Public Information Notice No. 07/130

Public Information Notice: IMF Executive Board Discusses the Fund's Role in the Poverty Reduction Strategy Process and Its Collaboration with Donors

October 15, 2007

On October 10, 2007, the Executive Board of the International Monetary Fund (IMF) discussed the Role of the Fund in the Poverty Reduction Strategy Process and its Collaboration with Donors.

Background

The Fund has made considerable efforts to define more precisely its role and responsibilities in low-income (LIC) countries since the introduction of the Poverty Reduction Strategy (PRS) approach in 1999. However, there is still debate about this role. Some see the Fund extending its reach into areas outside its core competencies; others perceive an undue focus on macroeconomic stability at the expense of growth and poverty reduction. The Fund's role in mobilizing aid also remains unclear to some, and there is a view that its collaboration with donors at the country level could be improved.

The Fund's Medium-Term Strategy (MTS) proposed to address some of these concerns by re-focusing the Fund's work in LICs on macroeconomically critical and financial sector issues and on its areas of comparative advantage, while enhancing collaboration with the World Bank and other institutions in other areas. It called for deeper involvement of the Fund in managing the implications of debt relief and assessing the relationship between aid inflows, Millennium Development Goals-related resource needs, and macroeconomic stability.

Against this backdrop, the present discussion focused on a series of recommendations for making operational these aspects of the MTS, and in the process, defining more precisely the Fund's responsibility and accountability in the PRS and donor collaboration processes. The thrust of the approach is to refocus and intensify the Fund's activities in three major areas: macroeconomic policy analysis and advice (particularly in helping countries manage the macroeconomic impact of aid inflows); the PRS process and the MDGs (including closer alignment of the Fund's country operations with the PRS and other domestic cycles, and reporting on country progress toward the MDGs); donor collaboration on the ground (through more frequent and extensive information exchange with donors and a more intensive field-level engagement).

Executive Board Assessment

Executive Directors generally welcomed the opportunity to discuss the scope of the Fund's engagement in the Poverty Reduction Strategy process and in its collaboration with donors, and to further clarify the role of the Fund in low-income countries. Directors stressed the continued important role for the Fund in LICs. Directors underscored the importance of effective collaboration with the World Bank and other development partners, based on clearly defined lead roles and responsibilities in supporting countries' development efforts. A number of Directors, however, would have preferred that the discussion take place after the Fund's resource envelope is established in the context of a more general review of the Fund's evolving reform priorities.

Focusing the Fund's Work in LICs

Directors reiterated that the primary focus of the Fund's work in LICs in the context of the PRS process should be to provide policy advice and technical support on the design of appropriate macroeconomic frameworks and on macroeconomically critical structural reforms. In this context, Directors concurred that Fund staff should draw on available analysis of the sources of growth and related constraints prepared by the World Bank and other development partners, but not take the lead in microeconomic or sector-specific growth analysis.

Managing Aid Inflows and Debt

Directors stressed that Fund staff have an important role in helping the authorities to manage the macroeconomic impact of aid inflows and avoid a re-accumulation of unsustainable debt. Most Directors agreed that a key aspect of this work could involve helping countries design relevant alternative macroeconomic scenarios when necessary so as to manage scaled-up external support effectively. Directors also stressed the importance of sound medium-term debt management strategies, guided by the Debt Sustainability Framework and Debt Sustainability Analyses. The application of the debt framework should be country-specific, and the Fund should impress upon creditors as well as borrowers the importance of cooperation and respecting the framework.

Engagement in the PRS process

Noting that Poverty Reduction Strategy Papers (PRSPs) have become the accepted operational framework for countries' poverty reduction efforts and for the coordination of external support to reach the Millennium Development Goals, Directors welcomed the clarification of the parameters of Fund staff's involvement in the PRS process. They agreed that staff should encourage and support the detailed discussion of macroeconomic issues in PRSPs, including the integration of trade policies and of alternative macroeconomic scenarios. Directors also encouraged staff to align the Fund's country operations and program work as closely as possible with domestic cycles, including the PRS, the budget, and existing joint government-donor evaluation processes.

Supporting the MDGs

Directors concurred that the Fund's principal contribution to the MDG effort lies in helping countries maintain macroeconomic stability, debt sustainability, and appropriate fiscal frameworks. The Fund should also continue to press for more predictable and more effective aid. However, Directors reiterated that the staff should not actively engage in mobilizing and coordinating aid, and should not attempt to estimate the resource requirements for reaching the MDGs in individual countries, as the necessary expertise for this work lay elsewhere. At the same time, many Directors believed that the Fund could act as a catalyst for mobilizing additional resources by determining whether a country's macroeconomic policies would enable it to use more aid without endangering macroeconomic stability. Most Directors considered that the staff should continue to summarize progress toward the MDGs in individual countries, relying on the work done by others.

Collaboration with Donors

Directors agreed that close collaboration with other development partners is essential for effective Fund engagement with its low-income members, and for a successful re-focusing of the Fund's role. Ways must thus be found to deepen this collaboration, with greater emphasis on delineating areas of competencies and the division of labor. At the same time, Directors stressed that country ownership of the aid process is essential to successful donor coordination.

Directors agreed that collaboration should be based on frequent and extensive exchange of information. Subject to the Fund's policies on sharing of confidential information, staff should continue to inform donors of their macroeconomic assessments and key policy concerns, and of the results of missions. Staff's assessments of the ability of countries to handle existing aid volumes, or to manage additional aid without endangering macroeconomic stability, would be an important part of this aspect of collaboration. Directors stressed that staff should provide such information to donors on a timely basis. By the same token, Directors noted that timely information and assessments from donors would be an essential input into the staff's own evaluations, its projections of aid inflows, and its advice to the country authorities on the macroeconomic management of aid.

A critical element of the collaboration with donors would be the country-level understandings between the authorities, the Fund, the World Bank, and other development partners on lead responsibility in supporting priority and growth-critical areas. This would enable each development partner to focus on its areas of comparative advantage, and would enhance the overall development effectiveness of external assistance.

The Role of Resident Representatives

Directors underscored the importance of effective donor collaboration, both for low-income countries and for the Fund. They agreed that resident representatives can play a critical role in the Fund's interactions with donors on the ground, including through cooperation with joint government-donor groups. However, the extent of resident representatives' engagement would depend on the individual country circumstances, and should be decided case-by-case by the relevant area department. Some Directors were willing to consider the idea of using externally-financed consultants to coordinate the Fund's work with government and donors. Regardless, some Directors were of the view that the role and resources of resident representatives should be reviewed, in the context of the Board's budget discussions. Where such an alternative is not feasible, Directors were of the view that departments should consider carefully a reallocation of available resources and a review of the terms of reference of the resident representatives involved to enhance their role.

Resource Implications

Directors emphasized that the current budgetary constraints facing the Fund require a careful assessment of priorities in each country by the relevant area department. Most Directors emphasized that any re-focusing of the Fund's activities in low-income countries should not lead to net additional costs to the Fund. A number of Directors, however, noted that it is premature to determine whether the Fund can afford any additional resources for low-income-country activities, since this will only be decided in the context of overall budget reform when the Fund's role is clarified and overall Fund policy priorities are determined.

Directors noted that one way of meeting the costs of more intensive engagement of the Fund in certain areas would be to implement the various activities over a somewhat longer time frame. However, as this measure would not be enough, Directors suggested that work in non-core areas that are non-macro critical, as well as other existing activities, may need to be scaled back or eliminated where possible. In this regard, a number of Directors saw scope for reducing the frequency or coverage of background notes and Selected Issues papers, or scaling down outreach activities, although many pointed to the valuable contribution of the staff's analytical work to the formulation of Fund policy advice.

Directors looked forward to the integration of the recommendations of this paper into a summary paper describing the full range of the Fund's activities in low-income countries and the cost implications.