IMF Concern for Reputation and Conditional Lending Failure: Theory and Empirics
The IMF is entrusted with the twofold task of enforcing conditionality and deciding whether or not to continue financial assistance. In this paper we examine the implications on IMF lending behaviour of the existence of uncertainty about its ability to monitor governments’ actions and to enforce conditionality. It is shown that the existence of an even small degree of uncertainty about the IMF ability as a monitor generates incentives for the IMF to take actions to protect its reputation as a good monitor. In turn, this desire for reputation distorts IMF incentive to interrupt financial assistance, i.e. programmes will be interrupted less often than it would be socially desirable. We have empirically investigated whether IMF disbursements are affected by the IMF own share of debt, which is taken as an indicator of the length of the relationship between a country and the IMF. The longer their relationship, the stronger IMF reputation will be affected in case it ultimately decides to interrupt the lending. Our results show that a higher IMF debt share does increase IMF disbursements.
One possible explanation for the unsatisfactory implementation of IMF conditionality has been attributed to the lack of credibility of the IMF threat of interrupting financial assistance in case of non compliance with the negotiated conditions. In this paper we suggest that such lack of credibility might be due to the dual role played by the IMF which acts at the same time as a creditor and a monitor of economic reforms. We show that the IMF incentive to hide its surveillance failures, in order to preserve its reputation of being a good monitor, may actually distort its lending decisions towards greater laxity (relative to social optimum) in punishing non-compliance with economic reforms. We have empirically tested such theoretical result by supposing that larger departures from efficiency of the IMF lending rule are associated with a longer relationship between a country and the IMF. The longer this relationship, the stronger the IMF reputation will be affected in case it ultimately decides to stop lending. Specifically, we have empirically investigated whether IMF disbursements are affected by the IMF own share of debt, which is taken as a proxy for the duration of the relationship between the Fund and a country. Our empirical results show that a higher IMF debt share does increase IMF disbursements.
In this paper we suggest that the dual role played by the IMF, as a creditor and as a monitor of economic reforms, might explain the lack of credibility of the Fund threat of sanctioning non-compliance with conditionality. Specifically, we show that the IMF desire to preserve its reputation as a good monitor may distort its lending decisions towards some laxity. Moreover, such distortionary incentives may be exacerbated by the length of the relationship between a country and the Fund. Estimating a dynamic panel of 53 middle-income countries, for the period 1982-2001, we find that a longer relationship does increase IMF disbursements.
IMF programmes, conditionality, incomplete information, reputation, dynamic panel
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