## _042512 - EXECUTIVE SUMMARY

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### INTRODUCTION: purpose, forms, and core contributions
- Purpose: Provide operational guidance to staff on the Fund’s engagement with low- and middle-income countries in fragile situations; help country teams tailor engagement to country-specific circumstances, including policy design, choice of financing facility or instrument, technical assistance and training, and donor coordination.
- Basis: Reflects the Executive Board discussion of Macroeconomic and Operational Challenges in Countries in Fragile Situations.
- Forms of engagement: surveillance, staff-monitored programs (SMPs), emergency financing, or arrangements meeting the upper credit tranche (UCT) standard (hereafter UCT arrangements), all combined with technical assistance (TA) and training.
- Core Fund contributions:
  - Support macroeconomic stability.
  - TA in core areas: public financial management (PFM), revenue mobilization, central banking and payment systems, and basic macroeconomic statistics—helps build capacity critical to state building and transition efforts.
- Key observation:
  - Fund engagement generally associated with improved macroeconomic outcomes and increased capacity.
  - Some low- and middle-income countries show greater risk of programs going off-track or failing to meet UCT-standard objectives, often linked to policy slippages rather than shocks, resulting in “stop-and-go” relationships and greater volatility of Fund financing.
- Approved By Siddharth Tiwari; April 25, 2012 — Prepared by the Strategy, Policy, and Review Department (in consultation with the African, Middle East and Central Asia, Legal, and Other Departments).

### CHARACTERISTICS AND IDENTIFICATION OF FRAGILE SITUATIONS
- Typical common characteristics (countries in fragile situations exhibit a preponderance of):
  - (i) significant institutional and policy implementation weaknesses assessed using the World Bank’s Country Policy and Institutional Assessment (CPIA) or other relevant information;
  - (ii) a fractious political context evidenced by a greater tendency to political stress and civil unrest;
  - (iii) severe domestic resource constraints;
  - (iv) vulnerability to shocks.
- Consequences:
  - Limited external assistance and/or high volatility in such assistance.
  - Some countries may experience domestic conflict, insecurity, and absence of government control, with potential spillover risks.
- Heterogeneity and dynamics:
  - Fragilities are case specific and change over time; drivers and transitions out of fragility vary (examples: Somalia as a failed state for over two decades; the Kyrgyz Republic went in and out of two major political transitions within the course of one year each).
- Assessment guidance:
  - Identify and regularly update the country’s main fragilities and the authorities’ policy capacity and commitment.
  - Use donors’, academics’, and other relevant sources (e.g., German Development Institute/UNDP User’s Guide on Measuring Fragility (2009)).
  - Use CPIA or other relevant information for institutional and policy implementation capacity; where CPIA is not available (such as in MICs), assess capacity case-by-case.
- Regular assessments should cover:
  - (i) the authorities’ willingness and ability to implement policy reforms and build institutional capacity;
  - (ii) progress in building peace, security, and political and social cohesion;
  - (iii) level of engagement and durability of support from the international community.

### POLICY DESIGN: objectives and core design principles
- Overarching objective: Achieve or ensure macroeconomic stability and promote sustainable growth; medium-term objective is progress toward a stable and sustainable macroeconomic environment consistent with strong and durable poverty reduction and growth.
- Principle: Policy design should remain consistent with the Fund’s Conditionality Guidelines when policies are to be supported by a Fund arrangement.
- Core design principles (of particular importance in fragile situations):
  - Explicit consideration of the political context:
    - Perform closer and more realistic assessment of socio-political constraints to reform and adjustment.
    - Understand which policies contribute to social cohesion and which can stress the political and social fabric.
  - Well-tailored pace of macroeconomic adjustment:
    - Quantitative objectives should account for weak institutional capacity, uncertainties about domestic policy needs, and exposure to shocks.
    - Particularly important where peace-related spending, demobilization, or reconstruction are involved.
  - Opportunities for “quick wins”:
    - Early focus on achievable, short-term objectives to deliver early successes and build support for reform; quick wins may have more dramatic public-support impact in fragile situations.
  - Inclusive growth and social protection:
    - Explicit attention to inclusive growth, job creation, and basic social safety nets as central to medium-term strategy; financial implications must be incorporated in the fiscal program.
  - Well-tailored structural reforms:
    - Low capacity suggests a strictly prioritized, gradual agenda of key structural reforms; consider timing of socially critical measures to foster realistic expectations and legitimacy.
    - In some rare cases with sufficient external support, TA, and government ownership, a broader reform agenda may be considered.
  - Integrated TA:
    - Very close integration between policy advice/program design and TA is essential; reinforce with structural benchmarks and a TA matrix where applicable.
  - Contingency planning:
    - Explicit recognition of political and economic risks should lead to contingency plans for continued engagement and specific contingency measures when programs veer off-track.

### MODALITIES OF FUND ENGAGEMENT: choice and rationale
- Sustained engagement is key to institution building; Extended Credit Facility (ECF) arrangements are expected to remain the main vehicle given protracted balance of payments needs.
- No single “normal” progression; choice among surveillance-only engagement, SMP, RCF, RFI, or UCT arrangement should be guided by country-specific circumstances and fragility characteristics.

- Close non-financial engagement
  - Appropriate when financial arrangements are precluded because of protracted arrears to the Fund, insufficient commitment to implement reforms, or lack of a potential/actual/protracted balance of payments need.
  - Fund actions include frequent interactions, provision of extensive TA, coordination with development partners, and regular reports to the international community.

- Staff-Monitored Program (SMP)
  - Helps establish or re-establish a track record of policy implementation ahead of a Fund financial arrangement.
  - Preferable to RCF when (i) significant capacity constraints exist and no adequate safeguards to Fund resources; and (ii) there is no urgent need to draw on Fund financial resources.
  - SMPs can be used in cases with overdue obligations to the Fund or arrears to official or external private creditors; careful examination of financing situation required.

- Rapid Credit Facility (RCF) — for PRGT-eligible countries
  - Preferred for LICs unable to implement UCT policies but with an urgent balance of payments need.
  - Roles:
    - Provide limited financial support, TA, and catalytic donor financing.
    - Facilitate improvement toward ECF/UCT requirements; repeated use can build a track record, consistent with PRGT Instrument rules and access limits.
    - Should be framed within a medium-term strategy to avoid “stop-and-go” outcomes.
    - Flexibility may be possible for countries with arrears; staff reports must detail arrears and prospects for clearance.
  - RCF should not be used if a UCT-quality program is feasible.

- Rapid Financing Instrument (RFI) — GRA financing
  - Provides rapid, low-access financing for urgent balance of payments needs where UCT-quality conditionality is not feasible or necessary.
  - Roles similar to RCF: financial support, policy/TA framework, catalytic financing, repeated use consistent with rules can help progression to UCT; flexibility on arrears policies for RFI disbursements.

- UCT Arrangements (PRGT-eligible countries and GRA financing)
  - Eligible for countries in fragile situations; deployment requires careful assessment of program strength and prospects for implementation, accounting for institutional, social, and political risks.
  - Appropriate where new governments have strong reform credentials backed by strong TA and policy support; moving too early can be counter-productive.

### RE-EVALUATION OF MODES OF ENGAGEMENT AND ACCESS
- Staff should remain open to re-evaluating modes of engagement between RCF/RFI and UCT arrangements based on program progress or slippages.
  - Example: faster-than-expected progress under RCF/RFI purchases may warrant quicker switch to UCT; severe repeated slippages under UCT may warrant switching to RCF/RFI or SMP.
- Access determination for each RCF/RFI disbursement and UCT arrangement should consider length of engagement and access norms, limits, and caps established for each facility.
- Access depends on three standard criteria:
  - (i) the member’s balance of payments need;
  - (ii) the strength of its program and capacity to repay the Fund (policy plans, adjustment effort, commitment, institutional capacity, track record, vulnerabilities, imbalances, debt sustainability);
  - (iii) the amount of outstanding Fund credit and the member’s record of past use.

### CONSIDERING THE POLITICAL CONTEXT
- Deeper understanding of political context needed to improve policy design, pace of adjustment, and to judge risks of engagement.
- Fund’s Guidelines on Conditionality: pay due regard to domestic social and political objectives, economic priorities, causes of balance of payments problems, and administrative capacity.
- Fund’s Guidance Note on The Role of the Fund in Governance Issues: seeking information about the political situation can be essential to judge prospects for policy implementation.
- Staff coordination and evaluation:
  - Coordinate with donors and other IFIs to share information on political economy (subject to confidentiality procedures).
  - Resident representatives should conduct their own evaluations of political and social context.
  - Main areas to consider: (i) political process; (ii) role of formal and informal norms; (iii) social risks and access to public goods; (iv) main fault lines in society.
  - Strong outreach with local civil society, parliamentarians, and academics can help build support for reform.

### TECHNICAL ASSISTANCE (TA) AND TRAINING
- Capacity building should be integral across modes.
- Key principles:
  - Pay closer attention to a country’s absorption capacity (availability of staff and resources).
  - Develop well-tailored TA programs with discrete objectives and deliverables aligned with program objectives and authorities’ capacity.
  - Adopt a programmatic approach to TA with a joint plan spelling out medium-term TA support—improves predictability, continuity, and coordination among providers.
  - Use results-based management: clear outcomes, well-designed indicators and milestones, tracking and reporting on TA performance.
  - Increase reliance on resident macroeconomic advisors—use new financing facilities/instruments where necessary; “boots on the ground” more effective at early stages.
    - Example: DFID financing under a three-year program to station resident advisors in six countries in fragile situations in the Middle East and Central Asia region.
  - Enhance donor coordination, including use of trust funds supported by donor financing; avoid overwhelming country officials or creating competing TA initiatives.

### DOCUMENTATION AND REVIEW PROCESS: policy note and mission cycle expectations
- Mission teams should explicitly identify fragility characteristics and link such information to choice and modality for Fund engagement.
- Continuous tailoring: country teams must continuously tailor level and nature of engagement during transition out of fragility.
- Pre-mission work:
  - Early consultation with SPR, FIN, LEG, and relevant TA departments when recognizing fragility.
  - Policy Notes for new programs, Article IV consultations, or re-evaluations should address:
    - (i) characteristics of fragility, including recent events;
    - (ii) political and social context and source of information;
    - (iii) capacity constraints and governance, including capacity and willingness to implement reforms;
    - (iv) donor coordination aspects.
  - If Policy Note pertains to a request for a new UCT arrangement or initial RCF/RFI disbursement, include brief discussion of overall transition strategy; for reviews/repeated disbursements, identify changes in program design and refer to transition strategy.
- On mission:
  - Coordinate closely with multilaterals, donors, and experts to understand political and social context and formulate aligned reform agenda that considers financing implications.
  - LOI/MEFP for new financing/program requests and reviews should discuss strategy to improve institutional capacity and governance and objective of achieving medium-term macroeconomic sustainability.
  - For repeated RCF/RFI use, LOI/MEFP could present a non-UCT program with explicit targets and expectations of repeated disbursements to evaluate progress toward a UCT-standard program.
- Post-mission:
  - Back-to-Office Report (BTO) should highlight developments with respect to strategy, program design, fragility, political developments, and donor coordination.
  - Staff Reports should include sufficient exposition of Policy Note requirements.
- Other documents:
  - The Joint Management Action Plan (JMAP) for LICs: discuss transition strategy with the World Bank, including program design and TA needs; prioritize reforms and identify quick wins for integration into Fund-supported programs.
  - Usual requirements for a PRSP and the PRS process apply as per the Updated Staff Guidance on Poverty Reduction Strategy Documents.

### MONITORING AND DONOR COORDINATION: principles and practices
- The staff monitored the Plan’s implementation through bi-annual staff visits; staff reports, together with World Bank and UN reports, are discussed at bi-annual donors’ meetings and inform donor disbursement decisions.
- Staff engagement with authorities and donors includes discussions with host authorities and donors on economic situation, reform progress, and financing needs; in the WBG context, staff engaged with Government of Israel officials on measures affecting development and growth.
- Key donor coordination practices:
  - Remain closely engaged with donors on financing commitments and aid projections.
  - Prioritize key program objectives within resource envelope to avoid overwhelming authorities.
  - Use common conditionality matrices to target complementary reforms where appropriate.
  - Embed quick wins into macroeconomic frameworks and quantify financing implications during missions.
  - Discuss with donors their understanding of political and social situations to tailor pace and type of reforms.
  - Engage on budget support and country-specific trust funds linked to Fund-supported programs.

### SELECTED COUNTRY EXPERIENCES AND GOOD PRACTICES (appendices)
- Close non-financial engagement examples:
  - Zimbabwe:
    - Arrears to the Fund and a declaration on non-cooperation precluded a financial arrangement; close non-financial engagement focused on policy advice, macroeconomic framework updates, and targeted TA.
    - After new government inauguration in February 2009, first Fund mission visited Harare in March 2009.
    - Since 2009, engagement supported short-term recovery and lifted suspension of TA in targeted areas (tax policy and administration; payments system; lender-of-last-resort and banking supervision; central banking governance and accounting), later also macroeconomic statistics, PFM, and anti-money laundering and combating the financing of terrorism.
  - Liberia (2003):
    - Close non-financial engagement after 2003 Peace Treaty focused on capacity building in policy-making and implementation in preparation for an SMP.
    - Fund mission reported on post-conflict situation in December 2003; TA needs missions from FAD, MCM (then MFD), and STA followed.
    - Token payments to the Fund started in January 2004; prospects for an SMP depended on policy performance in first half of 2004 and the 2004/05 budget.
  - West Bank and Gaza (WBG):
    - As an entity, WBG cannot receive Fund financial support; Fund provided policy advice, TA, and regular reporting to inform donors.
    - Fund staff helped develop the Palestinian Reform and Development Plan (PRDP) presented at the Paris Donors’ Conference in 2007 and the Palestinian National Development Plan (PNDP) published in 2011; staff reports have informed donor disbursement decisions.

- SMP experience and sequencing:
  - Liberia (2006–07):
    - SMP immediately after new government took office in January 2006; covered February–September 2006.
    - SMP envisaged a balanced cash-based budget and structural measures to strengthen fiscal and monetary management and governance.
    - Outcomes:
      - IDA approved a pre-arrears clearance grant in the amount of US$30 million in June 2006.
      - Gross donor assistance rose to approximately US$300 million in 2006 (excluding any arrears accumulation).
      - Token monthly payment to the Fund increased from $50,000 to $60,000.
    - SMP extended to June 2007 and again to December 2007 while arrears clearance financing efforts continued.
  - Afghanistan (2004–11):
    - Post-Taliban engagement began in 2002; SMP agreed for April 2004 to March 2005 to maintain financial stability and prepare for a UCT arrangement.
    - SMP implementation broadly on track despite difficult security and institutional environment.
    - SMP extended twice to prepare interim ANDS; succeeded by a three-year PRGF arrangement in June 2006.
    - Major events:
      - In January 2010, Afghanistan reached the completion point under the enhanced HIPC Initiative, bringing debt relief of $1.6 billion.
      - Collapse of Kabul Bank in September 2010 imposed a large fiscal cost (about 6 percent of 2010 GDP).
    - A new three-year ECF arrangement approved in November 2011 to address Kabul Bank fallout and strengthen the banking system; program aims include raising domestic revenue, improving PFM, and moving toward fiscal sustainability ahead of foreign troop departure in 2014 and expected donor support decline.

- Good practices in program design:
  - Sierra Leone:
    - PRGF arrangements sized at 120 percent of quota (exceeding the normal 90 percent of quota); disbursements were heavily front-loaded.
    - Two-stage approach: first stage (2001–02) linked to National Recovery Strategy (2002); second stage (2003–05) elaborated in PRSP Status Report (2003) and full PRSP (2005).
    - DDR program: By October 2001 about 60 percent of an estimated 25,000 RUF fighters had passed through UN-sponsored DDR process.
      - Annual cost of the DDR at program onset was $21.5 million, of which donors contributed $20 million.
      - Domestic component equivalent to 0.8 percent of recurrent spending or 0.2 percent of GDP.
    - Conditionality and donor collaboration: number of performance criteria and prior actions under the program was four times and five times, respectively, the average for PRGF countries as a whole.
  - Liberia:
    - Initial structural reforms focused on financial oversight and governance (including GEMAP) to regain donor support.
    - Comprehensive debt relief and macroeconomic stability were primary objectives supporting generally good implementation of SMP from 2006, PRGF/EFF from 2008, and HIPC triggers.
    - Structural reform delays mainly attributed to capacity weaknesses rather than lack of political commitment.

- Good practices in understanding the political context (Appendix VI):
  - Collaborate with donors and IFIs to share information on political economy (subject to confidentiality).
  - Resident representatives should evaluate political and social context.
  - Areas to analyze: political process, role of formal institutions and informal norms, social group effects on access to assets/services, broad social expectations and state capacity, main fault lines in society.
  - Strengthen outreach using Fund communication toolkit and Media Relations.

- Donor coordination and MDTF examples:
  - Haiti (Appendix VII):
    - Two consecutive SMPs (April 2003–September 2004); Emergency Post Conflict Assistance arrangements; PRGF (October 2006–September 2009) and successor ECF (July 2010–July 2013).
    - Donor coordination critical for timely aid disbursement, efficient resource use, tailoring reforms to capacity, and program implementation.
    - Budget support group (BSG) established with a budget support matrix to review progress and facilitate disbursement; BSG helped alleviate aid volatility.
    - Structural reform cooperation effective on revenue measures, PFM, accounting, financial sector reform (FSAP), business environment, and poverty analysis; close Fund–Bank coordination.
    - TA coordination improvement needed; work in progress to establish a TA matrix involving donors and authorities.
  - Afghanistan Reconstruction Trust Fund (ARTF) (Appendix VIII):
    - Established in 2002 to support national priority programs and ANDS goals; developed into the main multilateral funding mechanism for the government’s core budget.
    - Since early 2002, 30 donors have contributed over $3 billion, making ARTF the largest contributor to the Afghan budget.
    - Management: Management Committee (World Bank as administrator, IDB, ADB, UN (UNAMA and UNDP)); MC meets in Kabul with Ministry of Finance as observer; ARTF Donors meet quarterly.
    - Funding mechanics: donors contribute into a single account held by the World Bank; MC decides allocations monthly; two windows—Recurrent Cost Window and Investment Window.
    - Recurrent Cost Window reimburses a portion of eligible non-security operating expenditure annually and is tied to the government’s macroeconomic and budget framework reviewed by the Fund and the World Bank.
    - Investment Window expanded recently due to increased donor contributions; supports decentralized/national rural development, microfinance, education, capacity building, justice, power, urban development.
    - A three-year financing strategy was developed to align ARTF support with longer-term priorities and move away from annual allocations toward predictable multiyear financing.
    - Donor preferencing rules:
      - A preference is not an earmark; ARTF will not accept preferencing in excess of 50 percent of a donor’s contribution in a solar year.
      - This rule is lifted once sufficient un-preferenced funds have been paid in to cover Recurrent Cost Window obligations.
      - Geographic preferencing is not accepted.
      - Preferences must be for ongoing, on-budget, national priority programs with a clear funding gap.

*Source: GUIDANCE ON THE FUND’S ENGAGEMENT WITH COUNTRIES IN FRAGILE SITUATIONS (excerpts provided).*

### EXECUTIVE SUMMARY

### _042512 - EXECUTIVE SUMMARY

### INTRODUCTION
- Purpose: Provide operational guidance to staff on the Fund’s engagement with low- and middle-income countries in fragile situations; help country teams tailor engagement to country-specific circumstances, including policy design, choice of financing facility or instrument, technical assistance and training, and donor coordination.
- Basis: Reflects the Executive Board discussion of Macroeconomic and Operational Challenges in Countries in Fragile Situations.
- Forms of engagement: surveillance, staff-monitored programs (SMPs), emergency financing, or arrangements meeting the upper credit tranche (UCT) standard (hereafter UCT arrangements), all combined with technical assistance (TA) and training.
- Core Fund contributions: support macroeconomic stability; TA in core areas of Fund expertise—public financial management (PFM), revenue mobilization, central banking and payment systems, and basic macroeconomic statistics—helps build capacity critical to state building and transition efforts.
- Key observation: Fund engagement generally associated with improved macroeconomic outcomes and increased capacity; however, some low- and middle-income countries show greater risk of programs going off-track or failing to meet UCT-standard objectives, often linked to policy slippages rather than shocks, resulting in “stop-and-go” relationships and greater volatility of Fund financing.

### CHARACTERISTICS AND IDENTIFICATION OF FRAGILE SITUATIONS
- Typical common characteristics (countries in fragile situations exhibit a preponderance of):
  - (i) significant institutional and policy implementation weaknesses assessed using the World Bank’s Country Policy and Institutional Assessment (CPIA) or other relevant information;
  - (ii) a fractious political context evidenced by a greater tendency to political stress and civil unrest;
  - (iii) severe domestic resource constraints;
  - (iv) vulnerability to shocks.
- Consequences: Limited external assistance and/or high volatility in such assistance; some countries may experience domestic conflict, insecurity, and absence of government control, with potential spillover risks.
- Heterogeneity and dynamics:
  - Fragilities are case specific and change over time; drivers and transitions out of fragility vary.
  - Examples: Somalia has been a failed state for over two decades; the Kyrgyz Republic went in and out of two major political transitions within the course of one year each.
- Assessment guidance:
  - Effective engagement requires identification and regular updates of the country’s main fragilities and of the authorities’ policy capacity and commitment.
  - Multiple dimensions of fragility can be assessed using donors’, academics’, and other relevant sources (e.g., German Development Institute/UNDP User’s Guide on Measuring Fragility (2009)).
  - A (possibly lagged) snapshot of institutional and policy implementation capacity can be obtained using the World Bank’s CPIA or other relevant information.
  - Where CPIA is not available (such as in MICs), assessment of institutional and policy implementation capacity should be made case-by-case.
- Regular assessments should cover:
  - (i) the authorities’ willingness and ability to implement policy reforms and build institutional capacity;
  - (ii) progress in building peace, security, and political and social cohesion;
  - (iii) level of engagement and durability of support from the international community.

### POLICY DESIGN
- Overarching objective: Achieve or ensure macroeconomic stability and promote sustainable growth; medium-term objective is progress toward a stable and sustainable macroeconomic environment consistent with strong and durable poverty reduction and growth.
- Principle: Policy design should remain consistent with the Fund’s Conditionality Guidelines when policies are to be supported by a Fund arrangement.
- Core design principles (apply across membership but are of particular importance in fragile situations; see Appendix V for experiences and good practices):
  - Explicit consideration of the political context:
    - Perform closer and more realistic assessment of socio-political constraints to reform and adjustment.
    - Understand what policies/reforms contribute to social cohesion (e.g., a fall in inflation from very high levels) and what policies/reforms can stress political and social fabric (e.g., a large fall in public sector employment, including in the military).
    - Factor political and social context into implementation of other principles.
  - A well-tailored pace of macroeconomic adjustment:
    - Quantitative objectives should account for weak institutional capacity, uncertainties about domestic policy needs, and exposure to shocks.
    - Particularly important where peace-related spending, demobilization, or reconstruction are involved.
  - Opportunities for “quick wins”:
    - Early focus on achievable, short-term objectives to deliver early successes and build support for reform.
    - Quick wins may have more dramatic impact on public support in fragile situations than in other low- and middle-income countries.
  - Inclusive growth and social protection:
    - Explicit attention to inclusive growth, job creation, and basic social safety nets as central to medium-term strategy.
    - Example: providing employment opportunities for low-skilled, idle youth to enhance peace and security.
    - Financial implications of such measures should be fully incorporated in the fiscal program.
  - Well-tailored structural reforms:
    - Low capacity typically suggests a strictly prioritized, gradual agenda of key structural reforms.
    - Consider timing of socially critical measures to foster realistic expectations and enhance legitimacy of state institutions.
    - In some (likely rare) cases with sufficient external financial support, TA, and government ownership, a “window of opportunity” for a more comprehensive structural reform agenda may be considered.
  - Integrated TA:
    - Very close integration between policy advice/program design and TA is essential.
    - Adoption and effective implementation of key structural or institutional measures often requires targeted and timely TA.
    - Where applicable, reinforce with structural benchmarks and a TA matrix matching these benchmarks.
  - Contingency planning:
    - Explicit and candid recognition of political and economic risks should lead to contingency plans.
    - Contingency planning may include approaches to maintain continuous engagement when a Fund-supported program veers off-track (e.g., how to maintain policy dialogue and delivery of TA) and the design of specific contingency measures.

*Approved By Siddharth Tiwari; April 25, 2012 — Prepared by the Strategy, Policy, and Review Department (in consultation with the African, Middle East and Central Asia, Legal, and Other Departments).*

### 11. Program design will naturally differ between LIC and MIC cases, both in terms of

### _042512 - 11. Program design will naturally differ between LIC and MIC cases, both in terms of

### Modalities of Fund engagement
- Sustained engagement is key to institution building and improvements in macroeconomic and social indicators; repeated use of available facilities and long-term TA and training may be required.
- Given protracted balance of payments needs, Extended Credit Facility (ECF) arrangements are expected to remain the main vehicle of Fund engagement across countries in fragile situations.
- Choice among close surveillance-only engagement, Staff-Monitored Program (SMP), Rapid Credit Facility (RCF), Rapid Financing Instrument (RFI), or UCT arrangement should be guided by country-specific circumstances, case-specific characteristics of fragility, and the need to promote sustained engagement; there is no single “normal” progression.

- Close non-financial engagement
  - Appropriate when financial arrangements are precluded because of protracted arrears to the Fund, insufficient commitment to implement reforms, or lack of a potential/actual/protracted balance of payments need.
  - Fund actions:
    - Frequent interactions to discuss and monitor macroeconomic developments and provide policy advice, including elaboration of a quantified macroeconomic framework via Article IV missions and staff visits.
    - Provision of extensive TA to build capacity.
    - Close coordination with development partners and, where requested, regular reports on macroeconomic developments and policies and related capacity building for the international community.

- Staff-Monitored Program (SMP)
  - Can help members establish or re-establish a track record of policy implementation ahead of a Fund financial arrangement and provide assurances that authorities have capacity and commitment to implement a UCT-quality program.
  - Preferable to RCF when (i) significant capacity constraints exist and no adequate safeguards to Fund resources; and (ii) there is no urgent need to draw on Fund financial resources.
  - SMPs can be used in cases with overdue obligations to the Fund or arrears to official or external private creditors; careful examination of financing situation is required.

- Rapid Credit Facility (RCF) — for PRGT-eligible countries
  - Preferred for LICs that cannot yet implement UCT policies due to factors such as inability to make credible commitments beyond the short term, inability to absorb stress from large policy adjustment, or severe capacity constraints, but where Fund financing is needed for an urgent balance of payments need.
  - RCF roles:
    - Provide limited financial support and a framework for policy support and TA; play a catalytic role in mobilizing donor financing.
    - Facilitate improvement in policies and outcomes needed to meet requirements for an ECF arrangement; repeated use can build a track record toward a UCT arrangement, consistent with PRGT Instrument rules and access limits.
    - Be framed within a medium-term strategy to support sustained engagement and avoid “stop-and-go” outcomes.
    - Flexibility in certain circumstances for countries with arrears to official or external private creditors, making RCF disbursements possible without meeting all non-toleration of sovereign arrears or lending into arrears policies; staff reports must provide detailed information on such arrears and prospects for clearance.
  - The RCF should not be used if a UCT-quality program is feasible and more appropriate.

- Rapid Financing Instrument (RFI) — GRA financing
  - Designed to provide rapid, low-access financing to address urgent balance of payments needs arising from fragile/post-conflict situations or other disruptive events where UCT-quality conditionality is not feasible or not necessary.
  - RFI roles:
    - Provide financial support, a framework for policy support and TA, and catalytic financing for official and market sources.
    - Repeated use, consistent with rules, can be part of a well-paced progression out of fragility and help build a track record toward UCT arrangements; can be underpinned by SMPs.
    - Flexibility in applying Fund policies on non-toleration of sovereign arrears and lending into arrears for RFI disbursements.

- UCT Arrangements (PRGT-eligible countries and GRA financing)
  - Eligible for countries in fragile situations; deployment requires careful assessment of program strength and prospects for implementation, accounting for institutional, social, and political risks and constraints.
  - Appropriate where new governments have strong reform credentials backed by strong TA and policy support; moving too early can be counter-productive.

### Re-evaluation of modes of engagement and Access
- Staff should remain open to re-evaluating modes of engagement, especially between RCF/RFI and UCT arrangements, based on actual program progress or slippages.
  - Example: faster-than-expected progress under RCF/RFI purchases may warrant a quicker switch to UCT; severe repeated slippages under UCT may warrant switching to RCF/RFI or SMP before a new UCT arrangement.
- Access determination for each RCF/RFI disbursement and UCT arrangement should consider the needed length of engagement and access norms, limits, and caps established for each facility.
  - Access depends on three standard criteria:
    - (i) the member’s balance of payments need;
    - (ii) the strength of its program and capacity to repay the Fund, taking into account policy plans, adjustment effort, commitment to implement the program, institutional capacity, track record of policy implementation, and country circumstances such as vulnerabilities, imbalances, and debt sustainability;
    - (iii) the amount of outstanding Fund credit and the member’s record of past use.

### Considering the political context
- A deeper understanding of the political context is needed to improve design of Fund-supported policies, especially pace of adjustment and reform, and to judge risks of engagement.
  - Fund’s Guidelines on Conditionality state the Fund will pay due regard to domestic social and political objectives, economic priorities, causes of balance of payments problems, and administrative capacity to implement reforms.
  - Fund’s Guidance Note on The Role of the Fund in Governance Issues notes that seeking information about the political situation can be essential to judge prospects for policy implementation.
- Understanding political context:
  - Improves prospects for successful and sustained engagement by informing realistic expectations, adoption of second-best reforms, and assessment of risks.
  - Is complex and volatile in fragile situations; not always straightforward.
- Staff coordination and evaluation:
  - Staff should coordinate closely with donors and other IFIs to share information on, and understand, the political economy (subject to confidentiality procedures).
  - Resident representatives should conduct their own evaluation of political and social context to align the extent and pace of policy measures with socio-political factors.
  - Main areas to consider when analyzing drivers of political decisions:
    - (i) political process in the country;
    - (ii) the role of formal and informal norms;
    - (iii) social risks and access to public goods;
    - (iv) the main fault lines in society.
  - Strong outreach by mission teams and resident representatives with local civil society, parliamentarians, and academics can help build support for reform programs and increase understanding of the Fund’s role.

### Technical assistance (TA) and training
- Capacity building (TA and training) should be integral to Fund engagement across modes.
- Key principles:
  - Pay closer attention to a country’s absorption capacity, including availability of staff and other resources.
  - Develop well-tailored TA programs with discrete objectives and deliverables aligned with program objectives, authorities’ capacity, commitment to reform, and identified quick wins.
  - Focus on a programmatic approach to TA involving a plan jointly prepared with authorities that spells out how the Fund’s TA will support reform objectives over the medium term; this approach improves predictability and continuity and facilitates coordination among TA providers.
  - Use results-based management to improve design of TA projects and programs—focus on clear outcomes, well-designed indicators and milestones, and tracking and reporting on TA performance.
  - Increase reliance on resident macroeconomic advisors—utilize new financing facilities and instruments where necessary; “boots on the ground” may be more effective at early stages to kick-start capacity building.
    - Example noted: DFID financing under a three-year program to station resident advisors in six countries in fragile situations in the Middle East and Central Asia region.
  - Enhance donor coordination, including use of trust funds supported by donor financing—avoid overwhelming country officials or creating competing TA initiatives; Steering Committees of RTACs are a natural platform, and IMF participation in country-specific donor groups is desirable where appropriate and feasible.

*Source: GUIDANCE ON THE FUND’S ENGAGEMENT WITH COUNTRIES IN FRAGILE SITUATIONS (excerpts provided).*

### 18. Training of country officials, including through increased emphasis on training in

### 18. Training of country officials, including through increased emphasis on training in home country and greater use of RTACs.

### Regional training and boots-on-the-ground
- A regional approach offers opportunities for peer-to-peer learning while maintaining a focus on the specific needs of the region.
- The principle of "boots on the ground" may be more beneficial in the context of fragility.
- The IMF institute works with a large number of regional training organizations and with the RTACs when deciding on course topics, which are highly demand driven. (footnote 24)

### Coordinating with donors
- The Fund can play an important role in coordination efforts between the authorities and donors, including development agencies, in countries in fragile situations.
- The Fund may not always assume the role of lead coordinator, but is often expected to play a catalytic role through its financing and the establishment of a consistent macroeconomic framework.
- Country teams, particularly resident representatives, are expected to pay more attention to the following:
  - Remain closely engaged with donors on their financing commitments and discuss countries’ financing needs.
  - Help keep donor engagement focused via prioritization of key program objectives within the resource envelope, while working closely with the country authorities to avoid overwhelming their capacity.
  - Use common conditionality matrices in some instances to target a limited set of complementary reforms supported by the country’s development partners (see Appendix VII for an example).
  - Work closely with country authorities and donors to identify quick wins, taking into consideration financing implications.
  - Where possible, embed quick win reforms into Fund macroeconomic frameworks and, during missions, work with country authorities, donors, and IFIs on the ground to help quantify financing implications of the identified reforms and, wherever possible, incorporate them into the authorities’ budget and the Fund’s macroeconomic framework.
  - Discuss with donors their understanding of the political and social situations to provide context to the reform strategy and to better tailor the pace and type of reforms.
  - Be engaged on use of budget support as an important and flexible mode of delivery of donor assistance, including through country-specific trust funds with links to performance under Fund-supported programs. (footnote 25)
- In countries that already have multi-donor trust funds (MDTFs) in place or where establishment of MDTFs is under consideration (at the World Bank, other IFI, or bilateral donors), Fund staff should strive to remain fully informed of the process, in order to study the opportunity for a donor budget support window linked to a Fund-supported program.
  - The intention is not to have the Fund manage MDTFs, but rather that any such MDTFs are linked to Fund-supported programs, to help donors channel budget support to governments through MDTFs. A cited example is the Afghanistan Reconstruction Trust Fund administered by the World Bank. (footnote 25)

### Guidance on the Fund’s engagement: Documentation and review process (Appendix I)
- Purpose: Summarizes documentation requirements and procedures for a typical mission cycle to a middle- or low-income country in a fragile situation; highlights additional issues of relevance to countries in fragile situations; guidance should be interpreted flexibly and sensibly.
- Key procedural expectations:
  - Identification of fragilities
    - Mission teams should explicitly identify characteristics of fragility in a country as the first step in the design of Fund engagement.
    - Mission teams should indicate whether a country displays some or all common characteristics of fragility and link such information to the choice and modality for Fund engagement.
  - Continuous tailoring
    - Country teams need to be able to continuously tailor the level and nature of Fund engagement during the complex process of emerging from fragility.
  - Pre-mission work
    - Early consultation: Area departments should informally consult with SPR, FIN, LEG, and relevant TA departments at an early stage when recognizing fragility.
    - For new financing or program support, early consultation should focus on the choice of instrument and access.
    - Policy Note requirements: For new programs, Article IV consultations, or when unexpected developments call for re-evaluation, Policy Notes should explicitly address the nature of fragility, including:
      - (i) characteristics of fragility in the country, including recent events or changes to the status quo;
      - (ii) political and social context, including source of information (i.e., donors and/or other IFIs) if applicable;
      - (iii) information on capacity constraints and governance, including capacity and willingness to implement reforms; and
      - (iv) aspects of donor coordination.
    - Additional Policy Note expectations:
      - If the Policy Note pertains to a request for a new UCT arrangement or initial RCF/RFI disbursement, include a brief discussion of the overall strategy to help the country transition out of fragility, in terms of choice of facility or instrument and elements of program design that reflect the Guidance Note pillars.
      - For existing program reviews or repeated RCF/RFI disbursements, identify any changes in program design in accordance with the Guidance Note and refer back to the overall transition strategy.
      - Policy Notes for Article IV missions should lay out characteristics of fragility, political and social context, capacity and governance issues, and coordination with donors; policy advice on the medium-term approach should focus on helping authorities build capacity and achieve macroeconomic sustainability to help transition out of fragility.
  - On mission
    - Missions should coordinate closely with other multilaterals, donors, and experts on the ground to understand the political and social context and to formulate an aligned reform agenda that considers financial implications of reforms.
    - LOI/MEFP expectations: For new financing/program requests and program reviews, authorities should discuss in their LOI/MEFP the overall strategy to improve institutional capacity and governance and the objective of achieving medium-term macroeconomic sustainability; set out policies and measures intended to pursue in line with Fund-supported program.
    - For repeated use of an RCF (LICs) or RFI (MICs), the LOI/MEFP could present a non-UCT program with explicit targets and discuss any expectation of repeated disbursements, providing structure for evaluating progress toward an UCT-standard program (i.e., the track record).
  - Post-mission work
    - Back-to-Office Report (BTO) should highlight developments with respect to the strategy based on this guidance note, including program design and issues related to fragility, political developments, and donor coordination.
    - Staff Reports should include sufficient exposition of the Policy Note requirements in addition to usual Staff Report requirements.
  - Other documents
    - The Joint Management Action Plan (JMAP) for LICs:
      - In addition to standard JMAP requirements, Fund staff should discuss with the World Bank the overall strategy to help the country transition out of fragility, including program design and TA needs.
      - Fund staff should work closely with the World Bank, through the JMAP process and on the ground, to prioritize reforms and identify quick wins that can be integrated into Fund-supported programs where possible; the joint memorandum for files should document such discussions.
    - The usual requirements for a PRSP and the PRS process apply as per the Updated Staff Guidance on Poverty Reduction Strategy Documents.
    - See The Handbook and Implementation of the Joint Management Action Plan on Fund-Bank Collaboration for procedural context.

### Appendix III: Experience with close non-financial engagement in countries in fragile situations — country examples
- Rationale: Close non-financial engagement may be appropriate where a financial arrangement is precluded because of protracted arrears, lack of sufficient policy commitment, or absence of financing needs that could be met by the Fund.

- A. Zimbabwe
  - Arrears to the Fund and a declaration on non-cooperation preclude a financial arrangement; close non-financial engagement became the best form of engagement, including policy advice, regular updates of the macroeconomic framework, and targeted TA.
  - Timeline and actions:
    - After the inauguration of the new government in February 2009, collaboration between the authorities and Fund staff became more intensive.
    - The first Fund mission following the inauguration visited Harare in March 2009.
    - Since 2009, Fund engagement focused on supporting short-term economic recovery with regular updates of the macroeconomic framework, detailed revenue projections, and recommendations to strengthen macroeconomic stabilization, introduce structural measures, and improve credibility of the new dollarized monetary system.
    - Following Executive Board decisions in 2009 to lift the suspension of TA in targeted areas, functional departments started to provide TA in:
      - (i) tax policy and administration;
      - (ii) payments system;
      - (iii) lender-of-last resort and banking supervision; and
      - (iv) central banking governance and accounting.
    - The suspension of TA has subsequently been lifted also in:
      - (i) macroeconomic statistics;
      - (ii) PFM; and
      - (iii) anti-money laundering and combating the financing of terrorism.

- B. Liberia (2003)
  - Given arrears to the Fund and the need to normalize relations, close non-financial engagement was the most effective mode of engagement, with initial focus on capacity building in policy-making and implementation in preparation for an SMP.
  - Timeline and actions:
    - After the signature of the 2003 Peace Treaty and the departure of President Taylor in August 2003, the UN established UNMIL and a National Transitional Government (NTGL) was formed to prepare for elections in October 2005.
    - The Fund sent a mission to report on the post-conflict situation in December 2003 in parallel with TA needs missions from FAD, MCM (then MFD), and STA.
    - The immediate post-conflict engagement focused on defining TA needs, policy advice, and normalizing financial relations, with an SMP unlikely for mid-2004.
    - Staff outlined a TA program and assisted the authorities in crafting fiscal policies for January–June 2004.
    - Token payments to the Fund started in January 2004; prospects for an SMP depended on policy performance in the first half of 2004, the 2004/05 budget, and improving data provision.
    - With external partners, the NTGL elaborated a two-year reform program for 2004–05.
    - Subsequent missions concluded that a mixed record of cooperation and slow progress meant authorities were not yet ready to adopt and implement an SMP; staff proposed no further remedial actions in April 2005 and awaited the October 2005 elections and a new administration.
    - Country Report referenced: 04/84: Liberia-Report on Post-Conflict Economic Conditions and Economic Program for 2004/05. (footnote 2)

- C. West Bank and Gaza (WBG)
  - As WBG is considered an entity (not a member of the Fund), Fund support can only take the form of close engagement focused on policy advice, TA, and regular reporting to inform the donor community; the Fund’s role in coordinating donor support was important.
  - Key points:
    - The Fund cannot provide financial support to WBG because it is not a member state, but Fund staff has taken a leading role among international agencies on economic, fiscal, and financial issues.
    - Fund staff worked with the Palestinian Authority (PA) to develop the Palestinian Reform and Development Plan (PRDP) presented at the Paris Donors’ Conference in 2007 and its successor Palestinian National Development Plan published in 2011.
    - Fund staff reports reviewing progress in implementing the plans have been taken into account by donors in their disbursement decisions; bi-annual staff reports are timed with donors’ meetings and have been used for informal Board briefings on the WBG.
    - The public finance management system had been severely degraded by mismanagement and financial sanctions; Fund staff provided policy advice and TA to restore financial controls, enhance fiscal transparency and accountability, and ensure detailed monthly reporting of budget execution on the Ministry of Finance’s website.
    - The Fund has been the primary provider of policy advice and TA to the Palestinian Monetary Authority (PMA); over time the PMA has gained trust of the Central Bank of Israel and international banks and can now regulate and supervise the Palestinian financial system fully, with rigorous implementation of regulations against money laundering and the financing of terrorism.
    - Fund staff worked with authorities to develop a macroeconomic framework for continual appraisal of economic conditions and outlook; intensive TA has been provided to raise the quality of official economic statistics.
    - After preparation of the PRDP and its endorsement by the Fund’s Executive Board, the Fund began close monitoring of implementation; IMF Executive Directors endorsed the Plan at an informal Board meeting held in December 2007.
    - The staff assisted the PA in preparation of the 2011–13 Palestinian National Development Plan (PNDP), published in 2011, and has been reviewing implementation through bi-annual reviews.

*Source: Guidance on the Fund’s Engagement with Countries in Fragile Situations (selected excerpts).*

### 12.      The staff has monitored the Plan’s implementation through bi-annual staff visits

### _042512 - 12.      The staff has monitored the Plan’s implementation through bi-annual staff visits

### Monitoring and donor coordination
- The staff monitored the Plan’s implementation through bi-annual staff visits reflected in staff reports.
- Staff reports, together with reports prepared by the World Bank and the UN, are discussed at bi-annual donors’ meetings.
- The Fund and Bank staff reports are taken into consideration by donors in their aid disbursement decisions.
- At the local level, in Jerusalem and Ramallah, Fund staff supported donor aid coordination through co-chairing, with the PA, of a local forum to apprise key donor representatives of developments covered by staff reports.

### Staff engagement with authorities and donors
- During missions staff discusses the economic situation and progress in economic reforms with the PA, Government of Israel officials, and donor representatives.
- Discussions with the Israeli authorities centered on conveying the staff’s analysis of the economic consequences of Israeli measures that have an impact on the WBG’s development and growth.
- The Israeli authorities have considered the Fund’s analysis helpful in informing their decisions aimed at helping the PA’s development efforts.
- In discussions with donors, Fund staff worked to strengthen the donor community’s engagement in the WBG, with a focus on encouraging the provision of adequate and predictable support to the PA budget.

### Appendix IV — Experience with Staff-Monitored Programs (SMP) in fragile situations: Liberia (2006–07)
- Rationale and modality:
  - Given arrears to the Fund, after initial progress on capacity building, an SMP was judged the most appropriate modality after re-engagement with Liberia.
  - The SMP helped improve cooperation with the Fund and good performance helped to rapidly bring back donor support.
- Key timelines and design:
  - SMP put in place immediately after a new government took office in January 2006, covering February to September 2006.
  - The SMP envisaged a balanced cash-based budget (maintained through the SMP and through the subsequent ECF arrangement) and structural measures to strengthen fiscal and monetary management and improve governance.
- Outcomes and donor responses:
  - Staff reported much improved cooperation from the new administration on both policies and payments to the Fund and support from other partners rapidly increased during 2006.
  - IDA approved a pre-arrears clearance grant in the amount of US$30 million in June 2006.
  - Gross donor assistance rose to approximately US$300 million in 2006 (excluding any arrears accumulation).
  - The token monthly payment to the Fund was increased from $50,000 to $60,000.
- Extensions and financing for debt relief:
  - SMP extended to June 2007; de-escalation of remedial measures began after the first review (September 2006).
  - The SMP was extended again to December 2007 while efforts continued to raise debt relief financing.
  - In June 2007, a comprehensive financing package was proposed involving distribution of SCA-1 resources, Liberia-related burden-shared deferred charges adjustments, new cash contributions, including an SDR 45 million commitment from the G-8, to enable an arrears clearance operation and move from the SMP to a Fund arrangement without a RAP.

### Appendix IV — Afghanistan (2004–11)
- Early engagement and SMP:
  - Post-Taliban engagement began in 2002 with intensive cooperation focused on policy advice and TA; first post-2001 Article IV consultation took place in 2003.
  - An SMP was agreed for April 2004 to March 2005 to maintain financial stability and prepare groundwork for a UCT arrangement.
- Implementation and environment:
  - Program implementation under the 2004 SMP was broadly on track despite a difficult security situation, poor infrastructure, a large informal/illicit economy (including the opium sector), and weak institutions and governance structures.
  - Authorities established sound fiscal and monetary policies contributing to economic growth, declining inflation, the build-up of international reserves, a relatively stable exchange rate, and sizable revenue gains.
- Sequencing to longer arrangements:
  - SMP extended twice—first to end-September 2005 and then to end-September 2006—to improve capacity and prepare an interim ANDS.
  - SMP succeeded by a three-year PRGF arrangement in June 2006.
- Major events and fiscal impact:
  - In January 2010, Afghanistan reached the completion point under the enhanced HIPC Initiative, bringing debt relief of $1.6 billion.
  - The collapse of Kabul Bank in September 2010 imposed a large fiscal cost (about 6 percent of 2010 GDP).
- ECF arrangement and program focus:
  - A new three-year ECF arrangement was approved in November 2011 to address near-term problems from Kabul Bank’s collapse and strengthen the banking system.
  - Program aims include raising domestic revenue collection, improving PFM, and moving Afghanistan toward fiscal sustainability ahead of the scheduled departure of foreign troops in 2014 and an expected gradual decline in donor support.
  - The success of the program depends critically on progress in improving governance, safeguarding the rule of law, reducing the role of the illicit sector, and limiting the influence of vested interests.

### Appendix V — Good practices in program design: Sierra Leone and Liberia examples
- Sierra Leone: A well-tailored adjustment program
  - Rationale: uncertainty in external conditions, an underlying balance of payments need, and the role of Fund-supported policies in catalyzing international support.
  - Size and front-loading: PRGF arrangements sized at 120 percent of quota (exceeding the normal 90 percent of quota); disbursements in Sierra Leone’s program were heavily front-loaded.
  - Two-stage approach: Interim PRSP (2001) established a two-stage approach recognizing immediate post-conflict needs and long-term development objectives:
    - First stage (2001–02) linked to the National Recovery Strategy (2002).
    - Second stage (2003–05) further elaborated in the PRSP Status Report (2003) and the full PRSP (2005).
  - DDR program: By October 2001 about 60 percent of an estimated 25,000 RUF fighters had passed through the UN-sponsored DDR process.
    - Annual cost of the DDR at program onset was $21.5 million, of which donors contributed $20 million.
    - Domestic component equivalent to 0.8 percent of recurrent spending or 0.2 percent of GDP.
  - Conditionality and donor collaboration:
    - Number of performance criteria and prior actions under the program was four times and five times, respectively, the average number for PRGF countries as a whole.
    - Coordination with the Bank, EU, Paris Club, and DFID was critical for restoring and sustaining peace and supporting reforms.
- Liberia: Well-tailored structural reforms
  - Initial structural reforms focused on financial oversight and governance to regain donor support, including implementation of the GEMAP agreement.
  - Comprehensive debt relief and macroeconomic stability were set as primary policy objectives, supporting generally good implementation of the SMP from 2006, the PRGF/EFF from 2008, and HIPC triggers.
  - Structural reform delays were attributed primarily to capacity weaknesses rather than lack of political commitment.

### Appendix VI — Good practices in understanding the political context
- Importance:
  - A deeper understanding of the political context in countries in fragile situations is important for improving design of Fund-supported policies, particularly the pace of adjustment and reform, and for judging risks of engagement.
  - Failure to anticipate political and institutional challenges is a chief cause of unsuccessful policy reform processes.
- Collaboration and analysis:
  - Fund staff should collaborate with donors and other IFIs to share information on, and understand, the political economy in fragile situations (subject to confidentiality procedures).
  - Resident representatives should conduct their own evaluation of the political situation and social context where possible.
  - It is legitimate for Management to seek information about the political situation in member countries as an essential element in judging prospects for policy implementation.
- Areas to consider when analyzing drivers of political decisions (drawn from World Bank and DfID guidance):
  - Political process in the country, including distribution of power, interest groups, and incentive structures and how these generate particular policy outcomes.
  - Role of formal institutions (e.g., rule of law, elections) and informal social, political, and cultural norms in shaping political and economic competition.
  - Effect of existing social and cultural groups on access to assets, services, and public goods to better determine sources of growth and social risks bearing on economic policy.
  - Broad social expectations and the capacity of the state that may impact economic policy-making and the capacity to implement policies under Fund-supported programs; studying main fault lines in society (including political ideologies, religion, and cultural beliefs) can aid understanding of political behavior and public policy.
- Outreach:
  - Strengthening the Fund’s outreach is key to improving understanding of Fund involvement in reform processes.
  - Mission chiefs and resident representatives can use the Fund’s communication toolkit and draw on Media Relations at the External Relations’ Department.

*Source: _042512 - 12.      The staff has monitored the Plan’s implementation through bi-annual staff visits*

### APPENDIX VII. GOOD PRACTICES IN DONOR COORDINATION ON REFORMS

### APPENDIX VII. GOOD PRACTICES IN DONOR COORDINATION ON REFORMS

### A. Haiti: Cooperation with Donors — summary of experience and findings
- Coordination with the World Bank has been effective in advancing Haiti’s reform agenda; cooperation with donors has been generally good on structural reforms. Further efforts would be worthwhile to improve coordination on budget support, including for capital spending.
- The Fund’s engagement history in Haiti:
  - Two consecutive SMPs from April 2003 to September 2004 and during April–September 2004.
  - Two consecutive Emergency Post Conflict Assistance arrangements (from October 2004 to September 2005; and during September 2005–2006).
  - Two programs supported by arrangements under the PRGF (October 2006–September 2009), and its successor, the ECF (July 2010–July 2013).
- Donor landscape and coordination imperatives:
  - Donors include international financial and regional institutions and a significant number of bilateral donors from Europe and the Western Hemisphere.
  - Coordination is critical to: (i) ensure timely disbursement of aid and TA provision; (ii) use resources efficiently and avoid cross conditionality and overlaps; (iii) tailor the reforms to fit existing capacity; and (iv) create the conditions for a successful implementation of the program.
  - From the Fund standpoint, cooperation covers three key areas: budget support, the structural reform agenda, and TA provision.

### Budget support — practices, challenges, and metrics
- An ad hoc budget support group (BSG) was established and designed a budget support matrix.
- BSG activities and benefits:
  - The BSG meets as often as possible to take stock of progress under the program, review aid projections, and facilitate disbursement.
  - The existence of the BSG has helped alleviate the volatility of aid disbursement observed in the past, which hindered program execution.
- Remaining coordination needs:
  - Need for more coordination given (i) the various forms of budget support provided in Haiti, including line item support, unrestricted support, and reimbursement of expenditures covered by the government; and (ii) the different budget cycles and constraints of donors.

### Structural reform cooperation — scope and modalities
- Cooperation has been more effective in structural areas:
  - The Fund led dialogue on revenue enhancing measures and tax policy with close coordination with the Bank, the Islamic Development Bank (IDB), the EU, and some bilateral donors.
  - Covered areas: public expenditure management (budget formulation and execution, medium-term expenditure frameworks); accounting procedures; financial sector reform (mainly through the FSAP); the business environment; and poverty analysis.
- Operational coordination mechanisms:
  - Reform measures were discussed and agreed between teams; Bank staff participated in Fund review missions; progress assessments are discussed regularly.
  - Coordination was reflected in annual Progress Reports and updated Joint Staff Assessments Notes.
  - Fund and Bank worked closely with authorities on poverty reduction strategies (2006 and 2010) and preparations for HIPC and MDRI eligibility.
  - At the request of IDB, the Fund provided macro inputs and assessment letters on several occasions to facilitate IDB lending operations.
  - Consultations among World Bank, IDB, and Fund staff continue regularly at headquarters and in the field.

### Technical assistance (TA) — roles and coordination gaps
- The Fund’s TA focus areas:
  - Improve macroeconomic data, enhance tax and revenue administration capacity, and strengthen monetary and foreign exchange frameworks.
  - With EU support, Fund staff assist authorities in reforming accounting procedures and treasury management, and in establishing a macro-fiscal unit at the ministry of economy and finance.
  - Close coordination with World Bank staff in the financial sector; ad-hoc discussions with other donors on public finance TA.
- Coordination gaps and ongoing work:
  - While progress is made, there is room for improving coordination, including establishing a TA matrix that would involve all donors and the authorities. This work is in progress.

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### APPENDIX VIII. EXAMPLE OF A MULTI-DONOR TRUST FUND (MDTF): Afghanistan Reconstruction Trust Fund (ARTF)

### Purpose, objectives, and national impact
- The ARTF is a partnership between the international community and the Afghan government established in 2002 to support the government’s national priority programs and contribute to the Afghanistan National Development Strategy (ANDS) goals.
- The ARTF developed into the main multilateral funding mechanism for the government’s core budget and is positioned to be the key funding source for ANDS implementation.
- Specific objectives:
  - Position the national budget as the key vehicle to align the reconstruction program with national development objectives.
  - Promote transparency and accountability of reconstruction assistance.
  - Reduce the burden on limited government capacity while promoting capacity-building.
  - Enhance donor coordination for financing and policy dialogue.
- National-level impacts:
  - Contribution toward greater coherence of delivery of development assistance in Afghanistan.

### Fiduciary framework, channels, and operational features
- Fiduciary arrangements:
  - The ARTF’s fiduciary framework has contributed to strengthening the government’s PFM systems.
  - Disbursements are based on eligibility criteria agreed with the government in line with the broader fiduciary framework for public expenditures.
- Ways the ARTF contributes to coherence:
  - Channeling resources in line with Afghan priorities—strengthening ownership and accountability.
  - Channeling resources through the Afghan budget—strengthening the budget as the main policy tool.
  - Offering a collective platform for donor funding—reducing transaction costs of dealing with 30 plus donors bilaterally.
  - Offering a collective platform for donor/government dialogue—creating leverage on critical reform points.
  - Offering an efficient channel for funding scale up of national priority programs—considered more effective than individual projects.

### Governance, funding mechanisms, and scale
- Management structure:
  - Managed by a Management Committee (MC) consisting of the World Bank (as the administrator), the IDB, the Asian Development Bank (ADB), and the UN (UNAMA and UNDP).
  - The MC meets regularly in Kabul with the Ministry of Finance as an observer; ARTF Donors meet once a quarter to discuss broader strategy.
- Funding mechanics:
  - Donors contribute into a single account held by the World Bank.
  - The MC decides allocations at monthly meetings; allocations are translated into funds through Grant Agreements between the World Bank and the Government of Afghanistan.
  - Two windows for allocations: the Recurrent Cost Window and the Investment Window.
  - Since early 2002, 30 donors have contributed over $3 billion, making ARTF the largest contributor to the Afghan budget.

### Recurrent Cost Window — role and linkage to macro framework
- Purpose and operation:
  - The Recurrent Cost Window reimburses the government for a certain portion of eligible and non-security related operating expenditure every year.
  - ARTF financing of recurrent budget expenditures is based on the government of Afghanistan’s macroeconomic and budget framework that would be reviewed by the Fund and the World Bank.
  - There is close coordination with bilateral and multilateral donors who also provide budgetary support for recurrent expenditures.
- Rationale:
  - Domestic revenues continue to be insufficient to cover the costs of government; the Recurrent Cost Window ensures basic government functioning including payment of salaries and delivery of services such as healthcare and education.

### Investment Window — scope expansion and strategic shift
- Recent developments:
  - The Investment Window has increased significantly in volume and scope in the last two years due to increased donor contributions.
- Areas supported:
  - Decentralized and national rural development programs (e.g., the National Solidarity Program, the National Rural Access Program), microfinance programs, education sector, capacity building, justice sector reform, power, and urban development (roads, water, and sanitation).
- Strategic planning:
  - A three-year financing strategy was recently developed and agreed by donors and the government to better align ARTF support with longer-term government priorities and to move the ARTF away from annual allocations toward more predictable multiyear financing.

### Donor contribution rules and preferencing
- Contribution timing:
  - Donors generally make annual pledges which are paid in during the Afghan Solar Year (March to March).
- Preferencing system (key rules):
  - A preference is not an earmark; it is a formal recognition by the Administrator of the donor’s preference to allocate a certain portion of a contribution toward a particular project.
  - The ARTF will not accept preferencing in excess of 50 percent of a donor’s contribution in a solar year.
  - This rule is lifted for all donors once sufficient un-preferenced funds have been paid in to cover the Recurrent Cost Window obligation.
  - Geographic preferencing is not accepted by the ARTF.
  - Preferences must be for ongoing, on-budget, national priority programs that have a clear funding gap.

*Source: APPENDIX VII. GOOD PRACTICES IN DONOR COORDINATION ON REFORMS; APPENDIX VIII. EXAMPLE OF A MULTI-DONOR TRUST FUND (MDTF) — content as provided in the supplied PDF chapter.*

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