Heartbreak and Hardship—Finding a Way Out for Fragile States

IMF Blog, September 7, 2011

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Author: Dominique Desruelle
Date: September 7, 2011
Context: Countries affected by war, natural disasters, and internal conflict face legacies of weakness in institutions, infrastructure, and public service delivery (examples cited: Iraq, Haiti, Sierra Leone).
Central argument: Helping a country’s economy to work better—the IMF’s core expertise—is a central building block to move beyond fragile situations and achieve better lives for citizens.

A recent review found that the IMF has played an important positive role in fragile states through:
- Programs the IMF supports
- Technical assistance
- Training
These contributions have helped strengthen macroeconomic policies and build institutional capacity.
Acknowledgement that IMF engagement has not always been perfect and that there is “plenty of scope to adapt how we engage” toward “a more graduated, flexible, and longer view approach.”

Priorities and constraints:
- Promoting macroeconomic stability is a top priority.
- Fragile countries face severe capacity constraints, requiring realistic timeframes for policy actions.
- Emphasis on strict prioritization of policy actions.
Incorporating “quick wins”:
- The IMF can strive to incorporate “quick wins” identified by others (examples given: restoration of electricity services, jobs programs for unemployed youth) into sustainable medium-term macroeconomic policies.
Use of IMF facilities:
- Fuller use of the IMF’s Rapid Credit Facility (RCF)—described as a low conditionality, low access facility—could allow more gradual adjustment during critical initial transition stages in low-income countries.
- Subsequent support could be provided through the IMF’s Extended Credit Facility (ECF), “which allow higher financing with tighter conditionality standards.”
- To facilitate this sequencing, adapting some modalities of the RCF, such as financing limits, “could be considered further.”

Long-term financing needs:
- Best served by highly concessional donor resources.
IMF role in catalyzing donor support:
- The IMF could seek to stimulate further support from donors for countries in fragile situations.
- Example mechanism: promote inclusion of budget support windows in multi-donor trust funds (managed by others), with a link to IMF-supported programs or IMF monitoring.

Technical assistance and training are described as “crucial to success” in fragile situations.
The IMF, in partnership with development agencies, is seeking ways to offer more on-site expertise to assist country officials with day-to-day policy implementation.

Fragility is “not the exclusive domain of low income countries.”
Middle-income fragile countries may have higher financial resources and higher technical capacity, but still face complex, risk-laden paths out of fragility.
Proposal: creating an RCF-like facility—limited conditionality, low financing—could be useful to boost early IMF engagement with some fragile middle-income countries and help speed up the international community’s response.

The IMF intends to refine the ideas presented and develop guidance to embed greater flexibility of IMF engagement into operations.
The IMF seeks further discussions with IMF membership, development partners, and civil society.
Public seminar:
- Title: Fostering Engagement with Fragile States
- Date and time: Thursday, September 22, 2011 from 10 a.m. to 11:30 a.m.
- Location: IMF Headquarters in Washington DC
- Note: “Proceedings of the seminar will be available after the event on the IMF’s website.”
- Reference provided to the 2011 Annual Meetings Program of Seminars website: http://www.worldbank.org/pos/.

Source: Heartbreak and Hardship—Finding a Way Out for Fragile States, Dominique Desruelle, September 7, 2011.