Extract from

International Monetary Fund (IMF)

by
Annamaria Viterbo

2019 Wolters Kluwer

The monograph International Monetary Fund is an integral part of Intergovernmental Organizations

in the International Encyclopaedia of Laws series.

Balance of Payments Support

Introduction
1. According to Article I (v), one of the purposes of the IMF is ‘to give confidence to members by
making the general resources of the Fund temporarily available to them under adequate
safeguards, thus providing them with opportunity to correct maladjustments in their balance of
payments without resorting to measures destructive of national or international prosperity’.
2. In the practice of the Fund, balance of payments support has become a dominant activity,
virtually overshadowing other tasks. Whereas each member is entitled to balance of payments
support, until recently Fund’s resources have been predominantly borrowed by developing
countries and countries in transition. The last decade, however, has witnessed a major shift in
economic performance. Some developing countries have been able to accumulate monetary
reserves or gained access to financial markets and thereby became less dependent on IMF
resources. In contrast, the financial position of certain industrialized countries has worsened
considerably; indebtedness, amplified by the fall-out of the financial crisis in 2008, has
increased to alarming levels. Since Italy and the UK received support from the Fund in the
1970s, Greece was the first advanced economy and Euro area country to receive financial
assistance from the IMF and the EU in 2010. Ireland, Portugal and Cyprus followed shortly
after.

Chapter 1 Balance of Payments Problems

§1 THE BALANCE OF PAYMENTS

3. Each member country has to regularly report balance of payments data to the IMF. In order to
promote uniformity in the book-keeping and to facilitate analysis of the figures, the Fund gives
directions to members about the way in which transactions are recorded. These directions are
published in the ‘Balance of Payments and International Investment Position Manual’. The
figures relating to the balance of payments of member countries are published in the ‘Balance
of Payments Statistics Yearbook’.
4. The Fund defines the balance of payments as a statistical statement for a given period that
summarizes transactions between residents and non-residents and consists of: the current
account, the primary income account, the secondary income account, the capital account and
the financial account.
5. The current account includes: a) the balance of trade in goods and services; b) the primary
income; and c) the secondary income between residents and non-residents. In particular, the
goods and services account includes transactions in items that are outcomes of production

1
 activities. The current account balance shows the difference between the sum of exports and
income receivable and the sum of imports and income payable.
6. The capital account shows: a) the acquisition and disposal of non-produced, non-financial
assets (like natural resources) between residents and non-residents; and b) capital transfers
receivable and payable between residents and non-residents.
7. The financial account shows net acquisition and disposal of financial assets and liabilities.

§2 THE NEED FOR SUPPORT

8. A balance of payments problem occurs when a state imports more goods and services than it
exports. The capital balance may also be negative because of flights of capital or investments
abroad. As long as these deficits are limited and of short duration, official reserves can provide
a solution. It is possible that after a time, a surplus will arise so that the reserves can be
brought back to the desired level. However, when the deficit is serious or difficult to shift, most
countries may run into distress, as the reserves will be exhausted. In such cases two
responses are possible.
9. First, it is possible to seek elsewhere for a means of covering the deficit. One option is for a
country to offer sovereign bonds in a foreign currency, within or outside its own territory.
Countries can also try to secure loans from commercial banks, operating on the market for
currencies which are traded outside the country of issue. A state may also raise financial
resources obtaining bilateral lending from other countries. This might take the shape of Official
Development Assistance (according to the OECD, ODA is defined as assistance ‘provided by
official agencies, including state and local government, or by their executive agencies, each
transaction of which: a) is administered with the promotion of the economic development and
welfare of developing countries as its main objective; and b) is concessional in character and
conveys a grant element of at least 25 percent’). Particularly for developing countries, calling
on external financial sources does however have its limits. Often, the only source of credit,
which does not entail future obligations, are grants. This particular source is, however, scarce.
When the balance of payments position shows no signs of improvement, and the
creditworthiness of the debtor country worsens, creditors will become ever more reluctant to
furnish additional financial resources.
10. Second, a country can obtain financial assistance from the IMF and carry out an adjustment
programme aimed at restoring the balance of payments equilibrium. Such a policy means that
the government opts for economic reform through reducing government spending, adjusting
exchange rates, fighting inflation and other measures. Adjustment is in fact unavoidable when
confidence in the country concerned has fallen to such a level that new credits are no longer
offered. The IMF has set itself the task of helping countries in setting up and carrying out
adjustment programmes. The IMF has laid down that structural balance of payments deficits
must be countered by policy measures aimed at reducing public spending, raising GDP growth,
curbing inflation, and achieving benchmarks for interest and exchange rates and other
variables of economic and monetary policy. Simultaneously, the Fund provides short-term
balance of payments support in order to cover immediate deficits.

§3 THE POLITICAL ECONOMY

11. Adjustment becomes necessary for example because circumstances in the preceding period
have had an adverse effect on the balance of payments: f. ex. excessive imports due to over-
consumption, disappointing export revenues due to falling commodity prices, wrong exchange

2
 rate policy, misguided tax incentives, flight of capital or unfocused investment policy. Some of
these causes can be laid at the door of the country concerned, while others, such as falling raw
materials prices, can hardly be blamed on the country. However, adjustment is inevitable,
regardless of the cause of the balance of payments deficit, and regardless of whether the
country itself is to blame for the deficit. Only when an unlimited appeal can be made on
international credit, postponement of adjustment is possible.
12. Although the Fund cannot prevent adjustment, it can soften it. Member countries call on the
organization’s help in order to make the adjustment process proceed as smoothly as possible,
without seriously endangering the economy. The Fund can also be requested to ensure that
the adjustment happens in such a way that the socio-economic position of vulnerable groups is
protected as far as possible. It may be expected that IMF-supported adjustment is more
gradual and somewhat less painful than market-enforced adjustment.
13. There are several reasons why the IMF insists on adjustment. The first is rather mundane: as
credit will only temporarily be made available, the IMF wants to make sure that the member is
able to pay back. In fact, one of the purposes of the Fund is to make its general resources
temporarily available to member countries under adequate safeguards (Article I (v)). A member
that does not reform and continues to spend foreign currency beyond its means will certainly
not be able to repay. Second, the IMF must facilitate the expansion and balanced growth of
international trade. Adjustment is expected to ensure that countries continue to participate in
the world trading system. There may also be a third reason: countries running out of foreign
reserves may become insolvent and create a risky environment for international banks and
investors.
14. When an adjustment programme is being negotiated, negotiators of the IMF and the country in
need may have fundamental differences of opinion. Parties will agree that reforms must be
aimed at restoring equilibrium, but they may disagree on the best recipe to find it. In the end,
parties may come up with a deal which is reflected in a document outlining the reforms (a
memorandum of economic and financial policies attached to the country’s letter of intent). What
counts, of course, are effective changes in domestic economic policies. Changes usually
include drastic budget cuts and tax reform, price liberalization, trade and foreign investment
liberalization, privatization and private sector deregulation. Generally, adjustment follows a
predetermined pattern, meaning that the public sector steps back while the private sector
moves in.
15. Governments have not always been eager to seek IMF financial assistance. They would rather
rely on unconditional support, which does not restrict political priorities. Although the Fund calls
on its members to take timely measures, in practice members only turn to the Fund when other
creditors have turned their backs and the ship is threatening to sink or has already sunk.
Unintentionally the Fund becomes a lender of last resort. This situation means that adjustment
under Fund guidance often entails a radical change in economic policy. Painful choices have to
be made. Interest groups who for years have been able to count on special benefits see their
financial position undermined by economy drives as a part of Fund’s conditionality (on which
see infra). Social spending is cut, with a negative impact on health, school and pension
systems. Government jobs are axed, and the military see their budgets melt away. A
government must stand firm to resist the pressure from so many interest groups, and it is not
unusual for the Fund, for political reasons, to take the blame for these painful measures. The
IMF has been prepared to let these reproaches go unanswered, as a sort of silent contribution
to the adjustment effort

3
16. [On the so-called Washington Consensus: The concept and name of the Washington
Consensus were first presented in 1989 by John Williamson, an economist from the Institute
for International Economics, an international economic think tank based in Washington, D.C.
John Williamson used the term to summarize commonly shared themes among policy advice
by Washington-based institutions at the time, such as the International Monetary Fund, World
Bank, and U.S. Treasury Department, which were believed to be necessary for the recovery of
countries in Latin America from the economic and financial crises of the 1980s. The consensus
as originally stated by Williamson included ten broad sets of relatively specific policy
recommendations: 1) Fiscal policy discipline, with avoidance of large fiscal deficits relative to
GDP; 2) Redirection of public spending from subsidies ("especially indiscriminate subsidies")
toward broad-based provision of key pro-growth, pro-poor services like primary education,
primary health care and infrastructure investment; 3) Tax reform, broadening the tax base and
adopting moderate marginal tax rates; 4) Interest rates that are market determined and positive
(but moderate) in real terms; 5) Competitive exchange rates; 6) Trade liberalization:
liberalization of imports, with particular emphasis on elimination of quantitative restrictions
(licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; 7)
Liberalization of inward foreign direct investment; 8) Privatization of state enterprises; 9)
Deregulation: abolition of regulations that impede market entry or restrict competition, except
for those justified on safety, environmental and consumer protection grounds, and prudential
oversight of financial institutions; 10) Legal security for property rights.].
17. The Fund fulfils a pivotal function in the relation between the debtor country and its creditors.
For creditors (like bondholders which invested in sovereign bonds issued by the country
concerned), the Fund is competent to judge the creditworthiness of a country. Practically all
creditors trust the IMF’s judgment and are only prepared to provide support (or debt relief) if the
debtor, in consultation with the Fund, carries out an adjustment programme. As long as the
Fund provides support, creditors will have faith that the adjustment programme is on the right
track and will judge that the risks entailed in providing credit are acceptable. The debtor country
also realizes that creditors will place their trust in an adjustment programme which meets with
the Fund’s approval.
18. There may also be another reason why the finance minister and central bank governor of the
requesting country adhere to IMF-supported programmes. These authorities, responsible for
financial and monetary policy, try to strengthen their position vis-à-vis their government in
seeking support from the IMF. Backed up by the Fund, they hope to induce greater fiscal
discipline among their fellow ministers.

Chapter 2 IMF Lending

19. According to the principle of uniform treatment, access to the Fund’s general resources is
equally open to all members, irrespective of the state of their economic development. Until
recently, only developing countries and members in transition have drawn on the IMF
resources. Since the start of the global financial crisis though, four members of the Euro area –
Greece, Portugal, Ireland and Cyprus – received IMF support.
20. A member country may request IMF financial assistance if it has a balance of payments need
(present, prospective or potential), that is if it cannot find sufficient financing on affordable
terms to meet its net international payments (e.g., for imports or external debt redemptions)
while maintaining adequate reserve buffers. A request may be made under the condition that

4
 the Fund’s resources would be used in accordance with the provisions of the Articles and of the
IMF policies subsequently adopted.
21. Upon request by a member country, the IMF provides its resources through a lending
arrangement. The loan is intended to facilitate the adjustment policies and reforms that a
country must make to correct its balance of payments problem and restore conditions for
strong economic growth. Financing can be provided through a variety of lending facilities.
22. IMF lending has evolved over the years. Originally, the IMF could only provide outright
disbursement to requesting countries subject to an assertion of an actual or potential balance
of payments need. The practice of lending in tranches through Stand-By Arrangements was
introduced in 1952 and formalized by the 1978 Second Amendment to the IMF Articles of
Agreement. It was not until the 1960s that the Fund introduced ‘special’ facilities (or lending
windows) to address specific balance of payments problems for which ordinary Stand-By
Arrangements would prove inadequate or insufficient. Only in the mid-1970s, the Fund started
lending to low-income countries on concessional terms through trust funds separate from its
general resources

§1 PROCEDURE AND MODALITIES

23. Only member countries can express a request for balance of payments support to the IMF.
Following the request, the Fund sends a mission to visit the country. In cooperation with the
mission, the member’s authorities outline a series of adjustment measures that are then
described in detail in a Letter of Intent, or in a Memorandum on Economic and Financial
Policies (MEFP), sometimes accompanied by a Technical Memorandum of Understanding
(TMU). These documents, usually written in close consultation with the Fund’s staff, contain a
declaration of aims and policy by the requesting country. They are submitted to the Managing
Director for circulation to the Executive Board which has the power to approve a loan. The
release of financial resources is then formalized in a Stand-By Arrangement or in another loan
arrangement (such as an Extended Arrangement approved under the EFF).
24. The Letter of Intent and the IMF loan arrangement (more often a Stand-By Arrangement) do
not entail any contract or international law obligation, not even when read together. They do not
constitute an international agreement from the perspective of public international law, nor they
amount to unilateral legal acts, since the ‘intention of being bound’ is absent. An important
consequence of the absence of a contractual relation between the IMF and the borrowing
country is that, from the combined reading of the Letter of Intent and the Stand-By
Arrangement, no binding agreement arises making the execution of the adjustment programme
mandatory. The programme only stipulates the conditions under which currency purchases are
possible; if the conditions are not fulfilled, the purchase will not go ahead. The lack of
contractual character also has consequences in other areas: treaty law is not applicable, and it
is not necessary to follow national procedures that might be necessary for the approval of
international agreements.
25. The IMF puts forward a number of different arguments for the lack of a contractual bond. The
most important legal reason lies in the formulation of Article V, section 3(b): ‘A member shall
be entitled to purchase currencies (…) from the Fund (…) subject to the following conditions
(…)’ [emphasis added]. It follows that the loan arrangement is declaratory, in the sense that it
recognizes the member’s entitlement to use the Fund’s resources; it does not create the
entitlement. Stand-by arrangements and other loan arrangements do no more than specify the
conditions under which this right may be exercised.

5
26. Furthermore, the IMF wishes to avoid the impression that adjustment programmes are dictated
by setting forth contractual obligations. To set out the results of a negotiation in the form of an
agreement would amount to painting a false picture of the relationship between the Fund and
its members. A contractual bond would be inconsistent with the ‘national ownership’ principle.
The IMF supports the programme without wishing to appeal to contractual rights and
obligations.
27. The adoption of a Fund decision in the form of a Stand-By Arrangement (or another loan
arrangement) offers a number of advantages both for the member and the IMF:
(a) Speed. The procedure for setting up a letter of intent and a Stand-By Arrangement
can be quickly dealt with; the procedure is simple, and because the member is under
no obligation, there is less necessity to formulate the text of the letter of intent in
minute legal detail; speed is of the essence when balance of payments problems are
threatening.
(b) Confidentiality. The procedure can be handled in complete confidentiality, since there
is no question of an agreement that must be put before a legislative assembly, or
which must be published; confidentiality is particularly important when currency
devaluation forms a part of the adjustment programme. If the adjustment programme
were a matter of public knowledge, the risk would ensue of a flight of capital or
speculation against the currency undergoing devaluation. An objection to
confidentiality is that radical adjustment measures are adopted without the democratic
scrutiny of a parliament or other stakeholders.
(c) Primacy of economic sovereignty. The member may, at any given moment, call a halt
to the adjustment programme without being guilty of breach of contract, and without
sanctions from the IMF. If the member decides to do so, there is no question of non-
compliance with the letter of intent or the Stand-By Arrangement. The only
consequence will be the suspension of the balance of payments support. The
resources already purchased are not possessed unlawfully, and do not have to be
yielded up prematurely by repurchase. It would only be a question of unlawful
behavior (a ‘non-complying purchase’) if the use of the resources conflicted with the
purposes of the Fund. However, invoking economic sovereignty does have practical
consequences, since continuation of the programme remains a condition for
continuing the balance of payments support, not only by the Fund, but also by other
creditors. If balance of payments support is indispensable, a country has in practice
no option but to see the adjustment programme through. Should a member
nevertheless decide to bring a premature end to the adjustment programme, the
relation of trust will be seriously compromised. If a new request for support is made,
the IMF will insist on clarification about the reasons for halting the programme and will
require more security before proceeding to a new Stand-By Arrangement.

§2 MONITORING AND MEASURING PERFORMANCE

28. Once an arrangement is approved by the Executive Board, resources (in the form of purchases
of international reserve currencies) are usually made available to the requesting country in
phased instalments. Disbursements made in instalments are linked to demonstrable policy
actions. Quantitative performance criteria (QPCs), indicative targets and structural benchmarks
are established to assess the member’s compliance with the programme and progress in its
implementation.

6
29. QPCs must ‘normally’ be related to the Fund’s core areas of responsibility, i.e.,
‘macroeconomic stabilization; monetary, fiscal, and exchange rate policies, including the
underlying institutional arrangements and closely related structural measures; and financial
system issues related to the functioning of both domestic and international financial markets’.
30. QPCs constitute the core of conditionality. Failure to fulfil the criteria will result in a cutting off or
suspension of balance of payments support. Differences of interpretation about whether the
criteria have been adequately met should, ideally, not occur: a member country should be in
the position to know at any given moment whether it has met the criteria and thus whether it
may purchase currency from the Fund (on the purchase-repurchase mechanism see supra,
par. 247).
31. If a QPC is not met, the Executive Board may however approve a formal waiver, but only if it is
satisfied that ‘the programme will nevertheless be successfully implemented – i.e., that it will
achieve its goals – either because of the minor or temporary nature of the non-observance or
because of corrective actions taken by the authorities’ (2014 Operational Guidance to IMF
Staff).
32. Before new releases are made, the Fund checks if the programme is on track. Through
periodical programme reviews, the Executive Board assesses if conditions are being met
according to the agreed timetable and establishes if the programme need to be modified in light
of new developments. Disbursements under an IMF-supported programme can take place only
upon the programme review approval, or completion of reviews, by the IMF Executive Board.
33. A member may also be expected to take ‘prior actions’ and to implement some measures
before the IMF’s Executive Board approves financing, completes a review or grants a waiver
when upfront implementation is critical to achieve programme goals. Prior actions ensure that
the programme has the necessary foundation for its successful implementation, or that it is put
back on track. Preconditions should be quantitatively as limited as possible and may only be
required when necessary for carrying out the programme in accordance with the IMF’s policies.
Following the global financial crisis, the Fund developed a new framework to include a more
systematic use of ex ante conditionality.

§3 IMF FACILITIES
34. It should be recalled that according to the principle of uniformity, no distinction is allowed
between member countries based on their stage of development for what concerns both the
reserve tranche and the upper credit tranche policy. However, to overcome this limitation on
the use of the Fund’s general resources disbursed from the GRA, lending activities have been
organized also under various ‘facilities’ to better take into account the specific circumstances of
its members.
35. Facilities can be divided in two broad categories: a) non-concessional facilities for countries
with sound fundamentals experiencing a balance of payments problem; the legal basis for the
adoption of non-concessional facilities is Article V, section 3(a), under which the Fund adopts
specific policies on the use of its general resources for a set of balance of payments problems;
and b) concessional facilities tailored to address the specific circumstances of low-income
countries. Each facility establishes: the maximum amount a member may borrow; different
disbursement schedules (phasing), maturities and charges; the type of conditionality connected
to the loan; as well as procedures for reviewing the borrowing country’s performance under the
arrangement. Low-income countries may usually borrow on more favourable terms, such as

7
 reduced charges, and may be granted a grace period. The Fund can also establish
administered accounts (financed through voluntary contributions by its members) to provide
countries with financial and technical services.
36. Stand-By Arrangements (SBA), under which countries are given financial support to address
short-term balance of payments problems, are the main lending instruments of the IMF.
Programmes are designed to address these problems and disbursements are made conditional
on achieving these targets. The length of an SBA is typically twelve to twenty-four months, and
repayment is due within 3¼–5 years of disbursement. SBAs may be provided on a
precautionary basis: in this case, countries choose not to draw upon approved amounts but
retain the option to do so if conditions deteriorate. The SBA provides for flexibility with respect
to phasing, with front-loaded access where appropriate.
37. The IMF started to provide concessional financing to developing countries in 1976 through its
Trust Fund (terminated in 1981), funded by the proceeds of IMF gold sales. The establishment
of the Trust Fund was therefore a departure from the principle that general resources should be
made available for all member countries on an equitable basis. This principle was meant to
prevent discrimination among members on the basis of their stage of development and to
ensure reasonable uniformity in accessing IMF resources and in loan conditions. With the 1978
Second Amendment to the IMF Articles of Agreement, special provisions were introduced to
allow the allocation of surplus proceeds from IMF sales of gold to concessional lending. Thus,
balance of payments assistance could be made available on special terms to developing
countries in difficult circumstances and for this purpose the Fund could take into account the
level of pro-capita income.
38. In 2009, in order to provide financial assistance to low-income countries (LICs) in a more
effective way, the IMF reformed its concessional lending framework and transformed the
Poverty Reduction and Growth Facility into the Poverty Reduction and Growth Trust (PRGT).
The trust is funded through bilateral loan agreements at market rates and by donations from
members or reserves available within the Fund (for instance, reserves deriving from the 2009-
2010 gold sales). A country can receive concessional lending from the PRGT if it is unable to
access international financial markets on a substantial basis and it is eligible for IDA support.
Under the PRGT, the IMF operates as trustee and provides loans on concessional terms (zero
interest rates) to low-income countries. The PRGT covers three facilities: the Extended Credit
Facility (ECF), the Stand-by Credit Facility (SCF) and the Rapid Credit Facility (RCF). The
ECF is

Chapter 3 IMF Conditionality

39. The IMF’s ‘conditionality policy’ refers to the body of policies and procedures adopted by the
Fund to govern the use of its resources in a manner that fulfills the purposes of the Articles.
Conditionality plays an important role as it provides assurance to the Fund that the country will
be able to repay its loan and that resources will be made available to other countries.
Conditionality thus embodies the adequate safeguards clause under which, according to Article
I (v) and Article V, section 3(a), the Fund can make its general resources temporarily available
to members. At the same time, it helps countries solve their balance of payments problems
‘without resorting to measures destructive of national or international prosperity’.

8
40. In parallel, the term ‘conditionality’ refers to the policies a member is required to follow in order
to be able to use the Fund’s resources. When a country borrows from the Fund, it agrees to
implement macroeconomic and structural reforms to overcome the crisis and restore growth
and stability. Policy adjustment and conditionality makes the IMF ‘co-author’ of economic
policies and co-responsible for the consequences of adjustment.
41. Just like a government makes policy choices that reflect political, moral and legal values, the
IMF must also give them consideration. In light of the IMF’s practice to insist on firm adjustment
efforts, incisive questions on the scope of conditionality may be asked. Can the IMF ask for the
closing down of state subsidized hospitals and schools? Can it demand a policy by which
parents must pay a user’s fee for their children in primary school? What are the ethics of the
IMF? Does it consider itself to be bound by human rights?
42. Searching for values and human rights in the IMF Articles does not produce clear answers.
According to the Articles, the IMF must avoid measures that are harmful to national or
international prosperity, but this has little practical meaning for the protection of non-economic
values without a proper interpretation. Significant is an opinion of the IMF’s General Counsel
on the relationship between the Fund and the UN Covenant on Economic, Social and Cultural
Rights (1966). The opinion suggests that the IMF is factually contributing to the promotion of
socio-economic standards, by creating a more prosperous economy in the long-term. The
opinion also maintains, though, that the IMF is not legally bound by the Covenant because it is
not a party. Some authors, proceeding on the assumption that human rights are part of a larger
framework of international law, argue instead that both the IMF and the World Bank are bound
to respect customary human rights obligations in their activities.
43. Sovereignty and political independence are also relevant legal notions. In negotiations with
country officials it may be tempting for the IMF to ignore such concepts. Critics contend that the
IMF encroaches upon national sovereignty, serves as a tool of the wealthiest countries and
exacerbates economic problems worsening the living standards of the poor, focusing on
privatization, market deregulation and austerity measures. In July 2017, for instance, the UN
Independent Expert on the promotion of a democratic and equitable economic order affirmed
that the IMF imposes conditions ‘which discourage social spending and therefore hinder States’
fulfilment of their human rights obligations. Often these conditions increase unemployment,
lower standards governing labour, health and the environment, and reduce access to free
quality education’. He concluded that the IMF lending policies, thus, undermine human rights
and development policies and the work of other international organizations.
44. Besides, it is worth noting that the IMF lends to countries with a balance of payments problems
even if they have very poor human rights records.

§1 GUIDELINES ON CONDITIONALITY
45. In the past, countries have reproached the IMF with intrusions of sovereignty. Developing
countries also accused the IMF of unequal treatment. This has prompted the Fund to adopt
back in 1979 its Guidelines on Conditionality. In 2002 the Guidelines were revised and later
supplemented by Operational Guidance Notes for assisting the staff in discussions with
members. In March 2009, the IMF further modernized its conditionality framework. In 2014, the
Fund adopted the ‘Revised Operational Guidance to IMF Staff on the 2002 Conditionality
Guidelines’. A thorough review of conditionality was started in 2018 to assess programme
design since the global financial crisis, but it still has to be completed.

9
46. The 2002 Guidelines on Conditionality – which are still relevant today – deal with ‘principles’
and ‘modalities’ of conditionality. They are complemented by the 2014 Revised Operational
Guidance to IMF staff.
47. The first guideline emphasizes that Fund resources are provided for resolving balance of
payments problems only. Being a least developing country or a fragile state (see supra, par.
258 ff.) cannot per se give reason for financial assistance.
48. Guideline 2 explains that conditional balance of payments support is one of the ways in which
the IMF helps members to strengthen their economic and financial policies. Article IV
consultations, as discussed above, may also signal developments that raise concern. The IMF
suggests to members not to postpone difficult decisions.
49. In Guideline 3 the Fund acknowledges that programmes cannot be imposed on countries. In
the past, too often the IMF prescribed the required policies to governments. Governments were
asked to sign documents on policy reforms that were prearranged by IMF missions. The
Guidelines explain that ‘the member has primary responsibility for the selection, design and
implementation of its economic and financial policies’ and stresses that ‘national ownership of
sound economic and financial policies and an adequate administrative capacity are crucial for
successful implementation of Fund-supported programmes’. This is an important warning sign
to all IMF missions to listen carefully to government officials. There must also be an appropriate
institutional framework for the implementation of pogramme reforms. The 2014 Revised
Operational Guidance to IMF Staff further clarifies that the Fund’s staff should ‘seek the views
of country authorities early and make every effort to accommodate their preferences and policy
choices – including on growth, labor market and distributional targets – where possible, subject
to consistency with resolving balance-of-payments problems, macroeconomic stability, and all
other program goals’. By stressing that the programme is country-owned, the IMF attempts to
prevent that it will be named a scapegoat, as it has often happened. Many governments
conveniently blamed the IMF for painful measures: ‘we do not want this, but the IMF forces us
to do so’. Governments may not always like the idea that they must take full responsibility for
adjustment policies.
50. Guideline 4 explains that: ‘in helping members to devise economic and financial programmes,
the Fund will pay due regard to the domestic social and political objectives, the economic
priorities, and the circumstances of members, including the causes of their balance of
payments problems and their administrative capacity to implement reforms’. The language of
this principle suggests some leeway for preserving domestic policies when an adjustment
programme is put in place. In reality the latitude is limited. First, ‘due regard’ does not mean
‘respect’ and does not compel the IMF to give overriding force to domestic policies. If the
economic consequences of domestic choices conflict with IMF policies, the latter will prevail. A
second caveat is that the Fund’s policies interfering with sovereign decision-making have been
expanded in the 1990s. Significant is the IMF Standards and Codes Initiative (on which see
supra, par. 153), under which since the end of the 1990s the Fund endorsed twelve
internationally recognized standards and adopted a set of guidelines and codes to strengthen
the international financial system. With the proliferation and application of codes and
standards, the IMF is increasingly interfering with decision-making in areas that traditionally
belonged to the exclusive domain of governments. Guideline 4 also mentions ‘past
performance’ as a relevant circumstance. This refers to behaviour of members in previous
periods. In the past, some countries have misled the IMF by offering false economic data to
demonstrate that programmes were on track.

10
51. Guideline 5 expresses the principle of ‘consistent application of policies’ to maintain uniform
treatment of members. Non-discrimination is an important principle, but it is difficult to prove
that uniform treatment has not taken place since the economic circumstances of countries will
never be the same. Besides, capacity and commitment of the requesting country are other
important criteria for providing credit. This principle also explains the key role of the IMF’s
management. The Managing Director has to rely on the judgment of IMF missions that
negotiate the programme. It will be difficult for the Executive Board to denounce the
recommendation of the Managing Director (on procedure and modalities see infra, par. 295 ff.).
Staff in the IMF has a high responsibility for vigilant judgments.
52. Guideline 6 provides that the Fund’s balance of payments support should be directed primarily
towards solving the member’s balance of payments problem ‘without recourse to measures
destructive of national or international prosperity’ (as provided also by Article I (v)). The
provision is softly phrased and it is unclear what is meant by ‘prosperity’ and whose prosperity
should be preserved. Does prosperity refer to GDP or socio-economic standards? Obviously, it
will be difficult to keep all parties involved prosperous when an adjustment programme is in
place. Moreover, a programme must aim to achieve ‘medium-term external viability while
fostering sustainable economic growth’. Significant is ‘fostering’, which suggests that the IMF
does not directly promote ‘sustainable’ economic growth, but principally paves the way towards
‘growth’ focusing on macroeconomic policy issues rather than on broad development priorities.
53. Guideline 7 explains that programme-related conditions governing the provision of Fund
resources will be applied ‘parsimoniously’. Parsimoniously means restrictively. This is to avoid
the proliferation of conditions that in the past plagued many countries under IMF scrutiny. The
conditions should also be of ‘critical importance’ for achieving programme goals. According to
the 2014 Revised Operational Guidance to IMF Staff, ‘a judgment that a condition is of critical
importance means that if it was not implemented, it is expected that the goals would not be
achieved or that programme monitoring would not be possible. Conversely, all critical
measures generally must have conditionality associated with them, because the Fund needs to
be able to interrupt purchases or disbursements if the program is off track or if sufficient
information is not being provided to adequately monitor program implementation’. Again,
attention should be given to the ‘policies’ clause. As explained above the IMF has not been
‘parsimonious’ in developing new policies. In practice, more policies mean more conditions.
Furthermore, the IMF will impose conditions that ‘normally consist of macroeconomic variables
and structural measures’ within the Fund’s mandate (core areas of responsibility). Inclusion of
non-macroeconomic variables must be explicitly motivated. Macroeconomic variables have not
been defined, but likely they refer to aggregate data. Accordingly, the IMF may ask for a
reduction in overall government spending, but it should not systematically impose conditions on
a detailed scheme for such reductions. Structural measures first introduced in the 1980s have
also been a source of major controversy because related conditions were considered to go
beyond the Fund’s mandate. Structural adjustment programmes, in fact, saw the IMF’s
involvement in sensitive policy areas such as the privatization of state-owned enterprises, trade
and financial liberalization, labour market reforms and social policies. In 2009, the Fund
decided that structural performance criteria would no longer be part of the conditionality
framework. Since then, recourse to structural measures in IMF conditionality reduced only
marginally and during the global financial crisis structural conditions became a growing
component of IMF programmes.

11
54. Guideline 8 addresses cross-conditionality and the relation with the World Bank. Debtor
countries fear the domino effect of conditionalities imposed by various international financial
institutions and creditors. If a debtor failed to meet the conditions of one creditor, other
creditors could subsequently decide to cut off their credit lines. The Fund commits itself not to
apply this so-called ‘cross-conditionality’. There is also an acknowledgement that cooperation
with other institutions, notably the World Bank, is imperative. Both organizations tend to overlap
in their activities and, in some occasions, their activities may even result to be in conflict. The
more the IMF became concerned with structural reforms – e.g., the liberalization of trade or
reform of economic sectors – the more cooperation was required in these areas. In their
cooperation agreement (the Concordat, on which see infra, par. 361 ff.), the IMF and the World
Bank have accepted the concept of ‘lead agency’. Depending on the reforms required, one
institution would take primary responsibility, with the other expected to follow.
55. The Guidelines do not address the problem of socio-economic consequences following
adjustment. However, adjustment must take into account the plight of the poor and the ‘national
prosperity’ clause of Article I(v) should be applied: adjustment should be carried out ‘without
resorting to measures destructive of national or international prosperity’. Accordingly, the
Guidelines could have clarified that international human rights standards be upheld during
adjustment. For that purpose, the Guidelines could indicate that the Fund must cooperate with
appropriate UN bodies, such as the treaty-based Committee on Economic, Social and Cultural
Rights. It is worth noting that the 2014 Revised Operational Guidance incorporates guidance
on conditionality related to macro-social (jobs and growth) issues, affirming that ‘where feasible
and appropriate, policy measures to mitigate adverse impacts on the most vulnerable should
be included in program design’.
56. Another inherent flaw is the absence of even a basic dispute settlement provision. States may
disagree with the Fund and they may be wrong or right. The point is that the Fund’s view will
always prevail even when this view is illegitimate or unlawful. In the final analysis, the IMF
interprets the Guidelines without any corrective procedure. The Fund might take the World
Bank as an example. The Bank has established an independent Inspection Panel for the
purpose of providing people directly affected by a World Bank project with an independent
forum through which they can request the Bank to act in accordance with its own policies and
procedures. Accordingly, the IMF should create a procedure for member countries that believe
that the Fund is failing to observe its Articles of Agreement or implementing decisions. A
member country should have the opportunity to ask the IMF not to insist on conditionality that
implies a breach of the member’s international obligations. An example of such controversial
policy was the IMF’s insistence on the introduction of a ‘user fee’ for basic services in health
and education. For instance, a user fee for primary education would not only ignore the
Guidelines – conditions should be primarily ‘macroeconomic’ – but also violate international
human rights instruments that require compulsory and free elementary education.

12