The IMF has been battling funding shortfall because many developing countries paid off their debt and borrowed less

April 19th, 2009

Washington D.C. (USA) — In a dramatic turn of events, the International Monetary Fund (IMF) is scrapping some of the stringent harmful conditionalities that has caused lingering mistrust and stigmatised the Fund's operations in developing countries, particularly in Africa.

The Fund sad lending will no longer be tied to its mandatory structural performance criteria starting May 1. Instead, borrowing countries would be able to receive money based on their domestic reform programmes.

The IMF has been battling funding shortfall because many developing countries paid off their debt and borrowed less. The Fund was forced to lay off some 400 workers last year to enable it stay in business even as it was plagued by calls for reform. It however received a life-line recently when its line of credit was tripled to $750 billion by the G20 group of nations.

As part of a wide-ranging reform aimed at revamping its operations, the IMF is re-defining the way it engages with countries. Although structural reforms will continue to be part of IMF-supported programmes, they will be carried out only if it is seen as critical to a country's recovery, the Fund said.
Monitoring of such policies will be done in a new way to reduce stigma and countries will no longer need formal waivers if they fail to implement an agreed measure by a specific date.

"We arrived at these reforms by listening to our membership, consulting with a variety of stakeholders, and reviewing past experiences," said the IMF's First Deputy Managing Director, John Lipsky. "These reforms will pave the way for countries to work more effectively with the Fund on crisis prevention and crisis resolution."

Announcing the new rules of engagement through its survey magazine, the Fund said: "The IMF's new lending framework focuses on the underlying objectives of a country's structural reform program rather than on specific actions that need to be adopted according to a specific deadline.

"The new framework will apply to all the IMF's loan programs, including those with low-income countries. It requires the IMF's Executive Board to assess how much progress a country is making on implementing its structural reform agenda, based on key actions agreed with the country at the outset of the program that will serve as benchmarks."

The IMF said its intention is to do away with procedures that had prevented dialogue with some countries and the stigma associated with its operations in some regions of the world. Previously, structural reforms that change the underlying makeup of an economy, such as fiscal systems and social safety nets, were a requirement for borrowing.

Usually, when a country borrows money, its government agrees to adjust its economic policies supposedly to deal with the problem that compelled it to borrow in the first place. The conditionalities were of two types, namely the macroeconomic conditions, which may include criteria for containing inflation, reducing budget deficits and public debt, or strengthening the central bank's reserves. The second was structural conditions, which may include measures to strengthen banking supervision, reform the tax system, improve fiscal transparency, and build up social safety nets.

In many cases, it did not produce the desired results. Instead, poor countries acquired so much debt that the amount they paid out servicing loans hampered progress.

The Fund has acknowledged this problem, revealing that a study carried out in 2007 by the Independent Evaluation Office (IEC) found that "a significant number of structural conditions are very detailed, and often felt to be intrusive and to undermine domestic ownership of programs".In practice, the new rules require that reviews will provide the primary tool for monitoring performance on the structural reform agenda. A country will receive the next tranche of loans if the Executive Board of the IMF sees that it has implemented agreed policies, based on a review.

"More flexibility in our lending along with streamlined conditionality will help us respond effectively to the various needs of members. This, in turn, will help them to weather the crisis and return to sustainable growth," said the IMF Managing Director, Dominique Strauss-Kahn.

 

source.This Day (Nigeria), by Constance Ikokwu