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Sovereign Debt, Structural Adjustment and Conditionality

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  • Marcel Fafchamps

Abstract

The lack of proper enforcement mechanism for sovereign debt generates a commitment failure. As a result, a sovereign may seek to improve its position in debt renegotiations and thus evade its debt obligations by reducing exports. Conditionality seeks to provide a solution to the incentive problem by addressing the commitment failure. Formalizing this argument, we show that conditionality helps the repayment of sovereign debt. In certain circumstances, it can eliminate debt overhang, especially when it is coupled with concessionary lending of sufficient magnitude. It is, however, unable to restore first best. When it is anticipated by lenders, conditionality may get IFIs and sovereign debtors into a trap where the debt overhang persist, debt rescheduling takes place periodically, and conditionality continues indefinitely. Forthcoming in the Journal of Development Economics, November 1996

Suggested Citation

  • Marcel Fafchamps, "undated". "Sovereign Debt, Structural Adjustment and Conditionality," Working Papers 96015, Stanford University, Department of Economics.
    • Handle: RePEc:wop:stanec:96015
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    File URL: http://www.stanford.edu/~fafchamp/sover.pdf
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    Cited by:

    1. Giulio Federico, 2001. "IMF Conditionality," Economics Papers 2001-W19, Economics Group, Nuffield College, University of Oxford, revised 01 Sep 2001.
    2. Guimarães, Bernardo de Vasconcellos & Ladeira, Carlos Eduardo de Almeida, 2015. "The determinants of IMF fiscal conditionalities: economics or politics?," Textos para discussão 391, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    3. Gonçalves, Carlos Eduardo & Guimaraes, Bernardo, 2015. "Sovereign default risk and commitment for fiscal adjustment," Journal of International Economics, Elsevier, vol. 95(1), pages 68-82.
    4. Axel Dreher, 2009. "IMF conditionality: theory and evidence," Public Choice, Springer, vol. 141(1), pages 233-267, October.
    5. Miles B. Cahill & Paul N. Isely, 2000. "The Relationship between Aid and Debt in Developing Countries," The American Economist, Sage Publications, vol. 44(2), pages 78-91, October.
    6. Bernardo Guimaraes & Oz Iazdi, 2015. "IMF conditionalities, liquidity provision, and incentives for fiscal adjustment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(5), pages 705-722, October.
    7. Raul Hopkins & Andrew Powell & Amlan Roy & Christopher L. Gilbert, 1997. "The World Bank And Conditionality," Journal of International Development, John Wiley & Sons, Ltd., vol. 9(4), pages 507-516.
    8. Menbere Workie Tiruneh, 2005. "Why heavily indebted poor countries have failed to pay back their debt? An empirical investigation (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(3-4), pages 124-140, March.
    9. Bernardo Guimaraes & Carlos Eduardo Ladeira, 2021. "The determinants of IMF fiscal conditionality: Economics or politics?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1361-1399, November.
    10. Jorra, Markus, 2012. "The effect of IMF lending on the probability of sovereign debt crises," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 709-725.
    11. Ablam Estel Apeti & Kwamivi Gomado, 2023. "IMF conditionality and structural reforms: Evidence from developing countries," WIDER Working Paper Series wp-2023-97, World Institute for Development Economic Research (UNU-WIDER).
    12. Spiros Bougheas & Indraneel Dasgupta & Oliver Morrissey, 2011. "Repayment versus Investment Conditions and Exclusivity in Lending Contracts," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(2), pages 247-265, June.
    13. Marcel Fafchamps & Flore Gubert, 2007. "Contingent Loan Repayment in the Philippines," Economic Development and Cultural Change, University of Chicago Press, vol. 55(4), pages 633-667, July.
    14. Devesh KAPUR & Richard WEBB, 2000. "Governance-Related Conditionalities Of The International Financial Institutions," G-24 Discussion Papers 6, United Nations Conference on Trade and Development.
    15. Ablam Estel Apeti & Kwamivi Mawuli Gomado, 2025. "International monetary fund conditionality and structural reforms: Evidence from developing countries," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 33(2), pages 439-486, April.
    16. Prasanna Gai & Nicholas Vause, 2003. "Sovereign debt workouts with the IMF as delegated monitor - a common agency approach," Bank of England working papers 187, Bank of England.
    17. Araújo, Carlos Hamilton Vasconcelos, 2002. "Political risk, incentives and international credit market equilibrium," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 22(2), November.

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