Growing Together The IMF and African Low-Income Countries

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• Authors: Atish Ghosh, Anna Postelnyak
• Published: February 4, 2022

Slow evolution

• At inception in 1946, the IMF intended to provide only short-term balance of payment support, regardless of a member’s stage of economic development.
• Ethiopia’s first request to draw US$900,000 (15 percent of quota) was refused because its financing needs were judged neither immediate nor temporary.
• The IMF added an African Department in 1961 as newly independent African countries joined.
• Facilities introduced recognizing diverse needs:
  • Compensatory Financing Facility (1963)
  • Buffer Stock Financing Facility (1969)
  • Extended Fund Facility (EFF) established in 1974 after the 1973-74 Oil Crisis
• Concessional lending began with interest payment relief under the general Oil Facility and the Trust Fund launched in 1976; because the Articles of Agreement prohibit unequal treatment, concessional financing must be provided using donor trust funds, not IMF quota resources.
• Early IMF view: directly tackling poverty or fostering growth was outside the IMF’s mandate; focus remained on helping countries weather adverse external shocks.

A debt crisis

• Late 1970s borrowing by developing countries to pay for oil imports and investment projects led to repayment difficulties by early 1980s amid global recession, collapsing commodity prices, and rising interest rates.
• Trust Fund resource depletion prompted IMF reevaluation of lending strategy to poor countries.
• IMF diagnosis emphasized poor policies, unproductive borrowing, and incomplete program implementation; response included greater emphasis on supply-side reforms and structural conditionality.
• New facilities responding to these lessons:
  • Structural Adjustment Facility (1986)
  • Enhanced Structural Adjustment Facility (1987)
• Recognition in the 1980s that reform impacts on the poor and related social unrest needed to be addressed led to:
  • Standard inclusion of poverty analysis in Policy Framework Papers
  • SAF- and ESAF-supported programs including targeted compensatory measures for vulnerable populations
  • Growing pledges to strengthen social spending, especially on health and education

Working toward a solution

• 1990s experience showed conditionality alone was insufficient without strong country ownership.
• ESAF restructured in 1999 as the Poverty Reduction and Growth Facility (PRGF) with requirement that countries prepare Poverty Reduction Strategy Papers (PRSPs) with civil society and development partner participation; PRSPs formed the basis of PRGF measures.
• Debt relief developments:
  • 1988 “Toronto terms” led the Paris Club to offer reschedulings that reduced present value of debt.
  • 1996 Heavily Indebted Poor Country (HIPC) Initiative linked multiyear track records of good policies to grant eligibility alongside concessional loans via ESAF.
  • 1999 enhanced HIPC lowered the threshold for unsustainable debt and accelerated relief; within three years enhanced HIPC delivered almost US$1 billion in debt relief to 25 countries.
  • Multilateral Debt Relief Initiative cancelled all debt owed by eligible countries to the IMF, the World Bank, and the African Development Fund.
  • On January 6, 2006, the IMF delivered US$3.4 billion of debt relief to 19 countries.
• By the turn of the century, IMF engagement with low-income countries centered on three pillars:
  • Better funded and designed programs
  • Debt relief to facilitate poverty reduction efforts
  • Technical assistance
• Under Managing Director Michel Camdessus the focus of technical assistance shifted to African countries; by the early 2000s they were receiving more than one-quarter of the IMF’s technical assistance.
• The IMF opened the first two African Regional Technical Assistance Centers as part of the Africa Capacity Building Initiative in the early 2000s.

Assistance amid the pandemic

• Since March 2020, the IMF provided exceptional levels of emergency financing facilitated by temporary increases in access limits.
• 2020 IMF financial assistance to low-income countries surged to $13 billion, compared to an average of $2 billion a year before the pandemic.
• 53 out of 69 eligible countries received financial support in 2020, with more than half in sub-Saharan Africa.
• July 2021 Executive Board actions:
  • Approved a further 45 percent increase in normal concessional financing access limits under the PRGT
  • Eliminated hard limits for the poorest countries if their programs meet requirements for above-normal access and stronger safeguards to ensure debt sustainability
• The IMF modified the Catastrophe Containment and Relief Trust to allow immediate debt service relief for low-income countries affected by pandemics; 29 countries benefited from this relief.

Return to growth

• By 2019, 36 out of 39 eligible countries had received debt relief totaling some $125 billion, which helped increase social spending, especially on health and education.
• Reforms, debt relief, and a more benign external environment helped rekindle growth in the latter half of the 1990s and accelerate through most of the 2000s, narrowing the income gap with advanced economies.
• Program monitoring without loans introduced in 2005 via the Policy Support Instrument for countries that could benefit from external monitoring and the IMF’s “seal of approval.”
• In 2010 the PRGF was renamed the Poverty Reduction Growth Trust and split into three concessional facilities:
  • Extended Credit Facility (protracted balance of payments needs)
  • Standby Credit Facility (short-term and precautionary balance of payments needs)
  • Rapid Credit Facility (low-conditionality financing for natural disasters or emergencies)
• Post-Catastrophe Debt Relief Trust established in 2010 (renamed Catastrophe Containment and Relief Trust in 2015) enabled IMF participation in international debt relief for poor countries hit by natural disasters and epidemics; early 2015 saw speedy assistance to Guinea, Liberia, and Sierra Leone.
• 2005 introduction of the Debt Sustainability Framework for low-income countries aimed to guide borrowing decisions amid risks of excessive borrowing; several countries nonetheless faced elevated debt levels when commodity prices collapsed in 2015, weakening fiscal health on the eve of the COVID-19 pandemic.

Atish Rex Ghosh and Anna Postelnyak, “Growing Together The IMF and African Low-Income Countries,” F&D Special Feature: Africa at a Crossroads: Learning from the Past and Looking to the Future, December 2021.