CONDITIONALITIES BY INTERNATIONAL

MONETARY FUND
INTRODUCTION:: When a country borrows from the IMF, its government agrees to
adjust its economic policies to overcome the problems that led it to seek financial aid from the
international community. These loan conditions also serve as a guarantee that the country will be
able to repay the Fund so that the resources can be made available to other members in need. In
recent years, the IMF has streamlined conditionality in order to promote national ownership of
strong and effective policies.

The International Monetary Fund mainly lends to countries that have balance of payment
problems (they cannot pay their international debts).Conditionalities are implemented to ensure
that the money lent will be spent in accordance with the overall goals of the loan

Why IMF impose conditionality: . Conditionality is aimed at helping member

countries solve balance of payments problems without resorting to measures that may put
national or international prosperity in jeopardy. At the same time, the measures are meant to
safeguard IMF resources by ensuring that the country’s economy will be healthy enough to repay
the loan. All conditionality under an IMF-supported program must be “macro-critical”—that is,
either critical to the achievement of macroeconomic program goals or necessary for the
implementation of specific provisions under the IMF’s Articles of Agreement.’

A country’s progress in implementing the loan conditionality is monitored through reviews

carried out by the IMF’s Executive Board.

TYPES OF CONDITIONALITIES:
• macroeconomic conditions, which may include criteria for containing inflation, reducing
budget deficits and public debt, or strengthening the central bank’s reserves, and

• structural conditions, which may include measures to strengthen banking supervision, reform
the tax system, improve fiscal transparency, and build up social safety nets.

Structural adjustments are the policy changes implemented by the International Monetary
Fund (IMF) in developing countries.

STRUCTURAL CONDITIONS:

 Cutting expenditures, also known as Austerity.

 Focusing economic output on direct export and resource extraction,
 Devaluation of currencies,
 Trade liberalization, or lifting import and export restrictions,
  Increasing the stability of investment (by supplementing foreign direct investment with
the opening of domestic stock markets),
 Balancing budgets and not overspending,
 Removing price controls and state subsidies,
 Privatization, or divestiture of all or part of state-owned enterprises,
 Enhancing the rights of foreign investors vis-a-vis national laws,
 Improving governance and fighting corruption.

These conditions have also been sometimes labeled as the Washington Consensus.

1. Fiscal discipline: strict criteria for limiting budget deficits.

2. Public expenditure priorities: away from subsidies and administration towards neglected
fields with high economic returns and the potential to improve income distribution, such
as primary health and education, and infrastructure.
3. Tax reform: broadening the tax base and cutting marginal tax rates.
4. Financial liberalization: interest rates should ideally be market determined.
5. Exchange rates: should be managed to induce rapid growth in non-traditional exports;

6. Trade liberalization: tariffs, not quotas, and declining tariffs to around 10 per cent within
10 years.

7. Foreign direct investment: no barriers and 'equality’ with domestic firms.

8. Privatization: state enterprises should be privatized.

9. Deregulation: abolition of 'regulations that impede the entry of new firms or restrict
competition’, and establishing ‘such criteria as safety, environmental protection, or
prudential supervision of financial institutions' as the means to justify those which remain.

10. Property Rights: Secure rights without excessive cost and available to the informal sector.

MODERNIZING CONDITIONALITY:

The IMF aims to ensure that conditions linked to IMF loan disbursements are focused and
adequately tailored to the varying strengths of countries’ policies and fundamentals. In the past,
IMF loans often had too many conditions that were insufficiently focused on core objectives.
This modernization is to be achieved in two key ways. First the IMF will rely more on pre-set
qualification criteria (ex-ante conditionality) where appropriate rather than on traditional (ex
post) conditionality as the basis for providing countries access to Fund resources. This principle
is embodied in a new Flexible Credit Line. Second, implementation of structural policies in IMF-
supported programs will from now on be monitored in the context of program reviews, rather
than through the use of structural performance criteria, which will be discontinued in all Fund
arrangements, including those with low-income countries.

CONDITIONALITIES IN CASE OF PAKISTAN:

IMF funding is always short-term because it is for structural adjustments, not development
projects. The idea is that the borrowing country should tighten its belt to squeeze its trade and
fiscal deficits, quickly revive sectors that promise higher exports, cut imports, and halt a decline
in tax revenue, but in countries like Pakistan, more than anything else, it requires cutting the
government’s current expenditure.

Under normal global circumstances, IMF lending builds confidence of other agencies and
countries to lend to or invest in countries borrowing from the IMF. That logic doesn’t apply in
the present global scenario. The other assumption is that tight IMF conditionalities force
borrowing countries to improve governance i.e. sharpen focus on priorities, check corruption,
and cut waste. Not much of that is visible either.

It is being highlighted by official circles, that compared to eight conditionalities applying to

Pakistan’s monetary policy in the 2008 agreement only three apply to that policy in the new
agreement. Reasons: SBP allowed ‘flexibility’ of the exchange rate and shifted the load of
providing foreign exchange for import of crude oil as well on to the banking sector making
Pakistan more ‘resilient to external shocks.’

It is such faulty logic that makes IMF prescribed economic adjustment strategies the target of
criticism, for instance, describing the unchecked slide in rupee’s exchange rate as ‘flexibility’.
How on earth can a politically and socially volatile country that imports twice as much as it
exports benefit from such exchange rate ‘flexibility’ when it inflates the import prices of even
the essentials, and IMF disallows subsidies?

BEST UTILIZATION OF LOANS FOR PAKISTAN: IMF funding can’t

succeed in credibly backing the rupee because the support will last for just 23 months. Secondly,
shifting the funding of crude oil imports from SBP on to the banking sector implies that IMF
funds will be used primarily to repay the IMF. Finally, the amount of the IMF facility as well as
its term defy supporting the effort needed to add real value to the economy by giving it a
semblance of stability.
And where shall we stand after the IMF facility is (hopefully) paid off? With the rupee at a new
historic low, Pakistan could be in the worst economic mess, unless the import substitution
industry is revived on the largest possible scale. It may be just the kind of jolt Pakistan requires
(because nothing else works), to revive its import substitution industries but for the present there
is not much on the cards in that context.

Lack of focus on cutting imports by reviving import-substitution industries was evident from the
coverage of the trade policy announcement; it contained nothing in terms of a target for cutting
imports or a reference to sectors that will be helped (via cheaper credit) and encouraged (via
higher tariffs on imports) to achieve that target. Short-term IMF funding can’t support these
incentives long enough to revive this sector.

What Pakistan needs is medium and long-term debt. Medium-term debt could keep the economy
going and the currency stable until those gaps are plugged, and long-term debt could fund the
mega infrastructure projects. More importantly, during this period worms in the state machinery
would have to be weeded out to improve governance of the state and optimal resource
productivity.

Talking of value-generating use of IMF funds, IMF didn’t react to the controversial power rental
agreements the government is negotiating. The fact that IMF has permitted printing of more
money (up to Rs117 billion in FY10) backed by a part of its short-term facility implies that
power sector’s circular debt should be settled instead of entering into rental power agreements,
which makes IMF’s silence on the issue very perplexing.

The key issue is stabilising the rupee; if we remain satisfied with its current ‘flexibility’ there
will never be enough to repay the debt we are accumulating. Allowing the rupee to slide also
confirms that Pakistan lacks the wherewithal (and the will) to impose effective checks on
imports; Afghan Transit Trade makes things worse. Such compromises will only pass on to the
next generation an unbearable burden of external debt.