Prolonged Use and Conditionality Failure: Investigating the IMF Responsibility

Abstract

Prolonged use of Fund resources has consistently expanded since the 1970s among both lowincome and middle-income countries. Overall this phenomenon suggests a lack of effectiveness of Fund supported programs. Such conditionality failure has been explained by the literature by looking both at the characteristics of the borrowing countries and at the lack of credibility of the IMF threat of interrupting financial assistance in case of non compliance with conditionality. In this paper we suggest that such lack of credibility might be attributed to the dual role played by the IMF, which acts at the same time as a creditor and as a monitor (or as an advisor) of economic reforms. We show that the Fund desire to hide its surveillance failures, in order to preserve its reputation of being a good monitor/advisor, may actually distort its lending decisions towards greater laxity in punishing non-compliance with economic reforms. Such laxity may be exacerbated by the length of the relationship between a country and the Fund. Thus we claim that prolonged use of IMF resources is not only a consequence of a lack of effectiveness of adjustment lending but it might itself be a determinant of conditionality failure.IMF conditionality, incomplete information, reputation