Conditionality, Debt Relief, and the Developing Country Debt Crisis

Abstract

This paper raises several cautionary notes regarding high-conditionality lending by the International Monetary Fund and the World Bank in the context of international debt crisis.It is argued that the role for highconditionality lending is more restricted than generally believed, because enforcement of conditionality is rather weak.Moreover, the incentives for a country to abide by conditionality terms are also likely to be reduced by a large overhang of external indebtedness.Given the limited ability to enforce conditionality agreements, nodesty and realism should be a cornerstone of each program.The experience with conditionality suggests two major lessons for the design of high-conditionality lending.First, debt forgiveness rather than mere debt rescheduling may increase a debtor country's compliance with conditionality, and thereby increase the actual stream of repayments by the indebted countries.Second, given the complexity of the needed adjustments, and the difficulty of enforcing conditionality agreements, programs are most likely to be successful when macroeconomic stabilization is given priority over large-scale liberalization.

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