## Macroeconomic Research in Low Income Countries — June 2014 ## Source details **Canonical URL:** [Macroeconomic Research in Low Income Countries — June 2014](https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/documents/june2014.pdf) ## Other formats - [Markdown version](/-/media/files/topics/lics/macro-research-for-development/documents/june2014.pdf.md) - [Structured JSON version](/-/media/files/topics/lics/macro-research-for-development/documents/june2014.pdf.json) --- ### Project scope, funding, and objectives - Strategic partnership between DFID and the IMF titled "Macroeconomic Research in Low Income Countries". - Project objectives (a–d): enhance generation of high-quality research on key macroeconomic issues in LICs; ensure research uptake via close collaboration with policymakers; expand the network of macroeconomic researchers working on LICs using the IMF’s pulling power; achieve objectives cost-effectively. - Timeline: began in March, 2012 and will conclude in June, 2015. - DFID funding: £4.14 million or US$ 6.585 million over three years. - Stated Outcome: better macroeconomic policy making in LICs leads to faster economic growth, job creation and poverty reduction in LICs. - Stated Impact: deeper understanding of, and better engagement by IMF policy makers on LIC-specific macroeconomic issues and development of toolkits across six thematic areas. ### Output 1 — High quality, policy relevant research on macroeconomic issues affecting LICs - Performance: Output 1 score A++. - Working papers: - 30 papers produced over two years (17 completed in year two; total 30). - Coverage: five of six topics — macroeconomic management of natural resource wealth; financial deepening and macro stability/growth; monetary and exchange rate policies in LICs; public investment, growth, and debt sustainability; growth through diversification. - Examples of completed working papers (authors and focus retained as in source): Berg et al. (2013); Andrle et al. (2013); Berg, Portillo, and Zanna (2014); Aslam et al. (2013); Clark and Arnason (2014); Issoufou et al. (2014); Clark and Rosales (2013); Berg et al. (2014) (DSF testing); Eberhardt and Presbitero (2013); Bettin et al. (2014); Melina and Xiong (2014); Richmond, Yackovlev, and Yang (2013); Melina and Xiong (2013); Bi, Shen, and Yang (2014); Barajas, Chami, and Yoesfei (2013); Henn, Papageorgiou, and Spatafora (2013); Dabla-Norris et al. (2013). - Peer-reviewed publications: - 7 published papers by end of second year (6 published in second year, bringing cumulative total to 7). - Titles/authors listed as in source (forthcoming details preserved). - Reasons for A++: quantity targets substantially exceeded and quality evidenced by publications in leading development and macroeconomic journals. - Recommendations related to Output 1: - IMF consider a Phase 2 programme of work scoped via consultation with key stakeholders. - Produce policy briefs to broaden readership and reach. - Produce technical notes or briefs to accompany working papers; convert annex technical information into separate technical notes. ### Output 2 — IMF research products used by IMF country teams and partner authorities (Uptake) - Performance: Output 2 score A++. - Expected uptake by end of year 2: - IMF country teams: between 4 and 14 instances. - Partner authorities: between 1 and 3 instances. - Actual uptake by end of year 2: - 21 instances of research uptake by IMF teams. - 3 instances of uptake by country authorities. - Country applications with IMF country teams: 12 applications covering three broad topics: - Public investment, growth, and debt sustainability (Ghana, Yemen, Rwanda, Senegal). - Ghana: Buffie et al. (2012) model applied; debt ratios under baseline and ambitious scenarios could be reduced to about 40 and 50 percent of GDP, respectively, assuming gradual improvement of investment efficiency and attainable user fees. - Macroeconomic management of natural resources (Azerbaijan, Mozambique, Republic of Kazakhstan, Turkmenistan). - Current account norm (Ghana, CEMAC, Turkmenistan, Azerbaijan). - Ongoing country work: - Financial deepening model-based approach implemented in Kenya, Uganda, and Mozambique (work in "12 developing countries"; working paper to be issued by June). - Export quality and diversification dataset used for case studies and an IMF Board paper. - Uptake by country authorities (two reported engagements): - Kenya: multiple workshops for Central Bank of Kenya staff (October, 2013; June, 2013; August, 2013; Washington March, 2013); development/maintenance of FPAS; MPC engagement and requests for alternative risk scenarios. - Ghana: IMF staff visits September 11–October 2, 2013 and March, 2014; training for Bank of Ghana FPAS, modelling, Matlab/IRIS/Econometrics toolboxes; over "30 hours" of training and person-to-person consultations with "12 Research Department staff"; Bank of Ghana increased its key policy rate in an emergency meeting in February following input. - Courses and workshops: - Debt sustainability course presenting Buffie et al. (2012) model applied to over a dozen countries. - Workshop on debt sustainability modelling with Liberian authorities (August, 2013) with five Liberian Ministry of Finance staff attending. - Recommendations: - Capture uptake activity systematically and consider incorporating this output and related indicators under a Phase 2 programme of work. - Operational metrics: - Impact Weighting: 30% (25% for 2nd and 3rd years). - Risk: LOW. ### Output 3 — IMF strengthens engagement by senior IMF policy makers on LIC macroeconomic issues - Performance: Output 3 score A++. - Indicators and numbers (Year 1, Year 2, Total; Targets H/M/L for End of Year 2): - 3.1 High-Level Policy Conferences attended by senior IMF staff: 6, 4, 10; Target H 5 M 3 L 2. - 3.2 Results of papers reflected in IMF board discussions and policy papers: 4, 4, 8; Target H 4 M 3 L 2. - 3.2.1 Results of papers reflected in IMF board papers: 3, 3, 6; Target H 4 M 2 L 1. - High-level conferences with IMF senior staff involvement (four listed): - Transition to Modern Monetary Policy Frameworks in Low-Income Countries Conference — March 17-19,2014. - Macroeconomic Challenges Facing Low-Income Countries Conference — January 30-31, 2014. - IMF Spring Meetings — Africa Rising: Building to the Future—Session on Structural Transformation and Economic Diversification. - IMF Spring Meetings — Africa Rising: Building to the Future—Session on Scaling Up Public Investment: Opportunities and Challenges. - Reflection in IMF Board papers and policy outputs: - Three IMF Board papers reflected team research during the second year: "Sustaining Long-Run Growth and Macrostability in Low-Income Countries: The Role of Structural Transformation and Diversification"; "Conditionality in Evolving Monetary Policy Regimes"; "The Fund’s Capacity Development Strategy-Better Policies Through Stronger Institutions". - Research influenced a new conditionality option proposing FPAS-type analysis for monetary policy consultation clauses. - Impact on IMF policy: research contributed to more flexible IMF conditionality frameworks and strengthened capacity development strategy coverage. ### Staff Guidance Note on the Application of the Joint Bank–Fund Debt Sustainability Framework for LICs - Guidance: full DSA write-ups should include, at a minimum, "a discussion of the determinants of growth, including public investment." - Advice: where scaling-up of public investment is ongoing or anticipated, use more complex and resource intensive analytical techniques. - Annex 2: highlights the IMF-DFID team’s Buffie et al. (2012) model and provides further information on analysing public investment and growth. - Impact Weighting: 30% (25% for 2nd and 3rd years). - Risk: LOW. ### Output 4 — Strengthening research capacity and expanding LIC researcher network - Performance: Output 4 score A++. - Targets and achievements: - 4.1 Commissioned Papers: Year 1 = 0; Year 2 = 13; Total = 13; Target H = 8, M = 6, L = 4. - 4.2 Attendance of External Researchers at High-Level Policy Conferences: Year 1 = 6; Year 2 = 5; Total = 10; Target H = 5, M = 3, L = 2. - 4.3 Outputs disseminated in e-newsletter and updated public web page: Year 1 = 2; Year 2 = 4; Total = 8; Target H = 6, M = 4, L = 3. - Project outputs delivered: - 13 commissioned papers presented at January, 2014 conference. - 10 high-level policy conferences cumulative attended by external researchers. - 4 newsletters during reporting year; IMF website updated quarterly. - Commissioned paper topics and authors preserved as in source. - Training, data, and dissemination: - Course on public investment, growth, and debt sustainability oversubscribed. - Course attendees by IMF Department: Africa 17; Asia and Pacific 3; Finance 2; Fiscal Affairs 1; Institute for Capacity 1; Office of Executive 6; Research 1; Strategy, Policy, and 2; Western Hemisphere 2. - Datasets on trade diversification and product quality cover 178 countries from 1962-2010 with export measures at 1, 2, 3, and 4 digit SITC levels. - Risk: LOW. - Impact Weighting: 10% (first year), 20% (second and third years). ### Key impacts, challenges, and institutionalization - Policy influence and country-level outcomes: - Influenced IMF policy frameworks to better accommodate public investment/growth linkages (reference to Staff Guidance Note). - Monetary policy agenda in LICs moved toward forward-looking frameworks; research informed more flexible conditionality. - Work on debt sustainability and natural resource management linked to IMF research on resource-rich developing countries. - Angola adjusted fiscal policies to create buffers and established the Angolan Sovereign Fund; team’s work noted publicly. - Challenges: - Attracting high-quality researchers to LIC work given short contract tenures; departures of DFID-financed visiting scholars to permanent Fund jobs complicate replacements. - Balancing research production with country applications, training missions, and uptake. - Mainstreaming research across the Fund remains uneven across topics. - Mitigation and sustainability: - Use of AFRITAC funding for follow-on FPAS applications. - Collaboration with Institute for Capacity Development to offer training on debt sustainability. - Development of a simple user interface for country teams. - Pilot monetary policy work and new projects to be financed by AFRITAC South and AFRITAC East. ### Costs, timescale, value for money, and risks - Financial on-track: Yes; spending on track against revised payment schedule. - Re-profiling: $1m pushed back into a third year due to procurement change. - Timescale: not on-track against original timescale; re-profiled to deliver 34 papers in 3 years rather than 2 years; programme expected to be extended by two years. - Key cost drivers: additional staff on short-term contracts, visiting scholars (underspent due to hiring longer contracts). - Unit cost metrics: - Cost per research paper estimated at £121 k (consistent with business case). - GRT’s composite ‘benchmark rate’ is £ 150 k per published paper. - IMF Project: 4115 34 121 (figures preserved as in source). - GRT Benchmark: 4000 26 150 (figures preserved as in source). - Publications to date: 7 publications. - Project management costs: direct project management costs represent less than 2 percent of the total first year budget; including the Trust Fund management fee, program management costs are below nine percent. - Risk assessment: - Output Risk Rating: Low. - Staff turnover risk acknowledged; proposed two-year extension to mitigate short contract tenure. - Risk of funds not being used as intended: LOW (only one milestone payment). - Climate/environment risk: unchanged from business case. - Value for Money: overall VfM judgement — project demonstrates very good value for money and is delivering as anticipated in the original business case. - Recommendations: - Develop shorter policy briefs and technical notes to accompany working papers to broaden audience. - Actively scope and consider a Phase 2 programme; consult broadly to develop a fuller specification for DFID consideration. *Source: International Monetary Fund (IMF) — IMF/DFID project report "Macroeconomic Research in Low Income Countries", June 2014.* ### Introduction and Context ### Introduction and Context ### UK support and project scope - The project "Macroeconomic Research in Low Income Countries" is a strategic partnership between DFID and the IMF with intentions to: - (a) enhance the generation of high-quality research on key macroeconomic issues in low-income countries (LICs); - (b) ensure research uptake through design and execution in close collaboration with policymakers within and outside the IMF; - (c) use the IMF’s pulling power to expand the network of macroeconomic researchers working on LICs; - (d) achieve these objectives as cost-effectively as possible. - The project began in March, 2012 and will conclude in June, 2015. - DFID will provide £4.14 million or US$ 6.585 million over three years. ### Expected results and intended impact - Outcome: better macroeconomic policy making in LICs leads to faster economic growth, job creation and poverty reduction in LICs. - Impact: a deeper understanding of, and better engagement by IMF policy makers on LIC-specific macroeconomic issues based on robust analysis and evidence, and the development of toolkits to enable LICs to benefit from development in six key thematic areas. - Anticipated outcomes include: - Produce high quality research, aimed at high quality journals and operational/applied frameworks. - Encourage uptake by IMF country teams, with the Fund expecting at least 3 country teams to use the public investment/debt sustainability analysis tool in the year of completion and reference such analysis in Article IV and other staff reports. - Encourage uptake by country authorities, with the Fund expecting at least two central banks to use the monetary policy models developed, as evidenced through interactions with IMF staff and noted in IMF staff reports. - Strengthen engagement by IMF senior policymakers on LIC issues; research is expected to provide direct inputs and influence Fund Board papers on LICs. - Expand the network of researchers working on LIC macroeconomic issues via a commissioned process similar to an annual research conference to commission up to ten research papers on LICs and publish a conference volume. ### Context and rationale for DFID support - The Growth Report of the Commission on Growth and Development (2008) concluded that “it is impossible for poor countries to lift large populations out of poverty without growth,” and emphasized the need to deepen understanding of how to apply growth strategies to economic and political context. - Much policy research focuses on developed economies; LIC research has received less attention, partly due to lack of quality data in LICs impeding applied research. - The Commission noted macroeconomic instability deters private investment; empirical studies (Bleaney (1996), Fischer (1991, 1993)) concluded macroeconomic stability matters for sustained growth, but debate remains on definitions and policy choices for stability in developing countries. - Reasons for DFID commissioning growth research: - DFID can deliver policy-focused, usable research. - DFID has incentives to focus on the least developed countries, an under-resourced area. - DFID-funded research increases diversity and competition in advice to developing country policy-makers and is intended to be independent and not “message or ideologically driven.” - DFID growth research supports DFID strategic priorities including ‘Wealth Creation’, ‘Gender’, and ‘Private Sector Development’, and contributes to RED strategic objectives: (1) capacity to do and use; (2) new knowledge to help shape policy; (3) evidence and new research are used for better decision-making. - DFID intervenes in macroeconomic research because capacity is small in LICs, and the global macro crisis creates new challenges that could divert resources away from LIC agendas; DFID investment aims to protect and promote the LIC agenda. ### Output 1: High quality, policy relevant research on macroeconomic issues affecting LICs - Output 1 score and performance description: A++ - The project produced an impressive number of high quality, policy relevant research outputs in its second year. - Performance against targets: - Working papers produced: 30 papers against a cumulative mid-target of 20 papers and a high target of 30. - Published papers in peer reviewed journals: 7 papers by end of second year against a mid-target of 1 and a high target of 3. - Coverage: Papers covered five of the six broad topics identified: macroeconomic management of natural resource wealth; the role of financial deepening in fostering macroeconomic stability and growth; monetary and exchange rate policies in LICs; public investment, growth, and debt sustainability; and growth through diversification. - Reason for A++: quantity targets substantially exceeded and quality evidenced by publications in leading development and macroeconomic journals. Progress against expected results — Working papers - This year the IMF completed 17 working papers, bringing the total to 30 over the two years. - The working papers cover five broad topics: Monetary and exchange rate policies; Public investment, growth, and debt sustainability; Macroeconomic management of natural resource wealth; Role of financial deepening in fostering macroeconomic stability and sustained growth; Growth through diversification. Completed working papers (numbered as in original report) 1. Berg, Charry, Portillo, and Vlcek (2013) — study of Kenya, Uganda, Tanzania and Rwanda; find clear evidence of a monetary transmission mechanism in most countries and explain deviations by differences in policy regimes. 2. Andrle, Berg, Berkes, Portillo, Vlcek, and Morales (2013) — incorporate explicit role for money targets and target misses in monetary policy analysis with an application to Kenya; highlight benefits of model-based approaches including for money-targeting frameworks. 3. Berg, Portillo, and Zanna (2014) — study exchange rate regime, reserve accumulation, and sterilization policies in macroeconomics of aid surges; find policies that limit absorption and result in large reserve accumulation are welfare reducing. 4. Aslam, Berkes, Fukac, Menkulasi, and Shimmelpfenning (2013) — Afghanistan: use a general equilibrium model to capture security-development tradeoffs amid declining donor support and high security spending. 5. Clark and Arnason (2014) — use Buffie et al. (2012) model to evaluate macroeconomic consequences of scaling-down investment in Rwanda. 6. Issoufou, Buffie, Diop, and Thiaw (2014) — apply a two-sector, open-economy, dynamic general equilibrium model to Senegal to investigate public investment scaling with varying debt finance and fiscal adjustment. 7. Clark and Rosales (2013) — estimate nexus between public investment, financing, and growth in Liberia using an inter-temporal macroeconomic model; highlight trade-offs and risks of different financing options and fiscal policy changes. 8. Berg, Berkes, Pattillo, Presbitero, and Yakhshilikov (2014) — empirically test the debt threshold approach (DTA) and worst-case aggregator (WCA) in the debt sustainability framework (DSF); find: (1) the DTA loses information relative to a simple proposed alternative; (2) the WCA is too conservative (predicting crises too often) in terms of the loss function used in the DSF; and (3) the WCA is less accurate than some simple proposed alternative aggregators as a predictor of debt distress. 9. Eberhardt and Presbitero (2013) — study long-run relationship between public debt and growth in a large panel; find some support for a nonlinear relationship between debt and long-run growth across countries, but no evidence for common debt thresholds within countries over time. 10. Bettin, Presbitero, and Spatafora (2014) — examine how international remittances are affected by structural characteristics, macroeconomic conditions, and adverse shocks in source and recipient economies. 11. Melina and Xiong (2014) — present the DIGNAR (Debt, Investment, Growth, and Natural Resources) model, a dynamic, stochastic small open economy model to analyse debt sustainability and macroeconomic effects of public investment plans in resource-abundant developing countries. 12. Richmond, Yackovlev, and Yang (2013) — apply the fiscal framework from Berg et al. (2013) to Angola, incorporating investment inefficiency and absorptive capacity constraints; find aggressive investment scaling-up can erode fiscal buffers under oil price shocks. 13. Melina and Xiong (2013) — apply DIGNAR to Mozambique to simulate public investment scaling-up under alternative LNG market scenarios; find conservative approach misses growth opportunities while aggressive approach risks absorptive capacity constraints and potentially unsustainable public debt in adverse scenarios. 14. Bi, Shen, and Yang (2014) — study fiscal policy effects in developing countries with external debt and sovereign default risks; simulate state-dependent distributions of fiscal limits based on macroeconomic uncertainty and fiscal policy specifications. 15. Barajas, Chami, and Yoesfei (2013) — use dataset for 150 countries for 1975–2005; dynamic panel estimations suggest the beneficial effect of financial deepening on economic growth displays measurable heterogeneity. 16. Henn, Papageorgiou, and Spatafora (2013) — develop extensive estimates of export quality covering 178 countries and hundreds of products over 1962–2010; evidence suggests quality upgrading is best encouraged through a broadly conducive domestic environment rather than sector-specific policies; diversification is important for creating upgrading opportunities. 17. Dabla-Norris, Thomas, Garcia-Verdu, and Chen (2013) — document stylized facts on structural transformation and empirically analyze determinants using sectoral real value added data for a panel of 168 countries over 1970-2010. 1.2 Published papers (second year and cumulative) - During the second year the IMF published six papers, bringing the total to 7 published papers: 1. “Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime,” by A. Berg, R. Portillo and L.F Zanna, forthcoming in World Development. 2. “Afghanistan: Balancing Social and Security Spending in the Context of Shrinking Resource Envelope” by A. Aslam, E. Berkes, M. Fukac, J. Menkulasi, and A. Schimmelpfennig, forthcoming in Asian Development Review. 3. “Modeling African Economies: A DSGE Approach,” by A. Berg, S. Yang, and L.F. Zanna, forthcoming in the Oxford Handbook of Africa and Economics: Context and Concepts. 4. “Monetary Policy Issues in Sub-Saharan Africa,” by A. Berg, S. O’Connell, C. Pattillo, R. Portillo, and F. Unsal, forthcoming in the Oxford Handbook of Africa and Economics: Context and Concepts. 5. “The Future of African Monetary Geography,” by P. Masson, C. Pattillo, and X. Debrun, forthcoming in the Oxford Handbook of Africa and Economics: Context and Concepts. 6. “Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework,” by J. Benes, A. Berg, R. Portillo, and D. Vavra, forthcoming in Open Economies Review. Recommendations related to Output 1 - The review team notes continued impressive performance in year two and successful collaboration between Research, African, and Strategy, Policy, and Review Departments improving relevance, dissemination, and use by country teams and partner authorities. - Recommend IMF consider a Phase 2 programme of work to meet growing demands from country teams and partner authorities; scope Phase 2 via consultation with key stakeholders to ensure relevance and uptake. - Encourage IMF to produce policy briefs to broaden readership and reach of outputs. - Suggest producing technical notes or briefs to accompany working papers to improve understanding of technical modelling and frameworks; convert annex technical information into separate technical notes available on the website. Impact Weighting and Risk (as reported) - Impact Weighting (%): 30% - Risk: LOW ### Output 2: IMF research products used by IMF country teams and partner authorities - Output 2 score and performance description: A++ - Expected uptake by end of year 2: - IMF country teams: between 4 and 14 instances. - Partner authorities: between 1 and 3 instances. - Actual uptake achieved by end of year 2: - 21 instances of research uptake by IMF teams. - 3 instances of uptake by country authorities. - Because actual uptake exceeded expected performance, the review team scored the output A++. *IMF / DFID project report: "Macroeconomic Research in Low Income Countries" (Introduction and Context).* ### 2.1 Uptake by IMF Teams 9 12 21 H 14 ### 2.1 Uptake by IMF Teams 9 12 21 H 14 ### Progress against expected results - The project team collaborated closely with country teams and partner authorities over the second year, resulting in: - "12 different country applications of the models" - "14 missions" - Uptake of the work by country authorities in Kenya and Ghana - The team offered workshops, training, and courses to IMF staff and country partner authorities. ### Output 2.1 - Country Applications with IMF Country Teams The IMF completed 12 applications covering three broad topics: 1) Public investment, growth, and debt sustainability; 2) Macroeconomic management of natural resources; and 3) Current account norm. a) Public investment, growth, and debt sustainability - Ghana: 2013 Article IV Consultation - The Buffie et al. (2012) model was applied to Ghana. - Assuming a gradual improvement of investment efficiency and user fees of a magnitude attainable over the medium term, the debt ratios of the baseline and an alternative ambitious investment scenario could be reduced to about 40 and 50 percent of GDP, respectively. - The model illustrates that successful scaling up of public investment would require both fiscal consolidation and improved investment efficiency. - Yemen - The model described in Buffie et al. (2013) was used to simulate public investment scenarios and provided input for a presentation at a technical meeting of the Deauville Partnership on December 5, 2013 in Brussels. - Rwanda - Assessed possibilities for further scaling-up of ambitious investment goals amid declining grant aid without sacrificing debt sustainability. - The paper recommends a moderate scaling-up to continue lessening dependence on foreign aid. - Senegal - Used a two-sector, open economy, dynamic general equilibrium model to investigate effects of varying fiscal policy instruments and policy packages that increase public investment in energy and infrastructure under scenarios with varying degrees of debt finance and different types of supporting fiscal adjustment. b) Macroeconomic Management of Natural Resources - Azerbaijan (See Box 2, page 10) - The IMF Sustainable Investing tool (Berg et al. 2013) was applied to analyze fiscal strategies to support transformation of oil windfalls into long-term sustainable economic growth. - The model captures two channels to induce higher non-oil GDP with higher public capital. - Mozambique (See Appendix IV) - Analysed Mozambique’s liquefied natural gas (LNG) market using the DIGNAR model for the Article IV Consultation. - Concluded that gradual public investment scaling-up anticipating some but not all future LNG revenue would be appropriate given infrastructure needs and uncertainty regarding LNG production/revenue. - Republic of Kazakhstan: Selected Issues - Applied the Melina et al. (2013) framework to analyse oil wealth management. - Ambitious public investment may boost growth but could lower private consumption and household welfare; a prudent approach can boost non-oil growth with a much smaller cost. - Turkmenistan - For the Article IV consultation, two natural resource revenue investment approaches were analysed using Berg et al. (2013). c) Current Account Norm - Ghana (See Box 2 on page 13) - For the Article IV consultation, the IMF-DFID team conducted an external sustainability assessment using the model developed in Araujo et al. (2012), incorporating the recent discovery of offshore oil and gas into the current account assessment. - CEMAC (See Box 2 on page 46) - Using the model developed in Araujo et al. (2013), IMF staff completed an assessment of the current account norm and real effective exchange rate. - Turkmenistan - For the Article IV consultation, the current account norm was analysed using Araujo et al. (2013). - Azerbaijan (See Box 5, page 14) - The current account norm was estimated using the external assessment framework. d) Ongoing Work with Country Teams - Financial deepening - Professor Robert M. Townsend (MIT) worked with the IMF-DFID team to strengthen analytical underpinnings of analysis and policy advice in "12 developing countries." - A model-based approach was developed and implemented in a few LICs (Kenya, Uganda, and Mozambique) using micro data to examine relationships between financial deepening and inclusion, growth and inequality, and to provide policy recommendations (working paper will be issued by June). - The framework is being used in financial sector surveillance; Professor Townsend attended the Fund’s Financial Surveillance Group meeting in December, 2013. - Export quality and diversification dataset - The dataset was used for case studies on Malaysia, Bangladesh, Angola, Vietnam, and Tanzania for an IMF Board paper. - Datasets used in the Board paper on structural transformation and diversification were made available to IMF staff. ### Output 2.2 - Uptake by Country Authorities - Two successful country authority engagements reported in the year. 1. Kenya - The team held several workshops for Central Bank of Kenya (CBK) staff in Nairobi (October, 2013; June, 2013; August, 2013) and in Washington (March, 2013). - Workshops supported development and maintenance of a forecasting and policy analysis system (FPAS) at the central bank. - CBK staff prepared a forecast presentation for the analytical session of the monetary policy committee (MPC). - MPC members highlighted the usefulness of the approach for policy decisions and requested alternative risk scenarios, which were finalized during the second half of the workshop. 2. Ghana - IMF staff visited the Bank of Ghana from September 11-October 2, 2013 to provide assistance and training for the Bank’s FPAS; this was the third trip from the IMF/DFID project, with two more planned. - Work focused on strengthening: - 1) the understanding of how the Ghanaian economy functions; - 2) the analytical capacity supporting the MPC; - 3) macroeconomic data intelligence. - The team worked with "12 Research Department staff" on four monetary policy research topics and provided "over 30 hours of training and person-to-person consultations." - Training included an introductory course on using general equilibrium models to analyse tactical policy questions and instruction on Matlab, IRIS (macro-modelling toolbox), and Econometrics toolbox in the Bank’s environment. - An on-line course was launched via the IMF Institute’s website to provide offsite training. - The IMF/DFID team provided input during the Bank of Ghana’s key policy rate deliberations; the Bank of Ghana increased its key policy rate in an emergency meeting in February. - The Bank changed the way MPC decisions are delivered to the public to be more succinct and focus only on the relevant facts, mimicking the Bank of New Zealand’s delivery—an outcome of the Bank of Ghana staff trip to the Bank of New Zealand. - Mrs. Akofa Vorkliyah, Head of the Governor’s Department at the Bank of Ghana, expressed appreciation for the team’s “expert advice and guidance on modelling and monetary policy issues,” noting strengthened modelling and forecasting capabilities and that the institution “benefitted tremendously from the training.” - Staff conducted a fourth visit to the Bank of Ghana in March, 2014 to assist with the inflation and economic outlook for the March/April MPC meeting, teach model operation, and update staff on new forecasting techniques. Since October, 2013, Bank of Ghana staff had made progress on database consolidation efforts. Ongoing work with country authorities - Chad - The team visited Chad in December, 2013 and presented “Public Investment, Natural Resources, and Debt Sustainability: A DSGE Model for Chad.” - The presentation was well-received; the authorities offered helpful feedback and are interested in working on a paper with the IMF-DFID team to incorporate suggested changes. Courses and Workshops - Debt sustainability course at the IMF - The project team offered a course to IMF economists presenting a dynamic LIC-specific macro-economic model that complements the IMF-World Bank debt sustainability framework (IMF-WB DSF) to study macroeconomic effects of public investment surges in LICs (see Buffie et al. 2012). - The model has been applied to over a dozen countries in Article IVs and program reviews at the Fund. - Workshop on debt sustainability modelling with Liberian authorities - Five staff members from the Liberian Ministry of Finance attended a workshop on debt sustainability modelling in August, 2013. - Discussions focused on modifying Buffie et al. (2012) to capture specificities of the Liberian economy to inform policy analysis. Recommendations - The review team notes excellent progress against this output during year two. - Ongoing capacity building efforts with partner country authorities and officials are noted. - Recommendation: "to capture this activity more systematically we recommend the IMF consider incorporating this output and related indicators, under a phase 2 programme of work." Operational metrics - Impact Weighting (%): 30% (25% for 2nd and 3rd years) - Revised since last Annual Review? Y/N YES - Risk: Low/Medium/High: LOW - Revised since last Annual Review? Y/N NO ### Output 3: IMF strengthens engagement by senior IMF policy makers on macroeconomic issues affecting LICs - Output 3 score and performance description: A++ - Objective: strengthen engagement by senior IMF policy makers through: attendance at high level policy conferences; reflection of research findings in IMF policy outputs; reflection of findings in IMF Board papers and discussions. - Performance exceeded expectations across indicators. Key performance numbers (Year 1, Year 2, Total, Targets for End of Year 2) - 3.1 High-Level Policy Conferences attended by senior IMF staff: 6, 4, 10; Target H 5 M 3 L 2 - 3.2 Results of papers reflected in IMF board discussions and policy papers: 4, 4, 8; Target H 4 M 3 L 2 - 3.2.1 Results of papers reflected in IMF board papers: 3, 3, 6; Target H 4 M 2 L 1 3.1 - High-level Policy Conferences attended by IMF Senior Staff - IMF senior staff were actively involved in four conferences organized by the IMF-DFID team this year: 1. Transition to Modern Monetary Policy Frameworks in Low-Income Countries Conference — March 17-19,2014 - Topics: monetary policy implementation in Uganda, design of monetary policy frameworks, conditionality in evolving monetary policy regimes, monetary communication strategies in Africa. - Target audience: upper and mid-level managers of central banks in Sub-Saharan Africa (SSA) adopting or considering modern monetary policy frameworks. - Antoinette Sayeh, director of the IMF African Department, provided opening and closing remarks. 2. Macroeconomic Challenges Facing Low-Income Countries Conference — January 30-31, 2014 - Topics: monetary policy, fiscal policy, natural resource management, investment and growth, economic diversification and structural transformation, financial sector development. - Opening Remarks: Olivier Blanchard (IMF). - Panel chaired by Min Zhu (IMF) featured Stefan Dercon (DFID), Philip Lane (Trinity College), Chris Otrok (University of Missouri), and Eswar Prasad (Cornell University). 3. IMF Spring Meetings — Africa Rising: Building to the Future—Session on Structural Transformation and Economic Diversification - Chair: Sharmini Coorey (IMF). - Panelists: Sean Nolan (IMF), Bartholomew Armah (UNECA), Douglas Gollin (Oxford). - Discussion: limited structural transformation in many African countries, small manufacturing sectors, low-productivity agriculture, foreign-owned mining enclaves, limited diversification and its implications for sustained productivity increases. 4. IMF Spring Meetings — Africa Rising: Building to the Future—Session on Scaling Up Public Investment: Opportunities and Challenges - Chair: Sanjeev Gupta (IMF). - Panelists: Andrew Berg (IMF), Christopher Adam (University of Oxford), Eric Werker (Harvard University). - Topics: development gaps in infrastructure, health, education; growth momentum and low debt levels in many countries; questions on borrowing for investment, sustainability, management and allocation of natural resource revenues, assessing public investment programs (rate of return, efficiency, institutional capacity), and role of the private sector. Output 3.2 – Results of papers reflected in IMF Board discussions and papers - During the second year, the results of the research were reflected in three IMF Board papers and one Staff Guidance Note. IMF Board Papers (reflected research) - 1. Sustaining Long-Run Growth and Macrostability in Low-Income Countries: The Role of Structural Transformation and Diversification - Received universal praise during the informal Board meeting. - Work and outreach will continue; the paper was featured in the Africa Rising conference during the April, 2014 IMF Spring Meetings. - IMF Deputy Managing Director Min Zhu gave opening remarks. - The diversification panel was chaired by Sharmini Coorey (IMF) with panellists Sean Nolan (IMF), Bartholomew Armah (UNECA), Douglas Gollin (University of Oxford). - Two members of the IMF-DFID team coorganized the conference. - The conference during the IMF-World Bank Spring Meetings was a kick off event for the high-level conference in May 2014 in Mozambique. - 2. Conditionality in Evolving Monetary Policy Regimes - Draws heavily on team’s research on the monetary transmission mechanism and on the FPAS model. - Proposes FPAS-type analysis for monetary policy consultation clauses (new conditionality option). - Argues for capacity building to support countries moving to modern monetary policy frameworks and spotlights the IMF-DFID collaboration. - An informal Board meeting heard Directors’ views; Directors subsequently formally supported the new conditionality option. - Chapter 3 of the IMF’s Regional Economic Outlook: Sub-Saharan Africa is closely aligned with this Board paper. - Professor Steve O’Connell contributed to and advised on this paper. - 3. The Fund’s Capacity Development Strategy-Better Policies Through Stronger Institutions - The IMF-DFID project was recognized in Box 6 on page 28 highlighting research and collaboration with policymakers in sub-Saharan Africa. - Notes synergies between technical assistance and training in the region due to the IMF-DFID monetary policy project. - Discusses joint Research/Institute for Capacity Development/African Department training and technical assistance to country authorities and mentions the IMF-DFID project specifically. - Examples include training seminars for IMF country teams and country authorities, online sites for peer-to-peer learning, and internal training and support for country desks. - This paper was the Fund’s first comprehensive strategy for capacity development. - IMF Staff Guidance Notes: (not expanded in the supplied content) *Source: International Monetary Fund (IMF) — IMF-DFID project report, June 2014.* ### 1. Staff Guidance Note on the Application of the Joint Bank-Fund Debt Sustainability Framework ### Staff Guidance Note on the Application of the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries ### Determinants of growth, public investment, and modeling - The Staff Guidance Note states full DSA write-ups should include, at a minimum, "a discussion of the determinants of growth, including public investment." - In countries with ongoing or anticipated scaling-up of public investment, the Note advises using more complex and resource intensive analytical techniques to inform the discussion. - IMF and World Bank staff developed models to examine the nexus between public investment and growth; the IMF model referenced is the Buffie et al. (2012) model developed by the IMF-DFID team. - Annex 2 highlights the IMF-DFID team’s model and provides further information on analysing public investment and growth. - Recommendations: There are no recommendations against this output. - Impact Weighting: 30% (25% for 2nd and 3rd years) - Revised since last Annual Review? Yes - Risk: LOW - Revised since last Annual Review? No ### Output 4 — IMF strengthens research capacity by expanding the network of LIC researchers (Performance summary) - Overall score and description: A++ (outputs substantially exceeded expectations). - Objective: strengthen research capacity by expanding the network of LIC researchers working on LIC macroeconomic issues via three channels: commissioned papers; attendance of external researchers at high-level policy conferences; outputs disseminated in e-newsletter and updated public webpages. - Performance against targets (Year 1, Year 2, Total vs. Targets for End of Year 2): - 4.1 Commissioned Papers: Year 1 = 0; Year 2 = 13; Total = 13; Target H = 8, M = 6, L = 4. - 4.2 Attendance of External Researchers at High-Level Policy Conferences: Year 1 = 6; Year 2 = 5; Total = 10; Target H = 5, M = 3, L = 2. - 4.3 Outputs disseminated in e-newsletter and updated public web page: Year 1 = 2; Year 2 = 4; Total = 8; Target H = 6, M = 4, L = 3. - Project outputs delivered: - 13 commissioned papers (presented at the Macroeconomic Challenges Facing Low-Income Countries Conference in January, 2014); authors were invited to a pre-conference workshop in July, 2013. - 10 high-level policy conferences (cumulative) attended by external researchers against a second year target of 5. - 4 newsletters during the reporting year; IMF website updated on a quarterly basis. - Recommendations: There are no recommendations against this output. - Impact Weighting: 10% (first year) 20% (second and third years). - Revised since last Annual Review? YES. - Risk: LOW. - Revised since last Annual Review? NO. ### Commissioned papers (list of papers presented) - 1. Distributional effects of monetary policy in developing countries — Eswar Prasad* and Boyang Zhang - 2. Income inequality, trade, and financial openness — Guay C. Lim and Paul D. McNelis* - 3. Rail revival in Africa? The impact of privatization — Matt Lowe* - 4. Why do so many oil exporters peg their currency? Foreign reserves as a de-facto sovereign wealth fund — Samuel Wills* and Rick van der Ploeg - 5. Deindustrialization and economic diversification — Tiago Berriel*, Marco Bonomo, and Carlos Carvalho - 6. Imported intermediate inputs and export diversification in low-income countries — Felipe Benguria* - 7. Does uncertainty reduce growth? Using disasters as natural experiments — Scott Baker and Nick Bloom* - 8. Developing macroeconomic stabilization policies for low-income countries — Romain Houssa*, Jolan Mohimont, and Chris Otrok - 9. Capital flows in low-income countries — Philip Lane* - 10. Output data revisions in low-income countries — Eduardo Ley and Florian Misch* - 11. Liquidity crisis: Are Islamic banking institutions more resilient? — Sajjad Zaheer and Moazzam Farooq* - 12. Banking market structure and macroeconomic stability: Are low-income countries special? — Franziska Bremus* and Claudia Buch - 13. Financial sector reforms, competition, and banking system stability in sub-Saharan Africa — Jennifer Moyo, Boaz Nandwa*, Jacob Oduor, and Anthony Simpasa ### Attendance of external researchers and conference dissemination - The team participated in six high-level policy conferences (two additional conferences beyond those discussed in Output 3.1 did not involve IMF senior staff). - Examples: - Annual Meeting of the Society for Economic Dynamics, Seoul, Korea, June 2013. - CSAE conference: Ten papers from the IMF-DFID project were presented; IMF-DFID team chaired sessions. - Papers presented included: "Benchmarking Structural Transformation Across the World"; "Infrastructure and Income Inequality in a Structural Transformation Framework"; "Remittances and Vulnerability in Developing Countries"; "Bias and Accuracy in the IMF/WB Debt Sustainability Framework for Low-Income Countries"; "Inflation Targeting and Exchange Rate Management in Less Developed Countries"; "Forecasting and Monetary Policy Analysis in Low-Income Countries: The Role of Money Targeting in Kenya"; "On the First–Round Effects of Food Price Shocks: the Role of the International Asset Market Structure"; "Government Spending Effects in Low-Income Countries"; "Natural Gas, Public Investment and Debt Sustainability in Mozambique"; "Financial Deepening, Growth, and Inequality: A Structural Framework for Developing Countries." ### E-newsletters and outreach - Quarterly e-newsletters spotlighting working papers, conferences, and activities: - May 2013 Newsletter - August 2013 Newsletter - November 2013 Newsletter - February 2014 Newsletter - IMF website updated quarterly. ### Progress, capacity building, and country applications - Training and course delivery: - The team taught a course for IMF staff on public investment, growth, and debt sustainability that was over-subscribed. - Course attendees by IMF Department (counts): - Africa 17 - Asia and Pacific 3 - Finance 2 - Fiscal Affairs 1 - Institute for Capacity 1 - Office of Executive 6 - Research 1 - Strategy, Policy, and 2 - Western Hemisphere 2 - Data dissemination: - Datasets on trade diversification and product quality cover 178 countries from 1962-2010 and provide export diversification and quality measures at the 1, 2, 3, and 4 digit SITC sectoral levels. - Country technical assistance and model uptake: - Five staff members from the Liberian Ministry of Finance attended a workshop on debt sustainability modeling in Washington, DC, August, 2013; authorities discussed modifying the Buffie et al. (2012) framework for Liberia. - IMF mission chief for Liberia intended to "use the model to inform our fiscal policy commencing fiscal year 14/15 budget and subsequent budgets." - Pilot model-based work with the Central Bank of Kenya became a key input into monetary policy formulation via bi-monthly presentations to the Monetary Policy Committee; the approach prompted AFRITAC South and AFRITAC East to finance follow-up support. ### Key impacts and policy outcomes - The project influenced IMF policy frameworks to be more flexible in accommodating public investment/growth linkages (reference to the IMF Staff Guidance Note on the Application of the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries). - Monetary policy agenda in LICs has moved toward forward-looking monetary policy; research informed a more flexible IMF conditionality framework (reference to IMF (2014)). - Work on debt sustainability and public investment is linked to IMF research on managing natural resource wealth and contributed to more flexible IMF policy (reference to IMF Board paper Macroeconomic Frameworks for Resource-Rich Developing Countries). - Country-level influence cited: Angola adjusted fiscal policies to create buffers and established the Angolan Sovereign Fund; team’s work noted in public fora and national press. - Diversification and structural transformation research produced an IMF Board paper arguing for flexible, country-specific policy approaches and produced a toolkit for researchers. ### Challenges and sustainability - Main challenges: - Attracting high-quality researchers to LIC work given IMF’s ability to offer one-to-two-year contracts; departures of DFID-financed visiting scholars to permanent Fund jobs make replacements difficult. - Balancing time between developing new research tools and supporting country applications, training missions, and uptake. - Mainstreaming the research within broader Fund work remains uneven across topics. - Mitigation and institutionalization: - Use of AFRITAC funding to support follow-on applications of forecasting and policy analysis system models. - Collaboration with the IMF’s Institute for Capacity Development (ICD) to offer training on debt sustainability. - Development of a simple user interface for IMF country teams to increase accessibility of models. - Pilot monetary policy work with Rwanda, Tanzania, Kenya, and Uganda, and a new project with Mozambique, to be financed by AFRITAC South and AFRITAC East. ### Annual outcome assessment and value for money - The project is on track to deliver the anticipated outcome: better engagement by IMF policymakers on LIC-specific macroeconomic issues, leading to improved policy-making in thematic areas. - The project is delivering impact-level influence on policymaking in low-income developing countries through working papers, IMF Board papers, country applications, conferences, technical assistance, training, and data/tool dissemination. - Direct beneficiary feedback highlights high regard for the project’s outputs and influence: - Stephen O’Connell (Chief Economist, USAID) praised the creation of "a true centre of excellence in macroeconomic research on low-income countries" and called the project "extraordinarily effective." - IMF Deputy Managing Director Min Zhu emphasized research on monetary transmission mechanisms, financial deepening, and structural transformation/diversification that culminated in important policy papers and a toolkit. *Source: IMF staff guidance note and project annual review materials.* ### 2. Costs and timescale ### 2. Costs and timescale ### Financial on-track status - Is the project on-track against financial forecasts: Yes - The project’s spending is on track against the revised payment schedule. - $1m was pushed back into a third year due to re-profiling after a change in procurement approach. ### Key cost drivers - Largest budgeted items: additional staff on short-term contracts, and visiting scholars. - Procurement change: hiring staff for one year or more contracts rather than per-paper reduced the need for the “Visiting Scholars” budget line, which is substantially underspent. - Exchange rate exposure: No foreseeable changes in cost structures due to exchange rates as rates were set at a conservative level. ### Timescale and schedule - Is the project on-track against original timescale: No - Revised schedule: project re-profiled early in the first year to deliver 34 papers in 3 years rather than 2 years. - Rationale: original two-year timescale was unrealistic given time taken to mobilise staff during the first 6 months of the programme. - Expectation: programme expected to be extended by two years (to help mitigate staff turnover and short contract tenure). ### Evidence and evaluation - Changes in evidence: No changes that challenge the original justification; the project continues to fill gaps in the research agenda. - Evaluation progress: N/A ### Risk assessment - Output Risk Rating: Low - Justification for Low rating: - Progress made during the first two years. - Project is surpassing log frame expectations. - Delivering high quality outputs consistent with, and in many cases surpassing, the log frame. - Momentum, profile, and impact increasing within the Fund and among country Authorities. - Successfully leveraged resources for technical assistance from regional institutions. - Staff turnover risk: - Some contractual staff accepted permanent positions at the IMF or central banks and left earlier than anticipated. - Impact on delivery: not detrimental due to the attraction of working at the IMF and programme momentum. - Mitigation: proposed two-year extension to mitigate short contract tenure and allow replacement of staff who have left. - Risk of funds not being used as intended: LOW - There is only one milestone payment. - Climate and environment risk: unchanged from those described in the business case. ### Value for Money (VfM) - Overall VfM judgement: The project demonstrates very good value for money and is delivering as anticipated in the original business case. - Unit cost metrics: - As the project budget remains as originally planned, the cost per research paper is estimated at £121 k consistent with the business case. - GRT’s composite ‘benchmark rate’ is £ 150 k per published paper. - IMF Project: 4115 34 121 - GRT Benchmark: 4000 26 150 - Publications and outputs: - To date, the team have achieved 7 publications. - It is potentially too early to make a definitive statement regarding cost per journal article published due to time lags in refereed journal publication; unit-cost assessments for journal articles are preliminary and assessed using first-year expenditure to capture lagged effects. - The project focuses on applied and operational research with a higher propensity for policy impact than for top-journal publication; the journal-article indicator can realistically only be assessed at least one year after programme completion. - Cost controls and commercial improvement: - IMF follows Fund guidelines for hiring, travel, and conferences; contractual hires undergo competitive processes. - Project manager position was put up for competitive bid in January, 2014. - Direct project management costs represent less than 2 percent of the total first year budget; including the Trust Fund management fee, program management costs are still below nine percent. - Hiring longer-term visiting scholars is expected to improve engagement, reduce recruitment time, and lower administrative overhead. ### Role of partners - Effective collaboration exists between the Strategy, Policy, and Review Department and Research Department, country teams, and country authorities. - Oversight: IMF Board and senior IMF staff, including the Deputy Director and Chief Economist, have provided oversight through active engagement. ### Conditionality - No specific conditions attached to the programme beyond those specified in the business case. ### Conclusions and recommended actions - Project performance: - The programme continues to exceed expectations and was scored an A++ project score. - Second year productivity: team more than doubled outputs compared to the first year while achieving considerable uptake and impact. - Observed policy changes at the IMF with far-reaching implications for policy advice provided to authorities in Article IV consultations and staff-funded stabilisation programmes. - Positive reception across IMF staff, Executive Board members, and policy makers in developing countries. - Project expanded the pool of researchers on macroeconomics in LICs and built capacity of southern policy makers via regional workshops. - Example testimonial: Head of the Governor’s Department at the Bank of Ghana noted that “the institution benefitted tremendously from the training provided by the IMF-DFID team during the mission to Ghana”. - Project team leaders received one of only two Fund-wide awards for excellence in Leadership. - Constraints and responses: - Demand for technical support from partner country authorities sometimes exceeds the programme’s capacity. - Response: leveraged additional support from regional technical assistance centres. - Recommendations: - IMF should consider developing shorter policy briefs and technical notes to accompany working papers to reach a broader audience beyond macroeconomic policy makers. - DFID project team recommends actively scoping and considering a Phase 2 programme; an outline specification sent to DFID is a starting point and IMF should consult broadly to develop a fuller specification for DFID’s consideration. ### Review process - Review duration: 3 months. - Reviewers: members of DFID’s Growth Research Team (Deputy Programme Manager and lead economic advisor), consulting with policy and country office colleagues and IMF staff. - Quality assurance and approval: quality assured by Growth Research Team’s Senior Economic Advisor and approved by DFID’s Chief Economist. - Documents reviewed as part of the annual reporting assessment included: Second Year IMF Annual Report to DFID (April 2013-March 2014), IMF Quarterly Newsletters (various issues), various working papers and IMF Board Discussion Papers, IMF Article IV discussions using project outputs, and last year’s IMF Annual Review document. --- _Source: https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/documents/june2014.pdf_