IMF CONDITIONALITY The IMF has been an important source of loans for debtor nations

experiencing repayment problems. The importance of an IMF loan is more than simply having the IMF “bail out” commercial bank and government creditors. The IMF requires borrowers to adjust their economic policies to reduce balance of payments deficits and improve the chance for debt repayment. Such IMF-required adjustment programs are known as IMF conditionality.

Part of the process of developing a loan package includes a visit to the borrowing country by an IMF mission. The mission comprises economists who review the causes of the country’s economic problems and recommend solutions. Through negotiation with the borrower, a program of conditions attached to the loan is agreed upon. The conditions usually involve targets for macroeconomic variables, such as money supply growth or the government deficit. The loan is disbursed at intervals, with a possible cutoff of new disbursements if the conditions have not been met.

The importance of IMF conditionality to creditors can now be under- stood. Loans to sovereign governments involve risk management from the lenders’ point of view just as loans to private entities do. Although countries cannot go out of business, they can have revolutions or political upheavals leading to a repudiation of the debts incurred by the previous regime. Even without such drastic political change, countries may not be able or willing to service their debt due to adverse economic conditions. International lending adds a new dimension to risk since there is neither an international court of law to enforce contracts nor any loan collateral aside from assets that the borrowing country may have in the lending country. The IMF serves as an overseer that can offer debtors new loans

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dominated by the interests of the advanced industrial countries. In terms of voting power, this is true.

Votes in the IMF determine policy, and voting power is determined by a country’s quota. The quota is the financial contribution of a country to the IMF and it entitles membership. Each country receives 250 votes, plus one additional vote for each SDR100,000 of its quota. (At least 75 percent of the quota may be contributed in domestic currency, with less than 25 percent paid in reserve currencies or SDRs.) The United States has the most votes, since the U.S. quota accounts for almost 20 percent of the total fund. Then come Japan and Germany, each with about 6 percent of the total, followed by the U.K. and France, each with about 5 percent of the total. These five developed countries contribute more than

40 percent of the IMF quotas and dominate voting accordingly. The IMF has been criticized for imposing conditions that restrict economic growth and lower living standards in borrowing countries. The typical conditionality involves reducing government spending, raising taxes, and restricting money growth. For example, in May 2010, Greece signed a h30 billion loan agreement with the IMF. In addition, the European Union agreed to provide funds making the total financing package reach h110 billion. At the heart of the agreement Greece would impose fiscal discipline that would reduce the budget deficit from its 15.4 percent level in 2009, to well below 3 percent of GDP by 2014. To accomplish this the Greek authorities committed to reduce government spending and increase taxes. Note that in this case monetary growth was not an issue as Greece belonged to the Eurozone, and cannot adjust monetary growth.

In the original statement by the IMF and Greek authorities, it is recognized that the austerity package will lead to short-run output con- traction. However, the view is that the structural reforms and fiscal discipline will improve the competitiveness and long-run recovery of the economy. Such policies may be interpreted as austerity imposed by the IMF, but the austerity is intended for the borrowing government in order to permit the productive private sector to play a larger role in the

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IMF CONDITIONALITY The IMF has been an important source of loans for debtor nations