4 January 2008
On January 3, the International Monetary Fund (IMF) released a report by its Independent Evaluation Office (IEO) on the use of structural conditionality in IMF programs. The IEO has a record of often making sharp criticisms of IMF practice, though its recommendations are sometimes criticized for being too moderate in relation to the severity of its critique.
On January 3, 2008, the International Monetary Fund (IMF) released a report, "An IEO Evaluation of Structural Conditionality in IMF–Supported Programs," by its internal Independent Evaluation Office (IEO) on the use of structural conditionality in IMF programs.
Structural conditions are steps designed to contribute to changes in a country’s economic structure – its policies, regulations, etc. These are distinct from quantative conditions, which are targets, such as attaining a specific level of budget deficit or surplus, or a specific level of inflation.
In this case, the IEO set out to review the IMF’s progress in meeting the goals delineated as part of the staff’s 2005 review of conditionality. At that time, the IMF committed to reducing the number of conditions included in IMF programs and focusing them more tightly on concerns in the IMF’s “core areas” such as public expenditure management and tax administration. The IEO says that the main motivation for these pledges was criticism (presumably from civil society groups, but also, especially in the wake of the East Asian crisis, academics, government officials, and others) that the IMF’s conditions were too intrusive, undermine “ownership” of policies, overburden governments with limited capacity, and are “ideologically based and often misguided.” The IEO reports that these criticisms continue, and have created resistance to IMF programs and stigmatized the steps contained in the conditions.
Unfortunately, in its evaluation the IEO does not consider the content of the conditions. The question of misguided ideology is, therefore, left aside. Indeed, the report’s usefulness for civil society is limited because the IEO only considers the instrumentality of the IMF’s conditions. The IEO asks whether the conditions contribute to the goals of the programs to which they are attached, or to a longer-range reform agenda. It does not examine the program goals, nor does it question whether alternative policies could have been used to achieve the same, or better, ends. Likewise, no attempt is made to gauge the intrusiveness of conditions on governments’ latitude in determining their own economic policy.
The “headline” for the report concerns the number of structural conditions the IMF is imposing on countries. The report finds that the number per country per year has not changed, despite the “streamlining initiative” undertaken in 2000 (it compares averages for 1997-2000 against those for 2001-2004). But IMF staff and management maintain, in a phrase that is repeated frequently, “that the number of conditions is at best a crude metric.” They explain that in some cases more steps are explicitly listed than in others; the determination of how much detail, and thus how many conditions appear, relies on factors such as government capacity and experience. As the Brussels-based CSO Eurodad found in a recent study of World Bank conditions, the number is indeed manipulable. It finds that the World Bank now uses fewer conditions than in the past, but that many of those conditions contain multiple steps.
The crucial change, says the IMF, has occurred in the scope and focus of the conditions. Here the IEO seems to agree that progress has been made. For example, the IEO finds that conditions are more focused in areas of the IMF’s core competence. Staff and management say there has been a change of “mindset”: no longer do they aim for comprehensiveness when making up their lists of conditions. The new aim is expressed by the word “parsimony,” which literally means frugal or sparing, but which usually carries a connotation of being stingy and mean. One wonders whether the IMF public relations staff was consulted on that word choice.
Perhaps the most important finding is that the overall rate of compliance with the structural conditions is about 50 percent. This, the IEO points out, raises the question of whether one of the goals of the IMF’s streamlining, increased “criticality” (how critical, or essential, a given step is in achieving the overall program’s objectives), is really being met. Given that most of the programs ultimately were judged to succeed, despite conditions going unmet, the IEO reasons that the conditions must not have been truly critical. Although the IEO does not explicitly say so, this suggests that IMF is trying to force countries to take more drastic measures than are required for the realization of their program goals. Even accepting the assumption that the program goals are wisely chosen, this means that, for example, governments may be working to force down inflation rates, often at the cost of economic growth and spending on health and education, to rates that are unnecessarily low.
The IEO also highlights conditions that are well outside the IMF’s expertise, and which seem unlikely to have a significant bearing on meeting macroeconomic goals, such as “conditions on the type of medical experts that could verify disability certification and on specific amendments to the Law of Misdemeanors”.
Within the narrow parameters adopted by the IEO, there are potentially important recommendations made:
- The most interesting is that the IMF adopt a “notional cap” on the number of structural conditions imposed each program year. It suggests that the number be four or five. This, the IEO maintains, would force the IMF “to justify the ‘criticality’ of each condition.” It would also address one of the IEO’s initial concerns – the problem with “country ownership” of IMF programs.
- In addition to reducing the number of “performance criteria” (the main kind of structural condition), the IEO says IMF programs should have fewer prior actions – steps a government must take before a program is put into effect. Structural benchmarks – guideposts which are not strictly conditions – should be discontinued.
- One reason for the continuing high number of conditions is that the IMF includes measures at the behest of donors such as the World Bank and European Union. Many IMF programs were being used to gauge suitability of countries trying to gain EU accession. Accelerated timelines demanded by the G8 for debt cancellation programs encouraged the IMF to include criteria that did not relate strictly to the IMF program itself. The IEO notes that “this role was widely acknowledged, although not always explicitly stated in Board documents.” Indeed, while civil society has long known that the IMF frequently acts on behalf of other institutions, it is something that is rarely acknowledged, and it is very difficult to know which conditions in a program originate from outside the IMF. The IEO seems willing to tolerate the continuation of this practice, but recommends making the distinctions more explicitly, and specifying which conditions are crucial for a country to satisfy in order to continue receiving IMF funds.
- The IEO recommends that where the IMF finds it necessary to mandate steps, such as trade reforms or privatization, that lie outside its core areas of competence, it request that the World Bank take the lead in formulating and imposing the condition. This recommendation proved quite unwelcome to the IMF staff, which gripes that the IEO’s logic dictates that if the Bank isn’t able to include the condition, and the IMF feels it is essential, its only option would be to terminate the program and deny funding. The IEO responds that in such cases, “explicit guidance” should be obtained from the IMF Board.
- In addition to emphasizing that the logic behind conditions be explained more thoroughly in all IMF programs, the IEO suggests that loans made under the Poverty Reduction & Growth Facility (PRGF), the IMF’s program for low-income countries, should include “an operational roadmap covering the length of the program, elaborating on […] their sequencing and expected impact.”
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