The question of cross-conditionality

Abstract

All member countries of the Bretton Woods institutions (the International Monetary Fund and the World Bank) have an interest in close cooperation between the two institutions as well as in consistency and complementarity between their programs. Such cooperation has grown steadily, especially in recent years, as the degree of overlap in the operations of the two institutions has increased. Cooperation between the Bretton Woods institutions is being stepped up still further under the Fund’s new Structural Adjustment Facility (SAF), since although loans to SAF-eligible countries will continue to be negotiated and administered separately by the IMF and World Bank, they will have to be consistent with a “policy framework” previously agreed upon between the two institutions and the country concerned. There has also been a strengthening of cooperation between the Bank and Fund and other external sources of capital, particularly the regional development banks, the bilateral donors and the commercial banks. Inevitably, the drawing together of these various agencies and the growing interdependence of their decisionmaking processes have greatly increased the complexity of the negotiating process for potential borrowers, and this consideration alone has caused delay in the approval and disbursement of loans. The costs of such delays to the borrowers are considerable even where there are no disagreements between lenders and borrowers, or among the lenders themselves. The consequences of delays in the granting of loans by the development finance institutions have been especially severe in cases where disputes over the policies of member countries have been protracted. Damage to a country’s economy may result not merely from the holding up of a single project, but from the consequential suspension of preparatory work on new projects, so that the project pipeline becomes depleted. Any subsequent resumption of lending, even after full agreement on policies has been attained. therefore becomes subject to aggravated delay. While calling for closer cooperation between the Bank and Fund, the Interim and Development Committees have made it clear that crossconditionality is to be avoided, without, however, defining that term. Although it is difficult for an outsider to obtain all the evidence needed for a thorough evaluation of the issues arising in connection with cross-conditionality. it does seem that there have been cases in which the above-mentioned injunction of the two Committees has not been observed. It appears. however, that there have been relatively few. if any, cases in which formal cross-conditionality has occurred in the sense of a veto by one of the Bretton Woods institutions of a loan by the other. Rarely, if ever, does a case of crossconditionality reach the Executive Board of either institution. On the other hand there appear to have been many cases of informal cross-conditionality whereby each of the Bretton Woods institutions has withheld loans to a member country. or has suspended a borrower’s access to an existing loan. because the country concerned was in disagreement with the other institution on policies or performance. Ever since the adoption of the Extended Fund Facility (EFF) and multiyear stand-by arrangements by the IMF. designed to promote structural adjustment, the Fund has relied on the World Bank for the evaluation of investment priorities and other factors affecting the efficiency of the use of resources in member countries. The counterpart of this is that Structural Adjustment Loans (SALs) by the World Bank have been made only to countries having stand-by arrangements with the IMF or to