The Poverty Reduction and Growth Facility (PRGF)
Operational Issues

Key Features of IMF Poverty Reduction and Growth Facility (PRGF) Supported Programs
Prepared by the Policy Development and Review Department

August 16, 2000

1. The PRSP approach is intended to bring about substantive changes in the way countries’ programs are formulated. The core objective is to arrive at policies that are more clearly focused on growth and poverty reduction, in which the poverty reduction and macroeconomic elements of the program are fully integrated, and that embody a greater degree of national ownership, thereby leading to more consistent policy implementation. One implication of this is that agencies providing external assistance will need to change the way in which their programs support the efforts of national authorities.

2. The PRGF is the key instrument for the Fund to support countries in implementing this new approach, and this in turn means that the content and process for PRGF-supported programs will need to change in some ways from past practice. The Fund’s contribution needs to become more narrowly focused on the institution’s core areas of expertise (see sections E and F), but at the same time more consistent with the broad approach to poverty reduction (sections B, C, and G) and with enhanced country ownership (sections A and D).

3. Based on the feedback from Board discussions of the PRSP/PRGF policy papers and early PRGF country cases, as well as interactions with external partners, the expectations regarding these new features are now becoming clearer. Some of them are already reflected in the design of recent PRGF-supported programs, but to ensure that these changes are incorporated systematically in future country programs, it would be useful to have an agreed view now on what these key features are and how feasible it is to apply them in individual country programs. The latter will depend partly on how far advanced the country is in developing a comprehensive poverty reduction strategy, as well as on parallel changes in World Bank operations.

4. This note is not intended as a comprehensive guidance note on the PRGF.¹ Rather, it attempts to summarize the areas of expected change in PRGF-supported programs, and discuss how these features might be incorporated into program design. The aim is to use this list (which is summarized in the attachment) to help clarify expectations, guide the internal work of mission teams and review officers, and provide a benchmark to review progress a year from now. At the same time, the note should be viewed as setting forth propositions which may evolve as we learn and gain experience from the early country cases, and in response to feedback from officials and others engaged in this work in the field.

A. Broad Participation and Greater Ownership

5. Greater ownership is the single most often cited, but also the least tangible, change in moving to PRGF-supported programs. There is no single element of program design or documentation that will signal this change. But, over time, we should be in a position to demonstrate that:

• PRSPs have been produced in a transparent process involving broad participation, including representatives of the poor;

• PRSPs have been produced by the country authorities, and not by Bank and Fund staff: well meaning efforts to “improve” the presentation of country-authored documents should be avoided; and

• the main features of PRGF-supported programs can be seen to be drawn from the country’s PRSP.

6. Increased country ownership will require greater openness and flexibility on the part of Fund staff, beginning at the mission preparation stage and continuing throughout the process. Governments must be given more space to determine the timing and content of policies, in accordance with their priorities and assessment of what is feasible. As evidence of the Fund’s increased flexibility on policies, it is likely that we would be able to identify in some PRSPs which we can endorse and support overall, some policy choices different from or contrary to Fund policy advice. Staff should endeavor to highlight these instances in JSAs and/or staff reports for PRGF-supported programs, as they arise. Of course, such differences should not be expected in every case, and would not be contrived merely to demonstrate flexibility. Conversely, there may be strategies that are sufficiently flawed that the Fund cannot support them even though they are country-owned.

B. Embedding the PRGF in the Overall Strategy for Growth and Poverty Reduction

7. The PRGF-supported program will derive from and reflect the overall growth and poverty reduction strategy, which itself should be based on fully integrated macroeconomic, structural and social policies. PRGF staff reports will need to evidence this integrated framework, building on much closer interaction between Bank and Fund staff and programs in support of the country’s strategy.

8. This integration is expected to feed into the design and presentation of PRGF programs in two ways. First, PRGF staff reports will need to show how the specific measures supported are embedded within the country’s broader poverty reduction strategy and how they relate to the work of the Bank in complementary areas. One key area in this respect will be those measures intended to enhance the environment for the private sector to invest and create employment. It would be appropriate for PRGF staff reports to highlight those aspects of the poverty reduction strategy that promote growth through private sector development even though many such aspects may be ones on which the Bank is lead advisor. To cite another example, data and analysis on progress in social and economic indicators will generally draw upon World Bank staff sources and should be so identified. Similarly, distributional impact analysis of structural reforms will often be carried out with support from the Bank, and the Bank will generally take the lead in assessing the poverty impact of public expenditure programs. The PRGF staff report should report on this work, and how it has influenced program design.

9. Second, as noted below, the scope of PRGF programs will now be more focused on the Fund’s own areas of expertise and much of the structural conditionality in support of the PRSP’s objectives will be covered in parallel Bank programs. It is recognized that, at present, the Bank does not systematically cover all structural areas in IDA countries through an instrument like the PRGF, but a proposed instrument (the Poverty Reduction Support Credit) is now being developed.

C. Budgets that are more Pro-poor and Pro-growth

10. The importance of helping countries develop budgets that are more pro-poor and pro-growth has been stressed by both the Board and by other development partners in commenting on the PRSP/PRGF approach. What this will entail in practice will vary from country to country, but concretely programs could be expected to exhibit one or more of the following features:

• a reorientation of government spending towards the social sectors, basic infrastructure, or other activities that demonstrably benefit the poor, directly or indirectly (this is likely to imply an increase in the level of such spending in most countries, but not necessarily in all—the transition countries, for instance, may be exceptions);

• improvements in the efficiency and targeting of spending in key sectors relevant to growth and poverty reduction;

• tax reforms that simultaneously improve efficiency and equity—for instance, the removal of regressive exemptions or loopholes for the better off—and thereby generate more resources for the poverty reduction strategy.

11. In the short run, these changes will be hard to demonstrate in a rigorous way. The counterfactual problem will make comparisons difficult and the broad scope of programs to accelerate growth and reduce poverty raises definitional questions of what constitutes a pro-poor or pro-growth budget. Improvements in expenditure data and monitoring will also be needed to track some of the envisaged changes. Notwithstanding these difficulties, evidence of improvements in the level, composition, or efficiency of social spending will be an important element in assessing the change in a country’s budget strategy. In addition, the documentation for PRGF programs will need to show how the staff (with the World Bank generally in the lead) have considered the above issues in the design and review of public expenditures and revenue generation.

D. Ensuring Appropriate Flexibility in Fiscal Targets

12. Since (at least) the external review of ESAF, there has been an emphasis on allowing greater flexibility in accommodating rising budget deficits, financed on suitably concessional terms, for countries with sustainable macroeconomic and external debt positions and recognized scope for more productive public spending. Some PRGF-supported programs already allow for this, but not always; nor is it always clear from the documentation to what extent such flexibility has been exercised in the course of program formulation. It is rarer still for programs to explicitly address the ways in which fiscal objectives might need to be adapted in the event of commonly experienced shocks such as terms of trade downturns or adverse harvests.

13. Accommodation, of course, is not always the appropriate response to additional aid or negative shocks. As regards aid flows, uncertainty, especially over the medium term, remains an issue. Caution will always be needed to ensure that medium-term spending plans are not based on unrealistic notions of what assistance could be forthcoming. The impact of higher spending on domestic demand, and hence the real exchange rate and competitiveness, would also need to be carefully considered. And debt sustainability must remain a paramount concern. Similarly, there are several factors that need to be weighed in determining the appropriate response to an adverse shock.

14. Nevertheless, more can be done to address these issues in the context of work on PRSPs and the associated PRGF-supported program:

• First, programs could be presented in ways that give clearer signals to the donor community in the PRSP process; for instance, medium-term projections could be based on a more normative scenario for grants and concessional loans driven by the poverty and growth goals, rather than a continuation of declining trends with unfilled financing gaps.

• Second, it may be possible to obtain prior commitments of higher donor assistance, as programs are being formulated, and accordingly to program larger deficits and spending at the outset.² Staffs should be seeking such commitments in cases where they would be justified, especially for strong performers. In addition, programs could define contingent expenditures (drawing on priorities set in the PRSP) that would be executed if additional fungible external assistance on concessional terms were forthcoming. Indeed, it would be desirable that all PRGF-supported programs have this feature, in place of the standard but much-misunderstood adjuster for deviations in program financing.³ Again, these elements of the new approach call for improved measurement and tracking of government expenditures.

• Third, where relevant, programs should explicitly indicate how the fiscal objectives have been, or will be, influenced by actual or likely shocks. Where is the scope for adjustment, if needed? What are the constraints on accommodation, if warranted?

15. Finally, PRGF staff reports should indicate how, in the course of the PRSP process, choices were made regarding the balance between the public and private sectors in the allocation of total credit expansion. It is generally desirable that governments in low-income countries avoid or strictly limit their use of relatively expensive domestic credit. But there may be situations in which urgent public spending needs exceed the resources available from revenues and external assistance, and a case could be made for drawing on some of the domestic credit that would otherwise flow to the private sector. This is another area where flexibility can be exercised, depending on how the relative needs of the two sectors are prioritized.

E. More Selective Structural Conditionality

16. There is broad agreement that to accommodate the greater ownership expected under the PRSP approach, including countries’ decisions on timing, Fund and Bank conditionality should be more selective, focusing on the few key measures that are central to the success of the country’s strategy.

17. Within the structural areas on which the Fund is lead advisor in a particular country, this is likely to lead to a reduction in the number of measures that are considered sufficiently important to warrant conditionality in a PRGF arrangement (performance criteria or benchmarks). Fund staff would normally take the lead in advising on tax and foreign exchange regimes, fiscal management, budget execution, fiscal transparency, and tax and customs administration. In areas where responsibility is shared between the Bank and Fund--such as the establishment of an environment conducive to private sector growth, trade liberalization, and financial sector development—the lead role would be determined on a country-specific basis.

18. In each case, the structural conditions incorporated in arrangements will need to be justified. Ultimately, it is intended that PRGF arrangements should not apply conditionality in areas outside the Fund’s mandate and expertise, with the possible exception of measures that are critical to the country’s fiscal and/or external targets (a large privatization, for instance). Otherwise, conditionality in areas within the Bank’s domain, if needed, should be incorporated in Bank lending operations. How quickly it is possible to move in this direction, however, will depend on changes underway at the Bank—in particular, the development of the Poverty Reduction Support Credit—and on the nature of the Bank’s current lending operations in specific countries. In the meantime, if it proves necessary to include measures in PRGF arrangements because the Bank is not in a position to cover them on the required timetable, that fact should be stated explicitly in the PRGF staff report.

19. Irrespective of how conditionality is applied, PRGF staff reports should continue to report briefly on the overall structural program and progress in its implementation, identifying those parts subject to Bank conditionality.

F. Emphasis on Measures to Improve Public Resource Management/Accountability

20. One area where there is almost universal desire for greater focus and conditionality in PRGF programs is improved accountability for public resource management. Fiscal objectives and policies should be open to public debate, and transparent monitoring systems are needed to improve efficient delivery of public services. The necessary measures will obviously vary by country. For HIPC countries reaching their Decision Points, there should be specific measures in place to monitor the use of any additional budgetary resources flowing from debt relief. The planned use of HIPC debt relief is to be set out in the decision point document.

21. Important fiscal governance measures of this kind could be subject to PRGF conditionality. It would be desirable to present any such conditions as separate from whatever structural conditions may be applied, and possibly to adopt different terminology (e.g., “resource management benchmarks”). As with structural benchmarks, it will be important to be selective and focus on a small number of the most important measures. The question of which institution has taken the lead on policy advice in this area is also relevant. In some countries, the Bank may be in the lead, in which case it would be appropriate (if feasible) for the measures to appear in a Bank lending operation rather than the PRGF arrangement.

G. Social Impact Analysis of Major Macroadjustments and Structural Reforms

22. When a country’s program incorporates specific measures that could be expected to have significant (though presumably temporary) adverse effects on groups of the poor, it is essential to demonstrate that these effects have been carefully considered and, where appropriate, that countervailing measures have been built into the PRGF-supported program. To be feasible, this type of analysis would need to be restricted to substantial macroeconomic adjustments (e.g., a big tax increase, subsidy reform, or exchange rate realignment) or major structural reforms (e.g., civil service downsizing or price liberalization).

23. There will be situations where the distributional effects of a measure are fairly direct and clear-cut. In this case, the Fund and Bank country teams (perhaps with input from FAD, depending on the nature of the policy measure) may be able to address the issue without an extensive social impact analysis, drawing on cross-country experience. If a detailed analysis is required, this should be identified early in the PRSP process, and the relevant Bank experts should be brought into the teams’ work program. Where such detailed work is needed, the timing of the underlying reform measures may need to be delayed or, if urgent, accompanied by less detailed preliminary analysis.

24. The primary responsibility for helping countries to assess the distributional impact of reform measures and to develop ways to mitigate them lies with the World Bank. PRGF staff reports would, nevertheless, need to address how the analysis was being carried out, and how the results of this analysis had shaped the relevant policies.

Attachment

Summary of Key Features of PRGF-Supported Programs

1. Broad participation and greater ownership

• Draw main elements of PRGF from country’s PRSP

• PRSPs to be produced in transparent process with broad participation

• PRSPs to be produced by country authorities

• Where relevant, JSAs/staff reports to highlight flexibility in accepting country choices

2. Embedding the PRGF in the overall strategy for growth and poverty reduction

• Demonstrate how macroeconomic and other policies have been influenced by growth and poverty objectives

• Highlight aspects of the PRGF program that promote private sector development

• PRGF contribution to the strategy should be focused on areas within the Fund’s area of expertise and responsibility

3. Budgets that are more pro-poor and pro-growth

• Reorient government spending towards activities that benefit the poor

• Improve efficiency and targeting of spending in key sectors relevant to growth and poverty reduction

• Stress tax reforms that simultaneously improve efficiency and equity

• Improve data and monitoring to track expenditures

4. Ensuring appropriate flexibility in fiscal targets

• Present more normative macro-projections to signal financing needs

• Where warranted, seek commitments of higher aid flows and build in to the program

• Use PRSP to identify contingent expenditures that could be added if more aid were forthcoming

• Indicate how fiscal targets would be modified in the event of key shocks

5. More selective structural conditionality

• Limit conditionality to key measures, central to the success of the strategy

• Confine Fund conditionality to measures in the Fund’s domain; exceptions must be justified

6. Emphasis on measures to improve public resource management/accountability

• Fiscal policies and objectives should be open to public debate

• Develop transparent monitoring systems to improve efficient delivery of public services

• For HIPCs, include specific mechanisms for monitoring use of debt relief

• Consider selective conditionality on fiscal governance measures

7. Social impact analysis of major macroeconomic adjustments and structural reforms

• Demonstrate that distributional effects of substantial macro-adjustments or structural reforms have been considered

• Highlight countervailing measures to offset temporary adverse effects on the poor

• Bank should lead if technical impact analysis is needed, but PRGF documents should indicate what work was done and how it influenced policies.