Structural conditionality in IMF programmes

Ladies and gentlemen,

Let me start by thanking Mr Lamdany for his presentation and the Independent Evaluation Office for completing a useful, thorough, and very important report. The use of structural conditionality in IMF programmes is intended to support the achievement of macroeconomic goals. It gained prominence in the 1980s and is closely linked to the expansion of Fund concessional lending. Structural conditionality is different from traditional quantitative conditionality that has a focus on balanced budgets and public debt. At this conference, the focus is on structural, not quantitative conditionality.

The structural conditionality programmes of the 1990s were often in conflict to national ownership,.They were overly detailed, and insensitive to the particular circumstances faced by individual countries. Public services such as schooling and health is one example of this, where conditionality in some cases imposed user fees on poor people who were unable to pay them.

The Norwegian government’s emphasis on allowing programme countries policy space must also be read against this background, including our opposition to imposed privatisation and liberalisation. We believe there is a multitude of development strategies that may lead to prosperity. Our Nordic economic model is a pertinent illustration of this point. How? The main elements in the model is centrally coordinated wage bargaining, active state involvment and a well-developed public safety net financed by a relative high tax level. According to standard economic theory this should not perform well, because of lack of initiatives to education and working hard. But in practice the model gives us strong results when it comes to growth, high level of employment and living conditions.   

We must move beyond the structural conditionality of the 1990s. Today we must address and respond to the current IMF conditionality practice. The streamlining initiative launched in 2002 was intended to bring parsimony and criticality to IMF conditionality. Has it been effective? The IEO report shows signs of progress. It is encouraging to note that conditionality has shifted towards areas where the Fund has its core competence. This is in line with a clearer division of responsibility between the World Bank and the Fund. From our perspective, it is also very encouraging to note the drop in conditions relating to privatisation and trade liberalisation.

However, the IEO report also reveals limited progress in other areas. For instance, the number of conditions has not declined as a result of the streamlining initiative. Even though a numerical target only is an imperfect measure of the extent of conditionality, 17 is a very high number of average annual conditions per programme. The number indicates that there is scope for further streamlining of structural conditionality, especially as  many of the conditions do not appear to be critical to programme objectives. Furthermore, the general compliance rate remains low, at a mere 54 per cent of conditions.

The IEO report contains several important recommendations. Let me here comment on five of them.

First, and most importantly, the report suggests strengthening the streamlining initiative principles of parsimony and criticality in designing IMF programmes. I fully agree with the report. Further streamlining is very necessary to improve ownership, compliance, and the effectiveness of reform. National ownership to the development and reform strategy is also a virtue by itself, as it will allow countries policy space to design and decide on policies that are best tailored to their own particular circumstances. IEO suggests setting a notional cap on the number of conditions. Some fear this could lead to a superficial number’s game. And of course it could, if the willingness to reduce the number of condition is not strong enough. The problem is: It seems to be necessary to apply stronger pressure. Setting a cap could be one way, among several, to encourage all parts to be more sensitive to which conditions are the most necessary and effective to achieve programme goals.

Second, the IEO suggests developing a better framework for documenting not only the specific goals of each programme, but also how each condition being set is critical to the achievement of the programme goals. This is a sensible proposal, and it seems to enjoy widespread support, including mine.

Third, the IEO suggests that the Fund should play a subsidiary role to the World Bank in setting structural conditions outside Fund core areas. Today, one third of conditions are set in non-core areas, and this share seems to be in conflict with the intentions of the streamlining initiative. I support the IEO in suggesting that conditions only exceptionally should be set in non-core areas, and then with the explicit approval of the Fund’s Executive Board.

Fourth, the report has a very relevant analysis of the Fund’s use of structural benchmarks and conditions with so-called low structural depth. Structural benchmarks may be defined as reform criteria where lack of compliance in itself would not be sufficient to set the programme off track. Conditions with low structural depth are criteria where the completion in itself would not foster structural changes to the economy, but may be mere stepping stones in a wider reform programme. It is difficult to give a precise definition of these types of conditions, and their status remains unclear. In my view, the Fund should be very specific about the criteria upon which a country programme is conditional, leaving as little grey space as possible. Accordingly, I am critical to the continued use of both structural benchmarks and conditions with low structural depth.

Finally, Fund conditionality should not be developed for the purpose of being a monitoring tool for donor-led programmes or other initiatives. Instead, it would seem useful to develop a clearer distinction between the role of conditionality and the Fund’s policy advice and assistance, as suggested by the IEO. However, further clarification is needed on how such a distinction should be put into practice.

In conclusion: We generally support the IEO recommendations. The government will emphasise in particular the need for national ownership and policy space so that each country can develope policies suited to their particular circumstances. We hope the IEO report can help us to move further. IMF needs to move towards true parsimony and away from conditionality being set in non-core areas, such as for instance Fund-initiated privatisation and liberalisation. In my view, a more streamlined conditionality policy should not only focus more on fiscal transparency and anti-corruption measures, but also on democrazy. To ensure an open and instructive political democratic process the national parliaments in the borrowing countries should be consulted in deciding on the conditionality to be set. Maybe that could be a condition in itself? 

There are many questions to address, and I look forward to a lively debate on these issues!

Thank you.