Public Information Notice: IMF Executive Board Concludes Discussion on The Role of the Fund in Low-Income Countries
September 26, 2008
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September 26, 2008
On July 23, 2008, the Executive Board of the International Monetary Fund (IMF) discussed the staff paper on The Role of the Fund in Low-Income Countries.
The environment affecting low-income countries (LICs) and the Fund's role in these countries have evolved considerably since the establishment of the Poverty Reduction and Growth Facility (PRGF), Poverty Reduction Strategy Paper (PRSP) process, and Enhanced Heavily Indebted Poor Countries (HIPC) Initiatives in the late 1990s. Notwithstanding recent pressures created by high food and fuel prices, macroeconomic policies and performance in LICs improved markedly during this period, with many countries benefiting from the highest growth and lowest inflation rates in decades. The Fund provided an important contribution to these gains as it refined its LIC involvement, placing a greater emphasis on the macroeconomic foundations of growth and poverty reduction. Greater flexibility was introduced on budget and inflation targets, the full use of aid was encouraged, and debt sustainability became a central tenet of good macroeconomic management, in light of large-scale debt relief. The instruments to assist LICs were also modified and new ones created, including the Policy Support Instrument (PSI) and the Debt Sustainability Framework (DSF).
Guided by recent experience, the staff paper seeks to articulate a mission statement for the Fund with respect to low-income countries, namely, to help this group of countries achieve the macroeconomic and financial stability needed to raise growth and poverty reduction. By putting in place macroeconomic policies and institutions conducive to economic stability and strong, sustained growth, the Fund plays a vital part in ensuring the preconditions for effective poverty reduction. As with other members, the Fund delivers its assistance through policy advice, capacity building and, where appropriate, financial assistance. Its work is tailored to countries' evolving needs, and supportive of countries' own development objectives.
In its work in LICs, the Fund brings to bear a unique set of competencies in various macroeconomic areas, including fiscal, monetary, financial, and exchange rate policies, and expertise in supporting economic institutions and closely related structural policies. The Fund offers an integrated macroeconomic and financial perspective, helping countries set appropriate short-term and long-term objectives. Moreover, the Fund is positioned to offer insights, best practices, and international and cross-country experience on how to achieve macroeconomic targets while ensuring favorable impacts on growth and poverty reduction. Finally, in cases of balance of payments support, Fund financing can give countries time to implement orderly and coherent adjustment policies and help catalyze donor support on appropriately concessional terms.
In recognition of the critical nature of macroeconomic policies in providing the underpinnings for sustained growth and poverty reduction, the staff paper emphasizes that the Fund needs to remain closely engaged with its low-income member countries. Fund involvement not only seeks to help LICs secure and maintain macroeconomic stability, but also to strengthen their resilience to shocks and accelerate their progress to middle-income status, including through a greater integration with the global economy.
The paper also recognizes that it will be important to address the changing needs of LIC members with on-going refinements in the Fund's tool kit. Policy advice will need to be strengthened through the greater use of cross-country and regional perspectives, the use of new surveillance tools, and planned reviews to improve the PSI. Capacity building will increase its value-added by focusing on areas where the Fund has the greatest impact. Fund lending facilities (such as those for fragile states and shocks assistance) will need to be modified to be attractive to potential users.
Given the large number of development partners actively assisting LICs, effective cooperation and communication with development partners and other stakeholders will also be indispensable. In this context, strengthened communications on its LIC policies can help the Fund build greater understanding and support, and be responsive to the views of others engaged with LICs.
Executive Board Assessment
This has been a useful and constructive discussion. It has allowed the Board to take stock of the valuable contribution that the Fund has made to the progress of many low-income countries (LICs) toward macroeconomic and financial stability, which is central to sustained growth and poverty reduction. The discussion has reconfirmed a broadly shared vision on the need for a continued close Fund engagement with its low-income member countries that is tailored to their changing needs and emerging new challenges. The Fund's work on LICs will be shaped by its broader refocusing, and build on close collaboration with partner institutions. Against this background, it is important that the Fund's LIC-related objectives and responsibilities are well-articulated, consistent, and understood both within and outside the institution. Directors looked forward to the role the Low-Income Country Unit that is being set up will play in this regard.
On progress made over the past decade, Directors welcomed the substantial improvements in macroeconomic policies and performance in many LICs, and the gains made toward sustained growth and poverty reduction. Refinements and increased flexibility in the Fund's approach in several key areas have played their part in facilitating these gains. Fund policy advice and program design have entailed greater flexibility in inflation and fiscal targets. The prudent accommodation of larger fiscal and external deficits in the context of scaled-up aid and debt relief—in which the Fund has also played a central role—have allowed increased spending in priority areas while placing a greater emphasis on debt sustainability. Directors underscored that supporting LICs in ensuring debt sustainability and avoiding a new unsustainable debt build-up is a cornerstone of the Fund's work. Shifting conditionality to measures critical for macroeconomic stability has helped focus the Fund's work on its core competences and improve country ownership.
Most Directors considered that the proposed mission statement outlines useful guiding principles for the Fund's engagement in LICs. The statement affirms that the Fund aims to help LICs achieve the macroeconomic and financial stability needed to raise sustainable growth and have a durable effect on poverty reduction. While recognizing that the Fund's mandate is similar in all member countries, many Directors suggested that the mission statement should better reflect the fact that at times different instruments and approaches are required when working with LICs given the particular characteristics of this group of countries. Many Directors considered that the objective of achieving strong, sustained growth should be an integral part of the policies which the Fund is helping LICs put in place, while others felt that the emphasis should rather be on stability as the platform upon which sustainable growth can be achieved. Directors agreed that the main channels for the Fund's engagement will continue to be macroeconomic policy advice, capacity-building assistance, and concessional balance of payments support. On the latter, some Directors noted that the Fund is not a donor agency, and that its financing is relatively less concessional. A few Directors reiterated the view that LICs should not have to pay for capacity building assistance. As in other member countries, the Fund will focus on its core areas of expertise, namely, macroeconomic stabilization and fiscal, monetary, financial, and exchange rate policies, and the underlying institutions and closely related structural policies. The Fund's work will draw on country-owned development strategies, and its advice and engagement will be tailored to the specific characteristics of countries. We will need to reflect further on how to take forward the issuance of a mission statement in light of the comments as well as suggestions for further refinement that were made today.
Directors underscored that effective collaboration with the international community will help ensure that the Fund's work contributes to the attainment of the Millennium Development Goals. The Fund's refocusing has heightened the importance of further improvements, in particular in Fund-Bank collaboration. Directors also welcomed the plans to strengthen communication on the Fund's LIC policies to foster two-way communication and ensure that the rhetoric, policy, and practice of the Fund's LIC activities are fully aligned.
Directors welcomed the planned reviews of the Fund's instruments to ensure that they continue to meet the evolving needs and priorities of LICs. The immediate priority will be to modify the Exogenous Shocks Facility (ESF), which has so far not been used, to make it a more effective instrument in helping LICs cope with shocks, including those arising from food and fuel price increases. Today's discussion has raised a number of complex issues, on which we need to reflect further as we seek to adapt our instruments. This will involve careful examination of the merits of increasing the flexibility of the PRGF as the primary instrument for Fund financial engagement with LICs facing protracted balance-of-payments problems, including with respect to repayment schedules and the possibility of creating a precautionary window. The review of Fund facilities will also address proposals for increasing the fungibility of concessional resources across the Fund's toolkit, and for a possible Stand-By-type instrument to support short-term stabilization in LICs. Most Directors did not see a role for Fund financing to offset shortfalls in aid.
Overall, Directors agreed that the broad principles and objectives outlined in the staff paper provide a useful overarching framework for considering modifications and improvements to Fund instruments. They also called for sustained efforts to refocus and strengthen work practices to ensure continued high-quality support to LICs within the framework of the Medium-Term Budget. Directors looked forward to the follow-up paper, which will lay out how the Fund's work on LICs will be advanced, taking into account the views and suggestions expressed at today's discussion.