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Transcript of a Conference Call with Civil Society Organizations (CSOs) on the IMF Low-Income Countries (LIC) Facilities Review
May 15, 2009
Ms. Bisping: Hello, welcome, everyone. This is Jenny Bisping from the External Relations Department. I'm joined by Christian Mumssen and Stefania Fabrizio from the Low-Income Country Division of the IMF’s Strategy, Policy and Review Department. I think some of you have met Christian before. You know the purpose of the conference call, which is to get input from you on the review of the Fund’s facilities and financing framework for low-income countries.
Some of you participated in a conference call in January during the first stage of this review in which Christian briefed you on the process. At the time we shared a background note with you. This first stage was completed on March 20th, with a board meeting on the direction of the reform. We had another conference call with some of you after the board meeting on March 25th.
At this stage we would like to hear your recommendations and suggestions on the review. We sent you some questions to guide the discussion and the goal is to get your comments. I don't think we will respond to all your comments unless you ask us specifically to do so or if you have any questions.
Christian will give a short overview, what the review is looking at and what he would like to hear from you, then we'll take your comments and questions. We're recording this call and will make a transcript available afterwards.
I'll turn it over to Christian at this point.
Mr. Mumssen Okay, thank you so much for your time this morning, afternoon, or evening, whatever time it may be. My name is Christian Mumssen, I'm the Division Chief in the Low-Income Country Division in the Strategy, Policy and Review Department of the IMF. The purpose of the conference call today is to get your input into the review of the Fund’s facilities and financing framework for low-income countries.
We've had a chance to talk about it two or three months ago when we did the first stage of the review, which was essentially a consulting phase where we brought broad strategies and the framework paper to our Board of Executive Directors. This Board meeting took place on March 20th and the Board gave us the strategic direction needed to come up with a concrete reform proposal. And that's what we're putting together right at this moment. The purpose of this call is to exchange views with you about what you think are some of the critical elements.
I apologize in advance if some of what I say now you've heard before. Let me very briefly give you the background of why we're doing what we're doing. The Fund has been changing its architecture of lending facilities across all types of programs since before the global crisis, but of course it is now even more timely in the context of the global crisis.
We have essentially come up with an analysis that shows that our main lending facilities, especially the Poverty Reduction and Growth Facility (PRGF), has in been an appropriate instrument in terms of the financial design and the fact that it is based on Poverty Reduction Strategy Papers (PRSPs). Access limits, norms, semi-annual reviews, and all of these facility design features seemed to have worked reasonably well in the past, but in the last few years things have changed. And one thing that has changed is that many low-income countries have experienced a period of strong real GDP growth, strong export growth, and strong growth in foreign-direct investment and remittances, which is very good. But because countries have integrated themselves much more into the global economy they have also become more exposed to global volatility. As you know, we saw that already with the food and fuel price crisis, which was a global phenomenon and hit poor countries particularly hard.
And now with the global financial crisis, we're also estimating that low-income countries are very much affected, and of course there is a risk that they might actually take longer to emerge from the aftermath of the crisis. So, greater exposure to global volatility is one important change.
The other change we noticed is that in recent years low-income countries have become much more diverse than in the past. So you now have some countries that have made so much progress that they're really somewhere in between a developing country and an emerging market economy.
On the other hand, you have countries that have emerged from conflict or that are still in conflict and that have extremely low capacity and a number of geographical challenges. We have a spectrum that involves a very diverse set of countries. At the moment, we have 78 countries that are eligible for our concessional financing. That includes countries at both ends of the spectrum.
So the sense was that while the way the PRGF was designed was successful, what countries need right now is somewhat different. Some countries certainly are still in the process of a medium- to longer-term reform process where the Fund’s main role is to support their macroeconomic policies to provide relatively limited amounts of financing and to have a close policy dialogue. But there are other countries where the situation is somewhat different, for instance where there may not have been a Fund-supported program in place for a number of years or there may have been a Policy Support Instrument (PSI) in place,—which is the IMF’s non-financing program—and now some of these countries have financing needs related to the crisis. There have been also a number of cases where countries’ own macroeconomic policies have led to certain imbalances. In sum, we have an array of significant financing needs right now and some of these countries are not necessarily looking to return to a PRGF.
We're now looking at a way to meet the needs of these countries, as well as some of the fragile states where we in the past had difficulties to have an appropriate facility. Essentially, what the Board decided was that we should pursue it as a three pillar approach.
The first pillar would be a type of “reformed” PRGF. I say reformed without suggesting that there would be major changes, but reformed in the sense that we would look at the PRGF and see if there are some aspects in the design that could be improved.
The second pillar would be a short-term facility that would be particularly appropriate for some of the more advanced countries that are now hit by the crisis. This second facility would essentially be a more flexible Exogenous Shocks Facility (ESF) that where more members would be eligible, because currently the ESF is quite narrowly defined and in some cases, we have trouble using it for some countries with short-term financing needs.
And then finally, we will have a third pillar, which is a type of emergency facility that is supposed to be quite flexible in meeting needs that are currently covered by various facilities to address exogenous shocks, natural disasters, post-conflict, etc. The idea would be to streamline that into a simple and flexible facility with very limited or in some cases no conditionality, relatively low access, and based on outright disbursements.
Those are the three pillars that the Board decided on and now we're in the process of putting meat on these three pillars.
This is where I'd like to stop right now and turn back to you and ask your views about what aspects are important for a financial facility? What should be the length of the program, the amount of financing, the terms of financing, the design of the conditionality (just to clarify, this is not about whether we should have loose or tight fiscal targets, it's about how we measure progress—the design of conditionality)? Then to what extent, for example, should the amount of financing and conditionality, etc., differ between countries? I would just like to hear from you, if you were to give us advice on how to specify the design of these three facilities, what are some of the principles that we should keep in mind?
Ms. Bisping: Alright, who wants to go first?
Question: This is Peter from Bretton Woods Project. Maybe I should go first, because I don't want to answer Christian's question. I want to take a step back: the support approach, I think, is difficult because it seemed to want to match the low-income country facilities to the facilities available under the general resources account, but it left out a big gap, which is the newly created Flexible Credit Line. There is no proposal to make a matching facility for low-income countries on concessional terms at the IMF. I think that's a key gap that needs to be filled.
The FCL is a new program that just was launched and now has new takers and it seems to be well-regarded and accepted and based in the Funds financing facilities. I would urge when you go back to the Board, that you design or propose to design a facility similar to on the FCL that also has similar elements for the low-income countries.
Ms. Bisping: Alright, thank you. Anybody else?
Question: Yes, it's Joseph from Nigeria. I appreciate what has been done, the new direction they're obviously thinking, but I have one or two things to say: First can the IMF consider project based funding? That's one area.
Also, can IMF staff engage with civil society groups in countries, so that they can walk side-by-side with the government. Even when they give them money, as soon as they decide, civil society can be part of the monitoring how the money is used, not just government officials. The IMF should and can look at enableding civil society to walk with the government of countries that take money from the IMF. And also to focus on a project based lending to countries.
Ms. Bisping: Okay, thank you, Joseph.
Question: Jo Marie Griesgraber.
Ms. Bisping: Jo Marie, go ahead.
Question: I'd like to support what Peter has said about a Flexible Credit Line that is highly concessionary. Overall, I'd like to address the issue of the amount of money going to low-income countries. These countries work very hard to collaborate with the IMF recommendations, participating in the global economy, and now because they've succeeded in getting in the global economy, now they're especially vulnerable. So that's really at least a Catch-22, as the IMF needs to maybe re-assess what it does with low-income countries. Is it best for them to be so exposed to and integrated into the global economy? That would be one of the questions on conditions for an internal assessment.
I understand that currently in your emergency facility, I think it's the third pillar, countries can get, I believe, it is 25%, of their quota in a single disbursement. I'm sorry, when you give $10.00 and get one-fourth of $10.00 back for your emergency, that's nothing. There really has to be much more money immediately available and. the money has to be dispersed front-loaded in an emergency case. 25% is inadequate.
Similarly, the step that was taken recently that enabled countries to double their borrowing from the Fund, that sounds good until you realize that Mexico had ten times available to it and Mexico doesn't need money immediately and that's why it gets ten times its quota. The amount of money going to low-income countries is just not appropriate for the size of the problem. I think that's the most obvious issue.
The other point I wanted to pick up is what Joseph of Nigeria mentioned that how does the Fund track where the money goes? The World Bank is involved in the Stolen Asset Recovery (StAR) Initiative. What does the Fund do in terms of tracking with money leaving the country? The whole illicit finance question. I think that's a very serious question and I don't know the answer to it, but it certainly is extremely important as the global community is asking questions about tax havens and bank secrecy. What is happening when the Fund money goes into a country, who tracks that?
Ms. Bisping: Who wants to go next?
Question: Peter Bujari from Tanzania. I want to also add a few points on the area of the discussion on the three pillars. I begin by telling you that we are not comfortable with the three pillars that are now being done by IMF. Because when you give more loans to us, as we're already enduring loans that take 10% of the national value to debt repayment that is farther telling us that why we're waiting to be spending more than 15% or 20% of the value covering to date.
I think if we have to do things differently and help low-income countries, we'd want to think of different models of operations and think of how we can create a pillar that looks into the cancellation of the debt by providing grants, rather than providing money that is going to be repaid in another three or five years.
As we speak now, the Tanzanian government has announced a 25% budget cut on all the spending. Now, this is very serious and it is happening after the country has received the money from the IMF just recently. It doesn't tell us that the facilities are helping the countries to cope, because their money is going to be used to balance the external balance of payment.
I think if we have to really help low-income countries, we have to really consider how are high-income countries doing that are economically similar, and then say, how do we help countries in the low-income area, not through more new debt than we currently have? That is point number one.
Point number two, on the governance issue, I think I agree with Joseph. How the consultations are done when the IMF comes into the country talking to ministers or financing a loan and making decisions is very inappropriate. In particular, because whenever a loan that is being taken it is going to be passed from one government to the other and sometimes it may also be passed from one generation to the other. It is very important to ensure different constituencies participating in making decisions of how the money should be spent and how best it's currently been spending. How can we be tracking to ensure that the value of money is obtained? So those are two points I'd like to make as of now.
Ms. Bisping: Thank you, Peter. Who wants to go next?
Question: Hello, it's Marita. Okay, some points, and some questions. First, I know that you are, Jenny, but I'm not sure that everybody else is aware that we've done this study on the PSI. One of the conclusions that came out of that study was that there was actually not a lot of signaling taking place, because of the PSI. We also overheard the last time around when we did the seminars at the Spring Meeting that there was the intention in the program and in the reforms to start using the PSI much more in terms of the financial crisis. And given that, our research has found that there are questions around whether the PSI is the most appropriate instrument in terms of actually delivering on what it was supposed to be delivering.
We would actually say, don't do that. It sort of tends to create an incentive, which is where countries might decide to go for a PSI to get easy access to the ESF. The PSI as such doesn't actually warrant that. So that would be the first one.
The second point is also some of the access limits that are foreseen and I'm not a hundred percent sure, I looked through the document and I couldn't actually find this, but we would say that access limits for the ESF and PRGF probably need to be the same or at least really very similar. Why? Simply because otherwise countries would have an incentive to go for a PRGF. While actually in times of crisis, the PRGF is meant to be for longer term macroeconomic stability, but if they can get more money out of the PRGF they might actually go for that specific option.
In terms of some of the points that have been raised earlier, also from our side, the point that was raised by Peter in terms of what could potentially a similar FCL for low-income countries look like? It doesn't seem to be part of the proposals that is currently on the table. We definitely want to see more work on that.
Then probably some questions in terms of the access limits and in that sense also echoing what Jo Marie already said in terms of the need due to the financial crisis versus the actual access limit. Is anything more foreseen than the recent decision to double access limits? Is there going to be additional proposals in the low-income country review or is the decision that has been made last month efficient and does it stay there?
Another question in terms of the increased concessionality. When I read through the document I found the discussion somewhat confusing and that it's not really clear, what is being advised in terms of increased concessionality or not. At times the document seems to indicatethat you'll need more concessionality, but at other times the document seems to say that it's not necessary and it's not going to deliver that much. So from my end, I would appreciate a little bit more clarification on what exactly is being proposed.
And then a final question also is in terms of the precautionary instrument that is being proposed. When I was reading through the Board document where it says that, some were in favor, but not all were in favor. Would it be possible to elaborate a little bit on the arguments that were being used both ways in terms of the pros and the cons of a precautionary instrument for LICs.
Ms. Bisping: Okay, thanks, Marita. Maybe we'll have Christian answer those questions, because that can clarify some things for the full discussion, and maybe h e can respond on some of the other points if you think it makes sense at this point.
Mr. Mumssen: Okay. Thanks, Jenny, and thanks for your very, very good comments. Let me start with the FCL, which is a new facility designed for countries with a very strong set of policies and just clarify that it is actually not restricted to one particular set of countries. So it is available to all 185 IMF members. I suppose your question is if we could have something like that on concessional terms? And that's a very good question and we have in fact been thinking about this and let me just give you a couple of thoughts the way we are thinking now about the architecture for low-income countries.
The issue really is, why is the FCL attractive? It is because effectively it's expected there is no need, but if there is a need you have rapid access to financing without jumping through a lot hoops and without agreeing on monthly and quarterly program targets. It can be very appropriate in times of crisis particularly and it's really a crisis prevention instrument.
For low-income countries that's why we first of all have been thinking about a precautionary instrument; but secondly, we have also been thinking about how perhaps to structure the emergency facility so that it has some similar features. So my point there would be that we're trying to capture some of the attractive features—flexibility, rapid access, and the absence of predefined semi-annual forward-looking targets. The absence of a fully formulated program is sometimes appropriate, in particular when a country has been doing okay and then is hit by a shock. This is the way we're thinking about the emergency type facility. Again, to clarify the FCL, it's not restricted to any particular set of numbers, but it is true that as it is designed we do not have the capacity to subsidize it.
Another very good question relates to what we're doing on access. Access, just to be clear what that means, these are essentially our policies about how much financial assistance we can provide to a particular country based on the quota of this particular country. Marita or Jo Marie, both of you raised this point and it's quite correct. We doubled access limits and we doubled access norms, so currently those rules are in place, twice the size of financial assistance that we had available in the past.
And the question is how would we now treat this going forward and here we actually are thinking about exactly what Marita mentioned about this issue, about the ESF and the PRGF and access policies, in relation to each other. Because it is quite important that we do not create an incentive to use the wrong facility just because the access limits are not set at the correct level. So we're looking at making access rules consistent across all facilities and it is part of one of the concrete design features we need finalized before we can go to the Board next time.
On concessionality raised also by Marita and this is again a very good question: Let me just clarify what was in the paper that was really trying to set out why you can see this issue from two sides. On the one hand, of course, low-income countries have low income. They have in general somewhat lower capacities. So in case of shocks or crisis, they might be longer lasting. Of course, the capacity to handle debt is lower than in richer countries. So that speaks in favor of higher concessionality.
However, I would say that also there is the counter argument, and the counter argument in particular is apparent now in the time of crisis. What is really the price of concessionality? The price of concessionality is less financing, that's the bottom line. Because the IMF—despite what some person might think because of this new SDR allocation—cannot print money and donor countries cannot print money. There is essentially at any given point in time a fixed pot of money to subsidize operations in low-income countries. We do support a bigger pot, especially at the time of crisis. We have been in the forefront of advocating that the previous aid commitments made are honored and even that donors step up their assistance. At the end of the day, the reality is that the scope for increasing the amount of subsidy resources is very limited.
Here's the argument: If you, let's say, have subsidy resources of a hundred, you can do two things with this; you can either give this one hundred to one country to plug it's budget gap or you can give a concessional loan to four countries. So each one of them would get one hundred as a concessional loan, because you need the one hundred to finance four hundred of concessional lending.
At a time of crisis, what is often needed is liquidity and finance. We have a very different role from donors and from the World Bank—our loans are actually very small. The amount of subsidy resources we have is very limited and the total amount of financing that we provide is only about 2% of the gross financing needs of low-income countries.
And so what it means is that by providing loans, which are subsidized, we can leverage the amount of available subsidy resources to plug the various gaps in times of high need of particular countries. Why is this important? It's important because it limits the amount of adjustment, it limits the amount of expenditure cuts, import compression, etc. The choice is really that in times of high pressure—if you think about grants versus concessional loans—it's quite clear that our role is primarily in helping countries adjust to sudden financing needs, which change over time and between countries. Concessional lending is the right way to go.
I would say, however, that it's not just one form of concessional lending. There's more concessional lending and less concessional lending, and that's certainly something that we're looking at. The PRGF terms are essentially half a percent interest, a five-and-a-half-year grace period, and ten-year repayment period. This has been a reasonably good balance. We discussed in the papers that unfortunately for our natural disaster and conflict assistance we cannot use these terms. We're using the GRA terms, which is only a grace period of three years and repayment within five years, therefore much less concessional lending. One of the proposals, which we're quite certain we will ultimately be able to move toward, is to make this emergency type of assistance more concessional—at least as concessional as the current PRGF/ESF terms.
There was a question on the amount of financing. Here I fully agree that right now it would be desirable to have more financing available than there currently is for low-income countries. Again, part of the problem is that from some institutions these are either grants or highly concessional loans, so subsidy resources are needed and again the total amount of subsidy resources are fixed. They can only be raised through direct spending of donors’ budgets. I fully agree that in comparison to an emerging market, our financing to low-income countries is extremely limited. You could, of course, say that's a reflection that the emerging markets have much larger capital account exposure, and there is much more money that is flowing in and out. But I don't disagree with your basic claim that the amount of financing is very small.
In fact we're right now in the process in the IMF to identify what would be the basis of our subsidy resources and we're trying to find various sources of financing to ensure that we can meet the demand that we foresee and we foresee very substantial demand for our low-income countries financing programs. In the near term, we expect at least, I think $3 billion in 2009, $3 billion in 2010, and also the medium-term lending we expect to be higher than it was in the past. Again, by comparison with the World Bank, etc., these are not very large amounts, because the IMF subsidy resources are extremely limited.
Let me very briefly say something about the IMF’s role on missions and the involvement of CSOs. Now, this is actually something that's quite close to my heart, because I used to lead missions myself to African countries. I do think that in a number of our missions, we do engage quite extensively actually with civil society organizations, unions, parliamentarians, academics, etc. This may differ from country-to-country-case, but in principle—and I think we have been making a lot of progress in this direction—we're definitely doing much more than we might have done perhaps 20 years ago.
The other innovation over the last ten years as you know are the Poverty Reduction Strategy Paper (PRSP)-based programs. While initially there was perhaps some cynicism about these documents, I do not think that these are meaningless pieces of paper. I think these are actually strategies that are often taken extremely seriously and take sometimes years to prepare with a lot of consultation and our PRGF lending is based essentially on these medium-term strategies.
I think one more question I wanted to take in relation to project-based lending. This also is a very good question and is related to governance issues and where the money goes. Again, the IMF is not a traditional donor and our role is primarily to provide balance of payments support to boost the reserves of central banks. We do have a system in place, which is called a safeguards assessment. And this we do routinely in all of our program countries. So each central bank undergoes a safeguards assessment. In that sense, we have safeguards in place to assure us that the money is not being wasted. Of course central banks then use this money either to boost their reserves or to increase liquidity in the economy, possibly to buy government treasury bills. And then of course it's also important to consider the side of the ministry of finance. As you know we have in-depth discussions in our missions on fiscal policies, including on spending. And here, I just wanted to point out that I do not think you are correct about the 25% cut in Tanzania. My information there is that actually spending levels are being maintained. So I think there might be some miscommunication on this issue.
And more generally I wanted to point out that during this global crisis in our programs in Africa, I think, in over 80% of cases we have increases in the fiscal deficits, which make sense during this global crisis. We have been advocating this idea of fiscal stimulus for a while and many countries’ spending has actually increasing during this period. We're very mindful of the fact that at the time of an economic downturn you would ideally want to avoid sharp spending cuts. That's why it's important to mobilize sufficient financing during crisis.
So let me stop there and give the call back to others who haven't had a chance yet.
Question: This is Peter from Tanzania. What I said is what is happening on the ground and it is wrong to say that spending levels have been maintained. One quick resource I'll give you if you want to read is the report of the World Bank that was issued in March. On page 46, it says that the countries are cutting 25%. In particular, they're talking about HIV/AIDS, but they aimed this amount. [Inaudible] But the statement is that spending is going to be cut by 25% and you know that sector has been struggling to have more money to spend and provide these services. It is true and if you do not believe at least go to the World Bank report and you'll get that information. Understanding these problems from the ground, export has been crazy, people are being laid off,. [Inaudible] Problems that people are facing are very difficult as you can imagine. Thank you.
Ms. Bisping: Thanks, Peter, you know what, I think we will definitely pass that onto our staff working on Tanzania, and I think you might know the Resident Representative/Mission Chief there, David Robinson. So you should maybe have some conversation about that to make sure that we clarify all these issues.
Question: That would be good.
Ms. Bisping: Thanks. Anybody else?
Question: This is Jo Marie again. I've spoken once, but while others are figuring out their questions, I have two basic comments. One is that in light of the need for additional lending, and I understand you can give more countries more money by having it as loans instead of grants, but it does increase the debt ultimately; and therefore, there really has to be a major thought on the part of IMF and others about a sovereign debt problem.
The second point I wanted to raise is that in terms of the vulnerability of those countries that have become more integrated into the market, I think it would be extremely important for the IMF to explore ways to protect the countries from those exogenous shocks, not all countries are at a point where they can really participate in the market. They get buffeted too strongly and the consequences are too dire; and therefore, capital controls and other mechanisms that might not be favorable for integration into the market need to be rolled back. I think that's a thought for your conditionality, you really need to do some dramatic out of the box thinking for those countries that have been so mostly harmed by the exogenous shocks. Thank you.
Question: Hello, Jenny, this is Nuria here.
Ms. Bisping: Hello, Nuria.
Question: Sorry, I wanted to jump in earlier, but actually I had my phone muted and I'm so technically unskilled that I couldn't speak when I wanted to. The good thing is that Jo Marie probably said that would share what I wanted to say, so that saved some of the comments I wanted to make.
The second point I wanted to raise is in terms of the length of the programs, which is very much linked to the type of finance or for what purpose the IMF provides funding to low-income countries. I think that's one of the concerns some of us had for a while is that [inaudible] lending PRGFs or even sequence of different PRGFs, which makes that program as actually a country has actually a program for let's say 60 years or more. [Inaudible] This is probably a type of funding, which doesn't respond to short-term balance of payment type of needs. Which is the type of funding that initially and according to the original mandate, the IMF is designed to provide. This links very well to actually the complaint or the comment that Christian was making in terms of the IMF not having enough money to provide on more concessional terms or having a pot that's small, let's say 2% of all the needs for low-income countries.
Actually these lead to the reflection on some of the funding, which is being channeled on a longer term through the IMF: It's not actually responding to some types of needs, which are more long-term development needs, where actually other institutions would be a better place to go to.
So my question would be more on trying to clarify in the process of the review. What are the purposes that these types of facilities and finance are serving? What would be the best channel to meet these sequences of purposes and not just take all the [inaudible] in that with the IMF and keep on rolling loans for whatever purpose, let's say, without carefully testing [inaudible]?
Ms. Bisping: Okay, thank you. Yes, Marita.
Question: I also had an additional question. There are references to reviewing the debt sustainability framework. My first question is, what is the timeline foreseen for that? But there's actually also a broader question, whether you at the end of the call can give us an idea on the process of how this is being taken forward?
And then a question on the calculations that had been made in terms of the finance needs for low-income countries just to understand the premises or the basic assumptions behind that calculation? Because when you read through the documents you see there's a big need for low-income countries in terms of finance needs. I saw a hundred billion in this document. We had the low-income country facility document, which also had much higher figures and I know that there's a distinction between the $25 billion for the 22 most affected and other countries. The question then is, if the calculation could come to this $6/7 billion, which would actually be required if that is based on the 10% that the IMF would be financing or if it's based on doubling the concessional finance you would get to $6 billion? I'm sort of trying to find out how it relates to the financing need and what type of assumptions have been used. I hope my questions are clear.
Ms. Bisping: Thanks. Do we have anybody else at this point or should we have Christian respond?
Virginia This is Virginia from Nigeria.
Ms. Bisping: Yes, go ahead.
Question: First, Jenny, I wanted to thank you. [Inaudible]
Ms. Bisping: Thank you, thank you. As I said before, the Nigeria-related questions, it's always probably better to address with the Res Rep or I think it's actually the Mission Chief as well, David Nellor, who you might have met. Now let Christian respond to some of these questions.
Question: Can I make one more point before we get Christian's response?
Ms. Bisping: Yes.
Question: I just wanted to come back to Christian, because he talked about how the emergency facilities pillar—or the third pillar that he talked about—would have similar features to the FCL in terms of it being non-restricted, etc., and being quickly dispersing. I wanted to bring him back to the point that Jo Marie made that if Mexico can get ten times of their quota in an FCL, if that's the goal to build that into the emergency facilities pillar, can you please then think about what are the appropriate access limits for the similar type of arrangement? It probably should not be 25% of quota. It needs to be something like ten times of quota if that's what the goal is, is to match the FCL requirements into the third pillar on emergency finance.
Ms. Bisping: Okay, thanks.
Mr. Mumssen: Thank you. Let me actually pass onto my colleague, Stefania Fabrizio, who has been doing some analytical work on the expected financing needs at a global level for the low-income countries, and then I'll come back to the specific path that the IMF might face in closing the financing gap.
Ms. Fabrizio: Hello, everybody. The exercise back in March, showing an aggregate financing need for low-income countries of about $25 billion, was meant to be an illustrative exercise, based on the change in reserves for countries with reserves coverage falling below three months or with a drop of reserve coverage of more than half a month to less than four month. The exercise also reported other figures of financing needs, based on the effects of shocks to balance of payments flows relative to their 2008 values.
Those figures were based on forecasts made back in March. Since then our forecasts have changed and we are in the process of re-assessing the situation and re-calculate the financing needs.
Mr. Mumssen: And then let me just fill in there that the $25 billion was what is needed to keep reserves at an adequate level. There's also this other figure we used in the report, which is a hundred billion. This figure is based on our country teams projection over the medium term how much annually a country needs to finance. A lot of that is actually private finance, for example foreign-direct investment and other such nonofficial assistance-related flows. The IMF share in that hundred billion on average in the past has been a little less than 2% and this is basically simply a reflection of our available concessional resources.
On the other hand, our projections for 2009 and 2010 show a sharp increase in demand for our resources. This is done essentially country-by-country, basically having information from our operations that we foresee a country requesting a program, and this is indeed a projection that is consistent with the doubled level of access limits and norms.
Let me come to the question on, maybe this was an earlier question, what was the debate on the precautionary instrument? Essentially, we're thinking about a precautionary instrument. The one drawback again has to do with the subsidy element and that is if you have a precautionary element at the time you set it up for one country, it ties up grant resources at least on the commitment basis, which means you need to have identified the financing already when you agree on this precautionary arrangement.
And this of course means that if the financing is not needed, there's a certain tradeoff, because you might at the same time have another country with an actual financing need. So that is what speaks against a precautionary instrument. What speaks in favor, of course, is that the precautionary instrument by saying you have, essentially a certain amount of money that's available. Everybody knows how much money that is and you can draw on it whenever a need arises. It can actually possibly prevent a crisis, especially in countries where private sector sentiment might play an important role, and also it would help with speed in cases of very rapid shock.
We will certainly look into the specific spending issues in Tanzania, but like Jenny said, it may be best for you also to talk with the Res Rep.
On this sovereign debt problem that Jo Marie raised, of course, we fully share your concern about sustainability and debt vulnerability. We actually—and that links also to the question that Marita raised on the debt sustainability framework—have a debt sustainability framework that does assess risks of debt vulnerability and right now we're in a situation where the majority of low-income countries either have a low risk of debt distress or just a moderate risk of debt distress.
Those that have a high risk of debt distress or are in debt distress, in virtually all cases they are in the process of moving toward a HIPC completion point and MDRI, with possible chopping up, or possible highly concessional shock treat from Paris Club, etc. But that is not to say that we're complacent on the issue. We're essentially working on it on a continuous basis and certainly when we determine access levels for an individual country, debt sustainability is a key consideration as we set the level of access.
In terms of the length of the program and the terms of the facilities that Nuria raised, I think this is a good question that gives me an opportunity once more to come back to this issue of the role of the IMF versus the role of donors. Let me try to give you a “philosophical” picture of that. You can think of development assistance as being a transfer of resources from one country to another country. The transfer of resources that allows the recipient to invest these resources into social sectors, health education, infrastructure, into those things that are necessary to have long-term growth. The IMF’s role is of course to be supportive of this development agenda, but we have a relatively narrow mandate in the sense that our task is to look at certain macroeconomic aggregates and the sustainability of those aggregates and macroeconomic imbalances. What we do is, rather than transferring resources permanently so that countries invest it. we identify when countries have temporary financing needs. That is in contrast to the World Bank where each country gets an allocation for the next three years and then that's basically the money they will transfer.
We have a much smaller amount of money and we use it whenever large financing gaps arise temporarily and temporary is the key word here. Temporary meaning that for example right now there might be a large financing gap emerging in Tanzania. There's a temporary transfer of liquidity to Tanzania, but this temporary financing gap, if things go well, should go away over the next five to ten years and possibly earlier. This allows a country that then has strong policies and returns to a balanced macroeconomic position to return the money so it can be used for another country that then might have a financing gap. It is efficient in the sense that the liquidity can be moved over time and across countries and that is important since the amount of money is limited. This comes back to the purpose of our facilities, they're really there to provide temporary support and the only issue is that in some cases the time needed for this support is perhaps six months. This is maybe the case when you have the food and fuel price drop. There might be a gap in the budget for a very short time and then the country finds other ways of financing ideally more concessional ways of financing their needs over the medium and longer term.
There are also other countries, where the “temporariness” is quite long. Where there are structural imbalances that result in, for example, large fiscal deficits, a low level of reserves, a high level of debt. In those cases, our facilities like the PRGF are designed to be there for somewhat longer, but even in the case of the PRGF this is intended to be temporary, and actually the evidence, the history, has shown that this actually has in some sense worked. Because if we look at the countries that are paying back loans that have been given to them, these are to a large extent countries that today have lower needs than other countries. In a way it is this notion that in different countries financing gaps arise at different times and that's why our facilities are very much focused on this temporary nature of financing. At the same time, again, since there is some concern about debt vulnerability, although our financing admitted this is very small, it is important to make this financing concessional. So we have longer repayment periods and of course it is a very low interest rate.
On the timing of the debt sustainability framework review, I think this is envisioned basically over the next four to six months and we could if you wish, Jenny could set up something with my colleague who's working on that.
And then Peter, coming back to your question. Let me just clarify, the emergency facility is not intended to be the low-income country FCL. That is really not what I was trying to say. What I meant to underline is that some of the features that make the FCL attractive as an instrument, some of these aspects are included in the emergency facility, for example the absence of ex-post conditionality and also the fact that this money can be available very rapidly. Given that it is highly subsidized, again, there's a limited ability to provide such financing. But in principle I agree with you that access of 25% of quota is low and we'll certainly be looking at the appropriate access levels in this context as well.
Ms. Bisping: Very good. Any more comments from people who haven't spoken or want to add something?
Question: This is Nancy Alexander.
Ms. Bisping: Hello, Nancy.
Question: Hello. I'm sorry, this is Amy with GCE, I just un-muted myself, so if somebody else was going to say something, I'll wait my turn.
Ms. Bisping: Okay. Let's have Nancy and then Amy.
Question: Yes, a couple of really quick points. First of all, in the evaluation that the Independent Evaluation Office (IEO) did of IMF aid to Sub-Saharan Africa. It said that only about 65% of all donors felt that the IMF in its PRGF did not accommodate spending for education, health, and infrastructure. I was wondering if you could address that important survey finding?
And then I also wished to just say that while I appreciate the fact that the PRGF is intended as a relatively short-term facility, IMF data shows that over the last 22 years, four-fifth of low-income countries had PRGFs for 11 years. It's hard to construe that as short-term in nature and similarly it's hard to view the concessionality as real concessionality in the sense that in 1987 there was a 48% grant element in IMF assistance., whereas today there's a 28% grant element. I realize that's because of interest rate changes and not a policy of the IMF, but nevertheless, it does leave the concessionality element really quite low.
Ms. Bisping: Thank you. Amy?
Question: Yes, hello. I'm always specifically concerned about exactly the other piece that was surfaced in the IEO 2007 report. The diversion of aid to build up reserves or to pay down domestic debt. I'm also concerned about the lending facilities, but I'm really concerned about the policies that are accompanying the lending facilities. And one of the recent statements, I think it was Dominique Strauss-Kahn during Spring Meetings said that one-third of all the new IMF-supported programs do support fiscal expansion. At that point in time it really wasn't possible to get specific examples of what those 1/3 of the new programs are, but having more information about that specifically, those programs specifically, and what kinds of fiscal expansion is being pursued in those programs. And then also having some more substantive explanation for why the 2/3 of the other programs are not pursuing that.
And then I think just in terms of long-term productive input, the more transparency the IMF can offer for all of the claims that it makes including robust consultations on PRSPs, etc.—just a more transparent timely information you guys can present publicly to uphold what it is that you're saying—the better, because these things have been mired for decades about how participatory these events are, who gets invited, etc., etc. I just think that rather than continuing to have these debates, the more evidence the IMF can offer to uphold its assertions that these are broadly consulted instruments or processes that that would really be important for you guys to bring to the table.
Ms. Bisping: Thanks, Amy. Do we have anybody else at this point or should we have Christian respond?
Question: Can I bring up an entire separate and new point if you want, Jenny, which I wanted to talk about as well? One of the elements in the paper that went to the board was about the architecture of the finance, as in where does the money get held?
And I understand that one of the proposals the staff was making was to have a new general subsidy account, which would then fund any and all facilities, which would be designed for concessional finance. It wasn't clear from the Board PIN at the time, which said that most directors supported having a new facility, but then also said that some directors noted that they should PRGF and that trust should remain intact. I wasn't clear what the status of that was.
I wanted to pitch one of the things that we've been talking about in civil society, that whether new resources brought in particularly to combat the financial crisis and economic crisis can not go through a general subsidy account—which would then also bolster PRGF and ESF funding—but to a specific facility or trust fund that deals only with emergency and crisis response financing. So that it would essentially be available for just an FCL-type facility—if that gets created—for the precautionary and the emergency facilities, leaving the PRGF trust as it is for the PRGF and ESF-type facilities. I wanted to see both what Christian thought the status or what a clear expression of the outcome of the Board discussion and what they're planning to propose going forward.
Ms. Bisping: Okay, thank you. Let's let Christian comment here.
Mr. Mumssen: Okay, thanks. Yes, a couple of very good questions, on the question of health and education spending. We have in fact been looking at this issue for a while, and like Jo Marie commented, I think you said has indicated that 1/3 of our programs have essentially conditionality, namely a floor on priority spending, health, education, and so forth. It's true that is a good question to what extent it should be a more general feature. Let me clarify, this does not mean that in the other 2/3, health and education spending is being cut. We're quite confident that in virtually all of our programs an enormous amount of discussion and effort goes into preserving priority spending, and actually as I mentioned earlier, right now spending is increasing in a number of our programs. And in those cases where it's not increasing I am very confident that even if there are no explicit floors or explicit conditionality, the preservation of health, education, and vital infrastructure spending is always at the forefront of these discussions. I think it's a good suggestion to further think about whether these floors on this type of spending might be a feature that is useful and could be expanded to all programs. Again, this is not so much to say that we feel that in the other 2/3, which currently don't have the floor, these expenditures are being cut; and I am quite confident that this is not the case. I think it's a good idea to think about whether this is one of these features that we should perhaps have more generally than we have right now, to be very transparent about what is the level of priority spending, in which direction is it moving, and what is the objective of the government in terms of the amount of the spending.
Coming back to the PRGF, you're absolutely right, Nancy, this is not a short-term facility. I used the word temporary, which is of course different to short term. The idea here that, yes, it is actually a medium-to-long-term facility. The repayment takes ten years, but it is temporary. As you know in many countries we work with operationally, it takes a very long time to put in place certain institutions and capacities and macroeconomic management. I didn't want to suggest that PRGF is a short-term facility, but the idea of course is that ultimately all of the low-income countries end up graduating from PRGF-type financing. So these kinds of entrenched financing imbalances disappear and then all you need would be episodic and occasional finance. Nonetheless, there is a temporary nature. Whereas, I think donor assistance, this is essentially something where there should be some assurance that there is this long-term resource transfer. So just to clarify that.
On the grant element, which again Nancy raised, that's a very good point. Indeed, we have had the exact same financing terms for over 20 years, but world interest rates have decreased very significantly. I think it's a good point and I think it's certainly something that we're looking at. As I mentioned, definitely for emergency facilities, we intend to increase the concessionality and we're also looking at the case of the PRGF, whether the concessionality is pitched at the right level. Of course today's interest rate is a very poor predictor of what it will be in the medium term, but I think we'll certainly analyze this issue and have some discussion at the next Board Meeting on the appropriateness of the degree of concessionality.
On consultations with CSOs, to be more transparent and to publish it: I think this is actually an excellent suggestion. What I did in past missions, I would always put on the front cover of the staff reports who we met during the mission and it would always say civil society organizations, union, parliamentarians, etc., etc.
Question: Would it say those entities by name or by sector?
Mr. Mumssen: But perhaps what you have in mind is not to sift through hundreds of staff reports, but you would like some sort of summary of that. I think that we can definitely look into this. I think it's not a bad idea. I mean certainly our aim is to consult widely. It actually helps us give better advice to governments if we have to talk to different stakeholders in the country.
And then finally, on Peter's question regarding the general subsidy account. I think there was a lot of support at the Board actually on creating such a general subsidy account. At the same time a lot of donors do prefer to essentially direct their financing to those types of lending activities that they particularly support.
What we're trying to do— by we, I mean actually one IMF department is working on this—is to come up with a system that balances the needs to have a flexible subsidy account that makes sure that we can use available subsidy resources where they're needed mostly with essentially the wishes of the providers of the subsidies, which in some cases some may still want to have that directed through to certain purposes.
Question: May I clarify one of my questions? This is Nancy. The IEO report that I referred to where about 70% of donors felt that the IMF failed to accommodate their health education and infrastructure grants. That was a finding based upon their projected contributions to development assistance. And so the response that you've made, while very helpful in many respects, only addresses the fact that the IMF sets a floor. Which is a good thing, but it's a different thing that to set a floor than to accommodate future grant assistance. Does my question make sense? Is that clear?
Mr. Mumssen: Your question is crystal clear. I would be flabbergasted if we ever did not accommodate a grant for health and education. I would like to see a single piece of evidence where the IMF said, "Well you cannot take this grant to finance health and education." And I'm not sure if that's exactly how the question was formulated in the IEO.
Let me put it more generally, I can assure you, on the ground we spend a lot of time, when we get into budget discussions, on exactly this issue, and you would be surprised sometimes who is on which side on this issue between the authorities and the IMF. That's just a general point, I mean again, I can't give you specifics, because these discussions are confidential. But again, I would be very surprised if we ever said, you cannot have a grant for health and education. In fact, our programs are not designed that way. Our programs do not have ceilings on the amount of grants you could receive. The only ceilings that there are, are ceilings on non-concessional finance. Those ceilings of course are directly related to debt vulnerabilities and this is actually something we're also working on to make sure that these ceilings are set appropriately. In other words, that those countries with the least amount of capacity to handle debt, there would be some ceiling in terms of the overall amount of non-concessional finance that could be accommodated. But those countries that have no debt vulnerabilities, they could handle a larger amount without creating significant debt vulnerability.
Question: Offline, I would really appreciate a short exchange on page 23 of the IEO report, because it says that over 80% of IMF staff think that the PRGF accommodates for health education and infrastructure. Most IMF staff is of the view that you just expressed, but it shows that donors, 70% of them, feel that PRGF does not accommodate those expenditures. We could discuss that offline, but I think it's an awfully important point to help draw our disagreements or points of consensus more narrowly.
Ms. Bisping: Yes, we definitely follow up on that.
Mr. Mumssen: I think we basically again, we share the same principles. We have a very clear line during the global crisis, which is we allow our budget deficits to widen generally to the extent possible. We also would like to allow at some degree of higher expenditures if the financing is available. If there are any kind of cuts, we would prioritize always most importantly the health, education, and infrastructure. Again, I'd be happy to engage separately on what might be the reason why a donor perception may differ.
Question: That would be great.
Ms. Bisping: Thanks, anybody else or are we coming to an end here?
Question: This is Amy from GCE. I'm sorry, I blurted into Christian's report back, but it's a really minute detail, but in terms of reporting back the consultations: I think if those report backs can please be very specific as to the names of the organizations, because when sectors are referred to, saying “we consulted with civil society” is too big and too general. So we just need attribution. Attribution will make it very helpful. Who's actually in the room, who's actually participating, so then we can go back to those people and see, did your participation get absorbed? Is it reflected in the final document? Because that's really the issue with consultations, that it feels like it's frequently superficial, but it doesn't touch substance.
Mr. Mumssen: When I was leading missions, I think I had about 50 people in the room for just CSOs, and then I had another 30 people for just the trade unions. I mean, I'm not sure how valuable this information could be at the end. There would be like 35 different organizations on the CSO, 20 different unions. And these events, they're essentially open. In most countries, we organize these events and different organizations can come, many of them won't actually leave their detail. I'm not sure what the value would be of trying to find every single one. I would take the larger point so that probably just the world civil society organization that could mean a lot of things. That could also mean and when we're on a mission you just meet one guy, and then you say, well we talked parliament. That's of course not the idea.
It's customary, we can find some way where we have to do a little bit of thinking about it to be what is current. The same is, by the way on the authority side, we mentioned the Prime Minister of a country, governor and then we say other senior officials. There also you could argue we should name every minister and secretary, etc, but there is a limit of the efficiency of mentioning all the people and frankly in many cases we simply don't know who we're meeting in many cases. Each meeting has often 20 to 30 people and we have probably up to a hundred meetings provisioned or something like that.
Question: Yes, I don’t want to belabor the point much longer other than to just say, one of the reasons why I'm really dogged on this one is because I'm in the education sector and so I interact with the Fast Track Initiative (FTI) at the World Bank a lot. They're very proud of their in-country donor table where they believe that they convene the necessary stakeholders, but I just recently learned that in a country like Ghana, which is being highlighted by the FTI as having these great successes, the Ghana's National Association of Teachers had no idea that the FTI was even operating in Ghana.
So obviously huge important sectors in specific moments are not being involved in this process that on grosso modo is being touted out as something that does see all the stakeholders. I just think that broadly to get over the generalized idea that everybody's in the room and this is transparent and this is really happening, there needs to be more specific detail about it. But I appreciate the limits on space, and really it's not even who's in the room, it's seeing that the consultation actually substantively changes what it is that the product goes on to be.
Question: Sorry it's Peter here in London. ,Can I mention, that I think this is amusing, that we ourselves and some of the organizations get grants from the official sector and we're expected to report back who we meet with and in great detail all of the time, and I think IMF should be able to do the same thing if we can do it.
Ms. Bisping: Alright, point taken. Thanks, anybody else? If not then we'll leave it at that. Maybe Christian can say something quickly about what the next steps are with the review and when we're thinking of say going to the Board and all these things.
Mr. Mumssen: We very much hope to be at the Board before the summer, but it is not yet decided whether this will happen. That's certainly our ambition is that by July we have a Board Meeting, but this is an extraordinary complex exercise where some of our shareholders have somewhat different views on different issues.
We have also consultation processes going on. With the authorities, we had an event during the Spring Meeting. We have a very in depth consultation process ongoing among the IMF staff as well. While we're really hopeful that we can be at the Board before the summer, I would suggest that there are some risks that there might be some slippages. The general idea is that we move as fast as possible, because we believe that actually this reform is quite important also in the context of the current crisis. Because the spirit of the reform is really to make the instruments that we have more flexible and more accessible to countries, and also again to address this issue of the total amount of financing needed during this period. So we're extremely hopeful that we can make progress as quickly as possible.
And one final nuance on the timetable, as we're trying to put all the pieces together, the financing side will be very important. In other words, the amount of subsidy resources that we can count on for the new architecture will have an impact exactly on what we can propose in terms of access limits and so forth. So all of these pieces hang together and this is a rather significant reform. We're not embarking on these kinds of reforms very often, so we need to make sure it is carefully designed and that the financing is there and that we have consulted wisely.
Ms. Bisping: Very good. Alright, thank you very much for calling.
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