What Is Conditionality?

Conditionality refers to the conditions attached to the provision of loans, debt relief, or foreign aid by the provider to the recipient, which is usually a sovereign government. Conditionality on loans is usually associated with those loans required for restructuring or to help a country regain positive economic momentum. Debt relief or foreign aid would have similar objectives.

Key Takeaways

  • Conditionality involves limitations placed on loans, debt relief, or foreign aid given to a sovereign government.
  • Lenders who employ conditionality can include a single country, a group of countries, or an international organization.
  • The conditions imposed are intended to make sure that the funds are used effectively.

Understanding Conditionality

While the recipient of such funds is usually a sovereign country, the type of lender (or relief provider) can differ. It might be another country, a group of countries (such as the Paris Club group of creditor nations), or an international organization such as the International Monetary Fund (IMF) or World Bank (WB).

The principal motivation behind conditionality is that the recipient country has some sort of economic trouble requiring the loan, debt relief, or aid. In order to prevent the existing situation continuing or deteriorating and potentially requiring more funding later, conditions are attached that are designed to improve the underlying situation in the country, so that the funds are used effectively and the country moves on to a self-sustaining economic path. In the case of IMF conditionality, the group notes specifically that when a country borrows from it, “its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid from the international community.”

Disbursements of the loans or aid are usually made in installments, with later installments being provided dependent on the progress the country has made with achieving the conditionality attached to the funding.

Conditionality does not always achieve its goals and, indeed, can have unforeseen and unintended consequences.

Types of Conditionality

Conditions can range widely and cover both purely economic issues (for example, fiscal deficit reductions or targets of other economic indicators, such as inflation) to broader issues, such as reducing corruption (an important factor for improving economic efficiency but not easily quantifiable) and even human rights or other politically motivated conditions. The donor organization may also require that the funds be allocated toward a specific project or to targeted outcomes rather than usage being left to the discretion of the recipient.

Criticism of Conditionality

Conditionality, even that purely based on economic factors, can be controversial. For example, funding to debt-crisis countries in the late 2000s usually had conditions of fiscal austerity attached. While these may have been necessary from a debt-sustainability perspective, they also undermined the ability of the affected economies to grow themselves out of the recessions associated with the crisis.