Directors welcomed the opportunity to discuss ways to enhance Fund financial assistance to post-conflict countries, including those with arrears to international financial institutions, as requested by the Interim and Development Committees.

Most Directors observed that the existing policy guidelines have generally served Fund members well. In this regard, they noted that the Fund had provided technical assistance and macroeconomic policy advice at an early stage, and expressed satisfaction that the Fund's financial assistance has been provided relatively quickly and had played a catalytic role in concerted international assistance efforts.

Directors therefore reaffirmed that the basic approach of the post-conflict emergency assistance policy continues to be a sound basis for the Fund's involvement in post-conflict countries. Nevertheless, they noted that, within this framework, every effort should be made to enhance such assistance, and they welcomed the opportunity to consider the proposals put forward by the staff for this purpose. At the same time, Directors emphasized that, to be effective, any possible new steps by the Fund should be considered in the framework of substantially strengthened efforts on the part of the international community as a whole to ensure the maintenance of peace and to assist in the orderly transition from conflict to conditions conducive to stabilization and high quality growth. A few Directors suggested that enhanced assistance should also be available to countries struck by natural disasters.

Regarding the terms of emergency post-conflict assistance, Directors agreed that financial assistance on concessional interest rates would be more appropriate for low-income post-conflict countries than the General Resources Account (GRA) charges that currently apply to such assistance. In considering the four possible approaches discussed by the staff, Directors expressed a range of views.

Directors agreed that under any approach that involved the use of GRA resources, it would be essential to seek interest subsidies from bilateral donors on a case-by-case basis, with intensified efforts to mobilize these funds. In this regard, Directors called for an early indication of members' readiness to contribute to subsidies, and endorsed the idea of establishing an administered account at the Fund.

While a new special facility within the GRA would deal with the maturity issue and would effectively address the concessionality issue if accompanied by a decision to lower charges or an agreement by donors to provide subsidies. There is not sufficient support for the establishment of such a facility. However, some Directors asked the staff to continue examining this approach, including the possibility of using income from purchases under the SRF to help subsidize the rate of charge on use of GRA resources.

There was support for the approach that would provide for early replacement of GRA resources by resources provided under the ESAF, when the member is in a position to obtain an ESAF arrangement. This would be an effective way of providing more financial support on appropriate terms to low-income post-conflict countries, as it would address both the concessionality and maturity issues. Directors also agreed that this would be consistent with the present purposes, structure, and conditionality of the ESAF as well as the prudential interest of ESAF creditors. They stressed that this procedure should not result in a weakening of ESAF conditionalities or a rationing of ESAF resources.

Most Directors considered that the provision of emergency assistance under the ESAF would represent an undesirable modification of the structure of the ESAF.

On access and length of the program period, Directors noted that most of the countries that have used emergency post-conflict assistance have been able to move to a Fund arrangement with upper credit tranche conditionality within a year or so of the approval of emergency assistance. However, such a rapid move may not always be possible or desirable, especially if economic and political conditions remain particularly fragile.

Hence, Directors agreed that in situations in which the rebuilding of institutions and reestablishing of policy implementation capacity is slow, despite the efforts of the authorities, and the member is not in a position to implement a Fund arrangement after about a year under a program supported by emergency assistance, and when there is sufficient evidence of the authorities' commitment to reform and capacity to implement policies, additional access of up to another 25 percent of quota in the form of outright purchases could be provided. The additional 25 percent of quota would normally be tranched. A few Directors would have preferred smaller and/or more back-loaded disbursements, and a few would have preferred a larger initial amount. Directors noted that each purchase would need Board approval and would continue to be subject to satisfactory progress by the member in the rebuilding of capacity and macroeconomic stability. They emphasized that there should be continued stress on the catalytic role of the Fund, and that the Fund would be involved only as part of a concerted international effort, including technical support from other multilateral and bilateral agencies.

Directors indicated that the most difficult issue to address in considering the Fund's post-conflict assistance policy was the situation of post-conflict countries that have large, protracted arrears to the Fund. At present, there are a small number of countries that could fall into this category. Special efforts to accelerate the provision of financial assistance by the Fund in such cases poses particular difficulties in relation to the Fund's arrears strategy and could, if not carefully circumscribed, pose issues of moral hazard and undermine the Fund's preferred creditor status.

In this regard, most Directors considered that, while there are a number of attractive features in the proposals put forward by the World Bank staff for post-conflict assistance for heavily indebted poor countries that are in arrears to multilateral institutions, they need to be considered from the perspective of the key issues for the Fund's arrears policy: the principle of uniformity of treatment; payments to the Fund in the pre-arrears clearance period; length of the track record prior to arrears clearance; and the arrears clearance process and procedures for financing.

As to uniformity of treatment, Directors indicated that while it would be possible to make modifications to the arrears policy that could be applied to countries meeting specified post-conflict criteria, the application of those modifications could not discriminate among members by income level. Regarding the Fund's approach of requiring a member to establish a strong track record of sound policy and adequate payments to the Fund at a minimum, remaining current on obligations falling due to the Fund and making every effort to reduce its arrears to the Fund. They generally believed that this approach had been effective in reducing the total amount of arrears and arrears cases, and in restoring normal relations with countries in a wide range of situations.

At the same time, Directors recognized that, in the pre-arrears clearance stage, competing claims from multilateral institutions for payments from heavily indebted post-conflict countries in arrears to these institutions may not be sustainable. In this regard, they supported the staff's recommendation that the Fund consider relaxing its calls for payments as a test of cooperation, provided that the member is judged to be cooperating on policies and that all other multilaterals to which the member is in arrears take at least comparable action. Judgment as to the level of payment needed to sustain cooperation would be made on a case-by-case basis, taking into account the member's debt servicing capacity.

Directors stressed that a solid track record is important to provide assurances that a member's policy framework and commitment to sound policies are strong enough to ensure timely payments to the Fund in the future. In this light, it was generally agreed that a drastic shortening or elimination of the track record would not be desirable for the Fund or the international community more generally and that the current policy allows for sufficient flexibility in determining the appropriate length of the track record for post-conflict arrears countries.

With respect to arrears clearance, Directors stressed the need for consultation and coordination among creditors and donors in dealing with post-conflict cases. However, since the situations of these countries can vary widely, they endorsed a continuation of the case-by-case approach, which allows for sequential clearance of arrears to the international financial institutions in appropriate circumstances and the development of arrears clearance plans in individual cases, in coordination with other creditors.

In the absence of concessional financing for arrears clearance or rights encashment, Directors noted that arrears could likely be cleared through a bridge to a new arrangement in the GRA. They strongly reconfirmed their earlier views against the idea of the Fund matching rescheduling operations of the Paris Club or any other group of creditors, as being inconsistent with the monetary character of the Fund. Directors recognized, nonetheless, that there may be circumstances in which the Fund may need to consider exceptionally the use of the provisions of the Articles relating to postponement of repurchases and/or payment of GRA charges in domestic currency. This would need to be assessed as the countries neared the point at which arrears clearance operations would be appropriate and in the light of the circumstances of each case, including the financing requirements and financing possibilities available at that time.

Directors recognized that arrears clearance operations, through a bridge to a new arrangement in the GRA or postponement of repurchases and payment of charges in domestic currency, would not by themselves result in sustainable debt service positions for the heavily indebted post-conflict arrears countries. Hence, following clearance of arrears and the establishment of a satisfactory track record, the countries' debt to the Fund and other creditors would be subject to action under the HIPC Initiative. This underscores the critical importance of marshaling concessional resources for the ESAF and the HIPC Initiative.

In light of today's discussion, the staff will come back to the Board with proposals for appropriate modifications of existing policies, and with proposed decisions as necessary to give effect to the agreements on enhancing the Fund's assistance to post-conflict countries. In the meantime, a joint Bank-Fund report will be prepared for the Interim and Development Committees on the status of the institutions' consideration of these issues.