The IMF and Africa Overview
Africa seeks to lay foundation for growth

Listening and dialogue increasingly define IMF relations with African countries and civil society. The IMF has been actively seeking out the opinions of African heads of state, public officials, business and labor representatives, and civil society and has been translating this advice into streamlined conditionality and stronger national ownership of reform programs (see "Conditionality").

(From left) Presidents of Cape Verde, Pedro Pires; Ghana, John Kufuor; Mali, Alpha Omar Konare; ECOWAS executive secretary Mohamed Chambas; presidents of Senegal, Abdoulaye Wade; Ivory Coast, Laurent Gbagbo; Nigeria, Olusegun Obasanjo; and Benin, Mathieu Kerekou, meet for a regional summit of the New Partnership for Africa’s Development (NEPAD), May 2002.

For example, the pursuit of national ownership has been central to the poverty reduction strategy paper (PRSP) process, which has just undergone a thorough review (see "Poverty reduction"). And the IMF and the World Bank are working hard to make the enhanced Heavily Indebted Poor Countries Initiative a success—to provide deeper, broader, and faster debt relief to eligible countries and to strengthen the links between debt relief, poverty reduction, and social policies (see "Debt strategy"). There is also greater recognition that good economic advice cannot be separated from an understanding of national political processes and the social dimension of development.

Increasingly, the IMF sees that progress in African countries can show the way forward. Notably, African leaders themselves have designed and will carry out the New Partnership for Africa’s Development (NEPAD), a plan to revive the continent and end its marginalization. Under NEPAD, African countries have committed themselves to encouraging peace, democracy, and good governance; designing and implementing action plans to develop the key pro-poor sectors of health care, education, infrastructure, and agriculture; achieving economic integration at the regional and global levels by building a strong private sector and fostering a climate conducive to domestic and foreign investment; and developing more productive partnerships with Africa’s bilateral and multilateral development partners.

Kenyan entrepreneurs have launched East Africa’s first Internet coffee auction.

The IMF is committed to supporting NEPAD wholeheartedly. Recognizing that the biggest obstacle encountered by African economies striving for sustainable growth often is not lack of political will but lack of capacity, the IMF will set up Africa Regional Technical Assistance Centers (AFRITACs) in Abidjan and Dar es Salaam as part of its commitment. Through the AFRITACs, IMF resident experts and short-term specialists will help West and East African countries build local capacity for economic and financial management. Working closely with the World Bank, the African Development Bank, and donors, the IMF will focus on its core expertise—including macroeconomic policy, tax policy and revenue administration, public expenditure management, financial sector policies, and macroeconomic statistics. These AFRITACs, to begin operating later this year, are the first of five such centers eventually envisaged for the region.

Ghana is promoting high-tech development to reduce its dependence on mining and agriculture.

Given its ability to generate income and reduce aid dependency, trade is an important avenue for self-help, which is the cornerstone of NEPAD and a major weapon in the international community’s fight against poverty. Increased and better-coordinated support from rich countries in the form of more generous aid flows is also a major component of the poverty-fighting arsenal. The IMF continues to be an advocate for industrial countries to increase development assistance to poor countries with strong policies and to open their markets by phasing out trade-distorting subsidies and other trade barriers.

The IMF also supports stronger implementation of African regional initiatives as a way to increase access to markets both inside and outside Africa, improve competitiveness, and promote economic growth. NEPAD identifies regional cooperation and integration as key conditions that must be present in order for Africa to develop (see box).

This medical center in Burkina Faso exemplifies one country’s efforts to develop health care under NEPAD.

Implementing the “Monterrey Consensus,” which emerged from the International Conference on Financing for Development held in Monterrey, Mexico, in March 2002 (see box), is an important next step in the international community’s efforts to improve living conditions in Africa. The IMF remains committed to contributing to this global effort—through its economic policy advice and financial and technical assistance.

Advisory councils launched
Improving Africa's investment climate

Earlier this year, a joint initiative by IMF Managing Director Horst Köhler and World Bank President James Wolfensohn came to fruition with the inauguration of Investment Advisory Councils (IACs) in Ghana and Tanzania. These councils are intended to promote dialogue between the government and senior executives of local and international companies on ways to improve the investment climate.

Ghana’s IAC was launched in May 2002 under the chairmanship of President John Kufuor, who was joined by Köhler and senior Ghanaian and foreign business executives. At its inaugural meeting, the council identified a number of priority areas for government action, including regulatory reforms related to land ownership and mining and labor laws; safety and security; infrastructure, especially for energy, telecommunications, and information technology; financial services infrastructure; public sector sensitivity to the private sector; restoration of competitiveness to the mining sector; the economy’s dependence on aid and commodity exports; and the need for a partnership among government, private sector industries, and labor. The council will convene again in November to assess progress and update its recommendations.

The Tanzania Investors’ Round Table, chaired by President Benjamin Mkapa, held its opening meeting in July 2002 in the presence of Wolfensohn. Preparations for creating the Investment Advisory Council in Senegal before the end of the year are well under way, and several other African countries have expressed interest in launching their own IACs.

IMF and World Bank staff plan to attend future IAC meetings as observers and offer assistance and support where needed. The two institutions’ resident offices stand ready to cooperate with IAC working groups and provide information. The IMF and the Bank will also consider any technical assistance requests related to the councils’ work, especially for follow-up implementation needs and capacity building in their respective areas of expertise.

Debt strategy
Poor countries’ goal is to reduce debt, fight poverty, and achieve durable growth

The IMF plays 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 gaining access to international financial markets. The basic elements of the IMF’s debt strategy have remained 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.

Paris Club
Debtor countries seeking to reschedule their official bilateral debt typically approach the Paris Club—an informal group of creditor governments, mainly those of the Organization for Economic Cooperation and Development. Under such agreements, debtor countries generally reschedule their arrears and the current maturities of eligible debt service, with repayment stretching over many years. To ensure that such relief helps countries restore balance of payments viability and achieve sustainable economic growth, the Paris Club links debt relief to the formulation of an economic program supported 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.

Over the past two decades, rescheduling has helped some distressed middle-income countries return to financial stability. For low-income countries, the Paris Club began not only to reschedule, but also to reduce, their debts in the late 1980s.

New approach needed
Although the terms for Paris Club reschedulings became increasingly concessional over the years to bring more lasting relief, many poor countries did not grow as rapidly as had been hoped and their debt remained high. For these low-income, heavily indebted countries, creditors recognized the need for a new approach.

Launched in 1996, the original Heavily Indebted Poor Countries (HIPC) Initiative marked the first time that multilateral, Paris Club, and other official bilateral and multilateral creditors combined efforts to reduce the external debt of the world’s most debt-laden poor countries to “sustainable levels”—that is, levels that will allow these countries to service their debt through export earnings, aid, and capital inflows without compromising long-term, poverty-reducing growth. This exceptional assistance, which entails a reduction in the net present value (see box) of the public external debt of the indebted country, aims to free up resources that debtor countries can use to reduce poverty and invigorate growth.

Assistance under the HIPC Initiative is limited to countries that have per capita incomes low enough to qualify for World Bank and IMF concessional lending facilities and face unsustainable debt burdens even after traditional debt relief (see box). The vast majority of the eligible countries are in Africa.

Modifying HIPC
Following a review of the HIPC Initiative and extensive public consultations, a number of modifications were approved in 1999 to provide deeper, broader, and faster debt relief to eligible countries and to strengthen the links between debt relief, poverty reduction, and social policies.

But the enhanced HIPC Initiative is no panacea. Debt relief—no matter how generous—is only the first step to economic recovery for heavily indebted poor countries. These countries can achieve long-term debt sustainability only if they directly address the underlying causes that triggered the debt problem in the first place. To avoid slipping back into a situation where poverty-reducing investments are sacrificed to mounting external debt repayments, these countries must use the debt-relief proceeds to create the basis for sustained growth and poverty reduction.

What has the HIPC Initiative achieved?
By July 2002, 26 countries had reached their decision points under the enhanced HIPC Initiative, with commitments for over $40 billion of debt relief (in nominal terms) over time. This initiative, along with other debt relief, will reduce these countries’ external debts by about two-thirds, from $62 billion in net present value terms to $22 billion. Resources are being allocated to education; health care, including HIV/AIDS prevention and treatment; rural development and water supply; and road construction. Six countries—Bolivia, Burkina Faso, Mauritania, Mozambique, Tanzania, and Uganda—have received unconditionally all debt relief committed under the initiative. Two additional countries, Côte d’Ivoire and the Democratic Republic of the Congo, have been considered for HIPC relief on a preliminary basis and are expected to reach their decision points soon.

Challenges ahead
The first challenge is to bring more heavily indebted poor countries to their decision points. What makes this challenge particularly difficult is that many of the countries that have not yet qualified for HIPC relief are either engaged in, or have recently ended, domestic or cross-border armed conflict. Their need for debt relief is particularly acute because they suffer from abject poverty and face major reconstruction tasks. Many are also struggling with severe governance problems. These countries require help to develop a track record of good policy performance that will allow them to move toward their decision points and begin receiving debt relief. The second challenge is to keep the countries that have reached their decision points on track to implement sound, poverty-reducing policies so that they can reach their completion points under the HIPC Initiative and achieve sustainable growth.

Why not just forgive all the debt?
There have been repeated appeals to the international community to simply erase all the debt of the world’s poorest countries, but such a step would not be the most effective or equitable way to support the fight against poverty with the limited resources available. Today’s greatest development challenge––reducing world poverty––requires a comprehensive strategy that includes the efforts of the poorest countries to help themselves, as well as increased financial assistance from the international community and improved access to industrial country markets. Debt relief under the HIPC Initiative is only one element of the international support for poor countries that removes debt as an obstacle to growth. For many years to come, these countries will continue to need financial support on concessional terms to help them implement their growth and poverty reduction strategies and stand on their own feet.

Total debt cancellation would imperil the funds that multilateral creditors would have for future lending and would come at the expense of resources available to other developing countries, some of which are equally poor but have less external debt. Over 80 percent of the world’s poor live in countries that are not HIPCs. For the IMF, total debt cancellation would exhaust the resources that finance the Poverty Reduction and Growth Facility (PRGF) and the HIPC Initiative, and the IMF would have to stop providing concessional support to its poorest members.

Poverty reduction
Supporting country-led efforts

In 1999, the replacement of the IMF’s concessional lending facility, the Enhanced Structural Adjustment Facility (ESAF), with the better-focused Poverty Reduction and Growth Facility (PRGF) raised expectations about the IMF’s role in the fight against poverty. Loans under the PRGF—like ESAF loans—carry very low interest rates, long repayment terms, and a grace period. The PRGF differs from the ESAF in that it is based more directly on the premise of a mutually reinforcing relationship between macroeconomic stability, structural reform, growth, and poverty reduction. Yet this focus on poverty was not entirely new: since the late 1980s, IMF advice to its members has increasingly emphasized pro-poor policies while recognizing that the IMF’s traditional focus on macroeconomic stabilization—especially on price stability—also benefits the poor.

Demand for PRGF resources has been high. In recent years, more than 40 countries have had new PRGF arrangements or had ESAF arrangements transformed to include the new features of the PRGF. Overall in 2001, the IMF committed new PRGF loan resources of $2.7 billion, a record high, up from $1 billion in 2000. Last year’s increase partly reflected approval of a few large new commitments. Current projections indicate that new commitments in 2002 could reach $2 billion. If high levels of new commitments continue, consideration will need to be given to mobilizing new PRGF loan and subsidy resources.

All poor countries seeking assistance under the enhanced HIPC Initiative or low-cost loans from the IMF or the World Bank are expected to prepare comprehensive poverty reduction strategies. These strategies—formulated by a country’s government based on wide-ranging participation, including by civil society, donors, and international organizations, and spelled out in a poverty reduction strategy paper (PRSP)—now provide the basis for all concessional lending by the IMF and the World Bank.

There is no single blueprint for a country to follow in preparing its poverty reduction strategy. Rather, each country’s PRSP should reflect its specific circumstances. But each PRSP should describe the poor’s main characteristics and specify strategies for the medium and long terms that would have the highest impact on poverty reduction. And it should also identify realistic and trackable poverty reduction goals and set out macroeconomic, structural, and social policies for reaching them.

Locally produced PRSPs are expected to generate fresh ideas about how shared growth and poverty reduction goals can be reached and should help create a sense of ownership and national commitment to those goals. The IMF and the World Bank participate in the process and, along with other multilateral and bilateral donors, provide advice and expertise. But the strategies and policies should emerge from national debates in which the voices of the poor, especially, are heard.

Taking stock: the PRSP and the PRGF
Although implementation of the PRSP approach and the PRGF is still at an early stage, it is not too soon to take stock of lessons learned so far. The IMF and the World Bank together recently reviewed the first two years’ experience with the PRSP approach, and the IMF reviewed experience with the PRGF. The reviews drew on internal evaluations and extensive external consultations, engaging those with firsthand knowledge of the PRSP process and PRGF-supported programs: participating governments, international organizations, other aid agencies, and civil society organizations worldwide. Respondents provided written evaluations and voiced their opinions at regional forums as well as at the “International Conference on Poverty Reduction Strategies,” held in Washington, D.C., in January 2002, organized by the IMF and the World Bank.

Review of the PRSP process
Because only 10 full PRSPs were completed at the time, the review focused primarily on process and offered a tentative assessment of emerging content. While countries are completing their full PRSPs more slowly than originally expected, there is still enough information to begin defining “good practices.” A second review, planned for 2005, should provide an opportunity to assess progress more fully, including the impact on poverty outcomes and indicators.

What were the review’s main findings? The central one is that there is widespread support for the PRSP approach and broad agreement that its objectives remain valid. Most donors have indicated their intentions to align assistance programs with PRSPs, but more needs to be done to improve practices, especially to reduce the cost for low-income countries of mobilizing and using aid. It is noteworthy that the PRSP process has carved out a more prominent place for poverty reduction in policy debates. Data collection, analysis, and monitoring are becoming more systematic.

Supporting this, there is a growing sense of country ownership and more open dialogue within governments themselves and also between governments and civil society groups—even in countries that lack a well-established tradition of consultation. Nevertheless, the review saw much room for improvement, the main challenge being to promote broader and more substantive participation by domestic stakeholders. The quality of participation has varied widely from country to country. Discussions have often been limited to a narrow set of issues related to targeted poverty reduction programs, effectively excluding civil society organizations from the broader debate over structural reforms and macroeconomic policies. The review recommended that development partners increase technical assistance to bolster civil society’s ability to participate fully and effectively in the PRSP process. The review also recognized the need to involve parliamentarians in preparing, approving, and monitoring country strategies.

IMF expands antipoverty work in the former Soviet Union After the breakup of the Soviet Union just over a decade ago, the seven lowest-income members of the Commonwealth of Independent States (CIS)—Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova, Tajikistan, and Uzbekistan—were confronted with the dual challenge of building new states and market economies. Most of these countries have made significant progress toward these goals during the past decade. But the complexity of the transition challenges has caused living standards to fall sharply and, in some cases, has made it very difficult to implement market-oriented reforms effectively. The CIS-7 Initiative is designed to improve living standards in the former Soviet Union. At right, an agricultural market in Moldova, one of the target countries. The IMF—together with the World Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, bilateral donors, and neighboring countries—recently launched the CIS-7 Initiative intended specifically to help reduce poverty and promote economic growth in these seven countries. With nearly 20 million people living in extreme poverty within their borders, these countries clearly still have some way to go in overcoming the economic and social disruptions that have occurred in tandem with the transition from centrally planned to market economies. While each country obviously faces its own specific adjustment problems, the IMF and the other international financial institutions sponsoring the CIS-7 Initiative identified some common development challenges. In the area of political reforms, government capacity must be strengthened to resist corruption and deliver public services more effectively and accountably. All of these countries need more adequate health and education services for their people and must take action to fight the devastating human toll taken by diseases such as HIV/AIDS, tuberculosis, and malaria. Improved macroeconomic stability is key for establishing an environment for local businesses to plan, invest, and grow, and for helping attract technological know-how and capital flows from foreign direct investors to improve productivity and build a dynamic private sector. Enhanced regional cooperation—for example, in trade and energy—is indispensable in boosting the competitiveness of national economies and can be helpful in resolving regional disputes and dividing the cost of large infrastructure investments. Finally, urgent action is needed to reduce debt to sustainable levels. The seven countries will be responsible for making headway in these areas by intensifying their development and reform efforts. But trade and development partners and creditors will complement this work by strongly supporting these countries in strengthening conditions for growth and poverty reduction. This assistance to the CIS-7 is expected to include low-cost loans, debt relief, or debt restructuring (where needed), as well as greater access to industrial countries’ markets and promotion of direct investment. Development agencies plan to better coordinate the way they administer support under the CIS-7 initiative while also ensuring that this support is anchored in country-led poverty reduction programs. International and regional institutions intend to give added support through technical assistance and policy advice.

Looking ahead, the focus must shift to implementation of PRSPs and the need to better understand the links between policies and poverty outcomes. The review suggested that efforts would have the biggest payoff in the following four areas:

• Macroeconomic frameworks. Every country’s PRSP is underpinned by a macroeconomic framework in support of its growth and poverty reduction objectives. But attention needs to be given to setting more realistic growth targets that are in line with country circumstances and constraints, and more care needs to be given to identifying the sources of pro-poor growth underpinning these targets. Poor countries must also pay more attention to their heightened vulnerability to external shocks by identifying in advance potential areas of vulnerability and appropriate social safety nets or other relevant policy responses.
  
  
• Prioritizing policy actions. Trade-offs and better prioritization of policy actions are needed to make poverty reduction strategies realistic, especially in the face of tight budget constraints. Uncertainties about their overall growth strategies, the costs of various actions, and available financial resources often make it difficult for PRSP countries to set priorities. Development partners need to provide more technical and financial assistance to countries building capacities for setting priorities.
  
  
• Poverty and social impact analysis. National capacity constraints and technical difficulties can hinder countries’ ability to clearly link policy actions to either a comprehensive diagnosis of poverty or an analysis of their impact on the poor. Countries, with the assistance of development partners, should undertake more systematic poverty and social impact analyses of major policy changes.
  
  
• Public expenditure management systems. Countries need to assess the current state of these systems—which often face problems such as incomplete coverage, inappropriate classifications, limited capacity to track spending, and weak auditing—and develop realistic plans for improving them, seeking technical support as appropriate.

Review of the PRGF
Is the PRGF living up to expectations? To answer this, the IMF carried out a major review between July 2001 and February 2002 to assess the extent to which country ownership had been enhanced and PRGF-supported programs had been based on countries’ poverty reduction strategies. Since the PRGF is only a few years old and arrangements run three years, the review was necessarily limited and focused primarily on program design. An assessment of whether PRGF-supported programs are achieving their poverty-reduction or growth goals will have to await the later review scheduled for 2005. Among the major findings of the recent review were the following:

• The composition of budgeted and actual public spending is becoming more pro-poor and pro-growth in countries with PRGF-supported programs. These countries are allocating a larger share of government spending to education and health care, and PRGF-supported programs are incorporating measures to improve the efficiency of spending in these areas.

Farmers in Cambodia, a PRGF country, are experiencing the country’s worst drought in recent history.

• PRGF-supported programs are characterized by greater fiscal flexibility—whereby the fiscal framework permits an increase in poverty-reducing spending when additional resources are available—than the preceding ESAF-supported programs. PRGF-supported programs target noninterest public spending that is 2 percentage points of GDP higher, on average, than that targeted under the preceding ESAF-supported programs. PRGF-supported programs also show greater flexibility by accommodating more spending when foreign financing (including grants) is greater than expected, or by allowing additional domestic financing to compensate for shortfalls in external financing.
  
  
• Almost all PRGF-supported programs emphasize strengthening governance by improving public expenditure management. Most of these measures focus on budget control––in particular, keeping spending within the limits set in the budget. Others are designed to strengthen auditing procedures or anticorruption strategies.
  
  
• Around three-fifths of the country authorities responding to the survey said that the PRGF provided more opportunity to influence program design than in the past and that IMF resident representatives and Washington staff were increasingly engaged in the national dialogue associated with the PRSP process.
  
  
• Conditionality was substantially streamlined in PRGF-supported programs, in line with an overall streamlining of structural conditionality in all IMF arrangements. The review found that there were more performance criteria, prior actions, and structural benchmarks in PRGF arrangements than there had been for the same countries under the ESAF.

While the review concluded that PRGF-supported programs have had a promising beginning, it found that there is scope for a more systematic application of best practices:

• More systematic discussion and analysis of macroeconomic frameworks and policies are needed—including the sources of growth, alternative policy choices, and the constraints and trade-offs involved.
  
  
• The IMF and the World Bank need to make continued improvements in differentiating between their roles and coordinating their activities. IMF documents and joint assessments should more fully report conditions set by other donors to provide a better picture of total donor conditionality.
  
  
• Further efforts are needed on public expenditure issues—including improving the quality and efficiency of government spending, and strengthening public expenditure management systems.
  
  
• Documentation should clearly set out the PRGF’s role in the country’s overall poverty reduction strategy as well as the options considered and the commitments made by government officials.

Beyond the design of PRGF-supported programs, the review pointed to other improvements that are needed, including

• an increased focus on the sources of growth in PRGF-supported programs;
  
  
• more extensive and effective communication with government officials, development partners, and civil society in countries on the policy options for PRGF-supported programs;
  
  
• PRGF documents that routinely describe the poverty and social impact analyses being carried out, as well as discussions with country authorities on the social impact of key reforms;
  
  
• further capacity building to develop and assess macroeconomic frameworks, analyze poverty profiles, and conduct poverty and social impact analyses; and
  
  
• an examination of the structure of the PRGF and its adequacy in meeting the diverse needs of low-income countries.

Financial architecture
Fast-changing world economy drives IMF reforms

Much of what the world now knows about the complexity and dynamism of global finance was learned—sometimes the hard way—in the 1990s. The decade was a testament to the power of the markets to create wealth and destroy it. The suddenness, velocity, and scope of crises in the 1990s were unprecedented, but, in their wake, they yielded two lessons: crises need to be prevented whenever possible and resolved quickly when they do erupt.

These dramatic changes in the world economy and the lessons they imparted are at the heart of the reforms the IMF has advocated and itself absorbed in recent years. These reforms have emphasized the critical importance of more information and greater transparency, highlighted the role that global standards and accepted codes of good practices can play in improving performance and increasing levels of trust, underscored the need for expanded cooperation among countries and international organizations, and called for heightened vigilance over the types of vulnerabilities that can trigger crises.

More information, please
Markets, as recent crises have demonstrated, don’t like surprises. A dearth of information or the belated discovery of misinformation fosters unease, even alarm. The IMF translated this early lesson from the Asian crisis into action, encouraging countries to provide more information—and more reliable data—to markets. High on its list of reforms was a series of statistical initiatives:

Special Data Dissemination Standard (SDDS). Created in 1996, the SDDS is a voluntary standard whose subscribers—countries with market access or seeking it—commit to meeting internationally accepted levels of data coverage, frequency, and timeSpecial Data Dissemination Standard (SDDS). Created in 1996, the SDDS is a voluntary standard whose subscribers—countries with market access or seeking it—commit to meeting internationally accepted levels of data coverage, frequency, and timeliness. Subscribers also agree to issue calendars on data releases and follow good practices with regard to data quality and integrity. Information on subscriber data dissemination practices is posted on the IMF’s website on the Data Standards Bulletin Board, which is linked to subscriber websites.

General Data Dissemination System (GDDS). For countries that do not have market access but are eager to improve the quality of their national statistical systems, the GDDS offers a “how to” manual. Voluntary participation allows countries to set their own pace but provides a detailed framework that promotes the use of widely accepted methodological principles, the adoption of rigorous compilation practices, and ways in which the professionalism of national systems can be enhanced. Participating countries post their detailed plans for improvement on the Data Standards Bulletin Board, thus permitting both domestic and international observers to view their progress.

Data Quality Assessment Framework. The success of both the SDDS and the GDDS, and the growing recognition that good statistics are essential for effective policymaking, spurred the IMF, in consultation with national statistical offices, other international agencies, and data users, to take a further step and evaluate the quality of data as well. This new framework, developed in 2001, provides the means to assess data integrity, methodological soundness, accuracy and reliability, serviceability, and accessibility.

The openness revolution Some of the most dramatic changes over the past decade have taken place in information exchange. Technological changes have revolutionized the speed and ease with which information can be shared and have democratized the production and consumption of data. What was once arcane and in the province of the highly specialized is now, via the Internet, available to everyone with access to a computer. In an age in which global communications make the world very small indeed, the availability of information and commitment to openness matter more than ever. In the mid-1990s, when the IMF first began encouraging its members to be more open with their economic and financial data, its carefully vetted Annual Report contained virtually the only publicly available summary of the regular (Article IV) consultations the IMF conducted with its member countries on the current state and prospects of their economies. By 2000, the IMF’s Internet site––www.imf.org––was serving as the chief vehicle for what amounted to a sea change in the openness of the IMF and its membership. The website now posts Public Information Notices summarizing the IMF Executive Board’s discussions of Article IV staff reports for many member countries. It has become a key tool for the authorities and the IMF to share with the public the goals and means of country adjustment efforts. Documents outlining the authorities’ intentions are now routinely published, as are more than half of IMF staff reports on the use of IMF resources. The IMF has also become much more transparent about its own policies and operations. Staff papers outlining the pros and cons of various policy issues and summaries of Executive Board discussions of these papers are also now routinely released. On some key issues of wide public interest, the IMF uses its website to initiate a dialogue—soliciting opinions or offering early drafts of papers for comment. The IMF is also expanding its outreach to parliamentarians, nongovernmental organizations, and other interested groups to improve public understanding of its policies and operations and to broaden and deepen its dialogue with these groups. In 2001, the IMF took a formal step to improve the transparency and effectiveness of its policies and procedures when it created the Independent Evaluation Office (see "Independent evaluation office"). The office, intended to complement traditional internal evaluations, selects several major topics for review annually, carries out these reviews, and posts its findings on the Internet.

Role of standards and codes
Better data, while important in themselves, are an element of a larger project. Agreement on and implementation of broadly agreed standards of accepted practices and codes of good behavior provide yardsticks to measure the quality of policies and performance. They help national authorities formulate and assess policies and permit market participants to evaluate how well a country is doing. Widely accepted standards and codes also have a ripple effect by encouraging greater transparency, better governance, and improved accountability and policy credibility. In cooperation with a wide range of international institutions and with input from numerous national authorities, the IMF has been active in both developing standards and codes and incorporating them in their annual review (surveillance) of member country economies.

In 1999–2000, the IMF, with the World Bank, launched a joint program of voluntary and summary reports in a wide range of areas in which the two organizations have long-standing expertise. These Reports on the Observance of Standards and Codes (ROSCs)—about 70 percent of which are subsequently published—principally examine three broad areas: transparency, financial regulation and supervision, and corporate governance (including accounting, auditing, and insolvency). In these areas, the ROSCs promote the following:

• Transparent governmental policymaking and operations. The underlying assumption is that better-informed publics are more likely to hold their governments accountable for their policies and that investors, armed with better data and a standard against which to evaluate them, are more likely to invest wisely. Key tools are the IMF’s statistical initiatives (SDDS and GDDS) and codes of transparency in monetary, financial, and fiscal policies.
  
  
• Stable financial sectors. As a rule of thumb, financial sectors are as sound and consistent as their regulatory environments are vigilant. The IMF and the World Bank each year undertake a certain number of Financial Sector Assessment Programs (FSAPs). These detailed analyses review and test financial sectors for vulnerabilities, evaluate how risks are managed, weigh possible technical assistance needs, and help countries prioritize policy responses. In addition, ROSCs evaluate banking supervision, securities and insurance regulation, and payments systems, as well as the transparency of monetary and financial policies.
  
  
• Healthy corporate sectors. With the private sector serving as the engine of growth in most economies, the health of the corporate sector is a critical concern. The World Bank typically takes the lead in assessing the quality of corporate governance, the adequacy of accounting and auditing standards, and the state of insolvency procedures and creditor rights.

When are countries vulnerable?
More information and more openness can go a long way toward averting the shocks that ignite serious problems, but as the IMF and other institutions surveyed the damage done by recent crises, they also asked another question: how do we know when a country is at risk? The crises of the 1990s were different, reflecting a larger role for private sector financing, greater scope for cross-border contagion, and stronger links between external financing difficulties and distress in domestic financial and corporate sectors. All of this suggested the value of taking a fresh, hard look at the sources of vulnerability and the tools available to identify problems before they become crises.

As a first step, it was clear that the IMF needed to monitor capital market developments more closely and more continuously. This prompted the creation of the International Capital Markets Department in 2001 to complement the work of the organization’s traditional regional (area) and functional departments. As a result, country vulnerability assessments have been strengthened and now cover a more comprehensive set of inputs, including the impact of the latest changes in the global economic and financial environment, early warning systems and indicators, and ROSC and FSAP findings (when available).

An IMF Executive Board review of vulnerability assessments also pointed to the need for more data on foreign exchange exposures in financial and non-financial corporate sectors and more information on country financing needs. It urged international institutions to convey greater urgency when they discussed perceived vulnerabilities with national authorities, and it called for continued work on the formulation of policy guidelines. In recent years, detailed guidelines have been drawn up on public debt management (in consultation with the World Bank) and foreign reserves management (in close collaboration with both member countries and other international institutions).

Strengthening financial sectors
As the Asian crisis demonstrated, weaknesses in the financial sector can both amplify crises and cause them. Given the critical role that resilient financial sectors can play in heading off crises and the fuel that ailing financial sectors can add to the fire when economies are under siege, the IMF has been giving added attention to this sector. It has redirected its FSAP resources to large economies and key emerging markets that could have a systemic impact on the world economy. And it has supplemented the FSAPs with newly devised “core” and “encouraged” Financial Soundness Indicators. These indicators are meant to guide country surveillance efforts and alert national authorities to the qualities that characterize healthy financial sectors. The core indicators focus on crucial elements in the banking system, while those that are encouraged take a more detailed look at the banking sector and address aspects of nonbank financial, corporate, household, and real estate sectors.

Assessing offshore financial centers
Traditionally, global finance was the sum of its national parts, but the rise in offshore banking centers and a sharp increase in the volume of funds channeled through these centers have added another dimension—and level of complexity—to global finance. In response to increasing calls for more information about offshore banking activities, the IMF has helped these centers gather data and conduct self-assessments, providing technical assistance where needed.

Money laundering and financing of terrorism
Money laundering and its now allied concern, the financing of terrorism, affect both onshore and offshore financial centers. The IMF’s own work in this area began in the context of financial abuses that threatened the integrity and stability of the international financial system. The events of September 11 lent new scope and urgency to the work and hastened efforts to better coordinate responsibilities among international institutions to implement the recommendations of the Financial Action Task Force (FATF) on Money Laundering. The IMF, whose core expertise lies in economic assessment and in helping member countries build up the quality and effectiveness of their supervision and regulation of financial institutions, has focused its efforts on relevant supervisory principles, closer cooperation with major anti-money-laundering groups; increased technical assistance; and greater attention to anti-money-laundering issues in its surveillance and other activities.

Specifically, the staffs of the World Bank and the IMF have prepared a methodology to assess whether adequate controls and procedures are in place to prevent abuse; the document is currently being piloted as part of the institutions’ financial sector assessments. Their Boards will consider whether to add the FATF 40+8 Recommendations to the list of standards that includes preparation of a ROSC to combat money laundering and the financing of terrorism, and possible mechanisms for carrying out such assessments. IMF and World Bank staff are also working closely with the Financial Action Task Force on Money Laundering to adapt its recommendations so that they are consistent with the work being done in the context of the ROSCs.

When to liberalize the capital account
For many of the IMF’s emerging market economies, two important questions are when and how to liberalize their capital accounts. Access to capital markets provides the opportunities to finance the investment that is essential for growth, but the crises of the past decade are also vivid reminders that the transition can be tricky and the risks large.

What should countries do to lay the proper groundwork for opening their capital accounts, and how can they sequence reforms to enhance stability and minimize volatility?

The IMF, in the course of its annual consultations with member countries, has helped them gauge their readiness for capital account liberalization and prioritize financial sector reforms; it has also underscored the key role played by transparency. Although no foolproof recipe for liberalization exists yet, experience in many countries suggests that liberalizing longer-term flows (notably, foreign direct investment) first may be safer than starting with the more volatile short-term flows.

Resolving crises
Crises will occur no matter how many preventive measures are in place. The IMF’s goal is to reduce the number and severity of these crises and help countries deal decisively and effectively with those that do arise. In April, the IMF’s Managing Director, Horst Köhler, laid out a four-point work program to strengthen the IMF’s framework for crisis resolution. It called for increased capacity to assess the sustainability of a country’s debt, a clear-cut policy on access to IMF resources in capital account crises, enhanced means to secure private sector involvement in resolving financial crises, and continued work on a more orderly and transparent legal framework for sovereign debt restructuring.

Debt sustainability. The ability to distinguish between types and degrees of debt crises is key to tailoring an appropriate response. To provide effective assistance, the IMF must be able to differentiate among cases where restructuring is needed and a substantial write-down of claims may be in order; where the official sector will need to encourage creditors to reach voluntary agreements; and where it is appropriate for the IMF, along with others, to provide financing in support of a member’s adjustment program and to help restore confidence and catalyze the resumption of private capital flows.

When is debt sustainable? Hard and fast answers are typically hard to come by, but the IMF is working to strengthen its analytical tools to ensure that judgments are well informed. It will be looking in greater detail at the elements that go into these decisions—and testing the underlying assumptions about earnings growth, interest rates, and the primary balance
of spending and income.

Access to IMF resources. For members coping with capital account crises, there is often a wide gap between their large immediate financing needs and the IMF resources, as defined by quotas, that would normally be available to them. A clearer policy on access limits would allow the IMF to both provide the scale of financing needed in such cases and reinforce incentives for responsible policies and prudent assessment of risk.

Strengthened tools for involving the private sector. Within existing legal frameworks, how can the private sector play a more significant role in resolving financial crises? Alternative financing tools can help manage crises, but the IMF’s work in this area suggests that individual circumstances must be examined carefully and the benefits weighed against possible risks, including unsettled markets and a transfer of risk from sovereigns to the domestic financial systems. Where a restructuring of sovereign debt is needed, it is crucial to contain the erosion of confidence and keep the process orderly.

Sovereign restructurings. These become necessary when countries run up unsustainable debt burdens. They are infrequent but can be unusually costly because no legal framework currently exists to handle this process in a timely, predictable, and orderly manner.

In November 2001, IMF First Deputy Managing Director Anne Krueger renewed the discussion on what could be done to provide for a speedier and more orderly way to resolve these problems. Her proposal to create a sovereign debt restructuring mechanism (see box) has set off a lively debate about the form the mechanism should take. The IMF is expected to continue its work on this reform in advance of its 2002 Annual Meetings, where the SDRM proposal is expected to be taken up.

When countries can’t repay their debts Countries, like individuals, may run up debt and find themselves unable to keep up the payments on it. To avoid defaulting, they must restructure their debt. But, unlike bankruptcy provisions in domestic situations, the global financial system lacks a legal framework for sovereign debtors and their creditors to restructure debt in an orderly and timely way. One major challenge to sovereign debt restructuring stems from the way international capital markets have evolved over the past 20 years or so. They have become more integrated and there has been a shift from syndicated bank loans to bond issues. As a result, sovereign borrowers are increasingly able to issue debt in a range of legal jurisdictions, using a variety of instruments, to a diverse and diffuse group of creditors. Although this has expanded the sources of financing available to emerging market countries, it has also exacerbated the problems of coordination, collective action, and equal treatment of creditors when a restructuring becomes necessary. IMF proposes a solution In November 2001, IMF First Deputy Managing Director Anne Krueger proposed a sovereign debt restructuring mechanism (SDRM) to facilitate the orderly, predictable, and rapid restructuring of unsustainable sovereign debt. Since November, the proposal has undergone various changes, and the IMF’s decision-making role is envisaged to be smaller in the latest incarnation. The resulting twin-track —that is, statutory and contractual—approach has since received the endorsement of the international community. For the mechanism to be effective, there must be incentives both for debtors to address their problems promptly and for debtors and creditors to agree quickly on the restructuring terms. The IMF’s policies spelling out the availability of its resources before, during, and after the restructuring process would help shape these incentives. However, use of the mechanism would be for the debtor country to decide and not for the IMF or a country’s creditors to impose. The debtor country and a majority of its creditors would have the essential decision-making authority. How the mechanism would work The first track of the SDRM would involve greater use of collective action clauses in sovereign bond contracts. The second track would involve creating a statutory mechanism to empower a qualified majority of a country’s creditors to negotiate a restructuring agreement that would then be binding on all of the country’s creditors. There would also be provisions to prevent creditors from pursuing litigation against debtors while a restructuring agreement is being negotiated; safeguards to protect creditor interests during this period; and a mechanism that would encourage new financing by guaranteeing that fresh private lending would not be restructured. The statutory approach would use a treaty obligation—probably achieved through an amendment of the IMF’s Articles of Agreement—that would provide for legal uniformity in all jurisdictions. IMF First Deputy Managing Director Anne Krueger first proposed a plan for restructuring sovereign debt in November 2001. To coordinate a debtor’s varied creditors, a framework must be created that will aggregate claims across instruments for voting purposes while taking account of the seniority and varying economic interests of the creditors. As part of this framework, a forum is envisaged for the resolution of disputes between a sovereign debtor and its creditors as well as disputes among creditors. The dispute resolution forum would be small, have a limited role, and be independent in its membership and operation. The international community has learned its lesson from the turmoil that emerging market economies have experienced in recent years: cooperation helps the global financial system work more smoothly. To address the protracted, disorderly, and costly restructuring process, the IMF will continue to examine the legal, institutional, and procedural aspects of establishing the sovereign debt restructuring mechanism. For a fuller explanation of the proposed SDRM, see the IMF’s website (www.imf.org).

Effective surveillance and crisis prevention
Helping IMF members reduce vulnerabilities, promote stability, and foster growth

In today’s global economy, the economic developments and policy decisions of one country may affect many other countries, and financial market information can be transmitted around the world instantaneously. In this environment, there must be some mechanism for monitoring countries’ exchange rate and macroeconomic policies to ensure that the international monetary system operates effectively. The IMF does this by holding regular dialogues with its member countries about their economic and financial policies and by continuously monitoring and assessing economic and financial developments at the country, regional, and global levels. Through this function, referred to as “surveillance,” the IMF seeks to signal dangers on the economic horizon and enable its members to take corrective policy action.

How surveillance is conducted

Country surveillance. As a result of a recent IMF Executive Board decision, the IMF will generally conduct regular consultations every year with each of its 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.) 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. The IMF’s World Economic Outlook report, prepared twice a year, features comprehensive analyses of prospects for the world economy, individual countries, and regions and also examines topical issues. The quarterly Global Financial Stability Report (GFSR) provides timely coverage of mature and emerging financial markets as part of the IMF’s stepped-up tracking of financial markets. The GFSR seeks to deepen policymakers’ understanding of the potential weaknesses in the global financial system and identify the fault lines that could lead to crises.

Regional surveillance. To supplement country consultations, the IMF also examines policies pursued under regional arrangements, holding regular discussions with the European Union, the West African Economic and Monetary Union, the Central African Economic and Monetary Community, and the Eastern Caribbean Currency Union. The IMF has increased its participation in member countries’ regional initiatives, including the Southern African Development Community, the Association of South East Asian Nations, the Manila Framework Group, the Gulf Cooperation Council, the Common Market for Eastern and Southern Africa, and the Meetings of Western Hemisphere Finance Ministers.

Improving the effectiveness of surveillance

Provision of information. Timely, reliable, and comprehensive data are essential. The IMF encourages countries to introduce greater policy transparency, for instance, by providing detailed data on external reserves, related liabilities, and short-term external debt. Members having, or seeking, access to international capital markets can now do this through the Special Data Dissemination Standard (SDDS) (see "Financial architecture").

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

Focus. In light of the globalization of capital markets, the IMF recognizes that its focus must extend beyond short-term macroeconomic issues. Surveillance must involve a closer and more detailed examination of the functioning of countries’ financial sectors; capital account issues; and external vulnerability, including attention to policy interdependence and the risks of contagion. Conclusions drawn from the IMF–World Bank Financial Sector Assessment Program are intended to promote early detection of financial system weaknesses that may have macroeconomic implications and to help national authorities develop appropriate policy responses.

Observance of standards and codes. Following internationally recognized standards, or codes of good practices, can improve countries’ economic and financial policies and systems and thereby strengthen the international financial system. Monitoring countries’ observance of international standards increases their incentives to adopt and adhere to such standards. (see discussion on ROSCs) Thus, IMF surveillance provides a framework for discussing with national authorities the implications of assessments of adherence to standards and codes.

Transparency. The importance of credibility in maintaining and restoring market confidence underlines the value of policy transparency. The IMF has taken steps to encourage its members to make their policies more transparent and has made its own policy advice more transparent. To this end, the IMF Executive Board has agreed to do the following:

• Publish information on countries’ IMF-supported programs, including letters of intent, memorandums of economic and financial policies, staff reports, and Chairman’s statements on Executive Board discussions of such programs.
  
  
• Publish information about IMF surveillance of members, including public information notices (PINs), and Article IV consultation reports where the member agrees.
  
  
• Publish staff reports on policy issues, together with PINs, based on case-by-case decisions of the Board.
  
  
• Carry out internal and external evaluations of IMF practices.
  
  
• Continue dialogue and consultation with the public on IMF activities—to that effect, the Managing Director’s work program statement was published for the first time in June 2001.
  
  
• Release more financial information about the IMF (for example, financial statements are posted on the IMF’s website).

Independent Evaluation Office
Evaluators look at prolonged IMF borrowing, fiscal reforms, and capital account crises

The Independent Evaluation Office (IEO), established by the IMF’s Executive Board in July 2001, provides objective and independent evaluations of IMF policy and operations. It is independent of IMF management and operates at arm’s length from the IMF’s Executive Board. It enhances the learning culture of the IMF, promotes understanding of its work, and supports the IMF’s Executive Board in its governance and oversight. There is a strong presumption that the IEO’s evaluation reports will be published after their consideration by the IMF’s Executive Board.

Since it started its operations in the fall of 2001, the IEO has been working on three projects.

Staff of the IEO (from left): Ali Mansoor, David Goldsbrough, Montek Singh Ahluwalia (Director), Tsidi Tsikata, Isabelle Mateos y Lago, and Kevin Barnes.

Prolonged use of IMF resources. Some 25 countries have been indebted to the IMF for more than 30 years out of the past 50. Sixteen countries have been under IMF-supported programs for 12 years or more out of the past 18. Such prolonged use contradicts the mandate set forth in the IMF’s Articles of Agreement. Drawing on case studies of Pakistan, Senegal, and the Philippines, along with cross-country analyses, this project aims to answer the following questions: What are the causes of this pattern of repeat use of IMF resources? Are there specific program-design or other weaknesses that might have contributed to the pattern? What costs has repeat use entailed for the borrowers, for the IMF, and for the rest of the membership? The project will also assess possible remedies—whether in the design of lending facilities and programs, in the IMF’s internal governance, or in the division of labor with providers of long-term financing. The IEO released a final issues paper and terms of reference on the prolonged use of IMF resources in March 2002.

Fiscal adjustment in IMF-supported programs. Fiscal adjustment, especially in low-income countries, has long been the subject of criticism largely because it involves severe trade-offs between stability and growth, or stability and social expenditures. Often, these trade-offs are not adequately articulated or quantified and involve distributional issues that are highly sensitive politically. Based on a sample of (mainly low-income) countries that have limited access to private international capital markets, the study is examining the major features of fiscal program design, the dialogue between IMF staff and the country authorities and other groups, the extent of country ownership, and the results in terms of the efficiency, sustainability, and social impact of the fiscal adjustment. The IEO released a final issues paper and terms of reference for the evaluation of fiscal adjustment in IMF-supported programs in mid-June 2002.

Role of the IMF in a group of recent capital account crises cases. Beginning with Mexico in 1994, a number of emerging market economies have been affected by currency crises, against the background of increasing financial market integration in recent years. When the IMF was called in to help resolve these crises, it was sometimes criticized for failing to mitigate the adverse consequences of the associated rapid and substantial capital flow reversals. The severity of output loss in some of the affected countries and the impact the crises had on the global economy have generated interest in how the IMF handled the past crises and how it should handle future ones. The study, focusing on Brazil, Indonesia, and Korea, evaluates the effectiveness of both the IMF’s role in spotting vulnerabilities during the precrisis period and of IMF-supported programs in resolving the crises. The proposed country cases represent contrasting examples of the factors underlying a crisis and also of outcomes. The IEO released a final issues paper and terms of reference for the capital account crises cases evaluation in mid-June, 2002.

More information on the scope of these projects and on the IEO’s work program is available on the IEO’s website at www.imf.org/ieo.

Conditionality
IMF reviews its approach to conditionality, emphasizes country ownership of reforms

When the IMF commits its financial support to a member country, the country is expected to implement policy adjustments and reforms to correct the underlying problems that gave rise to its balance of payments difficulties and its need for assistance.

Why is it necessary?
Conditions for financial support help ensure that borrowing countries solve their external balance of payments problems in an orderly way, without resorting to measures that would harm their own or other countries’ prosperity. By meeting the conditions, a country is assured of continued financing.

To safeguard its resources, the IMF must be sure that the policy adjustments required to achieve medium-term sustainability are being undertaken so that the country can eventually repay its loans.

How should conditionality be applied?
A flexible approach to conditionality is called for because the IMF must take care to treat all its members equitably while considering each country’s circumstances and problems. Conditions should be focused on those policy measures that are critical to achieving the program objectives and should be applied particularly sparingly outside the IMF’s core areas of responsibility.

How is it monitored?
The IMF requires a “letter of intent” or a memorandum from the country’s authorities outlining their policy intentions during the program period; any policy changes they will make before the program can be approved, if necessary; and objective indicators that show whether the country has complied with specific performance criteria. The IMF periodically reviews a country’s progress by assessing if its policies are consistent with the program objectives.

How has IMF conditionality changed?
Conditionality has evolved over the IMF’s history as the circumstances and challenges facing its members have changed. Since the 1950s, the IMF has attached conditions to its lending, focusing initially on monetary, fiscal, and exchange rate policies.

Beginning in the late 1980s, the IMF increasingly emphasized the need to achieve adjustment through improvements in the supply side of the economy. This raised the issue of how IMF-supported programs should try to address structural bottlenecks. The IMF’s response was to increase structural conditionality. Consequently, the average program involved 2 or 3 structural conditions a year in the mid-1980s, climbing to 12 or more by the second half of the 1990s.

The increase in the number of conditions raised concerns that the IMF might be overstepping its mandate and expertise. Excessively detailed policy conditions can undermine a country’s sense that it is in charge of its own reforms. Without such “ownership,” reform will not happen.

Moreover, poorly focused conditionality can overburden countries attempting to implement nonessential reforms at the expense of reforms truly needed for economic growth and continued access to IMF financing.

To ensure continued effectiveness, the IMF has regularly reviewed developments in conditionality. In its latest review, which began in September 2000, the IMF took steps to streamline conditionality to make it more efficient, effective, transparent, and focused. The review also aimed to enhance the effectiveness of programs by concentrating on those conditions that are critical to the success of countries’ macroeconomic objectives while taking account of their decision-making processes and ability to carry out reforms.

• September 2000: The IMF Managing Director issued interim guidelines that set out general principles, which IMF staff are now applying in both new and existing IMF-supported economic programs.
  
  
• March 2001: Papers prepared by IMF staff were posted on the IMF website to invite public comment on the principles and issues related to conditionality. Country officials, academic experts, and representatives of other organizations also added their views. Among their suggestions were the need to pay attention to the sequence and pace of policy implementation and the importance of a clear and coherent strategy for assistance from the international community.
  
  
• April 2002: The IMF Executive Board agreed on the general principles to be embodied in new conditionality guidelines. These guidelines are to be finalized in the fall of 2002.

Can country ownership be strengthened?
Country authorities should be involved in the early stages of designing a program. They must be convinced that the reforms can be achieved and are in the country’s best interests. Moreover, ownership should involve not only the executive branch of a country’s government but also its parliament and other major stakeholders.

The IMF should be open to programs that differ from the staff’s preferred options, as long as the core objectives of the program are not compromised.

What if a country is not fully committed?
The IMF has to strengthen its analysis of political economy issues to better understand what might block or weaken program implementation. It should develop a more effective dialogue on feasible policy options and become more selective in supporting programs.

In countries with entrenched structural problems in which the IMF is likely to be involved for a considerable period, it is desirable for the country to take charge of building a consensus to strengthen national ownership of effective policies.

IMF technical assistance could be redirected toward the medium and long term and aim at improving countries’ capacity building (including program design). This would help countries take charge of their economic policies.

A country’s authorities should have primary responsibility for communicating policy intentions and program content to the public, with the IMF playing a supporting role.

Financial facilities
IMF borrowing and lending

The volume of financing that the IMF has provided to its member countries has fluctuated significantly over time. The oil shock of the 1970s and the debt crisis of the 1980s were both followed by sharp increases in IMF lending. In the 1990s, the transition process in Central and Eastern Europe and the crises in emerging market economies led to another surge in the demand for IMF lending.

Only countries that are members of the IMF can borrow. Membership in the IMF is practically universal, currently comprising 184 countries.

Why and how does the IMF lend?
The IMF provides financial assistance to member countries with temporary balance of payments problems. It does not provide financing for specific purposes or projects, as development banks typically do (see “IMF at a glance”). The IMF’s Executive Board must approve financial assistance.

The IMF extends financing through three channels:

• Regular financial assistance is made available—subject to interest at the IMF’s standard rate of charge —through a number of policies and facilities designed to address specific balance of payments problems.
  
  
• The IMF provides low-interest loans to low-income member countries through its Poverty Reduction and Growth Facility (PRGF), which helps them restructure their economies to increase growth and reduce poverty. The IMF also provides grants or interest-free loans to qualifying members under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative to help reduce their external debt to sustainable levels. (For more information on the PRGF and the enhanced HIPC Initiative, see "Poverty reduction")
  
  
• The IMF can also create international reserve assets by allocating SDRs to members, which they can use to obtain foreign exchange from other members and to make payments to the IMF (see"What is SDR?".)

Financing is provided under different facilities and policies (see table). The main ones are the credit tranche policies, which address members’ short-term, cyclical balance of payments difficulties, and the Extended Fund Facility (EFF), which focuses on external payments difficulties arising from longer-term structural problems. Loans under these facilities can be supplemented with very short term resources under the Supplemental Reserve Facility (SRF) to assist members experiencing a sudden and disruptive loss of capital market access.

The IMF levies charges on the financing. Charges and repayment periods vary by facility. The amount of financing a member can obtain from the IMF is generally based on the size of its quota.

The IMF has also developed special facilities that provide additional assistance for certain specific balance of payments difficulties, such as following a conflict or a natural disaster.

To discourage excessive use of IMF funds and free up funds for use by other members, the IMF levies surcharges on credit outstanding above a threshold level. The IMF also levies surcharges on SRF resources.

The IMF has introduced accelerated repayment schedules to encourage early repayment of IMF financing. Members are expected to repay on the earlier schedule (in advance of the standard repayment schedule). Members unable to meet the earlier repayment schedule may request an extension, but the repayment schedule cannot be extended beyond the standard repayment schedule.

Where does the IMF get its money?
The capital subscriptions of the IMF’s member countries are the primary source of financial resources for the IMF. Each member country pays in a subscription, equal to its quota, on joining the IMF (see "Quotas"). The IMF also has two lines of credit with a subset of its members to supplement its quota resources in case of unusually high demand for IMF financial assistance. These credit lines, known as the New Arrangements to Borrow (NAB) and the General Arrangements to Borrow (GAB), currently are not in use. They were last activated in 1998 following the Asian financial crisis and before the most recent quota increase took effect.

The IMF is authorized to borrow from private capital markets and has considered the option on several occasions. It has, however, concluded each time not to do so because of organizational and operational drawbacks.

The resources for the PRGF and the HIPC Initiative are financed through contributions from a broad spectrum of member countries and the IMF itself. They are separate from the quota subscriptions and are administered under the PRGF and PRGF-HIPC Trusts, for which the IMF acts as trustee. The PRGF Trust borrows at market or below-market interest rates from loan providers—central banks, governments, and government institutions—and lends them to PRGF-eligible member countries at an annual interest rate of 0.5 percent. The PRGF Trust receives grant contributions to subsidize the rate of interest on PRGF loans and maintains a Reserve Account as security for loans to the Trust.

How much can the IMF lend?
The IMF has limited resources. Only a portion of its quota subscriptions is usable, because the IMF cannot use the currencies of members that it is assisting or that its Executive Board does not consider to be The IMF has limited resources. Only a portion of its quota subscriptions is usable, because the IMF cannot use the currencies of members that it is assisting or that its Executive Board does not consider to be financially strong. The IMF’s liquidity position is further reduced by the existing demand for assistance—undrawn commitments under current IMF arrangements—and the need to always hold an additional amount of resources for working balances.

Overdue payments
To maintain the cooperative nature and protect the financial resources of the IMF, and to keep other financial sources open to them, members must meet their financial obligations to the IMF on time. However, if a member does fall behind in its debt-service obligations, it is expected to take steps that will enable it to settle its arrears as quickly as possible.

The IMF’s strategy to help prevent new cases of arrears has three main elements:

Prevention. To prevent new cases of arrears from emerging, the IMF attaches conditions on the use of its resources, assesses members’ ability to repay, cooperates with donors and other official creditors, undertakes safeguard assessments of the central banks receiving IMF resources, and provides technical assistance to members.

Intensified collaboration and the rights approach. Intensified collaboration helps members design and implement economic policies to resolve their balance of payments and arrears problems. It also provides for members in arrears to establish a track record of policy and payments performance, mobilize resources from international creditors and donors, and become current in their obligations to the IMF and other creditors.