A summary of the report “conditionally yours: An analysis of the policy conditions attached to IMF loans”

23 April 2014 by Giulia Simula

The European Network on Debt and Development (EURODAD) has published a report on the conditions attached to International Monetary Fund (IMF) loans. All IMF lending programmes come with conditionality attached that requires national governments to implement specific reforms in order to receive credit from the fund. The intrusion of the IMF within the national political and economical domain has been largely criticised leading to a reform of the Fund in order to limit conditions and streamline IMF lending facilities. To put this attempt to test, EURODAD has conducted a research on IMF conditionality from October 2011 to August 2013 to assess what has changed and whether we can see any improvement in the Fund conditions.

Unfortunately, the results of this research, confirm what others had already demonstrated: the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

uses its great influence and power to impose fiscal and liberalisation measures attached to loans. These conditions have not decreased in number and they interfere with highly sensitive and political policy areas such as fiscal and spending policies in recipient countries. The impacts are particularly suffered by the poorest part of the population that pays the highest costs.

What is conditionality?

When a country is hit by economic and financial crisis, the IMF is available as a lender of last resort to help nations solve liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. issues. However, IMF lending programmes come with conditions attached. What does conditionality include? What kind of policies conditions does the Fund recommend?

Countries facing economic crisis are required to enact specific economic and political reforms -developed by the Fund itself - in order to receive loans. According to the IMF, the prescribed structural reforms are necessary to restore macroeconomic stability and growth and to create the optimal economic condition before a loan can be granted.

Due to significant criticism towards IMF conditionality during the 1990s, the Fund reviewed the conditions attached to its loans. Some conditionality-free facilities were introduced and, allegedly, the number of conditions has been reduced to only critical reforms in order to limit interference with sensitive policy areas. However, the present research developed by EURODAD advocates that the IMF has actually made no improvements. On the contrary, the amount of structural conditions requiring policy changes per loan has increased and the IMF remains deeply engaged in extremely sensitive and political policy areas.

The major problem, as many have notice, lays in the interference of IMF conditions with national policies. IMF conditions cover a wide range of policy areas not always related with the Fund core competencies. Following criticism over policies’ ownership, the IMF has tried to increase recipient governments’ ownership of reforms.
Nevertheless, in practice, the fund remains highly involved in the drafting the documents containing the structural reforms to be implemented. In addition, even if recipient governments prepare the draft proposal themselves, the IMF remains the institution that eventually accepts or rejects the proposed reforms.

As mentioned in the EURODAD report “the IMF’s own Independent Evaluation Office (IEO) review in 2007 found that 84% of Fund staff surveyed recognise that the first draft of the MEFP was prepared by IMF staff, and there is no evidence that this has changed significantly since 2008.”
The words of the Ukrainian Prime Minister Arseniy Yatseniuk adequately represent the reality of the situation faced by governments: “will meet all IMF conditions... for a simple reason... we don’t have any other options.” Simply put, if a government does not meet the condition, it will be harder to receive credit. For this reason, if credit is needed to recover from a severe crisis, then accepting IMF’s conditionality is the only option on the table.
As previously mentioned, in addition to the issue of ownership, there is another controversial aspect of IMF conditionality which is the intrusive nature of policies. Increases in structural conditionality throughout the 1990s led to a strong criticism by both recipient governments and the civil society in regards to the invasiveness of policies and the high amount of prescribed reforms.
As a result, starting from 2002, the IMF carried out reforms intended to: I) simplify conditionality processes and II) focus on limited areas of core competence to the Fund.
However, a previous research conducted by EURODAD in 2008 showed that the reforms did not bring about any significant change in IMF conditionality. On the contrary:
The amount of conditions per loan actually increased from 2005 to 2008.
One third of conditions were in sensitive economic areas and demanded policies such as privatisation and liberalisation.
Moreover, subsequent to the latest international crisis in 2007-2008, the IMF is lending again to old and new governments. To the ‘good performing’ countries - those considered by the Fund to have strong economic fundamentals and good policy track records- the IMF introduced a facility without conditionality. However, for the great majority of countries, loans come with conditionality attached especially to those countries strongly hit by the crisis and facing heavy debt distress.
European countries are now highly involved in IMF lending programmes. Are these programmes any better and fairer than before? Have IMF conditions evolved?
To attempt to answer these questions, the EURODAD study aims to assess any changes in IMF conditionality by focusing on: 1) the number of conditions and 2) the amount of conditions interfering with politically sensitive areas.
The study took in consideration all loans with structural conditions approved from 1 October 2011 until 31 August 2013. A total of 23 operations in 22 countries were analysed including 7 non-concessional loans (which totalled $34 billion - 92% of the total) and 16 concessional loans, more numerous but smaller in size.
All lending programmes with structural conditionality have been scrutinised leaving aside the funding programmes without borrowing arrangements (such as the Policy Support Instrument) and the lending programmes without structural conditionality attached. Countries with on going programmes on the date corresponding to the start of the study were not included. The research is based on IMF documents agreed with recipient countries at the beginning of the lending programme.

Please see conditions attached…

The result of the research regarding the number of conditions per loan shows that this has risen despite the Fund efforts to revert this trend.
EURODAD calculated a total of 448 structural conditions equal to an average of 19.5 per lending programme. The average number of conditions was 13.7 in the previous research conducted by EURODAD in 2005-07 and 14 in 2003-04 meaning that the conditions increased considerably. Stunningly, this research might actually underestimate the number of conditions as it examines only original programme documents, leaving aside on going lending programmes.
The number of the conditions imposed clearly indicates the great extent to which the IMF influences economic policies in recipient countries. Moreover, the majority of the recipient countries have a history of programmes with the IMF. This is an indicator that the IMF does not only lend in cases of illiquidity (as its mandate suggest) but also in cases of sovereign insolvency.

Politically sensitive conditions

To assess IMF’s intrusion with sensitive political domains, the study selected two main policy areas.

Fiscal Policy - The first area taken into account is the fiscal policy space. This includes conditions that interfere with policies of taxation and restrict public spending and borrowing thereby interfering with budgeting decisions.
About 60% of all sensitive conditions limited the fiscal autonomy of governments by increasing taxation and restraining the freedom to invest in vital areas such as health education and social services.
The contentious nature of policies attached to lending programmes was even recognised by the IMF who admitted in the 2012 World Economic Outlook that the impact on growth from changes in government spending and taxation was largely underestimated by the Fund.
Cyprus constitutes a significant example of the fiscal conditions imposed through lending programmes. In the island, VAT increased from 17% in 2013 to 19% in 2014, pensions and civil servants’ wages were frozen until end-2016 and employee and employer contribution was raised.

Liberalisation and Privatisation - three key areas were identified under this domain:

- Liberalisation comprising price, trade and exchange rate liberalisation as well as the lifting of monopolies and encouraging the private sector to participate in the production of goods and services. Conditions in this area include the removal of social protection measures and the reduction of regulations of important national markets through price liberalisation for products such as petroleum and electricity

- Privatisation - the transfer of property or responsibility from the public to the private sector.

- Public enterprise restructuring - as mentioned in the report itself this area looks at the “conditions that call for the exploration of restructuring a sector or call for a study to be undertaken to look at the profitability of a certain sector, or call for a management review and change to the regulatory environment” (p.11).
In Greece for example, the government reduced trade union rights and minimum wage levels were frozen. To restructure public enterprises, Côte D’Ivoire was forced not to inject public funds in national banks in difficulty.
The findings of the EURODAD report demonstrates that conditions in privatisation and public enterprise restructuring are actually decreasing from the past but remain on the agenda. However, this could be due to the fact that such reforms are implemented at the beginning of IMF lending programmes.


This research confirm other studies’ findings- such as the study by the Centre for Economic and Policy Research (CEPR) and the report published by Development Finance International (DFI): the IMF increasingly concentrate on policies with potentially very negative impacts on the poorest part of the population such as:

- Diminishing social protection -health care, education, pensions, employment protection
- Reducing labour’s part of national income
- Increasing poverty and inequality -both social and economic

This situation is particularly worrying for borrowing countries with a low and medium income. These countries have in fact a limited voice within the IMF decision-making and hold a minority vote.

The EURODAD network underline the need of a fundamental reform within the Fund based on three suggestions:

1. The IMF should make faith to its mandate and should therefore be the lender of last resort rather than implementing lengthy programmes and imposing policy change in borrowing governments. The only condition should be the repayment of the loan on the agreed terms.
2. If recipient countries face serious debt repayment problems, new loans just deteriorate the situation. The solution should rather be the development of fair and transparent debt work-out procedures to assess and cancel unsustainable and illegitimate debt. As the major lender, the IMF should not be involved in the work-out of debt restructuring measures as it would face heavy conflict of interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. .
3. The IMF should solve its legitimacy problem by giving to developing countries a fair voice and vote and by increasing transparency within the Fund. An initial step could be the introduction of double majority voting “so that approval is needed from a majority of IMF member countries, in addition to a majority of IMF voting shares”.

Here to read the full report: http://eurodad.org/files/pdf/533bd19646b20.pdf



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