Policy Support and Signaling in Low-Income Countries
Implementation of the Policy Support Instrument
Strengthening the IMF's Support for Low-Income Countries -- An Issues Brief
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IMF Executive Board Approves the Establishment of Policy Support Instruments for Aiding Low-Income Countries
On October 5, 2005, the Executive Board of the International Monetary Fund (IMF) approved a proposal establishing Policy Support Instruments, which will provide policy support and signaling to low-income countries that do not want—or do not need—financial assistance from the IMF.
In concluding the discussion on Policy Support and Signaling in Low-Income Countries (See PIN No. 05/144), the Executive Board supported the establishment of a framework for Policy Support Instruments, or PSIs. PSIs are designed to address the needs of low-income members that may not need Fund financial assistance, but seek Fund endorsement and assessment of their economic policies. A PSI will be available only upon request of a member and will add to the toolkit of instruments from which low-income countries can choose their desired form of engagement with the Fund. The PSI will be a complement to, and not a substitute for, the Poverty Reduction and Growth Facility (PRGF), which will remain the main instrument for Fund financial support to low-income members with balance of payments needs. The nature of the Fund's engagement in low-income members will be decided on a case-by-case basis, depending on the needs and policies of the member at the time.
Implementation of the Policy Support Instrument, addressed: (i) the modalities for a fixed schedule of reviews, including how to signal that a program is back on track; (ii) the application of a misreporting framework under the PSI; and (iii) the relationship between a PSI and the poverty reduction strategy (PRS) process. The report on implementation of the PSIs also addresses the modalities for publication of PSI documents and specifies that safeguards assessments will remain optional for PSI users, though they will be encouraged.
Executive Board Assessment
The approval by the Executive Board of the proposed decisions on the establishment of the framework for the Policy Support Instrument (PSI) and the consequent amendments to current Fund policies marks an important step in strengthening the Fund's ability to serve its low-income members. The decisions on October 5, 2005 have created the PSI to address the needs of low-income members that may not need, or want, Fund financial support, but still want the Fund to support, monitor, and endorse their policies. They are based on the guidance from the Board at its July 25 and August 3, 2005 meetings and from the International Monetary and Financial Committee. The PSI will offer a sound approach for helping countries design effective economic programs and provide signals to donors, the multilateral development banks, and markets.
The Executive Board's discussion has reconfirmed the broad consensus reached on various elements of the PSI at its last meeting, including program standards and conditionality, Board reviews and involvement, and transparency. Directors reiterated the importance of ensuring that the PSI, as implemented, remains a voluntary, demand-driven instrument supported by strong country ownership. Directors also reiterated that the PSI should serve as a complement to, and not a substitute for, PRGF financing, including low-access PRGF arrangements. In addition, Directors noted that agreement on the proposed shocks window within the PRGF, based on a decision that will be proposed in the next few days, will—along with the PSI decided today—constitute an integral element in the series of decisions that the Fund is taking to support its low-income members.
Directors agreed that, to assess the implementation of a member's program under a PSI, program reviews will normally be scheduled semi-annually. Limited flexibility would be allowed in the timing of these reviews, and the Board would conduct reviews irrespective of the status or prospects of program implementation. Directors welcomed the possibility of returning to an uncompleted review during a limited time period, and agreed that a PSI should automatically lapse in the event that two consecutive scheduled reviews are not completed. While supporting these proposals, a few Directors reiterated their earlier arguments for greater flexibility in the timing of reviews, including to modify program targets. Directors also reiterated their understanding that an on-track PSI could provide the basis for rapid access to PRGF resources through a new shocks window in the event of a shock.
Directors noted that the provision of timely and accurate information from the member with a PSI would be an essential basis for the Fund's assessments. The procedures and safeguards within member countries would play the primary role in ensuring that appropriate data are provided to the Fund. Directors agreed that a framework for dealing with possible cases of misreporting is necessary to safeguard the integrity of IMF assessments under the PSI. They supported a misreporting framework for the PSI that is an abridged and simplified version of the misreporting framework applicable in the context of the use of Fund resources.
Directors considered that, to help ensure ownership of policies, the authorities' poverty reduction strategy should be a basis for PSI program targets and structural reforms. They therefore welcomed the proposed link between the PRS process and the PSI. Some Directors suggested in this context that staff examine the scope for further streamlining the PRS process in relation to the PSI and the PRGF.
Directors adopted an amendment to the Fund's transparency policy decision in order to establish that publication of PSI documents will be voluntary but presumed, and that the publication regime for the PSI effectively will mirror that governing PRGF-related documents.
Finally, Directors supported a review of the experience with the PSI after three years, although many Directors noted that a sunset clause could have been included. The staff have carefully noted Directors' useful comments on the modalities for implementation of the PSI, which they will take into account in preparing the operational Guidance Note for staff.
IMF EXTERNAL RELATIONS DEPARTMENT