IMF and WB conditionalities, and domestic policy — V

Although the Covid-19 pandemic further exposed the already deep cracks in the structural adjustment programme policy framework, and while both the IMF, and the World Bank in the wake of the Covid-19 pandemic expressed desire to move away from this neoliberal, and austerity basis of programmes, yet little could change in the actual lending conditionalities of these programmes.

In fact, the fast-unfolding nature of climate change crisis – which in turn also exacerbated the related ‘Pandemicene’ phenomenon that was also in part responsible for the Covid-19 pandemic – had already sensitized IMF to the need for enhancing the scope of determinants that influenced macroeconomic stability, and economic growth to include environmental aspects.

The (2025) ‘Cambridge University Press’ published book ‘Greening the International Monetary Fund’ pointed out in this regard as follows: ‘As early as 2015, then-Managing Director Christene Lagarde (2015) explained that climate issues are ‘macro-critical,’ impacting the economy as a whole and, therefore, within the Fund’s remit. …By 2023, the IMF’s current Managing Director Kristalina Georgieva could confidently reiterate that “climate risks affect macroeconomic and financial stability” and inform the world that “we are a financial institution, so we put the money where our mouth is”…’

READ MORE: IMF and WB conditionalities, and domestic policy — IV

With the coming of the Covid-19 pandemic, and increased frequency, and depth of climate catastrophes that started to appear a number of years before that, the IMF in 2022 launched ‘Resilience and Sustainability Facility’, with the objective as per the same book ‘…to provide financial support primarily to climate-vulnerable countries that face steep adaptation and mitigation challenges.’ Yet, the continuation of underpinning its traditionally main lending windows – standby arrangement (SBA), and extended fund facility (EFF) for instance – with neoclassical assumptions, and in turn, adopting the austerity agenda through them, is contradictory to climate agenda as enshrined through its RSF lending stream.

Here, it needs to be mentioned that Pakistan is currently in both EFF, and RSF programmes, with major lending coming through EFF, along with its neoliberal, and over-board austerity focus quite neutralizing the institutionalizing, and spending effort in RSF to create resilience against climate change.

Rather than revisiting conditionalities away from austerity emphasis in its traditional lending windows, IMF has apparently created a ‘conflict’ in its policy conditionalities by introducing an otherwise much-needed innovative policy approach through its RSF programme, given virtually opposite forces at work in this programme as compared to its traditional programmes.

READ MORE: IMF and WB conditionalities, and domestic policy—III

On one hand, the austerity approach carried by traditional lending windows restricting spending on resilience, and also keeping macroeconomic stability on fragile grounds, given the wrong neoclassical assumptions it is based on and, in turn, not caring for its link to building up determinants of greater environmental stability.

On the other hand, the RSF approach is trying to do virtually the opposite by strengthening the link between macroeconomic stability and environmental stability by not adopting neoclassical economics-based policies that have proved time and again in programme countries to be detrimental to its objectives of achieving sustained macroeconomic stability, and economic growth, whereby austerity policies have not put macroeconomic stability on a sound footing even after restricting spending, and overall giving a lot of sacrifice of economic growth.

Hence, there should be one set of assumptions underlying all IMF programmes, which should not generate this conflict, otherwise created by following neoclassical economics, and related neoliberal, and austerity policies.

READ MORE: IMF and WB conditionalities, and domestic policy—II

Moreover, it is strange to say the least that IMF apparently has left no choice for programme countries to not accompany a traditional IMF programme, while subscribing to RSF. Highlighting this point, and distinguishing the approach of RSF from IMF’s traditional lending windows, the same book indicated the following: ‘Unlike traditional IMF lending, the RSF explicitly integrates climate considerations into macroeconomic policy-making, providing long-term financing on favorable terms.

However, access to RSF funds is contingent on countries having an active IMF program with structural reforms, meaning that climate financing is intertwined with broader economic policy conditions. Our analysis of RSF loan agreements reveals that conditionality primarily focuses on fiscal policy, sectoral reforms, and mobilizing private finance for climate objectives. While this approach aims to strengthen resilience, it also raises concerns about the extent to which IMF-supported policies expand policy space for climate action versus reinforcing pre-existing market-oriented policy frameworks.’

Also, as time passed since the outbreak of the Covid-19 pandemic, this initial vigour of IMF in pushing for improving environmental impacts of programme conditionalities seems to be taking a back seat in view of an apparent weakening of this emphasis.

In fact, that transition is yet to take place in any meaningful way, while even the initial levels of focus seem to be fleeting even though climate change crisis has only worsened over the years, with the probability of the related ‘Pandemicene’ phenomenon, also likely to be increasing. For instance, catastrophic flooding was taking place twice in Pakistan during the last five years. Globally, ‘Nipah’ virus is making a somewhat significant return, which first appeared in late 1990s.

READ MORE: IMF and WB conditionalities, and domestic policy– I

The book pointed towards apparently a lack of motivation at the IMF in this regard as ‘Although the Resilience and Sustainability Facility (RSF) represents a major organizational innovation for the IMF, most of its lending still takes place outside the confines of its new climate-oriented lending facility.

During the acute phase of the COVID-19 pandemic, no- or low-conditionality facilities were the organization’s most prevalent lending instruments, but these were gradually replaced by traditional lending arrangements – like the Stand-By Arrangement or the Extended Credit Facility – that mandate the introduction of policy reforms over a period of on to four years. …between 2020 and 2024 the IMF approved sixty-four traditional IMF condition-carrying programs, providing access to SDR 109bn in credit. The majority of approved loans, both in terms of quantity (forty-six programmes) and total resources approved (SDR 94 billion) are not linked to the RSF.

Importantly, many of these non-RSF borrowers are also countries with extensive climate vulnerabilities: twenty-nine programmes are with countries ranked in the bottom third of the Notre Dame Global Adaptation Initiative (2023) index that measure vulnerability to and readiness for climate shocks.’

In addition, macroeconomic instability that the austerity approach inculcates negatively impacts fiscal space with governments due to unduly high interest payments needs over-board austerity approach generates in general. This, in turn, not only has a reducing impact on public expenditure, but also hinders built-up of real incomes, and larger savings to bear the spending needed to make the transition from the fossil-fuel-based economy to a much more greener one. In addition to interest payments, requirement of austerity approach to remove fuel subsidies and applying carbon taxes raises a reform sequencing issue.

Hence, while first incomes need to rise at the back of return of sustained level of high economic growth levels, and only taking the route of such carbon pricing and fuel subsidy removal should come thereafter. The absence of such sequencing runs the risk of hurting social and political cohesion in society.

Here, reform intervention to provide social protection to low-income consumers against the fiscal burdens generated as a result of removal of fuel subsidies also remains limited in terms of intended impact. This is because weak institutional environment of developing countries adds to frustration with public in general due to loopholes distracting such support, adding, in turn, justifiable weight to the argument in support of provision of fuel subsidies in a broad-based way.

Hence, this rightly points to the need of fixing the ‘sequencing’ of reform conditionalities under IMF programmes, where first rolling back neoliberal and austerity policies is put in place, and greater reform in this light improves economic institutional quality and brings higher level of sustained economic growth, and then make the shift towards providing targeted subsidies to more appropriately protect consumers from removal of fuel subsidies. For example, the same book pointed out: ‘While the economic logic of subsidy removal might be compelling and these policies are commonly included in IMF loan conditionality, such measures have clear social and political implications.

Indeed, recent political turmoil in Ecuador and Sri Lanka is linked directly to government decisions to remove subsidies… energy subsidies can be directed to consumers, which is a de facto social policy in many developing countries where other forms of redistribution and social provision are severely constrained… A common problem is that subsidies are often not targeted, thus favouring those with higher incomes in absolute terms and contributing to widened inequalities.

Even so, individuals with lower incomes still benefit substantially from these policies, as fuel expenditure tends to be a high proportion of their overall spending and these subsidies may be the only type of support they receive from the government… Thus, even though fuel subsidies do not expose individuals to the true cost of carbon, they help maintain social peace and provide substantial support to low-income individuals.’

Hence, structural adjustment programmes reduce resilience to shocks. Taking the example of Pakistan’s EFF programme with the IMF from back in 2020 – which is similar to the currently ongoing EFF programme in terms of assumptions, and broad orientation of policy conditionalities under the influence of these assumptions – the same book pointed out: ‘The IMF resumed a thirty-nine-month $6bn lending program with Pakistan in March 2020 – it was initially approved in July 2019 but interrupted due to the pandemic. …Despite the Fund’s stated commitment to mainstreaming climate considerations, our analysis of thirty-three non-RSF-linked loan agreements and case studies of Argentina and Pakistan suggest that its traditional lending programs remain largely resistant to change. These programs continue to prioritize fiscal consolidation, deregulation, and market-oriented reforms, often at odds with the investments and policy shifts required for a green transition.

In many cases, IMF-mandated austerity measures limit fiscal space for climate adaptation and mitigation, while energy sector reforms focus on subsidy removals with clear commitments to reinvest savings into renewable energy or social protections.’

The misgivings of programme conditionalities, for instance, for resilience – and in doing so also likely to diminish the positive consequences of the RSF programme – and hence, need to be reversed away from their neoliberal- and austerity emphasis.

The case study of the EFF programme from around 2020 remains critical for understanding the programme’s underlying neoliberal approach, especially serious compatibility issue this holds with regard to the RSF programme, since by limiting the role of public sector, and by limiting public investment, the EFF programme negatively impacts effort to green the energy sector, for instance. Instead, what is required from IMF programmes is that they should significantly include putting in place an active, public-sector-steered sustainable industrial policy, as being increasingly done in developed countries.

In this regard, the book pointed out ‘The IMF’s push for private sector-led energy transitions also risks sidelining state-led green industrial policies, which are crucial for long-term sustainability and are now widely practiced in high-income countries.

The case studies [of Argentina, and Pakistan] further illustrate the contradictions in IMF’s approach. …In Pakistan, tax reforms that increased the cost of renewable energy technologies directly discouraged the country’s transition to a low-carbon economy. …Overall, the evidence suggests that the IMF’s standard lending operations continue to reinforce rather than reform the existing economic structures that contribute to climate vulnerability, raising concerns about whether the institution’s broader climate strategy is truly transformative or merely superficial.’

This, in turn, points out that both traditional lending operations done under legacy programmes like SBA or EFF for instance, and much-needed more innovative RSF programmes cannot go together; where decades of seriously sub-optimal performance of IMF’s neoclassical-based structural adjustment programmes call for abandoning these programmes, and taking forward the work in the direction of augmenting RSF, by shifting its philosophical basis away from neoliberal, and austerity policies.

Moreover, the World Bank should also push for this shift away from structural adjustment programmes, and should also reform the conditionalities of its development policy loans on these lines. This is important for the proper progression of its goals in greening the economy through its project loans, for which macroeconomic environment needs to support this endeavour of the World Bank, which in turn requires moving structural adjustment programmes away from their traditional neoclassical underpinnings to, for instance, heterodox institutional economics philosophical assumptions, and plan of action formulated in that light. This would mean adopting an institutional economics approach, and seeing the role of government in a social democratic, mission-oriented, entrepreneurial way.

(Concluded)

Copyright Business Recorder, 2026