Rice harvest in Kendu Bay, Kenya. Project applied economic model to Kenya covering food price role in inflation (photo: Ariadne van Zandbergen/Alamy)
LOW-INCOME COUNTRIES
The three-year project aims to raise the profile of low–income country research, drawing on collaboration between IMF staff members and project-funded researchers to produce high-quality research papers. Additional goals are to expand the network of low–income country researchers and to influence the uptake or traction of the research outputs by high-level policymakers in low–income countries and in the IMF.
With the external environment as uncertain as ever, and daunting developmental goals unmet, low-income countries are still facing a whirlwind of macroeconomic challenges. The IMF’s joint project with the United Kingdom’s DFID therefore sets out to study six broad, macroeconomic policy issues critical for low–income country policymakers: monetary and exchange rate policies; public investment, growth, and debt sustainability; natural resource wealth management; macro policies and income distribution; financial deepening; and growth through diversification.
To further maximize the policy impact of the project’s research outputs, the collaboration focuses on developing practical frameworks and tools that are accessible to country authorities, IMF staff members, and low–income country researchers. Direct cooperation with clients is also a crucial component of the project, and team members have traveled to Kenya, Uganda, Ghana, and Rwanda, among other countries, to provide training, hold seminars, and collaborate on new research.
Feed into policy
The project team wants to ensure that research findings and analytic frameworks are feeding into policy discussions, getting traction, and being disseminated to a wide audience. Accordingly, in addition to direct collaboration with IMF country teams and authorities, their work has included presentations at high-level policy conferences, commissioned papers, project-financed conferences, and a quarterly e-newsletter for a broad network of low-income country researchers and policymakers.
The project has also brought much-needed attention to the importance of low–income country research at the Fund. “The IMF-DFID project is pushing the frontier in producing new research in areas that are high on the policy agenda of the Fund’s low-income country members,” said IMF Deputy Managing Director Min Zhu. “I am hoping that these analytic frameworks and tools will further strengthen our policy dialogue in these economies to support well-tailored macroeconomic policy frameworks and sustainable economic development.”
IMF African Department Director Antoinette Sayeh stated: “Given the exigencies of the global financial crisis and the need to focus the Fund’s energies on systemically important countries, it is not surprising that research on low–income countries has not had the priority that we might have desired. The DFID-financed project goes a substantial way to addressing this gap.”
The research project team has worked with staff in the IMF African Department, and their joint effort on monetary policy has led to the development of a forecasting and policy analysis system designed specifically for sub-Saharan African countries.
Inflation policy
Countries in this region are modernizing their monetary policy frameworks; that is, the central banks are moving away from strict money targeting policies and are instead incorporating more forward-looking features. Central banks must understand why inflation is potentially deviating from the target and what policy decisions may be necessary to bring the inflation forecast back in line.
The forecasting and policy analysis system developed under this project is essential in formulating and guiding central bank policy on inflation: among other features, the model incorporates an explicit role for food prices, which have been subject to external shocks in recent years. The model has been applied to Kenya, and the team will continue to work with staff from the central banks of Kenya, Uganda, Rwanda, and others on the forecasting and policy analysis system.
Other ongoing monetary and exchange rate policy research focuses on the role of the financial system in transmitting external shocks; the real determinants of food price inflation; and the role of managed floats and exchange rate interventions in monetary policy regimes.
Sustainable new debt
The project team developed an analytically grounded framework for understanding the links between public investment, growth, and sustainable debt to complement the widely used World Bank and IMF debt sustainability framework. This work is particularly timely, since—given low public debt levels—many countries have scaled up borrowing, including on nonconcessional terms, to finance ambitious infrastructure projects that address growth-constraining infrastructure gaps. For resource-rich countries, the framework is also extended to allow scaling up public investment financed by natural resource revenues and borrowing.
It is critical to ensure that the rapid accumulation of new debt in some of these countries—especially the increasing reliance on more expensive domestic and external commercial debt—is sustainable and does not lead to a new debt crisis.
The project’s papers show that an increase in infrastructure investment can produce large benefits for the real economy in the long run because of output expansion and revenue gains, but that these positive results are contingent on the economy’s structural conditions, such as the efficiency of investment, return to public capital, and capacity to collect revenue. This model has been widely used by IMF staff to enrich their analyses of public investment/growth linkages in assessing debt sustainability and has been useful in the policy dialogue with authorities in several countries, including Togo, Burkina Faso, and Cape Verde.
Financial deepening
Promoting well-managed financial deepening in low–income countries can enhance resilience and capacity to cope with shocks, improve macroeconomic policy effectiveness, and support solid and durable inclusive growth. The project team has focused on developing a new IMF approach to financial sector surveillance in low–income countries.
The research provides frameworks for analyzing policy and institutional constraints to sustainable financial deepening, accounting for countries structural characteristics, while also specifying the linkages between financial deepening and macroeconomic stability. The frameworks have been rolled out in several pilot country applications including in Benin, Senegal, and Ghana, where the findings are discussed with the authorities and featured in country surveillance reports.
â– All papers arising from the IMF-DFID collaboration project are freely available both through DFID’s research portal and a dedicated project website maintained by the IMF.
