Compliance of Countries with Agreements
Made as a Condition of Receiving IMF Financial Assistance
The IMF provides financial resources to member countries on conditions that are designed to encourage economic adjustment and to ensure that a member has the capacity to repay the IMF on time. This, in turn, helps ensure that the IMFs pool of financial resources is available to other members facing balance of payments problems. Such conditions aim to reduce a members balance of payments deficit to a manageable size while fostering economic growth, employment, financial stability, and the elimination of restrictions on international trade and payments.
The IMF has developed a process and a range of techniques for monitoring and assessing a countrys compliance with conditions for receiving financial assistance. The IMF requires that the national authorities provide a "letter of intent" outlining: the governments policy intentions; the policy changes that must be taken before financing can be approved; performance criteria (macroeconomic indicators that must be satisfied on a quarterly, semiannual, or in some cases monthly basis for drawings to be made); and periodic reviews that allow the IMFs Executive Board to assess the consistency of policies with the objectives of the program.
Increased transparency at the IMF is giving the public greater capacity to make its own assessment about the degree to which countries comply with conditions for IMF financial assistance. The more systematic release of letters of intent as well as information about periodic program reviews means that, in most cases, the public can monitor the evolution of a countrys program from the initial elaboration of policy intentions through decisions regarding release of financial resources.
The IMFs guidelines on conditionality, which are reviewed periodically:
While these guidelines apply to all cases where members seek IMF financing, the Fund recognizes that no single reform model suits every circumstance. Each member country, in close collaboration with IMF staff, designs its IMF-supported program. The process involves a comprehensive review of the members economy, including the causes and nature of the balance of payments problem, and an analysis of the policies needed to achieve a sustainable balance between the demand for, and the availability of, resources. In sum, the IMFs approach to conditionality seeks to strike a balance between the need for equal application of rules regarding access to finance, and the need for reasonable flexibility in the design and monitoring of adjustment programs.
A recent report by the General Accounting Office looked in detail at the process by which the IMF establishes financial arrangements with borrower countries and the types of conditions set under such arrangements. The study also assessed, for six countries (Argentina, Brazil, Indonesia, Korea, Russia and Uganda), the degree to which conditions were met and not met, and the actions the IMF took in response.1 The report found that "in some cases, the IMF determined the countries had made sufficient progress in meeting program conditions so that additional funds could be made available. In other cases, however, the IMF determined that country progress in meeting the conditions had not been sufficient, and its response varied depending on the specifics of the condition and the judgment of the IMF staff and Executive Board on the countrys overall progress." The report cites specific examples of how the IMF deals with situations where a determination is made that progress in meeting conditions has been insufficient.
The IMFs website (www.imf.org) contains additional information about this subject (see "conditionality" on the websites index of subjects). There is also extensive literature, both country-specific and cross-country studies, on the related question of the effectiveness of IMF programs. See, for example, "Do IMF-Supported Programs Work? A Survey of the Cross-Country Empirical Evidence" (IMF Working Paper WP/98/169 by Nadeem Ul Haque and Moshin S. Khan). This study is available on the IMFs website and includes a lengthy list of additional works on this subject by authors both inside and outside the IMF.
1. International Monetary Fund: Approach Used to Establish and Monitor Conditions for Financial Assistance." General Accounting Office, June 1999.