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The IMF provides financial resources to member countries on conditions that are designed to encourage economic adjustment and to ensure that a member has the capacity to repay the IMF on time. This, in turn, helps ensure that the IMF's pool of financial resources is available to other members facing balance of payments problems. Such conditions aim to reduce a member's balance of payments deficit to a manageable size while fostering economic growth, employment, financial stability, and the elimination of restrictions on international trade and payments.
The IMF has developed a process and a range of techniques for monitoring and assessing a country's compliance with conditions for receiving financial assistance. The IMF requires that the national authorities provide a letter of intent outlining: the government's policy intentions; the policy changes that must be taken before financing can be approved; performance criteria (macroeconomic indicators that must be satisfied on a quarterly, semiannual, or in some cases monthly basis for drawings to be made); and periodic reviews that allow the IMF's Executive Board to assess the consistency of policies with the objectives of the program.
Increased transparency at the IMF is giving the public greater capacity to make its own assessment about the degree to which countries comply with conditions for IMF financial assistance. The more systematic release of letters of intent as well as information about periodic program reviews means that, in most cases, the public can monitor the evolution of a country's program from the initial elaboration of policy intentions through decisions regarding release of financial resources.
The IMF's guidelines on conditionality, which are reviewed periodically:
- encourage members to adopt corrective measures at an early stage;
- stress that the IMF should pay due regard to members' domestic social and political objectives, as well as their economic priorities and circumstances; and
- permit flexibility in determining the number and content of performance criteria.
While these guidelines apply to all cases where members seek IMF financing, the Fund recognizes that no single reform model suits every circumstance. Each member country, in close collaboration with IMF staff, designs its IMF-supported program. The process involves a comprehensive review of the member's economy, including the causes and nature of the balance of payments problem, and an analysis of the policies needed to achieve a sustainable balance between the demand for, and the availability of, resources. In sum, the IMF's approach to conditionality seeks to strike a balance between the need for equal application of rules regarding access to finance, and the need for reasonable flexibility in the design and monitoring of adjustment programs.
A recent report by the General Accounting Office looked in detail at the process by which the IMF establishes financial arrangements with borrower countries and the types of conditions set under such arrangements. The study also assessed, for six countries (Argentina, Brazil, Indonesia, Korea, Russia and Uganda), the degree to which conditions were met and not met, and the actions the IMF took in response. The report found that in some cases, the IMF determined the countries had made sufficient progress in meeting program conditions so that additional funds could be made available. In other cases, however, the IMF determined that country progress in meeting the conditions had not been sufficient, and its response varied depending on the specifics of the condition and the judgment of the IMF staff and Executive Board on the country's overall progress. The report cites specific examples of how the IMF deals with situations where a determination is made that progress in meeting conditions has been insufficient.
- In some cases (e.g., Argentina March 1999, Uganda April 1998) the IMF Executive Board granted waivers for nonobservance of specific conditions at various points during their programs. These waivers were based on the IMF's judgment that there was sufficient overall progress in implementing the program and that deviations from meeting required conditions were minor.
- In other cases (e.g., Brazil February-March 1999; Indonesia March and June 1998) the Executive Board delayed disbursements until the country had made sufficient overall progress in meeting the program requirements.
- Sometimes, as in the case of Russia (March 1999), a program may be terminated.
- Finally, the GAO report points out that in some cases the IMF and borrower countries may also negotiate changes in conditions to respond to unanticipated developments. In the case of Korea, this reflected a determination by the IMF during the course of 1998 that the initial program was overly optimistic. In other cases, this may be due to changes in the international environment or other factors over which the country has little or no control.
The IMF's website ( www.imf.org) contains additional information about this subject (see conditionality on the website's index of subjects). There is also extensive literature, both country-specific and cross-country studies, on the related question of the effectiveness of IMF programs. See, for example, Do IMF-Supported Programs Work? A Survey of the Cross-Country Empirical Evidence (IMF Working Paper WP/98/169 by Nadeem Ul Haque and Moshin S. Khan). This study is available on the IMF's website and includes a lengthy list of additional works on this subject by authors both inside and outside the IMF.