ECONOMIC AND FINANCIAL COMMITTEE Brussels, 2 September 2002 EFC/ECFIN/352/02 Common Understanding - The role of the IMF in the Poorest Countries The main objective of the IMF is to promote macro-economic and financial stability. This ensures that, even in the very poor countries, the necessary conditions are established for reducing poverty and enhancing growth. Against this background, the IMF can play a vital role for its low-income country members, encompassing a broad range of activities, including Article IV surveillance, financial assistance under the Poverty Reduction and Growth Facility (PRGF), and technical assistance. In addition, it works jointly with the World Bank on poverty reduction strategies, financial sector assessments, the implementation of codes and standards, and assist countries in maintaining and/or reaching sustainable external positions, and by providing where necessary debt relief under the Enhanced HIPC initiative. The IMF s role in development necessitates continuing efforts to review IMF economic policy advice and its financial and technical assistance to the poorest countries. Against this backdrop, there are important lessons to learn from the Poverty Reduction and Strategy Paper (PRSP) and PRGF reviews earlier this year, and measures needed to ensure the Enhanced HIPC initiative successfully meets its objectives. The reviews brought a strong endorsement of the PRSP approach and the key features of the PRGF, which have sharpened the IMF s awareness of the impact of its policies on growth, poverty reduction and enhancing country ownership. But the reviews also indicated areas where future improvement needs to take place. There is more to be done in many cases to improve participation processes, to bring about more open dialogue with civil society, to improve the content and implementation of PRSPs, and to better align IMF and World Bank and bilateral donor strategies fully behind the PRSP approach. The reviews also clearly showed that countries with a Full PRSP performed significantly better than countries that were allowed to proceed on the basis of an Interim PRSP. At the Spring Meetings, the IMFC requested a report from the Fund and the Bank on their progress in collaborating on these issues, for the Annual Meeting 2002.
Improving the PRGF The reforms incorporated in the PRGF are strongly welcome, but there are still many areas in which the IMF can improve its financial assistance under this facility. These include continuing to streamline structural conditionality, better identifying the sources of economic growth, promoting within the joint framework of the PRSP budgets that are more pro-poor and pro-growth, greater consideration of alternative policy choices for authorities, strengthening public expenditure management and using poverty and social impact analysis (PSIAs) more systematically. The IMF should continue to streamline PRGF structural conditionality to areas critical to the success of PRGF programmes. It should co-ordinate these actions with the World Bank to ensure overall consistency of the two institution s activities. There is a strong case for an assessment of the net change in IMF and World Bank conditionality, with overall conditionality of the two institutions reviewed for its effectiveness and focus, and links between the PRSP and necessary conditionality. The PRGF review indicated the importance of considering alternative policy choices and the related trade-offs. As part of a move to more outcomes-based conditionality, country authorities should have the initial responsibility for proposing a reform programme, or where this is not feasible the Fund staff may present the authorities with a genuine menu of options. In particular, the Fund could do more to ensure appropriate flexibility in the setting of fiscal targets, consistent with sound fiscal management and with safeguarding medium and longer-term sustainability. It is important to build on the progress made to promote pro-poor spending and growth in PRGF programmes. PRGF documents could provide greater detail on areas of pro-poor and pro-growth budgets, such as basic expenditures on primary education or primary health spending - key areas of relevance to the poor and the achievement of the MDGs. Details of pro-growth spending on infrastructure, agriculture etc. would also be of benefit. Ensuring debt sustainability for HIPCs The Enhanced HIPC initiative affords some of the poorest countries the opportunity to escape from unsustainable debt burdens. To date, 26 countries are benefiting from debt relief under initiative. These countries stand to have their debt burdens reduced by almost two thirds in net present value terms, 1 thereby freeing up critical resources for much needed investments in health and education. As many as 37 HIPCs may eventually benefit from debt reduction under the Initiative. 2 However while recent studies by the World Bank and IMF have demonstrated considerable progress with respect to implementing the enhanced HIPC Initiative, there are factors that may prevent HIPCs from receiving all the debt reduction assumed in the Initiative. - First, not all creditors have agreed to provide debt reduction. - Second, the financing needs of the Initiative as estimated at Cologne in 1999 have not been fully met. Total pledges to the HIPC Trust Fund amount so far to USD 2554 million of which 1721 million are disbursed. The EU and its member states have pledged USD 1484 million (around 60% 1 Development Committee, Heavily Indebted Poor Countries (HIPC) Initiative Status of Implementation (DC2002-0009). April 14, 2002. 2 Of the 42 countries classified as HIPCs, four are considered to have sustainable debt loads after the application of traditional mechanisms. One other (Lao PDR) has decided not to apply for HIPC debt relief.
of total) of which USD 1075 million - about 2/3 - have been disbursed. The US Congress has so far endorsed a USD 360 million to the Trust Fund of which 238 million were disbursed (66% of its commitment). Japan has pledged USD 200 million and disbursed 115 million (58%). - Finally, as a result of weaker growth and export commodity prices, a number of countries could be at risk of not having sustainable debt at the Completion Point. Here, individual assessments are needed as some countries` problems in achieving debt sustainability are due to new borrowings, weak implementation of economic reform programmes and/or inadequate policy responses to external shocks. To ensure genuine debt sustainability for all eligible HIPCs it will therefore be necessary to take action in a number of areas, and to pay renewed attention to the implementation of sound policies in HIPCs during and following the interim period, including strict avoidance of new borrowing on non-concessional terms. The IMF should work with other stakeholders to secure the compliance of all creditors, official and private and to ensure full financing of the HIPC Trust Fund. Increasing the effectiveness of technical assistance There is widespread recognition of the vital need to build capacity in the core macroeconomic and financial areas of Fund responsibility, including building sound macroeconomic frameworks, public finance and administration, the strengthening of financial sectors, and sound statistical and data dissemination systems. This is also of relevance for the capacity of developing countries to implement and participate in the design of codes and standards. Particularly welcome is the success of the regional initiatives in the Pacific and Caribbean and the decision to establish two African Regional Technical Assistance Centres. These centres will be an important step in enhancing the IMF s provision of technical assistance. The Fund is undertaking a review of its technical assistance policy and experience: it will be important to ensure that TA is well targeted, is well-coordinated with other providers and consistent with the policy objectives set out in PRSP. It should also include inputs into parliamentary and civil society capacity to better understand macro-economic policy and strengthen country-level debate. Strengthening the voice of developing countries The Monterrey Consensus calls for further action to help developing countries to build their capacity to participate effectively in multilateral forums. This is especially true for the poorest countries in sub-saharan Africa, where the MDGs are most at risk of not being met. The IMF and World Bank should consider realistic measures for taking this commitment forward. Enhancing Poverty and Social Impact Assessments (PSIAs) As part of the reforms that led to the PRGF, there was an understanding that PSIA should be carried out for any major macro-economic or structural reforms likely to have a significant impact on the poor. However, IMF and World Bank efforts to address PSIA have been fairly limited so far. This is an area where, even though the World Bank should keep the leadership, collaboration between the two institutions needs to be strengthened considerably. The IMF has made some progress, but more needs to be done to ensure systematic PSIA in all PRGFs. The World Bank has initiated work
on a PSIA methodology and IDA will be mandated to undertake PSIA in the framework of analytical work underpinning IDA s Country Assistance Strategies in IDA13. Good PSIA is fundamental to more explicit discussion of policy choices and trade-offs, improvement of policy design in order to minimise the impact of reform on the poor, and, while avoiding any weakening of conditionality, properly define compensatory measures. Enhancing Public Expenditure Management (PEM) Good public expenditure management is a necessary condition for effective poverty reduction, and the IMF and World Bank are right to attach substantial importance to this issue. The IMF has made progress in monitoring PEM with many PRGF documents carrying a discussion on the current status of PEM with future steps mapped out for attaining appropriate standards. The IMF should extend this coverage to all PRGFs whose objectives rely heavily on PEM, and continue to ensure that PEM analysis features in Article IV surveillance. There are however too many PEM initiatives: these include the IMF s ROSC on Fiscal Transparency, its pilot Fiscal Management Review, the World Bank s Country Financial Accountability Assessments (CFAAs), Country Procurements Assessments (CPAs) and Public Expenditure Reviews (PERs) as well as joint work on tracking of poverty reducing spending in 25 HIPCs. There is clearly room for harmonisation of PEM areas and tools/diagnostics to avoid duplication, reduce unnecessary burdens on governments and improve cooperation between the IMF and the World Bank. Proposals (PRGF): The IMF should continue its work to identify more effectively the sources of economic growth, to promote budgets that are pro-poor and pro-growth, and give greater consideration of alternative policy choices for authorities The IMF should continue its important work to streamline conditionality to areas critical to the success of PRGF programmes. The IMF and World Bank should assess the net change in conditionality, with overall conditionality of the two institutions reviewed for its effectiveness and focus, and links between the PRSP and necessary conditionality (see separate note on IMF/WB cooperation). In addition, the IMF should step up its efforts to inform the donor community about its assessment of the macro-economic situation, possibly through appropriate guidelines to IMF staff. The PEM report should consider harmonisation, and models for enhanced Fund-Bank cooperation in order to address the multiplicity of initiatives. The IMF should stress the importance of finalising a Full PRSP especially towards those countries that already enjoyed debt relief on the basis of an Interim PRSP. The PRGF should be fully financed through donors contributions to the IMF PRGF-HIPC Trust Fund.
Proposals (HIPC): The forecasts underlying debt sustainability should be made on the basis of prudent and realistic assumptions about growth and exports. The IMF/World Bank review for the Annual Meetings should include an evaluation of the cases where a fundamental change in a country s economic circumstances that was due to an exogenous development has led to an unsustainable debt at completion point. While the results of the IMF/WB report on TA should not be anticipated, there seems to be a case for assessing whether TA should be available to HIPCs facing potentially litigation from vulture funds. The IMF and World Bank should prepare a comprehensive report on legal action brought against HIPCs by such funds and on options for HIPCs to obtain technical assistance. To manage the totality of conditionality a structural policy matrix should provide a comprehensive overview of every single structural reform, its purpose, its timing, and the institution primarily responsible for its monitoring. This instrument could contribute inter alia to operationalise the lead agency-concept. There should be action to tackle non-compliance of both official and private creditors; the IMF should identify countries participation in the initiative ahead of any debt rescheduling in the Paris Club, and include participation in reporting under Article IV. Donors and creditors need to respond to meet the identified financing gap; it could be explored whether part of this might be met through additional use of the European Development Fund. The Initiative should be fully financed through appropriate bilateral debt relief and donors contribution to the World Bank HIPC and IMF PRGF-HIPC Trust Funds.