7 The IMF's Approach to Macroeconomic Policy in Low‐Income Countries

Abstract

Abstract Donors often make foreign aid conditional on an ‘on-track’ IMF-supported program. This practice is supported by evidence that aid is more effective in the presence of sound macroeconomic policies. But it is important to consider whether IMF program approval is the measure of policy soundness most relevant to decisions on aid. Moreover, the use of IMF financing as a signal — like any signaling mechanism — affects the incentives of the parties concerned, including aid-receiving countries, donors, and the IMF itself. This chapter examines these issues and their implications for aid allocation and variability as well as for IMF financing.

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