Public Information Notice No. 02/30

Public Information Notice: IMF Executive Board Reviews the Poverty Reduction and Growth Facility (PRGF)

March 15, 2002

On March 8, 2002, the Executive Board of the International Monetary Fund (IMF) concluded its review of the Poverty Reduction and Growth Facility.

Background

The September 1999 Annual Meetings resulted in a clear mandate for the IMF to integrate the objectives of poverty reduction and growth more fully into its operations for the poorest countries and to base these operations on national poverty reduction strategies prepared by the country with broad participation of key stakeholders. Reflecting this new approach, the IMF established the Poverty Reduction and Growth Facility (PRGF) to replace its previous concessional assistance instrument, the Enhanced Structural Adjustment Facility (ESAF). At that time, the Executive Board also called for a review after two years of the initial experience under the PRGF.

As use of the PRGF has evolved, a number of distinctive features of the new facility have emerged. These various aspects of the PRGF were compiled in the document Key Features of Poverty Reduction and Growth Facility (PRGF) Supported Programs, which was published by the IMF in August 2000 and helps to form an organizing framework for this review. Foremost among these is broad public participation and increased national ownership. Basing a PRGF-supported program on the country's PRSP should ensure that civil society has been involved in the formulation of the program, that the country authorities are the clear leaders of the process, and that the program is properly embedded in the overall strategy for growth and poverty reduction. Thus, Fund staff are required to explain to the Executive Board how these programs derive from the poverty reduction strategy and how they are complementary to the World Bank's activities and conditionality. An important outcome of the new approach is that more attention is being given to the economic aspects of governance than in the past. At the same time, more attention should be given to the social impact of major reforms under the program. Where there are expected to be major reforms, analysis of the impact on the poor has to be conducted (normally by the World Bank where governments lack the capacity to do this work themselves), and, where necessary, countervailing measures incorporated in the PRGF-supported program. With improved country ownership, PRGF conditionality can and should be more selective, focusing on measures central to the success of the country's strategy, particularly in the macroeconomic and financial area.

As had been the expectation of the Executive Board, the staff papers for this review—Review of the Poverty Reduction and Growth Facility: Issues and Options—and the associated background paper Review of the Key Features of the Poverty Reduction and Growth Facility- Staff Analyses draws upon a broad range of internal and external views gathered over the period July 2001 to February 2002. These include discussions at various regional fora on the Poverty Reduction Strategy Paper (PRSP) approach during 2001, in which a majority of PRGF countries participated; meetings held with donor government officials and representatives of civil society organizations including with representatives of the donor governments at the OECD's Development Assistance Committee (DAC); and the deliberations at the three main sessions on the PRGF at the recently concluded Bank-Fund International Conference on Poverty Reduction Strategies (January 2002). In addition, the views of key officials in member countries with PRGF arrangements were surveyed and have been taken into account.

A joint review by the IMF and World Bank of the Poverty Reductions Strategy Paper (PRSP) approach was conducted in parallel with the review of the PRGF. The IMF Executive Board's assessment for that review is reported in PIN No. 02/31, "IMF Executive Board Reviews the Poverty Reduction Strategy Paper (PRSP) Approach."

Executive Board Assessment

Directors welcomed the opportunity to review the implementation of the Poverty Reduction and Growth Facility (PRGF) after its first two years, and broadly agreed with the staff assessment. They noted that, since the introduction of the PRGF at the end of 1999, more than 40 countries have had new PRGF arrangements or had ESAF arrangements transformed to reflect the new features of the PRGF. They also noted that the PRGF is well on its way to adopting the program design goals of the Poverty Reduction Strategy Paper (PRSP) approach as they relate to the Fund's areas of expertise. Directors considered that the basic structure and goals of the facility set out in 1999 remain appropriate, and that the Key Features of the Poverty Reduction and Growth Facility issued in August 2000 can continue to serve as a useful summary and guidance document.

Directors concurred that PRGF-supported programs show substantial progress in the implementation of the PRSP approach. In many such programs, budgetary resources for poverty-reducing spending have increased; fiscal frameworks are more flexible in accommodating higher spending to support country-defined poverty reduction objectives; public expenditure management has been strengthened; and macroeconomic frameworks are generally consistent with, or derived from, the supporting Interim PRSPs and PRSPs. Directors also noted that the review found substantial streamlining of structural conditionality in PRGF-supported programs towards areas of Fund expertise or measures deemed critical to the success of the program. They urged, however, continued improvements in coordination and definition of roles between the IMF and the World Bank. They also called for more comprehensive reporting of the conditionalities of other donors, especially the World Bank, in order to provide a better picture of total donor conditionality.

Directors emphasized that there is a need to sustain and even strengthen these efforts going forward. They saw an increased focus on the sources of growth in PRGF-supported programs as being of particular importance in this regard. They noted that growth is critical for achieving poverty reduction, and attention to the sources of growth is essential in developing appropriate policies and projections. They stressed the importance of incorporating into PRGF-supported programs structural reforms to develop the private sector, increase foreign direct investment, enhance external competitiveness, and increase labor productivity, where they are critical to the success of the Fund program. They also stressed the need for increased market access for the exports of low-income countries.

Directors also agreed that there is scope for more systematic application of best practices in other areas. They noted the need for further efforts on a variety of public expenditure issues, including improving the quality and efficiency of government spending, and further steps to strengthen public expenditure management systems. For HIPCs, the latter would involve implementing the action plans designed in collaboration with the Bank and the Fund for strengthening the capacity to track poverty-reducing spending and spending more widely, and regular reporting on implementation in PRGF documents. In view of the uncertainties regarding external financing flows, Directors also stressed the importance of domestic revenue mobilization through strengthening of tax administration and widening of the tax base.

Directors welcomed the progress made in incorporating poverty and social impact analyses (PSIA) into PRGF-supported programs and staff documents, but indicated that there was scope for a more systematic treatment of this issue in PRGF documents. They requested that documents for PRGF-supported programs routinely provide a description of the PSIA being carried out in the country, including a qualitative description of the likely impact of major macroeconomic and structural measures on the poor and a summary of countervailing measures being implemented to offset any adverse effects.

Directors noted the progress made in achieving greater ownership and flexibility in PRGF-supported programs. However, they also saw the need to encourage broader and deeper discussion and analysis of macroeconomic frameworks and policies for PRGF-supported programs, including on alternative policy choices and the constraints and trade-offs involved. Directors noted that documentation for PRGF-supported programs should clearly set out the program's role in the context of the overall poverty reduction strategy, as well as the options that were considered and the commitments made by the authorities in the context of the program. However, this should be done in a manner consistent with the staff's support for the program while respecting the need for frank and confidential discussions between the staff and the authorities. A few Directors stressed that limited PRGF resources should be targeted to countries that truly demonstrate—through actions not promises—ownership and commitment to credible reform programs.

Directors observed that there is scope for more extensive and effective communications with the authorities, development aid partners, and civil society in PRGF countries, and in reporting on these communications in staff reports. They agreed that Fund staff need to more actively explain to a broad audience their views and analysis regarding the links between the macroeconomic framework and growth and poverty reduction outcomes in the context of work on PRGF-supported programs.

Directors welcomed the increased transparency of PRGF-supported programs and discussed options for its further enhancement which will be taken up in the context of the upcoming review of Fund transparency. In particular, Directors saw merit in publishing LOI/MEFPs and PRSPs in original languages when original language versions of these documents are provided by the authorities.

The need for further capacity building to develop and assess macroeconomic frameworks, analyze the profile of poverty, and conduct poverty and social impact analyses has been noted by a wide array of internal and external commentators. In this context, Directors emphasized the importance of additional efforts at capacity building as a key to ensuring full ownership of the reform agenda in PRGF countries. They also emphasized the importance of ongoing efforts by the Fund and others to increase technical assistance to PRGF countries, including through the proposed new regional technical assistance centers in Africa. They also welcomed additional efforts on analyzing macroeconomic policies in the specific context of low-income countries as part of the Fund's research agenda.

Directors took note of the diverse circumstances of low-income countries including countries with little or no balance-of-payments need for Fund resources, countries affected by commodity price or other shocks, or countries emerging from conflict. In this context, they agreed that staff should report back to the Board by the end of 2002 on issues relating to the current structure of Fund financial assistance for the poorest countries, keeping in mind that the available financing resources are limited. There was mixed support for post-program monitoring to apply to PRGF resources, but Directors agreed to take up this matter in the context of the broader review of concessional Fund assistance to low-income countries.

Finally, Directors agreed that the experience with the PRGF and PRGF-supported programs should be reviewed again at the latest before the Spring Meetings in 2005, though some would like to see it reviewed by Spring 2004.