How the IMF Helps Poor Countries
The IMF provides low-income countries with policy advice, technical assistance, and financial support. Low-income countries receive more than half of the technical assistance provided by the Fund, and financial support is extended at low interest rates and over relatively long time horizons. Low-income countries with high external debt burdens are also eligible for debt relief. |
What can be done to reduce poverty?
Despite progress in recent decades, the extreme poverty prevalent in low-income countries is a critical problem facing the global community. At present, more than a billion people are living on less than $1 a day. More than three-quarters of a billion people are malnourished—about a fifth of them children. One-hundred and sixteen of every 1000 children born in low-income countries die before reaching the age of five, the majority from malnutrition or disease that is readily preventable.
The Millennium Development Goals (MDGs) set by the United Nations are centered on halving poverty between 1990 and 2015. There is little dispute that a sustained, rapid rate of growth in average per capita incomes is essential for meaningful poverty reduction. The factors that have been shown to promote such growth include openness to trade, sound economic policies, strong institutions and legal frameworks, and good governance. Accordingly, in the March 2002 Monterrey Consensus, the international community adopted a two-pillar strategy for achieving the MDGs. The first is the pursuit of sound policies and good governance by the low-income countries themselves. The second is larger and more effective international support, including official development assistance and opening markets to developing country exports.
The role of the IMF
The IMF is helping low-income countries make progress toward the MDGs and contributing to the approach embodied in the Monterrey Consensus through each of the Fund's three key functions—lending, technical assistance, and surveillance.
Lending. The IMF provides financial assistance to low-income countries experiencing protracted balance of payments problems through its Poverty Reduction and Growth Facility (PRGF) and, for temporary needs arising from exogenous shocks, through the Exogenous Shocks Facility (ESF). The interest rate on PRGF and ESF loans is concessional (only 0.5 percent), and loans are repaid over a period of 10 years (with 5½ years' grace).In addition, the IMF provides Emergency Assistance for natural disasters and to post-conflict countries. The assistance is repaid over 5 years (with 3¼ years' grace) and donor contributions are used to subsidize the interest rate to 0.5 percent for low-income countries.
PRGF and ESF lending programs are based on Poverty Reduction Strategy Papers (PRSP). A PRSP is prepared by the government of a low-income country, in concert with civil society and development partners such as the IMF and World Bank, to describe the policies that will be employed to promote growth and reduce poverty in the country. In addition to economic policies, PRSPs typically cover structural and social policies that are needed to improve health and education, safeguard the environment, and combat HIV/AIDS, malaria, and other diseases. The IMF sees the PRSP approach as a key framework for implementing the Monterrey Consensus, and is working to ensure better alignment of PRGF lending programs with PRSPs.
Some low-income countries are eligible for the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). The joint IMF-World Bank HIPC Initiative entails coordinated action by the international financial community, including multilateral organizations and governments, to reduce to sustainable levels the external debt burdens of heavily indebted poor countries. The MDRI adds full debt relief by three multilateral institutions—the IMF, the International Development Association (IDA) of the World Bank, the Inter-American Development Bank (IADB), and the African Development Fund (AfDF). The HIPCs that have already obtained debt service relief are spending much more on social services than on debt service—on average four times as much—and have shown a marked increase in the share of health and education in the budgets under their PRGF programs.
The Policy Support Instrument offers support for low-income countries that do not want or do not need financial assistance from the IMF but want its advice, monitoring, and endorsement of their economic policies. It is a vehicle intended to help them design effective economic programs and provide signaling to donors, the multilateral development banks, and markets.
Technical assistance. Adequate policy-making capacity is critical for sustainable development and growth. The IMF provides assistance and training—generally free of charge—to help member countries strengthen the capacity of their institutions and officials to manage economic and financial policies. In recent years, the Fund has reinforced its efforts in low-income countries by establishing regional technical assistance centers in the Pacific, the Caribbean, East, West, and Central Africa, and in the Middle East.
Surveillance. Low-income countries benefit from the full range of policy advice that is provided regularly to all 185 members through IMF surveillance. The objectives of this advice are to help countries: i) establish economic frameworks that can support sustained high growth and poverty reduction; ii) identify and manage sources of macroeconomic risks and vulnerabilities, including debt-reltated vulnerabilities; and iii) strengthen institutions and policies that underpin sound macroeconomic management. Low-income countries also benefit from the Fund's surveillance over the policies of other countries and the international monetary system, which promotes global growth and economic stability. The IMF also uses the surveillance process to encourage developed countries to live up to their pledges toward the MDGs.
Progress in implementing the policies and actions needed to achieve the MDGs and related outcomes is assessed annually in the Global Monitoring Report, a publication produced jointly by the IMF and the World Bank, in collaboration with other international partners.