Youssouf Diallo
International Political Economics

Critique of IMF Loan Conditionality
What is Conditionality?
Conditionality is most often associated with aid money. International organizations, such as the International Monetary Fund (IMF) and World Bank, or individual countries can use conditionality when lending money to another country. The donor country requires that the country receiving the funds adhere certain rules directing the use of funds (Investopedia, 2013).
Conditionality in its broad sense covers both the design of IMF-supported programs—that is, the macroeconomic and structural policies—and the specific tools used to monitor progress toward the goals outlined by the country in cooperation with the IMF (IMF, 2013).
Over time, the IMF has been subject to a range of criticisms, generally focused on the conditions of its loans. The IMF has also been criticized for its lack of accountability and willingness to lend to countries with bad human rights record.
On giving loans to countries, the IMF makes the loan conditional on the implementation of certain economic policies. These policies tend to involve: * Reducing government borrowing - Higher taxes and lower spending * Higher interest rates to stabilize the currency. * Allow failing firms to go bankrupt. * Structural adjustment. Privatization, deregulation, reducing corruption and bureaucracy.
The problem is that these policies of structural adjustment and macro-economic intervention often make the situation worse.
For example, in the Asian crisis of 1997 (Giancarlo Corsetti, 1999), many countries such as Indonesia, Malaysia and Thailand were required by IMF to pursue tight monetary policy (higher interest rates) and tight fiscal policy to reduce the budget deficit and strengthen exchange rates. However, these policies caused a minor slowdown to turn into a serious recession with higher unemployment.
In 2001, Argentina was forced into a similar policy of fiscal restraint. This led to a decline in investment in public services, which arguably damaged the economy.
Exchange Rate Reforms
When the IMF intervened in Kenya in the 1990s (ukessays, 2007), they made the Central bank remove controls over the flows of capital. The consensus was that this decision made it easier for corrupt politicians to transfer money out of the economy (known as the Goldman scandal). Critics argue this is another example of how the IMF failed to understand the dynamics of the country that they were dealing with - insisting on blanket reforms.
The economist Joseph Stieglitz has criticized the more monetarist approach of the IMF in recent years. He argues it is failing to take the best policy to improve the welfare of developing countries saying the IMF "was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community."
Free Market Criticisms of IMF
As well as being criticized for implementing 'free market reforms' others criticize the IMF for being too interventionist. Believers in free markets argue that it is better to let capital markets operate without attempts at intervention. They argue attempts to influence exchange rates only make things worse - it is better to allow currencies to reach their market level (Mutume, 2001).
Lack of Transparency and involvement
The IMF has been criticized for imposing policy with little or no consultation with affected countries.
Jeffrey Sachs, the head of the Harvard Institute for International Development said:
"In Korea the IMF insisted that all presidential candidates immediately "endorse" an agreement which they had no part in drafting or negotiating, and no time to understand. The situation is out of hand...It defies logic to believe the small group of 1,000 economists on 19th Street in Washington should dictate the economic conditions of life to 75 developing countries with around 1.4 billion people. (Khor, 1998)"
Faced with strong criticism for its expansive and erroneous use of conditionality, and in the wake of a financial crisis, the International Monetary Fund (IMF) approved in 2002 a set of guidelines to inform its use of structural conditionality. The Conditionality Guidelines committed the Fund to reduce the overall number of conditions attached to Fund lending and ensure that those attached respected and were drawn from nationally developed poverty plans in recognitions that developing country ownership is instrumental for successful development (Pereira, April 2008).
The IMF’s own Independent Evaluation Office (IEO) issued a study in January 2008, which concluded that the Fund dramatically increased both the number of structural conditions and their intrusiveness in recipient countries’ domestic affairs.
The IMF Conditionality Guidelines and their limited view of ownership are having serious social consequences. The Fund continues to push for privatisation and liberalisation of poor nations’ economies, interfering with decisions, which should be freely taken by countries according to domestic priorities and needs. In Mali the IMF and the World Bank forced the reform and privatisation of the cotton sector despite opposition. The reforms went ahead and now cotton farmers face an even harder future. A quarter of all IMF structural conditionality still promotes privatisation and liberalisation reforms, which have proven to be highly sensitive and often have had disastrous consequences for the poor.
Copper mining in Zambia perfectly illustrates this point. The IMF backed the privatization of the complex copper mining sector and introduced fiscal reforms to attract transnational corporations. Many of the reforms were far from the IMF field of expertise. This process has yielded far less poverty reduction and respect for environmental standards than was predicted (Pereira, April 2008).
The practice of attaching conditions to grants and loans has been widely criticized for being ineffective, undermining ownership and imposing inappropriate policy choices. Civil society, academics and southern governments agree that conditionality is an infringement on national sovereignty and has not been effective in inducing economic policy reform. But even the World Bank and the International Monetary Fund – the world’s leading advocates of economic policy conditions – agree that conditionality has failed to create incentives for policy reform.
The IMF holds the global monopoly on assessing countries’ macroeconomic health, which in developing countries is measured by being “on-track” with an IMF programmed, typically a Poverty Reduction and Growth Facility (PRGF). Thus, IMF conditionality hardly ever is contested by other donors, which perceive it as a scarce and necessary service for their own disbursement decisions. Moreover, the technical complexity of macroeconomic policies, which the IMF addresses, has also often dissuaded civil society groups from voicing criticism of the Fund’s measures (Pereira, April 2008).
The Fund attaches two different types of policy conditions to its loans in poor countries – quantitative and structural. Quantitative conditions are macroeconomic targets determining, for example, the level of fiscal deficit a government is allowed to run up or the permitted level of domestic credit. Structural conditions, on the other hand, push for institutional and legislative policy reforms within countries. They include, for example, trade reform, price liberalisation and privatisation.
IMF Conditionalities for the Least Developed Countries
The controversial issue of the Fund’s conditionality originates from Article V (“Operations and Transactions of the Fund”), Section 3 of the Fund’s Articles of Agreement, which broadly presents the conditions governing use of the Fund’s resources. Briefly, Section 3(a) states that the Fund: “shall adopt policies on the use of its general resources (…) and may adopt special policies for special balance of payments problems, that will assist members to solve their balance of payments problems in a manner consistent with the provisions of this Agreement and that will establish adequate safeguards for the temporary use of the general resources of the Fund.”
This means that, prior to the release of any financial resources to its members, the Fund requires that certain constraints, widely known as “conditionalities”, are imposed in the form of compliance with both Fund rules and Fund-suggested (practically mandated, in the case of poor countries) policy guidelines and adjustments. These “monitoring techniques” provide the framework with which the Fund ensures solvency safeguards while targeting temporary balance of payments’ problems.
By acknowledging the existence of two broad types of structural reforms, the Fund tacitly admits the existence of double standards with regard to conditionalities. The first cluster, based on the Fund’s core areas of expertise, tackles macroeconomic scenarios via policies that aim to ensure stabilization of exchange rate practices, as well as reduce balance of payments and financial or monetary problems. Such policies could also include measures such as tax reform, fiscal responsibility, banking and monetary reforms and exchange rate flexibility.
The second cluster, involving a much-enlarged scope of Fund conditionality, advocates “policies aiming more generally at improvements on the economy’s underlying structure – its efficiency and flexibility – to foster growth, and facilitate adjustment to exogenous shocks.”5 This is where the Fund arrogates to itself the right to engage in much broader reforms including trade liberalization, pricing and marketing, labor market reorganization and generic institutional or regulatory changes.
This enlarged scope of Fund involvement, through its conditionalities, should be urgently reviewed and circumscribed by the Fund’s existing legal provisions and guidelines. For instance, the mandate to establish “adequate” solvency safeguards should not be interpreted as giving the Fund an unlimited mandate to prescribe all-encompassing structural reforms on a Fund member.6
A restrictive interpretation of the Fund’s mandate is supported by the IMF Guidelines on Conditionality7, which emphasize that conditionality objectives must be strictly related to resolution of balance of payments problems, in conformity with the Fund’s Articles and in a manner that establishes “adequate” safeguards for the use of Fund resources. In other words, “adequate solvency safeguards” to address balance of payments problems should not extend to trade, labor and regulatory policies.
Other language regarding Fund conditionality does not resolve this crucial distinction between Fund “demands” and “suggestions”. While ownership of and capacity to implement a program is acknowledged to be the sole responsibility of a member country, the Fund is supposed to only be guided, but not bound by the same principle of ownership.
This wording ensures that the Fund is shielded from external criticism on legal grounds, since sole responsibility is borne by the borrowing government. The same guidelines provide unlimited scope for the Fund to apply conditionalities even though a borrowing least developed country might have different policy preferences and priorities, e.g. with regard to trade and poverty reduction policies. Hence, “adequate safeguards” allows the Fund to demand reforms even though they are not supported by the Fund’s own core mandate.
Such conclusion is further buttressed by Paragraph 8 of the same Guidelines, asserting that the Fund “is fully responsible for the establishment and monitoring of all conditions attached to the use of its resources” and, even more candidly under the “Principles Underlying the Guidelines on Conditionality”, which state that the “need for ownership implies selectivity: approval of the use of Fund resources depends in particular on the Fund’s assessment that the member is sufficiently committed to successful implementation”
With regard to Fund trade policy conditionalities in low-income countries, proper regard to social and political goals as well as the specific circumstances of members has not been given, contrary to the spirit of Paragraph 4 of the Guidelines. This is especially relevant for the one size fits all approach or policy reform homogeneity characteristic of Highly Indebted Poor Countries (HIPC)11 and PRGF program, including trade policy reforms; such policy conditionalities also seem insensitive to the challenges of correct policy sequencing, particularly for low-income borrowing countries (Guilherme, 2008).
As correctly acknowledged by key Fund documents, trade policy conditionalities have little to do with the Fund’s traditional mission or areas of expertise, and represent an obvious deviation from the Fund’s “core” legal mandate to provide assistance to countries with balance of payments problems. Instead of focusing on exchange rate issues, balance of payments concerns or financial and monetary analysis, the Fund has turned to trade policy reforms, streamlining trade policy administration, government revenue, governance and customs administration reforms, all pushed through on the basis of dubious efficiency improvement claims.
Finally, it should be emphasized that imposition of cross-conditionalities by the Fund is prohibited; nevertheless, in the recent past, the Fund has made specific requests for the least developed countries to undertake unilateral commitments towards further trade liberalization within the WTO or via regional trade agreements, drastically restricting a least developed country’s sovereign right to pursue its own interests. As the Fund demands that its conditionalities not be subject to decisions taken by countries in other multilateral frameworks, it seeks to be “primus inter pares”, relegating other international organizations and commitments to “secondary status”.
Notwithstanding the ongoing debate on coherence, it appears doubtful that lending arrangements with IMF member countries have complied with existing Fund rules. Such deviation from the core mandate of the Fund also raises the likelihood of resource misallocation and failure to provide proper oversight of the international economy.
Case Study: Cameroon
The Fund continues to push for privatisation and liberalisation of poor nations’ economies, interfering with decisions, which should be freely taken by countries according to domestic priorities and needs. Among the loans approved during last three years, almost a quarter of all conditions required policy reforms related to privatizing or liberalizing. This represents virtually no change with regards to the share of privatisation and liberalisation related conditions found in loans approved between 2003 and
2004. Out of the PRGFs approved during the last three years, the vast majority of countries assessed by Eurodad – 16 out of 20 countries – had liberalisation or privatisation conditions. However, some of the countries bear a much higher privatisation burden than others. In Benin, seven out of the thirteen conditions in 2005 required privatizing state-owned enterprises in the infrastructure, telecommunications and cotton sectors. And in Cameroon six out of the fifteen conditions attached to their PRGF in 2006 contained some sort of privatisation in the telecommunications, postal and airline sectors, one condition required price liberalisation and subsidy removal for the national oil company SONARA, and two conditions required restructuring of the public postal enterprise. According to the Fund’s arguments, privatisation should lead – amongst other effects – to increased transparency and good governance in the sectors privatized. Unfortunately, the privatisation process of the Cameroon’s airline company shows that expected benefits in theory do not always translate into reality (Pereira, April 2008).

In September 2007 a joint delegation of the International Monetary Fund (IMF) and the World Bank arrived in Cameroon to discuss the implementation of the three-year economic program signed between the two institutions and the Cameroon government. The meetings were expected to handle technical issues on the execution of the public investment budget, the implementation of the fiscal reforms and progress in the privatisation process – particularly focusing on financial sector reform with emphasis on the privatisation of Credit Foncier. Not content with the push made to the financial sector, the joint delegation was also reported to have successfully mounted pressure on President Paul Biya, to re-launch the privatization process of the Cameroon Airlines, Camair, which the President had put on hold. Local newspapers reported that the offer from the First Delta Air Services-led consortium had finally been selected. However, the privatization process was halted following a late submission of a better offer from an US group, Valiant Airways. This group was strongly backed by the US Ambassador to Cameroon and the Prime Minister. Later it was found that the bidder, Valiant Airways, was a fake and that the company was unknown to the American Federal Aviation Authority and other international organizations. Since the privatization started in February 2005, Camair’s debt and losses have mounted. In general the privatization project has been cast in shadows. The attempt to privatise Cameroon Airlines clearly shows that processes leading up to privatisation are not necessarily respectful of minimum good governance standards, unless regulatory measures intended to ensure transparency are in place. Once again, pressure from the IMF to privatize may have not yield the expected results but may have worsened the company’s situation.
Case Study: Mali
Bypassing ownership: imposed cotton sector privatisation in Mali is one of the world’s poorest countries and its economy is heavily reliant on the cotton sector. Since the 1990s, the World Bank and the IMF have pressed for the privatization of the Malian cotton sector and liberalisation of its pricing system, tying cotton prices to world market values. These reforms coincided with a period when the cotton prices were, and still are, heavily distorted by heavy subsidized production in developed countries. In 2005 Malian President Amadou Toumani Touré opposed the reforms and spoke out against Bank and Fund conditions. He said “true partnership supposes autonomy of beneficiary countries in requesting aid and in determining its objectives… Often programs are imposed on us, and we are told it is our program… People who have never seen cotton come to give us lessons on cotton… No one can respect the conditionalities of certain donors. They are so complicated that they themselves have difficulty getting us to understand them. This is not a partnership. This is a master relating to his student.”
According to the World Bank and the IMF the reform was expected to improve management and increase cotton prices while decreasing the cost of farm inputs. The results could not have been gloomier. Data from the World Bank for 2005-06 cotton sales show that farmers were producing at a loss. The immediate impacts were a collapse of households’ purchasing power and increasing poverty and food insecurity. Long-term effects include migration and price falls in the cereal sector as a consequence of farmers switching crops. The Oxfam study Kicking the habit: How the WB and the IMF are still addicted to attaching economic policy conditions to aid predicts economic losses of 2 to 4% of Mali’s GDP. The reforms supported by the World Bank and the IMF, occasionally by means of cross conditionality – identical conditions imposed by both institutions - have endangered the farmers’ livelihoods and Mali’s poverty reduction strategies more broadly. A villager from Wacoro complained, “ before, at harvest time, a part of the income was given to the women. But this year, that was not the case. On the contrary, the livestock we have accumulated over many years had to be sold to enable us to cover our food costs, in particular the purchase of cereals. As a result, we have almost nothing left in terms of savings to protect us from the difficult times to come.”
Some bilateral donors are currently backing the introduction of support funds, having realized the importance of the cotton sector and the impact of its highly volatile prices. This fund should help to compensate price differences from one year to the other. Several donors support this initiative; however, the World Bank and the IMF remain in an uncomfortable silence.
Case Study: Zambia
Zambian mining: toughening the tax regime Back in the 1990s, the World Bank insisted that as a condition on their finance that the state-owned Zambia Consolidated Copper Mines (ZCCM) should be privatized. The IMF backed the privatization of ZCCM through the three-year ESAF (Enhanced Structural Adjustment Facility) and one-year SAF (Structural Adjustment Facility) Loans approved in 1995.30 Subsequently ZCCM was chopped into several smaller companies and sold to private investors between 1997 and 2000.
Ahead of privatisation, the Washington-based IFIs advised the Zambian government that, in order to bring in investment, the country should make itself attractive by developing an “investor-friendly” regulatory regime. The World Bank and the International Monetary Fund then used Zambia’s dependence on their funding and debt relief to withdraw many of the controls that the state had previously established on company behavior. The IFIs continued imposing conditions even when the privatisation deals were done, including one-sided “development agreements” granting tax exemptions to foreign investors and all sorts of benefits not normally granted in the national legal framework. In its 2004 PRGF agreement with Zambia, the IMF required the government to “define a policy for the granting of tax concessions.” The consequence of this condition was that royalties raised by the Central Government represented just 0.2% of their revenues. This deadly combination has prevented the increase of the profits in the Zambian mining sector translating into an increase in the standards of living of the population in these areas.
As a result of the privatization formal employment has decreased. Several structural adjustment programs have also affected the informal sector. Additionally the communities of the Copperbelt now face acid rain, heavy metals pollution, silting and other environmental problems which not only affect peoples’ health, but also their capacity to grow their own food.

Conclusions and Recommendations
The Fund has failed to implement its own Conditionality Guidelines. Even after the 2005 review, which showed limited progress in implementing the Guidelines, the Fund has not taken further steps to address this failure and streamline conditions. One of the main conclusions of the 2005 review was that: “numbers of structural conditions have not shown much of a decline.” Beyond the numbers, the principles of ownership and tailoring to national circumstances should entail refraining from placing controversial conditions, which may be highly sensitive for some national constituencies and may lead to domestic tensions and social unrest. On this front, the Conditionality Guidelines are too limited. The CG defines the principle of ownership as the “willing assumption of responsibility for a program of policies, by country officials who have the responsibility to formulate and carry out those policies.” The Fund considers ownership is sufficient when there is enough “buying” by country officials of policy reforms designed by Fund economists. This deviates from the concept of genuine ownership as understood by civil society groups and recipient governments, which would require recipient governments and their citizens to take the lead in designing and prioritizing policy reforms.
The IMF’s limited view of ownership is having serious social consequences. In Mali the IMF and the WB forced the reform and privatisation of the cotton sector despite opposition. The reforms went ahead and now cotton farmers face an even harder future. A quarter of all IMF structural conditionality still promotes privatisation and liberalisation reforms, which have proven to be highly sensitive and often have had disastrous consequences for the poor. Altogether, a third of the Fund’s structural conditions contain some sort of sensitive policy reforms – including privatisation and liberalisation, but also regressive reforms to the taxation systems or strict ceilings on national expenditures which may constrain the government’s ability to invest in much needed basic services.
Copper mining in Zambia perfectly illustrates this point. The IMF backed the privatization of the complex copper mining sector and introduced fiscal reforms to attract transnational corporations. Many of the reforms were far from the IMF field of expertise. This process has yielded far less poverty reduction and respect for environmental standards than was predicted. The Fund cannot afford to continue turning a blind eye to reality and implementing just a few incremental measures to reform its conditionality policy. The Fund’s strategy so far has yielded poor results, aggravating the institution’s general difficulties. If the IMF is serious about undertaking a broader and deeper reform, which is to culminate in an agreement on the Fund’s mandate and corporate governance before the end of this year, and increasing legitimacy among its membership, it will have to serious address conditionality as one of its most dangerous Achilles heels.

Bibliography
Giancarlo Corsetti, P. P. (1999). What caused the Asian Financial and currency crisis. New York: Federal Reserve Bank of New York.
Guilherme, R. S. (2008). IMF Conditionalities for the Least Developed Countries. Policy Brief No. 19.
IMF. (2013, April 2). IMF Conditionality. Retrieved June 26, 2013, from http://www.imf.org: http://www.imf.org/external/np/exr/facts/conditio.htm
Investopedia. (2013, January 1). Conditionality. Retrieved June 26, 2013, from http://www.investopedia.com/terms/c/conditionality.asp: http://www.investopedia.com/terms/c/conditionality.asp
Khor, M. (1998, December 4). IMF policies make patient sicker. Retrieved June 26, 2013, from http://www.twnside.org.sg/: http://www.twnside.org.sg/title/sick-cn.htm
Mutume, G. ( 2001, Mar 18). Criticism of IMF gets louder. Retrieved June 26, 2013, from http://www.twnside.org: http://www.twnside.org.sg/title/louder.htm
Pereira, N. M. (April 2008). The IMF maintains its grip on low-income governments. Brussels: European Network on Debt and Development. ukessays. (2007, April 4). Criticism Of The International Monetary Fund Economics Essay. Retrieved June 26, 2013, from http://www.ukessays.com/: http://www.ukessays.com/essays/economics/criticism-of-the-international-monetary-fund-economics-essay.php