International Monetary Fund Conditionality and Options for Aggrieved Fund Members

The International Monetary Fund (the IMF or the Fund) was created to assist in stabilizing rates of currency exchange. Each country is able to achieve stability only by balancing the amount of local currency flowing out against the amount of foreign currency flowing in. When exchange rates are stable, capital can flow more easily to places where it can be most efficiently utilized, thus raising the worldwide level of prosperity. Unfortunately, the process of adjustment from imbalance to balance entails some sacrifices. A country with an imbalance must eliminate the excess of imports over exports. The IMF has the power to use a carrot-and-stick approach to convince member countries to endure the painful transition. Generally, the Fund uses only the carrot by offering the prospect of large-scale, interest-free financing while the adjustment is under-way. The Fund, of course, attaches strings, known as conditionality, to the financing packages. Conditionality can be harmful both to the debtor nations and to those nations\u27 creditors. This Note examines the ways in which the Fund uses conditionality to improve a country\u27s balance of payments. The Note then details objections that nations and individuals may have to conditionality and addresses the range of possible responses to it. The Note concludes by arguing that resistance to conditionality fails to serve the long-term interests both of those involved and of the world community as a whole