How the International Monetary Fund’s loan conditionality is hurting developing countries

By Joshua Kenyon

The International Monetary Fund (IMF) is an organisation made up of 190 countries working to achieve global economic stability and growth whilst reducing poverty, by giving loans to countries in need of financial assistance. These loans often come with conditions — called conditionality — which includes fiscal consolidation, a tool that involves lowering government spending and/or increasing taxation. Though these conditions seek to ensure loan repayment and economic stability in the recipient country, their efficacy has been called into question, as they frequently undermine sovereignty, human rights, and development objectives. Protests have broken out in many recipient countries and the Covid-19 pandemic has exposed IMF’s conditionality in facilitating underfunded and understaffed health services. Many non-governmental organisations, economists, and political organisations are now calling for reform to IMF’s loan conditionality so that developing countries can regain autonomy over their domestic policies.

The economic damage of IMF conditionality

Contrary to its aim, fiscal consolidation can damage the economic output of developing countries, especially by reducing public investment in infrastructure and services. A study of 26 countries receiving IMF loans from 2016-17 showed that 23 had received loans with fiscal consolidation conditions attached. Guinea and Sierra Leone, for example, were under programmes that encouraged wage bill freezes and reductions. Despite IMF’s goal of ensuring economic stability, most of the countries that received an IMF loan from 2016-17 were repeat borrowers, suggesting conditionality to be ineffective at improving long-term debt sustainability – or even counterproductive. Most concerning is that eight countries studied had higher debt repayments as a percentage of GDP than health spending, implying that debt relief could have freed up spending to invest in underfunded health services instead.

A sign reads “No to external debt repayment, out with the IMF” at a demonstration in Buenos Aires, Argentina, in February 2020. Photo credit: Shutterstock

Consequently, 20 of these 26 countries have experienced internal protests over the government cutbacks resulting from IMF loans. Moreover, 17 of the 18 low-income countries that received recommendations from IMF to reduce public sector employment spending are now below the nurse-population threshold of 30 nurses per 10,000 citizens advised by the World Health Organisation. This means that countries already struggling to cope with the Covid-19 pandemic must also deal with medical worker shortages, which has led to severe health outcomes.

The health sector damage of IMF conditionality

IMF’s loan conditionality has contributed to a reduction in many developing countries’ ability to respond to the Covid-19 pandemic. Many countries are now severely understaffed and do not have the health service facilities to meet the demand caused by rising Covid-19 patients. Ecuador, for example, received a $4.2bn loan in 2019, with conditions that call for fiscal consolidation of around 6% of its GDP. As a result, health sector spending was cut by 64% between 2017-2019, leading to a 4.5% decrease in public health sector employment. Unprepared and understaffed, the country has been crippled by the COVID-19 pandemic, with ECLAC estimating that Ecuador will be left with one of the highest increases in extreme poverty and inequality in the region. And despite Ecuador having the second highest excess deaths per capita worldwide, the government is still prioritising debt repayments over public health sector investment. While IMF ostensibly claims to support an increase in public health spending, a loan granted in May 2020 encourages the continuation of fiscal consolidation from 2019 to 2025, leaving the health service in Ecuador to work out how they will survive another six years of austerity.

Coronavirus tests being administered in Quito, Pichincha, Ecuador. Photo credit: Shutterstock

Though IMF loans are focused towards developing countries, OECD countries maintain 63% of the vote in IMF. And despite their failures, IMF continues to impose austerity measures on countries receiving these loans. In 2015, the US Senate passed a bill that revised the voting structure of IMF, including reallocating 6% of votes to emerging economies, which increased voting power in countries such as India, Brazil, and China. The reform also means that all 24 seats are elected, compared to the previous format where US, Japan, Germany, France, and the UK all had formally appointed seats. It is apparent that further reform is needed, however, to ensure IMF is more representative of the countries who receive the loans and to avoid the disastrous effects of IMF conditionality. Many organisations are now calling for these countries to regain their autonomy and for IMF to drop the conditions that they attach to loans other than the loan repayment. In the meantime, IMF’s destructive policies continue to damage both the reputation of IMF and indeed the condition of the developing countries it claims to help.

Joshua is an undergraduate at the University of Sheffield studying Economics, and has interests in economic development.


The views expressed in this article are those of the author and do not necessarily represent the views of Development in Action.

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