September 2000

Contents

Overview IMF at a Glance Globalization Financial architecture Organization Executive Board table Surveillance Transparency Quotas Quota table Facilities and policies Access limits

Conditionality Social issues Poverty strategy Debt strategy Technical assistance Governance Borrowing Liquidity Income and charges Overdue payments SDRs IMF chronology

Recovery from the economic slowdown that followed the 1997-98 financial crises in emerging markets has been stronger than expected, and global economic growth in 2000 seems likely to be the strongest in over a decade. Still, significant risks to sustained growth remain, and more needs to be done to speed economic growth and poverty reduction in the poorest countries.

The issue of globalization has been much debated over the past year. Critics have blamed the IMF for its role in promoting world trade growth and for its policy advice to countries in difficulty. In fact, however, experience has demonstrated that freer global trade is among the surest engines of economic growth, benefiting all countries and giving people in poor countries the same opportunities as people in rich countries. The evidence is clear that, although a wide gap exists between rich and poor countries, poor countries have benefited from expanded markets whereas countries with closed markets have done less well.

The IMF has a vital role to play in smoothing the process of globalization because the modern world economy—which was rocked by a series of regional financial crises during the 1990s—requires more international cooperation on monetary issues than ever before. In response to changing political and economic realities, the IMF has recently instituted reforms that are transforming the way it conducts its business. Over the past year, the IMF has increased the amount of information it publishes about its policies and operations, as well as about the economies of its members; begun to streamline its lending options, eliminating four little-used facilities (see Facilities and Policies); and tightened auditing standards for countries seeking to borrow. It is establishing an independent evaluation office to complement ongoing internal and external evaluation exercises. The IMF has also embarked on a pilot project, working with the authorities of member countries, to prepare reports that summarize the countries' observance of certain internationally recognized standards and codes, focusing principally on the areas of direct operational concern to the IMF.

Developments in the world economy

Global economic growth registered 3¹/2 percent in 1999 and is projected to register about 4³/4 percent in 2000—its fastest pace since 1988—before tapering off to about 4¹/4 percent in 2001. Inflation is expected to remain in check in most countries. Although growth in the U.S. economy has remained strong, the pattern of growth among countries is now becoming more balanced, most notably with the pickup of growth in the euro area.

There is some evidence that U.S. economic growth is slowing to a more sustainable pace. If the United States achieves a gradual slowdown—the more likely scenario—the impact on the rest of the world will probably be muted. A harder landing, which would be characterized by a significant pickup in inflation, a sharp tightening of monetary policy, a slump in stock prices, and a marked decline in the value of the dollar, could stall growth in the United States and have more serious repercussions for the world economy.

In the euro area, output growth has strengthened and should be close to 3¹/2 percent both this year and in 2001—the best outcome in 10 years—while inflation remains low. Moreover, growth is more evenly spread across the 11 countries of the area. Unemployment in the euro area has fallen to 9.2 percent, compared with its peak of 11.7 percent in 1997. A major question about the European economies is how far, in light of the structural rigidities that characterize many of them, unemployment can continue to decline without triggering inflation. The challenge for the countries in the euro area will be to implement policies that will sustain the recovery and make it more resilient.

Asia's recovery from the crises of 1997-98 has been impressive—spectacular in some cases—but many countries in the region need to make more progress with structural reforms. Japan still has to tackle structural rigidities and financial sector weaknesses and deregulate key sectors of its economy. Korea and Malaysia have made good progress in restructuring and strengthening their financial and corporate sectors. Asia's recovery is projected to continue this year, partly on the strength of the region's export growth. Its imports have also surged, and a steady increase in investment is expected.

Among developing countries, growth in all regions this year is projected to be higher than in both 1998 and 1999. However, with the current high oil prices, some developing countries that depend on imported oil are experiencing trade deficits. The economic situation in most of Latin America has improved dramatically over the past 12 months, largely as a result of the successful implementation of structural reforms and sound macroeconomic policies, including in response to the crises of 1997-99. Underlying fiscal and structural weaknesses remain, however, and the countries of the region must persist with domestic reforms.

A number of countries in Africa have made substantial progress with stabilization and reform policies over the past decade, and real per capita incomes have been rising again in several of them. Output in Africa as a whole, however, grew by only 2¹/4 percent in 1999, its lowest rate in five years, partly because of military conflicts and corruption. Growth in Africa is projected to strengthen somewhat in 2000, to about 3¹/2 percent, but is far below what is required to make a dent in the still-pervasive poverty on the continent.

Several of the transition economies, mainly the former centrally planned economies of central and eastern Europe, have made considerable progress with economic reforms and are now facing challenges similar to those of middle-income market economies. These countries are projected to grow by 3 percent this year and by 4¹/4 percent next year. Most of the countries of the former Soviet Union, where scarce financial resources continue to be directed to poorly performing state enterprises and where corruption is still pervasive, are lagging behind their central and eastern European neighbors.

Despite the remarkable recovery of the global economy since 1998, many difficult problems remain, including the wide imbalances in external payments among the industrial countries. All countries must avoid complacency and be aware that the improved global economy could weaken the momentum for further reform.

IMF in 1999/2000

In 1999/2000, the IMF continued to help its member countries meet the challenges of economic globalization and reap its benefits. Together with the World Bank, the IMF began to implement a new approach to helping its poorest member countries reduce poverty and strengthen economic growth. Under the IMF's new concessional lending facility—the Poverty Reduction and Growth Facility (PRGF)—poverty reduction and policies to achieve it are explicitly linked, and country authorities themselves are responsible for formulating programs, in consultation with civil society and bilateral and multilateral donors. In addition, the IMF and the World Bank introduced the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, which provides deeper, broader, and faster debt relief to support poverty reduction programs.

Along with the improvements in global economic and financial conditions, the IMF's financial position—bolstered by the increase in its quotas under the Eleventh General Review that took effect in January 1999—continued to strengthen throughout the financial year, with the demand for IMF financial support falling dramatically as the global economic crises eased. Members' drawings of IMF general resources amounted to SDR 6.3 billion in financial year 2000, which ended April 30, 2000, compared with SDR 21.4 billion the previous year. Drawings consisted of SDR 5.7 billion under Stand-By and Extended Arrangements, SDR 0.2 billion under the Compensatory and Contingency Financing Facility, and SDR 0.4 billion in emergency assistance. Drawings under the PRGF and the Enhanced Structural Adjustment Facility also fell, to SDR 0.5 billion from SDR 0.8 billion in financial year 1999. As of April 30, 2000, 16 Stand-By Arrangements, 11 Extended Arrangements, and 31 PRGF Arrangements were in effect with member countries.

IMF highlights and reforms

On November 9, 1999, Michel Camdessus, who had served as IMF Managing Director for 13 years, announced that he would resign in early 2000. Under Camdessus, the profile of the IMF rose considerably as it shepherded the countries of the former Soviet Union and a number of central and eastern European countries through their transformation into market economies, increased its efforts to combat financial crises, and took initiatives to help the poorest countries.

Horst Köhler, from Germany, succeeded Michel Camdessus as IMF Managing Director, assuming office in May 2000. During his first months in office, he traveled to Latin America, Asia, and Africa to obtain the perspectives of member countries on the critical issues facing the global economy. As a result of these discussions and his initial review of IMF policies and operations, Köhler has identified five key areas that should be the focus of this year's Annual Meetings in Prague, Czech Republic: (1) reform of the IMF; (2) a renewed emphasis on macroeconomic stability to promote lasting growth and fight poverty; (3) an assessment of the efforts under way to strengthen the international financial system (see page 5); (4) completion of the debt relief initiative proposed at the Cologne economic summit in June 1999 (see IMF Survey, July 5, 1999, page 209); and (5) adjustment of the issues emphasized by the IMF in its programs, especially conditionality, to reflect a better understanding of poorer countries and their difficulties with reform.

The strengthening of the world economy in the past year can be attributed in part to actions taken in response to lessons learned from the crises of the 1990s. The reforms implemented by the IMF, as well as by other players in the international community, represent first steps toward making the international financial system more stable and less prone to crisis. It is impossible to rule out future financial crises, and for this reason, the institutions that deal with them should be reformed rather than weakened. However, the focus must shift to crisis prevention. In addition to promoting sound macroeconomic policy, transparency, and the implementation of internationally recognized standards in its member countries, Köhler has stressed that regular direct exchanges of information and dialogue between the IMF and the private financial sector must form a key element of crisis prevention. For this reason, he has decided to establish a capital markets consultative group, which will hold its inaugural meeting in Prague before the Annual Meetings.

IMF at a glance Establishment: December 27, 1945, when 29 countries signed the Articles of Agreement (charter). Financial operations began on March 1, 1947. Current membership: 182 countries Governing bodies: Board of Governors Executive Board Managing Director: Horst Köhler First Deputy Managing Director: Stanley Fischer Deputy Managing Directors: Eduardo Aninat Shigemitsu Sugisaki Staff: About 2,700 from 127 countries Total resources: SDR 212 billion (about $280 billion) Primary purposes: Promote international monetary cooperation. Facilitate the expansion and balanced growth of international trade. Promote exchange stability and maintain orderly exchange arrangements among members. Assist in establishing a multilateral system of payments in respect of current transactions between member countries and assist in eliminating foreign exchange restrictions that hamper the growth of world trade. Make available to members the IMF's general resources on a temporary basis to enable them to correct balance of payments problems without resorting to measures that would harm national or international prosperity. Shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

Globalization means different things to different people. Some view it as a beneficial process—a key to future world economic development—that is both inevitable and irreversible. Others believe that it increases inequality within and between countries, threatens employment and living standards, and thwarts social progress.

Although globalization offers extensive opportunities for worldwide development, it is not progressing evenly. Some countries are becoming integrated into the global economy more quickly than others and are seeing faster growth and reduced poverty. For example, outward-oriented policies brought dynamism and greater prosperity to much of east Asia, transforming it from one of the poorest areas of the world 40 years ago. As their overall living standards rose, these countries reduced poverty dramatically and made progress on democracy and other fronts, such as labor standards and the environment.

In contrast, where countries pursued inward- oriented policies—for example, in Latin America and Africa in the 1970s and 1980s—their economies stagnated or declined. As these regions have changed their policies, their incomes have begun to rise. Encouraging this trend, not reversing it, is the best course for promoting growth and development and reducing poverty.

What is globalization?

The term "globalization," which entered common usage in the 1980s, refers to the increasing integration of economies around the world, particularly through trade and financial flows. It sometimes also refers to the movement of people and knowledge across national borders, as well as the extension beyond national borders of the same market forces that have operated for centuries at all levels of human economic activity—village markets, urban industries, and financial centers. Recent technological advances have made it easier and faster to complete international transactions.

Markets promote efficiency through competition and the division of labor—the specialization that allows people and economies to focus on what they do best. Global markets offer people greater opportunity to tap into more and larger markets around the world, giving them access to more capital flows, technology, cheaper imports, and larger export markets. But markets cannot ensure that everyone shares equally in the benefits of increased efficiency. Countries must be prepared to adopt the policies that will enable them to benefit from globalization. The poorest countries may need the support of the international community as they do so.

Are periodic crises inevitable?

Some observers viewed the rash of financial crises in the 1990s—Mexico, Thailand, Indonesia, Korea, Russia, and Brazil—as direct and inevitable results of globalization. Clearly, the crises would not have developed as they did without exposure to global capital markets. At the same time, however, these countries could not have achieved such impressive growth rates prior to the crises without such exposure.

The crises were complex. Although many of these countries' records of economic performance before the crises were, by most standards, impressive, each was in some way vulnerable to shocks transmitted through global financial markets because of their exchange rate regimes, fragilities in their financial systems, unsustainable public debt, or more extensive fiscal and structural weaknesses. While macroeconomic stability, fiscal and financial soundness, transparency, and good governance are important for all countries, the crises made it clear that global financial markets can be unforgiving to countries that come up short in one or more of these areas.

The shifts in global capital flows during the crises were all the more abrupt because some creditors had not adequately assessed or managed their risks before the crises and because some key information—for instance, on the precariousness of the countries' reserve positions—became known only in the middle of the crisis. The international community responded by further strengthening the international monetary and financial system. The broad aim is for markets to operate with more transparency, equity, and efficiency.

It is disturbing that the income gap between high- and low-income countries has widened and that so many of the world's citizens live in abject poverty. But it is wrong to assume that nothing can be done to improve this situation. Low-income countries have not been able to integrate with the global economy as quickly as other countries partly because of their chosen policies and partly because of circumstances beyond their control. No country can afford to remain isolated from the world economy, and the international community should work to help the poorest countries become better integrated and grow more rapidly. Although growth is not all that is needed to reduce poverty—improvements in other areas, such as public health and education, are also important—it is an essential precondition. The evidence shows that growth is generally associated with rising living standards for rich and poor alike. This is the way to ensure that all people in all countries have access to the benefits of globalization.

The financial crises of the 1990s exposed weaknesses in the international financial system. In response, the international community has mobilized to strengthen the "architecture" of the system.

This architecture is the institutions, markets, and practices that governments, businesses, and individuals use when they carry out economic and financial activities. Building a stronger, more stable international financial system will make the world less vulnerable to financial crises. At the same time, it will allow countries to enjoy the benefits of globalization, with its demonstrated potential to spur economic growth and improve living standards.

Major areas of reform

Cooperative global reform efforts have concentrated on five major areas.

Transparency. The goal is to make timely, reliable data—plus information about economic and financial policies, practices, and decision making—readily available to financial markets and the public.

• The IMF's Special Data Dissemination Standard encourages the members that voluntarily subscribe to it to release detailed and reliable national economic and financial data.
• In overseeing members' economies, the IMF continues to encourage members to release Public Information Notices (PINs), which describe the IMF Executive Board's assessment of their economy and policies. The IMF has established a pilot project to encourage countries to release the staff reports on which the surveillance process is based. About one-third of IMF members participate in the pilot project, and the majority of countries now allow the release of PINs.
• The IMF also encourages members to release the "letter of intent" or "memorandum of economic and financial policies," which outline the policies that the member will carry out to achieve the objectives of its IMF-supported program.

Standards. Adherence to internationally recognized standards and codes of good practices helps ensure that economies function properly at the national level, which is a prerequisite for the smooth functioning of the international system.

• In consultation with others, the IMF has developed standards or codes of good practices in its main areas of responsibility: the Special Data Dissemination Standard, the Code of Good Practices on Fiscal Transparency, the Code of Good Practices on Transparency in Monetary and Financial Policies, and principles on financial sector soundness.
• The IMF has prepared experimental reports on countries' observance of standards and codes that evaluate their economic and financial practices relative to international standards. The World Bank and various standard-setting groups are developing and strengthening standards for accounting and auditing, corporate governance, and securities market regulation.

Financial sector strengthening. Banks and other financial institutions need to improve internal practices, including in assessing and managing risk, and the public sector needs to upgrade supervision and regulation of the financial sector to keep pace with the modern global economy.

• The IMF and the World Bank have stepped up, and improved, their assessments of countries' financial systems through a joint program (Financial Sector Assessment Program) that identifies potential weaknesses.
• With input from the IMF and others, the Basel Committee on Banking Supervision is addressing gaps in regulatory standards.

Private sector involvement. Increasing the involvement of the private sector in preventing and resolving crises can limit moral hazard (anything that encourages people to believe that they will reap the benefits of risky investments while being protected from losses), strengthen market discipline by fostering better risk assessment, and improve the prospects of both debtors and creditors.

• When crises occur, private sector involvement—through, for example, cooperation in restructuring debt—can help avert financial disruption, economic dislocation, and contagion.
• To facilitate the restructuring of sovereign debt, the IMF is recommending such measures as introducing collective action clauses in sovereign bond issues.

Systemic improvements: Contingent Credit Lines. The IMF created the Contingent Credit Lines (CCL) as a new instrument for preventing crises; it offers a precautionary line of credit to member countries with strong economic policies and is designed to protect them from future balance of payments problems caused by international financial contagion. The CCL creates further incentives for

• countries to adopt strong policies, be transparent, adhere to internationally accepted standards, and have a sound financial system; and
• the private sector to play a constructive role in preventing and resolving crises.

The IMF's Articles of Agreement provide for a Board of Governors, an Executive Board, a Managing Director, and a staff of international civil servants.

The Board of Governors, the highest decisionmaking body of the IMF, consists of one governor and one alternate for each member country. The governor, appointed by the member country, is usually the minister of finance or the central bank governor. The Board of Governors has delegated to the Executive Board all except certain reserved powers. It normally meets once a year.

The Executive Board (the Board) is responsible for conducting the business of the IMF. It is composed of 24 directors, who are appointed or elected by member countries or groups of countries. The Managing Director serves as its chairman. Meeting several times a week, the Board deals with a wide variety of policy, operational, and administrative matters, including surveillance of members' exchange rate policies, provision of IMF financial assistance to member countries, and discussion of systemic issues in the global economy.

Selected by the Executive Board, the IMF's Managing Director serves as the head of the organization's staff. Under the Board's direction, the Managing Director is responsible for conducting the ordinary business of the IMF. The Managing Director serves a five-year term and may be reelected to successive terms.

The International Monetary and Financial Committee of the Board of Governors (formerly the Interim Committee of the Board of Governors on the International Monetary System) is an advisory body composed of 24 IMF governors, ministers, or other officials of comparable rank and represents the same constituencies as the IMF's Executive Board. It normally meets twice a year, in April or May and at the time of the Annual Meeting of the Board of Governors in September or October. Among its responsibilities are to guide the Executive Board and to advise and report to the Board of Governors on issues related to the management and adaptation of the international monetary and financial system-- including sudden disturbances that might threaten the international monetary system--and on proposals to amend the IMF's Articles of Agreement.

The Development Committee (the Joint Ministerial Committee of the Boards of Governors of the World Bank and the IMF on the Transfer of Real Resources to Developing Countries) also has 24 members—finance ministers or other officials of comparable rank—and generally meets at the same time as the International Monetary and Financial Committee. It advises and reports to the Boards of Governors of the World Bank and the IMF on development issues.

IMF Executive Board (as of August 31, 2000)
Director    Alternate    Casting votes1 of    (percent of IMF total) Karin Lissakers    (Vacant)    United States    (371,743-17.33 percent) Yukio Yoshimura    Haruyuki Toyama    Japan    (133,378-6.22 percent) Bernd Esdar    Wolf-Dieter Donecker    Germany    (130,332-6.08 percent) Jean-Claude Milleron    Gilles Bauche    France    (107,635-5.02 percent) Stephen Pickford    Stephen Collins    United Kingdom    (107,635-5.02 percent) Willy Kiekens (Belgium)    Johann Prader (Austria)    Austria    Belarus    Belgium    Czech Republic    Hungary    Kazakhstan    Luxembourg    Slovak Republic    Slovenia    Turkey    (111,696-5.21 percent) J. de Beaufort Wijnholds (Netherlands)    Yuriy G. Yakusha (Ukraine)    Armenia    Bosnia and Herzegovina    Bulgaria    Croatia    Cyprus    Georgia    Israel    Macedonia, FYR of    Moldova    Netherlands    Romania    Ukraine    (105,412-4.91 percent) Agustín Carstens (Mexico)    Hernán Oyarzábal (Venezuela)    Costa Rica    El Salvador    Guatemala    Honduras    Mexico    Nicaragua    Spain    Venezuela    (92,989-4.34 percent) Riccardo Faini (Italy)    Harilaos Vittas (Greece)    Albania    Greece    Italy    Malta    Portugal    San Marino    (90,636-4.23 percent) Thomas A. Bernes (Canada)    Peter Charleton (Ireland)    Antigua and Barbuda    Bahamas, The    Barbados    Belize    Canada    Dominica    Grenada    Ireland    Jamaica    St. Kitts and Nevis    St. Lucia    St. Vincent and the Grenadines    (80,636-3.76 percent) Olli-Pekka Lehmussaari (Finland)    Åke Törnqvist (Sweden)    Denmark    Estonia    Finland    Iceland    Latvia    Lithuania    Norway    Sweden    (76,276-3.56 percent) Gregory F. Taylor (Australia)    Jong Nam Oh (Korea)    Australia    Kiribati    Korea    Marshall Islands    Micronesia, Fed. States of    Mongolia    New Zealand    Palau    Papua New Guinea    Philippines    Samoa    Seychelles    Solomon Islands    Vanuatu    (72,413-3.38 percent) Sulaiman M. Al-Turki    Ahmed Saleh Alosaimi    Saudi Arabia    (70,105-3.27 percent) Kleo-Thong Hetrakul (Thailand)    Cyrillus Harinowo (Indonesia)    Brunei Darussalam    Cambodia    Fiji    Indonesia    Lao PDR    Malaysia    Myanmar    Nepal    Singapore    Thailand    Tonga    Vietnam    (68,229-3.18 percent)	José Pedro de Morais, Jr. (Angola)    Cyrus Rustomjee (South Africa)    Angola    Botswana    Burundi    Eritrea    Ethiopia    Gambia, The    Kenya    Lesotho    Liberia    Malawi    Mozambique    Namibia    Nigeria    Sierra Leone    South Africa    Sudan    Swaziland    Tanzania    Uganda    Zambia    Zimbabwe    (69,968-3.26 percent) A. Shakour Shaalan (Egypt)    Abdelrazaq Faris Al-Faris (United Arab Emirates)    Bahrain    Egypt    Iraq    Jordan    Kuwait    Lebanon    Libya    Maldives    Oman    Qatar    Syrian Arab Republic    United Arab Emirates    Yemen, Republic of    (64,008-2.98 percent) Aleksei V. Mozhin    Andrei Lushin    Russia    (59,704-2.78 percent) Roberto F. Cippa (Switzerland)    Wieslaw Szczuka (Poland)    Azerbaijan    Kyrgyz Republic    Poland    Switzerland    Tajikistan    Turkmenistan    Uzbekistan    (56,900-2.65 percent) Murilo Portugal (Brazil)    Roberto Junguito (Colombia)    Brazil    Colombia    Dominican Republic    Ecuador    Guyana    Haiti    Panama    Suriname    Trinidad and Tobago    (53,422-2.49 percent) Vijay L. Kelkar (India)    A.G. Karunasena (Sri Lanka)    Bangladesh    Bhutan    India    Sri Lanka    (52,112-2.43 percent) Abbas Mirakhor (Islamic Republic of Iran)    Mohammed Daïri (Morocco)    Algeria    Ghana    Iran, Islamic Rep. of    Morocco    Pakistan    Tunisia    (51,793-2.41 percent) WEI Benhua    Jin Qi    China    (47,122-2.20 percent) Ana María Jul (Chile)    A. Guillermo Zoccali (Argentina)    Argentina    Bolivia    Chile    Paraguay    Peru    Uruguay    (43,395-2.02 percent) Alexandre Barro Chambrier (Gabon)    Damian Ondo Mañe (Equatorial Guinea)    Benin    Burkina Faso    Cameroon    Cape Verde    Central African Republic    Chad    Comoros    Congo, Rep. of    Côte d'Ivoire    Djibouti    Equatorial Guinea    Gabon    Guinea    Guinea-Bissau    Madagascar    Mali    Mauritania    Mauritius    Niger    Rwanda    São Tomé and Príncipe    Senegal    Togo    (25,169-1.17 percent)
1As of August 31, 2000, members' votes totaled 2,144,854. This total does not include the votes of the Democratic Republic of the Congo, whose voting rights were suspended effective 2, 1994. The votes in the Executive Board totaled 2,142,708. This total does note include the votes of the Islamic State of Afghanistan and Somalia, which did not participate in the 1998 Regular Election of Executive Directors.

In today's global economy, where the results of one country's domestic policy actions may spill over to other countries, it is essential to have a mechanism for monitoring economic policies. This mechanism is embodied in the IMF's oversight ("surveillance") of the international monetary system to ensure that it operates effectively. In assessing countries' policy decisions and economic developments, the IMF seeks to signal dangers on the horizon and anticipate the need for its members to take policy action. In light of the Mexican crisis of 1994-95 and the Asian crisis of 1997-98, the IMF has taken steps to strengthen the effectiveness of surveillance to reduce the likelihood of future crises, including by encouraging its members to increase the openness, or transparency, of their economic policy decisions.

How the IMF conducts surveillance

The IMF carries out surveillance in several ways.

Country surveillance is conducted through regular (usually annual) consultations with member countries. (The consultations are referred to as "Article IV consultations" because they are required by Article IV of the IMF's Articles of Agreement--the IMF's charter.) These consultations focus on the member's exchange rate, fiscal, and monetary policies; its balance of payments and external debt developments; the influence of its policies on the country's external accounts; the international and regional implications of its policies; and the identification of potential vulnerabilities. As financial markets around the world become more integrated, IMF surveillance has become increasingly focused on capital account and financial and banking sector issues. When relevant from a macroeconomic perspective, policies that affect a country's labor market, the environment, and governance are also covered by surveillance.

Global surveillance entails regular, normally biannual, reviews by the IMF's Executive Board of global economic developments, based on World Economic Outlook reports prepared by IMF staff, and periodic discussion of developments, prospects, and policy issues in international capital markets.

Regional surveillance related to monetary unions has recently intensified. For example, in fiscal year 2000, the Executive Board discussed developments in the European Economic and Monetary Union and in the Central African Economic and Monetary Community. Discussions between IMF staff and regional authorities supplement consultations with member countries.

Stepping up surveillance

It is essential for countries to provide timely, reliable, and comprehensive data. Given that gaps or deficiencies in data can hamper analysis, the IMF emphasizes the importance of clear and candid information on the quality of members' data. The IMF's General Data Dissemination System was established in 1997 to improve members' data and statistical practices. The Special Data Dissemination Standard, to which members are encouraged to subscribe, applies to countries that generally already meet high standards of data quality and that have, or are seeking, access to international capital markets.

To ensure that surveillance is continuous and effective, the IMF supplements annual consultations with interim staff visits to member countries and frequent informal meetings of the Executive Board to review major developments in selected countries.

The focus of surveillance has broadened to include a closer and more detailed examination of the functioning of countries' financial sector, capital account issues, and external vulnerability, including attention to policy interdependence and countries' risks of being affected, through contagion, by events in other countries. To strengthen financial sector surveillance and support more effective dialogue on related issues, the Financial Sector Assessment Program was launched in May 1999 by the IMF and the World Bank. Conclusions drawn from such assessments are intended to promote early detection of financial system weaknesses that may have macroeconomic implications and to help national authorities develop appropriate policy responses.

If countries observe internationally recognized standards, or codes of good practices, they can improve their economic policymaking and strengthen the international financial system. Monitoring countries' observance of such standards can increase their incentives to adopt and adhere to them. Thus, the IMF and the World Bank have begun preparing a series of experimental Reports on the Observance of Standards and Codes, many of which have been published and are available on the IMF's website (www.imf.org/external/np/rosc/rosc.asp). IMF surveillance provides a framework for organizing and discussing with national authorities the implications of assessments of adherence to standards and codes.

The role of credibility in restoring market confidence—for example, in the Asian crisis countries—underlines the importance of policy transparency. The IMF is thus emphasizing that the staff must communicate its views on economic developments in member countries with greater candor.

Efforts to increase transparency of both members' policies and IMF policy advice have progressed considerably. About a third of member countries participate in a pilot program for the voluntary release of Article IV staff reports, and the majority of members now allow the release of Public Information Notices after their Article IV consultation discussions.

Transparency at the IMF The more open, direct, and straightforward countries are in making policy decisions and providing data about economic and financial developments, the better they, and the international monetary system as a whole, will function. For its part, the IMF has taken steps toward providing its global audience with more information about its role and operations. It has also expanded its publications program and developed an extensive website (www.imf.org). Greater openness on the part of member countries encourages more widespread public discussion and analysis of their policies; enhances policymakers' accountability and the credibility of their policies; and provides information that is crucial for the orderly and efficient functioning of financial markets. Greater openness and clarity by the IMF about its policies and the advice it gives its members increases the public's understanding of its role and operations. The IMF's Executive Board has adopted measures (see below) to improve the transparency of members' policies and data and to enhance the IMF's external communications. In taking these steps, the Board has considered how to balance the IMF's responsibility for overseeing the international monetary system with its role as confidential advisor to its members. It has published more information about IMF surveillance of members, including PINs and Article IV consultation documents; published more information about countries' IMF- supported programs, including letters of intent, memorandums of economic and financial policies, and Chairman's statements on Executive Board discussions of such programs; conducted internal and external evaluations of IMF practices; continued dialogue and consultation with the public on IMF activities; and released more financial information about the IMF (for example, financial statements are now posted on the IMF's website).

The IMF is a financial cooperative, in some ways like a credit union. On joining, each member country pays in a sum of money, called its "quota." A country's initial quota is in the same range as the quotas of existing members that the IMF considers to be broadly comparable in economic size and characteristics. Quotas define members' financial and organizational relations with the IMF (see box).

The combined capital subscriptions of the IMF's members form a pool of resources, which the IMF uses to help countries experiencing financial difficulties. Having an adequate level of quotas allows the IMF to support members' efforts to establish currency convertibility and liberalize trade, help members converting their economies to market-based systems, provide balance of payments financing to members implementing reform programs, and avoid costly supplemental borrowing.

At regular intervals of not more than five years, the IMF's Board of Governors reviews members' quotas and decides—in light of developments in the global economy and changes in members' economic positions relative to other members— whether to propose adjusting them. A member may also request an adjustment of its own quota at any time.

In September 1997, the IMF's Executive Board agreed to increase total quotas by 45 percent, from SDR 146 billion (about $200 billion) to SDR 212 billion (about $280 billion). Its decision was based on the expansion of the world economy since quotas were last increased in 1990; the scale of potential payments imbalances; the rapid globalization and liberalization of trade and payments, including the capital account; and the IMF's current and prospective liquidity needs and the adequacy of its borrowing arrangements.

The distribution of the overall quota increase was largely equiproportional—that is, 75 percent of the increase was distributed to all members in proportion to existing quotas. Another 15 percent was distributed in proportion to members' shares derived from formulas that measure a country's relative position in the world economy on the basis of GDP, current account transactions, and official reserves (called "calculated quotas"). The remaining 10 percent was distributed to address the most important anomalies in the quota distribution—that is, to members whose shares in calculated quotas most exceeded their shares in actual quotas.

The Eleventh General Review of Quotas was completed in January 1998 and took effect in January 1999. Because of this increase in quotas, the IMF's resources available for lending have risen substantially.

What are quotas? A member's quota defines basic aspects of its relationship with the IMF. Subscription: A member's IMF quota is its subscription in the organization. A member must pay its subscription in full: up to 25 percent in reserve assets specified by the IMF (SDRs or "usable" currencies) and the rest in its own currency. Voting power: Each IMF member has 250 basic votes plus 1 additional vote for each SDR 100,000 of quota. Thus, the quota defines a member's voting power in IMF decisions. Access to financing: The maximum amount of financing a member can obtain from the IMF (access limits) is based on its quota. Under regular IMF facilities, a member can generally borrow up to 300 percent of its quota. Two of the IMF's special facilities—the Supplemental Reserve Facility and the Contingent Credit Lines (CCL)--do not specify a limit; however, the Executive Board has indicated that CCL access is expected to be in the range of 300-500 percent of quota. Allocation of SDRs: Members' shares in SDR allocations are set in proportion to their quotas.

The IMF provides financial assistance to members to help them correct balance of payments problems in a manner that promotes sustained growth. Assistance is subject to Executive Board approval and, in most cases, to the member's commitment to take steps to address the causes of its payments imbalance. Financing is made available to member countries under various policies, or facilities, whose terms address the nature and source of the balance of payments problem that the country is experiencing.

During financial year 2000, the Executive Board initiated a review of the IMF's nonconcessional lending facilities and policies to determine if they were all still needed and were appropriately designed. It agreed to eliminate several financial support mechanisms, including the Buffer Stock Financing Facility, support for commercial bank debt- and debt-service-reduction operations and for currency stabilization funds, and the contingency element of the Compensatory and Contingency Financing Facility. These facilities had been used only infrequently and in some cases had not been used at all for a number of years. The Board also considered that other IMF facilities were adequate for the purposes these facilities had originally been created to serve. At the same time, the Board began a more fundamental discussion—which is still ongoing—about the IMF's financing role and how its facilities might best be tailored to the evolving world economic environment.

In September 1999, the Board approved the establishment of a temporary Y2K Facility, under which the IMF would extend short-term financing to countries that encountered balance of payments difficulties arising from potential or actual Y2K-related failures of computer systems. No member made use of the facility, and it expired at the end of March 2000.

Regular lending facilities

Members using the IMF's general resources "purchase" (or draw) other members' currencies or SDRs by paying an equivalent amount of their own currency. The IMF levies charges on these drawings and requires that, within a specified time, members "repurchase" (or buy back) their own currency from the IMF with other members' currencies or SDRs.

IMF credit is subject to different conditions (see below), depending on the relative size of the financing provided. For drawings of up to 25 percent of a member's quota (called the first "credit tranche"), members must demonstrate that they are making reasonable efforts to overcome their balance of payments difficulties. Drawings above 25 percent of quota (upper credit tranche drawings) are made in installments as the borrower meets certain established performance targets. Such drawings are normally associated with Stand-By or Extended Arrangements.

Stand-By Arrangements. Under a Stand-By Arrangement, which is typically one to two years long but can be as long as three years, a country carries out a program that it has designed in consultation with the IMF staff to resolve balance of payments problems of a largely cyclical nature. The program focuses on key macroeconomic policy measures and, to receive the financing, the member must meet performance criteria marking its successful implementation of the program. These criteria—which allow both the member and the IMF to assess progress and may signal the need for further corrective policies— generally cover ceilings on government budget deficits, credit, and external debt, as well as targets for reserves. The country repays the money it has borrowed over 3¹/4-5 years.

Extended Fund Facility (EFF). The IMF provides financial support to its members for longer periods under the EFF. Extended Arrangements are designed to correct balance of payments difficulties that stem largely from structural problems and take longer to correct. A member requesting an Extended Arrangement outlines its goals and policies for the period of the arrangement, which normally runs for three years but can be extended for a fourth, and presents a detailed statement each year of the policies and measures it will implement over the next 12 months. The repayment period is 4¹/2-10 years.

Special lending facilities and policies

Supplemental Reserve Facility (SRF). In December 1997, the Executive Board established the SRF in response to the unprecedented demand for IMF assistance resulting from the Asian crisis. The SRF is intended to help member countries experiencing exceptional balance of payments problems created by a large short-term financing need resulting from a sudden and disruptive loss of market confidence. Assistance is available when there is a reasonable expectation that strong adjustment policies and adequate support will enable a country to correct its balance of payments difficulties in a short time. Access under the SRF is not subject to the usual limits but is based on the member's financing needs, its ability to repay the IMF, the strength of its program, and its record of past use of IMF resources and cooperation with the IMF.

Financing under the SRF, which is provided in the form of additional resources under a Stand-By or an Extended Arrangement, is generally available in two or more drawings subject to conditionality. Countries drawing under the SRF are expected to repay within 1 to 1¹/2 years of the date of each purchase. The Board may, however, extend this repayment period by up to one year. Repayment must be made no later than 2 to 2¹/2 years after the drawing. An interest surcharge is levied on SRF financing to encourage early repayment.

Contingent Credit Lines (CCL). The CCL was established in 1999 for members pursuing strong economic policies to obtain IMF financing on a short-term basis. Only members satisfying strict eligibility criteria qualify for the CCL. The CCL is intended to be a preventive measure solely for members concerned about their potential vulnerability to contagion but not facing a crisis at the time of the commitment. Thus, drawings on a CCL are not expected to be made unless a crisis stemming from contagion strikes. The repayment period for and rate of charge on CCL financing are the same as for the SRF. No member has yet made use of the CCL.

Compensatory Financing Facility (CFF). Formerly the Compensatory and Contingency Financing Facility (CCFF), the CFF provides timely financing to members experiencing a temporary shortfall in export earnings or an excess in cereal import costs attributable to circumstances largely beyond their control.

Concessional lending facility

Poverty Reduction and Growth Facility (PRGF). On November 22, 1999, the Enhanced Structural Adjustment Facility—the IMF's concessional financing facility to assist poor countries facing persistent balance of payments problems—was renamed the Poverty Reduction and Growth Facility and given a more explicit antipoverty focus. Programs supported under the PRGF are expected to be based on a strategy designed by the borrowing country to reduce poverty and are formulated with the participation of civil society and developmental partners. The strategy, to be spelled out in a poverty reduction strategy paper produced by the borrowing country in cooperation with the IMF and the World Bank, should describe the authorities' goals and macroeconomic and structural policies for the three-year program. (See section on poverty reduction strategy below.)

Other IMF policies and procedures

Emergency assistance. The IMF provides emergency assistance to members facing balance of payments difficulties caused by a natural disaster. The assistance is available through outright purchases, usually limited to 25 percent of quota, provided that the member is cooperating with the IMF to solve its problems. In most cases, this assistance has been followed by an arrangement from the IMF under one of its regular facilities. In 1995, the policy on emergency assistance was expanded to cover countries emerging from civil unrest or international armed conflict that are unable to implement regular IMF-supported programs because of damage to their institutional and administrative capacity.

In April 1999, the Executive Board agreed on steps to improve the terms of emergency assistance to postconflict countries. It also agreed that a second phase of assistance of up to an additional 25 percent of quota could be provided to countries meeting certain requirements; for example, the rebuilding process is slow despite the authorities' efforts and commitment to reform. It further agreed that the IMF, in carrying out its strategy on overdue financial obligations, would take into account the special difficulties faced by postconflict countries in arrears.

Emergency Financing Mechanism (EFM). EFM procedures allow for quick Executive Board approval of IMF financial support under the usual facilities. The EFM is to be used in rare circumstances representing, or threatening, a crisis in a member's external accounts that requires an immediate response from the IMF. The EFM was established in September 1995 and was used in 1997 for the Philippines, Thailand, Indonesia, and Korea and in July 1998 for Russia.

Member support in 1999/2000

During financial year 2000, the IMF approved 11 new Stand-By Arrangements and 4 new Extended Arrangements for member countries, with total new commitments of IMF resources of SDR 22.3 billion (about $29 billion). New commitments for Stand-By Arrangements, including augmentations of the existing arrangements for Bosnia and Herzegovina and Cape Verde, amounted to SDR 15.7 billion. The largest commitments under Stand-By Arrangements were for Argentina (SDR 5.4 billion), Mexico (SDR 3.1 billion), Russia (SDR 3.3 billion), and Turkey (SDR 2.9 billion). As of April 30, 2000, 16 countries had Stand-By Arrangements with the IMF, with commitments totaling SDR 45.6 billion and undrawn balances of SDR 17.4 billion.

General terms of IMF financial assistance
		Repurchase terms
Facility or Policy	Charges	Period (years)	Number of installments
Credit Tranches, Emergency Assistance, and Compensatory Financing Facility	Basic rate	31/4-5	8 (quarterly)
Extended Fund Facility	Basic rate	41/2-10	12 (semiannual)
Supplemental Reserve Facility and Contingent Credit Lines	Basic rate plus surcharge	2-21/2	2
Poverty Reduction and Growth Facility	0.50 percent a year	51/2-10	10 (semiannual)
Memorandum item:
Service charge	0.50 percent
Commitment charge (fee)	0.25 percent

Four new Extended Arrangements were approved, and the existing arrangement for Ukraine was augmented, resulting in total new commitments of SDR 6.6 billion. The largest commitments under Extended Arrangements were for Indonesia (SDR 3.6 billion) and Colombia (SDR 2.0 billion). As of April 30, 2000, 11 countries had Extended Arrangements with the IMF, with commitments totaling SDR 9.8 billion and undrawn balances of SDR 8.2 billion.

The IMF also approved 10 new PRGF Arrangements, with commitments totaling SDR 0.6 billion ($0.8 billion). As of April 30, 2000, 31 members' reform programs were supported by PRGF Arrangements, with IMF commitments totaling SDR 3.5 billion and undrawn balances of SDR 2.0 billion.

During the year, Algeria and the former Yugoslav Republic of Macedonia drew SDR 237.3 million under the CCFF. The IMF also provided emergency post-conflict assistance, totaling SDR 19.1 million, to Guinea-Bissau and Sierra Leone and emergency natural disaster assistance of SDR 361.5 million to Turkey.

Under the Heavily Indebted Poor Countries Initiative, the Executive Boards of the IMF and the World Bank assist countries eligible for debt relief. As of the end of financial year 2000, the IMF had committed SDR 467 million ($615 million) to nine of these countries, five of which had received grants totaling SDR 213 million ($280 million). The grants will be used to reduce their debt-service payments to the IMF.

Access limits are guided by quotas Access limits (Percent of member's quota) Stand-By and Extended Arrangements1 Annual 100 Cumulative 300 Special facilities Supplemental Reserve Facility/ Contingent Credit Lines none2 Compensatory Financing Facility3       Export earnings shortfall 20       Excess cereal import costs 10       Optional tranche 15 Poverty Reduction and Growth Facility    Three-year access       Regular 140       Exceptional 185 1Under exceptional circumstances, these limits may be exceeded. 2However, access under the Contingent Credit Lines is expected to be in the range of 300-500 percent of quota. 3These limits are under review and may be modified. The amount that a member may borrow from the IMF is determined by the IMF's policies on access to its resources. The rules governing access apply uniformly to all members. Access is determined primarily by a member's balance of payments need, the strength of its adjustment policies, and its ability to repay the IMF. With the exception of access under the Supplemental Reserve Facility (SRF) and the Contingent Credit Lines (CCL), annual and cumulative access limits under other facilities and policies are set in proportion to a member's quota. The Executive Board reviews the access limits annually in light of, among other considerations, the extent of members' balance of payments problems and developments in the IMF's liquidity. The IMF's current policies on access reflect the Board's decision in 1994 to raise the amount a country can borrow annually (the annual access limit) in the credit tranches and under the Extended Fund Facility (EFF) to 100 percent of quota from 68 percent and to maintain the maximum amount of outstanding credit (the cumulative access limit) at 300 percent of quota. In January 1999, following the increase in quotas under the Eleventh General Review, the Board decided that the annual and cumulative access limits under the credit tranches and the EFF would remain unchanged in percent of quota, effectively raising access by about 45 percent in SDR terms. In December 1999, the Board decided that the current annual and cumulative limits would be maintained through the end of 2000, pending a broader review of access policy and related issues. As of August 2000, the total amount a country can borrow under the Compensatory Financing Facility (CFF) ranges from 10 percent to 55 percent of quota. These limits are being examined in the context of a broader review of the CFF. Under the Poverty Reduction and Growth Facility, an eligible member may borrow a maximum of 140 percent of its quota under a three-year arrangement, although this limit may be increased, under exceptional circumstances, to up to 185 percent of quota. Drawings under the SRF are made in the context of a Stand-By or an Extended Arrangement but are not subject to a specific access limit. Drawings under the CCL are made in the context of a Stand-By Arrangement and are also not subject to a specific access limit, although access is expected to be in the range of 300-500 percent of quota.

When the IMF provides financial support to member countries, it must be sure the members are pursuing policies that will improve or eliminate their external payments problems. The explicit commitment that members make to implement corrective measures in return for the IMF's support is known as "conditionality." This commitment also ensures that members are able to repay the IMF in a timely manner, which in turn allows the IMF's limited pool of financial resources to be made available to other members with balance of payments problems. IMF financing, and the important role it plays in helping a country secure other financing, enables the country to adjust in an orderly way without resorting to measures that would harm its own or other countries' prosperity.

Conditions for IMF financial support may range from general commitments to cooperate with the IMF in setting policies, to the formulation of specific, quantified plans for financial policies. IMF financing from its general resources in the "upper credit tranches" (that is, where larger amounts are provided in return for implementation of remedial measures) is disbursed in stages. The IMF requires a "letter of intent" or a "memorandum of economic and financial policies," in which a government outlines its policy intentions during the period of the adjustment program; the policy changes it will make before the arrangement can be approved; performance criteria, which are objective indicators for certain policies that must be satisfied on a quarterly, semiannual, or in some instances monthly basis in order for drawings to be made; and periodic reviews that allow the Executive Board to assess whether the member's policies are consistent with the program's objectives.

Conditionality is flexible

The Executive Board's guidelines on conditionality

• encourage members to adopt corrective measures at an early stage;
• stress that the IMF should take into consideration members' domestic social and political objectives, as well as their economic priorities and circumstances;
• permit flexibility in determining the number and content of performance criteria; and
• emphasize that IMF arrangements are decisions of the IMF that set out, in consultation with members, the conditions for its financial assistance.

How conditionality works

The IMF recognizes that no one reform model suits all members and that individual countries—both governments and civil society—must have "ownership" of their programs. Thus, each member country, in close collaboration with the IMF staff, designs its IMF- supported program. The process involves a comprehensive review of the member's economy, including the causes and nature of the balance of payments problems and an analysis of the policies needed to achieve a sustainable balance between the demand for, and the availability of, resources.

IMF-supported programs emphasize certain key aggregate economic variables--domestic credit, the public sector deficit, international reserves, and external debt--and crucial elements of the pricing system—including the exchange rate, interest rates, and, in some cases, wages and commodity prices—that significantly affect the country's public finances and foreign trade and the economy's supply response.

Although macroeconomic policies designed to influence aggregate demand (the total amount of national planned expenditure in an economy) continue to play a key role in many IMF-supported adjustment programs, it is widely recognized that measures to strengthen an economy's supply side (production of goods and services) are frequently essential to restore and maintain external viability and sound growth. Among the IMF-supported policy adjustments that member countries make to enhance the growth potential and flexibility of their economies are measures to

• remove distortions in the external trade system and in domestic relative prices,
• improve the efficiency and soundness of the financial system, and
• foster greater efficiency in fiscal operations.

Structural reforms in these areas have been particularly important in programs under the Extended Fund Facility and the Poverty Reduction and Growth Facility (PRGF), and the latter focuses particularly on poverty reduction as well. Given the emphasis on structural reforms in IMF-supported programs, close collaboration with the World Bank has been important.

During a Stand-By Arrangement, an Extended Arrangement, or an arrangement under the PRGF, the IMF monitors a member's reform program through performance criteria selected according to the economic and institutional structure of the country, the availability of data, and the desirability of focusing on broad macroeconomic variables, among other considerations. Performance under IMF-supported reform programs is also monitored through periodic reviews by the IMF Executive Board.

A key element in the IMF's mandate is to contribute to the promotion and maintenance of high levels of employment and real income of its members. To this end, the IMF promotes sound macroeconomic policies, growth-enhancing structural reforms, and good social policies—conditions that contribute to human development.

Over the years, the IMF has increasingly recognized that it must be sensitive to the social implications of its policy advice, which has ramifications for the popular support for, or "ownership" of, reform programs and their ultimate success. In particular, attention to the close integration of social policy issues into IMF-supported programs--including social safety nets and the prioritization of public spending on areas of social policies--has become increasingly important.

In late 1999, the IMF replaced its concessional lending facility, the Enhanced Structural Adjustment Facility, with the new Poverty Reduction and Growth Facility (PRGF), with the aim of making poverty reduction in low-income members a key and more explicit element of a renewed growth-oriented economic strategy. In this approach, member countries prepare, through a broad participatory process, strategies for poverty reduction and social development, which are embodied in poverty reduction strategy papers and on which PRGF- supported programs are based.

Social sector spending

Fiscal adjustment is a critical aspect of any IMF reform program and of IMF policy advice on social issues. Government expenditures reflect social priorities and can be redirected to meet the needs of the poor more specifically. In pursuing this aspect of its work, the IMF collaborates extensively with other institutions for advice, including the World Bank, regional development banks, the United Nations Development Program, the International Labor Organization, and the World Health Organization. With their expertise, the IMF seeks to ensure that social and sectoral programs designed to reduce poverty can be accommodated and financed. It also helps the IMF identify key categories of public expenditure that must be maintained, or even increased if necessary, as well as unproductive spending—including excessive military spending—that can be reduced so that more money is available for basic health care and primary education.

In 61 countries where military spending, has recently declined, social spending on average, has increased. Between 1993 and 1997, military expenditure declined by 0.4 percentage point of GDP, while spending on health care and education increased by 0.2 percentage point. In many regions, efforts still need to be made to reduce wasteful, unproductive spending.

Through policy discussions and technical assistance, the IMF plays a role in improving the transparency of governments' decision making and their ability to monitor social developments. Recognizing the link between the level and efficiency of health and education spending and economic growth, the IMF also focuses on member countries' spending in these areas.

Thirty-two low-income countries that received IMF support between 1985 and 1998 made progress in raising public social expenditures and improving social indicators. Although results varied widely from country to country, for the entire group, on average, per capita real spending on education increased by 4.3 percent a year and on health, by 4.2 percent a year. Social indicators also improved during the review period. On average, illiteracy rates declined by 2.2 percent a year, primary school enrollment increased by 1 percent a year, infant mortality declined by 1.5 percent a year, and life expectancy increased by 0.2 percent a year. At the same time, access to health care improved by 11.2 percent a year and to safe water, by 4.2 percent a year.

Social safety nets

In the short term, some measures that are necessary for economic stability may initially hurt some of society's most vulnerable groups. Reform is likely to entail changes in income distribution as some groups gain or lose more than others as a result of policy changes. For example, currency devaluations may hurt the urban poor, who consume imported grains, while helping low-income farmers who produce export crops in rural areas. This is why the IMF is increasingly incorporating into its policy advice and programs cost- effective social safety nets to try to ease the effects of reform on the poor. About three-fourths of the countries that had programs under the Enhanced Structural Adjustment Facility (now the PRGF) during 1994-98 included social safety nets in their programs.

Safety nets can take the form of subsidies, or cash compensation, for particular groups; improved distribution of essential commodities, such as medicines; temporary price controls on some essential commodities; severance pay and retraining for public sector employees who have lost their jobs; and employment through public works programs.

In September 1999, the IMF set out to integrate two objectives—poverty reduction and growth—more fully into its operations in its 80 poorest member countries. The outcome was the replacement in November 1999 of the Enhanced Structural Adjustment Facility with the Poverty Reduction and Growth Facility (PRGF). The PRGF functions alongside the debt-relief program—the Heavily Indebted Poor Countries (HIPC) Initiative—of the IMF and the World Bank.

Poverty reduction strategy

The centerpiece of the new approach is country "ownership" of the strategy to reduce poverty. Borrowing countries prepare poverty reduction strategy papers in a process involving the active participation of civil society, nongovernmental organizations, donors, and international institutions. These papers are expected to generate fresh ideas about strategies and the measures needed to reach shared goals and to help instill a sense of ownership and national commitment to reaching those goals.

The IMF and the World Bank will assist in this process, and other multilateral and bilateral donors are also expected to provide advice and expertise. But to be effective, the strategy and the policies must emerge out of national debates in which the voices of the poor, in particular, are heard.

How the PRGF works

Discussions on the macroeconomic framework will be both ongoing and more open. Key macroeconomic objectives—including targets for growth and inflation—and the direction of fiscal, monetary, and external policies, as well as structural policies to accelerate growth, are subjects for public consultation. During the process, key social and sectoral programs and structural reforms aimed at poverty reduction and growth are to be identified and prioritized, and their budgetary impact clarified. The authorities will need to take into account the effects the reforms will have on domestic demand, the country's ability to implement the reforms, and the need to maintain an adequate level of international reserves. They must ensure that they can finance spending programs in a way that will not, over the long term, lead to inflation. A primary focus of programs supported by the PRGF is to improve the management of public resources and to achieve greater transparency, active public scrutiny, and greater government accountability in fiscal management.

Eighty low-income member countries are eligible for assistance under the PGRF on the basis of per capita income and criteria that reflect closely eligibility under the World Bank's concessional lending window—the International Development Association—whose current cutoff point is a 1998 per capita GDP level of $895.

An eligible country may borrow up to 140 percent of its IMF quota under a three-year arrangement, although this limit may be increased under exceptional circumstances to 185 percent of quota. The maximum amounts do not constitute an entitlement, and the loan amount will depend on the member's balance of payments need, the strength of its reform program, its outstanding use of IMF credit, and its past record of using IMF resources. Loans under the PRGF carry an annual interest rate of 0.5 percent, with repayments made semiannually, beginning 5¹/2 years and ending 10 years after the disbursement.

IMF and World Bank roles

The staffs of the IMF and the World Bank cooperate closely, focusing on their traditional areas of expertise. The IMF staff takes the lead in advising on macroeconomic policies and structural reforms in related areas, such as exchange rate and tax policy. It also takes the lead in improving fiscal management, budget execution, fiscal transparency, and tax and customs administration. The Bank staff advises the authorities on strategies to reduce poverty, structural and sectoral issues, and social issues. It also guides the authorities in determining the cost of the priority poverty-reducing expenditures. The two institutions share other areas of responsibility, including establishing an environment conducive to private sector growth, trade policy, financial sector development, and governance and transparency.

Financing the PRGF

Concessional lending under the current PRGF is handled through the PRGF Trust, which borrows resources at market-related interest rates from loan providers—central banks, governments, and government institutions—and lends them to eligible borrowers. The Trust receives contributions that are used to subsidize the rate of interest on PRGF loans and also maintains a Reserve Account (providing security for creditor claims on the Trust) in the event that PRGF loans are not repaid.

Discussions held on financing the PRGF and the HIPC Initiative led to an agreement in September 1999 that would enable the IMF to contribute to the HIPC Initiative and to continue concessional lending to support poverty reduction and sustainable growth in its low-income members. The total cost to the IMF is estimated at $3.5 billion in end-1998 net present value terms, with the HIPC Initiative accounting for two-thirds of the total financing requirements. The financing package comprises contributions from a cross section of member countries and from the IMF itself to the PRGF-HIPC Trust, which will handle the operations under the two initiatives.

On December 8, 1999, the IMF's Executive Board made the decisions that enabled the IMF to begin making its contribution to the PRGF-HIPC Trust, including a decision to conduct off-market gold transactions. The IMF has completed six off-market gold transactions for a total of 12.2 million ounces of gold. The investment income from the profits generated by these gold transactions will be used to provide debt relief under the HIPC Initiative. The IMF has also begun to receive bilateral contributions to the PRGF-HIPC Trust and expects further significant contributions.

PRGF support in 1999/2000

During financial year 2000, the Executive Board approved 10 new PRGF Arrangements with commitments totaling SDR 0.6 billion for Burkina Faso, Cambodia, Chad, Djibouti, Ghana, Mali, Mauritania, Mozambique, São Tomé and Príncipe, and Tanzania. In addition, it approved augmentations, amounting to SDR 44 million, of the arrangements for Albania, Georgia, and Mozambique. As of April 30, 2000, the reform programs of 31 member countries were supported by PRGF Arrangements, with IMF commitments totaling SDR 3.5 billion and undrawn balances of SDR 2.0 billion. Total PRGF disbursements amounted to SDR 0.5 billion during the year, compared with SDR 0.8 billion in the previous financial year.

The IMF has played a central role, through its policy guidance and financial support, in helping member countries cope with external debt problems. The IMF's ultimate objective is to ensure that debtor countries achieve sustainable growth and balance of payments viability and establish normal relations with creditors, including access to international financial markets. The basic elements of the IMF's debt strategy remain the same, even though the instruments it uses have evolved over time:

• promote growth-oriented adjustment and structural reform in debtor countries,
• maintain a favorable global economic environment, and
• ensure adequate financial support from official (bilateral and multilateral) and private sources.

Official bilateral debt rescheduling

Member countries seeking to reschedule their official bilateral debt normally approach the Paris Club—an informal forum for indebted countries and their official bilateral creditors--to work out agreements. The agreements generally provide for the rescheduling of arrears and current maturities of eligible debt service falling due during the consolidation period (generally the period of an IMF arrangement), with a repayment period stretching over many years. To ensure that such relief helps restore balance of payments viability and achieve sustainable economic growth, the Paris Club links debt relief to the formulation of an economic program endorsed by the IMF. In deciding on the coverage and terms of individual rescheduling agreements, Paris Club creditors also draw on the IMF's analysis and assessment of countries' balance of payments and debt situations.

Among the 30 middle-income countries that have rescheduled with Paris Club creditors during the last two decades, 24 have graduated from rescheduling, and others are expected to graduate at the end of their current consolidation periods. Their exit from rescheduling reflects the significant progress they have made in macroeconomic stabilization and structural reform, which has improved these countries' access to private foreign financing. In contrast, fewer than one-fourth of the 37 low-income rescheduling countries have graduated from the rescheduling process, partly because of the severity of their debt burdens and, in many of them, the uneven pace of macroeconomic stabilization and structural reform. Even in these cases, in light of the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, the Paris Club has offered to review the situation of those countries that may require further debt relief.

Since December 1994, Paris Club creditors have provided concessional reschedulings for low-income countries on "Naples terms," under which debt service on eligible debt is reduced by up to 67 percent in net present value terms. Creditors have also provided exit reschedulings on the stock of eligible debt on Naples terms for low-income countries that have demonstrated a good track record under rescheduling agreements and IMF-supported programs.

An agreement was reached in September 1997 on Russia's participation as a creditor in Paris Club reschedulings. It provides for up-front discounts on Russian claims on rescheduling countries to make them comparable to claims of traditional Paris Club creditors. This agreement has already facilitated the regularization of Russian claims on developing countries and the implementation of the HIPC Initiative for countries with large debts to Russia.