The IMF’s new Resilience and Sustainability Trust (RST) is now up and running, with the first countries receiving commitments of financial support. But if lending from the RST is to achieve its objectives, the IMF should take a radically different approach in applying conditions to the loans.
The Resilience and Sustainability Trust was agreed formally in April 2022 and became operational in October as the IMF firmed up financial contributions from donors and then negotiated policy programs under the new Resilience and Sustainability Facility (RSF) that is funded by the RST. First recipients include Costa Rica, Barbados, Rwanda, and Bangladesh, all approved by the IMF Board, and Jamaica, which will go to the Board soon. Getting this far is a major accomplishment. But what comes next—including the approach to conditionality—will be crucial to determining whether this initiative is ultimately a success.
As the IMF sets the conditions that countries must meet to secure the unusually long-term RSF loans, “business-as-usual” conditionality is not fit for the ambitious purpose “to help countries build resilience to external shocks and ensure sustainable growth.” The IMF’s approach must adapt in three main ways if the RSF is to be effective and countries are to receive the support they need to build resilience. First, conditionality should incorporate a new mechanism for transparency covering a broad range of country policies. Second, specific conditions for RSF disbursements should focus much more narrowly on a few policy actions that the IMF has expertise to design and monitor. Finally, the design of RSF conditionality should be fully integrated with enhanced responsibilities of the IMF and other institutions for advice and monitoring to meet national and global goals.
What we know so far about RSF loan conditions
Some aspects of the IMF’s approach to RSF conditionality are already clear, together with their drawbacks.
First, at creditors’ insistence, RSF disbursements can only be made when the borrowing country has a regular IMF program or credit line in place. Moreover, no disbursement will be made on initial approval of the program but only following subsequent implementation of agreed structural reforms and only if the IMF program is on track. The concern is that countries facing existing balance-of-payments problems might try to avoid the typical conditions under a regular IMF program by “facility shopping”—accessing RSF resources with conditions aimed solely at dealing with prospective balance of payments problems. However, requiring concurrent programs means countries might delay seeking IMF support to tackle immediate macroeconomic problems, because of stigma or failure to secure political consensus. This would then also delay the urgent task of beginning to tackle the prospective problems of climate change and other major structural challenges, which has both local and global benefits. For this reason, we have advocated allowing some limited access (25 percent of IMF quota) to the RSF without a concurrent IMF program: an issue that could be revisited at the time of the first review of the Trust’s operations. Financing from the RSF is in any case limited, with the bigger prize coming from the urgent focus on ambitious policy reform that can catalyze much larger private and official investment.
Second, the emphasis is unsurprisingly on structural policies, yet the tensions long-since evident in applying IMF conditionality to meet structural problems are magnified in the design of the RSF. The danger is that the RSF conditionality based solely on IMF-monitored implementation of structural measures increases the likelihood that the IMF will overpromise and underachieve in its bid to bolster countries’ long-term resilience and sustainable growth. In particular, designing conditions to meet long-term structural problems presents unique challenges. Agreements on urgently needed policies lack traction because (i) formulation and implementation depend on agencies beyond the traditional IMF counterparts in a country’s finance ministry and central bank; (ii) financing requirements are enormous and far outweigh what the IMF can provide; and (iii) the collective impact will not in any case be fully known for a generation. Two underlying institutional weaknesses at the local and global level further complicate matters. National governments face difficulties to specify the policy actions most important to achieving long-term objectives, while strengthening the processes to implement them both during and after the program period. In addition, the framework of international cooperation lacks accountability for monitoring policy implementation to meet country commitments to combat climate change, for achieving the global targets, and for assessing the impact on individual countries.
Third, RSF disbursements are to be conditioned on a few reforms, in line with IMF guidelines that conditions are supposed to be parsimonious and aligned to country circumstances. However, the announced range of possible reforms is already very wide and disparate in nature, making it hard to evaluate the choice and significance of an individual reform, and stretching the limits of the IMF’s expertise. More will need to be done to erase the specter of unmanageable laundry lists of structural measures that accompanied IMF programs of yesteryear, or the difficulty of justifying why a particular reform merits being chosen as a condition.
In the face of these daunting challenges, the IMF seems to be “hoping for the best” by specifying as conditions various useful country-led policy reforms that plausibly contribute to tackling long-term structural problems and prospective balance-of-payments problems. Disbursements fund some new upfront expenditure, but also provide a reserve buffer. This approach amounts to using the RSF to “top up” access to the resources that are provided by the required regular IMF program. It has the advantage of making it easier to service debt that will be due to the IMF and others in the next few years when many RSF-eligible countries face the prospect of debt distress that is heightened by war, pandemic, and climate change, on top of any policy shortcomings. The RST would, in essence, allow a partial rescheduling of debt service falling due to the IMF and others. The temptation to pursue this unstated benefit, however, should not distract from trying to maximize the RSF’s impact on increasing long-term resilience to climate change and pandemics.
A more ambitious approach
A bolder approach would see the IMF adapting RSF conditionality to greatly increase the chances of achieving the substantive aims of the new initiative. The IMF has a unique opportunity, by leveraging its advice and resources, to help strengthen internal country processes that foster reform as well as improve the flawed system of international cooperation that is far too slow to address the risks posed by climate change and pandemics.
The IMF should adapt its RSF conditionality in three ways:
1. The IMF should establish a new mechanism for transparency
A new mechanism for transparency could make central—and give greater traction to—the authorities’ statement of policy objectives and actions to achieve them. The traditional policy memorandum—a formal part of any IMF conditionality—would, as usual, enumerate the specific actions that constitute the formal conditions for an RSF drawing. In addition, it would require that the authorities complete and periodically update a broader Resilience and Sustainability Policy Statement (RSPS). This new instrument would incorporate the specific policy actions that are RSF program conditions and would also:
- describe the timeline of all economic policies to achieve a country’s nationally determined contributions (NDCs) to mitigation, national adaptation plans (NAPs), and other resilience strategies, together with their expected macroeconomic implications;
- appear online in a format that described which government agency is responsible for which action and which international institution (if any) was responsible for supporting the country’s efforts, allowing progress updates and commentary by those agencies;
- describe the government’s commitment to allow parliamentary and public debate of their statement, as well as to present it to private investors and international partners at donor conferences.
The RSPS mechanism would increase the accountability of domestic and international institutions in their own areas of responsibility; better explain policy direction and help build internal consensus for the actions; and facilitate the IMF’s catalytic role in attracting domestic political support and much larger resource flows from official and private sector sources. Critically, the IMF’s role in preparing the RSPS would be limited but essential: it would provide a template and “metadata” guidance to country authorities on what the statement should include but would not need to approve the language with the authorities, except where a topic directly related to IMF loan conditions. Detailed analyses produced by or with the help of IMF or World Bank staff, such as Climate Change Policy Assessments, Country Climate and Development Reports, Disaster Resilience Strategies, and Public Investment Management Assessments, would provide useful inputs to the RSPS. The IMF, World Bank, and other institutions would be free to comment on the authorities’ RSPS at respective Board meetings, in public, and at the planned donor/private financing meetings. By conveying greater ownership and responsibility to the country authorities, this mechanism would avoid the bureaucratic bottlenecks and misplaced accountability that so bedeviled previous attempts at policy statements submitted to the IMF and World Bank.
2. The IMF should focus more clearly on a few critical actions that it will help design and monitor as loan conditions
These “IMF-focused” priority actions—some of which would constitute RSF conditions—should include:
- the path for carbon pricing (or equivalent regulation), including eliminating subsidies and imposing taxes, to deliver on their national targets and anticipate a world in which higher relative prices of greenhouse gases are set globally that affect the country’s trade, investment and consumption patterns;
- incorporation into the medium-term budget (through impact on public sector expenditure and revenue) the many specific actions required to meet the country’s NDCs and NAPs and support for the most vulnerable, and to increase pandemic preparedness;
- as a priority action for all gas- and oil-producing countries, levying default penalties on deemed methane emissions with the rebates allowed on verifiable satellite-based data. Curtailing methane emissions is urgent, both for local benefits of health, revenue generation, and energy access, as well as for the global benefit of slowing temperature rise; and
- stress-testing of institutions and the overall financial system as well as adoption of guidelines on reporting and disclosure by banks and financial institutions of climate-related risks.
The authorities’ policy memorandum would explain what they are planning to do—or not to do—in each of these key areas monitored closely by the IMF. The memorandum would also make explicit the quantitative target path for a country’s reserve buffer to increase resilience to future shocks. (Concurrently, the IMF should continually update its policy advice on the desirable level of reserve cover to increase resilience to shocks.) By providing explanations, the authorities would increase transparency about their actions and spur domestic debate and consensus on what can at times involve difficult policy trade-offs.
3. The IMF should integrate its RSF work into its broader responsibilities by expanding its surveillance and advisory roles
Since meeting the goal of the RST depends greatly on the policy actions of all IMF members, including the largest economies, the IMF should integrate its RSF work into its broader responsibilities by expanding its surveillance and advisory roles. Meeting head-on the urgency of its global obligations for macroeconomic stability and prosperity as member countries face increasing threats to lives and livelihood warrants:
- introducing the proposed RSPS mechanism as a tool to be part of IMF Article IV consultation discussions with all member countries, including the largest economies;
- as input to the discussions, developing a Resilience and Sustainability Assessment Program (RSAP), akin to the Financial Sector Assessment Program (FSAP), with a piloted then targeted approach to work with the largest economies as well as those most vulnerable; and
- conducting regular aggregate assessments of the implications for economic policies and consequences of the entire membership’s commitments to tackle climate change and pandemic preparedness– a role the IMF can uniquely play. The findings would be conveyed to other elements of the UN system charged with building consensus and delivering action, to strengthen the accountability of the complex existing arrangements for international cooperation.
A forthcoming note sets out in greater depth what has so far emerged about IMF policy toward RSF conditionality; explains the mismatch between the emerging conditionality and what is required to meet the need that the RST is designed to help countries face; and makes specific suggestions to adapt its approach to conditionality in the three areas noted above, with the aim of making the most of the IMF’s new initiative.
Many thanks to Mark Plant, David Andrews, and Kathryn McPhail for helpful conversations. The author is responsible for all errors.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
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