Civil Society Newsletter
The countdown to the 2006 IMF-World Bank Annual Meetings in Singapore has started, and IMF staff are preparing policy papers and proposals to be discussed by the Fund's International Monetary and Financial Committee (IMFC) and the joint World Bank and IMF Development Committee. On the agenda are a number of proposals related to the IMF's Medium-Term Strategy. One of these—and of great interest to Civil Society Organizations (CSOs)—is the reform of IMF governance. In a July 31 keynote speech at the Washington, DC-based Center for Global Development, IMF Managing Director de Rato also laid out the strategy for the IMF's role in low-income countries, an article summarizes the speech and subsequent discussion. He also elaborated upon the issue of governance in a August 3 speech in Tokyo.
The Annual Meetings will be held on September 19-20 in the Suntec Singapore International Convention and Exhibition Centre, to which all accredited participants have access. Fund and Bank staff, along with CSOs, are organizing a civil society forum. More information can be found at http://www.worldbank.org/civilsociety. See also the related information in the Bulletin Board.
As reported in the February Civil Society Newsletter, the IMF delivered on its part of the Multilateral Debt Relief Initiative (MDRI) in January; 14 of the 20 countries that received MDRI debt relief from IMF, are in Africa. We asked our country teams in the African Department (AFR) to give us an update on how this money is being used. In an interview, AFR Director Abdoulaye Bio-Tchané talks about how the department contributes to the IMF's work in low-income countries.
In a July 31 speech at the Center for Global Development (CGD) in Washington, DC, IMF Managing Director Rodrigo de Rato reaffirmed the Fund's commitment to low-income countries. A year ago at the G-8 Gleneagles Summit, the international community pledged to support debt reduction and help low-income countries make progress toward the Millennium Development Goals (MDGs). But much more remains to be done, de Rato said in his speech. The IMF's fundamental task is to promote macroeconomic stability, which is a prerequisite for sustainable growth. Most elements of the Fund's recently unveiled Medium-Term Strategy—such as improving surveillance, enhancing crisis prevention, and correcting global imbalances—will benefit low-income countries just as they benefit developed and emerging market countries. But the Fund has also undertaken measures that specifically target low-income countries.
The Multilateral Debt Relief Initiative (MDRI) was a key step, de Rato said, with the Fund leading international financial institutions in January by moving to provide 100 percent debt relief on debt owed by 19 poor countries. But he also sounded a cautionary note: the challenge now is to avoid another debt crisis. Countries that have benefited from the MDRI must now guard against assuming unsustainable debt now that their debt has been forgiven. Grants and highly concessional loans are also a vital part of the equation. But de Rato stressed that donors need to provide early and predictable commitments of support to allow low-income countries to plan successfully. He also emphasized that aid must be used effectively. "The Fund can help by ensuring that macroeconomic frameworks are sound and that adequate public expenditure . . . systems are put in place, so that scaled-up resource flows reach their targets," he said.
The Fund is committed to making sure that low-income countries have the fiscal space they need to expand social programs, de Rato continued, especially in health and education. The Fund does not advocate cutting back on spending in these areas, even in times of fiscal restraint. Indeed, he observed, many Fund-supported programs include floors on poverty-related spending.
The Fund also has a role in other policy areas critical to economic growth, such as promoting trade reform and supporting sound, well-functioning financial systems. In all these tasks, de Rato stressed, the Fund must cooperate with the World Bank, the donor community, and—most importantly—its member countries.
In the debate that followed, CGD senior fellow Liliana Rojas-Suarez elicited the views of the three panelists. Kemal Dervis, Administrator of the United Nations Development Programme (UNDP) welcomed de Rato's words on governance, voice, and greater weight for poor countries in the IMF. But he thought that the IMF seemed less concerned with exchange rate appreciation in middle-income countries than in low-income countries, calling it a policy of "benign neglect" with regard to middle income countries. Ricardo Hausmann, Director of Harvard University's Center for International Development, noted that the Fund's strategy for low-income countries focused too much on poverty reduction and the MDGs and not enough on economic growth—what is needed is a growth strategy for low-income countries, in his view. Dennis de Tray, CGD's Vice President, and a former IMF and World Bank staff member, observed that the IMF has been very successful in crisis management and promoting macroeconomic stability. But he questioned whether the Fund could become open to learning and flexible enough at the country level to contribute significantly to long-term development. Such changes in the IMF's culture would take a long time, he said.
Summarizing the discussion, Rojas-Suarez noted that all seemed to agree that the IMF has a key role to play in low-income countries, but there were questions about whether the institution can adapt to the challenges of development.
An interview with Abdoulaye Bio-Tchané on prospects for Africa and the Fund's work in low-income countries
Abdoulaye Bio-Tchané has been Director of the IMF's African Department (AFR) since March 2002. He talks about his experience leading the African Department, the prospects for Africa, the Fund's evolving role in low-income countries, and whether there is any truth to criticisms that the IMF restricts fiscal space for critical spending on social sectors.
Q: Mr. Bio-Tchané, you have now been at the Fund for over four years. What have been some highlights of your experience as Director of AFR?
A: I have very much enjoyed these last four years, though they have been hectic and the pace has only continued to accelerate. The many country programs as well as various new initiatives—including the Medium-Term Strategy (MTS)—keep us very busy. Substantively, the implementation of the Multilateral Debt Relief Initiative (MDRI) this past year has certainly been a highlight. It has complemented our continuing efforts to move more countries to the Heavily Indebted Poor Countries (HIPC) Initiative completion and decision points. I am also pleased to be able to say that we have built better relations with our member countries.
The reorganization of the African Department in 2004 was also a highlight. The objective was to make AFR more responsive to our members, more effective in its work, and more proactive on issues related to sub-Saharan Africa. I believe we have achieved that objective—not just because we have reorganized but also because we received significant additional resources to help us tackle the additional work we have had to take on.
Q: The economic outlook for sub-Saharan Africa has been encouraging lately, with growth rates in the past two or three years above 5 percent. Yet the impact on poverty is still not clear. The Global Monitoring Report suggests that growth rates must be still higher if African countries are to reach the Millennium Development Goals (MDGs). What do you think is needed for Africa to make the leap from growth to poverty reduction? Do the higher growth rates in recent years indicate that the continent is starting to turn the corner?
A: I think it's fair to say that the continent may be starting to turn the corner. The growth rate for sub-Saharan Africa last year was the highest in the last 10 years; inflation in 2004 and into 2005 was the lowest in 25 years; fiscal deficits are coming down; and in general countries have more control of their current account deficits. These solid macro results are a good sign for the continent.
But these encouraging trends have only prevailed for two or three years—clearly not enough to make an impact on poverty. For that, the key is to help countries not only achieve higher growth rates but also manage to sustain their growth. That is the agenda that this department, working with other Fund departments, must promote. In so doing, we will need to be focused in our advice, particularly in helping countries to identify growth-critical sectors. For many countries, the priorities will be trade and financial sector reform, strengthening public expenditure monitoring systems, and creating an encouraging environment for the private sector. But because that is not necessarily true of all countries, we must be flexible and tailor our advice to the specific circumstances of each country.
Q: The MTS outlines a "more focused" role for the Fund in low-income countries. Some have interpreted this as a signal that the institution is trying to scale down its involvement through streamlining and leaving some work that is not part of the core mandate to other institutions. Do you think this is a fair characterization? Where is the Fund going on low-income country issues?
A: We have achieved a lot in the past year, and the MTS is a big step forward. But perhaps we haven't explained enough what the MTS envisages, and what the Fund has done in the last few years for low-income countries. In fact, we have received a clear mandate, from both the Board and the International Monetary and Financial Committee (IMFC), to do more—not less—to help low-income countries achieve the MDGs. Rather than scaling down, we have actually expanded our work in low-income countries. The MTS does call on staff to work more closely with other partners in areas that are not clearly in our domain, but it does not permit us to do less. It is a direction to us to be more focused and results-oriented in our areas of expertise.
In the last year we have added to our toolkit new instruments—the Policy Support Instrument and the Exogenous Shocks Facility—to address issues our low-income members are facing. We have also expanded our efforts in capacity-building; for instance, we are opening a third Africa Regional Technical Center (AFRITAC) in Libreville, Gabon. The IMF was also the first institution to deliver debt relief under the MDRI (and note that most of that debt relief went to sub-Saharan Africa).
Q: Last year, the outcome of the G-8 summit at Gleneagles prompted a great deal of attention to debt relief, which resulted in the MDRI. This year the headlines seem to have died down somewhat. What do you hope will come out of the Annual Meetings in Singapore with regard to low-income country issues?
A: I don't know exactly what will come out of the Annual Meetings, but I know what we'll be working on in the run-up to Singapore. Our continuous agenda is to help countries accelerate growth, reach the HIPC decision and completion points, and qualify for the MDRI. We have delivered on our share of the MDRI. We will continue working on implementing the MTS. The G-8 and other OECD countries have pledged resources; now it is time to see how much will be delivered.
So we are moving on some fronts, including the scaling-up exercise (see related story in the Civil Society Newsletter February 2006 on the macroeconomics of managing increased aid flows to developing countries), but we need to make better progress on others, such as doing more to help countries meet the MDGs. There are perhaps fewer headlines on Africa because last year was about commitment, and this year is about implementation of those commitments. But I do not think there is less attention. Indeed, in late June, Prime Minister Blair unveiled a new proposal for a committee to monitor the commitments of the G-8.
Q: The issue of quotas is at the top of the agenda. What are you hearing about this from African Governors?
A: The Managing Director met with African Governors in Madrid at the end of June to discuss this issue. Quotas have moved to the top of the Fund agenda since the last meeting of the IMFC, which gave the MD a mandate to take to Singapore a proposal to rebalance the quotas. As the Ministers stated, this has been a long-standing issue for Africa, which for the past 20 years has expressed concerns about its voice and representation in the institution, including at the Board and on the staff. The African ministers made it quite clear that they would not like to finish this exercise with even lower quotas and voice than currently.
Q: A criticism of the Fund in Africa is the issue of fiscal space and whether the Fund constrains spending on critical sectors like health and education. How do you respond to that?
A: It is clearly not the case that we restrict spending in health, education, and other critical sectors. We have to say that as loudly and clearly—and as often—as possible. We live in the real world where there are always constraints, but within those constraints, we have always discussed with the authorities how to protect spending in vulnerable sectors. Indeed, in most of our programs, we have managed to provide space for increased spending in those sectors.
It is simply not true that we prevent countries from accepting grant resources from foreign donors for spending in such areas as HIV/AIDS for fear that this will lead to Dutch disease. It is important to manage the impact of those resources—and that is what we help countries do—but we do not prevent them from taking them in the first place. The claim that we constrain fiscal space in critical sectors is not a fair criticism of our work.
Benin: The resources freed up by the MDRI will be used to step up priority poverty-reducing programs under the new Poverty Reduction Strategy Paper (PRSP) 2006-2009, which focuses on education, health, infrastructure, and agriculture. Although the timing and actual projects to be financed are being specified, it is expected that some spending will begin immediately. In particular, the equivalent of the savings on debt service that would have been due in 2006 (US$7.7 million) will be used to increase spending in health and education, in the cotton sector, as well as for funding small-holder projects in agriculture. The total relief from the Fund alone amounts to $56 million, equivalent to 1.3 percent of 2005 GDP.
Burkina Faso: The cancellation of the outstanding debt stock owed to the Fund will free up approximately US$83 million, equivalent to about 1.4 percent of GDP. The resulting debt service savings in 2006 are estimated at US$10.6 million, or 0.2% of GDP. The Fund program with Burkina Faso allows for additional spending on priority social programs or priority infrastructure if the country receives unexpected balance-of-payments support, including MDRI relief, up to an amount of US$45 million. MDRI debt relief is expected to supplement priority social programs, including education, health, and rural infrastructure. The additional expenditures will be included in the revised budget, and will be subject to the established reporting, audit, and oversight requirements.
Cameroon: The IMF delivered debt relief totaling US$255 million (1.4 percent of GDP) to Cameroon in April 2006. The IMF program with Cameroon allows the use of MDRI resources on programs that are consistent with the priorities underlying the poverty-reduction strategy, including in infrastructure, health, education, agriculture, and institution building. Spending from MDRI resources will be subject to established reporting and oversight requirements.
Ethiopia: Ethiopia's total MDRI relief from the IMF amounts to US$114 million. The Ethiopian authorities have included Birr 648 million (US$74 million, equivalent to 0.5 percent of GDP) freed up by the MDRI debt relief as revenues in the 2006/07 budget. Budgeted poverty-reducing spending, as defined by the government's poverty reduction strategy, is projected to increase by Birr 603 million (US$69 million). Ethiopia does not currently have an IMF-supported program.
Ghana: The Ghanaian authorities have received US$381 million freed under MDRI, which will go toward meeting the resource requirements for the U.N. Millennium Development Goals (MDGs). The relief has made Ghana's external debt much more sustainable. The government intends to use the resources to enhance the realization of its development objectives—primarily through increasing the current level of public investment in basic infrastructure and providing for key poverty sectors. These include improvement in energy and water; the rehabilitation of essential major highways and feeder roads in the main agricultural areas; education; health; and development of information and communication technology. The government will be using the equivalent of US$200 million from the IMF relief in 2006—with the remainder in 2007 and 2008—within its updated Growth Poverty Reduction Strategy (GPRS II). The relief from the World Bank's International Development Association (IDA) and the African Development Fund (AfDF) will be used for social spending (with an emphasis on education and health).
Madagascar: The Malagasy authorities have committed to allocate resources freed up by debt relief to priority spending ministries in line with the country's Poverty Reduction Strategy. The total amount of debt relief to be provided under the MDRI by the IMF, the IDA, and the AfDF will amount to approximately US$2.3 billion (42 percent of GDP), with the ratio of the net present value of debt to exports expected to decline to about 9 percent from about 31 percent in 2005. The IMF debt relief amounts to US$186 million, the IDA debt relief to US$1.78 billion, and the AfDF debt relief to US$327 million. Together, the MDRI relief will free about US$36 million for additional priority spending in 2006, and about US$70 million each year during the next twenty years. This additional poverty reducing expenditure will be included in a supplementary budget in 2006 and in the annual budget laws in subsequent years.
Mali: The Malian authorities have received debt relief totaling $108 million from the IMF. Total relief, including the expected contributions from the IDA and AfDF, is projected to amount to US$2 billion, equivalent to 35 percent of 2006 GDP. The relief will reduce Mali's external debt to levels well below sustainable debt thresholds over the medium term. The government intends to use the resources released to accelerate progress towards achieving the MDGs—primarily through raising public investment in basic infrastructure and providing for higher spending in health and education. For 2006, the authorities envisage an amendment to the budget for additional spending of US$24 million targeted at water supply and road improvements.
Mozambique: As a result of the MDRI, Mozambique's external public debt stock will fall significantly by end-2006, by US$1.6 billion in nominal terms (of which US$154 million will come from the IMF), and from 25 to 12 percent of GDP in NPV terms. The Mozambican authorities have decided to place the IMF MDRI funds in a special account at the Bank of Mozambique to be used by the government to finance "priority" pro-poor spending. It is envisaged that Mozambique will make use of the special MDRI account over a period of about 4 years, with all outlays subject to regular budgetary rules and procedures ensuring full transparency and accountability. The fiscal framework for 2006 includes additional pro-poor "priority" expenditure identified in the budget financed by MDRI resources from the Fund. The authorities' Medium-Term Fiscal Framework (MTFF) for 2007-09 has also been revised to phase in additional "priority" spending based on the profile of MDRI debt service relief from the Fund, AfDF, and IDA (estimated at around 0.5 percent of GDP per annum until 2015) in agreement with all stakeholders. A strengthening of public expenditure management systems should ensure a more effective use and monitoring of the MDRI resources.
Niger: Niger has decided to set aside the resources freed by MDRI from the Fund (US$86 million) for priority development programs. Accordingly, in 2006, the US$ 4.5 million will be used to expand priority programs in education, health, and rural sector development. Beyond 2006, the authorities are preparing Medium-Term Expenditure Frameworks (MTEFs) for these development programs. The MTEFs are expected to be completed by late 2006 and will be incorporated into Niger's budgets for 2007 and beyond.
Rwanda: MDRI relief (of which the Fund's relief amounts to about 3.3 percent of GDP or US$78 million) is being gradually incorporated into the Fund program. Food imports and spending for the Lake Kivu methane gas project (to generate electricity) broadly correspond to the resources freed-up by the MDRI relief in 2006 (0.6 percent of GDP). Depending on absorptive constraints and the domestic demand impact of fiscal policies, further priority spending could be accommodated in the context of the first Poverty Reduction and Growth Facility (PRGF) review. Over the next three years, annual MDRI flow relief amounts to about 0.5 percent of GDP.
Senegal: The Senegalese authorities intend to use the additional resources freed by MDRI from the Fund (US$140 million, or 1.7 percent of GDP) for priority needs in the social services sector. These needs have been identified in the new Poverty Reduction Strategy Paper for 2006-10, which was recently validated by the authorities. A supplementary budget will be presented to Parliament soon to authorize additional allocations for specific projects in these sectors during 2006. MDRI savings from the Fund debt relief will amount to US$38 million in 2006 (0.5 percent of GDP).
Tanzania: The Tanzanian authorities have decided to pass on the resources (about US$338 million) freed up by MDRI relief from the Fund to finance the foreign exchange needs of high priority pro-poor social outlays and growth-critical projects, thus avoiding any impact on domestic liquidity. These outlays will focus primarily on addressing the aftermath of a prolonged drought and on critical energy needs. Funds will be used to help pay for food imports to provide free or heavily subsidized food to some 3.7 million food-insecure citizens. It will also be used for the purchase or lease of new power generation capacity, thus alleviating power rationing, which has affected mostly households and small businesses, and has shifted the government's energy policy focus away from rural electrification towards crisis management. All outlays will be subject to regular procurement and financial management laws and regulations.
Uganda: Uganda has received debt relief from the IMF in the amount of US$126 million. New MDRI-related spending will be governed by poverty objectives (as outlined in Uganda's Poverty Eradication Action Plan) and macroeconomic stability. In this light, and given Uganda's acute electricity shortage, the government is considering using the resources to help meet Uganda's urgent electricity needs.
Zambia: The resources freed up by the MDRI will be used to step up priority poverty reducing programs under the National Development Plan (NDP) 2006-2010. Given the NDP's focus on agriculture and infrastructure, the MDRI savings are likely to be allocated to these areas, but for the most part the timing and actual projects to be financed have yet to be specified. That said, some spending will begin immediately: in 2006 the equivalent of the savings on debt service that would have been due (US$18 million) will be used to increase spending on agricultural projects devoted to small-holder irrigation and livestock disease control. The total relief from the Fund alone amounts to US$581 million, equivalent to 8 percent of 2005 GDP.
PRSP process starts to take hold in Moldova