ABSTRACT
This article examines the legal nature and implications of the loan conditionalitiesimposed by the International Monetary Fund (IMF) and the World Bank onborrowingcountries, particularly in the Global South. It assesses whether such requirementsundermine the principle of state sovereignty, as enshrined in international law, orwhether they constitute a legitimate exercise of international financial governance. Theanalysis explores the legal framework of both institutions, the concept of economicsovereignty, and key jurisprudence, drawing on treaties, customary international law, and state practice.
INTRODUCTION
The International Monetary Fund (IMF) and the World Bank are two BrettonWoodsinstitutions established in 19441 with the primary goals of ensuring global financial stability and promoting economic development, respectively. Over the decades, theirlending operations have become central to the financial policies of numerousdeveloping countries. However, the conditions attached to these loans, commonlyknown as structural adjustment programs (SAPs) or conditionalities, have raisedpersistent concerns about the erosion of state sovereignty in the borrowing States.
This article evaluates the legality of such conditionalities froman international lawperspective and discusses their implications for the sovereign rights of states topursueindependent economic and social policies.
SOVEREIGNTY UNDER INTERNATIONAL LAW
Sovereignty, as a cornerstone of international law, implies that a state possessesfull control over its internal affairs without external interference2 . This includes the right toformulate economic, social, and political policies.
The United Nations Charter of Economic Rights and Duties of States provides underArticle 1 of Chapter II that "Every State has the sovereign and inalienable right to chooseitseconomic system as well as it political, social and cultural systems in accordance with the will of its people, without outside interference, coercion or threat in any form whatsoever" 3 .
However, it is generally recognized from an economic perspective that sovereigntyisnot absolute. Thus, because states interact, certain rules and regulations needtobeobserved to maintain peace and order in their relations with each other. Suchrulescannot be made by any individual state, but by all the states participatingintherelations they are supposed to govern.
From the perspective of increased interdependence, therefore, a state is regardedassovereign if its acts are not subject to any other rules than those of international law. Sovereignty, and the rules and norms that guide it, is an institution which strengthensthe existence of international society. Changes in its interpretation, therefore, implyafundamental change in the structure of international relations
IMF AND WORLD BANK LEGAL MANDATES
- IMF: Established under the Articles of Agreement of the IMF (1945), theIMFprovides short- to medium-term balance of payment support to countries facingmacroeconomic instability.
- World Bank (primarily IBRD and IDA): Created under the Articles of Agreement of the IBRD, the Bank funds development projects andprovideslong-term economic support.
Both institutions are treaty-based organizations, and their conditionalities derivelegal authority from these founding treaties, which are binding on member states4 .
NATURE OF IMF AND WORLD BANK CONDITIONALITIES
Conditionality means an exchange of policy changes for external financing.5 FromtheInternational Financial Institutions' point of view, conditionality means an instrumentof mutual accountability. Based on the foregoing, it can be said that conditionalitydealswith financial leverage, which requires borrowing countries to carry out acts that theywould not have done but for the loan financing. Conditionality is also saidtoprovideprotection to the IFI and an assurance that the credit is being utilized for the agreedintention and the debtor will be able to acquit its debt.
Loan conditionalities may include requirements such as fiscal austerity, currencydevaluation, trade liberalization, privatization of public enterprises, and reductioninpublic subsidies.
When a country seeks to borrow from an IFI, its government agrees to adjust itseconomic policies in accordance with IFI's conditions, in order to overcometheproblems that led it to seek financial aid. These loan conditions also serveasanassurance that the country will be able to repay the loan so that the resources canbemade available to other member countries in need.
These conditions are ostensibly designed to ensure macroeconomic stability, debtsustainability, and good governance. However, they often lead to profounddomestic, economic and political restructuring in borrowing countries6 . It is arguedthat thisisinherently dangerous for the democracy of the borrowing country becauseIFIconditionality results in a domination of the IFI in national policies7 .
LEGAL BASIS AND LIMITS OF CONDITIONALITIES —TREATY LAWANDVOLUNTARINESS
States voluntarily join the IMF and World Bank and accept their Articles of Agreement. Therefore, under pacta sunt servanda (Article 26, Vienna Convention onthe LawofTreaties, 1969), they are legally bound by the terms. However, voluntariness inlawisonly meaningful when there is genuine freedom of choice. Therefore, when states areineconomic crisis and face no real alternatives, the voluntariness of consent becomesquestionable, raising concerns about coercion (cf. Article 52, VCLT).
Under customary international law, notably the Friendly Relations Declaration(1970) and the International Court of Justice's jurisprudence (e.g., Nicaragua v. USA), nonintervention is a core principle, prohibiting states and organizations fromcoercingotherstates into adopting specific policies. Conditionalities that impinge on a state's corepolicy areas such as fiscal policy, social welfare, and public services may amount toaform of economic coercion, raising the question of de facto intervention.
The UN Charter, particularly Articles 55 and 56, requires that states and international institutions promote economic and social development consistent with humanrights. Ifconditionalities result in violations of socio-economic rights, they couldbreachinternational human rights law (e.g., International Covenant on Economic, Social andCultural Rights obligations).
Although there is limited direct jurisprudence, legal scholars have increasinglyrecognized the responsibility of international organizations for their actions, especiallyfollowing the International Law Commission's Articles on the ResponsibilityofInternational Organizations (ARIO, 2011)8 . In cases such as the "Effect of AwardsofCompensation Made by the UN Administrative Tribunal" (ICJ, 1954) and the EuropeanConvention on Human Rights's Behrami and Saramati cases suggest that international organizations can be held accountable when they override member state sovereigntywithout due legal process9 .
Prominent legal scholars such as Antoni Cassese, Jan Klabbers, and JosephStiglitz10 (economist and former World Bank Chief Economist) have criticized conditionalitiesfortheir lack of transparency, democratic deficit, and undue interference insovereignpolicy-making.
However, despite the criticisms, it has been argued that conditionalities are contractual obligations, not coercive acts per se, noting that lack of alternatives for borrowingcountries does not necessarily equate coercion11 . Others have also argued that institutions like the IMF and World Bank are not states, and thus the principle of nonintervention must be interpreted differently when applied to them12 .
Therefore, from a formal legal perspective, it could be argued that conditionalitiesarenot illegal per se, though they must adhere to the limits of proportionality, necessity, and respect for fundamental rights.
CONCLUSION
While IMF and World Bank conditionalities are not inherently illegal underinternational law, they walk a fine line between legitimate financial oversight andunlawful infringement on state sovereignty. The legality of these conditions dependsonthe voluntariness, proportionality, and compliance with broader international legal norms, including human rights. Both institutions should recalibrate their lendingpractices to ensure they support rather than subvert the sovereign right of statestochart their own economic course.
Footnotes
1 The IMF and World Bank -https://www.imf.org/en/About/Factsheets/Sheets/2022/IMF-World-Bank-NewAccessed on June 10, 2025.
2 (Article 2(1) and 2(7), UN Charter
3 Charter of Economic Rights and Duties of States, GA Res. 3281(xxix), UN GAOR, 29th Sess., Supp. No. 31
4 International Monetary Fund — 4 Continuity and Change in the International Monetary Fund https://www.elibrary.imf.org/display/book/9780939934133/ch004.xml accessed on 30/6/2025 World Bank Group — Articles of Association,https://www.worldbank.org/en/about/articles-of-agreement
5 D. Zormelo, Is Aid Conditionality Consistent With National Sovereignty?, Overseas Development Institute, 17/021997, available on http://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinionfiles/7018.pdf accessed on 30/6/2025
6 T. Friedman, The Lexus and the Olive Tree: Understanding Globalization, New York, Random House, 2000.
7 D. UNLU, Op. Cit., p.9
8 Draft articles on the responsibility of international organizations 2011, https://www.worldbank.org/en/about/articles-of-agreement, accessed on 30/6/2025.
9 Al-Jedda v United Kingdom, App. No. 27021/08, European Court of Human Rights, 7 July 2011 https://legalblog.ie/protection-in-war/ accessed on 30/6/2025
10 Globalization and Its Discontents (2002
11 Hassoun on the Coerciveness of Loan Conditionality, https://politicalphilosopher.net/2013/08/16/hassoun-on-the-coerciveness-of-loan-conditionality/ accessedon 30/6/2025.
12 International Monetary Fund — Chapter 2 The International Monetary Fund and International MonetarySystem, https://www.elibrary.imf.org/display/book/9781557757968/ch02.xml accessed on 30/6/205.
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