Public Information Notice: IMF Executive Board Reviews the Role of the Fund in Low-Income Countries Over the Medium Term
September 10, 2003
|Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.|
On August 27, 2003, the Executive Board of the International Monetary Fund (IMF) held discussions on the Role of the Fund in Low-Income Countries over the Medium-Term and Fund Assistance for Countries Facing Exogenous Shocks.
Many low-income countries have made significant progress towards macroeconomic stability, and their rate of economic growth has increased, although these achievements remain fragile. A prolonged period of more rapid growth will be necessary for them to make progress towards the Millennium Development Goals (MDGs). The main challenge in low-income countries thus increasingly is one of sustaining high rates of growth, but many of the areas of policy reform necessary for this fall outside the Fund's core areas. These changing circumstances facing the Fund's low-income members suggest the need for evolution in the Fund's role in these countries over the medium term.
The first paper, Role of the Fund in Low-Income Members Over the Medium-Term—Issues Paper for Discussion, argues that the Fund needs to remain engaged in assisting low-income countries with the macroeconomic policy and institution-building challenges they face over the long term—support that should fully embrace the country-driven and participatory Poverty Reduction Strategy Paper (PRSP) approach. This has a number of implications for the Fund's work, including the need for evolution in program design to ensure macroeconomic frameworks are geared toward higher pro-poor growth rates, and for the Fund to work with other development partners to ensure that reforms in the non-macroeconomic policy areas proceed apace.
The paper develops a stylized typology of the economic circumstances of low-income countries to gauge the adequacy of Fund instruments. Four types of countries are identified: post-conflict, early stabilizers, mature stabilizers, and pre-emerging market countries:
- The paper notes that for the early and mature stabilizers, the PRGF can provide good support, although the content of programs will vary considerably across countries. In particular, in the early stabilizers, with macroeconomic conditions likely still very fragile, the Fund can be expected to play a major role in both financing and giving policy advice. In mature stabilizers, the challenges are more likely to be of an institution-building nature, and the paper argues for a more central role for the World Bank and other development partners.
- Evolution in the Fund's existing instruments could be considered in three areas: (i) for post-conflict countries, Emergency Post-Conflict Assistance can provide resources for immediate balance of payments needs, but has not always provided a sufficiently long bridge to an environment where a PRGF-supported program can be envisaged; (ii) the Fund also does not have instruments to facilitate the transition from a PRGF arrangement to the more standard surveillance relationship in circumstances when donors might still want the Fund to play a "gatekeeper" role; and (iii) the Fund also needs to take a more systematic approach to providing policy advice and financial assistance for low-income countries dealing with exogenous shocks.
The paper explores the circumstances in which strong performing low-income countries can move to a point where a sustained program relationship with the Fund is no longer necessary. It outlines a number of considerations to help identify this point, ranging from procedural approaches (such as the number of Fund arrangements that a country has had) to economic criteria (including fiscal and debt sustainability considerations). Greater selectivity in the circumstances in which the Fund should enter into a program relationship is also discussed.
The role of Fund financing in low-income countries is also discussed in the paper. The paper noted that the Fund has neither the capacity nor mandate to contribute to the long-term flow of resources needed by its low-income members to meet the MDGs. Instead, the Fund should provide temporary financing so as to ease the burden of adjustment while macroeconomic imbalances are being addressed. The Fund has a critical role to play in support of poverty reduction and growth in low-income countries in helping ensure that conditions are in place for development assistance to be mobilized and deployed more productively, to complement domestic resources, and to ensure long-term sustainability of the growth path.
The second paper, Fund Assistance for Countries Facing Exogenous Shocks, notes that low-income countries are particularly vulnerable to exogenous shocks, which can have a significant negative impact on growth, macroeconomic stability, debt sustainability, and poverty. But the impact of shocks can be partly mitigated through better preparation for shocks and better policy responses, supported importantly by timely receipt of external financial assistance. External financial assistance in these cases is most appropriately provided as grants to avoid a further build up of debt, particularly for the poorest countries. The paper concludes that:
- The Fund has an important role in assisting countries with macroeconomic policy advice on how to prepare better for shocks and respond to them.
- It can alert donors when a country may have unaddressed needs for financing, particularly in the case of "silent crises," such as commodity price shocks.
- While grant assistance is generally more appropriate, the Fund can provide quick-disbursing balance of payments assistance when donor assistance is not immediately forthcoming. Options for how Fund assistance can be improved or adapted to support member countries more effectively are explored.
Executive Board Assessment
I wish to thank Executive Directors for the constructive and stimulating exchange of views on the role of the IMF in low-income countries and on Fund assistance to countries facing exogenous shocks. The papers discussed today provide an important opportunity to assess how the Fund can best support low-income members and contribute to the intensified international effort towards the achievement of the Millennium Development Goals (MDGs). Directors agreed that the Fund would benefit from publication and wider discussion of these papers. They have affirmed that the Fund needs to remain engaged in assisting low-income countries over the long term. They noted that the objective of Fund policy advice and, temporary balance of payments support should be to facilitate the transition of low-income countries to market-based economies, such that they can reduce their dependence on official development assistance and exceptional financing and rely predominantly on private sources of financing. For most low-income members, this is a long-term objective. Directors agreed that during this transition, the Fund will need to intensify its support through policy advice, technical assistance, capacity building and, when warranted, temporary financial assistance. Directors underscored that the country-driven and participatory Poverty Reduction Strategy Paper (PRSP) approach and the Monterrey Consensus, based on the pursuit of sound policies and good governance matched by better and stronger international support, provide the appropriate framework for the Fund's engagement in its low-income member countries.
Role of The Fund in Low-Income Members
Directors noted that there has been encouraging progress in recent years in many low-income countries in achieving a stronger macroeconomic foundation for high growth rates. Nonetheless, these achievements remain fragile, and a sustained period of more rapid growth will be needed for continued progress toward the MDGs. With macroeconomic imbalances receding, the dominant challenge in many low-income countries is to sustain high rates of growth and reduce poverty. Programs need to adapt to help countries address this challenge. Directors welcomed in this regard the staff's intention to undertake a review of program design in low-income countries.
Directors discussed the broad principles outlined in the paper to guide the Fund's work in low-income members, noting the importance of consistency with the Monterrey Consensus call for development partners to specialize in their core areas of expertise. Directors agreed that the role of the Fund in helping low-income members should be primarily directed to: (i) establishing macroeconomic frameworks that can support high sustained growth and poverty reduction; (ii) identifying and helping countries manage sources of macroeconomic risks and vulnerabilities; and (iii) strengthening institutions and policies that underpin sound macroeconomic management—including the management of public financial resources as well as exchange, monetary, and financial systems through capacity building and technical advice. Directors acknowledged that macroeconomic stability and related reforms to macroeconomic institutions are a necessary but not sufficient condition for sustained high growth and progress towards the MDGs. Beyond macroeconomic stability, it is also important to build institutions that sustain property rights and facilitate their transfer, curb corruption, and provide oversight over economic activity, as well as providing social and physical infrastructure to enable the private sector to flourish. Directors highlighted the need for close collaboration in these areas with other development partners, in particular the World Bank, to ensure that low-income countries receive the advice and assistance they need for greater progress towards the MDGs.
Directors agreed that the PRGF should remain the principal tool of assistance to low-income countries. A number of Directors saw analytical merit in the typology of economic circumstances of low-income members developed in the paper to gauge the adequacy of Fund instruments, while others questioned its practical contribution. Directors stressed that, given the heterogeneous nature of low-income economies, the precise nature and duration of Fund support will need to be determined on a case-by-case basis. There should not be a presumption that any country will be a continuous user of Fund resources and, furthermore, the principle of equality of treatment should be preserved.
Directors acknowledged the need for further consideration of the Fund's existing instruments in a number of areas. Most Directors were of the view that for post-conflict countries, Emergency Post-Conflict Assistance (EPCA) may not always provide a sufficiently long bridge to an environment where a PRGF-supported program can be envisaged. A number of Directors called for greater use of the flexibility in EPCA, including the provision of longer-duration assistance combined with tapered access within the current guidelines. A few Directors called for changing repurchase terms to reflect those of the PRGF. Most Directors did not support the use of the PRGF with less stringent conditionalities, citing concerns about equal treatment and the integrity of the instrument.
With progress towards macroeconomic stability and the implementation of the enhanced HIPC Initiative in many low-income countries, Directors saw the need for instruments that would help members with a sustained record of macroeconomic policies and institutional improvements to move away from sustained PRGF-supported program engagement. However, many Directors warned against graduating from Fund support too quickly. Some considered that graduation should be done on a case-by-case basis without use of guidelines, while a few others saw merit in operationalizing a set of criteria for defining when a country should exit from the use of Fund resources. As to an exit strategy, suggestions put forward by Directors included progressively reducing access under the PRGF or the use of precautionary arrangements, possibly with low access. Beyond that, many Directors also expressed general interest in considering ways to adapt existing instruments or to create new instruments—or establishing some kind of framework—to provide signaling to donors and markets of the Fund's views regarding the appropriateness of macroeconomic policies, but without involving Fund financing. Directors asked the staff to prepare a paper on how to facilitate low-income members' transition to a point where they can move beyond Fund financial support, while at the same time allowing the Fund to provide them with close support in implementing their PRSPs and addressing their vulnerabilities to shocks.
Most Directors saw the need for greater selectivity in the circumstances in which the Fund provides financial support. Article IV staff reports and proposals for successor arrangements should trigger a fresh look at the nature of the Fund's involvement with the member, its reform effort under past programs, and the need for further financial support. Directors noted that, beyond the member's balance of payments need, two broad considerations should have a bearing on the Fund's decision to support a member's program: the member's capacity to implement the necessary reforms and, thus, repay the Fund; and the member's commitment to the necessary reforms.
Directors agreed that the Fund needs to continue to have the capacity to provide financing to low-income members on terms more concessional than those that apply to resources from the General Resources Account (GRA). Most Directors supported the broad considerations on the role of Fund financing outlined in the paper. Directors noted that the Fund has neither the capacity nor the mandate to provide long-term development assistance. Rather, the Fund's role is primarily in the provision of financial support to ease the burden of adjustment while macroeconomic imbalances are being addressed. A number of Directors expressed concern that there would be a halving in annual commitments with the self-sustained PRGF starting in 2006, and considered that more resources would need to be mobilized. Some other Directors stressed that the financial framework of the PRGF would be adequate in light of the need to increase selectivity and effectiveness of PRGF-supported programs and the process of low-income country graduation. Directors asked for a paper that would consider how the Fund's financing can best be structured to support its low-income members, in light of likely needs and the changing circumstances facing them.
Improving assistance to countries in preparing for and dealing with exogenous shocks
Directors expressed concern about the impact of exogenous shocks on low-income countries' efforts to strengthen growth and reduce poverty. They noted that low-income countries are particularly vulnerable to exogenous shocks, such as natural disasters, commodity price changes, and conflicts and crises in neighboring countries, which can also have significant negative impacts on macroeconomic stability and debt sustainability. Directors agreed that most negative shocks require a policy response in the country affected. They noted that determining the appropriate scale of adjustment is difficult because of uncertainty about the duration of a particular shock. Directors agreed that the timely provision of external assistance after a shock can be very effective in terms of boosting medium-term growth prospects, and avoiding the diversion of resources from development objectives. However, in their view, external financial assistance following a shock is most appropriately provided as grants, particularly for the poorest countries, to avoid a further build up of debt.
Regardless of the type of shock, Directors considered that the Fund should intensify its assistance to low-income members to prepare better for exogenous shocks, with the objective of minimizing their impact. Directors saw the need for both Article IV discussions and Fund-supported programs to take routinely into account the probability of shocks and to consider what type of macroeconomic policies would better prepare authorities for that eventuality. To this end, they highlighted the importance of flexible exchange rates, prudent debt management, sufficient reserves, institutional capacity building, economic diversification, and social safety nets.
Directors observed that the Fund also has an important role to play in alerting donors when a country may have unaddressed needs for financing, particularly in the case of "silent crises" such as commodity price shocks. Some Directors noted that the Fund is in the unique position of being able to provide quick-disbursing balance of payments assistance when there is an immediate need and donor assistance is not immediately forthcoming, although a few Directors felt that Fund resources should not be used simply because they are fast-disbursing.
Many Directors considered that there is scope to make the Fund's financing response in the case of shocks more consistent, and that there is merit in considering whether the terms of financing could be made more appropriate for low-income countries. To this end, they requested that the staff devise draft guidelines for augmentation of PRGF arrangements, and examine other options for Fund assistance in response to shocks experienced by PRGF-eligible members. These would be considered by the Board in a subsequent discussion. Directors acknowledged that options would need to carefully consider any moral hazard implications of providing these types of financing on different terms. A few noted that the role of the CFF could also be included, but it was agreed that consideration of this facility would be undertaken in the context of the forthcoming CFF review.