Fragile States Need Customized Support to Strengthen Institutions

IMF Blog, September 21, 2023

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Authors: Tobias Adrian, Franck Bousquet, Dominique Desruelle, Vitor Gaspar, Bert Kroese
Published: September 21, 2023

Fragile and conflict-affected states have been among the worst hit by the pandemic, Russia’s war in Ukraine, the increase in energy and food prices, climate change, and intensified political instability.
Each new crisis aggravates underlying fragilities and creates spillovers that can destabilize entire regions.
Conflicts forcibly displaced a record108.4 million people last year, many hosted in neighboring countries where fiscal conditions are already tight and growth prospects are weak.
Fragility and conflict drive fragmentation and can cause reversals in trade, capital flows, and investment.
Supporting fragile states by strengthening their economic and fiscal institutions is described as a global public good.

The 39 fragile and conflict-affected states experienced a large loss in economic growth rates between 2019 and 2023 compared to pre-pandemic projections.
Public finances deteriorated: revenue losses during the pandemic were significant and are not expected to recover in line with increased spending.
Government debt as a share of gross domestic product is down from its pandemic peak, but is now projected to start rising again next year; previously it had been projected to keep declining.
Structural vulnerabilities in fragile states include weak institutions, large informal sectors, and governance challenges.
Instability, poverty, and climate risks exacerbate vulnerabilities (examples: Chad, Guinea Bissau, Burkina Faso, Yemen, Somalia; Pacific island countries highly exposed to natural disasters and climate-related risks).

Boosting tax revenues, controlling and prioritizing government spending, and managing public debt.
Developing well-functioning central banks and ensuring sound financial institutions.
Strengthening governance and anti-corruption laws and institutions, including to curb money laundering and terrorist financing.
Publishing timely and accurate economic statistics.
Developing macroeconomic frameworks and basic tools to inform policy decisions.
Policymakers in fragile states face difficult tradeoffs between taxation, debt, economic growth, and social spending due to limited resources and compounding crises.

The IMF provides financing, economic policy advice, and capacity development (technical assistance and training) to strengthen economic institutions; external financing from donors is critical for this capacity development.
The 2022IMF Strategy for Fragile and Conflict-Affected States centers on tailoring activities to each country, with closer support for authorities and intensified dialogue with partners.
The Fund is stepping up capacity development and expanding its presence in fragile states.
The IMF is deploying more staff in-country and across its network of Regional Capacity Development Centers, which serve as hubs for knowledge, training, and peer-to-peer learning.
Just last year, the IMF placed more experts in fragile states and across these centers in Africa and the Middle East, increasing the number of specialized advisors focused on these countries by 30 percent.

Somalia: A peaceful transition of power occurred despite ongoing insurgency and prevalent food insecurity. The Country Engagement Strategy identified insecurity, poor infrastructure, and lack of skilled labor as impediments to growth. Capacity development focuses on tax policy, revenue administration, and public financial management. Technical assistance is closely integrated with the Extended Credit Facility-supported program, contributing to Somalia’s progress towards full debt relief under the Heavily Indebted Poor Countries Initiative.
Democratic Republic of Congo: Assessing and improving the quality of public investment management is highlighted as essential for strengthening economic management.
Timor Leste and Iraq: Creation of macroeconomic projection tools for a finance ministry (Timor Leste) or central bank (Iraq) are cited as essential steps.
Ukraine: Russia’s invasion resulted in a 30 percent contraction of GDP last year and placed significant pressures on staff and institutions. The IMF provided technical assistance to the central bank to support continued operations and is assisting with the development of anti-money laundering legislation in connection with ongoing financing.

Understanding the specific context of each fragile or conflict-affected state is crucial for designing appropriate reforms and providing technical assistance.
Fragile states need practical and sustained in-country support, recognizing that progress is often in fits and starts.
For impact to last, policymakers need assistance as they adjust to new and recurrent challenges; training is often required where staff turnover is high.
Countries experiencing armed conflict need capacity building focused on preserving state institutions.
The IMF strategy emphasizes: tailoring reforms to country context, increasing resources on the ground to support and sustain reforms, and working closely with other partners. External donors are crucial to providing this assistance.
Establishing and strengthening effective national institutions, or state-building, requires leadership, patience, and humility.

Source: Fragile States Need Customized Support to Strengthen Institutions (IMF blog, September 21, 2023).