By Beomhee Han, Group Head and CMIM Lead Specialist, and Achri Anatanarak, CMIM Specialist
Conditionality is an essential supplement to crisis financing programs. However, such conditions have long been debated by scholars and policymakers globally, as to whether they promote economic growth and development or undermine the national sovereignty of borrowers and hinder economic recovery.
Development and Application of IMF Conditionality
The discussion on conditionality started in 1944, after the US advocated that the International Monetary Fund (IMF) should have wide discretionary and policing power to influence and control the central banks of member countries. This position was unacceptable to the other members. The skirmish caused IMF activity to suspend and led the IMF Executive Board to adopt the principle of conditionality, aiming to revive IMF activity by incorporating the US view, and introducing the IMF standby arrangement (SBA); the main instrument equipped with conditionality.
Since 1944, the issue of conditionality has triggered debates and arguments, resulting in the first IMF guidelines on conditionality in 1969 and additional set of guidelines in 1979. But disagreements over IMF conditionality became heated again in the 1980s, with the introduction of IMF structural conditionality, which added an additional layer of complexity, and gave rise to a proliferation of IMF conditionality.
The increase in conditionality requirements prompted criticism that the IMF programs were overstepping; a view which subsequently led the IMF in the early 2000s to reassess the scope, degree of detail, and boundaries of conditionality, and discontinue the use of structural performance criteria in 2010.
Application of IMF Conditionality
IMF conditionality mainly serves two purposes: to encourage timely repayment, and provide a framework for macroeconomic adjustment as a condition to receiving financial support.
Even though criticism of IMF conditionality requirements led to a major overhaul in 2010, we observe that the average number of structural conditions attached to IMF programs between 2001 and 2020 did not decline; reflecting the fact that IMF structural conditions are still largely attached to its programs and the requirement for macroeconomic adjustment has stayed part of the global organization’s agenda since 1994.
Development of CMIM Conditionality
While there was no conditionality framework at the inception of the Chiang Mai Initiative (CMI), the concept of conditions for lending was considered by members from the very beginning.
The lack of an in-house conditionality mechanism led to an IMF linkage as a condition for full access to individual CMI bilateral swaps. Under the IMF linkage, swap donors would assess the economic and financial situation of recipients and observe the recipients’ macroeconomic policy implementation, based solely on the IMF framework.
The legal basis for CMIM conditionality was introduced in 2014 as part of the CMIM precautionary line arrangement, which expanded into the CMIM Stability Facility in 2019.
In 2020, the CMIM conditionality framework was formally adopted by ASEAN+3 members, and aimed to provide a set of rules for members and AMRO when designing and monitoring conditionality attached to CMIM financing, particularly in its sole operation.
In principle, conditionality should serve the same purpose in IMF-supported programs and CMIM arrangements. However, conditionality in the context of CMIM is different to that of the IMF because IMF financing programs stress structural conditionality, with loan tranches disbursed only upon the fulfilment of the requirements. By contrast, CMIM financing is provided upfront, with the fulfilment of conditionality requirements only relevant at the time of loan renewal.
In additional, the CMIM employs less severe measures, such as self-imposed targets for requesting countries of the CMIM precautionary line IMF De-linked Portion facility, with requesting countries setting their own targets in underperforming areas as identified by the Economic Review and Policy Dialogue (ERPD) matrix.