IMF Conditionality Theory and Practice

1
IMF Conditionality Theory and Practice

• June 10, 2008
• Christian Mumssen
• African Department
• International Monetary Fund

2
Outline

• IMF Low-Income Country Work
• PRGF-supported Programs
• Example Togo
• Conditionality Purpose, Principles, Practice
• IMF Programs in Sub-Saharan Africa Policies,
  Outcomes, Challenges
• Conclusion

3
IMFs Objectives

• What are the IMFs objectives in low-income
  countries?
• Ultimately economic growth and poverty reduction
• IMF focus macroeconomic policies and reforms in
  public finance, financial sector, and statistics
• Support macroeconomic stability and good (fiscal,
  monetary) institutions, which are critical for
  long-term growth and poverty reduction
• Work closely with country authorities to build
  capacity through technical assistance

4
IMFs Engagement in LICs

• How does the IMF support a countrys economic
  policies?
• Economic objectives, programs, and policy
  measures are defined by country authorities, with
  technical support from the donor community
  including IMF
• Conditionality is drawn from these programs and
  mutually agreed
• IMF policy dialogue is continuous and
  collaborative
• Policy and technical advice is much broader and
  deeper than the agreed program conditions
• In many LICs, IMF country missions provide, in
  effect, macroeconomic technical assistance
• Specialized technical assistance missions build
  institutions (AFRITACs highly successful)

5
What is a PRGF?

• Three-year program semiannual disbursements and
  reviews ½ percent interest rate
• Member country and IMF identify together the
  goals and strategies that the PRGF supports
• PRGF-supported program is a subset of the
  authorities broader program, usually defined in
  the countrys PRSP
• Program conditionality is a monitoring device of
  progress in implementation

6
Quick Example Togo

• Togos 108 million PRGF (2008-10)
• Goals Revive economic growth and improve basic
  living conditions while safeguarding economic
  stability
• Strategies reengaging with donor community
  (after long interruption) achieving HIPC/MDRI
  debt relief higher resources for infrastructure,
  health, and education strengthening fiscal
  governance reforming fragile banks, state-owned
  enterprises, and the business environment
• Conditionality (2008)
• Quantitative (based on 08 budget) primary
  fiscal balance net domestic financing external
  arrears new nonconcessional debt
• Prior actions, structural performance criteria
  and benchmarks fiscal governance (4) financial
  sector (3) public enterprises (2)

7
Conditionality Purpose

• Safeguard IMF (shareholder) resources policies
  should address macro imbalances
• Provide assurances to the country authorities
  conditionality defines what needs to be done to
  have access to IMF financial support and IMFs
  positive signal to donors and investors
• But also
• Define policy priorities identify the most
  critical macroeconomic policies and reforms
• Promote policy coordination facilitate domestic
  consensus and collaboration on fiscal, monetary
  and structural policies

8
Conditionality Principles

• Key issues in designing conditionality
• Country ownership
• Criticality for program success (see 2007 IEO
  report)
• Tailoring to country circumstance
• Parsimony (less is more) (see also 2007 IEO
  report)
• Coordination with other development partners
• Clarity of conditions
• IMF expertise

9
Conditionality Practice

• My experience with conditionality
• IMF programs do not lack ownership.
  Conditionality derives from authorities
  programs, e.g. PRSP, which are designed with
  technical assistance from donor community and in
  consultation with civil society
  non-implementation often reflects lack of
  capacity
• Quantitative targets are based on budget and
  central bank policies
• Conditionality is tailored to country
  circumstances (objectives, challenges, risks, and
  capacities vary greatly across countries)
• Authorities sometimes seek specific (and
  sometimes many) structural conditions to improve
  domestic policy coordination
• Most conditions are uncontroversial and common
  sense
• Conditionality is flexible (adjustors, waivers,
  benchmarks, reviews)
• Conditionality evolves with experiences on the
  ground, e.g. greater focus on Funds core
  expertise, removal of wage bill ceilings, etc.

10
IMF in Africa Policies

• IMF Policy Recommendations
• Policy advice is mostly pragmatic, focused on
  achieving intermediate economic goals, e.g.
  strengthening revenue collection, reallocating
  spending to priority areas, preventing high
  inflation, ensuring debt sustainability,
  attracting investment, reducing financial sector
  risks, etc.
• Programs accommodate spending and absorption of
  external financing if reserves are adequate and
  inflation is contained (see 2006 IEO report)
• Programs do not constrain domestic spending
  priorities but help set them by defining the
  overall resource envelope. Within a given
  budgetary envelope, higher wages can mean less
  investment, health and education spending, etc.
  But when additional resources are available,
  programs accommodate higher spending.
• IMF-supported programs do not blindly aim for
  lower inflation when it is already in single
  digits. But bringing down high inflation is
  painful, with well-known adverse distributional
  consequences.

11
IMF in Africa Outcomes

• What has been the result of the IMFs long-term
  engagement?
• In the 1980s and 1990s, economic growth was weak
  and the record on poverty reduction is mixed
• Various reasons terms of trade shocks, internal
  conflicts, excessive public debt, weak
  institutions
• Sound macro policies are starting to pay off
• Growth has picked up markedly over the past 5-10
  years
• Inflation is now under control in most countries
• Fiscal governance has been strengthened
  considerably
• Debt has been cut sharply
• Private investors are starting to explore the
  continent
• ... But, more needs to be done, as poverty
  remains widespread and there is a risk of
  reversals on macroeconomic gains

12
Africa Growth and Inflation

• Real GDP growth and inflation in SSA 1980-2008

13
Africa Debt and Deficits

• External Debt and Fiscal Balances in SSA
  1980-2008

14
IMF in Africa Challenges

• Food and oil price shocks impact and response
• Post-conflict countries and fragile states
  (re)build institutions HIPC/MDRI debt relief
• Mature stabilizers capital flows, domestic debt
• Resource economies managing the revenues
• Scaling up of foreign aid and managing aid
  volatility
• Institutional challenges
• Conditionality Fewer conditions, better
  documentation
• IMF- World Bank collaboration
• IMF facilities for LICs

15
Concluding Thoughts

• In my experience
• Conditionality is a useful monitoring and
  coordination tool for the country, IMF, and
  others
• Ownership is critical for success conditionality
  is now mostly based on authorities programs,
  which are developed with technical assistance
  from development partners
• Conditionality should be (and increasingly is)
  limited to a few critical measures, tailored to
  circumstances
• The IMFs main contribution to economic policy
  design is not conditionality but its continuous
  close policy dialogue and technical advice ? over
  the past few decades, this has contributed to a
  marked improvement in macroeconomic policies,
  institutions, and capacities in Africa