PRSP Approach to Development Assistance

The IMF and the World Bank jointly developed the PRSP approach to help focus the attention and resources of both low-income countries and the international donor community on poverty reduction. Since its introduction in December 1999, the approach has been widely adopted in low-income countries and has been increasingly embraced by these countries’ external development partners. In this context, alignment and harmonization of donor processes have been critical to sustaining the PRSP approach, designed to overcome long-standing problems of poor donor coordination and weak country ownership. Consequently, PRSPs are becoming effective instruments for countries to gain better control over external assistance.

Low-income countries prepare their Poverty Reduction Strategy Papers through a participatory process involving domestic stakeholders and external development partners. The strategies are endorsed by the Executive Boards of the IMF and the World Bank. Updated periodically (at least once every five years) and with annual progress reports, PRSPs describe countries’ macroeconomic, structural, and social policies and programs over a three-year or longer horizon aimed at promoting broad-based growth and reducing poverty, as well as associated external financing needs and major sources of financing. Under the PRSP approach, countries may receive financing from the Poverty Reduction and Growth Facility loan program. PRSPs also provide the operational basis for debt relief under the enhanced Heavily Indebted Poor Countries Initiative.

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

During FY2004, the Executive Board approved 10 new PRGF arrangements (for Bangladesh, Burkina Faso, Burundi, Dominica, Ghana, Honduras, Kenya, Mauritania, Nepal, and Tanzania), with commitments totaling SDR 955 million (see Table 7.3). In addition, an augmentation of the existing arrangements for Madagascar was approved. Total PRGF disbursements to these countries and other countries with existing arrangements amounted to SDR 865 million during FY2004. As of April 30, 2004, 36 member countries’ reform programs were supported by PRGF arrangements, with commitments totaling SDR 4.4 billion.

In their latest annual review of the program, in September 2003, Executive Directors welcomed the continuing strong momentum of the approach. They noted evidence of progress across a wide range of fronts as the approach matured, and stated that the imperative was to address the emerging challenges in implementation, including the need for better prioritization of policies and objectives, improved donor alignment and harmonization, and strengthened public expenditure management and budgetary processes.

Directors underscored the importance of national ownership of poverty reduction strategies. They welcomed the increasing engagement of parliaments and noted that the PRSP process had survived transitions in national governments in several countries, while requiring adaptations to reflect the programs of the new administrations. Directors emphasized the need for greater cohesion between PRSPs and other planning documents and for better integration between teams responsible for PRSP preparation and other units of government.

The greater openness of policymaking processes, which the PRSP approach is facilitating, was welcomed by Directors. The private sector is increasingly active, and nongovernmental organizations have often carved out roles for themselves as suppliers of information and watchdogs in monitoring government efforts. Directors acknowledged that, at the same time, there remained some continuing criticisms from civil society organizations, in particular, that they were being asked to react rather than to contribute to program formulation, and that some critical policies underpinning the PRSP—such as the macroeconomic framework—were sometimes not sufficiently open to public debate.

Directors underscored that macroeconomic policies and projections provided the framework for any PRSP. Consistent with the preparation of the PRSP as a country-owned process, they emphasized that the government, and not the Fund, should lead the discussion of the macroeconomic framework in the public domain. It was, however, also important for the Fund to continue its outreach efforts to civil society and donors. Directors called on governments to provide an explicit forum for macroeconomic dialogue in the context of the PRSP process in which Fund Resident Representatives could participate. Noting that the deepening and widening of skills is a prerequisite to strengthen any government’s ownership of its macroeconomic framework, Directors emphasized that the Fund would need to continue to support countries’ capacity-building efforts.

Democratic Republic of the Congo

The IMF has been providing policy advice to the Democratic Republic of the Congo (DRC) since early 2001-when the country was still torn by internal strife and armies from seven neighboring countries occupied about half its territory-first under a staff-monitored program and then under a program supported by the Poverty Reduction and Growth Facility (PRGF), which also provided financial assistance.

The two programs have contributed to a turnaround of the DRC’s economy. Real GDP growth was positive in 2002 for the first time in 13 years, and it accelerated to 5.6 percent in 2003. The vicious circle of hyperinflation and currency depreciation has been broken. By implementing prudent fiscal and monetary policies, adopting a floating exchange rate regime, and undertaking bold structural reforms, the DRC has achieved macroeconomic stability. This turnaround has contributed to the peace process. Foreign troops have withdrawn from the country, which was reunified under the transitional government formed in June 2003.

In FY2004, the Fund continued to provide extensive technical assistance to the DRC in a number of areas. As part of this assistance, it posted resident experts to the ministry of finance and the ministry of the budget.

DRC-IMF activities in FY2004

DRC-IMF activities in FY2004

June 2003	Submission to the Fund’s Executive Board of the DRC’s Preparation Status Report on the first year of implementation of the country’s Interim Poverty Reduction Strategy Paper (prepared in 2002) and the preparation of the full PRSP
July 2003	The DRC became the 27th country to reach its decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, making it eligible for debt-service relief of $6.3 billion, in net-present-value terms
March 2004	Completion of the third review of the DRC’s program, supported by an arrangement under the PRGF

View Table

DRC-IMF activities in FY2004

June 2003	Submission to the Fund’s Executive Board of the DRC’s Preparation Status Report on the first year of implementation of the country’s Interim Poverty Reduction Strategy Paper (prepared in 2002) and the preparation of the full PRSP
July 2003	The DRC became the 27th country to reach its decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, making it eligible for debt-service relief of $6.3 billion, in net-present-value terms
March 2004	Completion of the third review of the DRC’s program, supported by an arrangement under the PRGF

Board members considered it generally too early in the implementation of PRSPs to form judgments about whether the policies were delivering on their stated objectives. They welcomed the focus being placed in PRSPs on measures to foster private sector development. Noting the identification by a number of PRSPs of weak governance and corruption as significant constraints, they considered the implementation of measures to improve the investment climate as key to improving growth prospects. Directors noted that poverty-reducing spending has increased in the PRSP countries where data are available and were encouraged by the tentative signs of improved access of the poor to some basic services.

FY2004 saw a number of related measures to support the PRSP process:

• The Fund sought to coordinate PRGF arrangements with country budgets and PRSP cycles to ensure that macroeconomic policymaking moved in concert with national and donor decisions on poverty reduction initiatives.

• The Fund and the Bank collaborated more closely on country programs and conditionality (see Section 3). However, there is scope for improvement, and Fund staff will monitor performance closely and deal with issues of mutual concern through a reinvigorated Joint Implementation Committee.

• The Fund intensified its efforts to incorporate poverty and social impact analysis into the design of PRGF supported programs. Plans called for a small group (four staff members) to be set up shortly within a division of the Fiscal Affairs Department.

• The IMF pressed for fuller inclusion of trade policy considerations in PRSPs, including through the Integrated Framework for Trade-Related Technical Assistance, a cooperative interagency effort supported by bilateral donors, as well as for regional conferences with development and trade officials.

The next Fund-Bank PRSP progress report, which will be completed before the 2004 Annual Meetings, will be informed by a forthcoming Independent Evaluation Office report on the PRSP approach and the PRGF. The report will propose ways to sharpen the focus of PRSPs so as to provide a better link to the Millennium Development Goals and a better operational basis for policy choice and donor coordination.

Role of the IMF in the Medium Term

The Board met in August 2003 and again in March 2004 to consider various aspects of the role of the IMF in low-income countries.

The August discussion was broad. Directions considered that the Fund could best support poor members and contribute to the stepped-up international effort toward the achievement of the Millennium Development Goals by intensifying its policy advice, technical assistance, capacity building, and, when warranted, temporary financial assistance. They also reached the following conclusions:

• While Fund involvement in these countries will continue over the long term, greater selectivity about the circumstances in which it provides financial support may be required.

• The IMF’s financial role is to focus on the provision of temporary assistance in support of macroeconomic reform efforts and the policy response necessary to help countries adjust to the effects of exogenous shocks.

• The IMF’s instruments need to be strengthened further in three areas: (1) supporting post-conflict and other countries with severe institutional weaknesses in their efforts to get to a point where they can implement PRGF supported programs; (2) assisting countries with more durable records of macroeconomic performance to move from a program-based to a surveillance-based relationship; and (3) providing policy advice and financial assistance to help member countries deal with exogenous shocks.

Directors also acknowledged the need to consider more carefully how the IMF’s instruments might be better tailored to the diverse needs of its low-income country members.

In March 2004, the Board followed up by reviewing the instruments and financing for low-income countries. After affirming that the Fund had an important role in low-income member countries in terms of surveillance, policy advice, and technical assistance, Directors considered that the Fund would continue, where necessary, to support low-income countries financially, carefully calibrating its financing to the country’s circumstances. Directors endorsed the following proposals:

• For members with continuing needs for IMF financing, to establish norms for access to PRGF resources for the third and subsequent arrangements under the facility, and to strengthen Fund policy and guidelines for granting resources from both the PRGF and General Resources Account;

• For countries with a limited need for IMF financing, to establish a standard low-access level for PRGF arrangements;

• For countries that do not need IMF financing, to strengthen surveillance;

• For members with outstanding PRGF loans of 100 percent of quota or more, to cover under Post-Program Monitoring; and

• For countries emerging from conflicts, to modify the policy on emergency assistance to allow a longer time for transition to regular IMF lending through programs of longer duration and more tapered access.

Directors considered low-income countries to be particularly vulnerable to economic shocks outside their control—such as natural disasters and commodity price changes—that can harm growth, macroeconomic stability, debt sustainability, and antipoverty efforts. To help countries prepare for such events and provide financial support when appropriate, the Board endorsed the following proposals:

• To establish explicit principles for augmenting PRGF arrangements;

• To introduce a subsidy for emergency assistance for natural disasters; and

• To develop a vehicle that would provide lending on PRGF terms but with the program design features and duration of a Stand-By Arrangement. Such a vehicle could provide rapid and concessional assistance in response to shocks in circumstances where a comprehensive three-year PRGF arrangement might not be appropriate.

The Board also discussed the potential size of the financial resources required to support the Fund’s continued involvement in low-income countries and of various options for financing (see Box 7.6).

HIPC Initiative

The HIPC Initiative was launched in 1996 by the IMF and World Bank with the aim of ensuring that no poor country would face a debt burden it could not manage. The Initiative entails coordinated action by the international financial community, including multilateral organizations and governments, to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries (see Box 4.1). Following a comprehensive review in September 1999, a number of enhancements were approved to provide faster, deeper, and broader debt relief and to strengthen the links between debt relief, poverty reduction, and social policies. Countries’ continued efforts toward macroeconomic adjustment and structural and social policy reforms—including increased spending on social sector programs such as basic health care and education—are central to the enhanced HIPC Initiative.

The HIPC Initiative has freed up resources. Before the Initiative, eligible countries were, on average, spending slightly more on debt service than on health care and education combined. This is no longer the case in the 27 countries receiving HIPC relief. Under their recent IMF-and World Bank-supported programs, these countries have markedly increased their expenditures on health care, education, and other social services, and such spending is now almost four times the amount of debt-service payments, on average.

During FY2004, progress continued to be made in implementing the enhanced HIPC Initiative (Table 4.1) and reducing the debt burdens of poor countries:

• Five additional countries reached their completion points (Ethiopia, Guyana, Nicaragua, Niger, and Senegal) during FY2004, taking the total to 13.

• As of end-April 2004, about $52 billion had been committed in debt-service relief to the 27 countries that had reached their decision points. The debt stocks of these countries are projected to decline by about two-thirds as a result of debt relief under the HIPC Initiative.

• Of the 14 countries that have reached their decision points but not their completion points, the majority are on track with their macroeconomic programs and have made progress in the implementation of their full Poverty Reduction Strategy Papers. Several are expected to reach their completion points by the end of calendar year 2004.

• For the remaining 11 eligible HIPCs (9 of which are in Africa), the sunset clause of the enhanced HIPC Initiative is due to take effect at end-2004. Many of these countries are affected by conflict and, in some instances, have substantial arrears outstanding to various creditors. A few of these countries are moving toward establishing a track record of macroeconomic performance. Burundi started a PRGF arrangement in January 2004, and discussions for establishing a track record toward a PRGF arrangement by putting in place staff-monitored programs are under way for Comoros and the Republic of Congo. The Executive Boards of the Fund and the World Bank will consider later in 2004 options for addressing the sunset clause of the enhanced HIPC Initiative.

• Topping up is provided under the Initiative to countries that have experienced a fundamental change in their economic circumstances during the interim period because of developments beyond their control. By the end of FY2004, the Boards of the World Bank and the Fund had agreed to provide topping up to Burkina Faso, Niger, and Ethiopia.

• Three countries—Liberia, Somalia, and Sudan—have been in protracted arrears to the Fund, the World Bank, and other creditors for up to two decades. To date, no provision has been made for the HIPC grant resources that would be needed for these countries once they clear their arrears. Given the magnitude of their debt problems, achieving debt sustainability will require substantial additional resources from the international community. The mobilization of these resources could soon become urgent.

Table 4.1

Progress of Countries Under the HIPC Initiative, as of End-April 2004

Table 4.1

Progress of Countries Under the HIPC Initiative, as of End-April 2004

Completion points reached (13)		Countries In the interim period (14)		Countries still to be considered (11)
Benin	Mozambique	Cameroon	Honduras	Côte d’Ivoire	Myanmar
Bolivia	Nicaragua	Chad	Madagascar	Burundi	Somalia
Burkina Faso	Niger	Congo, Dem. Rep. of	Malawi	Central African Republic	Sudan
Ethiopia	Senegal	Gambia, The	Rwanda	Comoros	Togo
Guyana	Tanzania	Ghana	Sāo Tomé and Principe	Congo, Rep. of
Mali	Uganda	Guinea	Sierra Leone	Lao P.D.R.
Mauritania		Guinea-Bissau	Zambia	Liberia

View Table

Table 4.1

Progress of Countries Under the HIPC Initiative, as of End-April 2004

Completion points reached (13)		Countries In the interim period (14)		Countries still to be considered (11)
Benin	Mozambique	Cameroon	Honduras	Côte d’Ivoire	Myanmar
Bolivia	Nicaragua	Chad	Madagascar	Burundi	Somalia
Burkina Faso	Niger	Congo, Dem. Rep. of	Malawi	Central African Republic	Sudan
Ethiopia	Senegal	Gambia, The	Rwanda	Comoros	Togo
Guyana	Tanzania	Ghana	Sāo Tomé and Principe	Congo, Rep. of
Mali	Uganda	Guinea	Sierra Leone	Lao P.D.R.
Mauritania		Guinea-Bissau	Zambia	Liberia

Debt Sustainability for Low-Income Countries

Excessive debt in low-income countries poses serious problems. A debt overhang may undermine urgently needed progress on policy reforms and discourage private investment.

Donors and creditors can help low-income countries achieve debt sustainability, but the primary responsibility lies with the countries themselves. As they strive to reach the MDGs, low-income countries will need to preserve debt sustainability by limiting new borrowing to what they are able to repay and adopting better policies and institutions that help accelerate growth and gradually increase their resilience to exogenous shocks.

IMF staff, in collaboration with World Bank staff, have developed a debt sustainability framework for low-income countries. The aim of the proposed framework is to guide the borrowing decisions of these countries in a way that matches their need for funds with their current and prospective ability to service debt. At the same time, the framework provides guidance for the lending and grant-allocation decisions of official creditors and donors. Specifically, it combines (1) a template for analyzing the actual and projected debt-burden indicators in a baseline scenario and in the face of plausible shocks; and (2) indicative country-specific external debt-burden thresholds related to the quality of the country’s policies and institutions.

Following the Executive Board’s initial discussion of this framework in February 2004, staff members are undertaking further work on the framework, especially on the indicative thresholds and on the operational implications for the Fund and for other international financial institutions and donors. They will submit a report to the Board for consideration before the 2004 Annual Meetings. In the interim, the IMF is beginning to apply the debt dynamics template in the Article IV context, in close consultation with World Bank staff. In many countries, debt-sustainability analysis is likely to show that additional borrowing, even on concessional terms, would be incompatible with debt sustainability, pointing to the need to ensure that an adequate share of donor support is provided in the form of grants.

Millennium Development Goals

The eight Millennium Development Goals seek, by 2015, to (1) halve extreme poverty and hunger relative to 1990, (2) achieve universal primary education, (3) promote gender equality, (4) reduce child mortality, (5) improve maternal health, (6) combat HIV/AIDs, malaria, and other diseases, (7) ensure environmental sustainability, and (8) establish a global partnership for development. The Fund has a key role in helping its member countries make progress toward achieving the MDGs through a variety of channels.

The Fund encourages low-income countries to use their Poverty Reduction Strategy Papers to set out realistic plans to achieve the MDGs by strengthening domestic policies and securing additional external financing. Since not all low-income countries have the absorptive capacity to use external assistance on a large scale, Fund staff regularly examine and discuss with country authorities the potential macroeconomic implications of fluctuations in aid flows and of a possible substantial increase in aid to finance the additional spending needed to achieve the MDGs. In this work, the Fund pays close attention to the implications of increasing aid flows for fiscal policy and debt sustainability.

Debt relief, especially through the enhanced HIPC Initiative, is essential to enable low-income countries to free up resources for the social and infrastructure spending that they will need to achieve the MDGs.

Sound domestic policies in low-income countries need to be matched by more support from the international community if the MDGs are to be met. More financial support is crucial and must be on the right terms if future debt distress is to be avoided. In addition, support includes strengthening international trade by improving market access for developing countries’ exports and reducing trade-distorting subsidies in advanced economies (see below). Through its multilateral surveillance role, the Fund can act as an advocate for increased foreign aid and increased trade opportunities for low-income countries.

To enhance aid predictability and effectiveness, the Fund is working on donor harmonization and alignment with the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD) and the multilateral development banks. It is also helping donors and national authorities in the field develop more coordinated and streamlined frameworks for disbursing aid.

Tajikistan

A key element of Tajikistan’s Poverty Reduction Strategy Paper (PRSP), which was submitted to the IMF and the World Bank in 2002, was a commitment to undertake reforms that could accelerate growth. These reforms involve addressing constraints to growth in several sectors-namely, agriculture, banking, energy, and infrastructure-and increasing budget expenditures (as a share of GDP) on social services. For example, the Budget Law for 2004 increases spending in these areas by more than 1 percent of GDP. The authorities have finalized a comprehensive strategy for the education sector that includes reforming the curriculum and raising teacher salaries based on merit. And the authorities are reforming the gas (heating) sector in an effort to reduce the quasi-fiscal deficit. While this has meant increasing gas tariffs to cost-recovery levels, the government has sought to protect low-income households through a targeted compensation mechanism. As a result of these efforts and the country’s advances under a program supported by the Fund’s Poverty Reduction and Growth Facility (PRGF), in April 2004 the Tajik authorities were able to report progress in reducing poverty.

Tajikistan has also strengthened several institutions with ongoing Fund technical assistance in banking, debt management, and tax administration. Technical assistance in the banking sector has led to the restructuring of the central bank as part of an effort to improve the implementation of monetary policy. And, under the country’s Fund-supported program, the authorities plan to strengthen the supervision of the banking sector and enhance the banking environment to improve the sector’s intermediation function, especially for financing investment.

Tajikistan–IMF activities in FY2004

Tajikistan–IMF activities in FY2004

January 2004	Completion of second review of Tajikistan’s performance under the country’s PRGF supported program
April 2004	Submission to Fund’s Executive Board of Tajikistan’s first Poverty Reduction Strategy Paper progress report; assessment of Tajikistan’s statistical standards by Report on Observance of Standards and Codes (ROSC) mission

View Table

Tajikistan–IMF activities in FY2004

January 2004	Completion of second review of Tajikistan’s performance under the country’s PRGF supported program
April 2004	Submission to Fund’s Executive Board of Tajikistan’s first Poverty Reduction Strategy Paper progress report; assessment of Tajikistan’s statistical standards by Report on Observance of Standards and Codes (ROSC) mission

Joint efforts with the World Bank to strengthen the capacity of public expenditure management systems to track poverty-reducing public spending could contribute to such streamlining by simplifying reporting to donors.

The first Global Monitoring Report, prepared by the World Bank in 2004 with input from Fund staff, addresses policies and actions in developed and developing countries needed to achieve the MDGs and the related contribution of major agencies. The report makes clear that, although progress has been made, achievement of the development goals will require all parties to scale up their actions in line with the principles and partnership established at Monterrey.

The Fund staff is cooperating with the World Bank in the preparation of a report, “Mobilizing Financing for Development,” scheduled to be completed by the time of the 2004 Annual Meetings. This report will consider proposals for international financing facilities and other modalities to increase current official development aid. (For an example of other joint efforts, see Box 4.2.)

Doha Round and Other Trade-Related Issues

A successful conclusion of the Doha Development Round of multilateral trade talks is essential for the world economy and will benefit all countries. As noted above, it will also contribute significantly to efforts by the international community to meet the Millennium Development Goals. Indeed, Directors have noted that the MDGs will be hard to achieve should the Doha Round fail.

During FY2004, the IMF continued to press for the successful conclusion of the Doha Development Round (begun in 2001), and, together with the World Bank, urged participants from both developed and developing nations to make this a priority. In response to the setback in talks in Cancun, Mexico, in September 2003, the IMF Managing Director and the President of the World Bank sent a letter in November to heads of state and government, as well as trade and finance ministers, stressing the importance of pressing forward with the Doha Round. The letter emphasized the need for the meaningful liberalization of agricultural trade, for all countries to take on substantive obligations to liberalize trade, and for flexibility in areas that may result in heavy regulatory burdens on poor countries.

These messages were echoed in the April 2004 Communique of the International Monetary and Financial Committee (IMFC), which called for all countries to achieve early progress with the Doha Round by focusing their efforts on open markets and fair access and the reduction of trade-distorting subsidies, especially in agriculture. The IMFC members noted that a successful completion of the round is a shared responsibility, important for all countries, particularly developing countries.

The IMF itself has been doing its part to support an open international trading system. In April 2004, the Board approved a new financing policy, the Trade Integration Mechanism (TIM; see Section 3), aimed at mitigating concerns that countries might find it hard to cope with temporary balance of payments shortfalls resulting from the implementation of World Trade Organization agreements or nondiscriminatory trade liberalization by other countries. Under the new policy, the Fund has committed itself to providing access to its resources, within its existing facilities, to help countries meet balance of payments needs resulting from specified trade measures taken by other countries and to augment such access if the effect is larger than anticipated.

Apart from the TIM, the Fund has helped to ensure member countries can take full advantage of the opportunities of multilateral trade liberalization by

• providing technical assistance in such areas as customs reform, tax and tariff reform, and data improvements;

• participating in the Integrated Framework for Trade-Related Technical Assistance to help incorporate trade reforms in national poverty reduction strategies;

• identifying potential risks and helping authorities to understand the benefits of international integration; and

• using its research capacity to assess the impact of trade reforms on member countries (for example, model simulations to measure the implications of reduced agricultural subsidies, preference erosion, and the phase-out of textile quotas).