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IMFSurvey Magazine: Policy

Oil pipeline in Delta region of Nigeria, whose PSI recognizes large infrastructure gap (photo: George Esiri/Reuters)

SUPPORTING LOW-INCOME COUNTRIES

IMF's PSI Framework Offers Flexibility

By Maitland MacFarlan and John Green
IMF African Department

April 11, 2007

  • Policy Support Instrument encourages countries to deepen and broaden policy ownership
  • It signals that a country's economic policies have been discussed with the IMF
  • Experience to date has been positive for countries and their development partners

Several African countries are considering adopting a flexible new policy framework with the IMF that enables them to secure Fund support and endorsement of their economic policies without a borrowing arrangement.

Since it was established by the IMF's Executive Board in October 2005, four countries in Africa—Nigeria, Uganda, Cape Verde, and most recently Tanzania—have adopted the new Policy Support Instrument (PSI). Several others are considering following suit, according to Fund officials.

The PSI was created to provide a support framework for low-income countries that no longer need IMF financial assistance but want Fund endorsement of their economic policies. The PSI, which is voluntary and demand-driven, is well suited to countries graduating from Poverty Reduction and Growth Facility (PRGF) arrangements. These countries—so-called "mature stabilizers"—have made significant progress toward macroeconomic stability and debt sustainability, are well advanced in structural reforms, and have built up adequate international reserves. Nevertheless, they may still want Fund advice and support as they continue to strengthen growth prospects together with their macroeconomic policy frameworks, institutions, and governance structures. An on-track PSI may also provide the basis for rapid access to the IMF's quick disbursing, exogenous shocks facility in case emergency assistance is required.

Underpinning stability

The PSI encourages countries to deepen and broaden their ownership of the policy agenda. As much as possible, policy strategies and objectives draw on domestically-produced documents, including budget documentation and poverty-reduction strategy papers. Nigeria's PSI, for example, has been based on the National Economic Empowerment and Development Strategy (NEEDS), Nigeria's homegrown poverty reduction strategy. The authorities chose to present their policies to the Fund in their own Policy Statement rather than in the format of a conventional letter of intent. The initial PSI in Uganda and the new three-year PSI incorporate macroeconomic targets based on the country's existing medium-term expenditure framework and reflect the priorities and strategies set out in the country's Poverty Eradication and Alleviation Plan (PEAP).

"PSI countries have the flexibility to specify policy objectives and design reform strategies that are tailored to their economic conditions. "

Similarly, the PSIs for Cape Verde and Tanzania have been developed in coordination with these countries overall development and poverty-reduction strategies. In support of domestic ownership, PSI countries typically pursue a range of measures to strengthen local skills and capacities. For example, measures to increase capacities in such areas as public sector financial management, delivery of public services, and resource mobilization feature prominently in the current PSIs.

Critical bottlenecks

Under the PSI, countries have the flexibility to specify policy objectives and design reform strategies that are tailored to their own economic conditions. In general, policies aim to consolidate macroeconomic stability and push ahead with structural reforms, especially in areas that may pose critical bottlenecks to private-sector-led growth and poverty alleviation.

The reform agenda often includes measures to improve public sector management, strengthen the financial sector, and move forward in other areas consistent with the IMF's medium-term strategy. Under some of the current PSI-supported programs, countries have scope to borrow on less-concessional terms for high-quality projects, thus broadening their financing options and helping them move away from aid dependency. Within each program, however, there is substantial flexibility as to the specific areas of emphasis:

Uganda began with a 16 month PSI centered on preserving the country's long record of macro stability. The country then decided on a new three-year PSI that would both sustain this macroeconomic progress and give particular attention to financial market development—both longer term financing for businesses and access to financial services in rural areas—together with energy security, and transportation infrastructure as the keys to future prosperity. Uganda's PSI also makes special provisions for nonconcessional financing for hydroelectric dam construction, which is a critical part of solving the country's electricity crisis

• The PSI for Cape Verde aims to support the country's strong economic performance and prospects—as reflected, for example, in high and rising inflows of foreign direct investment. Particular attention is given to reducing macroeconomic risks and providing a safety margin against exogenous shocks, including through the reduction in public debt and further build-up of official foreign reserves.

• In Nigeria, the PSI recognizes the large infrastructure gap that is a main obstacle to private sector development, while emphasizing the need for continued efforts to safeguard the country's oil wealth and macroeconomic stability.

• The recently-approved PSI for Tanzania seeks to support sustained growth and poverty reduction by enhancing public resource mobilization and efficiency of spending, increasing the financial sector's contribution to growth and the effectiveness of monetary policy, and improving the business climate.

Signal to donors

The PSI also provides an important signal—including to bilateral donors, multilateral development banks, and financial markets—that the country's economic policies have been discussed with and endorsed by the IMF. Successful performance under the PSI has allowed Nigeria to implement the agreement with its Paris Club creditor countries, leading to a substantial reduction of the country's external debt. Such signals were also viewed as particularly important in Cape Verde, which continues to face significant needs for external assistance to support infrastructure development and other efforts to increase growth and reduce poverty. The signaling role of the PSI is reinforced by the regular, six-monthly review cycle of PSI-supported programs, coupled with the expectation of publication of the staff report and other program documents following each review.

In summary, the PSI offers low-income countries a flexible tool for articulating their policy priorities with the support of a continuing, close dialogue with the Fund, and signaling their policy commitments to the international community. Experience under the PSI to date has been positive, both among the countries themselves and among their development partners. These favorable responses may well continue in the period ahead, with countries graduating from PRGF arrangements finding that the PSI provides an appealing framework for focusing on the broader outcomes sought from their policy agendas and for exploring alternative approaches toward reaching these goals.


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