The Evolving Role of the IMF and the Reduction of Poverty

IMF News, February 13, 2003

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Published: February 13, 2003

Introduction and context

Speaking notes prepared for World Council of Churches — World Bank — IMF Meeting, Geneva, February 13-14, 2003 by Graham Hacche, Deputy Director, External Relations Department, IMF.
Purpose: explain the evolution of IMF work, particularly in relation to poverty reduction, in the context of its statutory purposes and changing global economy.

IMF statutory purposes (Article I) — exact wording preserved

First, to promote international monetary cooperation, exchange rate stability, and orderly exchange arrangements.
Second, to assist in the elimination of exchange restrictions which hamper the growth of world trade.
Third, by facilitating the balanced growth of world trade, to help promote, as primary objectives of economic policy, high levels of employment and real income, as well as economic development.
Fourth, to help member countries with balance of payments problems solve them "without resorting to measures destructive of national or international prosperity", including through the temporary provision by the Fund of financial assistance. The IMF's purpose is to "give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity..."

Changes in the structure of the world economy since Bretton Woods

Forty-four countries represented at the Bretton Woods Conference in July 1944.
Today: 184 member countries virtually covering the globe.
125 of them are developing countries, about 50 being in Africa.
Twenty-nine of our 184 member countries are counted as being "in transition" from central planning.
World trade growth has been roughly twice world output growth, on average, in the post-war period (relative to the inter-war period).
There has been a vast increase in capital flows; they have been a vital source of finance for productive investment and a source of financial and economic instability in some circumstances.

Five lessons about economic policy since Bretton Woods

Lesson 1: Need for a medium-term framework—fiscal discipline and monetary stability—to anchor expectations and plans; shortcomings of relying too much on short-term demand management (1970s and 1980s experience with inflation and stagflation).
Lesson 2: Importance of supply-side and structural policies to support macroeconomic objectives; macro policies must be supported by structural reforms in markets and sectors.
Lesson 3: Increased recognition of economic growth as an objective of IMF operations and advice; emphasis on growth in real per capita incomes that is sustainable and equitable — Michel Camdessus' term "High-Quality Growth".
Lesson 4: Maintaining pegged exchange rates is demanding for countries open to volatile international capital flows; experience has led to more widespread adoption of flexible exchange rate regimes and care in capital account liberalization. IMF Articles allow restrictions on capital flows; liberalization should be done carefully when supporting policies and institutions are in place.
Lesson 5: Importance of national ownership of policy programs, including broad public participation and civil society involvement.

IMF surveillance

Surveillance is the central activity of the IMF and applies to all member countries year-in and year-out.
Forms of surveillance:
- Country surveillance (usually annual formal consultations and other contacts).
- Global surveillance (including global economic projections and policy analysis).
- Regional surveillance.
The Executive Board represents the membership and conducts surveillance; the International Monetary and Financial Committee (IMFC) discusses surveillance usually twice a year.
Recent strengthening of surveillance has included greater attention to exchange rates and financial sector soundness, development of standards and codes of good practice, and promotion of transparency—with crisis prevention a major objective.
Relevance to poverty reduction:
- Financial and economic crises tend to hurt the poor disproportionately—crisis-prevention is pro-poor.
- High inflation hurts the poor—IMF promotes low inflation but also advises easing monetary conditions when appropriate to support sustainable growth (examples include advice to the European Central Bank and the Bank of Japan).

Financial assistance: evolution of lending facilities and conditionality

No industrial country has borrowed from the IMF since the late 1970s.
New facilities introduced to meet needs of developing countries and countries in transition:
- Extended arrangements (introduced in 1974): financing for medium-term economic programs with disbursements generally over 3 years and repayments over 4½ -10 years.
- SAF (Structural Adjustment Facility) and ESAF (Extended Structural Adjustment Facility), created in 1986 and 1987, offered concessional loans to low-income countries at 0.5 percent annual interest.
- ESAF enlarged in 1994; replaced in 1999 by the PRGF (Poverty Reduction and Growth Facility) to indicate poverty reduction as central objective and recognition of growth as essential to achieve it.
- HIPC (Heavily Indebted Poor Countries) Initiative introduced in 1996 and enhanced in 1999 to provide debt reduction.
Financing concessional loans:
- From capital gains on IMF gold holdings (subject to membership limits).
- From contributions and subsidies from member countries (ESAF Trust and member contributions to PRGF).
Conditionality and program design evolution:
- Trust Fund loans: limited conditionality (balance of payments need and commitment to correct problem), no performance criteria.
- SAF: Policy Framework Paper with World Bank; no performance criteria but quantified policy benchmarks.
- ESAF: stronger conditionality, semi-annual disbursements, performance criteria on macroeconomic and structural policies.
- PRGF: emphasizes poverty reduction as central objective and country ownership; programs based on Poverty Reduction Strategy Papers (PRSPs) prepared in a participatory process involving domestic civil society organizations—including the poor—and external development partners. Targets and policy conditions in PRGF programs are drawn from PRSPs but focused on the Fund's core areas and limited to measures with direct and critical relevance to macroeconomic objectives.

Key statistics on PRGF and HIPC (exact figures)

Close to 80 low-income countries are eligible for PRGF assistance.
As of the end of July 2003:
- 39 countries' policy programs were supported by PRGF arrangements.
- Loans outstanding amounting to $7.3 billion.
- Undrawn balances of $3.8 billion.
About 40 countries are eligible for debt relief under the HIPC Initiative.
As of the end of July, 2003:
- HIPC assistance of roughly $2.5 billion had been committed to 28 countries.
- $1.5 billion had been disbursed.
For countries benefiting from HIPC:
- Debt service payments are being reduced by about one half in relation to GDP, exports, and government fiscal revenue.
- Before HIPC eligible countries were on average spending slightly more on debt service than on health and education combined.
- All countries benefiting from HIPC are now spending more on social services than debt service—on average almost four times as much; and all have shown marked increases in the share of health and education in their budgets under recent IMF-supported programs.

Technical assistance

Technical assistance (including training) is the IMF's third major activity, helping countries strengthen policymaking capacity, institutional organization, procedures, and training of officials.
Technical assistance became a formalized IMF function in the mid-1960s and grew through the 1980s.
Early 1990s surge in requests when transition economies shifted to market systems.
Regional distribution has gradually shifted from transition economies to Africa, which now receives more than a quarter of the total.
Technical assistance is provided at no charge except for countries that can afford to reimburse the IMF.

Millennium Development Goals and Monterrey Consensus

The Millennium Development Goals (UN Millennium Declaration, September 2000) aim to achieve a halving of world poverty by 2015, relative to 1990.
The Monterrey Consensus (UN Conference on Financing for Development, Monterrey, March 2002) endorsed a "two-pillar" strategy:
- Pillar 1: responsibility and determination of low-income countries to pursue sound policies and good governance.
- Pillar 2: stronger international support for low-income countries' efforts.
IMF position:
- The Managing Director described the Monterrey Consensus as "our framework for the development partnership" and emphasized IMF contributions to both pillars.
- Advanced economies must do more to meet pledges, including the target for aid of 0.7 percent of donor countries' GNP and improved market access for developing countries' exports and reduced trade-distorting subsidies, particularly in agricultural sectors.

Conclusion — IMF role and poverty reduction

Poverty reduction in low-income countries is one of the IMF's main preoccupations.
Core IMF work—guarding macroeconomic and financial stability, preventing and resolving crises, and promoting durable and equitable growth—is broadly pro-poor.
The IMF will continue to adapt as member country needs evolve and the Fund learns new lessons; the international community will continue to call on the IMF to contribute to poverty reduction within its mandate.

Source: The Evolving Role of the IMF and the Reduction of Poverty by Graham Hacche, Deputy Director, External Relations Department, IMF (Speaking Notes Prepared for World Council of Churches — World Bank — IMF Meeting, Geneva, February 13-14, 2003).