What is Conditionality?

Levels of Conditionality

Low conditionality involves a country merely establishing that it has a “balance of payments need,” coupled with a declaration, which the fund does not ordinarily challenge, that it is taking measures to correct the problem.

High conditionality involves designing a specific set of measures to eliminate a country’s balance of payments problem, fund agreement that the program will be adequate for that purpose, and the country’s commitment to implement the program.

Provisions of Financing Programs

Preconditions are actions taken by a country before the IMF executive board will authorize a program.

Performance criteria are benchmarks that, if violated by a country, lead to suspension of further loan disbursements by the fund until a new agreement is reached.

Policy understandings are actions that a country agrees to take but that do not have any explicit sanction associated with nonperformance.

Typical IMF Financing Preconditions and Performance Criteria

  • General commitment to cooperate with the IMF in setting policies
  • Reducing government spending, budget deficits, and foreign (external) debt
  • Reducing the rate of money growth to control inflation
  • Ending government monopolies (i.e., privatization)
  • Deregulating industries and reforming the banking sector
  • Redirecting domestic credit from the public to the private sector
  • Ending government wage, price, and interest-rate controls and government subsidies
  • Raising real interest rates to market levels
  • Removing barriers to export growth
  • Lowering tariffs, ending quotas, and removing exchange controls and discriminatory exchange rates
  • Maintaining adequate levels of international reserves
  • Devaluing the currency for countries in “fundamental disequilibrium”
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