When a country borrows from the IMF, the government agrees to adjust its economic policies to overcome the problems that led it to seek financial assistance. These policy adjustments are conditions for IMF loans and help to ensure that the country adopts strong and effective policies.
Conditionality helps countries solve balance of payments problems without resorting to measures that harm national or international prosperity. In addition, the measures aim to safeguard IMF resources by ensuring that the country’s finances will be strong enough to repay the loan, allowing other countries to use the resources if needed in the future. Conditionality is included in financing and non-financing IMF programs with the aim to progress towards the agreed policy goals.
Member countries that borrow from the IMF have primary responsibility for selecting, designing, and implementing policies to make their economic program successful. The program is described in a letter of intent, which typically includes a memorandum of economic and financial policies for more detailed description of the policies. The program’s objectives and policies depend on a country’s circumstances.
The overarching goal is always to restore or maintain balance of payments viability and macroeconomic stability while setting the stage for sustained, high-quality growth. For low-income countries, there is an additional objective of reducing poverty.
Most IMF financing is paid out in installments and linked to demonstrable policy actions. Policy commitments can take different forms. They include:
These are steps a country agrees to take before the IMF approves financing or completes a review. They ensure that a program will have the necessary foundation for success.
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Examples |
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Fiscal revenue measures |
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Clearance of external arrears |
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Governance reform |
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Banking sector restructuring plan |
Quantitative performance criteria (QPCs)
These are specific, measurable conditions for IMF lending that always relate to macroeconomic variables under the control of country authorities. Such variables include monetary and credit aggregates, international reserves, fiscal balances, and external borrowing.
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Examples |
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Ceiling on new public guarantees |
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Ceiling on external debt |
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Ceiling on public sector external arrears |
Indicative targets
Indicative targets, which are flexible numerical trackers, may be set for quantitative indicators to help monitor progress in meeting a program’s objectives. Heightened uncertainty and limited capacity may justify greater use of indicative targets under certain circumstances. As uncertainty is reduced, these targets may become QPCs, with appropriate modifications.
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Ceiling on the general government wage bill |
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Ceiling on domestic arrears |
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Ceiling on government borrowing from the central bank |
Structural benchmarks
These are reform measures that often cannot be quantified but are critical for achieving program goals and used as markers to assess program implementation.
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Examples |
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Strengthen tax administration |
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Improve fiscal transparency |
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Improve anti-corruption and rule of law |
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Reform State-Owned Enterprises (SOEs) and their governance |
The IMF Executive Board conducts periodic program reviews to assess whether the program is on track or needs to be adjusted in light of new developments.
If a country misses a QPC condition, the IMF Executive Board may approve a waiver if it is satisfied that the program will still succeed. This may be because the deviation was minor or temporary or because national authorities are taking corrective actions. Missed structural benchmarks and indicative targets do not require waivers but are assessed in the context of overall program performance. MONA, the IMF’s publicly available database for the Monitoring of Fund Arrangements covers all aspects of program conditionality.
IMF lending has always involved policy conditions. Until the early 1980s, IMF conditionality largely focused on macroeconomic policies. The complexity and scope of conditions increased with the IMF’s growing involvement in low-income and transitional countries, where multiple structural problems may hamper economic stability and growth.
Over time, the IMF has become more flexible in the way it engages with countries on structural reform as its approach to conditionality continues to evolve. The IMF periodically reviews the performance of its programs. The most recent 2018 Review of Program Design and Conditionality provided a first comprehensive stocktaking of IMF programs since the global financial crisis.
To enhance outcomes and reduce risks, the review recommended measures to improve macroeconomic projections, sharpen debt sustainability analysis, and better tailor structural conditions to specific country circumstances.
Last update was in March 2023
