Ownership friendly conditionality

2 November 2001

A new IMF paper proposes changes to current methods of applying conditionality. This would give governments more flexibility in deciding how to achieve policy objectives and in timing structural reforms.

The first option is to adopt floating tranches. With this approach, the IMF would apply standard performance criteria to macroeconomic objectives, according to the IMF‘s timetable. For structural reforms loan tranches would be released not according to a specified timetable but when reforms had been implemented. This would give governments more discretion about the timing of structural reforms whilst continuing to access IMF resources.

The second approach is to introduce “outcomes-based” conditionality. This involves conditioning loan disbursements on the achievement of objectives, rather than putting conditions on policy measures. The policy objectives would be negotiated with the IMF, but how these are achieved is for the government to decide. “This is not as radical an approach as it might seem, since outcome variables have been defined as performance criteria in programs”, notes the report. It says likely outcome conditions include setting targets for inflation, international reserves, the trade balance, the current account, investment and growth.

One advantage of this latter approach, notes the report, is that governments would be responsible for programme success or failure. Second, loans would be disbursed only if the results were achieved. This could, however, imply a break in lending while moving from the current approach to an outcome approach. The first tranche could be released “on a promise” with subsequent tranches released only after targets are secured. It could also lead to more uncertainty about the availability of funds, since the agreed policies may not lead to the anticipated results. There could also be delays in reporting outcome data, making disbursement problematic. Since factors outside the government’s control can affect programmes’ success it is questionable to what extent a government should bear the risk of failure. There would need to be proper assessment of what factors led to missing any targets before decisions on releasing resources are taken.

The paper concludes, “While a good case can be made for incorporating outcomes-based conditionality in IMF lending, this is not an either-or matter. Programs would presumably combine both policy-based and outcomes-based conditionality.”

IMF Conditionality and Country Ownership of Programs by Mohsin S. Khan and Sunil Sharma, IMF Working Paper 01/142