Does Conditionality on Borrowing Help?

Abstract

Borrowers of international financial institutions (IFIs) have both interest and conditionality to deal with. Using data from the World Governance Indicators (WGI), we investigated the influence of conditionality on borrowers. By applying a dynamic panel regression method, we found compelling evidence, which supports our intuition that conditionality increases the debt burden of borrowing countries. However, this was not the case for all the indebted countries. Heavily indebted poor countries (HIPC) had some of their external commitments reduced when they agreed to implement some sets of conditionality. In light of these findings, we posit that the advocated structural reforms which is used, as a justification for prescribing conditionality does not materialize as planned. It however, erodes the capacity of borrower countries toward their debt servicing obligations. A direct consequence is their incessant need for external development assistance. Results of the study also proved robust.