## ppea2023010

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### Executive summary — objectives, rollout, and staff guidance
- Objectives of the FCS Strategy: (i) achieve macroeconomic stability, (ii) strengthen resilience, and (iii) promote inclusive growth to help FCS exit fragility.
- Rollout timeframe: FY22–25.
- Staff Guidance Note purpose: provide operational guidance to staff to facilitate stronger, better tailored, more agile, and more effective Fund engagement with Fragile and Conflict-Affected States (FCS).

### FCS classification — methodology, criteria, thresholds, and publication
- Methodology and application:
  - The Fund adopted the World Bank’s FCS classification methodology, thresholds, and criteria in place when the Fund issued the FCS Strategy in 2022; application results in an identical FCS list.
  - The FCS list will be public and updated annually; the FCS list becomes effective on the date of publication.
  - The Fund will publish its FCS list on the IMF thematic FCS website on the same day as the World Bank.
- Typology and criteria:
  - Institutional/social fragility: CPIA score below 3.0 (maximum of 6) for IDA countries; or flight of refugees recognized as in need of international protection; or deployment of a UN peace operation in the past 3 years.
  - Refugee threshold: 2,000 or more / 100,000 population.
  - Conflict category: based on conflict-related deaths using ACLED and UCDP with conflict thresholds:
    - Absolute thresholds: above 250 (ACLED) and above 150 (UCDP).
    - Relative thresholds: above 2 per 100,000 population (ACLED) and above 1 per 100,000 population (UCDP).
    - Rapid deterioration case: absolute deaths above 250 (ACLED) and 150 (UCDP); lower relative death rates with doubling of casualties in the last year (ACLED: 1–2 per 100,000; UCDP: 0.5–1 per 100,000).
- Autonomy and updates:
  - The Fund retains autonomy to update methodology and to decide whether to adopt future World Bank methodology changes.
  - SPR staff will hold technical discussions with the World Bank in advance of annual updates.
- Internal list:
  - The Fund discontinued its prior internal FCS list of 42 economies following publication of this Guidance Note.

### Uses of the FCS list and transition arrangements
- Operational roles:
  - Guide rollout of Country Engagement Strategies (CES), prioritization of Capacity Development (CD) delivery and reporting, implementation of the Career Framework for Fungible Macroeconomists, monitoring and annual reporting to the Board, and analytical work.
- Transition rules:
  - Countries removed from the FCS list: staff not required to conduct a CES but may choose to do so if fragility risks persist.
  - Countries added to the FCS list: a country must be present for two consecutive years on the FCS list before the requirement for a CES takes effect, though a CES may be undertaken earlier if business need exists.
  - In line with the FCS Strategy, within 18 months of issuance of this Guidance Note, country teams are expected to finalize CES for about half of countries classified as FCS (about 20 countries).

### Country Engagement Strategies (CES) — structure, confidentiality, and integration
- CES products:
  - Expanded CES: internal confidential diagnostic, prepared at least once every three years (more frequently if warranted), led by the Mission Chief, approved by Area Department Front Office, available internally on a need-to-know basis.
  - CES (3-page summary): subject to formal interdepartmental review; incorporated as an Annex in Policy Notes or Staff Reports; Annex not included in Staff Report wordcount.
- CES content and CD linkage:
  - CES should identify main fragility/conflict drivers, constraints to reform (including governance and corruption), long-term macroeconomic policies, and CD strategic priorities.
  - CES should include a brief CD section with: (i) snapshot of prior Fund CD and traction, (ii) sequenced CD priorities linked to surveillance and program objectives, and (iii) summary of engagement with other CD providers.
  - A separate CD Country Strategy Note (CD-CSN) is not required if an Expanded CES and CES are in place.
- Confidentiality and communication:
  - Main elements of an unissued CES should be discussed with authorities during Article IV consultations; the Expanded CES is internal confidential and will not be shared externally.

### Surveillance (Article IV) and tailored policy advice
- Article IV obligations:
  - FCS are equally subject to Article IV and the Integrated Surveillance Decision; consultations should be tailored to FCS capacity and fragility context.
- Use of CES in surveillance:
  - Inform diagnostics and thematic focus; identify capacity constraints; sequence and prioritize policy advice; integrate CD with policy advice.
- Practical points:
  - Data provision requirements under Article VIII, Section 5 remain applicable; members not found in breach for non-provision or inaccuracies occasioned by lack of capacity.
  - Staff encouraged to use strategic foresight, scenario planning, the Social Unrest Module, and other innovative tools (Macro-Risk Unit support) to assess risks and uncertainties.
- The Social Unrest Module:
  - Part of the Vulnerability Exercise; leverages machine-learning on over 300 indicators; forecasts social unrest one-year ahead; quantitative results usable in policy notes but explicit risk categories not to be used in Article IV Staff Reports.

### Capacity Development (CD) — prioritization, modalities, and transitions
- Prioritization and delivery:
  - FCS are explicitly targeted for increases in CD delivery provided adequate demand and absorptive capacity.
  - Change in FCS status can influence prioritization of new projects but will not impact ongoing CD.
  - CDMAP automatically tags FCS projects with the “Fragile and Conflict-affected States” growth area for budget identification.
- Human resources and footprint:
  - Complement agreed as part of the FCS Strategy:
    - 40 additional local economists,
    - 4 new Resident Representatives between FY23–25,
    - 30 CD long-term experts (LTX) to be hired by CD Departments.
  - Country allocation of local staff is prerogative of Area Departments.
- Design and delivery guidance:
  - Develop realistic, implementable CD strategies; start with training and hands-on assistance; progressively increase sophistication; rely on RCDCs and resident advisors.
  - RBM log frames for FCS: generally no more than 2-3 milestones per year; attainable objectives; less ambitious indicator targets; may allow longer project duration; consider frontloading milestones under special circumstances.
  - Capacity supplementation: hands-on approach with intense involvement to ensure basic operations of critical state functions; draw on regional centers and dedicated country experts where needed.
- MTW flexibility:
  - Medium-Term Workplans can be adjusted during the year; central reserves may be prioritized to accommodate FCS demands.

### Lending toolkit flexibilities, program design, and conditionality
- Instruments and eligibility:
  - No dedicated FCS-only lending instrument; Fund lending toolkit is available to FCS that meet policy requirements.
  - For PRGT-eligible FCS able to implement UCT-quality programs, principal mode is the Extended Credit Facility (ECF).
  - Non-UCT engagement options: Staff-Monitored Programs (SMPs), possibly combined with emergency financing.
- ECF flexibilities:
  - ECF arrangements duration: 3-5 years; can be used consecutively.
  - Policies and reforms can be developed progressively; specific policies after first 12 months may be defined in future reviews.
  - Programs may recognize Post-Program Financing Gaps (PPFGs) under safeguards when justified by sensitivity analysis confirming Capacity to Repay (CtR) and debt sustainability.
- Realism and parsimony:
  - Macro-frameworks must reflect implementation capacity, structure of the economy, risks of reform reversals, and include contingency buffers.
  - Conditionality should be parsimonious and tailored, preserving UCT standards; SBs and QPCs/ITs used with judgment.
  - Floating Tranches (FTs): disbursements contingent on specific structural measures/targets, offering timing flexibility; appropriate only for a small set of measures meeting restrictive criteria.
- Quantitative conditionality:
  - Greater use of Indicative Targets (ITs) may be justified under heightened uncertainty, with gradual replacement by QPCs as uncertainty abates; QPCs remain required for critical macro indicators.
  - Realism checks: use SRDT, fiscal multipliers toolkit, DIG model, SUI, LIC-DSF realism tools; apply realism flags for growth and fiscal adjustment (rule-of-thumb: fiscal adjustment realism flag currently set at one percentage points change of GDP over three years, derived from 75th percentile for 2010–20 FCS-program countries).
- Misreporting risk:
  - Define QPCs clearly in the Technical Memorandum of Understanding (TMU); consider reporting capacity and reporting burden when designing continuous QPCs.

### SMPs, Emergency Financing, and repeat use rules
- SMPs:
  - Can build a track record where UCT-quality programs are infeasible; used for institution-building and to attract catalytic donor finance.
- Concurrent use with Emergency Financing:
  - SMPs may be used concurrently with Emergency Financing (EF) to address urgent BoP needs while building a track record.
- Rapid facilities:
  - RCF repeat disbursements: capped at two disbursements in any 12-month period; repeat in preceding three years possible only if (i) BoP need caused primarily by a sudden, exogenous shock; or (ii) member established a track record of adequate macroeconomic policies for at least six months prior to request.
  - RFI for non-LIC FCS: repeat use within three years possible under similar conditions; no limit on number of disbursements in a 12-month period provided qualifications met.
  - Track record modalities: satisfied by SMPs or other modalities.

### Program implementation monitoring, flexibility, and contingency planning
- SBs and parsimony:
  - Staff apply judgment when setting Structural Benchmarks (SBs); reforms may be represented by single SBs or multiple granular SBs depending on capacity.
  - Parsimony is a principle, not a quantitative limit on number of conditions.
- Adjustments and contingency:
  - Contingency planning identifies pressure points and possible policy responses; staff may reset, modify, or drop SBs if non-observance would not undermine program objectives.
  - The ECF provides flexibility to develop policies progressively with credible medium-term objectives.
- Ownership and transparency:
  - Strengthen country ownership through communications and outreach; engage partners to learn best practices.

### Governance, corruption, and anti-corruption CD
- Governance framework:
  - Guided by the 2018 Framework for Enhanced Fund Engagement on Governance; macro-critical governance vulnerabilities identified via a centralized process and cross-departmental working group.
- CES integration:
  - CES should incorporate governance and corruption assessments and sequence reforms according to implementation capacity and political economy constraints.
- Tools and resources:
  - Governance diagnostic missions, LEG support for corruption network analysis, and leveraging World Bank RRAs and other partners.
- Program conditionality:
  - Governance and anti-corruption conditionality should be included when critical for program objectives; measures should be prioritized and sequenced per the 2018 Framework.

### Partnerships, donor coordination, and leveraging external analytics
- Core partners:
  - World Bank, MDBs, UN agencies, bilateral donors, WFP, UNHCR, CSOs, think tanks, and academia.
- Partnership objectives:
  - Leverage RRAs, RPBAs, forced displacement analytics; coordinate CD delivery; avoid duplication; explore joint CD and common conditionality matrices where feasible.
- Donor coordination:
  - Resident Representatives and Fund teams should map CD provision and pursue donor coordination to minimize burden on authorities and to quantify financing implications; explore multi-donor trust funds and donor budget support windows where appropriate.
- Expanded partners:
  - Strategic expansion to partners with contextual knowledge and sector expertise; map stakeholders and tailor engagement frequency and intensity.

### Staff development, field footprint, and safety/security
- Staffing and learning:
  - FCS learning curriculum to be developed in FY23; FCS Community of Practice; seminars and peer workshops; knowledge depository on intranet.
  - Career Framework for Fungible Macroeconomists (effective July 2023) requires relevant experience with LICs or FCS for promotion to managerial levels; FCS list used by HRD to assess requirement fulfillment.
- Field footprint:
  - Add 40 local economists, 4 Resident Representatives between FY23–25, and 30 LTX for CD departments; peripatetic experts option where residency difficult.
- Safety and security:
  - Staff in high-risk locations (HRLs) required to complete four security courses; dedicated Local Security Coordinators; consult CSF and IFD for administrative and IT support.

### Operational scenarios and case examples
- Ukraine:
  - March 2022: emergency assistance of US$1.4 billion under RFI.
  - August 2021: US$2.7 billion from IMF SDR allocation.
  - Two countries have disbursed US$2.2 billion through IMF Administered Account; two additional countries planning disbursements.
  - October 2022: US$1.3 billion emergency disbursement under Food Shock Window.
- Yemen:
  - Last Article IV in 2014; ECF lapsed after 18 months due to non-completion of reviews; continued TA to internationally recognized government; October 2021: first Board briefing since outbreak of conflict.
- South Sudan:
  - SMP combined with RCF disbursements: RCF used in 2020 and 2021 to clear public salary arrears; as of November 2022 two RCF disbursements since pandemic onset; SMP used to build track record (salary arrears reduced to one month).
- Jordan:
  - Hosts about 1.3 million Syrian refugees.
  - Unemployment: 22.6 percent for Jordanians and 45 percent for youth in 2022-Q2.
  - EFF: SDR 1,145.95 million (334 percent of quota).
  - RFI: SDR 291.55 million (85 percent of quota).
  - As of September 2022: 37,404 work permits for Syrian refugees issued.
- Venezuela displacement:
  - As of September 2022: 7 million Venezuelans migrated region-wide; 2.5 million in Colombia.
- Guinea-Bissau:
  - Child stunting: 28 percent of children aged 6–59 months; under-2 appropriate diet: about 4 percent; women 15–49 with minimum dietary diversity: 32 percent; undernourished population: 25 percent.

### Post-conflict reconstruction, external shocks, and spillovers
- Post-conflict priorities:
  - Immediate recovery: ensure minimal public services, safety nets, functioning payment systems, and reliable macro statistics; CD focus on revenue collection and expenditure management.
  - Reconstruction: accommodate higher spending for infrastructure, strengthen PFM, safeguard governance to ensure value for money, and promote financial deepening and inclusion.
- External shocks and spillovers:
  - Forced displacement, fiscal implications of insecurity, food insecurity, natural disasters, and climate risks can exacerbate fragility and have macroeconomic impacts (inflation, current account deficits, debt pressures).
  - The Resilience and Sustainability Trust (RST) is a potential source of financing for eligible FCS, conditional on an on-track UCT-quality program; Operational Guidance Note on the RST forthcoming in 2023.

### PPFGs, realism assessments, and procedures
- Post-Program Financing Gaps (PPFGs):
  - PPFGs under ECF can be recognized if sensitivity analysis confirms CtR remains adequate and debt remains sustainable under realistic financing assumptions.
  - Staff must ensure PPFG magnitude and dynamics do not tip DSA ratings or CtR into incompatible zones.
- Realism assessments:
  - Purpose: guard against excessive optimism in growth and fiscal adjustment projections and payoffs from structural reforms.
  - Tools: LIC-DSF realism tools, SRDT, fiscal multipliers toolkit, DIG family models, SUI, and partner data.
  - Specific checks:
    - Growth realism: compare current baseline with historical average, past baseline, and FCS peer averages.
    - Fiscal adjustment realism: flag if projected primary fiscal adjustment over any three-year period exceeds one percentage points change of GDP (75th percentile cutoff derived from observed FCS-program experience 2010–20).
  - Procedures when tools flag bias: Staff Report should explain justification; significant unexplained deviations should prompt iterative revisions and contingency buffers.

*Staff Guidance Note on the Implementation of the FCS Strategy — selected excerpts and operational guidance.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Overview
- The IMF Strategy for Fragile and Conflict-Affected States (FCS) provides a framework and key measures to strengthen the Fund’s assistance to its most vulnerable members.
- Objectives of the Strategy: (i) achieve macroeconomic stability, (ii) strengthen resilience, and (iii) promote inclusive growth to help FCS exit fragility.
- Rollout timeframe: FY22–25.
- This Staff Guidance Note provides operational guidance to staff on implementing the FCS Strategy to facilitate stronger, better tailored, more agile, and more effective Fund engagement.

### Guidance to staff — core operational measures
- Use of World Bank FCS classification methodology:
  - The Fund has adopted the World Bank methodology, thresholds, and criteria in place when the Fund issued the FCS Strategy in 2022.
  - The resulting FCS list will be public and updated annually.
  - Uses of the FCS list: monitor Strategy implementation; guide prioritization of Capacity Development (CD) activities; inform the Fund’s Career Framework for Fungible Macroeconomists.
  - Staff may support members showing signs of fragility and/or conflict regardless of FCS classification; guidance on smooth transitions on/off the list is provided.
- Country Engagement Strategies (CES):
  - Area Departments lead CES preparation with inputs from Functional Departments.
  - CES will identify main fragility/conflict drivers and constraints to reform, including governance and corruption challenges, and outline long-term macroeconomic policies and CD strategic priorities.
  - CES serve to: (i) better tailor Fund engagement; (ii) support integration of surveillance, CD, and lending; (ii) inform program design and conditionality; and (iv) dialogue with authorities and partners.
- Tailored policy advice:
  - Article IV consultation advice should account for capacity constraints that limit traction and feasibility of implementation.
  - Informed by CES, staff should provide authorities with the best possible policy advice addressing macroeconomic and financial sector implications of fragility and/or conflict, with thematic focus reflecting country-specific fragility context.
- Capacity Development (CD) prioritization and delivery:
  - CD should meet demand and needs of FCS, responding to local circumstances and absorptive capacity.
  - Guidance clarifies CD prioritization basis in the context of FCS classification and arrangements to ensure changes in FCS status do not diminish support for countries transitioning off the list.
  - Staff guidance on developing realistic, implementable CD strategies/projects that can adjust swiftly to changing circumstances.
- Lending toolkit flexibilities:
  - Staff should make full use of existing flexibilities to tailor program design and conditionality to FCS circumstances.
  - Focus areas: (i) enhancing realism of macro-frameworks; (ii) tailoring structural and quantitative conditionality; (iii) concurrent use of Staff Monitored Programs (SMPs) with emergency financing.
- Specific priorities for diverse FCS situations (guidance and country examples provided) include:
  - (i) building institutions to exit fragility;
  - (ii) addressing rising fragility risks or countries at risk of becoming fragile and/or conflict-affected;
  - (iii) remaining engaged with members affected by active conflict;
  - (iv) dealing with FCS experiencing government recognition issues in the context of irregular changes in government;
  - (v) supporting economic stability during post-conflict reconstruction;
  - (vi) responding to external shocks and spillovers (e.g., food insecurity, forced displacement).
- Partnerships:
  - Staff should strengthen partnerships with humanitarian, development, and peace actors where possible.
  - Focus on partnering with the World Bank, multilateral development banks (MDBs), the United Nations (UN), and civil society to leverage analytics and insights.
- FCS staff development and footprint:
  - The Fund’s footprint in FCS will grow through addition of local economists, Resident Representatives, and long-term resident advisors for CD.
  - Guidance provided on navigating an enhanced field posture, strengthening country teams, and learning opportunities.

### FCS classification — methodology, criteria, and thresholds
- The Fund adopted the World Bank’s FCS classification methodology as of 2022.
- The World Bank’s FCS list is public and updated annually.
- Typology captures heterogeneity across FCS; countries are divided into two categories:
  - Countries suffering from high levels of institutional and social fragility due to:
    - (i) relatively poor quality of economic management and governance, structural policies, public sector institutions, and social inclusion policies—as measured by a CPIA score of below 3.0; or
    - (ii) flight across borders of refugees recognized internationally as in need of protection; or
    - (iii) deployment of a UN peace operation (only UN peace operations are considered—the methodology does not include UN Special Political Missions or peacekeeping operations operating under a Chapter VII mandate that are led by regional organizations).
  - Countries in conflict identified based on the number of conflict-related deaths in absolute terms and relative to population.
    - Data sources: Armed Conflict Location and Event Data Project (ACLED) and Uppsala Conflict Data Project (UCDP).
- Table 1 (methodology summary) criteria and thresholds (as presented):
  - Country Policy and Institutional Assessment (CPIA) for IDA countries; threshold: A score of below 3.0 from maximum of 6.
  - Presence of United Nations peacekeepers; threshold: A UN peace operation in the past 3 years.
  - Flight of refugees in need of international protection across international borders; threshold: 2,000 or more / 100,000 population.
  - The number of conflict-related deaths; threshold: Absolute and relative thresholds (see original Footnote 6).

### CES, integration, and core functions
- CES preparation, outputs, and confidentiality procedures are specified (see Section III).
- CES will inform:
  - Surveillance (tailoring Article IV consultations to FCS capacity and fragility context);
  - CD prioritization and delivery (including use of RCDCs and realistic CD project design);
  - Lending, program design, and conditionality (including considerations for PPFGs and realism of macro-frameworks).
- The Guidance Note emphasizes integration of CES findings into staff reports and policy notes.

### Specific operational emphases and examples
- The note offers guidance and country examples on adapting CD and program design to low absorptive capacity and changing circumstances (e.g., South Sudan, Haiti examples referenced).
- Advice on concurrent SMPs and emergency financing, floating tranches operation, and tailoring structural/quantitative conditionality is provided.
- Annexes contain: expanded CES issues (Annex I); governance and corruption in FCS (Annex II); program design and conditionality considerations including PPFGs and macro-framework realism (Annex III); country examples of Fund support (Annex IV).

### Institutional and procedural notes
- This Staff Guidance Note supersedes the 2012 Staff Guidance Note on the Fund’s Engagement with Countries in Fragile Situations.
- The FCS Strategy was endorsed by the Executive Board in March 2022; Chair’s Summing Up—The IMF Strategy for Fragile and Conflict-Affected States (2022), March 11, 2022, is referenced.
- Document date on cover: February 28, 2023.

*Staff Guidance Note on the Implementation of the FCS Strategy — EXECUTIVE SUMMARY*

### 5.      The Fund’s new methodology for FCS classification is the same as the World Bank’s at

### ppea2023010 - 5.      The Fund’s new methodology for FCS classification is the same as the World Bank’s at

### A. Methodology, autonomy, and publication
- The Fund’s new methodology for FCS classification is the same as the World Bank’s at the time when the Fund adopted the FCS Strategy, and its application results in an identical FCS list.
- The Fund will maintain autonomy and ownership in both the choice of methodology and in its application.
- The Fund will publish the FCS list annually.
- The Fund may update its methodology (in consultation with the World Bank, as appropriate) if considered necessary, and will retain autonomy to decide whether any future World Bank methodology changes should also be adopted by the Fund.
- The FCS list becomes effective on the date of publication.
- The World Bank publishes an updated FCS list during the first two weeks of each fiscal year, which at the Bank starts in July. Staff in SPR will hold technical discussions with the Bank in advance of the annual update. The Fund will publish its FCS list on the IMF thematic FCS website on the same day as the World Bank.

### B. General principles on engagement and classification limits
- Regardless of FCS classification, the Fund supports all members: engagement would not necessarily be deprioritized due to a change in the status of a country in the FCS list.
- The 2018 IEO Report noted there is no universal definition of FCS and no fixed list of fragile states; some non-FCS countries may share fragility elements and may slip into conflict, while some FCS may remain classified for decades due to persistently weak governance and economic performance.
- Staff should be mindful that no classification methodology can fully capture the complex factors and circumstances that lead countries to become fragile and/or conflict affected.

### C. Uses of the FCS list — operational roles and timelines
- The new FCS classification methodology becomes effective with the approval of this Staff Guidance Note.
- The FCS list will be important for:
  - the rollout of CES (Country Engagement Strategies),
  - the prioritization of Capacity Development (CD) delivery and reporting on CD to the Board,
  - implementation of the Career Framework for Fungible Macroeconomists,
  - monitoring and annual reporting to the Board on FCS Strategy implementation,
  - analytical work.

- Historical experience: membership on the FCS list does not vary significantly each year; except for the one-time significant change at adoption of the new methodology, year-on-year variations are incremental and driven primarily by changes in the number of conflict-related deaths.

- Transition arrangements to ensure smooth support for countries removed from the FCS list and to avoid disruptive staffing shifts.

### D. Country Engagement Strategies (CES) — requirements and transition rules
- CES will be rolled out across FCS according to the timeline presented in the FCS Strategy.
- Transition arrangements:
  - For countries removed from the FCS list: Staff will not be required to conduct a CES but may choose to do so if fragility risks persist and warrant continued attention.
  - For countries added to the FCS list: A country must be present for two consecutive years on the FCS list before the requirement for a CES takes effect in accordance with the timeline of the FCS Strategy. However, a CES may be undertaken at any point once a country is included on the list if staff assess there is a business need.
- In line with the FCS Strategy and circumstances permitting, it is expected that within 18 months of the issuance of this Guidance Note, country teams will finalize CES for about half of countries classified as FCS (about 20 countries).

### E. Capacity development (CD) prioritization and transitions
- The FCS list will help guide prioritization of CD activities; change in FCS status will influence prioritization of new projects but will not impact ongoing CD.
- In annual work-planning and subject to country demand, members on the FCS list will receive higher priority for new projects compared to those not on the list provided there is adequate absorptive capacity and traction.
- Staff will apply judgment for members displaying signs of fragility but not officially FCS (e.g., weak institutional capacity, extreme poverty)—especially if country ownership is strong.
- Application of the FCS list for CD delivery will not be mechanistic and will factor in priorities established in the CD Management and Administration Program (CDMAP) and reflected in Medium-Term Workplans (MTWs).
- CDMAP automatically tags projects in FCS with the “Fragile and Conflict-affected States” growth area to identify CD budgets and spending on FCS.
- Specific provisions to ensure smooth transitions on/off the list and evenhanded CD delivery are discussed in Section IV.B (not included in this content unit).

### F. Career framework and human resources implications
- Effective July 2023, the Fund’s Career Framework for Fungible Macroeconomists requires that staff gain or have relevant experiences with direct operational engagement in low-income countries (LICs) or FCS to be promoted to managerial levels, as specified in the policy implementation guidelines. The FCS list will be used by HRD to determine if this requirement has been met through country-team assignments, missions, or a combination thereof.
- Complement agreed as part of the FCS Strategy for strengthened field presence in FCS:
  - 40 additional local economists,
  - 4 new Resident Representatives between FY23–25.
- The country allocation of local staff is the prerogative of each Area Department.
- 30 CD long-term experts (LTX) will be hired by CD Departments, with location and work programs prioritized by Area Departments.
- Any new demands from year-to-year changes in the FCS list will be handled as part of Departments’ annual budget negotiations.

### G. Implications for financing and program design
- The FCS list will not determine eligibility or qualification for Fund financing under Fund lending instruments and facilities; these are subject to the Articles of Agreement, relevant trust instruments on concessional financing and debt relief, and respective Fund policies.
- FCS would benefit from updated guidance on lending toolkits and program design, including conditionality to address specific circumstances that FCS typically face. Details are provided in Section IV.C (not included in this content unit).

### H. FCS list publication and communication
- The update and publication of the FCS list will be managed by the Strategy, Policy, and Review (SPR) Department.
- SPR staff will hold technical discussions with the World Bank in advance of the annual update to ascertain potential changes to the list. The list will be submitted to management for approval and published on the IMF thematic FCS website on the same day as the World Bank.
- Country teams could consult SPR regarding changes to the FCS list from the previous year as needed. Mission Chiefs and Resident Representatives will receive support if requested by authorities to explain a change in country status.

### I. CES preparation, outputs, confidentiality, and engagement
- CES will be rolled out across FCS, led by Area Departments with inputs from Functional Departments. CES serves as a strategic anchor for engaging with FCS, assessing challenges and key macroeconomic policies and reforms needed to exit fragility.
- CES outputs and preparation:
  - The Expanded CES:
    - Developed for internal use only to ensure candid assessment of fragility and conflict drivers and constraints to reform.
    - Will not undergo the interdepartmental review process, though consultations with Departments during preparation are encouraged.
    - Development led by the Mission Chief (who may delegate drafting to the Resident Representative or other country team members).
    - May incorporate insights from World Bank RRAs and consultations with UN and local stakeholders such as CSOs.
    - Upon completion, approved by the Area Department Front Office and classified as confidential. Available to Management upon request to the relevant Area Department.
    - May be shared internally on a need-to-know basis or as background during reviews for Staff Reports and Policy Notes.
    - Scope: Critical issues discussed in Annex I (e.g., key drivers of fragility, constraints to reform, macroeconomic policies needed to exit fragility). Teams should tailor scope, depth, and length to team resources and country context.
    - Frequency: Prepared at least once every three years. More frequent updates may be warranted if fragility and/or conflict trends or other events significantly alter parameters of Fund engagement (e.g., the country has reached a “pivotal moment”).
    - Country teams are encouraged to consult staff from SPR, FAD, MCM, ICD, STA, RES, LEG, FIN, and COM and to involve Fund CD providers and Regional Capacity Development Centers (RCDCs).

  - The CES (3-page summary):
    - For each new or updated Expanded CES, a summary of about 3 pages will synthesize the findings of the full report and will be subject to formal interdepartmental review.
    - The 3-page summary will be incorporated as an Annex in Policy Notes or Staff Reports for use of Fund resources, Article IV consultations, and other relevant country reports.
    - The Annex containing the CES will not be included in the wordcount of the Staff Report or Policy Note.
    - The main elements of a CES that has not yet been issued to the Executive Board should be discussed with country authorities as part of Article IV consultations and program reviews. The CES document itself should not be shared with authorities prior to issuance to the Executive Board to preserve independence of staff advice.
    - As a product subject to regular interdepartmental review, the CES represents staff’s collective views and will be approved by Management as part of a Policy Note or Staff Report and will follow relevant rules for dissemination and publication.

- CES content guidance:
  - A CES should include a brief CD section containing:
    - (i) a snapshot of previously provided Fund CD, with a short assessment of traction, implementation, and absorptive capacity constraints;
    - (ii) a limited number of sequenced CD priorities and associated workstreams reflecting demand from the authorities, explicitly linked with surveillance and program objectives;
    - (iii) a summary of engagement with other CD providers to enhance collaboration, leverage synergies, and avoid duplications.
  - A separate CD Country Strategy Note (CD-CSN) will not be required if a CES is in place (see Annex I).

### J. CES communication with authorities and confidentiality distinctions
- CES (3-page annex): main elements that have not yet been issued to the Executive Board should be discussed with authorities during Article IV consultations and/or program reviews. The CES will be shared with authorities, Executive Directors, and external stakeholders only as part of issued Staff Reports or Policy Notes and in accordance with the Transparency Policy and Transmittal Policy.
- Expanded CES (internal confidential document):
  - Staff should engage with authorities during preparation, striving for candid discussions on fragility and conflict challenges and their macroeconomic impacts.
  - When feasible, aim to build a shared understanding of medium-term reform priorities that steer the country towards resilience via dedicated sessions or written comments.
  - The Expanded CES should avoid a long list of externally imposed actions and instead leverage priorities articulated by or coordinated with the authorities, recognizing their constraints.
  - Staff analysis in the Expanded CES can be shared with authorities, Executive Directors, or external stakeholders as part of the broad consultative process led by Area Department country teams—provided no confidential information is disclosed unless in accordance with existing Fund policies.
  - The Expanded CES is an internal confidential document and will not be shared with Executive Directors, country authorities, or partners.

### K. Conflict threshold definitions (as applied in the methodology)
- The countries in conflict are:
  - (i) those with (a) an absolute number of conflict deaths above 250 according to ACLED and 150 according to UCDP; and (b) above 2 per 100,000 population according to ACLED and above 1 according to UCDP; or
  - (ii) countries with a rapid deterioration of the security situation, as measured by (a) an absolute number of conflict deaths above 250 according to ACLED and 150 according to UCDP; (b) a lower number of conflict deaths relative to the population between 1 and 2 (ACLED) and 0.5 and 1 (UCDP) and (c) more than a doubling of the number of casualties in the last year.

### L. Internal lists and discontinuation
- The Fund has maintained an internal FCS list of 42 economies representing about 20 percent of IMF membership. This internal list, updated in FY19, will be discontinued following the publication of this Guidance Note.

*Staff Guidance Note on the Implementation of the FCS Strategy — excerpt*

### 25.      When including the CES into Policy Notes and Staff Reports, staff should be mindful of

### ppea2023010 - 25.      When including the CES into Policy Notes and Staff Reports, staff should be mindful of

### Inclusion of the CES into Policy Notes and Staff Reports
- The CES should not duplicate the Policy Note; it should provide a medium- to long-term view on needed reforms and a framework for engagement with the authorities on reform priorities in the context of fragility and/or conflict.
- The CES should not lock staff into specific policy lines or program design choices; these will be tailored to the country’s needs in consultation with Functional Departments.
- Country teams should consult the Expanded CES for background diagnostics on political, social, security, and other structural issues, including downside risks, to support overall diagnostics, political-economy considerations, possible sequencing of reforms, and tailoring program design and conditionality to country contexts.
- Inclusion of the CES as Annexes in Policy Notes will:
  - provide background for reviewers and Management,
  - help reviewers and Management understand selected reform priorities and their sequencing,
  - incorporate the country’s fragility and/or conflict context into assessment of proposed policy lines and realistic program conditionalities,
  - ensure the CES informs surveillance and program considerations in an evenhanded way.
- New or updated CES: once approved following the review process, it will be included in the forthcoming Policy Note and/or Staff Report and referenced in subsequent Policy Notes and Staff Reports.
- Countries where engagement is constrained:
  - No expectation that the CES will be published for countries with limited Fund engagement and excessively delayed Article IV consultations (e.g., active conflict or government recognition issues) given the absence of a publishing platform.
  - Staff may carry out or update the Expanded CES to support quick reengagement should in-country conditions change.
  - Reports for such cases will be adapted to data and team resource availability and draw from partner insights.

*See The IMF Strategy for Fragile and Conflict Affected States (FCS), para. 42. See Appendix IX of the 2014 Updated Guidance Note on the Fund’s Transparency Policy.*

### Integration of the CES into Core IMF Functions
- The CES will ensure program design and conditionality decisions are informed by country-specific fragility and conflict dynamics.
- The CES provides critical context for IMF surveillance, CD delivery, and lending (summarized in Table 2 and discussed in Section IV).

Table 2. Linking the CES with Core IMF Functions (summarized functions and roles)
- Surveillance:
  - Inform diagnostics and thematic focus of Article IV consultations.
  - Provide fragility and/or conflict context to tailor policy advice, e.g., sequencing of structural reforms.
  - Identify capacity constraints that limit adoption of policy recommendations.
  - In FCS with limited Fund engagement, CES could present a contingency plan for re-engagement.
- Capacity Development:
  - Delineate sequenced priorities with objectives and outcomes mapped to surveillance and program priorities, reflecting demand from authorities.
  - Distinguish and sequence medium- and longer-term reforms from immediate priorities, including those originating from shocks.
  - Support complementarity of medium-term CD plans in close collaboration with Functional Departments and partners.
- Programs:
  - Provide context to tailor program design to the country’s fragility and conflict drivers, e.g., calibration of macro-adjustment.
  - Facilitate identification of a parsimonious set of quantitative indicators and reform priorities for program conditionality.
  - Map out CD to support reform implementation.
  - Inform internal discussions on program risks.

*Source: IMF Strategy for Fragile and Conflict-affected States (FCS) (2022).*

### Surveillance (Article IV Consultations)
- Staff should follow the 2022 Guidance Note for Surveillance under Article IV Consultations; FCS are equally subject to Article IV and the Integrated Surveillance Decision.
- Article IV consultations should be well-tailored to FCS circumstances and aligned with the FCS Strategy objectives: support macroeconomic stability, strengthen resilience, promote sustainable and inclusive growth, and help exit fragility.
- Staff should proactively use the CES to:
  - inform diagnostics and thematic focus;
  - provide context for tailoring policy advice;
  - identify capacity constraints preventing adoption of policy recommendations and integrate CD with policy advice;
  - facilitate re-engagement when opportunities arise.
- When Article IV consultations are combined with program reviews, staff should discuss economic challenges arising from fragility and/or conflict with authorities in line with the CES.
- If Article IV consultations are excessively delayed due to active conflict or government recognition issues, staff should maintain dialogues with stakeholders to remain informed and may prepare informal “Economic Developments” reports to the Board. Examples of informal briefings include Yemen (2021), Venezuela (2020), Haiti (2018), and DR Congo (2018).

### Article IV Consultations in FCS — Practical Considerations
- Country teams should clearly identify capacity constraints limiting traction and implementation of policy recommendations; FCS often face political/social instability, weaker institutional capacity, and lack of data.
- Use the CES to ensure Article IV consultations and policy advice are sequenced, prioritized, and adjusted to country circumstances.
- Examples of staff actions:
  - Early identification of capacity constraints and factoring CD priority measures to facilitate reform adoption.
  - Leverage HQ and RCDCs, long-term resident advisors, and cross-country expertise for ad-hoc critical needs.
  - Make greater use of innovative tools to adjust engagement to limited data availability and quality (see Box 2).
  - Ensure data provision requirements under Article VIII, Section 5 remain applicable to FCS while recognizing members would not be found in breach for non-provision or inaccurate provision occasioned by lack of capacity.
  - Enhance FCS-specific analytical work during Article IV cycles on macroeconomic and financial policies affected by fragility and conflict drivers and pursue analytical work on emergent topics (e.g., social spending, forced displacement, food security, fiscal impact of security crises).

### Addressing the Macroeconomic Implications of Fragility and Conflict
- A key pillar of surveillance in FCS is policy advice to address macroeconomic consequences of fragility and/or conflict based on the CES.
- Article IV reports should assess impacts of fragility and/or conflict on macroeconomic stability and growth prospects to design tailored recommendations.
- Policy advice focus areas:
  - promoting growth and job creation,
  - building resilience,
  - stabilizing and enhancing functionality in thin financial sectors,
  - ensuring debt sustainability to achieve macroeconomic stability.
- Recognize sharp tradeoffs in FCS between rising spending needs, difficulties in raising revenue, and elevated debt levels with shortened policymaker time-horizons.
- Macroeconomic policies can affect fragility/conflict evolution (e.g., distributional consequences of fiscal reform or governance-related reforms in sectors like mining).
- Article IV policy advice should include:
  - inclusive growth,
  - institution building,
  - governance and corruption,
  - macro-critical implications of climate change, gender, food security, and forced displacement where relevant.
- If authorities are hesitant to cover macro-critical policies within the Fund’s expertise, staff should cover them (e.g., fiscal implications of security expenditures, policies to prevent escalation of fragility, corruption and AML/CTF, economic inclusion of vulnerable groups). Staff should seek expertise from other organizations where needed and coordinate with partners.
- Staff encouraged to use innovative tools to better understand drivers of fragility, for example assessing risks of social unrest (see Box 3).

### Box 2: Assessing Risks and Uncertainties in FCS Article IV Consultations (high-level tools)
- Strategic Foresight Tools: qualitative structured approaches to explore multiple plausible futures to inform present decisions; Macro-Risk Unit (SPR) can be consulted for optimal application.
- Scenario planning: tailor existing scenarios to country contexts and create synergies with empirical/theoretical analysis (example cited: 2018 Regional Economic Outlook on the Future of Work in Sub-Saharan Africa).
- Risk Assessments: conduct on policy guidance (baseline and contingent) to imagine adverse outcomes if authorities adopt certain policies (e.g., fuel subsidy reform prompting mass unrest); exercises include discussions on pitfalls, unintended negative outcomes, and refinement of policies, sequencing, and risks.

### Box 3: Measuring Social Unrest
- The Social Unrest Module is part of the Fund’s Vulnerability Exercise (VE).
- It leverages machine-learning tools and considers over 300 indicators covering macro-financial, socioeconomic, development and political variables.
- It forecasts social unrest one-year ahead.
- Usage guidance:
  - Drivers of social unrest are heterogeneous and interact in complex ways; country teams should use underlying data and qualitative findings across Article IV surveillance documents to feed into policy guidance.
  - Note: the model’s quantitative results can only be used in policy notes; do not use explicit risk category (low/medium/high) in Article IV Staff Reports.

### Capacity Development (CD)
- CD is a cornerstone of the Fund’s engagement in FCS and is expected to increase further in line with the FCS Strategy, continuing the upward trend from the last decade.
- Objective: ensure CD is readily available to meet growing FCS needs, respond to local circumstances and absorptive capacity, and adjust swiftly to changing conditions.
- Prioritization of CD Delivery for FCS:
  - FCS are explicitly targeted for increases in CD delivery, provided there is adequate demand and absorptive capacity.
  - Area Departments are expected to give high priority to FCS projects in the annual medium-term work-planning exercise.
  - Medium-term workplans (MTWs) are finalized each year after the Spring Meetings and approved by Management in early summer.
  - The CD Management and Administration Program (CDMAP) facilitates prioritization.
  - The Committee on Capacity Building (CCB) will continue to assign the highest weight in the Fund priority scoring to FCS (along with program countries).
  - Area Departments will continue to assign FCS high values in their regional priority scoring in CDMAP.

*STAFF GUIDANCE NOTE ON THE IMPLEMENTATION OF THE FCS STRATEGY — INTERNATIONAL MONETARY FUND*

### 36.      A change in FCS status can influence prioritization of new projects but will not impact

### 36.      A change in FCS status can influence prioritization of new projects but will not impact ongoing CD

### Impact of changes in FCS status on CD prioritization and delivery
- Countries on the FCS list will receive higher priority for new projects than those not in the list, but this is unlikely to have abrupt impacts on the level of CD delivery to a given member—the objective remains to ensure adequate support to authorities.
- Area Departments typically assign high priority to members that display many signs of fragility but are not officially included on the list; staff will therefore apply judgement in responding to needs of such members (e.g., weak institutions, extreme poverty), especially if country ownership is strong.
- For countries transitioning off the list:
  - Staff will continue to deliver projects that have already been prioritized and/or are ongoing, as planned.
  - New FCS projects will be considered alongside others from non-FCS, but are expected to be treated favorably, particularly in cases where they are essential for stability and recovery.
  - Overall, for countries with large needs and adequate absorptive capacity that have shown ownership and traction, CD delivery could be expected to remain substantial, in line with the long-term nature of institution building, with potentially only marginal reductions.
- For countries transitioning to the list:
  - Staff will continue to deliver ongoing projects as planned.
  - New projects will receive higher priority as described above; an increase in CD delivery could thus be expected, conditional on adequate demand and absorptive capacity.
  - Previously proposed projects that could not be initiated due to competing demands in the region could also be rekindled if they are in line with the priorities of the CES (Figure 3).
- Project delivery can only begin after the receipt of an official request from a senior official of the member country (see paras. 14–33 of the Staff Guidelines on CD Prioritization and Work Planning and paras. 37–40 as well as paras. 50–58 of New Ways of Working in CD).

### MTW adjustments and workplan flexibility
- Even after approval, MTWs can be adjusted throughout the year to reflect relevant changes in circumstances or in member’s CD needs, particularly for FCS where country-tailoring must adapt to rapidly evolving conditions.
- The Fund’s CD prioritization framework ensures that CD Project Managers are free to make operational changes to project size, which enables agile adaptation.
- Workplan flexibility is further enhanced by the possibility that central reserves—i.e., uncommitted resources from the carry-forward for IMF02 resources—are prioritized to accommodate FCS demands.

### Adapting to absorptive capacity: broad approach
- There is “no one-size fits all” strategy for capacity building in FCS; staff can broadly follow steps to facilitate country-tailored CD implementation that calibrate pace, volume, and ambition consistent with domestic capacity and FCS-specific challenges.
- Assessing absorptive capacity should draw on past traction and results, and views of field staff and partners, when available.
- Flexibility and innovation on delivery methods, instruments, and training modalities should be a constant feature of CD support to FCS.

### (a) Developing realistic reform strategies based on FCS-specific analytics
- Staff should draw on illustrative frameworks, analytical materials, and diagnostic tools to define priorities of the country CD strategy in the CES and for CDD teams in designing projects.
- Existing guidance expanded with a focus on FCS contexts includes:
  - Building Fiscal Capacity in Fragile States
  - Building Capacity in Monetary and Financial Policies in Fragile and Conflict-Affected Countries
  - Building Statistical Capacity in Fragile and Conflict-Affected States
- Such frameworks should be complemented with staff’s own diagnostic and judgement on the ground, and intensive consultation with country authorities and development partners.

### (b) Designing implementable projects in FCS
- Translate reform strategy into implementable projects that reflect country conditions, involve country authorities, and leverage field presence; adjust to limited availability and quality of data.
- Key operational guidance:
  - Training is usually the first element: in the most challenging stages of fragility, training helps build absorptive capacity before strengthening PFM or tax collection functions; staff should coordinate with ICD and RCDCs.
  - The sophistication of CD support should increase gradually: first target basic needs (e.g., simple tax return filing and payment processes, basis for liquidity management at central banks, legal framework reviews, basic statistical data needs).
  - In early stages, light hands-on assistance often delivered by RCDCs, or resident advisors may be more effective than large multi-year projects and diagnostic missions (see Box 4).
  - When required conditions are in place, cautiously shift focus to more demanding medium-term projects (e.g., medium-term budgetary framework, toolkits to preserve price and financial stability, multi-year national accounts re-basing).
  - Resident Representatives and RCDC staff play a key role to ensure CD project managers are kept up to speed with changing field conditions.
  - Leverage enhanced field presence of RCDCs and country-based LTX to design implementable projects; invest more in consultations with authorities and partners to understand FCS-specific constraints (cultural barriers, social norms, readiness to engage, political limitations).
  - Strengthen donor coordination via coordination between country teams, CDDs, and RCDC directors and staff with key bilateral and regional donors.

- Examples and practices:
  - Box 4 (AFRITAC WEST CBF initiative): more intense TA, dedicated resident advisors, hands-on advice and coaching, more frequent and longer missions, continuous HQ support; helped clean-up tax arrears and supported creation of HQ units focused on tax arrears management and GFS/PSDS support from an additional advisor in Abidjan.
  - Box 5 (South Sudan): aligning CD with R-ARCSS priorities after Transitional Unity Government (Feb 2020); FAD remote mission (July 2020) recommended focusing scarce resources on a small number of achievable objectives; follow-up mission (Nov 2020) assisted in developing a PFM Reform Strategy Concept Note with an Immediate Action Plan for 2021 and road map for a medium-term PFM Reform Strategy; collaboration with the World Bank facilitated coordination and realistic strategy setting.

### Delivery modalities and RBM adaptation
- Projects in FCS should rely on delivery modalities that account for different levels of risks and institutional capacities:
  - RBM log frames should reflect FCS-tailored approach:
    - An FCS log frame should generally have no more than 2-3 milestones per year;
    - Objectives and outcomes that are attainable;
    - Less ambitious indicator targets compared to non-FCS;
    - Possibly allow for longer project duration.
    - Given that in FCS traction for reform can abruptly change, staff should consider frontloading several reform milestones under special circumstances (e.g., when a new government comes in or a Fund program begins).
    - Results log frames should be designed jointly with the authorities; while authorities are not required to approve all aspects, they should be aware of (and agree with) the results being targeted.
  - Use HQ or RCDC experts for flexibility; deploy in-country resident advisors when intensive support is required, conditional upon strong ownership and adequate absorptive capacity.
  - Integrate technical assistance with corresponding training and coaching programs; prefer customized training over standard courses; leverage remote delivery when connectivity allows.
  - In high security risk FCS where resident advisors or travel are not options, fully use third-country missions and remote missions (e.g., Yemen, Somalia).

### (c) Adjusting implementation to changing FCS contexts
- Maintain higher flexibility in FCS than standard CD implementation; CD Project Managers are responsible for making necessary adjustments to preserve country-tailoring as FCS circumstances and capacities evolve, following timelines and procedures in Staff Guidelines on CD Prioritization and Work Planning and implemented through CDMAP (see Box 6 for illustration).
- Following reengagement after conflict or when capacities erode, CD delivery is likely to include capacity supplementation:
  - Capacity supplementation = hands-on approach with intense involvement in day-to-day work to ensure basic operations of critical state functions.
  - Draws on normal CD resources, including experts in regional centers and in exceptional circumstances dedicated country experts.
  - Use synergies among countries in the region when supplementing capacity (common tools, methods, data sources).
  - To pursue more traditional CD approaches, capacity levels should be raised appropriately with close coordination with country authorities.
- If engagement is on pause or CD cannot be delivered due to security reasons, Area Department country team and Functional Departments must agree on whether and how to reallocate corresponding resources, reflecting the situation on the ground and other regional needs (example: 2020 remote TA mission to Yemen addressed missing CPI observations and methods to measure price changes where price collection was suspended).

### Lending, program design, and conditionality (introductory points)
- Guidance aims to support staff in assisting FCS to develop robust programs to address BoP problems, achieve macroeconomic stability, foster inclusive growth, and exit fragility by:
  - Harnessing existing flexibilities of the Fund toolkit to tailor program design to country specific needs and capacity;
  - Enhancing realism of macro-frameworks;
  - Clarifying cases for concurrent use of SMPs with emergency financing instruments.
- Guidance on conditionality should be read in light of the 2002 Guidelines on Conditionality and the conclusions of the 2018 Review of Conditionality; additional information on assessing realism of macro-frameworks and post-program financing gaps (PPFGs) is provided elsewhere.

*Staff Guidance Note on the Implementation of the FCS Strategy — excerpt (paras 36–47).*

### Annex III.

### Annex III.

### Program engagement with FCS — overarching guidance
- Successful program engagement with FCS generally requires appropriately prioritized policy measures and realistic macro frameworks (para. 48).
- Key requirements:
  - Develop a coherent policy package that addresses the most critical priorities in a carefully sequenced manner, rather than seeking to resolve all issues over the program period (para. 48).
  - Strict prioritization, coupled with timely and well-targeted CD support, is critical to avoid overburdening country authorities with very limited implementation capacity and ensure traction (para. 48).
  - Fund-supported programs for FCS should be informed by CES findings, and take into account social issues, in view of elevated levels of poverty and the high risk of failure if adjustment measures are socially infeasible (para. 48).

### Tailored program design and parsimonious conditionality
- Upper Credit Tranche (UCT)-quality programs for FCS should focus on the most critical measures to achieve program goals; conditionality should be tailored and parsimonious but preserve UCT-standards (paras. 49–50).
- Conditionality objectives:
  - Achieve or restore macroeconomic stability while addressing underlying structural challenges (para. 49).
  - Integrate CD activities to support limited implementation capacity on the most critical measures (para. 49).
  - Be adaptable to fast-changing circumstances, while safeguarding overarching program goals (para. 49).
- Program design must consider fragility manifestations: limited institutional capacity, weak governance, heightened security risks, unstable political environments, high vulnerability to economic and climate shocks, weak reserve positions, and high debt sustainability risks (para. 51).

### Key challenges to conditionality in FCS and tailoring principles
- Conditionality must be adapted to:
  - The country’s capacity to implement required policies (para. 52).
  - Binding political economy constraints, including elite capture and governance weaknesses and associated vulnerabilities to corruption (para. 52).
  - Lingering impact of conflict and other fragilities, while remaining appropriately ambitious (para. 52).
- Tailoring involves balancing:
  - Realism and ambition; parsimony and granularity; gradualism and speed; debt operations and fiscal adjustment (para. 53).
  - CES analysis should underpin, but not predetermine, Fund-supported engagement (para. 54).
- Parsimonious conditionality guidance:
  - Systematically scrutinize proposed conditionality and avoid inclusion of non-critical measures (para. 54).
  - Parsimony is an approach to identify measures most critical to program success; it is not a quantitative limit on the number of conditions (para. 54).
  - Well-designed conditionality can promote and strengthen ownership by aligning program targets with the authorities’ reform plans (para. 55).

### Fund financial engagement options and instrument choice
- Staff must assess appropriate instruments given member fragilities, the nature of BoP need, and specific circumstances (para. 50).
- The Fund’s lending toolkit is available to FCS if eligible and meeting policy requirements; no dedicated FCS-only lending instrument (para. 50).
- Engagement pathways:
  - If authorities lack capacity for a UCT-quality program, consider non-UCT engagement such as SMPs, possibly combined with emergency financing (para. 50).
  - For PRGT-eligible FCS able to implement UCT-quality programs, the principal mode is the Extended Credit Facility (ECF), which can often be repeated given the need for long-term engagement (para. 50).
  - The Standby Credit Facility (SCF) is appropriate for countries with short-term BoP needs and absence of a protracted BoP problem, including for FCS seeking precautionary arrangements (para. 50).

### Flexibility under the Extended Credit Facility (ECF)
- ECF features and program design elements (paras. 58–60):
  - ECF arrangements have a duration of 3-5 years and can be used consecutively to accommodate protracted BoP problems (para. 58).
  - In heightened uncertainty, policies and reforms can be developed progressively, with a near-term focus in the context of credible medium-term objectives; specific policies and measures after the first 12 months will be defined in future reviews (para. 58).
  - Medium-term objectives should enable significant progress toward a stable and sustainable macroeconomic position, consistent with strong and durable poverty reduction and growth; possible evidences include stronger fiscal or external positions, reduced debt vulnerabilities, higher levels of foreign exchange reserves, and/or more contained inflation, coupled with a higher and more inclusive growth (para. 58).
  - FCS programs must be aligned with standard program requirements, including financing assurances, Capacity to Repay (CtR), and debt sustainability requirements; fragility and political contexts should be considered in these assessments (para. 58).
  - Capacity building: aim to strengthen institutional capacity to implement appropriate macroeconomic policies (para. 58).
  - PRGS would normally be expected by the time of the second review, but members may request Board approval for an extension if limited institutional capacity exists (para. 58).
- Post-program financing gaps (PPFGs) under ECF:
  - Programs supported by the ECF can assume post-program financing gaps (PPFGs) if additional time is necessary to resolve protracted BoP problems and adequate safeguards are in place (para. 59).
  - Fund-supported programs are required to be fully financed, and financing gaps would not be expected to re-emerge after the program; however, for ECF arrangements it may not be feasible to fully resolve the protracted BoP problem within the program period (para. 59).
  - Existence of PPFGs could be explicitly recognized with appropriate safeguards; PPFGs can be justified when sensitivity analysis confirms CtR remains adequate and debt remains sustainable under realistic financing assumptions (para. 59).
  - PPFGs mean that sources to meet post-program financing needs (e.g., 3-4 years later) are not fully identified; financing gaps could be closed ex-post through a combination of post-program policy adjustment and additional financing (para. 60 and footnote cross-reference).

### Realistic macro-frameworks for FCS
- Realistic macro-frameworks are essential, especially given the high risk that overly ambitious adjustment paths may undermine social dynamics (para. 61).
- Framework design principles:
  - Reflect the structure of the economy, internalize implementation capacity constraints, take into account risk of reform reversals, and incorporate contingency buffers to account for heightened uncertainty (para. 61).
  - In addition to realistically projecting GDP growth, assess social and political realism of fiscal adjustment paths, drawing on CES findings and expertise of partners on the ground (para. 61).
  - Realism checks are intended to highlight key sources of tensions requiring reasonable justification; not to force convergence to rules-of-thumb or comparators (para. 61).
  - Assess robustness/feasibility of monitoring modalities (e.g., domestic arrears accumulation) and analyze unintended consequences (para. 61).
  - Further guidance on realism assessments, including use of realism tools, is presented in Annex III (para. 61).

### Pace, composition of adjustment, and social considerations
- Pace and composition of fiscal adjustment should carefully factor implications for socio-political stability and distributional impacts (para. 62).
- Country teams should draw on Poverty and Social Impact Analysis (PSIA) by other institutions where available (para. 62).
- Program conditionality can use indicative targets (ITs) on social spending and structural benchmarks (SBs) to enhance the efficiency of social spending and support targeted protection of vulnerable groups (para. 62).
- Military and security spending: the Fund will not take a view on appropriateness, but such spending should be considered within broader fiscal policy assessment (para. 62).
- Floating tranches (FTs) can give authorities greater flexibility on timing of critical structural reforms and may enhance ownership when well-designed (para. 62).

### The operation of Floating Tranches (FTs)
- Definition and purpose:
  - FTs are purchases/disbursements contingent on implementation of specific structural measures or observance of specific performance targets that meet certain requirements, rather than tied to a fixed Board review schedule or date (Box 7).
  - Appropriate use provides timing flexibility and can complement conditionality to monitor structural reforms without eroding overall program strength or safeguards (Box 7).
- Operational features:
  - FT measures/targets and associated access typically decided at approval of an arrangement, with Board approving FT commitment ex-ante; disbursement under FT approved by management on staff recommendation once associated reform completed and program is on track (Box 7).
- Criteria for considering FTs:
  - Unavoidable uncertainty about timing of implementation or undesirability of an upfront timing commitment (e.g., where implementation depends on international agreements or external factors) (Box 7).
  - Measures/targets underlying FTs need to strengthen the external position in the medium-term while creating an additional BoP need in the short term (Box 7).
  - Policies linked to fixed-tranche macroeconomic component must constitute a viable program even if FT-linked policies were not implemented; FT measures should not be required for immediate external stabilization, but should be critical for other program objectives (Box 7).
- Considerations:
  - Careful choice between SBs and FTs: SBs generally more suited for measures required for immediate external stabilization or where sequencing of multiple reforms is important (Box 7).
  - The restrictive criteria for FTs suggest they are appropriate for a small set of measures (e.g., trade liberalization, civil service reforms, social safety net reforms) that meet the criteria (Box 7).

*Source: Annex III.*

### 63.      The Fund’s longstanding practice involves judgement in determining whether a

### 63.      The Fund’s longstanding practice involves judgement in determining whether a particular measure should be established as a structural benchmark

### Structural benchmarks, parsimony, and program design
- Staff apply judgement to decide whether a measure should be established as a Structural Benchmark (SB) (para. 63).
- Approaches to SBs:
  - Landmark reforms can be assessed through a single SB.
  - Reforms may be broken into multiple granular steps, each with individual SBs when authorities have limited capacity to implement a large reform at once (para. 63).
- Parsimony requirements:
  - A program can include multiple SBs and still be regarded as parsimonious if consistent with the principles set forth (para. 63).
  - Measures important but not critical can be articulated in the memorandum of economic and financial policies (MEFP) as the authorities’ policy commitments, rather than as structural conditions (para. 63).
  - Reinforcing parsimony requires focus on key priorities that are critical, fragility-sensitive, and tailored to implementation capacity (para. 63).
- Conditionality and program design should reflect the provisions of the facility under which Fund financing is provided (see 2002 Guidelines on Conditionality, para. 4) (para. 63).

### Flexibility, contingency planning, and sequence of reforms
- Critical policies may need to change over the life of the program given rapidly changing policy environments and fluid situations in FCS (para. 64).
- Staff should prepare for events not going as planned and may warrant flexibility to adjust policy priorities and conditionality to focus on the most important measures critical to program success (para. 64).
- Contingency planning:
  - Enhances preparedness for anticipated and unanticipated shocks (para. 64).
  - Requires understandings between staff and authorities on a set of policy responses for adverse scenarios (para. 64).
  - Is a risk-management tool that identifies pressure points and a set of possible responses, not a precise response with defined triggers (para. 64).
- Pace and timing of adjustment and structural reforms should be flexible and calibrated to the political and social context while meeting applicable Fund policy requirements (para. 65).
  - Full-fledged structural reforms may not be optimal or feasible at program start when broad support is not yet entrenched (para. 65).
  - The ECF offers flexibility to develop policies and reforms progressively with a near-term focus in the context of credible medium-term objectives (see para. 58) (para. 65).

### Ownership, transparency, and accountability considerations
- Fund engagement should take into account country ownership, transparency, and accountability in FCS (para. 66).
- Strengthening ownership and leveraging authorities’ longer-term development agendas (for example, increasing employment rates or advancing SDG targets) can facilitate implementation of policies and reforms (para. 66).
- Assisting authorities in communication and outreach can help strengthen ownership (para. 66).
- Country teams could consult partners to learn best practices in engagement with FCS and lessons learned from past engagement (see Section VI) (para. 66).

### Program implementation monitoring and SB adjustments
- Program implementation should be assessed against the question of whether the program remains viable given unparalleled risks and capacity constraints in FCS (para. 67).
- High risk of programs going off-track; if an SB is not observed:
  - It could be reset or modified to more realistic targets or dropped provided staff assesses non-observance would not undermine program objectives (para. 67).
  - Staff may propose to the Board to modify SBs ahead of time if adjustments are needed owing to changes in economic conditions (para. 67).
  - A measure may be set as a prior action when it is critical for successful implementation and to underpin upfront implementation of important measures (footnote 45).

### Quantitative conditionality: ambition, feasibility, and ITs vs QPCs
- Quantitative conditionality should be appropriately ambitious while consistent with a socially and economically feasible adjustment path (para. 68).
- Staff considerations when developing targets (QPCs and ITs):
  - Consider implications for social dynamics and confirm authorities’ capacity to achieve envisaged quantitative targets (para. 68).
  - Pay particular attention to authorities’ commitment and capacity to meet indicative targets for social spending, including risks from donor shortfalls or overruns elsewhere (para. 68).
- Use of Indicative Targets (ITs):
  - Heightened uncertainty and limited capacity may justify greater use of ITs under certain circumstances (para. 69).
  - Variables may be established as ITs for parts of an arrangement where they cannot be QPCs because of substantial uncertainty about economic trends (para. 69).
  - ITs may be established in addition to QPCs as quantitative indicators to assess progress in the context of a program review (para. 69).
  - ITs should be replaced gradually by QPCs as uncertainty abates and capacity builds (para. 69).
- QPCs:
  - Fund-supported programs should include QPCs on macroeconomic indicators deemed so critical to program goals or monitoring implementation that disbursements should be interrupted in cases of nonobservance (para. 69).
- Complementary design:
  - When a key macroeconomic indicator is set as an IT due to heightened uncertainty (e.g., primary balance), it could be complemented by QPCs for more predictable and controllable indicators (e.g., expenditure) (para. 69).
  - Greater use of ITs requires case-by-case analysis and clear justification in program documents (para. 69).
- ITs and UCT standards:
  - Greater use of ITs does not imply loosening UCT standards; the macro-framework must still meet UCT standards (para. 70).
  - Assessment of performance relative to the macro-framework informs management’s recommendation on completing a review, considering past performance under QPCs, ITs, and SBs (para. 70).
  - In case of substantial deviations from targets (including ITs) and insufficient corrective actions, staff and management may not recommend completion of a review (para. 70).

### Addressing undue misreporting risk
- Program design for FCS should minimize undue risks of misreporting because misreporting—even due to capacity constraints—can cause substantial delays in resumption of Fund financing (para. 71).
- Staff responsibilities to mitigate misreporting risk:
  - Define QPCs clearly in the Technical Memorandum of Understanding (TMU), considering authorities’ reporting capacity (para. 72).
  - Define prior actions clearly and share background material with relevant functional departments before determining whether prior actions have been met (para. 72).
  - When considering continuous QPCs not explicitly required under Fund policy, take into account reporting burden and misreporting risk and consider whether regular periodic QPCs would be an acceptable alternative (para. 72).
- The misreporting policy applies to quantitative performance criteria, standard continuous performance criteria and prior actions, and to information provided in requests for waivers (footnote 48).

### Non-UCT engagement: SMPs and Emergency Financing (EF) concurrency
- SMPs (Staff-Monitored Programs):
  - Available for members that cannot implement UCT-quality programs and need to establish/re-establish a track record prior to moving to or resuming Fund resources (para. 73).
  - An SMP is an informal agreement to monitor implementation of the authorities’ economic program and has often been used by FCS (para. 73).
  - SMPs can be used to build a track record in cases of weak capacity, post-conflict reconstruction, lack of recent UCT-quality program experience, or when Fund-supported programs have gone off-track (para. 73).
- Concurrent use with Emergency Financing:
  - For FCS facing urgent BoP needs that qualify for EF, concurrent use of SMPs and EF could help address urgent BoP needs while moving towards a UCT-quality program (para. 74).
  - EF addresses urgent BoP needs that, if not addressed, would result in immediate and severe economic disruption; EF lacks ex-post conditionality (para. 74).
  - The SMP can provide a concrete anchor for track-record building and policy implementation, given EF’s lack of ex-post conditionality (para. 74).
  - Repeated use of EF to address continuing urgent BoP needs associated with fragility and/or conflict can be supported by SMPs to demonstrate a sufficient track record (para. 74).
  - While building a track record with SMPs, lack of financing could force excessive adjustment, run domestic arrears, or postpone essential reforms; combining SMPs with EF can mitigate these risks (para. 74).
- Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI) repeat use rules:
  - LIC FCS can request repeat disbursements under the RCF if applicable conditions are met; number of disbursements in any 12-month period is capped at two (para. 75).
  - If a member received an RCF disbursement in the preceding three years, another disbursement is possible only if: (i) the BoP need was caused primarily by a sudden, exogenous shock (“exogenous shocks” window or “large natural disaster” window); or (ii) the member has established a track record of adequate macroeconomic policies for at least six months prior to the request (“regular” window) (para. 75).
  - Even in fragility situations, a second RCF disbursement cannot be pre-committed at approval of the first disbursement (para. 75).
  - For non-LIC FCS, concurrent use of SMPs and RFI is possible to address urgent BoP needs while moving towards a UCT-quality program; repeat use under RFI within three years is possible if: (i) the urgent BoP need was caused primarily by an exogenous shock; or (ii) the member established a track record of adequate macroeconomic policies over at least six months immediately prior to the request (para. 76).
  - Under the RFI, there is no limit on the number of disbursements in a twelve-month period provided qualification conditions are met (para. 76).
- Track record modalities:
  - A track record required for repeat use of RCF/RFI can be satisfied by an SMP or other track record modalities (para. 77).
  - When RCF/RFI is requested concurrently with an SMP, each request should be justified on its own, follow respective policy, procedural and documentation requirements, and the Policy Note or Staff Report could be combined with that for an SMP review (para. 77).

### Building accountable institutions to exit fragility (introductory points)
- Building institutions capable of implementing macro-fiscal and monetary policies is central to the Fund’s comparative advantage in FCS; institutional strengths and constraints should be identified in the CES and inform tailored CD provision in revenue management, PFM, banking supervision, and central bank operations (para. 78).
- Specific guidance:
  - Strengthen macroeconomic knowledge base: Technical assistance and training on developing macroeconomic frameworks; develop basic tools for debt dynamics and macroeconomic forecasting to help implement policies and engage with the Fund (para. 78 bullet 1).
  - Use and adapt CD delivery frameworks developed by Functional Departments; phase-in support gradually from basic fiscal and monetary elements to institutional modernization (para. 78 bullet 2).
  - Data weaknesses: Economic and financial statistics in FCS are particularly weak on import/export price indices, national accounts, the CPI, and government finance statistics; About 70 percent of countries with serious data shortcomings that hamper Fund surveillance are FCS (para. 78 bullet 3).
    - Ensure CD includes hands-on training on data compilation and basic reporting systems; leverage RCDCs’ field presence; support participation in Data Standards Initiatives, ISORA and ISOCA; emphasize financing for digitalization of statistics (para. 78 bullet 3).
  - Promote good governance as a cross-cutting priority: Research shows poor governance is linked to a higher probability that a country enters fragility, given a 2 percent contraction in GDP (para. 78 bullet 4).
    - Deliver CD in fiscal governance, central bank governance, financial sector oversight, market regulation, AML/CFT, and rule of law (para. 78 bullet 4).
    - In conflict-affected countries, terrorism financing risks may be elevated and efforts to suppress terrorism financing could be prioritized (para. 78 bullet 4).
  - SMPs as institution-building tools: SMPs can help FCS establish a track record of policy implementation through improved institutional performance—e.g., increases in domestic revenues, capacity to implement budgets, and greater fiscal transparency—which can pave the way for potential Fund financial support and catalytic financing from donors and creditors as institutions improve incrementally (para. 78 bullet 5).

*Staff Guidance Note on the Implementation of the FCS Strategy*

### 79.      In line with the FCS Strategy, staff should explore ways of supporting members at an

### ppea2023010 - 79.      In line with the FCS Strategy, staff should explore ways of supporting members at an

### Two-Step Approach to Building Fiscal and Monetary Institutions (Table 3)
- Short run: Priorities for immediate recovery
  - Building Fiscal Institutions — Revenue
    - Focus on revenue collection through custom duties on imports and large sectors (e.g., telecom, banking, the agro-industry). Aim for simple organizational structures and the establishment of basic processes, including on human resource management and strengthening communication across agencies.
  - Building Fiscal Institutions — Expenditure
    - Focus on budget preparation and basic payment systems to allow for proper budget execution that can speed up public service delivery. Consolidation of cash resources to allow immediate government obligations to be met.
  - Building Fiscal Institutions — Debt management
    - Build institutional structure to facilitate effective debt management.
  - Building Monetary and Central Banking Institutions — Central bank operations
    - Ensure that the key principles for monetary policy implementation and lender of last resort are defined in central bank law. Develop the basis for liquidity management.
  - Building Monetary and Central Banking Institutions — Regulation
    - Establish prudential rules, reporting on capital adequacy, credit, market, and liquidity risks, including for AML/CFT. Set up a licensing framework for banks, risk measurement and management practices, build robust governance.
  - Building Monetary and Central Banking Institutions — Supervision
    - Set up and formalize the supervisory function, assess prudential reports, build basic elements of the supervisory toolkit.

- Medium-to-long run: Priorities for exiting fragility
  - Building Fiscal Institutions — Revenue
    - Establish a medium-term revenue strategy, enhance taxpayer base, introduce corporate and value-added taxation, establish compliance strategies, set up taxpayer offices, modernize the tax payment environment, and strengthen the management of the natural resources companies.
  - Building Fiscal Institutions — Expenditure
    - Build the medium-term PFM capacity development strategy, a medium-term expenditure framework, internal controls, accounting standards, annual financial statements, and the capacity for cash and debt management.
  - Building Fiscal Institutions — Debt management
    - Develop domestic debt markets, implement a medium-term debt management strategy.
  - Building Monetary and Central Banking Institutions — Central bank operations
    - Develop the operational toolkit and advice towards price and financial stability objectives.
  - Building Monetary and Central Banking Institutions — Regulation
    - Modernize regulatory framework through a medium-term strategy. Sequencing of regulatory reforms adjusted to low but gradually improving, administrative capacity.
  - Building Monetary and Central Banking Institutions — Supervision
    - Move from compliance-based to risk-based supervision. Strengthen legal framework; improve risk reporting, assessment, and monitoring; and take remedial actions.

- Source noted: FAD (2017), MCM (2021).

### Preventative Activities and Early Engagement (paragraphs 79–80)
- Purpose and scope
  - Preventative activities build resilience of institutions, economies, and livelihoods to manage fragility and/or conflict risks.
  - Prevention is typically addressed in development projects financed by the World Bank, bilateral donors, and other MDBs; the UN and regional organizations support political dialogues and crisis management efforts.
- Country team guidance and analytical approaches
  - Determine if a country is at risk by consulting partners working on prevention activities and by comparing trends in poverty, GDP growth, inflation, and conflict between at-risk countries and non-FCS peers.
  - Resident Representatives and field-based country team members should make qualitative assessments on persistence of social and economic grievances, degree of polarization, levels of insecurity, state legitimacy, or legacy of past conflict.
  - Area Departments can prepare a CES and check if other institutions (such as the OECD) classify at-risk countries as FCS even if the Fund does not.
- Policy and program design
  - Through the CES process, staff should understand interlinkages between economic, social, and political forces that may generate crises.
  - Encourage authorities to prepare carefully designed reform strategies with sequencing and pacing of politically difficult reforms, analysis of distributional impacts on vulnerable populations, and mitigation measures, as per the 2019 Strategy for IMF Engagement on Social Spending.
  - Where feasible, assist authorities to design communication campaigns to build awareness and strengthen country ownership.
- Analytical tools and partner engagement
  - IMF working papers have found that episodes of past unrest, along with inflation for food and oil prices, and contagion from neighbors are corelated with the probability of future unrest.
  - Use Article IV consultations to assess prevention aspects with innovative tools such as strategic foresight or the Social Unrest Index.
  - Leverage partners for early warning analytics and integrate partner insights into IMF core activities to enhance contingency planning.
- Footnote references present in source: 57 (United Nations and World Bank (2018)).

### Active Conflict: Remaining Engaged (paragraphs 81–85)
- Overall objective
  - When countries experience active conflict or political instability, the Fund should strive to remain engaged, continue surveillance where feasible, and may provide capacity development (CD) and lending subject to adequate safeguards and policy requirements. 58
- Surveillance and Article IV consultations
  - Surveillance is an obligation for both the Fund and the member; Article IV consultations have been conducted except where authorities are unwilling or where civil unrest, insecurity, or data quality make them infeasible.
  - If full-scale conflict prevents missions, Article IV consultations may be delayed, conducted virtually, or in third-party locations.
- Policy advice and CD during severe conflict
  - Consider integrated policy advice and CD to preserve functionality of key economic institutions and reduce stress on the population.
  - Continuously monitor impacts of conflict on growth, inflation, and poverty to support macroeconomic and fiscal management.
  - Article IV consultations should assess how conflict hampers government ability to implement fiscal, monetary, and financial sector policies, including BoP problems from foreign exchange rationing for essential imports.
  - Fund policy advice can address monetary and exchange rate policies, including removing exchange rate misalignments and freeing up foreign exchange availability.
- CD and payments infrastructure
  - CD needs are significant because of loss of human capacity; absorption capacity should be assessed to maximize traction.
  - Ensuring basic payment systems run by the monetary authority is important to facilitate relief and aid flows.
  - Banks may break correspondent relationships during conflict and reestablishing them takes time; payment networks may disconnect from FCS during conflicts.
  - AML/CFT risk-based supervision of banks and remittances may reassure correspondent banks; consider safe payment corridors for proven low-risk remittances.
  - Support fiscal authorities in managing revenues and expenditures, especially salary payments for state employees and public service delivery, to preserve state functions.
  - Coordinate CD and engagement with international financial institutions and development partners, including on preserving reliable macroeconomic statistics.
- Emergency financing
  - If appropriate conditions are met, the Fund may provide emergency financing under adequate safeguards to Fund resources and may work with bilateral partners to establish international assistance mechanisms benefiting a conflict-affected member. 58

### Engagement and Outreach in Conflict Settings (paragraph 83–85)
- Maintain dialogue with authorities and partners, where feasible, to:
  - Maintain understanding of economic, social, and political developments and structural constraints.
  - Assess capacity and commitment of authorities to implement reforms.
  - Provide well-grounded macroeconomic policy advice when opportunities arise.
- Keep lines of communication with international and regional organizations to exchange information on economic, political, and security developments and better understand evolution of conflict trends.
- Conduct outreach through think tanks, academics, and opinion shapers to deepen knowledge of political and geopolitical issues and influence debate on economic policymaking.
- Operational constraints when government loses control over territory
  - Access to Fund resources, surveillance, and technical assistance should be tailored to the portion of territory under effective control and related policymaking activities.
  - From a legal perspective, the Fund’s general principle on government recognition applies; operationally adapt support to conflict implications on government ability to implement reforms.
- Contact with competing political sides
  - Staff may engage with competing sides only if authorized by the government with which the Fund deals; if engaging de facto regimes or actors outside government control, the government must be informed and authorize such contacts.

### Dealing with Recognition Issues in Irregular Changes in Government (paragraphs 86–92)
- Consultation and legal guidance
  - When irregular changes in government occur (e.g., military coups), staff should consult with LEG and SEC on implications under the Fund’s approach to government recognition.
- The Fund’s approach to government recognition (summary)
  - The approach applies to all members regardless of FCS status and is country-specific; there is no “one size fits all” solution.
  - Consists of:
    - (i) a general principle—the Fund deals with authorities in effective control of the member; and
    - (ii) an exception—engagement is paused when there is clear evidence (e.g., public statements) that the international community (as represented by a majority of the total voting power) refuses to deal with the regime of a member. Dealings are also paused where a critical mass of the international community refuses to deal with a new regime, but there is not full clarity in the views of the international community. 59
  - In fluid situations where the views of the international community have not formed, there is no legal preclusion to engage with the new regime in effective control; engagement is a policy or judgment call by Area Departments.
- Operational guidance on two illustrative scenarios
  - Scenario I: Irregular Changes in Government and High Uncertainty (paragraphs 90–91)
    - Legal principle of dealing with regime in effective control still applies; staff should proceed cautiously and consult LEG and SEC to track how international views evolve.
    - Operationally, engagement is a policy or judgment call by Area Departments. Recent practice has been to remain engaged primarily through “low-level CD delivery” at first (see Annex IV, Burkina Faso, Guinea, and Mali examples). 60
    - Low-level CD examples: technical assistance on PFM issues such as cash management and control, training on public accounting, establishment of information systems to track public expenditures. Support often delivered by CD experts on the ground with virtual missions from RCDCs and HQ.
    - Country teams may hold targeted sessions with Area and Functional Departments and LEG to explore ways to remain engaged and customize guidance from the Active Conflict subsection.
  - Scenario II: Paused Engagements (paragraph 92)
    - When the international community refuses to deal with the regime, Fund dealings are paused: the member cannot access Fund resources or SDRs, and the Fund cannot conduct surveillance or provide CD to the regime in question.
    - The member cannot perform acts of representation at the Board of Governors or participate in regular elections of Executive Directors, nor attend Spring and Annual Meetings.

- Footnotes and examples referenced in source: 58, 59, 60, 61.

*Staff Guidance Note on the Implementation of the FCS Strategy (selected excerpts).*

### Annex IV, Afghanistan example).

### Annex IV, Afghanistan example).

### Collaboration with international organizations and contingency planning
- Staff may consider collaboration with other international organizations, especially those that have maintained a presence on the ground such as United Nations agencies. Country teams should consult LEG and SEC on the conditions of such collaboration.
- Staying informed about political developments and conflict dynamics is essential, especially if opportunities arise for stepped-up engagement. The World Bank may maintain an active portfolio of operations in such situations. Outreach to UN entities, as well as think tanks, CSOs, and academia can provide updated information on the fluid political and security developments.
- Staff can consider the preparation of papers with the World Bank and the UN to explore country scenarios. Such exercises can help determine conditions in which low-level Fund support can make a difference and enhance readiness to reengage when conditions permit.
- Coordination between Area and Functional Departments to assess contingency plans for reengagement of Fund activities is important. Contingency planning—while relevant for all FCS situations—may be especially needed given fluid conflict trends that can affect policy decisions and lift the pausing of Fund dealings with the member.
- Contingency planning can take various forms, depending on circumstances—for instance, staff can assess potential challenges and responses once Fund engagement is expected to resume, e.g., maintaining the policy dialogue and delivery of CD when a Fund-supported program is infeasible.

### Guidance on participating in conferences, seminars, and meetings when dealings are paused
- Fund participation at events also attended by an administration representing a member with paused dealings may be interpreted by third parties (including the authorities of the member) as recognition. The Fund must take actions to clarify its position and/or prevent misperception of recognition.
- When an international conference or meeting is about the specific member with paused dealings, staff have been advised not to attend such meetings to avoid a perception that the Fund is dealing with the member.
- When there is a general meeting organized or co-hosted by the Fund, staff have been advised that no representative of a member with paused dealings should be invited to participate in such events.
- In other cases where international conferences or meetings are of a general nature and no specific issues about a member with paused dealings are expected to be discussed, Fund Management and staff can attend even if representatives of members with paused dealings are also in attendance. Example given: the meeting of the UN General Assembly (or Annual Meetings of the ASEAN+3) where the Managing Director and Senior Fund Management attend regardless of whether representatives of members with whom Fund dealings are paused are also in attendance.

### Low-level engagement where relations are paused
- Low-level engagement may be permitted where relations have been paused; what constitutes “low-level engagement” is a matter of judgment for staff, based on considerations about the risk of misconstrued recognition.
- Low-level engagement would only include technical staff (such as economists) from both the Fund and the member. It does not include any high-level/senior staff from the Fund (e.g., Heads of Department, Mission Chiefs, Front Office staff).
- Staff may share with low-level representatives of the regime relevant off-the-shelf technical assistance reports that have already been published, as well as links to training courses on the Fund’s website.
- In general, it is preferable that low-level engagement be carried out in writing. Emails facilitate record-keeping and allow the agenda to be clearly delineated.
- Meetings (in person or virtual) should generally be avoided, even if between low-level/technical staff, because of the higher risk that such meetings would give rise to the misperception of recognition and the difficulty of controlling the agenda.
- Rare circumstances where meetings may be permissible: e.g., “fact-finding” meetings organized by other international organizations (e.g., UN or World Bank) with the authorities—with only technical staff from both sides participating—Fund staff may participate as “observers” only or in “listening mode.” Fund staff can pass along questions to the International Organizations (IOs) before the meeting, so that the relevant IOs can raise them with the authorities. As Fund staff are non-participants in such meetings and did not organize them, the risk of any misperception is correspondingly lower.
- Additional consideration for in-person meetings: Under N-Rule 16(c)(i), official travel by Fund staff to a member’s territory shall be undertaken only after consultation with the relevant ED. Therefore, Fund staff will not be able to attend such meetings that are held in the member’s territory (e.g., Kabul in the case Afghanistan), since relations are paused and consultation with the relevant ED cannot be undertaken. Such in person meetings can only be attended by Fund staff (pursuant to the guidelines above), if they are held in a third-party member’s territory.

### Post-conflict reconstruction: recovery, economic stability, and growth
- In countries emerging from conflict, the Fund should support the development of economic and financial stability, recognizing interlinked objectives: economic stabilization and inclusive growth; prioritizing spending and financing reconstruction sustainably; and gradually rebuilding institutions. The challenge is to do so sustainably without jeopardizing long-term growth and stability.
- The Fund can assist authorities and partners to determine financing needs for post-conflict construction. Staff can participate in Recovery and Peacebuilding Assessments (RPBAs) undertaken by the World Bank, UN, and the European Commission to evaluate reconstruction costs and assist governments in planning, prioritizing, and sequencing expenditures and recovery activities in the short and medium-term.
- RPBAs help ensure international and national interventions are aligned through a common platform. Fund analysis could highlight risks to growth associated with lack of financing, which could reignite social unrest. Depending on the country context, the IMF can also work with partners to organize pledging conferences.
- Article IV consultations should focus on policy advice to balance short and long-term policy objectives. Specific issues for policy advice include:

  - Immediate recovery stage:
    - Public expenditures in the months following a peace accord must cover the minimum needed to run basic government services, maintain a safety net, provide security, and maintain basic infrastructure (e.g., electricity, water, and transportation).
    - Maintaining functional payment systems is essential to ensure the integrity and effectiveness of public spending, facilitate humanitarian relief efforts, and reignite commercial activity.
    - Countries should resume the production and publication of reliable macroeconomic statistics.
    - CD delivery at this stage should focus on increasing revenue collection and improving expenditure management.

  - Reconstruction stage:
    - Assuming political and social stability, fiscal policy will need to accommodate higher spending necessary for reconstruction of physical infrastructure.
    - As external financing flows into the country, good governance is critical to preserve value for money of aid and investment.
    - With Fund CD support, public financial management (PFM) systems must strengthen accountability and reduce corruption risks.
    - Sustainable financial deepening can drive growth; financial inclusion facilitated by digital money and fintech can increase resilience to shocks for the population and private sector.
    - Fiscal, monetary, and exchange rate policies that foster currency stability will be needed to promote lower inflation, price stability, growth, and investment.

- Where needed, an IMF-supported program may be key to stabilizing the economy, supporting conditions for financial and economic stability and catalyzing donor finance. BoP imbalances often occur during conflicts and can trigger strains and crises, affecting the provision of public goods.
- Staff should follow additional recommendations outlined in Section IV on lending, program design and conditionality. Annex IV also provides examples of Fund-supported programs tailored to diverse post-conflict contexts in Solomon Islands (post 2017), and South Sudan (post 2018).

### External shocks and spillovers: strengthening resilience
- Fragility and conflict create spillovers for neighboring countries, including direct economic impacts (on output, inflation, employment, and trade) and indirect impacts such as forced displacement and cross-border violence.
- Forced displacement can generate inflationary pressures due to excess demand from large refugee populations and a limited short-term supply response.
- Civil wars can disrupt trade and transportation corridors, diminish business confidence, and raise security sector expenditures. Inter-state wars affecting agricultural production and global supply chains can exacerbate food price inflation and energy costs, increasing the risk of social instability.
- FCS are particularly vulnerable to external shocks linked to natural disasters and other climate-related risks. Most of the 35 countries considered vulnerable to climate change are FCS.
- Greater exposure to such shocks has macroeconomic effects resulting in lower GDP per capita, higher poverty, and a more volatile revenue base. In the absence of adaptation measures, these challenges exacerbate fragility and/or conflict risks.
- The Fund can support resilience to shocks and promote inclusive economic growth through policy advice, CD delivery, and programs. Staff should consider macroeconomic and financial sector impacts related to:
  - Forced displacement:
    - Article IV consultations and staff analysis may assess positive and negative economic impacts and help authorities identify policies and structural reforms.
    - Policy advice may recommend addressing impediments for large refugee populations to take part in the labor market and supporting private sector-led job creation, while promoting formal employment—particularly for women and youth.
    - Financing programs can include a floor on social spending to support education, health, and social protection investments for refugees and host communities, where appropriate.
    - Similar social spending policies can be explored when forced displacement consists primarily of IDPs in the context of inclusive growth policies.
    - The Fund’s work in Colombia and Jordan (Annex IV) illustrates IMF support to non-FCS affected by refugee flows.
  - Fiscal implications of insecurity:
    - Violence that spreads across borders can pressure public finances via higher security spending needs and lower tax collection, risking over-indebtedness, crowding out development spending, and macroeconomic instability.
    - Through policy advice, staff can explore: (i) assessing the loss of economic output to insecurity and the impact of additional security expenditures on fiscal space; (ii) creating fiscal space and raising spending quality to safeguard macroeconomic stability and protect space for essential development expenditures; and (iii) policy coordination with neighboring countries.
    - Example: In 2019, the Fund’s ECF program in Mali created fiscal space to safeguard social and infrastructure spending, while accommodating security expenditures and preserving macroeconomic stability. Fund analysis showed that Mali had lost more than 20 percent of its GDP to insecurity.
  - Food insecurity:
    - Given potential of food insecurity to exacerbate fragility and/or conflict risks, the Fund can support coordinated international actions to relieve burdens on the most vulnerable countries, per the IFI Action Plan to Address Food Insecurity (maintaining open trade, supporting vulnerable households, ensuring sufficient agricultural supply, and addressing financing pressures).
    - Staff can monitor impact of higher food prices on external balances and public debt burdens to identify countries with pressing financing pressures.
    - Tailored policy advice can focus on measures to improve social safety nets to protect vulnerable households.
    - When feasible and depending on context, Fund lending can assist with BoP needs due to higher energy and food prices and catalyze concessional support from development partners.
  - Natural disasters and climate risks:
    - The Fund has set up the Resilience and Sustainability Trust (RST) to provide longer-term affordable financing to address structural challenges such as climate change and pandemic preparedness.
    - The RST is a potential additional source of financing for eligible FCS, conditional on an on-track UCT-quality program and strong set of reforms.
    - The Operational Guidance Note on the RST is forthcoming in 2023. Based on early experience from the pilot phase, policies supported by the RST include both mitigation and adaptation measures. PFM-related measures to improve transparency and accountability and incorporate climate considerations in public spending; and disaster risk management and financing policies may be of particular interest to FCS.

- Staff should invest in maximizing coherence of action among partners. MDBs or UN agencies have expertise and on-the-ground staff to support assessment of security and economic linkages that cause spillovers from shocks in FCS to neighboring countries.
- Mission Chiefs and Resident Representatives should liaise with relevant humanitarian, development, and peace actors, and discuss impacts of fragility and conflict spillovers with IMF teams of neighboring countries. Example: In Colombia, Fund staff cooperated with UNHCR, Inter-American Development Bank, and the World Bank to quantify potential macroeconomic impact of migration and forced displacement from Venezuela based on shared analysis.

### Leveraging partners in FCS and donor coordination
- Strengthening partnerships with humanitarian, development, and peace actors is a core principle of engagement adopted by the FCS Strategy. Staff should develop partnerships that bring added value to Fund activities in FCS, consistent with the Fund’s mandate and role as a trusted advisor.
- The preparation of the Expanded CES is an opportunity for stakeholder engagement (Annex II), drawing on identified key drivers of fragility and/or conflict. The World Bank’s RRAs and broader footprint in FCS can provide Fund staff with valuable insights into the country context.
- Critical thematic areas for collaboration include forced displacement, food security, peace and security, climate change, gender and inclusion, and digitalization.
- Staff should be aware of risks and limitations of partnerships, including raising expectations of what the Fund can provide. Closer exchanges with partners should be managed carefully to balance expectations, especially regarding reciprocity, donor platforms, and messaging, and to ensure the Fund’s role as a trusted advisor to authorities is not impeded.
- When institutional capacity is limited, close donor coordination can help FCS make progress on Fund-supported programs and broader development outcomes. The Fund can play an important role in coordination between authorities and donors in its core expertise areas, including the use of trust funds for technical assistance supported by donor financing.
- Mission Chiefs, Resident Representatives, and RCDC/RTAC directors should explore opportunities to participate in (or possibly lead) coordination efforts, provided this adds value to the Fund’s engagement (see examples on Guinea Bissau and DR Congo in Annex III).

*Source: STAFF GUIDANCE NOTE ON THE IMPLEMENTATION OF THE FCS STRATEGY — Annex IV, Afghanistan example).*

### 108.      Improved donor coordination is especially important to increase efficiency of CD

### 108.      Improved donor coordination is especially important to increase efficiency of CD delivery and ease burdens on authorities.

### Importance of donor coordination
- Improved donor coordination increases efficiency of Capacity Development (CD) delivery and eases burdens on authorities.
- Staff should aim to reach broad agreements among partners on the objectives, tasks, and responsibilities of each provider.
- Where relevant, resident CD advisors can be appointed to monitor CD engagements and ensure closer dialogue with other CD providers.
- Effective CD coordination requires a mapping of CD provision by the main CD providers in each FCS.

### IMF value‑adding role in donor coordination (paragraph 109)
- Staff should seek value-adding opportunities for IMF-led donor coordination based on mandate and areas of core expertise.
- The Fund may play a catalytic role through its financing and the establishment of a consistent macroeconomic framework, even if it is not the lead coordinator.
- Resident Representatives should actively promote setting-up donor coordination groups where appropriate.
- Issues to focus on include:
  - Ensuring a shared understanding among donors and country authorities of fragility and/or conflict challenges that are relevant for economic stability and growth. When possible, assessments of the macro-critical implications of fragility and/or conflict drivers should be communicated and agreed upon with partners.
  - Helping to keep donor engagement focused, including by prioritizing key objectives of Fund activities, while working closely with country authorities. Where feasible, staff may explore the of use common conditionality matrices, which target a limited set of complementary reforms supported by the country’s development partners. To the extent possible, staff should ensure there are no overlaps between CD projects provided by the Fund and those funded by other donors. Where feasible, opportunities for joint CD delivery with specialized bilateral donor agencies should be explored. In addition, the results of Fund CD missions should be disseminated with partners.
  - Discussing countries’ financing needs. It is helpful to remain updated on donors’ financing commitments—also outside program relationships—in relevant areas pertaining to the Fund’s engagement in FCS, and where possible try to clarify where financing is on or off-budget.
  - Working with donors and sector-specific partners to help quantify financing implications of the identified reforms. Wherever possible, these assessments could be incorporated into the authorities’ budget and the Fund’s macroeconomic framework.
  - Engaging with donors on the use of budget support as an important and flexible mode of delivery of donor assistance. In countries that already have multi-donor trust funds (MDTFs) in place or where the establishment of MDTFs is under consideration (at the World Bank, other IFIs, or bilateral donors), Fund staff should strive to remain fully informed of the process and study the opportunity for a donor budget support window that could link to Fund engagement.

### Expanding the range of partners (Section B)
- Addressing country-specific manifestations of fragility and/or conflict may require diversifying engagement with institutions and actors that have complementary expertise to the Fund.
- Staff should adopt a targeted approach focused on key topics of Fund engagement in FCS and assess benefits and risks of a broader network of partners.
- Strategic expansion of partnerships may entail:
  - Identifying potential new partners by examining: (i) actors that can provide relevant contextual information; (ii) partners working on related projects or topics not closely aligned with Fund activities; and (iii) actors with whom the Fund can collaborate more closely, share data, and potentially align core messages.
  - Building relationships with new partners by exploring additional activities to enhance understanding of Fund activities and requesting briefings by partners to identify areas of cooperation and its limits.
  - Tailoring engagement to priorities and resources: Resident Representatives and long-term experts should seek to meet key stakeholders regularly but adjust frequency and intensity of contacts depending on priorities. Standing dialogues can increase efficiency when time and resources are constrained.
  - Mapping stakeholders regularly: Country teams should develop tools to map key actors and ensure consistency in Fund relations over time. Resident Representatives should include the range of relevant partners in handovers for staff transitions. Staff can work with COM to develop outreach strategies using traditional media and social media.

### Strengthening outreach to specific partner groups
- Bilateral donors:
  - Staff are encouraged to explore strengthening outreach to key bilateral donors represented in-country through development agencies and/or embassies.
  - Significant bilateral donors in FCS provide development and peacebuilding funding, maintain close relationships with authorities, and are valuable sources of information on sources of fragility and conflict.
- Multilateral Development Banks (MDBs) and international organizations:
  - MDBs can provide operationally relevant sectoral expertise and regional knowledge on fragility and conflict drivers.
  - The European Commission supports authorities in many FCS on issues including climate change, forced displacement, and security sector reform.
  - Staff are encouraged to build trusted relationships and strengthen cooperation where appropriate.
- The World Bank:
  - The World Bank is typically one of the main partners of the Fund in FCS.
  - Shared principles between the Fund’s FCS Strategy and the World Bank’s Strategy for Fragility, Conflict, and Violence 2020-2025 include tailoring engagement to country-specific manifestations of fragility and conflict; building institutions and systems that can deliver inclusive growth; and strengthening dialogue with country authorities and partners.
  - Staff are encouraged to actively consult and integrate, where appropriate, World Bank analytics and advisory services (ASAs) to inform the Fund’s engagement in FCS, within the framework of the 2022 Guidance Note on Information Sharing between IMF and World Bank Staff.
  - Bank expertise is especially important to support developing tailored and parsimonious conditionality on social safety nets, subsidies, labor markets, public procurement, and distributional analysis, and on macro-critical issues such as the impact of climate change, inclusion and gender, private sector development and jobs, public sector governance, and security sector public expenditure reviews.
  - Risk and Resilience Assessments (RRAs), Recovery and Peacebuilding Assessments (RPBAs), and forced displacement analytics are particularly relevant for the Fund’s engagement.
  - Staff should strengthen operational dialogue with the Bank to ensure complementarity of financial and non-financial engagements, discuss country transition strategies out of fragility, including program design and CD needs, and coordinate CD planning and delivery.
  - Engagement on public debt follows existing guidance such as the 2018 Guidance Note on the Bank-Fund Debt Sustainability Framework for Low Income Countries and the IMF-WB Multipronged Approach to Address Debt Vulnerabilities.
  - Staff should collaborate with the World Bank when prioritizing reforms and identifying quick wins that can be integrated into Fund-supported programs; the preparation of the CES is an opportunity to strengthen dialogue on political, institutional, and social inclusion factors that shape program outcomes.
- The UN System:
  - The UN is a key partner in FCS, especially in conflict settings. Resident Representatives, with support from local economists, should actively engage with the UN Resident Coordinator (RC).
  - The RC facilitates coordinated engagement of the UN with strategic partners and often acts as convener of donor coordination mechanisms.
  - UN agencies such as UNDP, WFP, UNHCR, UNICEF, and UNEP can provide analytics on food security, social spending, forced displacement, and humanitarian emergencies.
  - Engagement with peacekeeping missions and the UN Department of Peace Operations (DPO) can shed light on key security trends.
  - Opportunities for partnership can be explored at regional and HQ levels with regional economic commissions, development coordination offices, Special Political Missions, the Development Coordination Office, DPPA, and PBSO.
- Civil Society Organizations (CSOs), think tanks, and academia:
  - CSOs, local think tanks, and academia can provide contextual insight on political economy and societal dynamics in FCS.
  - Building on the 2015 Guidelines on the IMF Staff Engagement with Civil Society Organizations, CSOs can contribute to public debate on policy options, promote citizen oversight, and enhance IMF accountability and legitimacy through more transparent dialogue.
  - Service-providing CSOs, local academic institutions, and think tanks may have relevant survey and household-level data that can help contextualize or support Fund policy advice.

### Engagement practices and constraints
- Staff should support authorities in broadening support for sound policies and, in program engagements, assist authorities’ efforts to engage in a transparent participatory process in developing a policy framework (2014 Revised Operational Guidance to Staff on Conditionality).
- Staff should be prepared to assist authorities by giving seminars, providing training to officials, and meeting with interest or political groups (parliamentary committees, business groups, and CSOs).
- When engaging with CSOs and other non-traditional partners, staff should be aware of authorities’ views on staff contact with domestic groups and follow the 2015 Guidelines on the IMF Staff Engagement with Civil Society Organizations.
- Resident Representatives (and local economists) should lead on guiding the best way to engage with CSOs at the country level; COM can provide support on engagement with CSOs.

### Strengthening reciprocity with partners (Section C)
- Depending on context and feasibility, staff should explore entry points to strengthen reciprocity with partners to build trust and maintain robust relationships while observing the Fund’s obligations as a trusted advisor.
- Examples to strengthen reciprocity include:
  - Facilitating knowledge exchanges and briefings for key audiences to shape the policy debate.
  - Maintaining regular contact with partners, including during Management and Mission Chief visits.
  - Supporting partner messages, if consistent with the Fund’s mandate and objectives of Fund-supported programs.
- In programs, Table 4 outlines entry-points of mutually beneficial exchange through consultations (see next subsection for pre/during/post mission entries).

### Entry-points for enhanced partnerships in Fund-supported programs (Table 4)
- Pre-Mission:
  - Early consultations: Conduct targeted consultations with stakeholders to assess implications on fragility drivers, social cohesion and political economy dynamics of the instruments under consideration.
  - Policy Note: Provide details of coordination in areas of overlap, including a clear delineation of analytical responsibilities (in line with the lead agency principle); If applicable, update with information from CES.
- During Mission:
  - While in the field: Missions should coordinate closely with other multilaterals, donors, and experts to understand the political and social context and formulate an aligned reform agenda that considers financial and social implications of reforms.
- Post-Mission:
  - Back-to-Office Report (BTO): The BTO should highlight developments with respect to strategy, including program design and issues related to fragility, political developments, and donor coordination.
  - Staff Report: Mention, where relevant, coordinated partnerships and aligned interventions on sectoral issues (e.g., as Box or weblinks to publications by partners).
  - Lessons learned: Share best practices with partners.

### FCS staff development and enhanced country team roles (Section VII, paragraphs 123 onward)
- The Fund’s field presence will gradually increase through the addition of local economists, Resident Representatives, and resident advisors for CD delivery.
- Staff skills will be strengthened through a dedicated FCS learning curriculum and FCS Community of Practice.
- Enhanced roles and responsibilities:
  - Mission Chiefs:
    - Lead the CES preparation for FCS, with inputs from Resident Representatives, local economists, and Functional Departments.
    - Require familiarity with fragility and conflict drivers, constraints to policy implementation, and dialogue with partners who can provide data and insights.
    - Lead consultations with Functional Departments in preparing the Expanded CES and actively solicit input from local economists.
    - Ensure main elements of the CES are discussed with authorities during Article IV consultations and/or program reviews.
  - Resident Representatives:
    - Reporting to Mission Chiefs, expected to assume an enhanced role in FCS.
    - Responsibilities include: (i) liaising with national counterparts; (ii) bringing in political economy considerations; and (iii) coordination with humanitarian, development, and peace partners.
    - Play a key role in CD delivery, design of realistic and implementable CD projects, and strengthening country ownership.
    - Facilitate knowledge exchanges with HQ and other country teams and join milestone meetings of Fund activities to provide clarifications related to fragility and/or conflict drivers.
  - Local economists:
    - Provide support on strategic partnerships and donor coordination, and country-specific knowledge for prioritization and sequencing of Fund activities.
    - Country offices should explore enhanced tasks for local economists focused on monitoring and analyzing critical challenges pertaining to fragility and/or conflict and increasing the Fund’s network of partners.
  - Capacity Development:
    - CD missions should regularly check in with country teams through debriefing sessions and include Resident Representatives during field visits.
    - Country teams should draw CD missions’ attention to local manifestations of fragility and/or conflict and their potential impact on planned CD activities (e.g., limited absorptive capacity), and clarify how CD activities can help address identified fragilities.
    - The FCS Strategy provides for the allocation of 30 additional LTX to FCS; where residency is difficult, Area and CD Departments may explore deployment of peripatetic experts engaging both on and off-site.
      - Potential advantages of peripatetic experts include: (i) flexibility to adjust to evolving circumstances; (ii) a potentially larger pool of available experts; (iii) complementarity with RCDC resident advisors; and (iv) cost efficiency.

*Staff Guidance Note on the Implementation of the FCS Strategy, International Monetary Fund.*

### 124.      Country teams should be supported by stepped-up safety and security for staff.

### 124.      Country teams should be supported by stepped-up safety and security for staff.

### Staff safety and security requirements
- Staff working in and traveling to FCS classified as high-risk locations (HRLs) are required to successfully complete four security courses before or at the beginning of their assignments.
- Staff are provided with in-country security support in FCS, which follows the Fund’s general overseas security support structure and uses that of partners.
- Dedicated Local Security Coordinators (LSCs) will provide support.
- The Fund’s Security and Business Accountability Framework lays out the security-related roles and responsibilities of all Fund employees.

### Administrative support
- Services such as overseas real estate, information technology systems, language, and security will need to align with the operational priorities set forth by the FCS Strategy.
- Implementing departments should consult closely and in a timely manner with the Corporate Services and Facilities (CSF) and Information Technology (IFD) departments to allow for an adequate equipment and outfit of working spaces and corresponding services.

### Staff learning and knowledge sharing
- A dedicated FCS learning curriculum will be developed in FY23 to support staff in implementing the key measures of the FCS Strategy.
  - Curriculum content includes CES preparation, issues pertaining to program design and conditionality, and strategically enhancing partnerships with humanitarian, development, and peace actors in FCS.
  - The design and elements of the curriculum will be periodically updated to reflect lessons learned and staff needs.
  - The curriculum will be part of the Internal Economics Training (IET) and a new FCS Seminar Series offered regularly by ICD.
- All staff are strongly encouraged to participate in the ongoing FCS Community of Practice to:
  - Accelerate dissemination of knowledge and best practices and capture key lessons learned unique to FCS contexts.
  - Provide a forum to discuss FCS-specific challenges and enhance visibility of FCS work.
  - Facilitate networking, problem-solving, and learning for staff working in or on FCS within and across departments.
- Key activities already started:
  - Seminars offered in partnership with the IET program.
  - Peer-to-peer meetings through practice-oriented workshops.
  - Presentations from partners working in FCS.
  - Development of a staff-driven FCS knowledge depository on the intranet.

### Annex I — Expanded CES: key guidance and topics (summary)
- The Expanded CES should be tailored to country context; scope, depth, and length will vary.
- The approximately 3-page summary that will undergo formal interdepartmental review may follow this framework.

Issue 1: Fragility and Conflict Drivers
- The Expanded CES should analyze the most salient fragility and/or conflict drivers, which may include political, social, economic, financial, governance weaknesses, environmental, and security sector issues.
- No universal methodology exists; staff may draw on frameworks from OECD, the Fund for Peace, and the Commission on State Fragility, Growth, and Development, and conduct their own research.
- World Bank Risk and Resilience Assessments (RRAs):
  - RRAs are multidisciplinary analyses focused on (i) political economy and governance; (ii) land, natural resources, and climate-related risks; (iii) the quality of public service delivery; and (iv) security and justice.
  - Access to RRAs is governed by the Guidance Note on Information Sharing between IMF and World Bank Staff. Requests to obtain an RRA should be initiated by the Mission Chief through the World Bank Country Manager (or Country Director) or the Practice Manager (or Senior Director) of the Bank’s Fragility, Conflict and Violence Group.
  - RRAs identify sources of resilience useful for designing CD support to build macroeconomic policy institutions in FCS.
  - Fund staff should conduct informal brainstorming sessions with Bank colleagues; Resident Representatives can play a critical facilitation role.

Issue 2: Constraints to Reform Implementation
- The Expanded CES should articulate constraints to reform and policy challenges associated with fragility and conflict, which may include:
  - Instability of bargains needed to implement new policies (including passing legislation).
  - Governance and anti-corruption challenges.
  - Limited human capital and institutional capacity (e.g., fiscal institutions and the central bank).
  - Ongoing conflict in some cases.
- Staff can draw on the 2021 Comprehensive Surveillance Review—Ensuring Economic Sustainability Background Paper for examples of socio-political influences on balance of payments needs or economic stability.
- Specific issues undermining reform efforts may include:
  - Past failed reform efforts or reform reversals relevant to current priorities (e.g., subsidy reforms, exchange rate flexibility).
  - Capacity constraints: lack of sufficient staff, lack of adequately trained staff, high turnover, lack of adequate information systems.
  - Political economy dynamics, governance weaknesses, and the extent and nature of corruption.

Issue 3: Macroeconomic and Financial Sector Policies to Escape Fragility
- The Expanded CES should outline high-level macroeconomic and financial sector policies to escape fragility and progressively build stronger institutions. Possible recommendations include:
  - Fiscal policy: preserve fiscal sustainability and protect development and social spending via revenue mobilization, strengthening fiscal governance, and boosting the level and effectiveness of pro-growth and pro-poor spending—including financing infrastructure to facilitate trade integration; strengthen social protection and create fiscal space for social safety nets.
  - Monetary and financial sector reforms: strengthen central bank capacity for monetary policy, cash currency and reserve management, liquidity management, and foreign currency management; address weak banks, reform state-owned banks, promote strong oversight of payments; develop capacity for supervision and regulation of the banking sector and relevant non-bank financial intermediaries.
    - AML/CFT supervision should focus on compliance with preventative measures and customer due diligence, in particular for politically exposed persons and beneficial ownership, to mitigate risks of outgoing illicit financial flows and the impact of targeted financial sanctions.
  - Governance reforms: improve transparency and effectiveness of key state functions, operationalize anti-corruption and anti-money laundering regimes, boost asset declaration systems, and improve the business environment and institutions.
- The report may explore the impact of sound macroeconomic policies on reducing fragility risks and highlight structural reforms in health, education, taxation, and critical infrastructure to improve growth and employment.

Issue 4: An Overview of CD Priorities
- The Expanded CES lays out the CD strategy and sets priorities for CD in an FCS, following principles of the Staff Guidelines on Capacity Development Country Strategy Notes (CD-CSNs) and the Operational Guidelines for Integrating CD with Surveillance and Lending.
- Key elements:
  - Identify a limited number of top CD priorities, specific objectives, and proposed sequencing; priorities should be discussed with country authorities and reflected in the Expanded CES.
  - Provide a candid discussion of the ability of relevant institutions to absorb and implement CD; in severe fragility, enhanced efforts may be required to build buy-in and capacity gradually.
  - Clearly identify areas where other development partners are active to reduce duplication; partner consultations should inform CD prioritization.
  - When CD delivery is off-site due to security reasons, collaborate with development partners whose staff are on the ground to mitigate offsite delivery shortfalls.
  - Area Department teams should coordinate closely with relevant CD departments and RCDCs to enable proper timing and effective sequencing of CD engagement.

*STAFF GUIDANCE NOTE ON THE IMPLEMENTATION OF THE FCS STRATEGY*

### 9.      A separate CD Country Strategy Note (CD-CSN) is not required if the Expanded CES and

### ppea2023010 - 9.      A separate CD Country Strategy Note (CD-CSN) is not required if the Expanded CES and

### CD Country Strategy Note (CD-CSN) and Expanded CES
- A separate CD-CSN is not required if the Expanded CES and CES are in place.
- CD-CSNs are required for heavy CD users and encouraged for all countries using Fund CD, but must be stand-alone only when not incorporated into broader strategies (e.g., the Expanded CES and the CES approved through the review process).
- If a stand-alone CD-CSN already exists, its underlying strategy—updated as necessary—can be incorporated into the Expanded CES; the CD-CSN would then no longer be required.

### Issue 5: Engagement with Stakeholders
- Staff are encouraged to consult with partners during the preparation of the Expanded CES, especially on macro-critical issues beyond Fund expertise. Potential partners: World Bank, MDBs, the UN, bilateral donors.
- Expanded CES may also draw on engagement with CSOs, the private sector, members of parliament, experts, and former policymakers.
  - The Resident Representative should identify opportunities for meaningful dialogue.
  - Staff can engage the Communications Department for tailored stakeholder engagement strategies, especially with CSOs.
- Criteria for disclosure judgment include: type of interlocutor, stage of Expanded CES preparation, type of meetings (e.g., informal discussion vs. public event), amount of detail needed, and the Fund’s role as a trusted advisor.
  - Non-public information cannot be shared without consent of the information provider.
  - Only the official CES can be shared with partners.
- The Expanded CES may include a succinct assessment of partnerships to:
  - (i) promote information sharing on issues affecting macro-critical reforms and complementarities on CD; and
  - (ii) advance understanding of fragility and conflict risks to tailor engagement and maximize Fund impact.

### Issue 6: Risks to Fund Engagement
- The Expanded CES can identify risks to Fund engagement for a period of 3 years.
- Possible risks include:
  - Active conflict and crises causing abrupt halts to activities due to political instability or collapse of tenuous peace processes.
  - External economic shocks inducing social unrest and interrupting support to authorities.
  - Frequent turnover of high-level officials in FCS and weak institutional and technical capacity slowing economic reforms.
- Staff are encouraged to use institutional resources such as Enterprise Risk Management (ERM) tools (e.g., the Document Risk Self-Assessment Table) and build partner relationships to gain political and social insights.

### Annex II. Addressing Governance and Corruption Challenges in FCS — Overview
- The 2018 Framework for Enhanced Fund Engagement on Governance guides addressing macro-critical governance and corruption issues.
- The FCS Strategy identifies corruption and poor governance as a key driver of fragility and institutional weakness.
- For many FCS, integrating governance and anti-corruption perspectives into the CES, surveillance, CD support, and programs is critical.

### A. Assessing and Addressing Governance and Corruption Issues
- The 2018 Framework continues to guide identification of governance vulnerabilities via a centralized process that identifies severity of corruption and vulnerabilities in core state functions:
  - (i) AML/CFT; (ii) central bank governance; (iii) financial sector oversight; (iv) fiscal governance; (v) market regulation; and (vi) rule of law.
- The process is led by a cross-departmental working group and results are approved by management.
- Country teams must incorporate assessment results into their work:
  - In Article IV consultations, teams should cover identified vulnerabilities in depth during a medium-term surveillance cycle and recommend concrete, actionable policy measures.
  - Assessment results should inform how the six state functions and/or corruption feed into the CES and any Fund-supported program and CD work.
- Available resources to assist teams:
  - Brainstorming sessions with experts from Functional Departments and development partners when corruption risks are high and a governance reform agenda is lacking.
  - Governance diagnostic missions (co-led by FAD and LEG, subject to resource availability, typically including MCM and FIN staff) producing in-depth, country-tailored assessments and prioritized, sequenced measures.
    - In FCS, seven governance diagnostic reports have been completed as of September 2022 and most are published.
  - LEG can elaborate on networks of corruption to develop internal strategy documents outlining themes and core objectives over an extended period (5–10 years) for selected FCS where corruption is severe and foundational to governance arrangements.
    - These strategies aim to account for vested interests, corruption networks, elite capture, behavioral and institutional incentives, and civic space; they would be revised and updated as setbacks occur.
  - Leverage work from other organizations (e.g., World Bank Systematic Country Diagnostics (SCDs), Risk and Resilience Assessments (RRAs)) and seek views from civil society, bilateral donors, and other stakeholders.
  - Teams can contact FAD, LEG, or SPR for further information.

### B. Integrating Governance and Corruption Dimensions in the CES
- Where macro-critical governance and corruption vulnerabilities are identified, the CES can discuss ways to address them.
- Salient considerations for design and sequencing of reforms in FCS:
  - Implementation capacity:
    - Choice of policy instruments should depend on implementation capacity and organizational competencies.
    - In minimal state legitimacy/competency contexts, near-term potential may lie in reducing opportunities for corruption (e.g., eliminating export licensing requirements, unifying foreign exchange rates, targeted reforms of institutions vulnerable to rent-seeking, requiring publication of asset declarations for top officials).
    - As state competencies increase, focus may shift to improving core state functions, accountability, rule of law, transparency, monitoring, and international standards in natural resource management.
  - Incentives facing key stakeholders:
    - Consider how incentives and corruption/rent-seeking affect reform efficacy; apply a “corruption filter” to assess feasibility, prioritize, and sequence reforms.
    - Reforms relying on impartial civil service implementation may be unlikely to succeed where state capture is high.
  - Complementarity of reforms:
    - Success is enhanced when multiple mutually supporting institutions are improved (e.g., revenue institutions and lower tax complexity; efficient judicial institutions and strengthened financial sector regulation; transparency in state contracting enabling scrutiny).
  - Transparency and information technology:
    - Modern IT can drive standardization, enhance oversight, reduce discretion, enable just-in-time auditing via integrated financial management information systems, and support integrity standards (e.g., beneficial ownership, asset declarations).

### C. Governance and Corruption Issues in Fund-supported Programs in FCS
- Fund-supported programs should include governance and anti-corruption conditionality when critical for achieving program objectives.
  - Under the 2018 Framework, addressing governance and corruption vulnerabilities should be a condition for the use of Fund resources after assessing (i) severity of governance vulnerabilities and (ii) whether addressing them is critical for program goals.
  - The 1997 Governance Policy states weak governance should be addressed early; approval of a new program or completion of reviews could be suspended or delayed for poor governance with significant macroeconomic implications.
  - Measures beginning to address issues should be in place before IMF financial assistance is provided when applicable.
  - Design of governance-related measures should draw on analysis and prioritization/sequencing considerations (¶3 and ¶4) to assist parsimony in conditionality.
- Many recent FCS programs have made fighting corruption a core objective (examples listed in source: Central African Republic, Chad, The Gambia, Liberia, Mali, Rep. of Congo, Sierra Leone, Somalia, and Sudan).

### D. Governance and Anti-Corruption Reforms in Bilateral Surveillance
- Through Article IV consultations, FCS country teams should follow up on macro-critical governance and anti-corruption reforms and continue dialogue with authorities and stakeholders.
- Article IV consultations offer opportunities for in-depth analysis on causes of governance weaknesses, implications for macroeconomic stability, and policy advice.
- Teams are encouraged to seek support from functional departments for Article IV discussions (e.g., brainstorming sessions, issue notes, HQ-based support, on-site mission participation for complex issues) and should approach Functional Departments well in advance.

### E. Enhancing the Traction and Effectiveness of Governance and Anti-Corruption CD
- The Fund plays an essential role in building individual and organizational capacity related to governance and anti-corruption.
- Well-sequenced CD priorities aligned with the CES are critical to strengthen capacity and institutions to address corruption and governance issues.
- Expanding competency to identify corruption risks, increase transparency of core functions, and enhance the integrity of the justice system requires long-term CD support, including modern technology.
- For countries with a governance diagnostic, follow-up CD missions may be needed to address identified vulnerabilities.
- Fund efforts should be coordinated with other organizations (including the World Bank) to ensure synergy and avoid duplication.

### Annex III. Additional Considerations for Program Design and Conditionality in FCS — A. Post-Program Financing Gaps (PPFGs)
- Recognition of PPFGs could enhance realism of macro-frameworks under an Extended Credit Facility (ECF) arrangement and help authorities achieve an appropriate pace of adjustments.
  - PPFGs could be closed ex-post through post-program policy adjustment and additional financing not identified during the program period.
  - PPFGs under ECF-supported programs can be justified when sensitivity analysis confirms capacity to repay remains adequate and debt remains sustainable under realistic financing assumptions, including level of funding on non-concessional terms to close PPFGs.
- Presence of PPFGs and uncertainty on closure should be considered in capacity to repay (CtR) and debt sustainability analyses (DSAs).
  - Principles and guidance for assessments:
    - Criteria for assessing debt sustainability and CtR in presence of PPFGs:
      - (i) financing assumptions to fill gaps and related risks should be realistic;
      - (ii) magnitude of PPFGs should not lead to significant and protracted breaches of DSA indicators from applicable DSA thresholds under realistic assumptions on financing terms;
      - (iii) for exceptional access, country must meet relevant exceptional access policy conditions and criteria even with PPFGs;
      - (iv) closing PPFGs should not be projected to give rise to arrears or undue adjustment, and PPFGs should be narrowing over time relative to size of the economy;
      - (v) risk of further financing gaps in the future is contained.
    - Sensitivity analysis:
      - CtR and DSAs should be rigorously assessed under baseline financing assumptions and alternative scenarios where PPFG-related risks are realized (e.g., less policy adjustment, more unfavorable financing terms).
      - Staff should explore how PPFGs are closed under various scenarios and analyze impact on CtR and debt sustainability if unidentified financing risks materialize.
      - If limited institutional capacity, high uncertainty, or data constraints hamper full quantitative scenarios, staff should identify sources of adverse shocks with authorities and calibrate impacts on CtR and debt sustainability under plausible assumptions.
    - Post-program assumptions:
      - Financing to close PPFGs should exclude optimistic gap-closing items and assumptions on a Fund successor arrangement.
      - Given FCS fragilities, assumptions involving increasing foreign grants, rising domestic financing, large policy adjustment, or stronger growth after the program should be thoroughly justified.
      - Post-program projections should be based on realistic assumptions on how to close the gap (adjustment and financing mix, terms of additional financing) and its growth impact.
      - Potential risks from data gaps should be discussed and options for filling them should be a focus of team discussions with authorities.

*International Monetary Fund — STAFF GUIDANCE NOTE ON THE IMPLEMENTATION OF THE FCS STRATEGY*

### 3.      Staff should apply judgement to identify levels of PPFGs that would not compromise

### 3.      Staff should apply judgement to identify levels of PPFGs that would not compromise 

### Key guidance on PPFG judgement
- Staff should apply judgement to identify levels of PPFGs that would not compromise program achievements ex-post.
- Key considerations to guide staff judgement include:
  - (i) PPFG dynamics—sharply increasing or stable PPFGs are more worrisome than persistently decreasing trends; and
  - (ii) PPFG depth—large PPFGs in relation to indicators of economic and financial capacity to repay are worrisome signs.
- Judgement should only be applied when PPFGs do not tip DSA ratings and capacity to repay assessments into zones that are incompatible with the relevant lending policy.
- Staff should provide thorough justification in the presence of PPFGs based on these key considerations and other mitigating factors.

### Realism Assessments — purpose and approach
- Objective: guard against excessive optimism (or pessimism) of the expected payoffs from structural reforms and macroeconomic adjustment.
- Realism assessments primarily require appraising the credibility of key assumptions used in macro projections—especially for growth and planned fiscal adjustments—and assessing the realism of projected payoffs and distributional impact of planned structural reforms.
- Criteria for assessing realism could be based on benchmarking under three criteria:
  - (i) historical trends,
  - (ii) cross-country experiences, and
  - (iii) established rules-of-thumb.
- Staff would develop relevant rules-of-thumb, updated dynamically to incorporate experiences from the FCS community of practice and changing FCS context.

### Tools and methods for realism checks
- Realism checks should be conducted using simple descriptive statistics and appropriate tools within the suite of Board approved analytical toolkits for assessing growth and adjustment in IMF-supported programs (IMF 2022).
- The LIC-DSF toolkit provides four realism tools; two can be applied more broadly (beyond debt) to assess:
  - (i) the realism of planned fiscal adjustments, and
  - (ii) the consistency of fiscal adjustment-growth relation.
- When data are sufficiently available, teams could use the Structural Reforms Dividends Toolkit (SRDT) to assess realism of potential growth dividends from planned reforms.
- Other complementary tools to consider include:
  - the fiscal multipliers toolkit (FMT),
  - the DIG model (including extensions DIGNAR, DIGNAR-19, DIGNAD),
  - the social unrest indicator (SUI),
  - and leveraging data from partner institutions consistent with the Fund’s policy on the use of Third-party indicators (TPI).

### Specific realism checks expected for FCS macro-frameworks
- Realism of baseline growth projection:
  - Produce a summary chart showing the evolution of growth projections in the current baseline and three other reference vintages—the most recent past baseline, the 10-year historical average, and the average annual growth projection for all FCS countries in the active WEO vintage.
  - The size of the deviation of current growth projections from the historical average, the immediate past baseline, or the FCS peer projections provides indicative signals of realism bias.
- Realism of planned fiscal adjustments:
  - Compare the projected fiscal adjustment with the distribution of observed headline primary fiscal adjustment in FCS-program countries over a three-year horizon.
  - Realism flags are activated if the projected primary fiscal adjustment over any three-year period in the projection horizon exceeds an appropriately defined rule-of-thumb, currently set at one percentage points change of GDP, derived as the 75th percentile cut off point for the observed fiscal adjustment in FCS-program countries for the 10-year period (2010–20) following the global financial crisis.
- Consistency between fiscal adjustment and growth:
  - Compare baseline growth projection with alternative projections that incorporate the impact of planned fiscal adjustment on growth under a range of plausible fiscal multipliers and persistence parameters.
  - Results for this realism check should be directly retrieved from the DSA reports.
- Realism of payoffs from structural reforms and other realism checks:
  - Teams are strongly encouraged to apply the SRDT for assessing realism of payoffs from planned structural reforms and to use other Board approved toolkits based on data availability and country specificities.

### Procedures when realism tools flag bias
- Whenever realism tools flag bias in the macro-framework, particularly optimism bias, the Staff Report should spell out why staff nevertheless see projections as justified.
- Significant deviations from observed rules of thumb without credible explanations should lead to iterative revisions in the macro-framework to improve realism.
- Tools are not prescriptive; when credible justifications exist for upholding significant deviations from the norm, teams should:
  - provide explicit explanations in main program documents, considering changing structure of the economy, implementation capacity constraints, and risks from reform reversals, and
  - where possible, incorporate contingency buffers to account for heightened uncertainty in FCS contexts.

### Figures referenced
- Figure 3.1: Realism of Baseline Growth Projections (illustrative country case comparing current baseline and reference vintages).
- Figure 3.2: Realism of Fiscal Adjustment — compares the planned fiscal adjustment to the distribution of fiscal adjustments from FCS programs approved and completed 2010–2020 (distribution over the sample of countries in the World Bank’s FY22 list and IMF 2019 list, using Net lending/borrowing indicator from WEO, with an adjustment calculated over three years since program start).

*Staff Guidance Note on the Implementation of the FCS Strategy — excerpt*

### 17.       Prior to Russia’s invasion of Ukraine, the Fund had already in place an arrangement

### 17.       Prior to Russia’s invasion of Ukraine, the Fund had already in place an arrangement

### Ukraine: Emergency financing and donor channels
- Prior to the February 2022 invasion, the Fund had an arrangement with Ukrainian authorities; once the war began authorities canceled the existing Stand-By Arrangement (SBA) and requested emergency financing.
- March 2022: emergency assistance of US$1.4 billion provided under the Rapid Financing Instrument (RFI); funds disbursed immediately to help with urgent spending needs.
- August 2021: US$2.7 billion made available—Ukraine’s share in the IMF’s general SDR allocation of US$650 billion to all member countries.
- April 2022: Fund established an “Administered Account” to allow donor countries to channel loans or grants to Ukraine using the IMF’s payment infrastructure.
  - To date, two countries have disbursed US$2.2 billion through this channel, and two additional countries are planning disbursements.
- October 2022: Board approved a US$1.3 billion emergency financing disbursement under the Food Shock Window to help cope with urgent balance of payment needs from a major cereal export shortfall.
- Technical Assistance to the National Bank of Ukraine included business continuity, legal and operational aspects of emergency liquidity assistance (ELA), and refinancing facility measures (e.g., securing tangible assets, preparing a back-up site, protecting access to foreign accounts, and cash management during conflict).

### Yemen: Active conflict, constrained engagement, and continued TA
- Conflict since 2014 severely diminished institutional capacities, hindered data provision, and constrained engagement with the Fund.
- Last Article IV consultation completed in 2014; Board approved a three-year Extended Credit Facility (ECF) arrangement then, which lapsed after 18 months due to non-completion of reviews.
- Fund continued policy engagement and technical assistance (TA) with the internationally recognized government (IRG); engagement with the de facto regime in Sana’a limited to short technical meetings with IRG consent and internally classified as TA.
- Fund staff met regularly with UN agencies, major donors and creditors, other international organizations, development banks, and CSOs.
- October 2021: first Board briefing on Yemen since outbreak of conflict.
- 2020–21: Fund rebuilt macroeconomic framework using authorities’ data, mirrored trade data, remittance surveys, donor financing records, and locally sourced information on food prices and exchange rates; comprehensive report informed outreach and policy priorities.
- Key policy recommendations (e.g., removal of parallel exchange rates and implementation of a foreign exchange auction system) were implemented with large positive effects on exchange rate stabilization and resource mobilization.
- TA diagnostics on expenditure control and central bank operations informed Fund capacity development and partners’ action plans (e.g., USAID drafted its action plan for the Central Bank of Yemen based on the diagnostic).

### Libya: Reengagement with the National Unity Government
- Post-2011: IMF provided TA and policy advice on exchange rate policies and expenditure management; supported reforms included devaluing the official exchange rate and making foreign exchange readily available for current transactions to align parallel and official rates.
- Article IV consultation concluded in 2013; full-scale civil war from 2014 with discussions occurring in third-country locations thereafter.
- After formation of the national unity government (2021), Fund provided support on cash forecasting, public financial management, customs tax, monetary statistics and AML/CFT to the Central Bank of Libya and Ministry of Finance.

### Irregular changes in government — continuity of CD (Capacity Development)
- Mali (August 2020 and May 2021) and Burkina Faso (2022): military transitional governments formed; country teams proceeded cautiously during periods of uncertainty about recognition.
- Staff continued low-level engagement on technical CD initiated before coups; National Directorate for Treasury and Public Accounting continued to receive resident advisor support (long-term expert installed November 2018) and AFRITAC West (AFW) CD missions; tax and customs administration advice continued.
- Once AFR decided to resume full engagement, TA resumed in policy advice and new areas.

- Burkina Faso:
  - DGTCP received in-person support since 2018 and remote CD during the pandemic.
  - After January 2022 irregular change in government, a joint TA mission with AFW was postponed to March–April 2022 and conducted remotely; assisted in strengthening internal control framework, implementation of accrual accounting, operationalization of the Treasury Single Account (TSA), and modernization of cash management.
  - CD on cash management, TSA, and transition to accrual accounting continue—with FAD and AFW support.

### Guinea: CD delivery to a transition government
- September 5, 2021 coup led to a transition government; new Prime Minister and newly appointed ministers of finance and budget.
- Despite delays, transitional authorities continued implementing CD projects from FAD, MCM, STA and requested additional support from ICD on macroeconomic forecasting.
- Two FAD PFM resident advisors provided uninterrupted support to the Ministry of Budget and Ministry of Economy and Finance through coordination with Resident Representative Office, country team, FAD, and the European Union delegation in Conakry.
- The transitional government’s draft Interim Reference Program includes policies for:
  - efficient fiscal and monetary policies,
  - private sector development to attract foreign investment,
  - domestic revenue mobilization (especially mining sector),
  - increased efficiency in public expenditure,
  - reducing fiscal risks,
  - strengthening debt management,
  - strengthening monetary policy framework and banking supervision,
  - strengthening governance including AML/CFT,
  - improving collection and dissemination of macroeconomic and financial statistics.
- Specific results of support to Budget Directorate and Financial Control Directorate:
  - (i) improved budget execution and controls for 2022;
  - (ii) revised definition of expenditure payments arrears, with proper recording and monitoring in the expenditure information system and in the Table of Government Financial Operations (TOFE) in line with the 2014 Government Finance Statistics Manual;
  - (iii) revised regulation for budgeting value-added tax credits.
- MCM TA on debt management supported the first ever issuance of 3- and 5-year bonds in April and August 2022, respectively.

### Afghanistan: Dialogue maintained while engagement paused
- Engagement paused since Taliban takeover in August 2021.
- Staff expanded dialogue with international organizations and key shareholders, including United Nations agencies operating in Afghanistan.
- Dialogue covered economic developments and outlook, forced displacement and humanitarian crisis, humanitarian assistance mobilization, and donors’ efforts to seek sanctions-compliant ways to channel funds to meet basic needs.
- Staff provided high-level comments within Fund expertise and, together with UN and World Bank staff, worked on enhancing readiness to re-engage when conditions permit.

### South Sudan: SMPs combined with emergency financing
- Fund supporting South Sudan through a Staff-Monitored Program (SMP) to establish a track record of reform.
- Authorities committed to fiscal discipline and ceased monetary financing of the deficit.
- Exchange-rate reform liberalized foreign-exchange markets and eliminated large premium of the parallel market exchange rate relative to the official rate.
- As of November 2022, two Rapid Credit Facility (RCF) disbursements approved since the pandemic onset.
  - 2020: first lending operation since South Sudan joined the Fund in 2012; RCF support used to clear public salary arrears.
  - 2021: second RCF disbursement combined with a 9-month SMP allowed authorities to reduce salary arrears to one month.
  - Together with the SDR allocation, these operations closed the immediate BoP gap, although the medium-term gap remains significant.

### Solomon Islands: post-conflict recovery and vulnerability to shocks
- Country characterization:
  - active conflict: 1998–2003;
  - post-conflict recovery: 2003–17;
  - continued social and institutional fragility: from 2017 onward, including unrest in November 2021.
- Highly vulnerable to natural disasters.
- Early post-conflict (2003–09): RAMSI helped restore law and order and re-establish public institutions; Fund provided macroeconomic stability advice and CD.
- IMF-supported programs (including three-year ECF arrangement in December 2012 and earlier one-year precautionary SCF) helped anchor policies: fiscal discipline, revenue administration, monetary and exchange rate policy, and financial sector supervision/regulation.
- Post-program surveillance continued from 2017 onwards with 12-month Article IV consultation cycles.
- June 2020: emergency financing through RCF/RFI during the pandemic; continued intensive surveillance via remote missions; tailored CD to pandemic needs.
- Solomon Islands benefited from debt service relief through the CCRT.
- PFTAC and HQ mission teams provided intensive CD in statistics, fiscal policy, PFM, exchange rate management, monetary operations, and financial sector, guided by program conditionalities and surveillance assessments.

### Guinea-Bissau: food security, nutrition, and WFP collaboration
- Malnutrition and its impact on labor productivity:
  - Stunted growth affects 28 percent of children aged 6–59 months, peaking above 30 percent in certain regions.
  - Proportion of children under 2 years old receiving an appropriate diet is only about 4 percent.
  - 32 percent of women aged 15–49 years achieve minimum dietary diversity (44 percent suffer from anemia).
- Strong relation with the World Food Program (WFP) informs Fund activities; coordination helped capture macro-linkages related to food security.
- Macro-critical issues identified:
  - (i) lack of economic diversification makes households overly dependent on cashew nut prices;
  - (ii) weak rural resilience amplified COVID-19 effects on food insecurity;
  - (iii) effects of climate change such as coastal erosion destroy crops and limit diversification;
  - (iv) calls for urgent adaptation.
- Coordination with WFP during April 2022 program review/Article IV mission resulted in Staff Report highlighting food security challenges using WFP data.
- Country has second-highest proportion of undernourished population in West Africa after Liberia (25 percent of the population) despite highest concentration of natural wealth per capita (including agricultural land, fisheries, and forests).
- Rising food and fuel prices associated with Russia’s invasion of Ukraine are expected to:
  - slow down economic growth,
  - add inflationary pressures,
  - widen the current account deficit,
  - weigh on the fiscal position,
  - contribute to socio-political tensions despite recent relative stability.
- Future collaboration with WFP could include intensified consultation to secure fiscal space for supporting vulnerable populations and pooling technical resources to build databases and public registries for beneficiary targeting.

### Jordan: refugee response and program priorities
- Jordan hosts about 1.3 million Syrian refugees; regional conflicts and hosting this population put stresses on social conditions, public finances, investment, and external accounts.
- A decade of anemic growth led to high structural unemployment, exacerbated by COVID-19:
  - unemployment reached record levels around 22.6 percent for Jordanians and 45 percent for youth in 2022-Q2.
- Fund-supported program: Extended Fund Facility (SDR 1,145.95 million; 334 percent of quota) to tackle structural imbalances and promote inclusive recovery.
- Jordan also used the Rapid Financing Instrument (SDR 291.55 million; 85 percent of quota) for higher spending on healthcare, containment measures, and assistance to households and companies affected by COVID-19.
- EFF key priorities:
  - floor on social spending to support education, health, and social protection programs;
  - remove impediments to private-sector-led job creation;
  - promote formal employment and labor market reforms, particularly for women and youth.
- As of September 2022, 37,404 work permits for Syrian refugees had been issued, allowing work in all sectors open to non-Jordanians without being tied to a specific employer.

### Venezuelan displacement crisis and Colombia
- Latin America and the Caribbean migration crisis since 2015 due to Venezuela’s collapse: as of September 2022, 7 million Venezuelans (23 percent of population) have migrated.
  - 2.5 million in Colombia, 1.5 million in Peru, and 0.5 million in Ecuador, Brazil, and Chile respectively.
- Crisis is the second-largest external displacement crisis in the world.
- Migration and forced displacement raise macro-critical issues for host countries beyond typical Fund surveillance (immigration policy, residency permits, humanitarian aid, border security).
- For Colombia:
  - Economic and labor market effects examined in 2019 and 2020 Article IV Staff Reports.
  - Staff engaged with authorities (Migracion Colombia), IDB, World Bank (on macro-modeling and empirical estimates), and UNHCR (on TPS, passport issuances, travel restrictions).
- WHD paper documented regional impacts and found:
  - important short-term adjustment costs that pressure fiscal and external balances in recipient countries;
  - sizable medium-term gains in productivity and growth due to increased labor force and better alignment of workers’ human capital with jobs;
  - gains are larger for countries receiving larger and more educated migration flows relative to local population;
  - initial fiscal deficit increase narrows over time as tax base expands with economic activity.

*Italicized source attribution: Staff Guidance Note on the Implementation of the FCS Strategy (excerpts provided).*

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_Source: https://www.imf.org/-/media/files/publications/pp/2023/english/ppea2023010.pdf_