Documents Related to the April 20, 2002 IMFC Meeting
Debt Relief under the Heavily Indebted Poor Countries (HIPC) Initiative
The IMF's Poverty Reduction and Growth Facility (PRGF)
Financing for Development -- Implementing the Monterrey Consensus
Managing Director's Report to the International Monetary and Financial Committee (IMFC) on the Role of the IMF in Low-Income Countries
April 15, 2002
1. When I reported to you last November on the Fund's role in low-income countries, I reaffirmed our commitment to intensify our efforts to improve development outcomes and help support the international community's efforts to meet the Millennium Development Goals (MDGs). Since that time, the Fund has worked proactively through our policy dialogue, support under the Poverty Reduction and Growth Facility (PRGF), and technical assistance for capacity building to respond to new challenges facing our members. In parallel to these efforts, the staffs and Executive Boards of the IMF and the World Bank completed a joint review of the Poverty Reduction Strategy Paper approach; the Fund reviewed the implementation of the PRGF and considered the status of implementation of the HIPC Initiative and achievement of long-term debt sustainability.
2. The United Nations Conference on Financing for Development, which took place last month in Monterrey, reaffirmed the two pillar approach for fighting global poverty. First, low-income countries must help themselves by implementing sound policies, strengthening institutions, and improving governance. Second, for those countries that help themselves, the international community must provide strong support through greater trade opportunities and increased and better delivered aid flows. The emphasis on coherence between aid and trade policies echoed the key message of last November's Doha Declaration of the WTO Ministerial Meeting. The international agenda must now shift from words to actions. We must also focus on monitoring progress, including the development of indicators and the contribution of key actors. The basic thrust of Monterrey and Doha reinforces the approach that we have undertaken and strengthens our resolve to follow through on it.
The Global Economic Environment and Low-Income Countries
3. The economic downturn in industrial countries, worsened by the events of September 11, had a significant impact on many developing countries, including most low-income countries. The principal channel through which the global environment affected low-income countries has been through the decline in nonfuel commodity prices and the sharp drop in travel and tourism receipts. However, lower oil prices have helped mitigate the effect of these shocks in these countries, especially those with relatively strong policy frameworks. In 2001, sub-Saharan African countries with generally strong policies have managed to sustain substantially higher per capita GDP growth than in the region as a whole.
4. For 2002 and 2003, the outlook will depend largely on the extent of the recovery in the industrial countries and whether there is a resultant stabilization or possible pickup of nonfuel commodity prices. In this uncertain environment, concessional financing support by the donor community and the IFIs, particularly for countries pursuing good policies, will provide an important safety cushion.
5. The IMF staff has continued to monitor the changing economic environment and its impact on financing needs. Staff has held discussions with the authorities in more than 50 low-income countries on the impact of the global economic slowdown and their responses to it. The Fund stands ready to augment its resources under PRGF arrangements or provide other forms of nonconcessional Fund financing to respond to additional needs. In 2001, the Fund committed new PRGF loan resources of US$2.7 billion, a record high level. PRGF commitments are expected to remain high in 2002, and could reach US$2 billion. To the extent that the recent high demand for PRGF access continues, consideration will need to be given to mobilizing additional loan and subsidy resources. Also, we are reassessing the impact on debt sustainability for HIPCs and need for additional debt relief as detailed below. Finally, we welcome the contributions that will permit the Fund to subsidize charges on post-conflict assistance programs through the end of 2002.1 However, additional contributions are needed to continue subsidization beyond 2002.
The PRSP and PRGF Reviews
6. The Fund's Executive Board considered the PRSP and PRGF reviews in March 2002. These staff reviews drew upon contributions from representatives of low-income countries, international development agencies, and civil society organizations, both in written form and in the context of four regional conferences and an international conference held in Washington, D.C. in January 2002. The conferences provided an important opportunity for an open exchange of views among international partners on the PRSP process and the role of the Fund in that process, particularly through its implementation of the PRGF.
The PRSP Approach
7. The review2 revealed an encouragingly broad-based endorsement of the PRSP approach as the umbrella framework and vehicle for organizing domestic and international efforts to achieve poverty reduction in low-income countries. It reaffirmed the underlying principles that national poverty reduction strategies should be country driven, results-oriented, comprehensive, and long term in perspective, and should foster domestic and external partnerships that improve the effectiveness of development assistance. The review also underscored that there has been strong ownership of PRSPs among governments, more open dialogue with civil society, and greater prominence of poverty reduction in the policy debate. At the same time, the review found that progress has been uneven, depending on each country's starting point, capacities, and priorities, and that the design and implementation of country-owned poverty reduction strategies is a complex task that is taxing countries' limited institutional capacity. The PRSP approach is still evolving and everyone involved is learning by doing. We must therefore not lose sight of the fact that this is a long-term approach that will require patience, perseverance, and sustained effort.
8. While progress to date has been encouraging, there is more that can be done. The main challenges ahead for improving the preparation, content, and implementation of poverty reduction strategies are:
9. Participatory processes need to be strengthened to include a broad range of domestic stakeholders and development partners. In particular, while government leadership must be respected, there is greater scope for including parliaments, the business community, trade unions and other workers' groups, and groups representing the poor. There is also scope for more openness and transparency in decision making and in the dialogue among governments, stakeholders, and their partners.
10. The key challenge that remains is to improve the quality of countries' policies and institutions and the political commitment, which must underpin sustained implementation. Country poverty reduction strategies need to focus systematically on how to accelerate pro-poor growth, establish an enabling environment for the private sector, and strengthen the linkages between macroeconomic and structural/sectoral policies and poverty outcomes. Particular attention needs to be placed on designing appropriate measures to respond to both endogenous and exogenous shocks. Public expenditure management systems must also be improved to ensure poverty-reducing spending is effectively delivered and monitored. Finally, development partners must assist countries in undertaking systematic poverty and social impact analysis (PSIA) of major policy choices, and in designing compensatory measures whenever the adverse effects of policies cannot be avoided. In all these areas, there is a complementary agenda for research and the development of better analytical tools.
11. Donors need to increase the alignment of their assistance behind country-led poverty reduction strategies. There is a pressing need for donors to reduce the cost for low-income countries of mobilizing and utilizing aid, so that both aid resources and limited country capacity can be used more effectively. Donor procedures and reporting requirements should be harmonized and simplified, and assistance aligned with national cycles of government decision making, including annual budget cycles. More information on aid commitments and greater predictability in aid flows, especially to those countries implementing sound policies, would help low-income countries plan and implement their strategies.
12. We must also increase our efforts to assess whether the country strategies embedded in PRSPs and supported by the Fund are delivering results. The success of the PRSP approach will ultimately be judged by results—namely, the delivery of sustainable growth and poverty reduction. At the country level, monitoring and evaluation capacity has to be strengthened, and attention should be directed to developing indicators that could monitor progress towards key objectives--an area where assistance of development partners is also needed.
The Role of the Fund in the Effort to Reduce Poverty
13. The Fund is committed to working in concert with low-income countries and other development partners in implementing the PRSP approach, principally by promoting macroeconomic stability and thereby fostering more rapid growth. We will continue to support countries' poverty reduction and growth efforts in four ways: through our policy advice, concessional financing through the PRGF, debt relief through the enhanced HIPC initiative, and technical assistance.
14. The PRGF review allowed us the opportunity to look carefully at the content of recent programs and our way of doing business with low-income countries. Since the PRGF was introduced in 1999, more that 40 countries have had new PRGF arrangements or had ESAF arrangements transformed to reflect the new features of the PRGF. Given that it is too early to make an assessment of the PRGF's direct impact on poverty, the review focused on the design of PRGF-supported programs to see if they met the expectations set out for them in 2002.3
15. There has been good progress to date in aligning program design with the goals of the facility. Policy goals, including macroeconomic frameworks in PRGF-supported programs, are generally derived from and consistent with those of PRSPs. There is an increased allocation of budgetary resources toward poverty-reducing spending, and fiscal frameworks are accommodating higher spending to support country-defined poverty reduction objectives. Structural conditionality has been streamlined to focus primarily on areas of Fund expertise or areas critical to PRGF-supported programs, while providing better coordination and definition of our role vis-à-vis the World Bank. These efforts at streamlining conditionality are creating greater scope for national choices in program design and implementation.
16. There is, however, a need to build on this progress in several specific areas:
17. Growth is critical for achieving poverty reduction and attention to the sources of growth is essential in developing appropriate policies and projections. It will be important to underpin the growth projections in PRGF-supported programs with better analysis of the associated structural reforms to develop the private sector, improve property rights, increase foreign and domestic investment, enhance external competitiveness, diversify exports, and increase labor productivity. Good governance and strong institutions will be important to ensuring growth prospects.
18. Almost all PRGF-supported programs place substantial emphasis on strengthening public expenditure management. But a substantial reform agenda remains, including with respect to the comprehensiveness of budgetary data, the execution and reporting of budget outcomes, and its dissemination to the public. For HIPCs, in particular, action plans designed with the collaboration of the Fund and the World Bank will need to be implemented to strengthen capacity to track poverty reducing spending, and public spending more widely. Staff are now required to report on the implementation of these action plans in program documents sent to the Executive Board.
19. Poverty and social impact analysis needs to become routinely treated in the context of PRGF-supported programs. Documents for more than half of the current programs provide such analysis; going forward, this will be progressively strengthened so that a description of the PSIA being carried out in the country, including a qualitative description of the likely impact of major macroeconomic and structural measures on the poor and a summary of countervailing measures being implemented becomes a routine feature of program documentation.
20. Both the PRSP and PRGF reviews underscored the importance of considering alternative policy choices and the constraints and tradeoffs involved. Our aim is for PRGF-supported program documentation to clearly set out the program's role in the context of the overall poverty reduction strategy, as well as the options that were considered and the commitments made by the authorities in the context of the program. However, in their discussion, the Directors stressed that this needs to be done in a manner consistent with demonstrating the staff's support for the program and respecting the need for frank and confidential discussions between the staff and the authorities.
21. The PRGF review also pointed to the need for better communications among all the partners involved in the poverty strategy development and execution. In this regard, Fund staff will support national authorities in their efforts to explain to a broader audience the analysis regarding the links between the macroeconomic framework and growth and poverty reduction outcomes in the context of PRGF-supported programs.
22. The review underscored the diverse needs of low-income countries for IMF support and recommended further work on the adequacy of current facilities in meeting these needs. As such, during 2002 we will be examining issues surrounding the structure of the PRGF and how to adapt the PRGF in countries affected by commodity price or other shocks and countries emerging from conflict. We also need to consider the role of the PRGF in countries with little or no balance of payments need for Fund resources.
The Enhanced HIPC Initiative and Debt Sustainability
23. Debt relief can contribute in significant ways to poverty reduction. As of April 2002, 26 countries have reached their decision point under the enhanced HIPC Initiative4 with commitments for US$40 billion (in nominal terms) of debt relief. By cutting their debt service to exports ratio by about a third, HIPC relief provides annual budgetary savings for these countries varying between ½ and 1½ percent of GDP, allowing for significant increases in pro-poor spending.
24. As for developing countries as a whole, the recent global economic slowdown, coupled with a significant decline in many primary commodity prices over the last two years, has weakened the HIPCs' growth and export performance. Moreover, it has led to a deterioration of the external debt indicators for many but not all HIPCs. There are considerable differences in the evolution of the debt indicators among the HIPCs, reflecting largely differences in the implementation of economic reform programs and their different exposure to shocks. The impact of these adverse developments on the debt sustainability outlook of the HIPCs will depend on a number of factors including notably the adequacy of policy responses and of supporting resource transfers. The external debt sustainability outlook for most of the 20 countries in the interim period has worsened primarily because of lower exports, but has not necessarily been seriously impaired. The NPV of debt-to-exports ratios at the completion point are now projected to be above the 150 percent threshold in 8-10 countries; deviations for six of these had already been anticipated at the time of the decision points, although to a lesser degree. For these countries, the debt in excess of the HIPC threshold could range from US$0.5 billion to US$0.9 billion on NPV terms.
25. For countries in the interim period, the enhanced HIPC Initiative allows some flexibility in exceptional cases to top-up debt relief at the completion point to countries where exogenous factors have caused fundamental changes in their economic circumstances. The enhanced HIPC Initiative thus provides for the possibility of additional debt relief at the completion point. However, additional HIPC relief is not meant to compensate for slippages in policy reform, nor can it be provided on an ongoing basis to deal with future economic shocks. In the near term, to help countries deal with the impact of the deterioration in the external environment, some countries may require additional donor support, and increased interim relief may be helpful. The provision of any additional debt relief at the completion point would increase the overall costs of the HIPC Initiative. The financing implications of this will need to be explored in due course. In addition, HIPCs need to improve their debt management capacity, with donor assistance.
26. Both the PRSP and PRGF reviews underscored that capacity building is a potent vehicle for ensuring full ownership of the reform agenda in PRGF countries, as national expertise is developed, including in program design and poverty and social impact analyses. In low-income countries, it is often not a lack of political will that impedes reform but a lack of capacity. Therefore, the Fund will continue to strengthen its capacity-building technical assistance and training activities in the institution's core macroeconomic and financial areas of responsibility, including public finance and administration, financial sector development, development of sound statistical systems, and promotion of data dissemination. The PRSP is increasingly providing a means of coordinating our efforts with other technical assistance providers.
27. Our regional initiatives in the Pacific and in the Caribbean are allowing us to make more efficient use of our limited technical assistance resources, while ensuring that our activities are closely aligned with local and regional priorities identified in the PRSP process or through surveillance. We also intend to establish two pilot regional technical assistance centers in sub-Saharan Africa in the second half of 2002, as part of our support for the New Economic Partnership for Africa's Development. These centers aim at raising the effectiveness of the Fund's technical assistance projects by fostering ownership, enhancing accountability, increasing responsiveness, and strengthening coordination among technical assistance providers. The Board will soon consider a staff paper on the Fund's technical assistance activities, including a number of recommendations for improving technical assistance operations.
Support by the International Community
28. Monterrey reaffirmed that the best form of help for self-help is trade. The consensus at the Doha Ministerial Conference was that the best defense against aid dependency and recurrent debt problems was to build prosperity by expanding and diversifying exports and attracting foreign direct investment. Estimates of the possible benefits to low-income countries from increased trade are substantially higher than current levels of concessional flows. The international community must open markets and phase out trade-distorting subsidies, especially in areas where developing countries have a comparative advantage, such as agriculture, processed foods, textiles and clothing, and light manufactures. Greater transparency and public awareness of the costs of the status quo to the world's poor is especially important if we are to prepare the political ground for serious reform. The Fund has stepped up its surveillance of market access issues in the context of Article IV consultations.
29. Low-income countries need support to strengthen their ability to take full advantage of the opportunities of the global market and the multilateral trading system. As a participating agency under the Integrated Framework for Trade-Related Technical Assistance, the Fund is assisting with diagnostics of the trade environment in low-income countries, and the identification of policy and assistance priorities, and is addressing technical assistance requirements in its areas of expertise.
30. Monterrey welcomed the commitments by the EU and the US to increase aid flows but noted that more needs to be done. Well-directed aid, combined with strong reform efforts, can greatly reduce poverty. However, it is also clear that building strong public support for higher aid will require greater public understanding of aid as an investment in peace, stability, and shared prosperity, and—equally important—a demonstration by poor countries that they are putting aid to good use.
31. Effective monitoring of progress towards the MDGs is key to staying on track and for building sustained support for greater international assistance to the poor countries. At a global level, a comprehensive and transparent system to monitor progress towards the achievement of the MDGs is being developed and we welcome the efforts being undertaken by the United Nations to this end. Monterrey has now given us the impetus for agreeing on a set of indicators and the next step is to put such systems in place. As part of this process, we need to identify more clearly the respective responsibilities of poor countries and their development partners—donor countries, international institutions, the private sector, and civil society. On this basis we can establish better accountability.
32. There is now an unprecedented degree of agreement about what is required to overcome world poverty. The Monterrey Consensus defines the right priorities. It makes clear that durable progress is not possible without good governance, respect for the rule of law, and policies and institutions that unlock the creative energies of the people and promote investment-including foreign direct investment. It also recognizes that the international community should provide faster, stronger, and more comprehensive support to those low-income countries that live up to these responsibilities. To meet the Millennium Development Goals, progress must be made simultaneously on many fronts by many actors. The implementation of the Monterrey Consensus should be a next chapter in our efforts to create a better world and the Fund remains committed to contribute to this international effort to combat poverty in its areas of expertise through its economic policy advice and financial and technical assistance.
1To date, contributions have been received from Belgium, the Netherlands, Sweden, Switzerland, and the United Kingdom.
2Review of the Poverty Reduction Strategy Paper Approach-Main Findings and Issues for Discussion (SM/02/53) and Review of the Poverty Reduction Strategy Paper Approach-Early Experience with Interim PRSPs and full PRSPs (SM/02/54).
3Review of the Poverty Reduction and Growth Facility: Issues and Options (SM/02/51) and Review of the Poverty Reduction and Growth Facility-Staff Analyses (SM/02/51, Sup 1, 2/15/02).
4External Debt Management in Heavily Indebted Poor Countries (SM/02/92); Heavily Indebted Poor Countries Initiative-Status of Implementation (SM/02/94); and The Enhanced HIPC Initiative and the Achievement of Long-Term External Debt Sustainability (SM/02/95).