Policy cross-conditionality restrictions in multilateral development aid

Unacceptable "strings" may be attached to a loan by a creditor which a borrowing country must accept in order to avail itself of the loan. Compliance with these conditions is required before the loan is granted and/or funds are released.

Conditionality is often associated with the IMF whose low conditionality facilities include the reserve tranche, the first credit tranche, compensatory financing facility, buffer-stock financing facility, oil facilities, and the trust fund. High conditionality loans include the upper credit tranches, extended fund facility, structural adjustment facility. Since 1980 conditionality has been extended to sectoral and macro economic policies.

Aid, especially debt relief, to developing countries may only be made available under conditions whereby the country subjects itself to the constraints of an IMF programme. The constraints tend to be such as to prevent the countries maintaining growth, where priority is given by the IMF to restore imbalances of payments at all costs, even when such imbalances are of a short-term character. Since the creditworthiness of developing countries is evaluated by the World Bank (and by commercial banks) on the basis of a country's standing with the IMF, failure to enter into such agreement deprives a country of access to other sources of finance. Issues of policy cross-conditionality associated with Bank-supported adjustment programmes include: the adequacy of the policy package itself, the timing and sequencing of the programmes, and the collaboration between the Bank and the IMF.

In addition to the character and nature of the measures themselves, issues relating to the timing and phasing of implementation may also have negative consequences. The requirement of rapid major structural reforms and balance-of-payments adjustment may be beyond the reach of most poorer countries; political and administrative systems may not be adequate to deal with the speed at which the formulation and implementation of policy changes is advocated. There are also questions relating to policy sustainability: rigid policies phased over an insufficient time period enhance the potential for slippage.

A further specific issue is that of interdependent cross-conditionality, a situation where both the Bank and the Fund select the same policy instrument (eg the exchange rate) as the key element in their respective programmes. Developing countries seeking financial assistance are then exposed to concerted pressure and suffer from negative consequences of inter-agency cooperation.

The expansion of the World Bank's policy-based lending and the establishment of the IMF's Structural Adjustment Facility has led to a more intensive collaboration between the two institutions and the division of labour between them is no longer clear-cut. Although formal cross-conditionality does not occur between the Bretton Woods institutions, informal cross-conditionality arises in a number of cases, especially through the linkage between World Bank policy-based lending and IMF standby arrangements. In fact only three of all the World Bank sector loans approved from 1979 through 1985 occurred in countries where an IMF stabilization programme was not in place. The IMF compensatory financing facility was redesigned in 1982 from a more liberal low-conditionality form to a high-conditionality form.