Select Committee on Treasury Ninth Report

5  Lending

Conditionality of IMF lending  

57. There has been a significant amount of past controversy over the conditions the IMF places on borrower countries to receive loans, and it was a significant part of our discussions with the non-governmental organisations. In March 2005, the UK Government published a policy paper on aid conditionality, entitled Partnerships for poverty reduction: rethinking conditionality, which was intended to move UK policy from one where aid was conditional on specific policies, to one where poverty reduction was the key criterion in assessing aid requirements. The document set out five principles for the UK Government's aid relationships: developing country ownership, participatory and evidence-based policy making, predictability, harmonisation (including working more effectively with the IMF), and transparency and accountability.[132] There were to be three objectives to UK aid policy:

a)  reducing poverty and achieving the Millennium Development Goals;

b)  respecting human rights and other international obligations; and

c)  strengthening financial management and accountability, and reducing the risk of funds being misused through weak administration or corruption.

58. One initial concern the NGOs suggested to us was that an economic ideology operated at the IMF, based around economic liberalisation. Ms Olivia McDonald, of Christian Aid, reiterated a point made in their written submission, that the "IMF has a very pro-liberalization stance".[133] They felt that this alleged bias was then being expressed in the conditions on IMF lending. However, when the Committee put to the Governor of the Bank of England the idea that the IMF lectured on free markets, he responded, "I do not think the Fund is going to get very far just by lecturing people. It should be in the business of explaining things and letting people draw their own conclusions and I think that is where the Fund will have its biggest influence".[134] He went on to say "Whether there are tariffs on particular items or not is not a matter for the IMF, it is a matter for WTO, the country itself; the big, macro picture is what the Fund is concerned about".[135]

59. One particular area of concern about IMF conditionality in the past has been the micro-management of countries' policies. However, Professor Portes thought that the IMF had changed in its outlook, and believed that there had been "some substantial adaptation in the Fund and in the nature of conditionality. It is not as detailed as it used to be, for example."[136] On our visit to the United States, we heard from the IMF staff who told us that they had taken on board criticisms of excessive conditionality, and were taking steps to increase country ownership. However, the NGOs suggested to us that the reality was somewhat different. Ms McDonald informed us that:

One reason that we think the IMF is accounting for that supposed reduction in conditionality is by saying that they are reducing the overall number of conditions, but what we found when we analyzed it is you might have one single condition that says liberalized trade in a variety of sectors and that would be down to one condition, but that is actually quite a few different conditions because it could implicate at least three or four or five different sectors.[137]

Ms Greenhill described this to us as a "broadening of conditions", so that "even though there are fewer conditions, sometimes those conditions have greater weight".[138] The Governor of the Bank of England pointed out to the Committee that the conditionality imposed by the IMF on Asian countries "was much greater in detail than was imposed on Latin American countries which borrowed from the Fund. I do think that the Asian countries have a genuine cause for complaint about the way that was carried out."[139] However, the Governor also thought that "as far as the IMF is concerned, we have won the argument, because they themselves have acknowledged that certainly in the 1990s some of the conditionality was too detailed".[140] Mr Chris Salmon, Head of the International Finance Division at the Bank of England, also said that the IMF had debated this issue, and that the "conclusion [was] that it is much more important to demonstrate that conditions were on things which were macro-relevant, particularly on the structural side".[141]

60. Another key concern about conditionality has been that it appears to undermine the sovereignty of the countries receiving IMF support, a point raised by Mr Woodward, who told us that "the policy of conditionality raises a lot of issues around sovereignty and democracy".[142] Professor Miller however, pointed out that there occasionally had been beneficial results from the IMF's lending conditions, such as in Brazil.[143] Professor Miller also highlighted to us that conditions can be useful in trying to strengthen the governance structures of countries, especially around the spending of the IMF's loan, concluding "I think there are cases, particularly in Africa, where some of these issues [around elites pocketing money] can be addressed in terms of conditionality, and should be".[144] The NGOs also agreed that there would always have to be some form of conditionality. Ms Greenhill said that "I think you do need to have some conditions to ensure that money is well spent. We are not advocating writing blank cheques to the Mobutus and Mugabes of this world."[145] However, Ms Greenhill also said that "We have a particular concern that … what the IMF is doing in the countries is very often using anti-democratic processes; it is undermining the systems of local democratic accountability."[146]

61. The Governor of the Bank of England also felt that the IMF needed to do more to engage borrower nations. He told us: "The lessons I think we saw with IMF programmes are that it is no good just 'Here's a piece of paper; sign it,' because if people at home are not convinced that these policies are the right policies to be pursued in these circumstances they will find ways round it and the conditionality will not be met. It is a question of winning hearts and minds, not a question of telling people what to do."[147] The Chancellor of the Exchequer told the Committee that in the Government's own policy paper, "the emphasis is on less conditionality from the IMF and more accountability of governments to their own people so that they have to answer to their own people for how they are spending the money".[148]

62. The Fund will have to maintain some form of conditionality on its lending. We support the Government's policy paper, and its focus on poverty reduction, human rights and stronger financial management. We recommend that the UK Government lend its support to reforms to the Fund that ensure that democracy is protected, conditionality is appropriately designed for each individual country and solutions are not driven by a single economic philosophy.

The reduction in lending by the IMF

63. The Governor of the Bank of England told us: "I think actually one of the good news stories of the past five years is that the Fund is no longer a major lender, and far from being a problem this is actually very good news, that … countries do not wish to borrow and do not need to borrow and we ought to encourage that".[149] The Chancellor of the Exchequer said that the IMF should have "as little as possible" role in lending.[150] However, he dismissed the idea of the IMF not lending at all, saying "You cannot exclude the possibility that crisis resolution will have to happen in relation to economies in the future, but you wish to minimise both the crises and the liabilities or the loans you have to make to deal with them".[151]

New facilities


64. The Governor of the Bank of England expressed concern about the creation of new facilities, telling us "my own personal view is I have reservations about encouraging the Fund to develop yet more facilities. If we go on like this, soon we will have more facilities than borrowers."[152] However, two new facilities have been suggested and have been, or soon will be, implemented.


65. One of the new facilities welcomed in the IMFC communiqué was the exogenous shocks facility. The communiqué stated that the IMFC "underlines the importance of further contributions to enable the IMF to provide timely concessional shock financing".[153] The facility is described by the IMF as "policy support and financial assistance to low-income countries facing exogenous shocks", where exogenous shocks are described as including "commodity price changes (including oil), natural disasters, and conflicts and crises in neighbouring countries that disrupt trade".[154] The Governor of the Bank of England, after being questioned as to whether the ESF was not just another facility, told the Committee: "This is very specific, where it needs a facility, this is designed to help particularly poor countries which suffer from the consequences of big changes in oil prices, basically; that is why some of the producers have contributed to it. That is very much, I see, part of the development nexus and I think those involved in the development side welcome this; it is a question of trying to help countries which have suffered from the big changes in relative prices in the world economy".[155] The Chancellor of the Exchequer also saw the facility as being of service to the low-income countries.[156] He went on to say: "It was a tragedy that we could not act instantly in certain recent natural disasters, so we realise we have to do more on that, more on reconstruction and more on the economic effects of a natural or physical crisis".[157] We note the Governor's remarks on the need to limit new facilities, and therefore recommend that the UK Government exercise caution before recommending any new facilities at the Fund. However, we support the notion of the Exogenous Shocks Facility, though we recommend that it be designed so as to ensure that all member states that require it are not dissuaded by onerous conditionality.


66. The Managing Director's Report on Implementing the Fund's Medium-term Strategy suggested establishing a framework to enable the IMF to provide funds prior to a crisis in a member state taking place.[158] The proposed facility would be available to member states "with strong macroeconomic policies, sustainable debt, transparent reporting, but which still face balance-sheet weaknesses and vulnerabilities".[159]

67. One concern is that a previous facility of the IMF with a similar purpose, called the Contingent Credit Line facility, was never drawn upon, and lapsed in November 2003.[160] When we questioned him on the reasons for its failure, Mr Salmon, Head of the International Finance Division at the Bank of England, told us "the failure of CCL, in a sense, to attract any customers shows a problem, because you have to balance, on the one hand, safeguards for the Fund, how you make it sufficiently tight so that only countries which are really good go in there, versus benefits to the countries in the first place, and they could not get the balance between those two things right."[161] Jon Cunliffe agreed with this, telling the Committee that the Contingent Credit Lines "had some design problems because you had to find a way of designing an assurance for countries that the Fund would step in with potentially large amounts in the event of a crisis while maintaining the Fund's ability to set some conditions on the use of its funds, and that is quite a difficult problem to solve".[162] However, he went on to say to the Committee that "there is a lot of pressure from emerging market countries for a facility of that sort and it would give the Fund a relationship with countries before a crisis because they would have this facility and they would have to discuss with the Fund their programme in order to maintain it, and I think there is going to be quite an effort over the next year to try and solve some of those design problems to see if it can be made to happen". The Chancellor of the Exchequer, while telling the Committee that it was "very important that it is done right because the signal that is sent out by your application for help from this fund has got to be one that is stabilising rather than destabilising, and it is also important that the terms on which it is available are not too onerous, so there are difficult issues but I would not say that the lack of use of the contingent credit facility proved that there was no need for it." He went on to say: "If we are in the business of crisis prevention then we ought to be in the business of making it possible to draw on the support of the IMF to avoid a crisis".[163]

68. The Governor of the Bank of England expressed reservations to us about the proposed facility, although he did not disagree with the overall concept. Essentially, the Governor was concerned that, once the IMF had committed to lend funds under this new facility, should a crisis then occur in that country the Fund might face considerable political pressure to continue to lend despite likely assurances at the beginning of the process that it would not. He told us:

Taken at face value, there is a perfectly good case for that facility. The argument against it is not an argument against it on grounds of substance in those circumstances, it is a political, economy concern, that in the past the Fund has not shown itself to be as disciplined and rigorous as it might be in implementing what it said ex ante were the rules of the game.[164]

69. We note the lack of take-up by member states of the contingent credit lines facility. We understand that a balance has to be struck given the need to protect taxpayers' money. We recommend that the UK Government continues to take an active part in ensuring that the facility for contingent financing for crisis prevention is capable of ensuring that the Fund can fulfil its remit to prevent crises developing.

Debt restructuring

70. When a country defaults on its loans, there has occasionally been difficulty in organising the debt restructuring, because the bonds and loans of the defaulting country may be held by many different investors in different jurisdictions. Given the IMF's role in crisis resolution, it has put forward some ideas in this area. However, as the Bretton Woods Project pointed out in its written evidence to the Committee, there is a danger in placing "the IMF in a hypocritical position as both creditor and arbiter of debt work-outs".[165] Professor Miller, however, pointed out that the IMF should be involved in generating "promoting efficient ex poste [debt restructuring] negotiations …. I think the Argentine ones were quite successful at the end but it took about four years."[166]

71. The Governor of the Bank of England confirmed that a Chapter 11-style system, where day-to-day business continues while a restructuring of ownership occurs under a bankruptcy court, may be better for working out sovereign debt restructuring cases, and that the Bank of England and the Bank of Canada had done joint work that "proposed that it was necessary to take seriously the development of mechanisms in which the Fund would sanction debt restructuring".[167] However, the Governor also made the important point that, using the example of Argentina, it is sometimes necessary to admit to the overall scale of the problem and arrange a restructuring, rather than keep lending money, as "In the end, as in Argentina, it was inevitable that default occurred, and it did".[168] The Governor went on to explain that continued lending meant that while the residents of the country would have to repay the IMF from any bail out, the IMF would essentially have bailed out the "large western financial institutions".[169] The Chancellor of the Exchequer told us that this was going to have to involve both the private sector and the international institutions. While the UK government was supportive of the potential reforms, including those akin to Chapter 11 procedures in the US, he also warned that "this is a long-running issue and progress is going to be gradual rather than dramatic".[170] As evidence of this, in its supplementary evidence to us, HM Treasury noted that at the 2003 Spring meetings, the "IMFC decided not to pursue a statutory framework [for sovereign debt restructuring] further".[171]

72. The Governor of the Bank of England also felt that, as in the case of Korea, sometimes a standstill arrangement might be necessary because the repayment problems were an issue of liquidity rather than long-term ability to repay. He felt the best way to allow for such measures was "to go right back to when the contracts were signed, and that is the purpose of the Collective Action Clause in bond issues, and it is something which bond issues in London have recognised for a long time and the ones in Wall Street now have come more into line with that".[172] Mr Cunliffe told us that "The IMF is supporting collecting collective action clauses, particularly in the US markets. It is also supporting the private sector and emerging market governments' voluntary code on debt restructuring."[173] In its written evidence to us, HM Treasury stated that "market practice has converged toward broad acceptance of the use of Collective Action Clauses in international sovereign bonds".[174]

73. While the Fund has a desire to move towards a greater focus on crisis prevention, there will always remain a need for crisis resolution. Debt restructuring will sometimes be an integral part of this. The Fund, as a potential creditor in these situations, seems inappropriate as the organisation to oversee such restructuring. However, this does not preclude the IMF from taking an active part in the discussions over the design of the framework. We acknowledge the political difficulties of creating a final consensus, but we recommend that the UK Government continue to promote collective action clauses. We further recommend that the UK Government consider what role the IMF should play in any future debt restructuring mechanism. Though previously not followed up by the Fund, a statutory system may be appropriate, and may be similar to a Chapter 11-style system where the day-to-day business continues while a restructuring of ownership occurs under a bankruptcy court.

132   Partnerships for poverty reduction: rethinking conditionality, March 2005, Department for International Development, p 2 Back

133   Q 60 Back

134   Q 109 Back

135   Q 110 Back

136   Q 17 Back

137   Q 55 Back

138   Q 55 Back

139   Q 85 Back

140   Q 112 Back

141   Q 112 Back

142   Q 10 Back

143   Q 11 Back

144   Q 11 Back

145   Q 62 Back

146   Q 56 Back

147   Q 109 Back

148   Q 221 Back

149   Q 81 Back

150   Q 206 Back

151   Q 207 Back

152   Q 104 Back

153   Communiqué of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund, 22 April 2006, IMF, para 12 Back

154   An [IMF] Factsheet-December 2005 The Exogenous Shocks Facility (ESF), Back

155   Q 114 Back

156   Q 198 Back

157   Q 208 Back

158   The Managing Director's Report on Implementing the Fund's Medium-Term Strategy, 5 April 2006, IMF, para 18 Back

159   Ibid.Back

160   An [IMF] Factsheet-March 2004, The IMF's Contingent Credit Lines (CCL) Back

161   Q 99 Back

162   Q 209 Back

163   Q 209 Back

164   Q 98 Back

165   Ev 55 Back

166   Q 40 Back

167   Q 101 Back

168   Q 101 Back

169   Q 101 Back

170   Q 226 Back

171   Ev 88 Back

172   Q 103 Back

173   Q 228 Back

174   Ev 88 Back

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Prepared 13 July 2006