Chapter 4. The IMF's role in low-income countries
- International Monetary Fund
- Published Date:
- September 2005
The central goal of the IMF's work with its low-income member countries is to help them promote macroeconomic stability and growth, and thereby achieve deep and lasting poverty reduction. The Fund pursues this goal in close collaboration with other development partners—particularly the World Bank. In doing so, the IMF focuses on its core areas of responsibility and expertise, namely, helping member countries achieve stable macro-economic conditions by providing them with policy advice supported by financial and technical assistance.
In 1999, the IMF and the World Bank launched the Poverty Reduction Strategy Paper (PRSP) approach and the enhanced Heavily Indebted Poor Countries (HIPC) Initiative (the original HIPC Initiative was launched in 1996). In the same year, the IMF established the Poverty Reduction and Growth Facility (PRGF) to make poverty reduction and growth more central to its lending operations in its poorest member countries. These initiatives stress country ownership of policy programs, including through the broad participation of civil society. Subsequently, at the International Conference on Financing for Development, held in Monterrey, Mexico, in 2002, the international community formally adopted the declaration of intent known as the “Monterrey Consensus.” The conference provided a forum at which both industrial and developing countries could examine the internationally agreed development goals, including halving the number of people living in absolute poverty by 2015. The Monterrey Consensus stipulated that, to achieve these goals, low-income countries must implement sound policies, strengthen institutions, and improve governance, while the international community must provide strong support, in the form of greater trade opportunities and increased aid flows, to those countries that carry out sound policies and reforms.
During FY2005, the IMF continued to pursue a range of initiatives to strengthen its ability to respond, within its mandate, to the needs of low-income members, in collaboration with other lenders and donors. Key initiatives included the following:
- working to improve the design of programs supported by the PRGF and the PRSP process;
- strengthening other instruments for supporting low-income members, including the subsidization of Emergency Assistance for Natural Disasters (see Chapter 5), the Trade Integration Mechanism (see Chapter 3), and the possibility of a new shocks window within the PRGF Trust;
- increasing its efforts under the enhanced HIPC Initiative to help low-income member countries achieve debt relief and maintain debt sustainability; and
- mobilizing international support for low-income countries in 2005—a year that represents an important mile stone toward the Millennium Development Goals (MDGs).
A priority for the Fund in the short term will be to define more clearly its role in supporting low-income members by unifying its work in program design, signaling, PRSP involvement, and debt relief in a single framework. This work will build on the Board's recommendations following its August 2004 discussion of the IMF's role in low-income countries, which underscored that these countries must take the lead in their own reform efforts and that the Fund should focus on supporting the macroeconomic policy reforms needed to boost growth and reduce poverty over the medium term, through its policy advice and technical and financial assistance.
Review of the Fund's role and operations in low-income countries
A committee of senior staff on low-income country work, headed by First Deputy Managing Director Anne O. Krueger, was formed in 2004. One of its first tasks was to craft a succinct preliminary statement on the role of the Fund in low-income member countries, drawing on previous Executive Board documents and a recent study by the IMF's Independent Evaluation Office (IEO) on PRSPs and the PRGF (see Box 4.1). The paper was discussed, along with a number of other issues, by the Executive Board in August 2004.1
In their discussion, Directors welcomed the creation of the committee and agreed that a statement stipulating a framework for Fund engagement in low-income countries would usefully clarify its objectives and responsibilities, as well as guide the IMF's work in these countries in line with its mandate. At the same time, they recognized that the paper was not comprehensive in its coverage of all Fund policies in low-income countries and acknowledged that it was a work in progress involving interrelated components of Fund policies where discussions were still at a preliminary stage and consensus had yet to be reached. The proposed framework would therefore need to be revisited following separate discussions of these specific issues.
Most Directors agreed that it was 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. They concurred that the Fund should continue to support the efforts of its low-income member countries through policy advice, capacity building, and financial assistance, including debt relief. They also emphasized international partnerships, which are essential if low-income countries are to make significant progress toward achieving the MDGs over the next decade. Directors underscored the need for the Fund to cooperate 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 (PRS) process.
Box 4.1Independent Evaluation Office's review of the IMF's support for low-income countries
In July 2004, the Fund's Independent Evaluation Office published a report1 on the role of the IMF in the Poverty Reduction Strategy Paper (PRSP) process and on the extent to which programs supported by the Poverty Reduction and Growth Facility (PRGF) were fulfilling the objectives of poverty reduction and economic growth. The IEO report found that, while the PRS approach has resulted in some important changes, its implementation has fallen short of its potential. The report identified, in particular, a need to shift incentives toward improving underlying domestic policymaking processes and institutions and away from the production of documents.
In discussing the evaluation in July 2004, Directors agreed that the PRS approach has yielded benefits but that substantial scope exists for better implementation. They observed that the approach is perceived to be externally driven; participation by concerned domestic groups in the development of the strategy has sometimes been narrow, particularly in the formulation of the macro-economic framework underlying the PRSP; and PRSPs have often lacked operationally viable strategies. But they also cautioned against drawing premature conclusions about the ultimate success of the PRSP approach based on only five years of experience.
For programs supported under the PRGF, the IEO report found that such programs are increasingly being aligned with country-owned PRSPs, even though such alignment is still somewhat limited. The design of these programs has improved in a number of ways. For example, fiscal targets have become more flexible to accommodate increased expenditures on pro-poor programs, and there is no evidence of an excessive disinflationary bias. But major challenges remain. Directors noted, in particular, the challenge of basing Fund-supported programs on a full understanding of micro-macro linkages–which the IEO emphasized were crucial to understanding sources of growth. Directors also considered that more should be done to integrate the results of poverty and social impact analysis into program design.
The report had a number of constructive recommendations, which will continue to inform the Fund's efforts to strengthen the PRS approach, clarify the Fund's role in this approach, and enhance the Fund's advice and assistance to low-income countries. Individual recommendations include the following:
- introducing greater flexibility in the implementation of the PRS approach;
- shifting the emphasis of the initiative away from the production of documents to the development of sound domestic policy formulation and implementation processes;
- clarifying the purpose of the Fund's and the World Bank's Joint Staff Assessment of the PRSP and redefining the vehicle accordingly;
- clarifying what the PRS approach implies for the Fund's own operations and strengthening the implementation of the agreed role;
- strengthening the prioritization and accountability of what the Fund is supposed to deliver within the broader partnership framework, building around the priorities emerging from the PRS process, and ensuring resources match commitments; and
- encouraging a strengthening of the frame work for establishing the external resources envelope as part of the PRS approach.
The Fund has responded to many of these recommendations in its joint review with the World Bank of the implementation of the PRS approach and in its work program for 2004-05.1 The IEO's Report on the Evaluation of Poverty Reduction Strategy Papers and the Poverty Reduction and Growth Facility is available at www.imf.org/external/np/ieo/2004/prspprgf/eng/index.htm.
Strengthening instruments for supporting low-income countries
PRSPs: progress in implementation
Poverty Reduction Strategy Papers present low-income countries' macroeconomic, structural, and social policies and programs over a two- to five-year horizon that are aimed at promoting broad-based growth and reducing poverty. PRSPs form the crucial link between national public actions, donor support, and development outcomes. The Monterrey Consensus underlined the importance of national ownership of poverty reduction strategies in progress toward the Millennium Development Goals. PRSPs provide the basis for Fund concessional lending and for debt relief under the enhanced HIPC Initiative. They are also being used to help countries develop their statistical systems, which are critical to policy development and monitoring (Box 4.2).
Box 4.2Using PRSPs to improve statistical data in low-income countries
The availability of high-quality, timely statistics is an important prerequisite for policy development and monitoring. PRGF-eligible and other low-income countries, in particular, face special challenges in compiling such statistics. Data inadequacies and limited data dissemination also hamper stakeholders from participating fully in policy development. The Fund's General Data Dissemination System (GDDS) (see Chapter 2) provides a framework for developing national statistical systems that comprises economic and sociodemographic data, including indicators of progress toward the Millennium Development Goals (MDGs). The GDDS fosters sound statistical methods, professional data compilation, and effective data dissemination practices.
Including statistical development programs in Poverty Reduction Strategy Papers (PRSPs) makes it possible for countries to address their statistical needs more comprehensively. The PRSP process and the GDDS are based on similar premises–country ownership, a medium-term strategy, and an emphasis on monitoring and evaluation. Building the capacity to produce good statistics often requires wide-ranging legal and institutional reform, development of data compilation practices based on international norms, and dissemination in accordance with best practices to support transparency. The GDDS provides a systematic approach for addressing these issues and facilitates coordination among statistics-producing agencies, interactions between data producers and data users, and collaboration with and among potential donors.
Under the PRSP process, development of the statistical system should be addressed in the context of governance issues, together with the overall evaluation and monitoring of PRS implementation. The PRSP for Sierra Leone, for example, includes an “Empowerment with Statistics” section under “Good Governance, Peace, and Security”—the first of the four pillars of the country's poverty reduction strategy. The improvement in Sierra Leone's statistics using the GDDS complements the country's overall poverty reduction strategy, including pursuit of the MDGs. Such an approach is all the more important given that Sierra Leone's capacity for production, management, and analysis of statistics has suffered gravely during the past decade of economic deterioration and civil war.
The core principles underlying the PRS approach are that poverty reduction strategies be (1) country-driven, with broad-based participation by civil society in the adoption and monitoring of the poverty reduction strategy; (2) results-oriented and focused on outcomes that benefit the poor; (3) comprehensive in recognizing the multidimensional nature of poverty; (4) partnership-oriented, aimed at improved coordination among all development partners; and (5) based on a long-term perspective of the challenges of, and need for, commitments to reduce poverty.
The Executive Boards of the IMF and the World Bank have asked the staff of the two institutions to prepare annual reports on progress in implementing the PRS approach. The 2004 report considered by the Boards in September 2004 was the latest in this series.2
Fund Directors underscored the importance of the country-driven nature of the PRSP approach and of country ownership as the key to its success. While several countries had made considerable progress in customizing the MDGs to country-specific goals, there was still a need for closer linkages between the PRS process and its integration with country-specific decision-making processes and institutions, particularly the medium-term expenditure framework and the annual budget. Directors emphasized the need for countries to set priorities among the many objectives and goals of their poverty reduction strategies. This would be critical to fully integrating the programs and policies of the PRSP into annual budgets, thus raising the likelihood of their implementation.
On the operational level, Directors broadly supported the staffs' suggested redefinition of the objectives and audience of the joint staff assessment (JSA) and agreed that its primary objective should be to provide detailed feedback to the country authorities on the strengths and weaknesses of their Poverty Reduction Strategies, including those aspects that require further work. Eliminating the requirement of a standard statement in the JSA that the PRSP is a suitable basis for concessional assistance could contribute to reducing the perception of a Washington “sign-off.” Directors therefore supported the staffs' proposal to lift the requirement of an explicit endorsement of the PRSP by the Executive Boards in connection with approvals of new PRGF arrangements, reviews of decisions under existing arrangements, and determinations concerning the decision and completion points and interim assistance under the HIPC Initiative. The Board amended the PRGF Trust and PRGF-HIPC Trust Instruments accordingly.3
During 1996-2004, Armenia completed two IMF-supported programs. These programs supported the authorities' efforts to establish and maintain macro-economic and financial stability, sustain economic growth, reduce poverty, promote structural reforms, and tackle a banking crisis that forced the closure of one-third of the banking system.
During 2001-04, under Armenia's most recent program supported by the IMF's Poverty Reduction and Growth Facility, real economic growth averaged 12 percent a year, while annual inflation averaged 4 percent. Poverty and inequality indicators have fallen rapidly. The authorities improved fiscal management by clearing all external and domestic expenditure arrears. Moreover, Armenia significantly reduced its debt burden, while building up its foreign exchange reserves. The authorities also introduced major structural reforms that transformed the energy sector and significantly reduced quasi-fiscal deficits. Toward the end of the program, the financial sector began to recover.
In May 2005, the IMF approved the authorities' new three-year program supported under the PRGF. The new program, which aims to build on the achievements of the previous programs, focuses on reforming tax and customs administration as well as on improving the financial sector. Both of these are key to macroeconomic and financial stability.
The IMF has also provided significant technical assistance to Armenia in the financial and fiscal sectors, enabling it to make great strides in strengthening public sector management and to identify important reform objectives for the new program.
|Armenia-IMF activities in FY2005|
|May 2004||Completion of the fifth review of Armenia's performance under the country's PRGF-supported program|
|December 2004||Completion of Article IV consultation and ex post assessment of Armenia's performance under Fund-supported programs. Completion of the sixth review of Armenia's performance under the PRGF-supported program|
|April 2005||IMF and World Bank staff prepare a joint advisory note on the authorities' Progress Report on the country's Poverty Reduction Strategy Paper|
|May 2005||IMF Executive Board approves a new three-year PRGF arrangement for Armenia|
Going forward, 2005 will mark the fifth anniversary of the PRS approach. In this context, a more comprehensive review of progress, challenges, and good practice related to key issues identified by stakeholders, past staff reviews, and the IEO evaluation will be undertaken in advance of the 2005 Annual Meetings. This review will draw lessons from the experience of countries in preparing and implementing poverty reduction strategies and of donors in supporting these efforts. It will focus on five themes: (1) strengthening the medium-term orientation of the PRS; (2) using the PRS as a mutual accountability framework between recipient countries and donors; (3) broadening and deepening meaningful participation; (4) enhancing linkages among the PRS, planning documents, medium-term expenditure frameworks and budgets; and (5) tailoring the approach to conflict-affected and fragile states. Other work under way includes a review of the Fund's role in the PRS process.
Access to financial support
As part of the implementation of the Board's decision to adopt norms for tapered access to PRGF resources under successive arrangements, operational guidance to staff has been finalized. This guidance clarifies also the policy on blended use of PRGF resources and resources from the General Resources Account, and on the augmentation of PRGF arrangements in response to a shock.4 More specifically, a shocks window within the PRGF Trust for countries hit by a shock (whether these countries are already using PRGF resources or not) is being considered.
Emergency assistance for natural disasters
The Executive Board agreed in January 2005 to subsidize emergency assistance for natural disasters to PRGF-eligible members, subject to the availability of subsidy resources.5 Members that have previously received emergency assistance for natural disasters but have not yet fully repaid such assistance (for example, Grenada and Malawi) will be able to benefit from this initiative, as well as members affected by the December 2004 tsunami—notably, Maldives and Sri Lanka, whose requests for emergency assistance were approved in March 2005. To help the latter two members and others affected by the tsunami, the Fund moved quickly to provide an assessment of the macro-economic impact of the natural disaster (see Chapter 1). These efforts also facilitated the Paris Club creditors' recent decision to provide a one-year moratorium on debt service (see Chapter 3). It is estimated that subsidy needs for natural disaster assistance could amount to about $68 million–$98 million over the next five years, which would need to be met through new contributions from other IMF members.
The IMF continues to monitor closely the circumstances and policies of members that have substantial Fund credit outstanding following the expiration of their arrangements. In March 2005, the Board adopted a decision extending post-program monitoring (PPM) to PRGF resources. Most Directors felt that the extension of PPM would enhance the comparability of treatment across members and help safeguard scarce PRGF resources. Specifically, when a member has outstanding PRGF loans or PRGF loans combined with GRA credit in excess of 100 percent of its quota, there would be a presumption that the member would be subject to PPM. The proposed decision provides a consolidated framework for PPM, expanding the presumption of PPM to cover any case in which outstanding credit arising from the combined (or separate uses) of GRA and PRGF resources exceeds 100 percent of quota and the member does not have a program supported by a Fund arrangement or is not implementing a staff-monitored program with reports issued to the Board.
Policy support and signaling
The Board will take up in FY2006 the issue of whether and how the IMF's instruments might be adapted to support sound policies in low-income countries, particularly when these do not have a need for, or want to use, Fund resources. The work under way in FY2005 to lay the basis for this discussion drew on extensive consultations with donors and low-income members on their needs for signals and considered whether there is a need to fill information gaps and how this might be done, either within or outside the context of a Fund arrangement (see Chapter 2).
Debt relief and sustainability
The IMF continues to work with other official creditors to support low-income countries' efforts to achieve and maintain robust debt sustainability. Through debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative (Box 4.3) and improved tools for analyzing and managing debt, the Fund is playing an important role in supporting low-income member countries' efforts to achieve and monitor debt sustainability even as financing is needed to achieve the MDGs.6
During FY2005 five additional members—Ghana, Honduras, Madagascar, Rwanda, and Zambia—reached their completion points under the enhanced HIPC Initiative. A total of 18 members reached this stage by end-April 2005—two-thirds of the 27 countries that have reached their decision points.
The Fund's disbursement of debt relief at the completion point, together with already disbursed interim relief, accounted for just over 70 percent of the total amount the IMF has committed to the enhanced HIPC Initiative. As of end-April 2005, total disbursements of HIPC Initiative assistance by the Fund amounted to SDR 1.5 billion (see Chapter 5).
Maintaining macroeconomic stability has proved a challenge for many of the nine member countries that are in the interim period between their decision and completion points. The Fund is providing interim relief to three member countries (Chad, the Democratic Republic of the Congo, and Sierra Leone) whose macroeconomic programs are supported by a PRGF arrangement. In another two countries (Malawi and São Tomé and Príncipe), work is under way to put in place macroeconomic adjustments and reform programs that could be supported under the PRGF. Restoring macroeconomic stability in the remaining four members during the interim period (Cameroon, The Gambia, Guinea, and Guinea-Bissau) will require strong efforts to address obstacles in public resource management and structural reforms.
Box 4.3How the HIPC Initiative works
To qualify for HIPC assistance, a country must pursue strong economic policies supported by the IMF and the World Bank. There are three phases. In the first phase, leading up to the decision point, the country needs to establish a track record of good performance (normally, over a three-year period) and develop a Poverty Reduction Strategy Paper (PRSP) 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 in net present value (NPV) terms, after the full use of traditional debt relief, is above 150 percent of exports (or, for small open economies, above 250 percent of government revenue), the country qualifies for HIPC relief. At the decision point–the second phase–the IMF and the World Bank formally decide on the country's eligibility, and the international community commits itself to reducing the country's debt to a sustainable level.
Once it reaches the decision point, 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.
A country reaches its completion point–the third phase–once it has met the objectives set at the decision point. It then receives the balance of the debt relief committed. This means that all creditors are expected to reduce their claims on the country, measured in NPV terms, to the agreed sustainable level.
Of the remaining countries that have yet to reach their decision point, two (Burundi and the Republic of Congo) are making considerable progress on that route, while others still face significant challenges. Many of these have been affected by conflict, and several have large arrears to various creditors. Directors urged the staff to continue to work with the authorities in these countries, where possible, to overcome these obstacles. In this context, Directors underscored the urgent need to mobilize financial resources to enable the Fund to provide assistance under the HIPC Initiative to Liberia, Somalia, and Sudan once they become eligible.
In September 2004 the Boards of the Fund and the World Bank extended the HIPC sunset clause by another two years, to end-2006, to provide the opportunity for the remaining eligible countries to establish a track record that would allow their consideration for HIPC relief. This extension will apply only to members eligible for support from the World Bank's International Development Association and the Fund's PRGF that have not yet benefited from HIPC debt relief and that are deemed to have public debt in excess of the enhanced HIPC Initiative thresholds after full application of traditional debt relief mechanisms based on end-2004 debt data. Many of the countries that could benefit from the extension of the sunset clause are affected by conflict, and several, in particular Liberia, Somalia, and Sudan, have large and protracted arrears to various creditors.
Further debt relief
In response to the International Monetary and Financial Committee's call at the 2004 Annual Meetings for the international community to provide assistance, including “further debt relief,” to enable low-income countries to achieve the Millennium Development Goals (MDGs), the Board discussed issues related to possible further debt relief for low-income countries and possible means of financing such relief at two seminars in March 2005. The Board will also look into the G-8 Finance Ministers' proposal of June 11, 2005, for additional debt relief to low-income countries, which is to be put to the September 2005 Annual Meetings of the Fund and the Bank (see Box 5.5).
Debt sustainability framework
To preserve the potential benefits of debt relief, it will be critical to help countries avoid excessive borrowing in the future. This is the purpose of the new debt sustainability framework for low-income countries. The Executive Boards of the Fund and the World Bank discussed the framework in February and September 20047 and endorsed its key elements, including a standardized forward-looking analysis of debt and debt-service indicators, an assessment of sustainability informed by indicative policy-dependent debt-burden thresholds, and a consistent financing strategy. The framework has implications for PRGF program design, since it suggests a more systematic use of indicative targets on the net present value (NPV) of external debt, increased flexibility in the application of limits on non-concessional debt, and more systematic use of overall fiscal deficit limits. (Examples include the PRGF arrangements for Guyana and the Kyrgyz Republic. Guyana employs overall fiscal deficit limits and indicative targets on the net present value of external debt, while the Kyrgyz Republic's program includes a ceiling on concessional borrowing.)
The Board had a further discussion of the debt sustainability framework for low-income countries in April 2005.8 Directors endorsed indicative thresholds for the ratio of net present value of debt to exports of 100, 150, and 200 percent, depending on the quality of a country's policies and institutions as assessed by the World Bank's CPIA (a formal Country Policy and Institutional Assessment), and corresponding thresholds for the other four debt and debt-service indicators. The thresholds are centered on the operational thresholds of the HIPC Initiative. The new framework will be applied as soon as possible to all low-income member countries, including HIPCs. Specific modalities for collaboration between Fund and World Bank staffs in preparing joint debt sustainability assessments for individual countries have been formulated, taking into account each institution's responsibilities in line with its mandate. Directors asked the staff to report to them on experience with the implementation of the framework after six to twelve months.
Mobilizing international support
The international community recognized in the 2002 Monterrey Consensus that decisive progress toward the Millennium Development Goals (MDGs) would require ambitious country-led reform efforts supported by increased aid and its more effective delivery. The Fund offers low-income countries advice on how to manage aid inflows, which is crucial given the international effort to mobilize more aid for the MDGs. Mobilization and coordination of financing for the MDGs has figured prominently on the international agenda.
In April 2003, the IMF's Executive Board approved a three-year Poverty Reduction and Growth Facility (PRGF) arrangement for Senegal covering 2003-05 to support implementation of the government's Poverty Reduction Strategy Paper (PRSP). The PRGF-supported program emphasizes improving revenue collection, increasing capital and pro-poor spending, strengthening the efficiency and transparency of public expenditure management, and removing impediments to private sector development. Senegal also requested an updated assessment, under the joint IMF-World Bank Financial Sector Assessment Program (FSAP), of the stability and development potential of its financial sector.
In 2003-04, Senegal's economic growth was robust, inflation was low, and the fiscal and external deficits and government indebtedness were maintained at sustainable levels. Structural reforms were implemented, albeit with some delay, and the authorities took steps to correct fiscal slippages. Senegal reached the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in April 2004, paving the way for debt relief of $0.5 billion, in net present value terms, and a reduction in debt service of about 2 percent of GDP annually during the next 10 years.
|Senegal-IMF activities in FY2005|
|May 2004||Submission of Senegal's Annual PRSP Progress Report|
|March 2005||Completion of Senegal's 2004 Article IV consultation and of the second review of Senegal's PRGF-supported program|
|Publication of joint IMF-World Bank advisory note on Senegal's PRSP Progress Report|
|April 2005||Publication of report on Financial System Stability Assessment update|
The year 2005 represents an important milestone on the way to the Millennium Development Goals for 2015. The United Nations Millennium Project report, published in January 2005, marked the opening of a period of stocktaking on the progress made toward the MDGs and how to accelerate it—discussions that will culminate at the UN Summit Conference on Implementing the Millennium Declaration in September 2005. An important step in this process was the Second High-Level Forum on Aid Effectiveness held in Paris in March 2005. This Forum focused on ways to achieve greater aid effectiveness and better development results in support of efforts to reach the MDGs by harmonizing donor aid delivery procedures and reporting requirements and by aligning donor support programs with recipient countries' priorities. The Fund, although not a donor, supports the principles and commitments in the Paris Declaration on enhancing aid effectiveness and will promote its implementation. In particular, the Fund will work within its mandate with multilateral development partners toward enhancing the predictability of aid flows and achieving greater policy coherence on the part of development partners.
Board review of aid effectiveness
In September 2004, Directors discussed the issue of aid effectiveness and the merits of various options for mobilizing more resources in support of the MDGs, on the basis of a paper prepared jointly by Fund and World Bank staff.9 Directors emphasized that increased aid is not a panacea and that action is also required in other areas—further improvements in recipient countries' policy environments, better market access for developing countries' exports, better aid management and implementation, and a relaxation of absorptive capacity constraints. Directors generally considered that an increase in official development assistance was the best way to mobilize additional resources in pursuit of the MDGs, and most stressed that donor countries needed to move more forcefully toward meeting the UN target of 0.7 percent of gross national income devoted to aid. Directors' views varied widely, however, on alternative financing mechanisms to complement official development assistance, with most Directors calling for further work by the Fund on these issues.
Subsequently, in response to requests by the IMFC and the Development Committee to continue work on innovative sources of development financing, such as the International Finance Facility (IFF) and global taxes, Fund and World Bank staffs produced a joint note outlining progress that has been made in advancing the analysis of these issues. This includes continuing assessment by the Fund of proposed global tax instruments, such as aviation taxes, and a World Bank analysis of progress in putting in place the IFF for Immunization (IFFIm), a fund to support an enhanced vaccination program.
Global Monitoring Report
The second Global Monitoring Report was published in April 2005. The annual reports, prepared jointly by the IMF and the World Bank, track the progress made toward the achievement of the MDGs and the obstacles remaining. While the first report, published in June 2004, provided a comprehensive assessment of the policy agenda for achieving the MDGs and related development outcomes, the 2005 report had a more selective focus on key areas of the policy agenda but provided a more in-depth assessment in those areas.10 It paid special attention to Africa, the region most at risk of failing to achieve the MDGs.
The Fund staff's primary contribution to the 2005 report was on the agenda for growth, which is central to reducing poverty and meeting the MDGs. The broad priorities emphasized are macroeconomic stability and institutions and policies that promote private sector growth. Better expenditure management and policies are critical to improving the expenditure composition and sustaining macroeconomic stability. To invigorate the private sector, countries must remove excessive regulatory and institutional constraints. To underpin these efforts, recent progress on political governance must lead to improvements in economic governance. Transparency is a theme of many of the key interventions discussed in the report. Trade liberalization is also a critical domestic policy priority in many cases.
Meeting the MDGs, the report said, would require substantial increases in the amount of official development assistance reaching the poorest countries. While aid volumes had risen since the UN Financing for Development Conference in Monterrey in 2002, when donors pledged to increase assistance to the poorest countries significantly, debt relief and technical cooperation had accounted for a full two-thirds of the increase. Given reforms under way, many countries could effectively use a doubling of aid over the next five years.