Country circumstances should determine how IMF conditionality is applied to privatization

• Author: J.M. Davis/Timothy Lane/Hans Lankes/Rolando Ossowski
• Position: IMF Fiscal Affairs and Policy Development and Review Departments
• Pages: 283-285

Page 283

Privatization has emerged as an important issue in recent discussions about the conditionality the IMF attaches to the country programs for which it provides support. On July 12, the IMF's Fiscal Affairs Department and Policy Development and Review Department, in collaboration with the World Bank, cohosted a seminar on privatization, program design, and conditionality. The purpose of the seminar, which drew on the experience of IMF and Bank staff members as well as outside observers, was to discuss the incorporation of privatization in IMF-supported programs and to develop practical guidelines in light of the Executive Board's recent review of conditionality.

In opening remarks, IMF Managing Director Horst Köhler noted the timeliness and relevance of the seminar, given ongoing IMF reforms and the emphasis on streamlining conditionality. On privatization, Köhler was convinced that private sector activity is indispensable for growth and for improving welfare over the long run.Nonetheless, privatization should not be seen as a rigid ideology, because it is up to individual governments to make decisions about social organization.

Thus, while privatization is often the preferred route, the best way to convince governments is through consultation and persuasion. Collaboration between the IMF and the World Bank is particularly important, he said, because the privatization process is a microeconomic issue and therefore falls more within the World Bank's area of responsibility and expertise than the IMF's.

Privatization and program design

In a presentation on the fiscal and macroeconomic implications of privatization, Jeffrey Davis of the IMF's Fiscal Affairs Department noted that privatization proceeds should be transparently channeled through the budget and not into extrabudgetary funds, and they should be considered as financing in the fiscal accounts. Privatization proceeds, he added, should preferably be used for debt reduction, and any spending should be restricted to high-return projects and should also be consistent with macroeconomic objectives.

He noted that privatization was correlated with better macrofiscal outcomes, including higher growth and lower unemployment (at least in the aggregate).

Programs should estimate privatization proceeds cautiously, he said, and adjusters should be used to ensure that any excess privatization proceeds are saved.

Even though the evidence showed privatization improved enterprise and macroeconomic performance and enhanced government credibility, according to John Nellis, formerly with the World Bank, it remains a difficult, contentious, and unpopular action. The answer to this conundrum, he suggested, is that privatization involves trade-offs, including between multiple government objectives and between different segments...