Conditionality

Conditionality (Latin conditio, "condition" ) refers in the context of a sovereign debt crisis and in the development cooperation associated with the granting of loans or payments imposition of conditions by creditor institutions and donor countries.

General

International lenders have the contractual right, payment and leaving their loans to compliance with requirements to join as part of the freedom of contract. International will then speak of "conditions precedent " resolution conditions that must be met before it can be paid out of the loans. If the concrete pads from the debtor are not met, it does not disbursement of the loans. Another group are those requirements that must be complied with by the borrower during the repayment period. These are mostly " financial covenants ", ie business or economic indicators. Failure to achieve compliance with the debtor, a credit termination right of the creditor or a credit event is triggered automatically. Both forms of constraints which "conditions precedent " and the " financial covenants " to reduce the credit risk of the lender and guarantee the repayment of the pad -dependent loans.

In the conditionality in the narrower sense, the conditions must not be already fulfilled until disbursement of the loans, but in a set period of time thereafter. In the HIPC Initiative but some conditions are critical in ensuring the achievement of the " completion point " and to fulfill the full implementation of debt relief. The " completion point " is so that the time at which the action on the " decision point " agreed debt relief to take effect.

History

The first editions to states created by the International Monetary Fund in the granting of loans (IMF). Founded in 1944, its loans were still unconditionally, but already in October 1952 its loans were first attached to the authorization. It was not until 1969, the conditionality in the Articles of Association ( Articles of Agreement ) was added. Increasing resistance in recipient countries have, however, the fulfillment of conditions hampered in the past or even impossible. Already in the years 1968 and 1979, the IMF had made ​​in his first easing of conditionality. In September 2002, the Executive Committee of the IMF took again revised guidelines for the alignment of its conditionality as a result of fierce criticism. These guidelines are intended to make the loan covenants effective, clear and focused and ensure better coordination of IMF conditionality with other organizations.

Types of conditionality

Depending on the economic or political aspect of the requirements, a distinction is

• Macroeconomic conditionality

Subject macroeconomic conditionalities is the economic policies of a debtor country. This is about school thinking figures, government spending, inflation or unemployment rates, which are given by donor countries or institutions and must be met by appropriate economic policy decisions of the recipient countries. The macroeconomic conditionalities of the IMF shows a largely rigid defined macroeconomic stability requirement. He is recipient countries very strict limits on the allowed rate of inflation or government spending. This applies to the allowed amount of budget deficits as well as guidelines on the use of restrictive government spending. Developing countries are forced into IMF programs to reduce their social spending according to the specifications of a narrowly defined macroeconomic stability, what a dramatic impact on poverty or disease control may result. The restrictions imposed by the IMF HIPC conditionalities are one reason that the scope for fiscal policy has reduced. As the IMF has the definition of sovereignty for macroeconomic stability, the World Bank depends on its specifications.

Also, the Stability and Growth Pact is a macro-economic conditionality for EU Member States, as the Member States have to conduct their economic policies to these mandatory requirements and may result in non-compliance sanctions. These include in particular the indebtedness, which may not exceed 3% of gross domestic product and the national debt, which may reach a maximum of 60 % of gross domestic product (Art. 126 TFEU). These are aimed at increasing economic cohesion of the very heterogeneous EU members.

• Trade policy conditionalities

Classic Handelskonditionalitäten concern the elimination of tariff and non -tariff barriers to trade and have now become insignificant components of the support policy. Their share fell from 15.2 % of all conditionalities in the years 1980 to 1989 to 1.8 % between 2000 and 2004. However, it can not be concluded that had lost trade liberalization and trade issues in the support policies of the IMF and World Bank in importance. One of the reasons for the decreasing number of classical Handelskonditionalitäten is that most developing countries have their markets are already largely liberalized under the pressure of these conditions by the IMF and World Bank for customs purposes and therefore often no longer appropriate obligations are required. This development, however, shows that conditionality is well worth the intended effect with them are able to achieve.

New areas, such as the implementation of the WTO agreements in the regulatory systems of developing countries, have been added. There are important barriers to trade in developing countries, especially in the regulatory area, in the absence of infrastructure, restrictions on freedom of investment, poor governance and the lack of competent institutions for the World Bank. To that extent also the focus of the remaining 1.8% has moved to commercial policy conditionalities.

Although Classical Handelskonditionalitäten still play a role, but the focus is on trade facilitation, in particular in the field of certification, quality improvement and the elimination of sensitive trade barriers. World Bank and IMF have significantly reduced their conditionality in the classical field of tariff reduction. About 60% of the trade-related Programmkonditionalitäten the mid-1990s were based on the traditional instruments of tariff and non -tariff trade policy. Since 2001, this figure is less than 10 % of all conditionalities. The focus of Handelskonditionalitäten has shifted from the customs policy at customs clearance. Even the IMF, the classical trade policy conditionalities are still significant. To examine the IMF with its own Trade Restrictive Index ( TRI) regularly as " restrictive" the trading systems of the respective member countries. Whether and which trade policy conditionalities must meet a country is selected then receive what value the country. The less a country has opened its economy to the outside, the stronger are the requirements to liberalize the trade system of the country.

• Structural conditionalities

In the structural adjustment programs (SAP), the IMF also makes requirements on structural reforms (deregulation and liberalization ), where it votes with the World Bank. According to EURODAD include the World Bank, 43% of all conditionalities are attached to the loans for poorer developing countries, guidelines for public sector reforms. An investigation of Trocaire shows that even in the " Poverty Reduction Support Credit " (loans for poverty alleviation ) of the World Bank usually an extensive list is included in Governance conditionalities. In 20 surveyed PRSCs, there were a total of 427 governance conditionalities for the public sector. This made ​​a total of 38 % of the total conditionalities from the 20 PRSC. The number of structural conditionality of the IMF reached its peak during the Asian financial crisis in 1997 with 94 runs for Korea, 73 for Thailand and 140 for Indonesia.

• Micro-economic conditionalities

The World Bank has increasingly gone over on their project financing (investment lending) promoting sector reforms in developing countries. In project-based aid is determined that a project finance certain microeconomic indicators ( debt service as a% of cash flow, debt ratio) must meet in the form of financial covenants.

Legal basis

Legal basis of conditionality is Article V, Section 3 of the IMF's Articles of Association, which authorizes the IMF to assist member countries with balance of payments problems in the formulation of its policies and take for granted loans appropriate protective measures ( " safeguards "). Since 1955, it is common that a country that IMF funds on its reserve tranche addition takes, must be guided by his economic policies to the IMF conditions. The affected State creates an economic reform program that receives the IMF in the form of measurable targets as conditions in its loan agreements. For failure to meet the specifications, the quarterly overdue payments of the loan are stopped.

Sovereignty

The conditions ranging operational well into the autonomous state policy of the State concerned. He is, for example, imposed to take inflation- inflammatory actions to reduce unemployment, to control the money supply, make any prestigious investment to reduce its defense spending or curb corruption and infiltration. Thus, the support policy is a key instrument of donor institutions to exert influence on government policy of debtor nations and developing countries. Conditionalities access so directly in the a state or a company freedom and political autonomy. A state is forced through conditionalities, its economic policy to be amended so that the requirements of the lender are met. Without restrictions, the states might have pursued a different economic policy. How can it be explained that states are trying to defend themselves against some editions vehemently because they do not want to accept a limitation of their sovereignty. Therefore, the IMF is doing since the Asian crisis increased efforts to involve the recipient countries more in the design of the editions.

One of the most fundamental principles of the Paris Club is the equal treatment of creditors ( pari passu clause). Thereafter, the debtor must undertake to make no other group of creditors better (par conditio creditorum ). This is to prevent that, ultimately, the taxpayers bear the risks that individual companies or banks have been received. You should aim that the debtor beneficiary of the clause creditors pari passu also served in principal and interest payments, so no creditor - such as liquidity constraints - are preferred. A further condition for debt rescheduling or debt that the debtor country explicitly required by appropriate cooperation with the IMF, to pursue a policy that avoids re- activation of the Paris Club.

Ownership

Country ownership is defined as ownership by the beneficiaries, in implementing the regulations. This partnership principle is to eliminate the resistors that are often associated with unilateral conditioning by donor institutions. The recipient states submit themselves reform proposals, which lead to conditions. They should then be controlled in the context of ownership, the ongoing reform processes themselves and commit to reforms supported by the help it himself. The World Bank requires at country ownership that the government of a state is supported by all major forces in the country in the implementation of reforms to ensure that the implementation does not fail due to opposing forces. By ownership, the broad acceptance is to be achieved by restrictions.