Transcript of a Conference Call with Civil Society Organizations on IMF Papers on Aid Flows to Low-Income CountriesWith Mark Plant, Deputy Director of the Policy Development and Review Department;
Sanjeev Gupta, Senior Advisor in the Fiscal Affairs Department; and
Benedicte Christensen, Deputy Director of the African Department, IMF
Thursday, August 2, 2007
MS. BISPING: Good morning everyone and good afternoon to those in Europe and elsewhere. Welcome to this conference call on two sets of IMF policy papers. The title of the first one is Aid Inflows—The Role of the Fund and Operational Issues for Program Design and the second Fiscal Policy Response to Scaled-Up Aid.
My name is Jenny Bisping of the IMF External Relations. I am joined by Mark Plant, Deputy Director of the Policy Development and Review Department; Sanjeev Gupta, Senior Advisor in the Fiscal Affairs Department; and Benedicte Christensen, Deputy Director of the African Department, who will all make short opening remarks. We will then open the floor to questions and comments. This conference call is on the record. We would like to encourage all participants to ask questions during this call. Mark?
MR. PLANT: Thank you, Jenny, and good morning to everyone.
In the beginning of July, as you know, the IMF Executive Board looked at a set of papers that looked at various issues on aid flows, and they are complicated papers. You should have looked through them. I would like to make three points that I think are central to the papers.
First, the Board reaffirmed that in low-income countries, the Fund needs to work with these countries to create and maintain an enabling environment for the full use of aid. In that context, Fund-supported programs should be designed to support the full use of aid, and this is in what we call a "spend and absorb" context, which I will talk about in just a second. Again, this reaffirmation was quite important for us because it underscores the commitment of the Fund to work with low-income countries, with donors and with others to ensure that the aid—that we hope will be coming forward in support of the Millennium Development Goals-gets used and gets used well. There are many senses in which aid can be used well and not used well. From a macroeconomic standpoint, which is really where the Fund's expertise is, we focus on these concepts of spend and absorb, and these are complicated concepts that often times the words are used in different senses. So I just wanted to spend a couple seconds on how we used these particular words.
When we talk about spending, we are talking about the government making room for increased spending as a result of the inflow of aid, so that the government budget expenditures on health and education, and whatever the aid is going to be used for, increases. That is a fairly straightforward concept that I think we all understand. The one that is a little bit harder to understand is this notion of absorption, and this is where people use absorption in many different ways. In the macroeconomic sense, what we are talking about when we say absorption is that the aid effects a transfer of real resources, real goods and services from abroad into the country. That's the way aid can be helpful, when resources move from abroad into the country. Now that may be through the direct spending by the government on imported goods and services. They could import things, for instance, drugs to combat malaria or HIV/AIDS or it could be that the foreign exchange is used through the private sector, so the private sector then increases its absorption of foreign resources. So from a macroeconomic standpoint, what this means is that the government and the Central Bank have to work very carefully together to understand how the dollars or euros that are being sent to the government are used to import goods and services. And so, when we talk about absorption, this is what we mean in these papers.
The second point that is very important for those of us working in low-income countries is that as the Fund designs their programs and does projections of aid, what they should do is give the best estimate of what aid is available going forward. We found in doing these papers that in the past there was a tendency to err on the conservative side. If there was no aid committed, often times the budget going forward was made to look smaller or was made to look like there was going to be a budget gap. And so, the paper reaffirms that what we should do. What mission chiefs should do, is go out, talk to donors, talk to governments and use the best estimate of what aid might be going forward. And when those best estimates don't come true, when there is a deviation between what we project and what actually happens, the adjustors should work in a way to favor continuity of spending, so that just because there is a shortfall in aid doesn't mean that the government should cut its spending back. This is quite important. It shows that there is, an attitude toward getting good estimates, helping the government understand what is going to be there and then using it well, especially in the event of shocks, and Sanjeev will talk a bit more about this.
The third point that I think comes out clearly in the paper—and it goes back to this absorption notion—is that there are cases where the amount of aid absorbed is less than the amount of aid received. What does this mean? It means that the dollars that come in aren't necessarily spent to import goods and services, and so they go into reserves. In some cases, this is a conscious decision on the part of the government and the Fund to build reserves because we think there is a difficulty in the reserves position. But we have seen in some cases that, in fact, the country has absorbed less than was allowed in the Fund-supported program, and this often reflects a problem on what we call the microeconomic side, that there are not enough projects to use the money well, quickly. There are concerns that sometimes there is disconnect between the Central Bank and the government authorities as to how and when aid is going to be used. So it underlines the importance of the Central Bank, the Ministry of Finance, and the donors working together to make sure, as aid comes in, it can be fully absorbed in the macroeconomic sense and the microeconomic sense. Let me stop there and turn the microphone to Sanjeev. Thanks.
MR. GUPTA: Thank you, Mark. I will supplement what Mark said by focusing on the papers dealing with fiscal issues. There are three fiscal papers, and there are many messages that fall out of those papers, but I will focus just on three key messages for the sake of getting the discussion rolling.
The first message that I would focus on is the importance of medium-term frameworks and expenditure smoothing. Let me explain what I mean by that. The key challenge for low-income countries when aid is increasing is to ensure that the spending helps to achieve the MDGs and macro stability is maintained as spending is taking place. Because spending programs are implemented over several years, countries have to take a longer term view of spending needs and to take into account the availability of resources, both domestic and external sources, in formulating their fiscal policy or formulating their budget policy. Taking a longer term horizon helps prevent spending from rising to unsustainable levels due to temporary aid surges and compressing spending when there are aid shortfalls.
Given the volatility and uncertainty of aid flows, one objective is to ensure that expenditures are smoothened over a period of time so that programs are adequately funded. Under this approach, countries will respond symmetrically to aid increases and decreases. When aid is above projections or domestic constraints prevent full spending of aid, part of the aid flows will be saved to be spent in the future. When aid is below projections, this approach will allow countries to continue financing spending programs by drawing down reserves or through recourse to domestic financing subject to macroeconomic considerations.
Effective use of aid flows may require some aid be saved temporarily, but there are limits to how much a country can save. Donors have an interest in seeing that resources they transfer are, in fact, used for intended purposes, and there are domestic political pressures in aid-receiving countries to spend aid to improve economic and social outcomes. Ultimately, as Mark said, it is important for the development partners to build capacity of aid-receiving countries to absorb as much aid as possible.
The second message, which I am sure you are all interested in, relates to wage bill ceilings. As you know, wage bill ceilings have been used in a number of Fund-supported programs, especially when wage dynamics threaten macroeconomic stability and when a country's budgetary and other control systems are weak. Although seen as short-term measures, they have tended to persist and have not always been efficient in achieving their intended objectives. What is relevant to note here is that their incidence in Fund-supported programs is now declining. At present, eight programs have some kind of wage ceilings, and we should keep in mind that not all of them have these ceilings as program conditionality.
Our papers propose that in the future, such ceilings should be used in exceptional cases, only when warranted by macroeconomic considerations or when budgetary institutions are extremely weak as in post-conflict situations. Wage bill ceilings should be clearly justified in program documents and should be flexible to accommodate spending of scaled-up aid, particularly priority sectors such as education and health, and they need to be reassessed periodically at the time of program reviews. Formulating fiscal policy in a medium-term context, as I mentioned earlier, and the strengthening of the budgetary systems will allow governments to better manage employment and its cost, and this will over time obviate the need of such ceilings.
The third message, which is linked to the first one, is the need to strengthen fiscal institutions to help countries absorb as much aid as possible. Fiscal institutions, besides helping countries absorb aid, would also promote transparency, reduce waste and lower transaction costs for meeting donor conditionality. In this regard, the papers recommend that countries develop well-sequenced action plans for strengthening fiscal systems, especially public financial management systems. What is interesting is that 60 percent of the 78 PRGF-eligible countries either have the requisite action plan in place or are in the process of developing one. The Fund, along with other partners such as the Bank and other donors, are involved in helping countries develop and implement these action plans.
I will stop here and pass it on to Benedicte who will discuss a little bit more about the experience in Africa.
MS. CHRISTENSEN: Yes, I will just make a few comments, in order to allow time for questions, on how we go about the programming exercise.
First, I want to emphasize that the Fund applies no rule for spending aid. We aim at bringing the countries to the point where available aid can be fully absorbed and effectively spent over time. But in the meantime each program is different, and there is no rule for the targets on inflation, reserves, domestic debt, or any other macroeconomic variable. Let me just illustrate by a few examples.
There has been talk about that we didn't allow aid to be spent and absorbed if inflation was above a certain threshold, say, about 5-7 percent. We have several programs where inflation was above the so-called threshold of 5-7 percent, say, Burundi, Mozambique, Rwanda, Ghana, in certain years where we allowed full spending of aid. We do not use any rule for spending of aid.
Similarly, on reserves targets, it is true that we've had a variety of reserves targets and programs have allowed different degree of utilization of aid or, as Mark Plant said, of aid absorption. Sometimes reserves have increased by more than we had really targeted. Now if you look at the last five to ten years, initially, many of the Sub-Saharan African countries had very low level of reserves and were very vulnerable to exogenous shocks, i.e. commodity prices, weather, et cetera-and it was necessary to build up reserves to act as a cushion. If not, whenever a country was hit by shocks, it would have to embark on a stop-go spending policy which would be to the detriment of all the programs, including the social programs, of the government. Therefore, in order to ensure that there was continuity in these programs, at first, the reserve level had to be built up to a certain minimum level, which has now happened. For instance, in the recent episode when oil prices have increased in the world, Sub-Saharan Africa has been much more resilient to such shocks, and we haven't had this stop-go policy as seen in the past.
To add to Sanjeev Gupta's comments on the use of wage ceilings, programs now use wage bill ceilings only in exceptional cases. We have asked mission chiefs to review their use in each case and to justify if they still use them. We have had some resistance from country officials to abolishing ceilings, but also in those cases, we continue to pursue the discussion with the authorities.
Finally, I would like to stress that we see a strong need to increase health spending and pro-poor spending by maintaining reasonable macroeconomic stability. In line with this, we have in some cases agreed with country authorities on floors on pro-poor spending to prevent such spending from cuts in case of pressures from other spending categories. For instance, we have such floors in the programs for the Central African Republic, Rwanda, Sierra Leone and Uganda, and we have also supported targeting of fiscal spending towards the poor.
More is needed in this area, and the Fund, with others, is providing technical assistance to enhance public financial management. Indeed, this is an area we have identified for enhanced collaboration with the World Bank to join forces to help the African countries. Thank you.
MS. BISPING: Thanks, Benedicte. Why don't we open it up for questions and comments? We will see how many of you would like to speak and how we can structure it. But please identify yourself. Maybe the first one goes first and we will see how it goes. Anybody?
QUESTIONER: This is Jo Marie Griesgraber, New Rules for Global Finance. I would just want to comment that it seems as though there is de facto inflation targeting going on even if there isn't a rule or a law or absolute because all the evidence indicates that the Fund does use inflation targeting quite rigorously. There may be a couple of exceptions which thereby prove the rule.
The other point I wanted to raise is that in terms of the institution-building, I am wondering how you propose to go about building institutions in governments on budget processes. Is that a Fund purpose and project or how does that happen?
MS. BISPING: Why don't we get a couple of questions? Somebody else?
QUESTIONER: It's David Goldsbrough from the Center for Global Development. As you know, well, Jo Marie was on the working group, so she knows very well, we wrote a report on the interaction between IMF programs and health spending. I think we should recognize that these recent papers go some way but not the full way to addressing some of the messages that we had in our report, particularly to addressing this issue of, well, essentially in the way programs have actually been designed.
Until very recently, they've been too risk-averse in many senses as, in fact, various other speakers already referred to. I mean very conservative assumptions about aid, particular ways in which program designs respond to shocks, that have put too much pressure on spending rather than allowing reserve cushions to use it, et cetera. So I welcome the various changes in that direction, that the various reports move in.
I have two questions about it really. First, just a general question about, well, how are you going to implement these changes in program design in individual countries because I think as Mark Plant said, well, you're reaffirming. The Board reaffirmed that the Fund needs to work with countries for the full use of aid. Well, if that was the policy before but in practice programs were often rather risk-averse, in the sense of never mind the actual outcomes, but the program design in the end didn't really aim for the full absorption and spending of aid. So what changes in actually policy to bring about these various steps that you've mentioned in the report? That is the first point, the first question.
Then the second question I had is about policy vis-à-vis aid. As Mark Plant said, okay, the Fund should use the best estimates of aid available and avoid excessive conservatism. But that's answering the is question. All right, you make the best estimates. But what is the Fund going to do with respect to the should question or the more ambitious options? Because surely the Fund has a role to not just be out there heading counts to see what aid is going to be but at least sending some signal about the macroeconomic consequences of more ambitious aid. Now that doesn't mean to say that it is getting into the business of telling aid donors what they should deliver, but surely it does have a role of at least signaling that there wouldn't be macroeconomic problems if aid was much higher. How exactly is that going to be done? What benchmarks the more ambitious options? I mean is it going to be the MDGs? Is it going to be the Gleneagles commitments? What is it going to be? Thanks. Those are my two questions.
MS. BISPING: Thanks. Shall we start answering those?
MR. PLANT: Sure, let me take first Jo Marie's question on inflation targeting. We need to distinguish two concepts. There's one called inflation targeting that fairly advanced countries use to guide their monetary policy. That's really not what we're talking about at all in low-income countries.
Where our emphasis has been, particularly through the late eighties and early nineties, was in getting high inflation rates down, and that's generally been accomplished. There are a few cases, clearly an egregious one in Zimbabwe, but there are a few other cases where that still needs to be worked on.
What we've said in earlier papers is once that inflation rate comes down, say below 10 percent, that generally while programs going forward will necessarily have an inflation forecast, it is not a target per se that dictates the monetary policy. It's a forecast and that there should be flexibility around that forecast, given that these countries are subject to shocks from lack of aid, from unpredictable aid and other kinds of shocks.
So where this comes out is in a flexibility in monetary policy, that the monetary authorities of these countries, in concert with the budgetary authorities, don't adhere blindly to a particularly number moving forward. They have to look at what the overall circumstances are and, if shocks are bad, there should be room for monetary expansion. You don't see any Fund programs now that are aiming to get from 6 percent down to 3 percent. That's just not in the cards anymore.
On David's question on how to implement changes in individual countries, I think we went through some of the ways of how we go about forecasting aid. There is now an explicit policy about how you go about forecasting it. We've asked missions to explain their forecast of aid very clearly in their papers so that it's not hidden, and that way it's subject to scrutiny within the staff, at the Board and by external observers.
We, again, have talked about putting in place different kinds of adjustors and structures in our program to allow aid to be spent more generally. So the paper goes through the various components. Lots of them are very technical, but the overall push has been to make it very explicit what we are doing. As Sanjeev and Benedicte said, if we are going to use a wage ceiling, which isn't suggested, we need to explain very clearly why in this exceptional circumstances we might be doing it.
On the policy vis-à-vis aid scaling-up, the Board has said very clearly that part of our job is to help countries put together macro frameworks on scaled-up aid. While we might have a best estimate in our program because that's the short term planning horizon, we need to help countries think about what the macroeconomic impact of more aid is, and we hope that aid is coming forward. It will be important that we work with authorities to show those higher scaled-up scenarios. Whether it be a Gleneagles scenario or an MDG scenario, we need to help countries understand what the macroeconomic impact is and state clearly if there is macroeconomic room for more aid. Certainly, my colleagues want to add something.
MR. GUPTA: Yes, let me first take up the issue of building budgetary institutions. How do we propose doing this? As I said, a lot of work is underway in this area. There are over 50 technical assistance providers in the world, bilateral and other multilateral donors, who are helping countries build capacity in this area. The Bank and the Fund are working closely with the countries, using commonly--accepted diagnostic techniques to assess weaknesses in the systems and then coming up with an action plan which is country-owned and country-driven. These action plans are now being implemented in a number of countries or are in the process of being developed in other countries. What we are hoping is that since these plans have a medium-term focus, that in the next couple of years we should be able to see some concrete results.
For Africa I have the numbers. There are 24 countries, which already have action plans or are in the process of preparing such plans. And I think many of us including the NGO community have to continue putting pressure on the countries to implement these action plans in the context of the PRSP process and to see that the outcomes that we wish to achieve are actually achieved.
On David's question on alternative scenarios, which Mark has already responded to, the Board told us that we can construct scenarios and present them in the PRSPs and Article IV reports, but that they have to be consistent with macroeconomic stability and they should ensure debt sustainability. So as long as these conditions are met, we can construct the scenarios. We cannot propose a scenario which is way out of line with a stable macro environment and is not sustainable from the debt point of view.
MS. CHRISTENSEN: Just on the last point on scenarios, we have essentially told our mission chiefs that in all cases when the authorities have shown interest to discuss alternative scenarios, scaling-up scenarios, we are prepared to evaluate the macroeconomic challenges of scaling-up aid. We have, and that is with Sanjeev's help also, prepared a practitioner's guide to how to evaluate the macroeconomic challenges of scaling-up aid. What sometimes has held back the process it the lack of costing estimates for reaching the MDGs and the underlying sectoral and microeconomic calculations. For example, we need the microeconomic foundation in order for the scaling-up scenarios to make sense, e.g., for a doubling of aid, what does it mean for the health sector, the education sector and so forth. So we encourage others, such as the World Bank, UNDP, other organizations, to help us with this so we can use their costing estimates as an input in our work, and we are certainly prepared to do our part in the scaling up scenarios.
MR. GUPTA: If I may add to what Benedicte has said, the African Department has already prepared scenarios for a number of countries such as Ethiopia, Rwanda, Sierra Leone and Zambia; scenarios are being prepared for Mozambique, Mali and others. But the momentum for preparing such scenarios has been somewhat slow because the expected aid increases have not really come through so the countries are not pushing mission teams to do so. But from our side, we are very much open to helping countries prepare them.
MS. BISPING: Thank you. Are there any more questions?
QUESTIONER: This is Gorik from Medecins Sans Frontières (MSF). Hi, everyone. I have two comments and then five questions which I have already written last week and sent around, so I don't now if I have to repeat them, but let me start with the two comments first.
The first comment is on the explanation that perhaps the RMS was too conservative and didn't have the right information or estimations about future aid. I found it very difficult to accept as an explanation for what has happened because in several countries the IMF was perfectly well informed about donors wanting to increase their assistance but the IMF sent consistent messages that in fact aid should be reduced and that countries should become less dependent on aid, and this is in several PRSPs and other documents mainly in the years 2000 and 2001. So perhaps this attitude has changed, but then it has changed not explicitly and it would be helpful if the IMF would say if low-income countries are going to try to achieve the MDGs, then sustained financing and predictable foreign assistance is much more important than trying to reduce aid dependency because that is simply not compatible with achieving the MDGs.
A similar remark about an explanation, which is difficult to accept, is that reserves are built up to smoothen expenditure and to prepare countries for shocks. If that were the truth then you would expect to see in a number of those countries reserves going up one year, then going down the next year, then going up again, but remaining more or less stable. What we see in most countries in sub-Saharan Africa is that those international reserves are increasingly consistently year after year after year and that they are not used for let's say years when there is a bit less of foreign assistance but that they're just building up and so that this is not really an acceptable explanation for why those reserves exist and are so high. So those are the two comments.
Then the questions I have and that I have written in the memorandum, the first and for me the most important is, What are the real reasons for what I call—or rather what Joseph Hanlon called—the IMF tax? David made the comment in a blog on the Center for Global Development website, and there are similar indications in the report, that the IMF seems to assume explicitly that additional public spending will have no impact or no positive impact on growth. It seems that the IMF considers this aid or foreign assistance for increased social expenditure just as a waste of money, and if it doesn't, it would be rather helpful to clarify that this is not the case.
The second question is about the transparency or rather the secrecy about this policy. I was quite surprised when I read the report of the Independent Evaluation Office and this huge amount of aid that has either not been absorbed or not been spent. I have contacted several donors on this and not a single one of them said, yes, we knew this was happening and we were okay with it. In fact, most of them seemed to be very shocked. Joseph Hanlon was apparently in this meeting in London where the report was presented and where IMF staff would have said that the secrecy about this gave them more flexibility, so that is the second question.
The third question is about could this aid volatility or unpredictability become a self-fulfilling prophecy in the sense that if this is used as an argument for not absorbing or not spending the aid, then it becomes a bit normal that donors are reluctant to continue their funding. I find it today very difficult after reading the report of the Center for Global Development Working Group that 91 percent of the additional aid has directly or indirectly been used to build up reserves. When reading this, it just becomes impossible to go to our governments and say, yes, this country is going to need more assistance to achieve the MDGs if it is obviously not being used. And so I fear very much that it is becoming a self-fulfilling prophecy and that donors are becoming reluctant to increase the aid as they become aware that it is not used or not for the intended purposes.
Then perhaps the fourth question is what is needed to abandon this practice? And to make this question more concrete, I can understand the fear about the unpredictability of aid, but then it would be very helpful for example to say hiring nurses on foreign assistance is acceptable if the commitment is 5 years or if it is 7 years or whatever, 9 years, at least then we could go to donors and say this is the policy of the IMF, right or wrong, but as you are on the board of the IMF, we assume that you agree with it and therefore we want you to make your foreign assistance more predictable by pooling it into the global fund and expanding the mandate of the global fund or something else. But now there are these messages about the unpredictability, but we don't know what is the standard or the norm for foreign assistance that is predictable enough for the IMF to be allowed it to be used. I am speaking mainly about Malawi where you have this automatic adjuster on the ceilings, both on the wage growth ceiling and I believe also on the domestic primary deficit ceiling which are very helpful, but why aren't they used in other countries, and what would be the conditions to have similar systems in other countries to make sure that additional aid is 100 percent absorbed?
Then my fifth question is perhaps a more philosophical one, Why are all those papers of the IMF and I would say also of the World Bank consistently assuming and warning you know sooner or later this aid is going to go away? This has not been the case over the past 30 years where there has been increases and decreases in the levels, but the aid is not going away and if it is needed to realize a minimum living standard for human beings, I don't see why aid would disappear in 2015 or 2020. So rather than repeating this consistently, is it not possible to plead for open-ended and sustained foreign assistance rather than having these warning signals all the time that aid is eventually going to go away? Thank you.
MS. BISPING: Thanks, Gorik. There were a lot of questions and comments. Maybe we can take one more from somebody else and then answer them all together.
QUESTIONER: This is Brook Baker from Health GAP. My reaction to the discussion thus far is that the IMF is essentially talking about gradual and largely under publicized changes at the margins instead of announcing sharp breaks with past policy. For activists, the real issue is that there be an entirely different message about IMF's intentions and that those messages get to both donors and developing countries so that they understand that increased expenditures both of domestic resources and of aid is appropriate in the health and education sectors.
A second is, and again, I guess this reinforces something that Gorik was also arguing, that particularly in health and education these build and preserve capacity, they are essential to development. Instead of thinking of spending in these sectors as somehow being a drain for more useful expenditure elsewhere in the economy, it is actually essential for development and for the Millennium Development Goals.
So it seems to me that what we need is to take quite a different public stance and series of messages to clarify much more than has been done in the past about the flexibility the countries have to spend more and the need for consistent funding both from internal and external sources.
MS. BISPING: Thanks. Benedicte will start.
MS. CHRISTENSEN: I will address two of the questions. One is the question on reserves and the other one is the case of adjusters, Malawi. On reserves, the first question as I understood it was if reserves were meant to be a buffer, why didn't reserves just increase and fall from one year to another in line with the exogenous shocks, in fact, reserves had increased over time. It is true that reserves have increased in dollar terms over time. What has happened was that 10 to 15 years ago, reserves in many countries were at such low levels, in some cases down to a few weeks of imports that countries were very vulnerable to shocks. The low level of reserves was not just a matter of budgeting, but of national security concerns. . Therefore it was a deliberate policy of the governments to increase reserves. Now if you look at the reserves levels of African countries you have to look at the individual countries and country groups. In oil-producing countries they have increased a lot of course. In oil-importing countries, if you look at reserves in percent of imports, they have actually not increased that much because what has happened is at the same time as reserves have increased, imports have increased a lot too so that reserve coverage as measured in terms of imports have actually not increased that much.. But as I said earlier on, reserves are now at a much more comfortable level in many countries so that it is no longer an immediate concern of governments.
On the issue of adjuster in the case of Malawi, Malawi has a PRGF-supported program with a wage bill ceiling that is a performance criterion. The adjuster applies to that ceiling and would allow for additional expenditure under the SWAp program, which is a sectoral health program, in case additional donor funds emerge during the program period. This sectoral program is particularly developed in the case of Malawi so there are advance plans for how money could be spent. In other country cases, this is not the case. As you probably know, the health sector is one of the weaker ones in many of the African countries. It is weak on administrative capacity, on the ability for planning. So therefore if there is a good case with good plans for spending additional aid money, it can be spent, and that is the case in Malawi. In other cases where we don't have that well-developed sectoral program, we have reviews every 6 months and those reviews under the programs do allow us to look at the spending, also social spending.
MS. BISPING: Sanjeev?
MR. GUPTA: I used to work for Benedicte until about 9 months ago, so I just would like to pick up the issue of reserves a bit if it is okay. What is happening is that in sub-Saharan Africa the level of reserves now is approximately 5 months of imports for the oil-importing countries, excluding South Africa. This level of reserves actually came down in 2005 by about 2 or 3 weeks of imports because oil price increases. The higher level of reserves allowed these countries to accommodate or adjust to the higher oil prices. One must keep in mind that in the last 3 or 4 years the sub-Saharan African economies, especially the oil importers, have faced three major shocks. One has been the oil price increase, the second is the fall in cotton prices, and the third is the removal of textile quotas. All these have been major shocks for the region. Yet the region-because of the reserves—managed to deal with these shocks without resorting to external financing.
Next let me turn to the statement that we in the Fund don't really assign any importance to education and health spending and we believe that this spending is not sufficiently productive. Nothing is further from the truth because if you look at the papers that we have done and also at the handbook on scaling-up, we actually discuss what the impact of different types of spending—whether it is on education, health, or infrastructure—on growth is, and that this fact has to be taken into account in deciding expenditure allocations. In the fiscal policy paper, there is a reference to the literature where these estimates are presented, but there is one important issue. Whether the impact is positive or zero depends on the quality of spending, and on the quality of fiscal institutions. That is exactly what we have been trying to focus on—as long as the spending is well targeted and efficient, you will get the positive result of higher spending on growth, including on education and health. Indeed, if you look at the Fund-supported programs, the spending on education and health has increased consistently over time, and that is because we do believe that this spending is important for providing services to the population as well as to promoting growth and achieving the MDGs.
MS. BISPING: Mark?
MR. PLANT: I will be quick. There is a legitimate criticism that the Fund needed to break from a past of focusing on adjustment to that of programs and policies that help low-income countries grow. We had a rightful focus on adjustment in the 1980s and 1990s. We are trying to make that break and move toward growth orientation. We have been doing since the PRGF. Perhaps it has been marginal in some ways, but I think in many ways the set of papers over the last 2 years looks fundamentally at how we look at macroeconomics in these programs and we break with the past.
I think that those of you who observe us on the outside have to take a break too, and you have to look not at the stories of the past, but you have to look at the Managing Director's speech to the Center for Global Development last year where he makes it extremely clear that lots more aid is needed. If you look at the Global Monitoring Report where the Fund and the Bank make it clear that a doubling of aid is at least needed to get these countries moving. The break from the past is going to come when the donors live up to their commitments, which they are not doing, and we are saying it very clearly, and we are prepared to help the low-income countries deal with that increase in aid. It's got to come. That is the way we are going to get there.
MS. BISPING: Thanks. Maybe we can take a couple of final questions and there will be other opportunities to discuss these issues, obviously. Who would like to comment or ask a question?
SPEAKER: Can I just have an answer on the secrecy of all this?
QUESTIONER: Could I perhaps elaborate on Gorik's question on the lack of transparency, to try and break it down a little and seek the views of Mark perhaps especially? This is David Goldsbrough speaking.
It is certainly true that in some areas the Fund has become more transparent. It is publishing many more of the program papers, et cetera. But it has not gone as far as it could have done in explaining and making clear the rationale for the specific program designs in individual countries. That was one of the conclusions of our working group. Again, some progress more recently, but still as a general statement.
And a second area it could be more transparent is in essentially making more available the sort of database that underlay the independent evaluation of this analysis. Why not make that available to outside researchers so they can look at what is actually happening across the board in program design and in terms of absorption spending, et cetera, and make their own analysis and conclusions? So it doesn't all have to be an inside the IMF analysis.
QUESTIONER: Can I also pop in here? This is Peter Chowla from the Bretton Woods Project. I just wanted to follow-up a few more points on the transparency and secrecy issues. I think one thing that makes some of us very wary about claims that transparency is increasing and that secrecy is going down are things like this consultation happening after the board has already had a discussion on this, whereas it would be nice if you had a consultation or a call before the board had a discussion so you can take input from civil society. That would be one point.
The second one on the transparency point, Mark said very clearly that we want to explain clearly and we want to make very explicit our policies and our programs in the program documents. I think it would be very helpful if we were also able to assess some of that clarity and lack of secrecy and more transparency if we could see some of the documents that are guiding the staff missions and the mission chiefs. For example, the Operational Guidance Notes which are going to be produced on these papers would be very useful for civil society and for donors to be able to see these. Those are the kinds of things that the IMF if they produced publicly would help people then make an assessment of whether policy is being followed and whether that policy is appropriate.
Then I think the last point I would like to make is related to that, if we had those kinds of Operational Guidance Notes available then civil society, donors, and the management of the Fund as well can make an assessment of whether mission chiefs are following the Guidance Notes properly, and that might even reverberate into things like staff incentives. I don't think staff have any incentives to make appropriate aid projections or aid analyses right now because they frankly don't get rewarded for it. As far as I understand, there is nothing in their appraisals that goes back to check were their aid projections appropriate and were they correct or where they low-balling the estimates so that they could then not have to worry about a program going off track later. So it might be nice to have some staff incentives for making appropriate aid analyses and aid projections and that is the kind of thing we can't even assess if they are doing unless we have some more transparency on things like Guidance Notes for the staff.
MS. BISPING: Do we have one more question maybe?
QUESTIONER: This is Jo Marie. As you hear Peter and some of the other speak, and David, you've got the civil society brain trust on the phone and , I am sort of an observer on this, but it really comes to having data that can be verified. My particular question is more on the ethical and the political approach, how is it that we can get these things to happen faster, not wait for an IEO, 2-year report, and then a Center for Global Development year and a half project, and all of this to all of a sudden crank out papers? What are some political levers we can be pushing to get this so we don't have to play catch-up all the time. It is one thing for the NGOs to be dissatisfied, but what about the people whose lives are affected? And then related to that is the learning cost for the people in country as we learn that the Fund has been too conservative. These are people's lives and somehow there is no accountability, there is no follow-up, there is no compensation for errors to be made in good faith, but just it's morally unacceptable.
QUESTIONER: This is Amy Gray at ActionAid. I'm just going to jump in here quickly. I in no way want to take our focus off the push for the response from the IMF on the transparency matters, but I cannot help but observe that throughout this conversation there has only been reference made to an inflation range between 5 and 7 percent. So if we are going to be playing this chicken and the egg game about why the donors aren't giving more money but then the money that they're giving isn't able to go in because of the need for the reserves, et cetera, is the IMF prepared and able to run some controlled experiments in some countries where maybe even the ministries of finance themselves in consultation with civil society would be willing to run higher inflation rates and see if that is a way that they can more effectively flow the aid out into services? Is that something that you guys would be willing to do?
MS. BISPING: Thanks, Amy.
MR PLANT: It's a really broad set of questions. Again let me start on the transparency. I believe, and I am sure I will be corrected if I'm wrong, the Guidance Notes that we have done in the last 4 or 5 years on low-income countries, debt sustainability and other things, have all been public. I believe they are all on the Net and we intend to put the Guidance Note that results from this on the Net as well. I think the most important Guidance Note is the summing up that we got from the Board, which is out there, and it is fairly explicit. I won't apologize for it being in "Fundese", this is the way we talk to each other and those experts of you out there who have been following us a long time can cipher through that "Fundese" or we can even help you do it in some instances, but the summing up is going to be guiding our policies and that is where you hold us, the institution, accountable, and the way into the institution frankly is through the Board and through management and I think that's the lever, Jo Marie, that you have to pull.
I would also say that these papers did not spring up overnight in result of an IEO report. These papers just by their very nature take quite a long time to prepare. They were in preparation for a couple of years in various guises. We had a whole set of aid papers last year that flowed into these papers, or in late 2005, so this is not a new subject for us. Clearly, ultimately how we came out on these papers was influenced the IEO and not so much by David Goldsbrough's report because it came in a bit later, and those inputs will have important feedback into how we prepare the guidance. So I think we are prepared to be as transparent as we can on that.
I am not in favor of running inflation experiments really. I think what we need to do is sit with countries and give the ministry of finance and the central bank the flexibility they need to use the aid that is coming in well and to get smooth, strong expenditure paths that are going to support the MDGs, but as I said before, we've got to have the aid there to do that.
MS. BISPING: I think that's it. I think we'll close here. As I said, I think there will be more opportunities to discuss these issues the very latest at the Annual Meetings, some of you will be there, and if any of you want to do follow-ups in any way, I am always here to help with that. Thanks for calling in, and talk to you soon.
IMF EXTERNAL RELATIONS DEPARTMENT
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