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World Bank and IMF conditionality: a development injustice

Added 29/Mar/07

Executive summary

This report examines the conditions that the World Bank and the International Monetary Fund (IMF) attach to their development finance in the world’s poorest countries. It is based on new research undertaken by Eurodad examining World Bank and IMF lending in twenty impoverished countries. 

The report reveals that impoverished countries still face an unacceptably high and rising number of conditions in order to gain access to World Bank and IMF development finance. On average poor countries face as many as 67 conditions per World Bank loan. However, some of the countries faced a far higher number of conditions. Uganda, for example, where 23% of the all children under 5 are malnourished, faced a staggering 197 conditions attached to its World Bank development finance grant in 2005.

In addition to imposing a massive administrative burden on already over-stretched developing governments, the proliferation of IMF and World Bank conditions often push highly controversial economic policy reforms on poor countries, like trade liberalisation and privatisation of essential services. These reforms frequently contravene developing countries’ wishes, an acknowledged prerequisite for successful development. They can also have a harmful impact on poor people, increasing their poverty not reducing it, by denying them access to vital services. This harmful impact has been recognised by the British government and Norwegian government, both of which have formally rejected tying their development aid to privatisation and trade liberalisation conditions. The G8 leaders also last year highlighted the importance of national governments’ sovereign right to determine their own national economic policies, revealing the inappropriateness of tying development finance to these types of reforms.

Our research found that 18 out of the 20 poor countries we assessed had privatisation-related conditions attached to their development finance from the World Bank or IMF. And the number of ‘aggregate’ privatisation-related conditions that the World Bank and IMF impose on developing countries has risen between 2002 and 2006. For many countries privatisation-related conditions make up a substantial part of their overall conditions from the World Bank and IMF. For example, just under one third of all of Bangladesh’s conditions within its second World Bank Development Support Credit granted for 2005 were privatisation-related (18 out of 53). Bangladesh, where over 50% of the population live under the poverty line, faces direct conditions calling for privatisation of its banks, electricity and telecommunications sectors and additional reforms to the gas and petrol sector that will facilitate private sector involvement.

Our research also found that the IMF and World Bank often impose the same privatisation conditions on a country. One quarter (5 out of 20) of the countries we assessed had the same privatisation condition contained within Bank and Fund current loan documents. Such ‘cross conditionality’ places a massive pressure on developing countries to comply with the policy reform condition, as the country risks losing multiple sources of finance. It also reveals a worrying lack of division of roles and responsibilities between the two institutions.

Radical reform of IMF and World Bank conditionality is needed immediately. The World Bank and IMF need to totally re-think their current approach to development finance policy conditionality. Recent attempts by both the institutions to ‘streamline’ development finance conditionality have failed. Institutional guidelines to reduce the number and scope of conditions imposed are not being implemented properly, and are not sufficient to protect developing countries from the negative impact of onerous conditionality.

The World Bank and IMF have both introduced guidelines for their staff urging them to limit conditions that are deemed critical. However while the Bank and Fund continue to impose specific and binding conditions on recipient countries, the guidelines for its staff are vague and non-mandatory. They also do not apply to all conditions.

In the future conditions attached to development finance should only address vital fiduciary concerns. Fiduciary policy conditions must increase the transparency and accessibility of budget processes and public finance management to ordinary citizens, so they can hold their own government to account.   And all conditions which impose controversial economic policy reforms like trade liberalisation and privatisation should be stopped.

If reform is delayed any further, World Bank and IMF conditionality will continue to hinder rather than aid poor countries ability to fight poverty and meet the internationally agreed Millennium Development Goals.

 

The World Bank and IMF must:

  • Radically cut the number of binding and non-binding conditions attached to their lending. The World Bank in particular must stop its tendency to micro-manage reform in poor countries;
  • Immediately stop imposing controversial economic policy conditions which push privatisation and trade liberalisation related reforms, even if these are contained in nationally owned poverty reduction papers;
  • Ensure that any conditions focus only on fundamental fiduciary concerns which enhance developing countries citizens’ ability to hold their governments to account, rather than developing countries accountability to the Bank and Fund;
  • Stop all forms of 'cross conditionality'.