Public Information Notice No. 02/34

Public Information Notice: IMF Concludes Actions to Strengthen the Tracking of Poverty-Reducing Public Spending in Heavily Indebted Poor Countries (HIPCs)

March 25, 2002

On February 20, 2002, the Executive Board of the International Monetary Fund (IMF) considered a staff paper "Actions to Strengthen the Tracking of Poverty-Reducing Public Spending in Heavily Indebted Poor Countries (HIPCs)" prepared jointly by IMF and World Bank staff.

Background

The Executive Board discussion was a follow-up to an earlier discussion in 2001 of a Fund/Bank paper entitled "Tracking of Poverty-Reducing Public Spending in Heavily Indebted Poor Countries (HIPCs)." At that time staff reported on the preliminary assessments of the capacity of HIPCs to track poverty-reducing public spending. Staff were requested to follow-up with country authorities to finalize the assessments, prepare action plans to improve public expenditure management (PEM) systems in HIPCs, identify existing and planned donor assistance and any gaps that may remain, and report on progress in reforming PEM systems as part of regular reviews of Bank- and Fund-supported programs.

Executive Board Assessment

Most Executive Directors agreed with the assessment of the capacity of 24 HIPCs to track and report on poverty-reducing spending. They emphasized that HIPCs should track all poverty-reducing public expenditures (and not just spending financed by HIPC assistance) to ensure the additionality of resources allocated to such spending. The Poverty Reduction Strategy Paper (PRSP) should identify relevant poverty-reducing spending for tracking purposes. Directors noted that this approach should be adopted for all PRGF-supported programs. Efforts to improve the tracking of poverty-reducing spending should in principle be part of the broader and more comprehensive PEM reforms.

Directors also agreed that the ultimate responsibility for reporting on poverty-reducing public spending lies with the country. They were pleased that sixteen HIPCs are already reporting on poverty-reducing spending that is broadly consistent with programs identified in their PRSPs. They noted that of the 24 countries included in the current assessment, nine were found to require some upgrading to be able to track poverty-reducing spending satisfactorily, while the remaining fifteen required substantial upgrading to do so. Some Directors were concerned that weaknesses highlighted by the assessments could reduce donors' budgetary support to HIPCs, while other Directors were of the view that such a risk was exaggerated in the staff paper. Collaborative efforts to strengthen PEM systems represent the best way to ensure accountability in the use of donor funds as well as of domestic tax revenues.

Directors endorsed the action plans that have been agreed with HIPCs to strengthen their capacity to track poverty-reducing spending in the short- and medium-term. They urged HIPCs to move swiftly to implement short-term measures, such as broadening the coverage of government accounts, upgrading budget classification, and more frequent reporting of budget outturns. A few Directors suggested that the provision of general budget support by donors will depend on the progress in strengthening PEM systems. They also encouraged HIPCs to implement bridging mechanisms that would allow immediate tracking while PEM systems are being reformed. Where necessary, countries should implement "virtual" poverty funds, which entails tagging and reporting on expenditures identified as poverty-reducing. Directors noted with satisfaction that 11 of the HIPCs have already established, or are in the process of establishing such mechanisms. They stressed that these short-term measures should be consistent with longer-term reforms to strengthen PEM systems. Several Directors also underscored that the PEM effort should be designed to minimize additional burdens on the limited administrative capacity of HIPCs.

Given the growing trend toward decentralization in HIPCs, and the relatively weaker expenditure management capacity at the local level, Directors were concerned that the tracking of poverty-reducing spending is likely to become more difficult and require substantial institution building assistance over time. In this regard, they recognized that some HIPCs were addressing this issue in their action plans and that the World Bank is already providing assistance in this area to half of the 24 HIPCs. They urged other HIPCs to address this issue as a priority, and seek assistance as needed from the World Bank and other development partners.

Directors supported continuation of the existing role, scale and pattern of Bank, Fund and bilaterals' support to HIPCs. They noted that only a relatively small number of gaps in assistance were identified. They stressed the need for continued donor support for implementing the countries' action plans, including through technical assistance especially to develop skills of officials in financial management. As specific activities and instruments of the Bank and Fund were seen as largely complementary, the Fund should continue to focus its assistance on strengthening macrofiscal management, including through the upgrading of budget classification systems, and expenditure commitment control mechanisms and treasury reforms aimed at improving budget execution and reporting. Bank assistance should continue to focus on institutional capacity-building across the full range of the PEM system, including information management systems. Directors emphasized the need to strengthen further the collaboration between the Fund and the Bank, as well as the coordination with donors, with a view to improve the effectiveness of their work on PEM issues, including through technical assistance. In that context, they also looked forward to the preparation, at an appropriate time, of a joint Fund/Bank paper on the overall aims and objectives of activities in the PEM area, in order to bring greater clarity to this work.

Directors urged HIPCs to integrate the action plans to strengthen PEM capacity in the short and medium term into their PRSPs or other country-owned documents. This will enable them to better catalyze donor and other assistance. For countries that have already produced a full PRSP, periodic progress reports would provide an opportunity to review progress in PEM reform and address any emerging issues. Directors agreed that the staff should address donor coordination issues on a country-by-country basis.

Recognizing that the reform of PEM systems is a long-term endeavor that requires sustained commitment, Directors acknowledged that there are certain risks in the approach outlined by the staff. The action plan may not be supported by all relevant stakeholders in a HIPC, or the capacity to implement technical assistance programs may be weak. They noted that countries' starting points vary and that institutional change takes time. Directors encouraged the staff to be vigilant of these risks and to provide additional technical support to countries whenever necessary within resource constraints. In this context, Directors agreed that the staff should continue to report on progress in implementing PEM reforms envisaged in action plans as part of the normal review of Bank- and Fund-supported programs. They suggested that such a report take the form of a standard box in the program review documents. Directors stressed that all PRGF-supported programs should draw on PRSPs for PEM reforms.

While many Directors agreed that the staff should carry out the next comprehensive review of HIPCs' capacity to track poverty-reducing public spending in 2004, several Directors suggested that an annual update based on the standardized reporting in program reviews would be useful. Directors looked forward to the first annual update in 2003. In the context of reviews of Bank- and Fund-supported programs, the staff should also continue to report on data on poverty-reducing spending, as defined in PRSPs, and to the extent available.

Finally, Directors agreed to the publication of the staff paper, together with the PIN summarizing the Executive Board's discussion. They encouraged the authorities to use the individual assessment and action plans to seek international support for their reform efforts.