Conditionality
In the context of a sovereign debt crisis and in development cooperation, conditionality ( Latin: conditio ) refers to the issuing of conditions by creditor institutions or donor states associated with loan commitments or payments .
General
As part of the freedom of contract, lenders have the international contractual right to combine the disbursement and retention of their loans with compliance with conditions. Internationally, the term “conditions precedent” is used, subsequent conditions that must be met before the loan can be disbursed. If the debtor does not meet the specific requirements, the loan will not be paid out. Another group are those conditions that during the repayment term from borrowers must be observed. These are mostly “financial covenants ”, i.e. business or economic indicators . If the debtor fails to comply, the creditor's right of termination or a credit event is automatically triggered. Both forms of conditions that "conditions precedent" and the "financial covenants" are to the credit risk reduce the lender and the repayment guarantee the circulation dependent loans.
In the case of conditionality in the narrower sense, the conditions do not have to be met by the time the loans are paid out, but within a specified period afterwards. With the HIPC initiative, however, certain conditions are mandatory prerequisites for reaching the “completion point” and thus before the debt relief is fully implemented . The “completion point” is the point in time at which the debt relief measures decided at the “decision point” become effective.
history
The first conditions for lending to states were created by the International Monetary Fund (IMF). After it was founded in 1944, its loans were still unconditional, but as early as October 1952 its loans were subject to conditions for the first time. It was not until 1969 that conditionality was included in the Articles of Agreement . In the past, however, increasing resistance in recipient countries has hindered the fulfillment of requirements or even made it impossible. The IMF had already relaxed its conditionality policy for the first time in 1968 and 1979. In September 2002, the IMF Executive Committee again adopted revised guidelines on the direction of its conditionality as a result of severe criticism. These guidelines are intended to make loan conditions more effective, clearer and more focused, and to ensure better coordination of the IMF's conditionality with that of other organizations.
Types of conditionality
A distinction is made depending on the economic or political aim of the requirements
- Macroeconomic conditionalities
The subject of macroeconomic conditionalities is the economic policy of a debtor country. This is about debt ratios , government spending , inflation rates or unemployment rates , which are specified by donor states or institutions and which have to be met through corresponding economic policy decisions by the recipient states. The macroeconomic conditionalities of the IMF show a largely rigidly defined macroeconomic stability requirement. It places very strict limits on recipient countries on the permitted inflation rate or government spending. This applies to both the permitted level of budget deficits and requirements on the restrictive use of government spending. In IMF programs, developing countries are forced to cut their social spending according to the guidelines of a narrowly defined macroeconomic stability, which can have dramatic effects on the fight against poverty or disease. The HIPC conditionalities imposed by the IMF are one reason why the scope for fiscal policy has narrowed. Since the IMF has the authority to define macroeconomic stability, the World Bank also follows its guidelines.
The Stability and Growth Pact is also a macroeconomic conditionality for the EU member states, since the member states have to align their economic policy with these mandatory requirements and non-compliance can lead to sanctions. This includes in particular new debt , which may not exceed 3% of gross domestic product , and national debt , which may not exceed 60% of gross domestic product ( Art. 126 TFEU ). These aim at increasing economic cohesion among the still very heterogeneous EU members.
- Trade policy conditionalities
Classic trade conditionalities relate to the removal of tariff and non-tariff trade barriers and have meanwhile become insignificant components of the conditional policy. Their share decreased from 15.2% of all conditionalities in the years 1980 to 1989 to 1.8% between 2000 and 2004. However, it cannot be concluded from this that trade liberalization and trade issues have lost importance in the policy of the IMF and World Bank. One of the reasons for the decreasing number of classic trade conditionalities is that most developing countries have already largely liberalized their markets under the pressure of these requirements from the IMF and World Bank in the customs area, and corresponding requirements are therefore often no longer required. This development shows, however, that conditionalities can definitely achieve the intended effect in the long term.
New areas, such as the implementation of the WTO agreements in the regulatory systems of developing countries, have been added. For the World Bank, the main barriers to trade in developing countries are in the regulatory area, the lack of infrastructure, restrictions on the freedom to invest, poor governance and the lack of competent institutions. In this respect, the focus of the remaining 1.8% on trade policy conditionalities has shifted.
Classic trade conditionalities still play a role, but the focus is on facilitating trade, especially in the area of certification and quality improvement as well as the removal of sensitive trade barriers. The World Bank and IMF have significantly reduced their conditionality in the classic area of tariff reduction. Over 60% of the trade-relevant program conditionalities in the mid-1990s were related to the traditional instruments of tariff and non-tariff trade policy. Since 2001, this proportion has been less than 10% of all conditionalities. The focus of trade conditionalities has shifted from customs policy to customs clearance. At the IMF, too, the classic trade policy conditionalities are still important. The IMF uses its own Trade Restrictive Index (TRI) to regularly check how “restrictive” the trading systems of the respective member countries are. Whether and which trade policy conditionalities a country has to meet is selected according to the value the countries receive. The less a country has opened its economy to the outside world, the stronger the requirements to liberalize the country's trading system.
- Structural policy conditionalities
In the structural adjustment programs (SAP), the IMF also imposes requirements on structural reforms ( deregulation and liberalization ), whereby it coordinates with the World Bank. According to data from EURODAD, 43% of all conditionalities at the World Bank to which loans for poorer developing countries are tied contain requirements for reforms in the public sector . A study by Trocaire shows that the World Bank's “Poverty Reduction Support Credits” usually contain an extensive list of governance conditionalities. A total of 427 governance conditionalities for the public sector were found in 20 PRSCs examined. These made up 38% of the total conditionalities in the 20 PRSC. The number of structural conditionalities of the IMF peaked during the Asian financial crisis from 1997 with 94 conditions for Korea, 73 for Thailand and 140 for Indonesia.
- Microeconomic conditionalities
The World Bank has increasingly started to promote sector reforms in developing countries through its investment lending . In project-based assistance is determined that a project financing specific micro-economic indicators ( debt service as a% of cash flow , debt ratio ) must meet in the form of financial covenants.
Legal basis
The legal basis of the conditionality is Article V, Section 3 of the IMF Statutes, which authorizes the IMF to support member countries with balance of payments problems in shaping their policies and to take appropriate safeguards for the loans granted. Since 1955 it has been customary for a country that uses IMF funds in excess of its reserve tranche to orient its economic policy to the requirements of the IMF. The affected country drafts an economic reform program, which the IMF includes in the form of quantifiable requirements as conditions in its loan agreements. If the requirements are not met, the quarterly loan payments are stopped.
sovereignty
Operationally, the conditions extend far into the autonomous state policy of the state concerned. He is, for example, imposed inflation-inflammatory to take action, the unemployment to decrease the money supply to control not to make any prestigious investment to reduce its defense spending or corruption and infiltration curb. The conditional policy is thus a central instrument of the donor institutions to exert influence on the government policy of debtor states and developing countries. Conditionalities thus directly affect the freedom of action and political autonomy of a state or company. A state is forced by conditionalities to change its economic policy in such a way that the conditions of the lenders are met. Without conditions, the states might have pursued a different economic policy. This explains why states are trying vehemently to defend themselves against some requirements because they do not want to accept a restriction on their sovereignty. That is why the IMF has been making increased efforts since the Asian crisis to involve the recipient countries more closely in structuring the requirements.
One of the most important basic principles of the Paris Club is the equal treatment of creditors ( pari passu clause ). According to this, the debtor must undertake not to put any other group of creditors in a better position ( par conditio creditorum ). This is to prevent the taxpayer from ultimately bearing the risks that individual companies or banks have taken. Its purpose is to ensure that the debtor serves the creditors benefiting from the clause equally when it comes to interest and principal payments, i.e. not giving preference to any creditor - for example if liquidity is scarce. A further prerequisite for debt rescheduling or debt relief is that the debtor country expressly undertakes, through appropriate cooperation with the IMF, to pursue a policy that avoids the Paris Club being involved again.
individual responsibility
Country ownership is defined as the responsibility of the recipient states in implementing the requirements. This principle of partnership is intended to eliminate the resistance that is often associated with the one-sided conditioning by donor institutions. The recipient states themselves submit reform proposals, which then result in conditions. They are then supposed to steer the initiated reform processes themselves within the framework of ownership and commit themselves to carry out reforms supported by help themselves. In terms of country ownership , the World Bank assumes that the government of a state is supported by all important forces in the country in implementing the reforms, so that the implementation does not fail due to opposing forces. By ownership , the broad acceptance is to be achieved by regulations.
See also
Individual evidence
- ↑ Kyung-Rae Kim, The International Monetary Fund - A Critical Analysis from a Political-Economic Perspective , 2009, p. 157 f.
- ↑ Werner Lachmann, Development Aid: Motive, Possibilities and Limits , 2010, p. 233.
- ↑ Page no longer available , search in web archives: Jubilee Debt Campaign 2006 , p. 13 f.
- ^ UNDP, Does Debt Relief Increase Fiscal Space in Zambia? The MDG Implications, International Policy Center (IPC) No 5., 2006
- ↑ Richard Newfarmer / Dorota Nowak, The New Trade Agenda: The World Bank in Trade ff, 2005 S. 380th
- ↑ IMF, Review of Fund Work on Trade , 2005, p. 28.
- ^ IMF, Review of Fund Work on Trade , 2005, p. 26 f.
- ↑ Annual Report 2005, p. 15.
- ↑ Angela Wood, Demystifying 'Good Governance': An Overview of World Bank Governance Reforms and Conditions , 2005, p. 15 ff.
- ^ Ariel Buira, An Analysis of IMF Conditionality, G-24 Discussion Paper No. 22 , 2003, p. 16.
- ↑ Stefan Koeberle (Ed.), Conditionality Revisited: Concepts, Experiences And Lessons , World Bank 2005, p. 67.