Conditionality

[citation needed] Conditionality is typically employed by the International Monetary Fund, the World Bank or a donor country with respect to loans, debt relief and financial aid.

[2] Traditionally, the IMF lends funds based on ex-post criteria, which might induce moral hazard behavior by the borrowing country.

The moral hazard problem appears when a government behaves in a risky manner in the anticipation that it can turn to the IMF in the case of a crisis.

Institutional reforms of the International Monetary Fund, such as the Flexible Credit Line (FCL) in 1999, attempt to reduce moral hazard by relying more on pre-set qualification criteria (i.e.

For example, many countries tie aid to the purchasing of domestic products, although this practice has drastically decreased over the past 15 years.