Managing Director's Report to the International Monetary and Financial Committee--Streamlining and Focusing Conditionality and Enhancing Ownership of Fund-Supported Programs

Managing Director's Report to the International Monetary and Financial Committee—Streamlining and Focusing Conditionality and Enhancing Ownership of Fund-Supported Programs

April 17, 2002

1. Since the fall of 2000, the IMF has been conducting a review of conditionality, with the aim of enhancing the implementation and effectiveness of Fund-supported programs. This review recognizes that successful economic policy reforms must be founded on strong country ownership. To promote ownership, Fund-supported programs must take account of countries' preferences in choosing among viable policy options and of their circumstances, including their administrative capacity to implement reforms in the necessary time frame. In addition, programs are more effective and the scope for ownership is increased, if IMF conditionality is focused on our core areas of responsibility and expertise and is prioritized on the measures that matter most for the macroeconomic objectives of the program. We therefore have been striving to focus and streamline the conditions attached to our financing, to provide greater clarity to the scope and nature of conditionality, and to be flexible and responsive in discussing alternative policies with countries requesting financial assistance.

2.  Since the last meeting of the Committee, we have continued to make progress in the review. We have reached a broad consensus on how to streamline and focus conditionality and enhance ownership. We are strengthening our collaboration with the World Bank, and we are establishing a track record of well-focused programs. Accordingly, in the coming months we will be bringing the current review of conditionality to closure by adopting new guidelines that embody these principles. This report summarizes the specific steps that we are taking to ensure that the review results in substantial improvements to IMF conditionality and Fund-supported programs.
3.  Successful and lasting implementation of policy reforms is not just a function of conditionality. More fundamentally, it requires a commitment on the part of the economic and financial authorities, the political leadership, and other domestic groups, based on their understanding that reforms are in the country's interest. In November 2001, the Executive Board reviewed the ongoing efforts to strengthen country ownership of Fund-supported programs. That discussion suggested that ownership depends both on the content of the program and on an inclusive process of discussion of alternative strategies. To build on the measures on which agreement had already been reached (streamlined and focused conditionality, increased transparency and clarity, and strengthened collaboration with the World Bank), Directors expressed support for staff proposals to improve processes of interaction with members seeking to use Fund resources.

4.  In general, our process of interaction should aim to ensure that each Fund-supported program reflects the circumstances and priorities of the member. Specific proposals for strengthening this process include improving the Fund's capability to analyze issues of political economy; supporting country-led processes for building consensus for reforms, including by being responsive to alternative policies preferred by the authorities; aiming technical assistance at capacity building; and intensifying the ex-post analysis of program successes and failures. In doing so, the goal is to increase our sensitivity to the problems and needs of countries, not to get involved in or interfere with domestic politics. While we need to make every effort to promote ownership in countries where the commitment to reform is weak, and we need to be cognizant of the importance of timeliness in the provision of financial assistance, we also recognize that there will inevitably be cases when the Fund must be prepared to delay or interrupt lending when doubts about successful implementation are paramount.

5.   In streamlining and focusing conditionality, we are stressing the principle that policy measures that are critical for a program to achieve its macroeconomic objectives should be covered. Correspondingly, conditionality is being applied more sparingly to structural measures that are relevant to the program but may not be critical to its success, particularly when they are not clearly within the Fund's core areas of responsibility and expertise. Inclusion of such measures now requires a stronger burden of proof that they are needed. Finding an appropriate balance between streamlining conditionality and ensuring that key areas of policy are covered requires careful judgment, taking account of different countries' circumstances while ensuring uniformity of treatment. Accordingly, we are proceeding in streamlining and focusing conditionality on a case-by-case basis and are assessing the results with the aim of clarifying and generalizing best practices. In all cases, our efforts are aimed at ensuring that conditionality is directed at essential actions, avoiding micromanagement, and achieving enough flexibility in the process of program design to promote ownership.

6.  An essential requirement for meaningful progress in streamlining and focusing conditionality is a clearer division of labor and a more systematic working relationship with the World Bank. Over the past several years, the need for collaboration has increased, both in the design of support for country programs and in conditionality. While enhancing collaboration, we are mindful that each institution must retain ultimate accountability for its own lending decisions and for safeguarding the resources entrusted to it. Collaboration should aim to clarify the respective responsibilities of each institution, to ensure that there is an overall streamlining and focusing of conditionality, and to provide coherent support for countries' reform agendas. An important element in this process is the application of the concept of "lead agency". For each area of policy, on a case-by-case basis, one institution should be identified as the agency to lead the policy dialogue with the country. That institution's assessment of policy implementation should be reported transparently in the other institution's reports as an input to an overall assessment. Communication is, of course, critical to successful collaboration. It is essential that the two institutions discuss at an early stage each country's policy priorities and the division of responsibilities.

7.  Staff in both institutions have been working to apply this enhanced collaboration framework more systematically. Detailed guidelines are being developed jointly, and meanwhile the agreed approach is beginning to be applied. To accommodate the different work programs of the two institutions, this initial application is decentralized and varies case by case. In parallel, the Bank has been reviewing its experience with adjustment lending and conditionality. As part of its periodic review of operational policies and lending instruments in support of countries' own strategies and programs, the Bank has launched work to update its operational policy on adjustment lending. Progress on collaboration will be reviewed further before the next meeting of the Committee.

8. In January 2002, the Executive Board considered proposals for improving the modalities of conditionality. Directors broadly welcomed proposals to base conditionality to a somewhat greater degree on outcomes rather than on implementation of specified actions by the authorities. They also noted that providing some financing in floating tranches could enhance flexibility and ownership, but cautioned that the scope for this approach was likely to be limited because most policy conditions in Fund-supported programs must be implemented in a timely manner to be effective. In parallel with the overall streamlining and focusing of conditionality, some aspects of the application of conditionality—notably agreeing to waivers and requiring prior actions—would be used more sparingly. Directors stressed the need to adhere closely to the existing policy that, where performance criteria are not met because of significant policy slippages, waivers should be granted only if appropriate corrective action has been taken. Although Directors agreed that prior actions are an essential tool of conditionality in cases in which strong and front-loaded policy action is needed, the use of prior actions has been less successful for signaling the probability of continued reform implementation in cases where commitment to reform is in doubt. Greater selectivity in approving arrangements would, in some cases, be the preferred course of action to address instances of past poor performance and limited ownership. As these tools are streamlined, Directors envisaged that program reviews could become more important, and they noted that this evolution should go hand in hand with a clear delineation of the scope of reviews.

9.  Finally, on April 3, 2002, the Board took stock of the progress being made in implementing these various principles and procedures. Directors noted that substantial progress had been made in implementing the principles enunciated in the Interim Guidance Note. They also noted that the nature and extent of conditionality continued to differ across countries. Although some further convergence might be desirable, Directors agreed that to a large extent the differences among recent cases were an appropriate reflection of variation in country circumstances and in the nature of the Fund's financial support. Directors welcomed the progress that had been made in clarifying the scope and rationale of Fund conditionality in program documents, but stressed that more could be done to systematically lay out both the macroeconomic objectives of programs and the criteria for determining whether particular measures were critical for reaching these objectives. In that regard, Directors stressed the importance of effective implementation of the enhanced framework for collaboration with the World Bank, and they looked forward to discussing progress on this issue before the next meeting of this committee.

10.  Although parsimony in the application of conditionality may be widely agreed to be a desirable principle, the temptation to make exceptions is ever present. If Fund-supported programs are to be effective, each case requires careful attention to circumstances, and the range of desirable and even essential policy changes may be wide and unique to the particular case. A successful conclusion to this review therefore requires a clear statement of the principles on which agreement has been reached and a continuing commitment to apply those principles uniformly and consistently. In the months ahead, we shall be considering new guidelines that incorporate the conclusions of the review, with the aim of reaching agreement before the next meeting of the Committee. To maintain our commitment to a streamlined and focused approach to conditionality and to program design founded on strong national ownership, we will also be making the ongoing process of evaluating implementation more systematic. Periodic reviews of conditionality should include assessments of consistency with the guidelines, the processes of interaction with member countries and of collaboration with the World Bank and other agencies, and the transparent presentation and documentation of conditionality. These reviews should help to ensure that the Fund remains focused and responsive to the needs of its members, and that Fund-supported programs have a strong chance of success.