A Letter to the Coordinator of EURODAD
By Mark Allen
Director
Policy Development and Review Department, IMF
September 3, 2004

This letter was sent to Eurodad in reply to their open letter to the Managing Director of the IMF, signed by 26 civil society organizations, which may be read at eurodad.org.

Dear Mr. Wilks:

Thank you for your letter to Mr. Rodrigo de Rato of July 22, 2004, with its thoughtful contribution from civil society organizations to the debate about the role of the Fund in low-income countries. As you are aware, the Fund has been engaged in a process of refining its engagement with low-income countries over the past 12 months. The recent Independent Evaluation Office's (IEO) evaluation of Poverty Reduction Strategy Papers (PRSPs) and the Poverty Reduction and Growth Facility (PRGF) has provided an additional opportunity to reflect on the accomplishments and challenges of the PRSP/PRGF approach, as well as the broader issue of the Fund's role in low-income countries. Your letter adds further valuable input.

Let me first reassure you that the Fund is a committed partner in the international effort to implement the comprehensive development strategy expressed in the Monterey Consensus for achieving the Millennium Development Goals. This role was reaffirmed by the International Monetary and Financial Committee at our 2003 Annual Meetings.

The Fund is in the process of drafting a succinct statement of its role in low-income countries. This will reiterate the Fund's focus on its core expertise and mandate-helping countries establish and maintain macroeconomic and financial stability, which is essential to foster durable growth and reduce poverty—and the three complementary ways through which Fund support is provided, namely, policy advice, capacity building, and financial assistance. Together with other work in progress, in particular the forthcoming annual report on progress in implementation of the PRSP, produced jointly with the World Bank, this body of work should address and clarify many of the issues raised both in your letter and the IEO evaluation.

In the meantime, staff colleagues have prepared the attached note that addresses a number of the issues that you have raised. I hope you will find it useful, and that our reactions go some way to address your concerns. We look forward to further opportunities to discuss these issues. The IMF is open to, and undoubtedly benefits from, the contributions made by civil society organizations. This is invaluable as we all seek to work with the low-income countries to make progress toward the Millennium Development Goals.

The IMF's Role in Low-Income Countries
A response to Eurodad's open letter

This note contains some preliminary reactions by IMF staff to the questions raised in a July 22, 2004, open letter to the Managing Director of the IMF written by 26 civil society organizations led by the Eurodad Network. Many of the issues raised in that letter are actively on the work program of the IMF or the international community. This note should therefore be seen as a contribution to a continuing dialogue. Further discussion of these issues is likely to occur in the context of the 2004 Annual Meetings in October.

1. Ensuring a Pro-Poor Focus in Low-Income Countries

Together with other multilateral and bilateral partners, the IMF is working to ensure that the Poverty Reduction Strategy Paper (PRSP) process provides an operational tool for implementing and coordinating efforts to foster growth, poverty reduction, and progress towards achieving the Millennium Development Goals (MDGs). Work has progressed on aligning Poverty Reduction and Growth Facility (PRGF)-supported programs with the PRSP and, as acknowledged in the Independent Evaluation Office (IEO) evaluation, there have been significant changes in program design. In particular, fiscal targets under PRGF-supported programs are now more flexible and pro-poor expenditures have increased. In addition, Fund staff collaborate closely with the World Bank and other development partners in ensuring that appropriate expenditure management systems are in place to ensure that annual budgets fully reflect PRSP priorities. The IEO study also showed that projections in PRGF-supported programs do not suffer from a systematic "aid pessimism" bias, nor is there evidence of an excessive disinflationary bias.

In our view, and that of the IEO, the PRSP approach has led to important achievements, including better ownership of policies; more focus on poverty reduction; and better integration of sectoral agendas. However, there are important shortcomings: participation has been limited, ownership sometimes questioned, integration with PRGF-supported programs imperfect, and the PRSPs themselves, in some cases, are not sufficiently prioritized or elaborated to serve as the basis for donor, including Fund, support. We are striving to address these issues. To some extent, however, these shortcomings reflect tensions inherent in the PRSP approach, for example, long-term ambition versus immediate budget constraints; comprehensiveness in addressing the different dimensions of poverty versus focus and prioritization; and meeting the expectations or needs of the international community versus country ownership.

Fund staff have been attempting to clarify further the intensity and scope of the IMF's engagement in the PRSP approach along the lines of the IEO suggestions and earlier guidance from our Executive Board. In particular, the IEO report has pointed to the need to give more emphasis to Fund staff involvement in the domestic policy debate over macroeconomic policy and to open to broader scrutiny the rationale for our policy recommendations. It should be noted, however, that in this process the Fund will be bound by the approach taken by governments to broaden participation in the policy debate. Meanwhile, we are working to ensure that the Fund staff has the deepest possible understanding of the impact of macroeconomic policies on growth and poverty reduction, so as to be able to provide the best policy advice. Our increasing reference to poverty and social impact analysis (PSIA) is an important development in this respect, and we have recently established a dedicated group to assess the PSIA being undertaken by various development partners for possible integration into PRGF-supported programs. However, it needs to be underscored that the Fund is not alone in seeking this understanding—this is something that has been a challenge to the economic profession for some time.

On the issue of debt relief, the Fund remains committed to getting Highly Indebted Poor Countries (HIPCs) to the completion point without delay, and progress is being made on this front. Out of the 27 countries that have reached the decision point under the Enhanced HIPC Initiative, 14 have now reached their completion points. In collaboration with the World Bank, Fund staff is also proposing to extend the duration of the initiative by another two years to end-2006 to provide the remaining HIPCs that have not yet reached their decision points the opportunity to begin to establish a policy track record that would allow their consideration for HIPC debt relief.

Higher levels of external grants and their more effective use are important to reach the MDGs. Our aim would be to support a framework for the effective use of that aid, and we stand ready to assist countries in this effort. Since the Fund does not have expertise or a comparative advantage in costing the resource gap for each country in meeting the MDGs, we would rely on the World Bank and other bilateral and multilateral donors to craft the estimates.

2. Clearer and Reduced Role in Low-Income Countries

The need to tailor the Fund's financial support to the differing needs of low-income countries has already been the subject of reviews. The changes in policies regarding Emergency Post-Conflict Assistance, access norms, low-access PRGF arrangements, and blending—endorsed by our Executive Board in March 2004―are important steps in that direction. Work is also underway on a possible shocks facility within the PRGF and subsidization of emergency natural disaster relief. Furthermore, we are currently examining the issue of the Fund's role when its financial assistance is not critical to meeting a country's balance of payments needs. Here the key issues are what low-income countries need in terms of regular macroeconomic advice—be it in the form of articulated economic programs or more general counsel—and what signals donors need from the Fund to assure them that the macroeconomic policies of the country provide a sound basis for their aid. This goes to the Fund's "seal of approval" role raised in your letter, and the need to exchange views with donors in this respect, which the Fund is currently doing.

Financial assistance is just one of three complementary ways in which the Fund aims to support its low-income members, together with policy advice and capacity building. The Fund's policy advice will center on its core expertise―macroeconomic stability. Many low-income countries have made considerable strides in the 1980s and 1990s in achieving macroeconomic stability, and very few question the need for macroeconomic stability and financial stability as a prerequisite for growth and poverty reduction. This progress must not be lost, and to help ensure this the Fund also assists low-income member countries in building the capacity to formulate and implement macroeconomic and financial policies. This assistance takes many forms, including technical assistance, training of country officials, and working with country authorities in formulating and executing macroeconomic reforms.

On the issue of Article IV consultations, we continue to look for ways to use these occasions to provide a fresh perspective in program countries, to ensure that we step back and take stock of experience and of the medium-term challenges faced by the countries where we are intensively engaged. In particular, our guidance on the timing of Article IV consultations seeks to ensure that surveillance feeds directly into more thoughtful program design. On a related point, we are now fully engaged in the process of preparing "ex post assessments" for countries with longer-term program engagement, most of which are low-income countries—around 27 are expected to be completed this year. In addition to providing a fresh perspective on successes and failures under successive Fund-supported programs, these assessments examine the rationale for continued Fund engagement, suggest priorities, and, where appropriate, present an exit strategy.

Maintaining debt sustainability, even in the course of pursuing the MDGs, is a key issue for low-income countries if unsustainable debt levels are not to hamper long-term growth and poverty reduction. In this regard, the staffs of the Fund and World Bank have developed a debt sustainability framework for low-income countries that is soon expected to be made operational. The aim is to help countries assess their capacity to take on further debt. In particular, where the debt sustainability framework suggests that there is risk of debt distress, the Fund will signal to donors that financing for much needed development projects to achieve the MDGs should be in the form of grant financing rather than loans.

3. Governance and Institutional Reform

Some of the proposals raised in the third section of Eurodad's letter lie outside the influence of IMF staff or management, requiring consultation among and decisions by the member governments.

As to the relationship between the United Nations system and the IMF, the Fund liaises closely with the UN system through its offices in New York and Geneva and ensures that collaborative relations with the UN system are maintained. In this context, the Fund maintains close relations with ECOSOC, including through participation in high-level meetings, briefings, and exchange of information. However, the Articles of Agreement that established the IMF require it to always function as an independent international organization. Any arrangements for cooperation which would alter the IMF's independence or involve modification of any other provision of its Articles, can only be effected after amending the Articles of Agreement. Changing the existing relationship between the IMF and the UN system would also require amending the UN Charter and the UN-IMF Agreement of 1947.

There is considerable sympathy among IMF members for raising the voice and participation of low-income countries in the institution and the issue continues to be on the agenda, including at the 2004 Annual Meetings. The issue is being approached on two different tracks: administrative capacity-building initiatives and member voting rights. Regarding the first track, in 2003, the two IMF Executive Directors representing 20 or more African countries each were given additional staff, and efforts are underway to enhance their administrative capacity. Decisions on voting rights require a broader political consensus among the membership. While there is support from many member countries for an increase in basic votes to strengthen the voting power of the smallest countries, the required 85 percent majority for such an increase does not exist at this stage. Moreover, there is a clear preference among the membership to address the issue of basic votes as part of a comprehensive package in the context of the next general increase in quotas. Given the Fund's satisfactory liquidity position, such an increase is not in prospect at present. The IMF will continue to monitor closely and assess the adequacy of IMF resources, and measures to improve the distribution of quotas and voting power will be considered in the context of the next general review of quotas.

In the early 1990s, the IMF expanded its resident representative program considerably, and there are currently some 80 posts. This move was precisely in response to some of the broad concerns expressed in your letter. Presence in a country enables resident representatives to develop a deep understanding of economic and political circumstances, to establish close working relations with key officials, and to provide frequent and timely policy advice. They also help build institutional capacity within countries and, increasingly, conduct outreach activities. The Fund has also in the past few years opened a number of regional technical assistance centers (in Africa, the Middle East, the Pacific, and the Caribbean), and more are planned. These initiatives are designed to make the Fund's support for capacity building more relevant and more immediately available to the countries that need it.

The resident representative plays a full role in headquarters' discussions thanks to modern communications, and typically exerts an important influence on the work of Fund missions. The advantages of delegating authority for providing speedy, on-the-spot advice to country authorities are well recognized, and this is standard practice. The importance of the role of resident representatives in engaging in policy discussions with stakeholders outside the government, including with civil society organizations (CSOs), was reaffirmed in the October 2003 Guide for Staff Relations with Civil Society Organizations.¹. The Fund is currently conducting a review of the resident representative program, and its deliberations have benefited from input received from a variety of stakeholders, including CSOs.

Given the very different nature of IMF operations from those of other international financial institutions, it is unlikely that an inspection mechanism of the type envisaged in your letter would be appropriate. While economic policy advice given to members and macroeconomic programs of member governments supported by the IMF may have distributional impacts, it would often be very difficult for an inspection panel to disentangle such impacts from those of other concurrent economic developments. The Fund has, however, acknowledged the need to incorporate PSIA in the design of specific policy measures in PRGF-supported programs in low-income countries, and to inform the design of compensating measures where appropriate. More generally, the IEO provides independent oversight of the Fund's work. In particular, the office serves as the main vehicle for the conduct of objective and independent evaluations on issues relevant to the mandate of the Fund, such as the aforementioned PRSP and PRGF evaluation. The IEO does this through independent studies of relevant issues, including systematic evaluations of the IMF's general policies; comparative cross-country analyses of the IMF's economic policy advice, both in the context of surveillance and in the context of IMF-supported programs and evaluations of completed country operations.

¹ See IMF public website at http://www.imf.org/external/np/cso/eng/2003/101003.htm.