Redesigning “One Size Fits All” Conditionality: are New IMF Arrangements with Ex-Ante Conditionality Stillborn?

International Monetary Fund (IMF) has long been at the epicenter of harsh and grounded criticism over its lending practices, in particular the use of conditionality. IMF, similar to other bureaucratic organizations, is slow to respond to such calls for change. However, with a nudge from the 2008 crisis and the following Great Recession, it finally introduced new borrowing instruments with both concessional and non-concessional terms in March 2009. Instead of the “one size fits all” system, the Fund now claims to offer many sizes to developing and low-income countries in need of loans. Even though new IMF facilities - the Flexible Credit Line (FCL), Precautionary and Liquidity Line (PLL), and the Rapid Financing Instrument (RFI) - present a mindset different from the traditional conditionality approach, and diversify the Fund’s instruments of crisis prevention, they are not quite popular among the borrowing countries. So far, only three countries - Mexico, Colombia, and Poland - signed FCLs. Two countries, Republic of North Macedonia and Morocco, have used the PLL. Similarly, Vanuatu, St. Vincent and Grenadines, Iraq, and Ecuador are the only four that accepted an RFI, and then mostly in conjunction with another facility. In fact, IMF is having a hard time selling these new arrangements even to those in dire need of liquidity. Egypt downright rejected an RFI in 2013. Why do countries refrain from using the new conditionality toolkit, especially the low-cost arrangements? Using a formal model of signalling and a content analysis of the Fund’s review documents, I compare the new arrangements with traditional conditionality packages of IMF as well as some outside options (e.g. borrowing from China). I also consider the failed negotiations for the new arrangements such as the Egyptian government’s rejection of RFI in 2013. I argue that demand for IMF facilities depends on the comparative advantage of the alternative options. When compared to traditional instruments like a Stand-by Arrangement (SBA), the new facilities lack a crucial commitment device: ex-post conditionality. Selecting a facility devoid of this mechanism may signal problems with program ownership and the extent of overall economic weakness, and therefore this choice may unintentionally increase expectations of worsening economic conditions. Anticipating high reputational costs of the new lending arrangements, countries, which can afford to negotiate longer, will opt out for a traditional arrangement. This makes the market for the new instruments extremely limited. For a small pool of countries whose need for cash far exceeds their reputational considerations, these arrangements might be useful. In these cases, however, the Fund runs the risk of entering a cycle of lending to countries in chronic arrears. Hence, even though IMF introduced these instruments to satisfy reform appeals from developing countries, demand for these facilities will remain limited, and in some cases, their application might be counterproductive.