The end result of the two world wars, coupled with a Great Depression was enormous physical and economic destruction in both Europe and the United States. These necessitated the drive to create a new international monetary system that would stabilize currency exchange rates without backing currencies entirely with gold; to reduce the frequency and severity of balance-of-payments deficits; and to eliminate destructive mercantilist trade policies, such as competitive devaluations and foreign exchange restrictions, while substantially preserving each country’s ability to pursue independent economic policies.
In fact, multilateral discussions led to the UN Monetary and Financial Conference in Bretton Woods, New Hampshire, U.S., in July 1944. Delegates representing 44 countries drafted the Articles of Agreement for a proposed International Monetary Fund that would supervise the new international monetary system. Indeed, the framers of the new Bretton Woods monetary regime hoped to promote world trade, investment, and economic growth by maintaining convertible currencies at stable exchange rates.
Countries with fairly moderate balance-of-payments deficits were expected to finance their deficits by borrowing from the IMF rather than by imposing exchange controls, devaluations, or deflationary economic policies that could spread their economic problems to other countries.. Since its creation, the IMF’s principal activities have included stabilizing currency exchange rates, financing the short-term balance-of-payments deficits of member countries, and providing advice and technical assistance to borrowing countries.
Conditionality of IMF Lending
Conditionality is one of the key and critical elements of IMF lending to emerging markets, more importantly, to African economies. In fact, conditionality in IMF-Supported programmes was actually introduced in the 1950s and accordingly incorporated as a key requirement into the Articles of Agreement in 1969. Previously, conditionality mainly focused on:
- Monetary policies
- Fiscal policies, and
- Exchange-rate policies.
By the 1980s, and more significantly, in 1990s, in addition to the above macroeconomic indicators, the Fund financing variables has included structural changes. The structural changes involve changes in:
- Policy processes
- Legislation, and
- Institutional reforms.
Interestingly, this move by the IMF led to a significant increase in the average number of structural conditions in Fund-Supported Programmes. In fact, the increase in the number of structural conditions raised concerns that the Fund was actually exceeding its mandate and expertise. It was equally argued by analysts and scholars that the number and detail of structural policy conditions associated with IMF loans were too extensive to be fully effective (UN, 2001).
Buira (2003) noted that the above concerns led to reduction in member countries’ compliance level with Fund-Supported programmes to about 16 percent in the 1990s. There were also concerns that excessive conditionality might have undermined the national ownership of IMF-Supported programmes. Griffith-Jones, Ocampo (2003) were of the view that conditionality is not a substitute for government commitment.
In the late 2005, IMF introduced a new Exogenous Shocks Facility (ESF). The main purpose was to provide policy support and financial assistance to Poverty Reduction and Growth Facility (PRGF) eligible low-income countries facing exogenous shocks that do not have a PRGF program in Place. It is worth noting that under such a facility, conditionality is quite high, a phenomenon which is appropriate in a facility to finance exogenous shocks.
Conclusion
African economies must learn to manage their economies in a manner that will ensure strict adherence fiscal discipline, macroeconomic stability and sustainable debt levels. Failure to do so, may result to financing assistance from the IMF which is attached with conditionality which may not be socially friendly to the citizens.
The writer is a Development Economist and Chartered Business Consultant. Daniel is the Chief Economist at the Policy Initiative for Economic Development. He also the Director of Research and Analysis, B&FT. He can be reached on email: [email protected]
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