.
The
second cluster, involving a much enlarged scope of Fund conditionality,
advocates “policies aiming more generally at improvements on the economy’s
underlying structure – its efficiency and flexibility – to foster growth, and
facilitate adjustment to exogenous shocks.”5 This is where the Fund arrogates
to itself the right to engage in much broader reforms including trade
liberalization, pricing and marketing, labour market reorganization and generic
institutional or regulatory changes.
This
enlarged scope of Fund involvement, through its conditionalities, should be
urgently reviewed and circumscribed by the Fund’s existing legal provisions and
guidelines. For instance, the mandate to establish “adequate” solvency
safeguards should not be interpreted as giving the Fund an unlimited mandate to
prescribe all-encompassing structural reforms on a Fund member.6
A
restrictive interpretation of the Fund’s mandate is supported by the IMF
Guidelines on Conditionality, which emphasize that conditionality objectives
must be strictly related to resolution of balance of payments problems, in
conformity with the Fund’s Articles and in a manner that establishes “adequate”
safeguards for the use of Fund resources. In other words, “adequate solvency
safeguards” to address balance of payments problems should not extend to trade,
labour and regulatory policies.
This
crucial distinction between Fund “demands” and “suggestions” is not resolved by
other language regarding Fund conditionalities. While ownership of and capacity
to implement a programme is acknowledged to be the sole responsibility of a
member country, the Fund is supposed to only be guided, but not bound by the
same principle of ownership.
This
wording ensures that the Fund is shielded from external criticism on legal
grounds, since sole responsibility is borne by the borrowing government. The
same guidelines provide unlimited scope for the Fund to apply conditionalities
even though a borrowing least developed country might have different policy
preferences and priorities, e.g. with regard to trade and poverty reduction
policies. Hence, “adequate safeguards” allows the Fund to demand reforms even
though they are not supported by the Fund’s own core mandate.
Such
conclusion is further buttressed by Paragraph 8 of the same Guidelines,
asserting that the Fund “is fully responsible for the establishment and
monitoring of all conditions attached to the use of its resources” and, even
more candidly under the “Principles Underlying the Guidelines on
Conditionality”, which state that the “need for ownership implies selectivity:
approval of the use of Fund resources depends in particular on the Fund’s
assessment that the member is sufficiently committed to successful
implementation”
With
regard to Fund trade policy conditionalities in low-income countries, proper
regard to social and political goals as well as the specific circumstances of
members has not been given, contrary to the spirit of Paragraph 4 of the
Guidelines. This is especially relevant for the one size fits all approach or
policy reform homogeneity characteristic of Highly Indebted Poor Countries
(HIPC) and PRGF programmes, including trade policy reforms; such policy
conditionalities also seem insensitive to the challenges of correct policy
sequencing, particularly for low-income borrowing countries (Guilherme,
2008) .
As
correctly acknowledged by key Fund documents, trade policy conditionalities
have little to do with the Fund’s traditional mission or areas of expertise,
and represent an obvious deviation from the Fund’s “core” legal mandate to
provide assistance to countries with balance of payments problems. Instead of
focusing on exchange rate issues, balance of payments concerns or financial and
monetary analysis, the Fund has turned to trade policy reforms, streamlining
trade policy administration, government revenue, governance and customs
administration reforms, all pushed through on the basis of dubious efficiency
improvement claims.
Finally,
it should be emphasized that imposition of cross-conditionalities by the Fund
is prohibited; nevertheless, in the recent past, the Fund has made specific
requests for the least developed countries to undertake unilateral commitments
towards further trade liberalization within the WTO or via regional trade
agreements, drastically restricting a least developed country’s sovereign right
to pursue its own interests. As the Fund demands that its conditionalities not
be subject to decisions taken by countries in other multilateral frameworks, it
seeks to be “primus inter pares”, relegating other international organizations
and commitments to “secondary status”.
Notwithstanding
the ongoing debate on coherence, it appears doubtful that lending arrangements
with IMF member countries have complied with existing Fund rules. Such
deviation from the core mandate of the Fund also raises the likelihood of
resource misallocation and failure to provide proper oversight of the
international economy.
Case
Study: Cameroon
The
Fund continues to push for privatisation and liberalisation of poor nations’
economies, interfering with decisions which should be freely taken by countries
according to domestic priorities and needs. Among the loans approved during
last three years, almost a quarter of all conditions required policy reforms
related to privatising or liberalising. This represents virtually no change
with regards to the share of privatisation and liberalisation related
conditions found in loans approved between 2003 and 2004.
In Cameroon six out of the fifteen conditions attached
to their PRGF in 2006 contained some sort of privatisation in the telecommunications,
postal and airline sectors, one condition required price liberalisation and
subsidy removal for the national oil company SONARA, and two conditions
required restructuring of the public postal enterprise. According to the Fund’s
arguments, privatisation should lead – amongst other effects – to increased transparency
and good governance in the sectors privatised. Unfortunately, the privatisation
process of the Cameroon’s airline company shows that expected benefits in theory
do not always translate into reality (Pereira, April 2008) .
In
September 2007 a joint delegation of the International Monetary Fund (IMF) and
the World Bank arrived in Cameroon to discuss the implementation of the
three-year economic programme signed between the two institutions and the
Cameroon government. The meetings were expected to handle technical issues on
the execution of the public investment budget, the implementation of the fiscal
reforms and progress in the privatisation process – particularly focusing on
financial sector reform with emphasis on the privatisation of Crédit Foncier. Not
content with the push made to the financial sector, the joint delegation was
also reported to have successfully mounted pressure on President Paul Biya, to
re-launch the privatization process of the Cameroon Airlines, Camair, which the
President had put on hold. Local newspapers reported that the offer from the
First Delta Air Services-led consortium had finally been selected. However, the
privatization process was halted following a late submission of a better offer
from an US group, Valiant Airways. This group was strongly backed by the US Ambassador
to Cameroon and the Prime Minister. Later it was found that the bidder, Valiant
Airways, was a fake and that the company was unknown to the American Federal
Aviation Authority and other international organisations. Since the privatization
started in February 2005, Camair’s debt and losses have mounted. In general the
privatization project has been cast in shadows. The attempt to privatise
Cameroon Airlines clearly shows that processes leading up to privatisation are
not necessarily respectful of minimum good governance standards, unless regulatory
measures intended to ensure transparency are in place. Once again, pressure
from the IMF to privatise may have not yield the expected results but may have
worsened the company’s situation.
Case
Study: Mali
Bypassing
ownership: imposed cotton sector privatisation in Mali Mali is one of the
world’s poorest countries and its economy is heavily reliant on the cotton sector.
Since the 1990s, the World Bank and the IMF have pressed for the privatization
of the Malian cotton sector and liberalisation of its pricing system, tying
cotton prices to world market values. These reforms coincided with a period
when the cotton prices were, and still are, heavily distorted by heavy
subsidised production in developed countries. In 2005 Malian President Amadou
Toumani Touré opposed the reforms and spoke out against Bank and Fund
conditions. He said “true partnership supposes autonomy of beneficiary
countries in requesting aid and in determining its objectives… Often programmes
are imposed on us, and we are told it is our programme… People who have never
seen cotton come to give us lessons on cotton… No one can respect the
conditionalities of certain donors. They are so complicated that they
themselves have difficulty getting us to understand them. This is not a
partnership. This is a master relating to his student.”
According
to the World Bank and the IMF the reform was expected to improve management and
increase cotton prices while decreasing the cost of farm inputs. The results
could not have been gloomier. Data from the World Bank for 2005-06 cotton sales
show that farmers were producing at a loss. The immediate impacts were a
collapse of households’ purchasing power and increasing poverty and food
insecurity. Long term effects include migration and price falls in the cereal
sector as a consequence of farmers switching crops. The Oxfam study Kicking the
habit: How the WB and the IMF are still addicted to attaching economic policy
conditions to aid predicts economic losses of 2 to 4% of Mali’s GDP. The
reforms supported by the World Bank and the IMF, occasionally by means of
crossconditionality – identical conditions imposed by both institutions - have
endangered the farmers’ livelihoods and Mali’s poverty reduction strategies
more broadly. A villager from Wacoro complained that “before, at harvest time,
a part of the income was given to the women. But this year, that was not the
case. On the contrary, the livestock we have accumulated over many years had to
be sold to enable us to cover our food costs, in particular the purchase of
cereals. As a result, we have almost nothing left in terms of savings to protect
us from the difficult times to come.”
Some
bilateral donors are currently backing the introduction of support funds,
having realised the importance of the cotton sector and the impact of its
highly volatile prices. This fund should help to compensate price differences
from one year to the other. Several donors support this initiative; however,
the World Bank and the IMF remain in an uncomfortable silence.
Case
Study: Zambia
Zambian
mining: toughening the tax regime Back in the 1990s, the World Bank insisted
that as a condition on their finance that the state-owned Zambia Consolidated
Copper Mines (ZCCM) should be privatized. The IMF backed the privatization of
ZCCM through the three-year ESAF (Enhanced Structural Adjustment Facility) and
one-year SAF (Structural Adjustment Facility) Loans approved in 1995.30
Subsequently ZCCM was chopped into several smaller companies and sold to
private investors between 1997 and 2000.
Ahead
of privatisation, the Washington-based IFIs advised the Zambian government
that, in order to bring in investment, the country should make itself
attractive by developing an “investor-friendly” regulatory regime. The World
Bank and the International Monetary Fund then used Zambia’s dependence on their
funding and debt relief to withdraw many of the controls that the state had previously
established on company behaviour. The IFIs continued imposing conditions even
when the privatisation deals were done, including one-sided “development
agreements” granting tax exemptions to foreign investors and all sorts of benefits
not normally granted in the national legal framework. In its 2004 PRGF
agreement with Zambia, the IMF required the government to “define a policy for the
granting of tax concessions.” The consequence of this condition was that
royalties raised by the Central Government represented just 0.2% of their
revenues. This deadly combination has prevented the increase of the profits in
the Zambian mining sector translating into an increase in the standards of
living of the population in these areas.
As
a result of the privatization formal employment has decreased. Several
structural adjustment programs have also affected the informal sector.
Additionally the communities of the Copperbelt now face acid rain, heavy metals
pollution, silting and other environmental problems which not only affect
peoples’ health, but also their capacity to grow their own food.
Conclusions and
Recommendations
The Fund has failed to
implement its own Conditionality Guidelines. Even after the 2005 review, which
showed limited progress in implementing the Guidelines, the Fund has not taken
further steps to address this failure and streamline conditions. One of the
main conclusions of the 2005 review was that: “numbers of structural conditions
have not shown much of a decline.” Beyond the numbers, the principles of
ownership and tailoring to national circumstances should entail refraining from
placing controversial conditions which may be highly sensitive for some
national constituencies and may lead to domestic tensions and social unrest. On
this front, the Conditionality Guidelines are too limited. The CG defines the
principle of ownership as the “willing assumption of responsibility for a
program of policies, by country officials who have the responsibility to
formulate and carry out those policies.” The Fund considers ownership is
sufficient when there is enough “buying” by country officials of policy reforms
designed by Fund economists. This deviates from the concept of genuine
ownership as understood by civil society groups and recipient governments,
which would require recipient governments and their citizens to take the lead
in designing and prioritizing policy reforms.
The IMF’s limited view
of ownership is having serious social consequences. In Mali the IMF and the WB
forced the reform and privatisation of the cotton sector despite opposition.
The reforms went ahead and now cotton farmers face an even harder future. A
quarter of all IMF structural conditionality still promotes privatisation and
liberalisation reforms, which have proven to be highly sensitive and often have
had disastrous consequences for the poor. Altogether, a third of the Fund’s
structural conditions contain some sort of sensitive policy reforms – including
privatisation and liberalisation, but also regressive reforms to the taxation
systems or strict ceilings on national expenditures which may constrain the
government’s ability to invest in much needed basic services.
Copper mining in Zambia
perfectly illustrates this point. The IMF backed the privatization of the complex
copper mining sector and introduced fiscal reforms to attract transnational
corporations. Many of the reforms were far from the IMF field of expertise.
This process has yielded far less poverty reduction and respect for
environmental standards than was predicted. The Fund cannot afford to continue
turning a blind eye to reality and implementing just a few incremental measures
to reform its conditionality policy. The Fund’s strategy so far has yielded poor
results, aggravating the institution’s general difficulties. If the IMF is serious
about undertaking a broader and deeper reform which is to culminate in an agreement
on the Fund’s mandate and corporate governance before the end of this year, and
increasing legitimacy among its membership, it will have to seriously address
conditionality as one of its most dangerous Achilles heels.
Bibliography
Giancarlo Corsetti, P. P. (1999). What caused the
Asian Financial and currency crisis. New York: Federal Reserve Bank of
New York.
Guilherme, R. S. (2008). IMF Conditionalities for
the Least Developed Countries. Policy Brief No. 19.
IMF. (2013, April 2). IMF Conditionality.
Retrieved June 26, 2013, from http://www.imf.org:
http://www.imf.org/external/np/exr/facts/conditio.htm
Investopedia. (2013, January 1). Conditionality.
Retrieved June 26, 2013, from
http://www.investopedia.com/terms/c/conditionality.asp:
http://www.investopedia.com/terms/c/conditionality.asp
Khor, M. (1998, December 4). IMF policies make
patient sicker. Retrieved June 26, 2013, from http://www.twnside.org.sg/:
http://www.twnside.org.sg/title/sick-cn.htm
Mutume, G. ( 2001, Mar 18). Criticism of IMF gets
louder. Retrieved June 26, 2013, from http://www.twnside.org:
http://www.twnside.org.sg/title/louder.htm
Pereira, N. M. (April 2008). The IMF maintains
its grip on low-income governments. Brussels: European Network on Debt
and Development.
ukessays. (2007, April 4). Criticism Of The
International Monetary Fund Economics Essay. Retrieved June 26, 2013,
from http://www.ukessays.com/:
http://www.ukessays.com/essays/economics/criticism-of-the-international-monetary-fund-economics-essay.php
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