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IMF to review `conditionality' norms

Our Bureau

NEW DELHI, April 9

THE much-abused term in monetary jargon, `conditionality', prescribed by the International Monetary Fund (IMF) when it extends loans to members seeking structural adjustment programme, is being reviewed and infused with new import in line with the changi ng times.

Recently, the IMF Executive Board discussed threadbare conditionality in Fund-supported programmes in the light of experience over the past decade. Whereas until the 1980s policy conditions were primarily limited to macroeconomic variables such as those pertained to domestic credit creation and the fiscal deficit, beginning in the late 1980s there was a major broadening of the scope of conditionality.

It may be noted that it is in the latter phase that India went to the Fund for a jumbo loan when faced with a balance of payments crisis at the dawn of the last decade.

The broadening of the scope of `conditionality' came increasingly to be attached to structural reforms, including those designed to strengthen fiscal institutions, to build a robust financial sector and to increase the efficiency of the economy more gene rally.

But the expansion of conditionality has raised a host of issues and in particular concerns that an excessively broad and detailed conditionality might undermine the national ownership of a policy programme, which is vital for successful programme impleme ntation.

In fact, in the aftermath of the BoP crisis even as India embarked on a liberalisation programme, the then ruling party had to face flak for executing reform programme under duress from the Fund.

It is in hindsight that the Managing Director of the IMF has given high priority to streamlining and focusing the Fund's conditionality and reinforcing national ownership. At the recent Fund meeting in Washington, Directors noted that the increasing scop e and detail of conditionality in the structural area raised a spate of issues.

While some Directors observed that the Fund's conditionality had remained focused on its core areas of responsibility, others noted that the application of some conditionality outside those areas gave rise to concerns that the Fund was overstepping its r emit and expertise.

They also took note of concerns that Fund-supported programmes sometimes short-circuited national decision-making processes and failed to take adequate account of the authorities' ability to muster public support for the policies envisaged, as well as th eir administrative capacity to implement these policies. Hence, Directors underscored the importance of avoiding ``ill-focused or unduly intrusive conditionality that could detract from ownership''.

Directors also noted that the boundaries of conditionality had become blurred, due to the increasing use of structural benchmarks and the use of Letters of Intent (LoIs) to set out the authorities' overall reform programmes.

This made it more difficult for both the Fund and outsiders to ascertain on exactly which policy measures the Fund's financing is conditional. In light of these considerations, Directors agreed that there was a need to streamline and focus the Fund's con ditionality.

The aim of streamlining should be to leave the maximum possible scope for countries to make their own policy choices, while ensuring that the Fund's financing is provided only if those policies that are essential to the purposes of the Fund continue to b e implemented.

Directors agreed that a clear division of labour and enhanced cooperation with the World Bank and other agencies was a crucial element of streamlining.

Directors agreed that some aspects of the tools of conditionality would need to be considered further before completing their review of conditionality.

These issues include the application of waivers of non-observance of performance criteria, the scope, content and frequency of programme reviews, the precise role of structural benchmarks and the use of prior action particularly on the need for transpare ncy and uniformity of treatment.