What Is a PRSP?

Poverty Reduction Strategy Papers (PRSPs) are prepared by low-income countries through a participatory process involving domestic stakeholders and external development partners, and are endorsed by the IMF and the World Bank. Updated periodically (up to five years) with annual progress reports, PRSPs describe the country’s macroeconomic, structural, and social policies and programs over a three-year or longer horizon to promote broad-based growth and to reduce poverty, as well as associated external financing needs and major sources of financing.

Recognizing that preparation of a PRSP is a lengthy process, the World Bank and IMF have agreed to provide concessional assistance on the basis of Interim PRSPs. I-PRSPs summarize the current knowledge and analysis of a country’s poverty situation, describe the existing poverty reduction strategy, and lay out the process for producing a full developed PRSP in a participatory fashion.

The country documents, along with the accompanying IMF / World Bank Joint Staff Assessments (JSAs), are made available on the IMF and World Bank websites in agreement with the member country. PRSPs and I-PRSPs, as well as policy documents related to the PRSP approach, can be found on the IMF’s website.

IMF–World Bank Collaboration on Public Expenditure Issues

Following the 2002 Monetary Conference, the Development Committee of the World Bank and the IMF indicated that the two institutions would scale up and intensify efforts to assist, countries to mobilize domestic, resources and improve the quality of public spending. In March. 2003, the IMF’S Executive Board considered a joint IMF-World Bank staff paper on the two institutions’ collaboration on public expenditure issues.

While each country has primary responsibility for its own economic and social development, Directors emphasized that the IMF and the Bank, guided by their respective mandates, had an important role to play in supporting country-led strategies on public spending reform. Although the two institutions have different approaches to public expenditure work, reflecting their different mandates and time horizons, their experience suggests that a clear government vision of reform could make their approaches more complementary. At the same time, Directors stressed that this vision would need to be buttressed by close World Bank-IMF collaboration to ensure that actual assistance and policy advice were consistent and complementary. Directors underscored the importance of developing processes that would enable a government and its development partners to formulate an agreed reform program and a common understanding of the sequencing of reforms.

Although a survey of stakeholders had rated Bank-IMF collaboration as between adequate and effective, Directors noted that there was scope for improvement. They highlighted, in particular, the need to better plan staff missions so as to reduce the burden on country authorities, to better coordinate the different time frames of IMF and Bank work on public expenditure issues, and to strengthen the collaboration with donors on country-led reform strategies.

Directors endorsed a new framework for better collaboration among development partners. Centered on strong country ownership, the framework focuses on:

• the articulation by the government of public expenditure reform strategies in PRSPs or other country-owned documents;

• an integrated and well-sequenced program of technical and financial assistance from development partners (including diagnostic work), to support countries’ public expenditure reform strategies; and

• periodic reporting by countries of their performance in public expenditure policy, financial management, and procurement.

Directors observed, however, that in the absence of adequate government commitment, even enhanced collaboration between the IMF and the World Bank would not ensure substantial progress on expenditure reform.

How the HIPC Initiative Works

To qualify for HIPC assistance, a country must pursue, strong economic policies supported by the IMF and the World Bank. It needs to establish a track record of good performance (normally, for a three-year period), and develop a Poverty Reduction Strategy Paper or an Interim-PRSP. Its efforts are complemented by concessional aid from all relevant donors and institutions and traditional debt relief from bilateral creditors, including the Paris Club.

In this phase, the country’s external debt situation is analyzed in detail. If its external debt ratio, after the full use of traditional debt relief, is above 150 percent for the net present value (NPV) of debt to exports (or, for small open economies, above 250 percent of government revenue), it qualifies for HIPC relief. At the decision point, the IMF and the World Bank formally decide on the country’s eligibility, and the international community commits to reducing the country’s debt to a sustainable level. A country reaches its completion point once it has met the objectives set up at the decision point. It then receives the balance of the debt relief committed. This means all creditors are expected to reduce their claims on the country, measured in NPV terms, to the agreed sustainable level.

Once it qualifies for HIPC relief, the country must continue its good track record with the support of the international community, satisfactorily implementing key structural policy reforms, maintaining macroeconomic stability, and adopting and implementing a poverty reduction strategy. Paris Club bilateral creditors reschedule obligations coming due, with a 90 percent reduction in NPV terms, and other bilateral and commercial creditors are expected to do the same. The IMF and the World Bank and some other multilateral creditors may provide interim debt relief between the decision and completion points.

Social Aspects of IMF Financing

By pursuing its mandate to promote global monetary cooperation, the balanced growth of international trade, and a stable system of exchange rates, the IMF contributes to long-lasting economic and human development. The IMF recognizes that to be successful, a macroeconomic program must include policies that directly address poverty and social concerns. The reason for attention to social policy issues is twofold: it reflects the recognition both that “country ownership” is necessary if the programs are to succeed, and that good health and education contribute to, and benefit from, growth and poverty reduction.

The IMF is committed to integrating poverty and social impact analysis in programs supported by lending under the PRGF. The purpose of this analysis is to assess the implications of key policy measures on the well-being of different social groups, especially the vulnerable and the poor.

When analysis indicates that a particular measure (for example, currency devaluation) may harm the poor, the impact is addressed through the choice or timing of policies, the development of countervailing measures, or social safety nets. Safety nets built into IMF supported programs have included:

• subsidies or cash compensation for particularly vulnerable groups;

• improved distribution of essential commodities, such as medicines;

• temporary price controls on some essential commodities;

• severance pay and retraining for public sector employees who have lost their jobs; and

• employment through public works programs.

In pursuing this aspect of its work, the IMF collaborates extensively with other institutions, including regional development banks, the United Nations Development Program, the International Labor Organization, the World Health Organization, and especially, as mentioned, the World Bank. Drawing on these institutions’ expertise, the IMF advises countries on how social and sectoral programs aimed at poverty reduction can be accommodated and financed, both domestically and externally, within a growth-enhancing macroeconomic framework. It does so by identifying unproductive spending that should be reduced to make more money available for basic health care and primary education. At the same time, it highlights key categories of public spending that must be maintained or increased. Through policy discussions and technical assistance, the IMF also plays a role in improving the transparency of governments’ decision making and their ability to monitor poverty-reducing spending and social developments.

HIPC Initiative Debt Relief at Work in Ghana

Citizens of Ghana can assess for themselves how their country’ is benefiting from participation in the enhanced Heavily Indebted Poor Countries (HIPC) Initiative—because the authorities are publicly signposting some of the results of Ghana’s HIPC involvement (see photograph in Highlights, page iii). As construction projects funded by HIPC relief have started, authorities have erected signs at the sites that designate the projects as HIPC Initiative benefits. Ghanaians therefore see, at an early stage, physical evidence that the $2.2 billion in HIPC assistance committed by all the country’s creditors is producing tangible results and is not merely a ledger entry in the government accounts, thereby increasing a sense of public ownership of the country’s poverty reduction strategy.

Ghana reached its HIPC’ “decision point” in February 2002, which means that the country has established a track record of adjustment and reform under IMF- and World Bank-supported programs and has been formally named as eligible for HIPC’ relief. By attaining its decision point, Ghana took a large stride toward reaching the final stage of qualification for full HIPC debt relief—its “completion point.” At the decision point, Ghana agreed to adopt and implement a poverty reduction strategy developed through a broadly based participatory process. The government duly prepared a Ghana Poverty Reduction Strategy, which was published in February 2003.

At the decision point, Ghana also became eligible for interim debt relief, which is designed to sustain a reforming heavily indebted country until it qualifies for full debt relief at its HIPC completion point. It is this interim debt relief that is at work at the signposted construction sites and project locations around the country. In 2002, Ghana received a total of $276 million in interim HIPC assistance, comprising $10 million from the IMF, $33 million from the World Bank, $214 million from the Paris Club of official creditors, and $19 million from other creditors. Of the interim relief total, the authorities have treated $174 million as assistance that Ghana would have received under traditional debt relief mechanisms, and therefore have used the resources for general purposes. One-fifth of the remaining $102 million is devoted to reducing the stock of domestic debt, leaving just over $80 million earmarked specifically for increasing the level and proportion of spending on poverty reduction.

The Ghanaian authorities have specified that the country’s poverty-related spending for the period 2001–03 will be devoted primarily to basic education, with funds also allocated to primary health care, agriculture, rural water supply and sanitation, feeder roads, and rural electricity provision.

Improving Market Access for Developing Countries’ Exports

The multilateral trade negotiations launched at the World trade Organization (WTO) in late 2001 were termed the Doha Development Agenda to signify the importance of the role that developing countries and development objectives would play in the multilateral trading system. This role, however, depends on industrial countries lowering trade barriers and reducing trade-distorting subsidies, thus improving market access to the exports of developing countries. While the world’s trading system is far more liberal than it was 40 years ago, it still discriminates against the poor, partly because they work in sectors such as agriculture that are most affected by industrial country tariffs and subsidies.

Executive Directors considered a joint IMF-World Bank staff report, “Market Access for Developing Country Exports-Selected Issues,” in September 2002. They agreed that the levels of protection in Organization for Economic Cooperation and Development (OECD) countries came at considerable cost both to the OECD countries and to developing countries.

The Board noted that the estimated global welfare gains from the elimination of tariff and quota restrictions on merchandise trade—in both industrial and developing countries—ranged from $250 billion to $680 billion annually, with the gains to developing countries far outweighing annual aid.

At a September press conference marking the public release of the report, Nicholas Stern, Chief Economist of the World Bank, embodied the report’s findings in more vivid terms. The average European cow, Stern said, receives about $2.50 a day in subsidy; the average Japanese cow about $7.50. In contrast, 75 percent of the people living in sub-Saharan Africa subsist on less than $2.00 a day. Kenneth Rogoff, Economic Counsellor and Director of the IMF’s Research Department, was equally critical, calling the magnitude of support given to farmers in rich countries “stunning.”

Support for reducing trade barriers also came from the IMFC, which said in its September communiqué that substantial trade liberalization in the Doha Round was vital for global growth.

Urgent progress in enlarging market access for developing countries and phasing out trade-distorting subsidies in developed countries was essential, the Committeé pointed out. Developing countries, for their part, should also further liberalize their trade regimes to maximize growth and development opportunities.

At the Annual Meetings in September 2002, the IMF and World Bank sponsored a seminar to discuss how developing countries could use trade to promote their development and how industrial countries might help them take advantage of the opportunities created by the global trading system. Panelists—representatives from academia, the World Bank, nongovernmental institutions, and both industrial and developing country governments—concluded that any easing of trade barriers must happen multilaterally, with reciprocal north-south negotiation during the Doha Round, and that global trade liberalization, despite concerted international efforts, would be a long, drawn-out process.