This is a question I think most government of developing countries fail to answer every time they approach the IMF for loans to solve their Balance of Payments (BoP) problems. Ordinarily, there is a positive and negative side to everything, but when it comes to lending, lenders will typically structure the loan to optimize their benefits. Based on this perspective alone, we could reach a lopsided conclusion that IMF conditionalities are not beneficial to developing countries, but considering the myriads of economic and financial challenges IMF loans have turned around in the last five to six decades, it is easy to conclude otherwise.
Having an understanding of IMF conditionalities is critical to answering the question raised by this article. What exactly are IMF conditionalities? These are required changes in a borrower country’s economic policies mandated by the IMF based on IMF’s belief that those policy adjustments would sustain the country’s fiscal resilience and therefore the ability to service and repay the debt. In IMF’s own words, conditionalities are not aimed at hindering national or international prosperity. Generally, when a country approaches the IMF for a BoP loan, the IMF will reel out a list of policy adjustments, from which the borrower country is expected to make some selection based on suitability with their local contexts. There is however a contrary view that the freedom of selection is not usually the case as IMF reserves the right to deny the disbursement of a loan if specific conditionalities they prefer are not selected by the borrower country.
Prior to 1980, IMF condiitonalities were principally focused on macroeconomic policy adjustments, but given the overwhelming influence of technology, environmental, social and geopolitical concerns, The conditionalities are subject to periodic revisions, with the latest in 2018. As of today, IMF conditionalities take different forms and shapes.
- Prior actions – Adjustments the borrowing countries must make before the IMF approves financing or completes a review. Examples include fiscal revenue measures, clearance of external arrears, governance reformns and banking sector restructuring plan.
- Quantitative Performance Criteria (QPCs) – Specific adjustment on macroeconomic variables under the control of the country authorities; for instance, debt ceiling.
- Indicative target – Flexible numerical trackers, which are set for quantitative indicators to help monitor progress in meeting the debt program’s objectives; for instance, ceiling on government borrowing from the central bank
- Structural benchmarks – Reform measures which often cannot be quantified but are critical for achieving program goals and used as markers to assess program implementation; for instance, improve fiscal transparency and improve anti-corruption and rule of law.
Among these four classes of IMF conditionalities, the most important are the QPCs. They are actively monitored by the IMF, and in the event that a country misses the QPCs target, negotiations can be arranged for a waiver if the reason for missing the target is reasonable.
Now to the nucelus of this article – are IMF conditionalities doing more harm than good for developing countries? There is no straight forward answer. There are academic researches which advanced that IMF conditionalities did not improve fiscal positioning. Papers like Buira (2002), Demir (2022) and Chletsos & Sintos (2023) noted a negative impact of IMF conditionalities on developing countries. Experientially, we have seen attempts at implementing IMF conditionalities resulting in mass revolution, strike actions and demonstrations that affect local economies. A good case study is the latest protest in Kenya, where the government had planned to implement a tax hike which attracted a major disruption in economic activities. It is therefore believed that some IMF conditionalities are counterproductive. For instance, when the IMF requires a borrower country to increase the tax rate to attract more revenue at a time when the overall cost of living is high; this contradicts IMF’s stance that their conditionalities are equally aimed at reducing poverty and inequality. In my view, I think it’s a debate of long run versus short run compromise. That is, IMF typically expect their conditionalities, especially, the structural ones to impact long run growth and prosperity, but that would come at a cost of short-run strain on the overall cost of living and fiscal performance in the short run. This view is supported by Buira (2002) who claimed that the reason why IMF conditionalities are touted as unsuccessful is because they are not implemented by the borrower country as directed by the IMF.
There are other views that support the benefits of IMF conditionalities. Gupta et al (2022) noted that IMF conditionalities, especially the structual ones are impactful on the economies of borrowing countries. All countries borrow and indeed, all countries that desire to grow and expand must borrow. That is a fact! The IMF is perhaps the biggest institutional lender to countries; therefore, their loans, by default are critical for economic growth and progress. The conditionalities attached to the loans, when examined from a generic standpoint, are usually aimed at fostering economic improvement, not limiting it. For instance, a conditionality requiring a government to grow its tax revenue is not necessarily a bad thing; the issue, in fact, is that the timing could be wrong; the magnitude of the tax hike could be overbearing; the potentials to even raise the tax could be non-existent. Therefore, while the conditionality is a good one, it has no enabling environment to thrive.
It is not my opinion that IMF conditionalities are altogether harmful to developing countries. I am of the opinion that for IMF conditionalities to work, there are certain measures that should be put in place. Some of these measures are even outside the scope of IMF conditionalities. Government of borrower countries should prove that they are a fiscal responsible entity based on their overal fiscal management plan in the short to medium term. Additionally, while most developing countries present their plan for utilizing the loans to the IMF, there is very little effort spent at monitoring the implementation of these projects. There are tons of instances of government of developing countries borrowing money from the IMF only to embezzle those funds or spend the funds on white elephant projects. It is also imperative for borrower countries to consider their local context when negotiating the QPCs associated with new loans requested from the IMF. For instance, a country with a weak tax base would be better off negotiating for a QPC on expenditure ceiling than tax revenue growth. Furthermore, I think a proactive than a reactive standpoint to creditworthiness is important for ensuring IMF conditionalities are effective. This means that instead of the IMF mallet-jamming the conditionalities on borrower countries during the process of reviewing and granting a loan; they could instead consider if the borrower countries had commence implementation of viable economic adjustment policies, perhaps, 1-2 years, before approaching the IMF for a loan.
To conclude, IMF conditionalities are not necessarily bad contrary to majority of the results in academic researches. In some cases, the issue lies with the fact that there is no enabling environment to sustain the implementation of the conditionalities; therefore, they become counterproductive. In other cases, the borrower country economy has enough foundation to hold the conditionalities, but since the funds from the IMF loans are not judiciously used, the conditionalities are deemed as ineffective.
Written by Michael Ogunremi
References
Gupta, S., Schena, M., & Yousefi, S. R. (2020). Revisiting IMF expenditure conditionality. Applied Economics, 52(58), 6338-6359.
Demir, F. (2022). IMF conditionality, export structure and economic complexity: The ineffectiveness of structural adjustment programs. Journal of Comparative Economics, 50(3), 750-767.
Iqbal, T., & Hussain, A. (2020). Impact of IMF Conditionality on Pakistan. MPRA Paper No. 112870
Chletsos, M., & Sintos, A. (2023). The effects of IMF conditional programs on the unemployment rate. European Journal of Political Economy, 76, 102272.
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