Public Information Notice No. 04/110

Public Information Notice: IMF Executive Board Reviews the Role of the Fund in Low-Income Member Countries

September 30, 2004

On August 30, 2004, the Executive Board of the International Monetary Fund (IMF) considered a paper on the role of the Fund in low-income member countries.

Background

The IMF has, for some time, been engaged in a review of its role in low-income member countries and how it can best support these members and contribute to the intensified effort toward the achievement of the Millennium Development Goals (MDGs). Earlier this year, a Committee on Low-Income Country Work, chaired by the First Deputy Managing Director, Anne Krueger, was formed to give overall coherence to staff work in this area. The Committee set as one of its first tasks the crafting of a succinct statement on the role of the Fund in low-income member countries. It drew on previous Executive Board documents¹ and the recent study by the IMF's Independent Evaluation Office (IEO) on Poverty Reduction Strategy Papers (PRSPs) and the Poverty Reduction and Growth Facility (PRGF).² It also drew on extensive staff discussions over the last few years with officials of low-income member countries, multilateral institutions, bilateral donors, and civil society. The paper that was considered by the Executive Board on August 30, 2004, and that is being issued at the same time as this PIN, contained a preliminary draft of this statement. The paper also raised a set of current policy issues stemming from the statement and outlined the main elements of the IMF's low-income country work program for the coming six months. It is envisaged that the staff and the Executive Board will reconsider the statement on the role of the Fund after the work program is completed.

Executive Board Assessment

Executive Directors welcomed the opportunity to consider a statement laying out the role of the Fund in low-income member countries and to reflect on the Fund's policy agenda in this area. They welcomed the recently established Committee on Low-Income Country Work with the objective of ensuring policy coherence across the Fund on issues related to low-income countries. Directors agreed with the Committee that a clear, succinct statement stipulating a framework for Fund engagement in low-income countries would usefully clarify the objectives and responsibilities, as well as guide the work of the Fund in these countries in line with its mandate. At the same time, they recognized that the paper is not comprehensive in its coverage of all Fund policies in low-income countries. They also acknowledged that this is a work in progress, as it involves interrelated components of Fund policies where discussions are still at a preliminary stage and consensus has yet to be reached on the statement. The proposed framework would therefore need to be revisited following the separate discussions of these specific issues.

Most Directors agreed that the content of the proposed statement on the role of the Fund in low-income member countries is broadly consistent with basic principles concluded at previous Board discussions. They particularly appreciated the emphasis that it is the responsibility of low-income countries to put in place the policies and institutions needed for their development, while the Fund's support should focus on helping members establish and maintain macroeconomic and financial stability to foster durable growth and poverty reduction. Directors concurred that the Fund should continue to support the efforts of its low-income member countries through three channels: policy advice, capacity building, and financing, which includes debt relief. They also welcomed the emphasis in the statement on placing the Fund's mandate in the context of international partnerships, which are essential if low-income countries are to make significant progress toward achieving the Millennium Development Goals (MDGs) over the next decade. Directors underscored the need for the Fund to cooperate and coordinate closely with other multilateral institutions, especially the World Bank, and bilateral donors under the Monterrey Consensus, as well as with low-income member countries through the poverty reduction strategy process.

Several Directors noted that, even at this stage, there remains scope for refining the proposed statement, and several suggestions were made in that regard. Issues that could figure more prominently in the statement include an exit strategy from PRGF-supported programs, the division of labor between the Fund and other multilateral institutions, and most important, the goal of reaching long-term development needs building on short-term macroeconomic stabilization. The view also was held by several Directors that the statement should be deferred until the Board reaches substantive conclusions on the outstanding issues that have implications for Fund financing and a more effective Fund engagement in low-income countries. These include, in particular, the refinement and operationalization of the debt sustainability framework, the adequacy of debt relief, mechanisms for providing Fund signals to low-income countries and donors, and financing options.

In considering the policy agenda, Directors recognized that resource costs are an overarching constraint, which necessitates careful prioritization. Given the current medium-term expenditure framework, Directors observed that resources for new work would need to be found through reductions or efficiency gains in other activities.

Directors supported the areas of policy work for the immediate future as laid out in the staff report. They agreed that the Fund's policy advice should focus on its core expertise—macroeconomic stability—and stressed the importance of preserving and spreading the gains in macroeconomic stabilization achieved by low-income countries in recent years. Directors also highlighted the need for the Fund to strengthen its efforts to explain how macroeconomic stability and efficiency in using structural reforms translates into higher growth in low-income countries, as well as how poverty reduction can be pursued in a stable macroeconomic environment. In this regard, they saw an important role for the Fund in ensuring that government policies support poverty reduction, including through its advice on how to manage aid inflows prudently and presentation of alternative scenarios and policy options. In addition, Directors generally saw merit in incorporating relevant Poverty and Social Impact Analysis into the Fund's work, with due regard being paid to resource constraints and comparative expertise. Some Directors saw a stronger role of the Fund in encouraging policy reform in industrial countries regarding trade, agricultural subsidies, and official development assistance in the context of the MDGs. Some other Directors, however, stated that these issues fall outside of the Fund's mandate and expertise, and should be left to the World Trade Organization and the World Bank.

Directors stressed that the Fund has a crucial role to play in capacity and institution building in low-income member countries, primarily through technical assistance. It was emphasized that further efforts should be made to make Fund technical assistance more effective and output-oriented. Directors agreed that the Fund's role in this area extends beyond the provision of technical assistance to include also the complex interactions between the Fund, its staff, and member countries that enhance the authorities' ability to develop and implement macroeconomic policies.

Directors observed that the Fund has already taken important steps to tailor its financial assistance to the varying needs of low-income member countries, although some items remain to be addressed, notably strengthening the Fund's ability to assist members facing shocks. Directors underscored that it is not the Fund's role to provide long-term development assistance but rather to assist members in responding to balance of payments problems. By helping members develop appropriate macroeconomic frameworks, and by providing financial support through the PRGF, the Fund could play an important catalytic role in mobilizing development assistance. Directors agreed, however, that the Fund's role in mobilizing aid on behalf of low-income countries for MDG financing needs to be clarified. Many Directors held the view that the Fund should not play a role in mobilizing aid from the international community, but rather its contribution in this area lies in providing policy advice based on sound assessments of financing gaps and macroeconomic implications of aid flows, in terms of both levels and variability. Some other Directors preferred a broader role of the Fund, including in promoting and coordinating aid inflows for MDG purposes.

Directors agreed on the need to develop further instruments for providing donors with an assessment of a member's policies in the absence of a program relationship. Such signaling is already provided through a number of instruments, including surveillance—regular and intensified—and low-access PRGF arrangements, but additional instruments may be worth considering. In this regard, a number of Directors felt that nonborrowing arrangements, precautionary PRGF arrangements, or post-program monitoring for countries with substantial outstanding loans under the PRGF would be useful not only as signaling devices but also as alternate channels through which low-income countries could benefit from an intensive dialogue with the Fund.

Directors agreed that the PRSP process enhances the poverty focus of Fund lending and provides a useful framework for country teams to collaborate closely with donors on aid prospects. They also reiterated that the PRGF remains the principal tool of Fund financial assistance to low-income countries. Directors noted, however, that there remain some unresolved issues regarding the role of the Fund in the PRSP process and the link between the PRSP and PRGF lending, and therefore asked the staff to continue its work on this front. Some Directors also emphasized the importance of strengthening the Fund's outreach efforts to both civil society in low-income members and donors.

Directors expressed broad support for the preliminary work program planned for the period between now and the 2005 Spring Meetings, and made useful suggestions regarding coverage, priorities, and sequencing—on which the staff would reflect further. Many Directors particularly looked forward to further consideration of issues related to instruments and financing. The papers listed on the work program before the 2004 Annual Meetings would give the Board an opportunity to review some of the priority issues on the extensive policy agenda. Directors acknowledged that the program for the period between the 2004 Annual Meetings and the 2005 Spring Meetings may need to be revised to take into account the deliberations of the IMFC during the 2004 Annual Meetings. It was agreed that the paper will be revised to take account of Directors' comments and drafting suggestions, and published together with a PIN summarizing the Board discussion.