1. This note provides guidance to staff in implementing the recommendations of the staff Task Force on Prolonged Use of Fund Resources that were adopted by the Executive Board. It elaborates on the guidance contained in the Summing Up of the March 2003 Board discussion and the conclusions of the Task Force.¹

2. In discussing both the Task Force conclusions and the original IEO evaluation report on prolonged use, the Board agreed that, in some instances, long-term Fund financial engagement can be appropriate to help member countries address deep-seated problems that require many years to resolve. ²At the same time, concern was expressed that in other cases prolonged use of Fund resources may reflect failures in the design and implementation of programs and that prolonged Fund engagement can hinder the development of domestic institutions.

3. The recommendations supported by the Board fall into two broad categories. First, procedures are to be implemented to strengthen scrutiny of countries engaged in Fund-supported programs over a longer-term period , through a systematic process of ex post assessment and forward planning linked to the Article IV consultation process. Second, the Board endorsed further broad-based efforts to strengthen Fund surveillance, improve program design, and focus conditionality.

Strengthened Scrutiny of Countries with Longer-Term Program Engagement

4. The procedures for ex post assessments recommended by the Task Force and broadly accepted by the Executive Board are to be applied as follows. Such an assessment is to be undertaken for a member when it has spent 7 or more of the past 10 years (84 out of the past 120 months) under upper credit tranche stand-by or extended arrangements, including precautionary arrangements, and arrangements involving a blend of GRA and PRGF/ESAF resources.³ A member using the Fund's concessional resources is to undergo such an assessment when it has gone through two or more multi-year arrangements under the PRGF or ESAF.⁴ In both cases an arrangement is counted even if it is cancelled or expires without all the scheduled purchases or disbursements having been made, although, for GRA arrangements, only the months prior to cancellation or expiration are counted in triggering an ex post assessment. In discussing the application of this framework, the Board stressed that in some cases longer-term Fund financial engagement with a member can be beneficial in assisting it through lengthy and complicated development processes. Although precautionary arrangements are subject to the ex post assessment, this should not imply that in the context of decisions on a successor arrangement they should be evaluated as if they were indistinct from a standard program. Precautionary arrangements may provide a more effective device for facilitating the transition from sustained reliance on Fund resources, and this framework for reducing the risk of inappropriate prolonged use of Fund resources should not entail a new bias against precautionary arrangements.

5. For the members identified above that are expected to request a new arrangement, an interdepartmental staff team with representatives from the area department, PDR, and at least one other functional department will prepare an ex post assessment of the existing program with input from the World Bank and, possibly, outside experts. The report will include an analysis of the economic problems facing the country, a critical and frank review of progress during the period of Fund-supported programs, and a forward-looking assessment that takes into account lessons learned and presents a strategy for future Fund engagement. The results of this exercise will be an input into the Board discussion on a successor arrangement or Article IV consultation mission (whichever comes first), and will be presented to the Executive Board as a supplement to the associated staff report.⁵ For countries that are graduating from Fund-supported programs, the assessment can be carried out by the mission team in the Article IV report following the program. As a transitional measure, for members already engaged in discussions toward a new multi-year arrangement, or for those members whose most recent Article IV report incorporated a detailed ex post assessment, this assessment will be conducted at the end of the next arrangement.

6. The procedures for ex post assessments should be implemented in a way that strikes an appropriate balance in each case between the need to reflect on the program's design and implementation in relation to its broader objectives and the desirability of avoiding unnecessary discontinuity in the member's relationship with the multilateral development banks and other donors. In some cases, it will be possible to undertake the ex post assessments during the latter part of the existing arrangement. In other cases, a pause in program engagement may be unavoidable or even desirable. In the latter cases, careful consideration would need to be given to the appropriate devices for providing an assessment of a member's policies where that is sought by multilateral development banks and other donors during the pause: where there is a reasonable degree of confidence that program engagement will resume, albeit perhaps with modifications in program design and conditionality, staff could provide the country with some targets to bridge this period, and use assessment letters to keep donors informed. Care should be taken, however, to maintain the credibility of the process and avoid prejudging the outcome of the ex post assessments. In all cases, clarity about the nature, status, and timing of the assessment procedures, vis à vis the authorities, other international financial institutions, and donors, will be essential.

7. Ex post assessments and the related sections of Article IV staff reports should spell out the challenges the authorities are confronting with the aid of the Fund, the rationale for prolonged Fund engagement to date, and the path to graduation from a sustained program relationship and, where relevant, to greater reliance on private financing, domestic and external. UFR staff reports should provide an explicit exit strategy and explain how the proposed program will make that exit possible. In cases where it may be necessary to envision a longer-term program relationship from the outset of a program, the substantive basis for that judgment should be made explicit. PRGF staff reports will not in many cases be able to offer a credible path to exit within the context of the proposed program, but they need to devote more attention to degree to which the program can be expected to contribute to progress in general and toward a greater reliance on private domestic and external sources of finance.

8. Executive Directors generally agreed that any recommendation of a new program for Fund support should be based on a careful assessment of the member's implementation capacity and program ownership. To facilitate this assessment, staff should identify key capacity weaknesses at the outset of a new program, explain how these weaknesses affect the choice and design of the program, and highlight measures in the program to build capacity in these areas. Staff should also provide an explicit analysis of various dimensions of ownership, indicating the level of political consensus on the nature of the problems the member country faces and the policy options available for addressing them.

9. Correspondingly, the access level for countries making slow progress toward external viability would require strong policy justification and should be guided by the need to reduce the outstanding use of Fund resources over time, in line with existing policies on access.

10. In consultation with area departments, PDR will prepare semi-annual reports on longer-term program engagement, starting in December 2003. Assessments of progress in implementing the adopted strategy, including the implementation of these guidelines, will be provided to the Board in the context of the biennial conditionality reviews. These reports will differentiate those cases in which a country has a precautionary arrangement for part of the relevant time period.

Strengthening Surveillance, Program Design, and Conditionality

11. The Board endorsed the emphasis placed by the Task Force and IEO report on the need for surveillance in program countries to take a step back from the program context so that the objective of limiting the prolonged use of resources can be achieved. Article IV consultations must provide a broader perspective on the economic challenges facing the country, with a clear, candid, and thorough assessment of whether the policies being pursued under the program remain appropriate to achieve longer-term objectives. These recommendations will be made explicit in the forthcoming guidance note on surveillance in UFR cases.

12. The IEO report noted that, in some cases, prolonged use reflects poor program implementation attributable to weak country ownership of economic policies or poorly focused conditionality. The Board endorsed the approach outlined by the Task Force, based on streamlining and focusing conditionality, promoting ownership, and improving the prospects for sustained implementation of Fund-supported programs through consistent implementation of the guidelines on conditionality approved in September 2002.⁶ The need for `realism' in program objectives and assumptions was also stressed. The Board also noted the need to strengthen members' implementation capacity, including by providing technical assistance.

13. The use of alternative vehicles to provide donors with the Fund's views on the economic policies of members can reduce pressures for inappropriately prolonged use of Fund resources. The surveillance framework provides the capacity for frequent assessment and monitoring of members' economic policies and these can be supplemented by track record staff-monitored programs (SMPs) and post-program monitoring (PPM) as appropriate in individual cases.

14. Given that appropriate program design and a proper evaluation of ownership will require increased understanding of political economy issues, staff is encouraged to enhance its analysis and reporting of political economy issues in briefings, back-to-office reports, and staff reports. The political economy discussion should be directly relevant to the macroeconomic and program issues at hand and should be candid but also avoid undermining confidence in the program. The mission team and the resident representative will mainly be responsible for this analysis, although in some cases, outside experts could be invited to contribute.⁷

15. The Board requested more systematic information when Fund-supported programs have gone off track as well as an assessment of the extent to which completed programs had achieved the initial objectives of the program. When the staff considers that a program has gone off track, it will notify the Board no later than six months after a scheduled review. This will normally be done in the context of the next Article IV consultation report, which is brought forward in these circumstances. If more timely information is required, an informal briefing (generally in a country matters discussion) of the Board can take place, describing the main issues and any expected change in the schedule of drawings or reviews. For programs that conclude successfully, the staff report for the final review will include a concise description of the degree to which the program has achieved its initial objectives. In cases where there is only a mid-term review, the Board should be informed of the degree to which the program achieved its original objectives in the context of the next Board discussion, either for the Article IV consultation or a new request for use of Fund resources.

¹ Summing Up of Conclusions of the Task Force on Prolonged Use of Fund Resources BUFF/03/51, April 8, 2003; Conclusions of the Task Force on Prolonged Use of Fund Resources SM/03/46, February 5, 2003.

² Evaluation of the Prolonged Use of Fund Resources, SM/02/287, September 6, 2002.

³ The test dates for this assessment will be end June and end December each year, and the assessment will apply for the interval between these dates.

⁴ The IEO originally recommended a similar approach, with the difference that it applied the "7 years out of 10" rule to PRGF-eligible countries as well.

⁵ The ex post assessment will be comparable to a country strategy paper, but instead of being a separate paper, will be integrated into the Article IV surveillance process or a request for a new program.

⁶ New Guidelines on Conditionality, September 2002, Operational Guidance Note on the New Conditionality Guidelines; see http://0-www-imf-org.library.svsu.edu/External/np/pdr/cond/2002/eng/guid/092302.htm and http://0-www-imf-org.library.svsu.edu/External/np/pdr/cond/2003/eng/050803.htm

⁷ The Board also endorsed efforts to strengthen staff skills and awareness in this area by increasing staff training on political issues that may have an important influence on program design and implementation, through targeted internal seminars, such as those recently introduced by INS, targeted participation in external events, and coaching, especially for mission chiefs and resident representatives.