Loaning Conditionality: Tryst with Conditional-Aid
By: Vaibhav Parakh
Tags: Imf, Economics, Loaning, Loaning Conditionalities, Aid

Whether it be the prolonged starvation of children in Africa, the Middle East conflict stretching the land mass, and the refugee crisis henceforth, what remains common is the need of aid–­–institutional aid—for the emancipation of those caught in the cross fire, forced under dire circumstances to lead a life they didn’t choose to and thus my essay elaborates how yet again it seems to be the hegemony of the West, to continue nursing the bottlenecks to economic freedom of LDCs. Aid to least developed countries and even developing countries have gone on to be marked as ‘White Man’s Burden’, rather than ‘White Man’s Responsibility’ not forgetting many developed nations do in fact owe to developing nations reparation costs for the damage done, physically as well as psychologically.

The International Monetary Fund has been the foremost authority on monetary policy moderation in the world, financial stability, fostering international trade, and exchange rate stability along with operating perhaps the most important and arguably the most controversial apparatus of Conditional Loaning mechanism critiqued often on the grounds:

1.) Not taking into account the status quo domestic economic conditions;

2.) Being biased against low and middle income countries

The International Monetary Fund (IMF) issues loans which comes with policy change conditions attached­­ — these conditions that have played a significant role. The nature of Loans being labelled as ‘Excessive Burden’ and ‘Politically sensitive’ has led to several reviews at the IMF and has resulted in the introduction of conditionality-free Facilities, often which are touted as being myopic on the ground for them being limited in scope. IMF claims that they have reduced conditions to critical reforms as agreed by the recipient governments but the IMF has had success in increasing the number of structure conditions that dictate policy changes per loan, and its engagement in highly politically sensitive areas.

Nature of Conditionality

IMF has often been documented using its influence to promote controversial austerity and liberalisation measures, capable of severely impacting the poorest people around the world.

This is worrisome for the borrowers belonging to developing countries bracket who seem to have limited voice and stand as minority at the IMF. In 2010, agreements to validate the voting voice of the nation blocs in minority was proposed but the resolution could not see the day of light as the United States which commands the majority voting power—albeit enough to veto all the all these kinds of decision unilaterally—failed to ratify the aforementioned proposal while the European Governments have high hopes from the eight out of the twenty-four seats at the IMF’s executive board.

According to the study ‘Conditionally Yours’ authored by Jesse Griffiths and Konstantinos Todoulos, they made the following recommendations:

• IMF should stay true to its mandate which is the ‘Lender of the Last Resort’ to countries facing imminent balance of payment crisis. Such countries are not in need of lengthy programmes that need major policy over haul however are in dire need to shore up public finances.

• The IMF lending creates a serious problem for a country, if at all it faces protracted and serious debt problems. The solution being fair and transparent debt work-out procedures which needs to be of top priority both at regional and national levels, IMF being the major creditor cannot be staged as a venue for the development of such debt-work out procedure as it would be conflicting with its interests.

• IMF needs to radically overhaul its governance structure to give developing nations a fair voice and vote, and to radically improve transparency and accountability addressing the crisis of legitimacy it faces.

The rationale supporting the IMF conditionality is that the country in fiscal crisis should only receive loans if they reform their policies—the precise agreed reforms and microeconomic targets are set out in the conditions attached to the loan. IMF has argued that these are necessary reforms for the borrowing country as it restores macroeconomic stability and growth but often these reforms have come under scrutiny for covering range of policy areas not linked to the core competencies of the IMF. In most cases the IMF loan deal is sealed with the presentation of the letter of intent accompanied by Memorandum of Economic and Financial Policies(MEFP). In theory, the onus of drafting and sending the letter of intent lies with the government of the borrowing country.

Stark reality being, that the IMF is heavily involved in drafting programme documents and the design of the conditions attached. According to IMF’s claim it recognises the ownership of the borrowing governments but on the contrary, the IMF’s own Independent Evaluation Office(IEO) has found that 84% of the staff at IMF recognised that the first draft of the programme and loan conditions was prepared by the IMF and the situation has not changed since 2008. Real ownership should be more than the acceptance of the government but is should be an evolutionary process entered around parliaments and the civil society organisations(CSO).

The Ukrainian Prime Minister Arseniy Yatsenuik who once said,

“We will meet all IMF conditions…for a simple reason…we don’t have any option.”

Two-Pronged Approach

The IMF loans come with two different types of conditions attached to it — Quantitate conditions and Structural Conditions.

• Quantitative Conditions also known as the Quantitive Performance Criteria(QPC) are set of macroeconomic targets which are to be met by the government of the borrowing nation for example the level of fiscal deficit allowed in the government budget.

• Structural Conditions come in two different forms: -

• Prior Actions:These are binding conditions which must be fulfilled before the loan is granted.

• Structural Benchmarks:These are not binding but are influence the performance review of the country carried out by IMF every 6 month, giving the final mood to the approval of the subsequent loan tranche.

Due to the widespread criticism of the IMF increasing the structural conditionality during the 90s period by the civil society organisations and the borrowing Governments led to the IMF streaming its practices resulting which the first set of conditional guidelines were laid out in the year 2002 setting the template for future loan approvals with the road objectives of:

• Streamlining Practices

• Focusing more on the areas of core-competence and expertise

But according to Eurodad’s (European Network for Debt and Development) research, the IMF has backtracked on some issues and changes in the conditions are slow:

• The number of conditions per programme actually increased 2005 onwards.

• 1/3rd of all the conditions belonged to the sensitive areas comprising of liberalisation and privatisation.

The IMF introduced a new loaning facility by the name of Flexible Credit Line(FCL) programmes, which are primarily loan programmes that come without any conditions attached to it, implying there is no need for changes in the government policy of the countries adjudged as good performers. But unfortunately, the policy is only meant for countries which according to the IMF are considered to have ‘very strong economic fundamentals and policy framework’.

IMF has cleverly circumvented the criticism attached to imposing conditionality by not imposing it but attaching a pre-condition of ‘very strong economic fundamentals and policy framework’. So far only Mexico, Poland, and Columbia are successful in using the FCL.

Conclusion

Policy reform is a slow and a tedious process and hence, donors can be more effective if they persuade the recipient country rather than forcing the reforms. As explained by Oliver Morrissey, the policy dialogue concept is based on persuasion as opposed to coercion which implies that the recipient is the owner of the policy to be implemented rather than the onus to be on the donors. Also the recipient through policy dialogue would be able to adopt policies at a faster rate keeping in mind the history of policy and how it was adopted by other recipient nations. Thus, opening window to social learning by observing the policies adopted by member nations. For example, Kenya willingly prepared a PRSP (Poverty Reduction and Strategy Paper) much influenced by the success of the Uganda’s adoption of the PRSP.

It’s the need of hour, for the developing countries to reorganise themselves into an effective bloc to push forward for policy initiatives, through state building mechanisms to benefit the masses and to reduce human collateral due to our own endeavours to conquer each other.

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