CONDITIONALITY OF IMF LOAN

CONDITIONALITY OF IMF LOAN

Conditionality is the unique distinctive features of the fund’s assistance. This characteristics is justified by the revolving nature of its funding and to the purpose of fund accommodation in providing finance for adjustment.
The IMF attaches two different types of conditions to its loans – quantitative conditions and structural conditions.

Quantitative conditions, known as Quantitative Performance Criteria (QPC), are a set of macroeconomic targets that governments must meet, including, for example, the level of fiscal deficit a government is allowed. In this research, we do not examine QPCs as they do not directly prescribe policy changes. However, we look at the outcomes of those policies, although these will also be important and are likely to be highly political.

Structural conditions, which tie IMFs lending to the achievement of institutional and legislative policy reforms within countries, come in two different forms:

• Prior actions – binding conditions, which have to be fulfilled before the loan is granted.

• Structural benchmarks – not binding, but influential in the reviews of government performance carried out by the IMF at least every six months, which give clearance for the release of a subsequent loan tranche.

Increases in structural conditionality during the 1990s and criticisms from civil society groups and borrowing governments over the years about the amount and intrusiveness of conditionality led to a series of reviews of IMF conditionality, aiming to ‘streamline’ practices.

Conditionality has become a hot topic again, after a boom in IMF lending following the global financial crisis. IMF lending had dwindled to very low levels by 2007, but the latest international crisis – beginning in 2007-08 – gave the Fund the opportunity to expand to new countries and to lend to old recipients.

This was to be expected as IMF lending has historically been linked to periods of debt distress during or after acute international crises – for example the 1970s oil crisis, 1980s debt crisis, 1990s Eastern European crisis, and the 1997 East Asian crisis. During the sovereign debt crises after 2008, there was a sharp increase in demand for credit, and the IMF responded by doubling quotas and access limits, allowing bigger loans.

It is claimed that conditionalities retard social stability and hence inhibit the stated goals of the IMF, while Structural Adjustment Programs lead to an increase in poverty in recipient countries. The IMF sometimes advocates “ austerity programmes ”, cutting public spending and increasing taxes even when the economy is weak, to bring budgets closer to a balance, thus reducing budget deficits. Countries are often advised to lower their corporate tax rate.