Public Information Notice No. 05/169

Public Information Notice: IMF Executive Board Discusses Doha Development Agenda and Aid for Trade

December 27, 2005

On November 14, 2005, the Executive Board of the International Monetary Fund (IMF) discussed the Doha Development Agenda and Aid for Trade.

Background

At their 2005 Spring meetings, the Development Committee and the International Monetary and Financial Committee called on the World Bank and IMF to work with others to develop more detailed proposals to help developing countries adjust to and take advantage of the Doha Round. In response, Bank and Fund staff prepared a paper on The Doha Development Agenda and Aid for Trade following a consultation process with donors and least developed countries.

The joint paper emphasizes that trade can be an important engine of growth, and stresses the importance of achieving an ambitious outcome from the Doha Round. Nevertheless, some countries might require assistance to help them alleviate the existing infrastructural and other supply constraints to taking advantage of the opportunities of open international trade, and in mitigating and managing adjustment costs.

Executive Board Assessment

Executive Directors welcomed the opportunity to discuss the Joint Fund and Bank staff proposals on Aid for Trade for the least developed countries, and reaffirmed the importance of successfully concluding the Doha Round of multilateral trade negotiations. An ambitious agreement on improved market access in both goods and services, and stronger trading rules in the WTO, will be key vehicles for promoting efficiency, economic growth, and poverty reduction, and thereby supporting the achievement of the Millennium Development Goals. Directors pointed to the critical role that developed countries can play in addressing remaining impediments to trade by removing market access restrictions, reducing tariff escalation, and cutting agricultural and other subsidies. In the same vein, Directors also called on developing countries, for their part, to commit themselves to further trade liberalization. Directors stressed that Aid for Trade is not a substitute for an ambitious outcome in the Doha Round, but an essential and useful complement aimed at allowing some developing countries to address obstacles to exploiting trade opportunities fully.

Directors discussed the staffs' recommendations on Aid for Trade, which include: (i) enhancing the Integrated Framework (IF), including predictable, multi-year financing on the order of US$200-400 million over an initial five-year period; (ii) examining the adequacy of existing mechanisms to address regional or cross-country aid for trade and exploring new financial mechanisms as appropriate; and (iii) making a firm Fund and Bank commitment to assist countries facing adjustment needs through analysis, policy advice and-as necessary-financial support, consistent with existing policies. Most Directors supported these proposals. A few Directors urged caution in setting forth a specific IF funding figure at this stage. A number of Directors supported the expansion of the IF to all low-income countries, including through a separate window for non-least developed countries, while a few others cautioned that this should not result in an erosion of benefits for the least developed countries.

Directors noted that, to date, many least developed countries have not prioritized trade-related projects in their donor assistance programs, and trade liberalization assessments and diagnostics and a comprehensive and coherent strategy for trade development often remain disconnected from the Poverty Reduction Strategy Paper process. Against this background, Directors agreed that an enhanced and suitably redesigned IF should play a more effective role in helping to identify aid for trade needs and in coordinating trade-related technical assistance. An enhanced IF could make a major contribution at the country level in identifying, through comprehensive diagnostic studies, the priorities for needed trade policy reforms and supporting action plans. Facilitating the integration of these plans in the country-led poverty reduction strategy process will be critical in helping to mobilize increased donor financial support. A possible approach for improving the operation of the IF at the country level could be the establishment of a national IF implementation body (NIB). A few Directors cautioned, however, that the approach to be implemented should take account of country specificities and avoid creating an additional level of bureaucracy.

Directors noted that a fundamental premise and strength of the IF is its broad-based donor participation, and that it envisages a recipient-driven process, donor coordination, and emphasis on provider competencies, while mainstreaming trade into existing bilateral and multilateral aid programs rather than setting up separate and parallel aid mechanisms. They welcomed the formation of the Geneva-based IF Steering Committee (IFSC) task force to design an enhanced operational and governance structure capable of delivering effectively on the IF's goals. In particular, they welcomed the task force's guiding principles for an enhanced IF, notably additional and predictable financial resources, strengthened capacity in IF beneficiary countries, and improved IF governance. Some Directors expressed the hope that the task force's concrete proposals for designing the enhanced IF would be based on careful consideration of the rationale for additional financial resources for the IF.

Most Directors agreed that an examination by the Fund and Bank staffs of the adequacy of existing mechanisms to address regional or cross-country infrastructural needs would be useful, and would allow a more informed assessment of the possible need for new financing mechanisms, including a dedicated multilateral fund to address cross-country or regional aid for trade needs. However, a few Directors were skeptical about the need for establishing specialized funds for regional projects, and believed that the Fund should instead explore ways that existing institutions with regionally-focused programs can better contribute to the IF and take regional trade concerns and existing regional funds into account.

Directors agreed that the Fund will continue to have a major role to play in helping members address the potential adjustment costs and any associated financing needs arising from more open international trade. However, they noted that financing needs assessments should take into account countries' implementation capacities. In addition, the Fund should confine its work to its mandate and core areas of competence, should be guided by the principles of selectivity and effectiveness, and should draw on the expertise of other institutions as much as possible. The Fund will continue to carry this work forward through its regular surveillance function, research, lending, and technical assistance-particularly on tax and customs reforms, and on financial sector regulation and supervision. In this context, Directors noted the establishment of a staff working group to examine the potential revenue impact of Doha tariff reduction scenarios for countries likely to face adjustment shocks. Some Directors also suggested that the staff study the potential consequences of trade liberalization, including country-specific ex-post analyses of previous trade reforms to draw lessons for the future. Many Directors expressed interest in the staff's proposal to promote the use of floating tranches in Fund arrangements to provide flexibility in relation to the timing of trade reforms associated with potential transitory balance of payments shortfalls, and looked forward to considering the use of floating tranches in the context of a specific Fund-supported program.

Directors agreed that the need for financial support in addressing the potential adjustment costs of trade reform can generally be met in the context of the existing Fund facilities, including the Trade Integration Mechanism, in collaboration with other international financial institutions and the donor community. Directors concurred that a dedicated multilateral fund to address adjustment costs would not be desirable, as any such fund would duplicate existing channels to provide adjustment assistance.

To conclude, Directors have welcomed the staff's suggestions to enhance the IF within the guidelines for the IMF's work on trade issues generally, and they look forward to the work of the IF task force in developing practical ways of implementing the suggestions to improve the IF by increasing engagement by donors, the private sector, and civil society. Directors recognize that members' technical assistance needs could increase as a result of the Aid for Trade initiative. The Fund's response to any such increased requirements will of course need to be based on carefully exploiting the scope for proper prioritization of projects and re-deployment of resources, and may need to be quantified in due course in the context of the Fund's medium-term budget. A few Directors cautioned that their support for the Aid for Trade Initiative is based on the understanding that this initiative will not lead to an unbudgeted and unfunded mandate for the Fund.