IEO Annual Report 2005-06

Appendix 5 Evaluation of Prolonged Use of IMF Resources: Recommendations, Board Response, and Subsequent Follow-Up1

International Monetary Fund. Independent Evaluation Office
Published Date:
January 2007
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IEO RecommendationExecutive Board Response2Staff Task Force Recommendations and Board Response3Follow-Up4
Institutional arrangements and rational for IMF involvement
Adopt an operational definition of prolonged use, as a trigger for enhanced “due diligence” (i.e., ex post assessments and forward-looking consideration of “exit” strategies). The criterion could distinguish between general and concessional resources.Directors saw merit in a definition to trigger greater due diligence. Many Directors noted that a definition should carefully differentiate low-income countries relying on concessional resources. Several Directors cautioned that a definition should not be interpreted as creating a new classification of member countries and that there should not be an a priori judgment that prolonged use necessarily implies a problem.For general resources cases, prolonged users should be defined as countries that have spent 7 or more of the last 10 years under Stand-By or Extended Arrangements, including precautionary arrangements, which was the definition used in the IEO evaluation.Definition adopted. The Board reviewed the policy on longer-term program engagement (LTPE) in May 2006. Directors agreed to make two changes in the LTPE definition. First, all members will now be considered as having LTPE if they have spent at least 7 out of the last 10 years under programs supported by the IMF. Second, time spent under precautionary arrangements that remain undrawn does not count toward LTPE, parallel to the treatment of members using the Policy Support Instrument.
For concessional resources, enhanced assessment and strategy procedures would be triggered after a country has gone through two multiyear arrangements under concessional facilities.Semiannual reporting of the incidence of prolonged use is taking take place on this basis.
Make greater efforts to judge whether countries are ready to implement credible programs and be more selective in extending financial support. Use of IMF resources proposals should contain an explicit and frank assessment of the readiness of borrowers to implement programs.Directors supported the recommendation that staff papers be more candid in assessing institutional capacity and ownership. They emphasized the importance of explaining downside risks and avoiding any bias toward overoptimism. Implementation of initiatives relating to ownership would be an ongoing process, sometimes involving difficult judgments, in particular regarding more selectivity in the provision of IMF financial assistance, where strong country ownership is lacking. A number of Directors stressed that greater selectivity should not imply giving up on difficult cases.Efforts to improve program design should be accompanied by greater selectivity in extending IMF financial support, based in part on the assessment of implementation capacity and ownership.Principal case-by-case follow-up will be through the internal review process and Board review of individual country cases, with periodic assessments as part of the regular conditionality review.
Aim to provide the international community with credible alternatives to IMF lending arrangements as a condition for other official flows.Directors noted that it would be desirable to develop credible alternatives to indicate to the outside world the IMF’s approval of members’ policies and looked forward to a discussion of the signaling function. They noted need for care in preparation and consultation, including with the Paris Club.The IMF should have effective ways to signal its views on policies to a country’s donors and creditors outside an IMF-supported program. Article IV staff reports, Public Information Notices, and “assessment letters” provide important vehicles. This topic should be taken further in the review of IMF role in low-income countries. Donors’ and other lenders’ concerns about burden sharing should not lead to inappropriate lending decisions by the IMF.The issue of signaling was taken up in the Board’s subsequent discussion on Signaling Assessments of Members’ Policies, although it did not address all the relevant issues brought up in the evaluation. This review resulted in the discontinuation of Staff Monitored Programs for signaling purposes. The Board discussed the issue of signaling on several occasions in 2004-05, culminating in the establishment in October 2005 of the Policy Support Instrument, which provides policy support and endorsement to low-income countries that do not need IMF financing and whose policies meet the standards of upper credit tranche conditionality.
Programs for identified prolonged users should include an explicit “exit strategy.”Directors stressed the desirability, where appropriate, of the elaboration of corrective measures as part of a conscious “exit strategy.”The proposed assessment and strategic planning exercises (see below) would include an explicit “exit strategy” where appropriate for ending prolonged use. An element of such a strategy would include helping countries widen their options for external financing.Policy adopted, with an explicit definition of prolonged use as the trigger (see above).
Introduce a differentiated rate of charge for prolonged users as a signaling device.The Board did not support a differentiated rate of charge for prolonged users.Not recommended.Recommendation rejected. No follow-up necessary.
Program design
Specific operational procedures should be developed to ensure greater emphasis in program design on the domestic policy formulation process, in order to maximize ownership: (1) modify procedures toward the authorities having the initial responsibility for proposing a reform program; (2) encourage a process whereby core program elements are subject first to a policy debate within the member’s own political institutions; (3) surveillance should help create a better understanding of what would be expected if a program should become necessary; (4) more explicit discussion of major uncertainties and how policies would be adapted if things turn out differently.Directors broadly agreed with the recommendations. Many Directors underscored that they should be seen as part of a broader effort to ensure greater effectiveness of programs. They saw a need for continuing effort to improve program design, which would draw on the fresh perspectives provided by the report.IEO’s recommendations were consistent with lessons emerging from recent country experience. The revised conditionality guidelines5 incorporate many of the recommendations and provide the appropriate vehicle to put them into practice.The internal 2005 review of the conditionality guidelines found that substantial changes have been made in the direction of increasing national ownership, and made suggestions to enable further progress in this direction. Key crosscountry findings were also assessed in the review of ex post assessments discussed by the Board in May 2006.
Programs should place more emphasis on key institutional changes and strengthening implementation capacity.Directors underscored the importance of increasing the effectiveness of technical assistance in support of institutional capacity building.The Task Force recommended that ongoing efforts to address these issues in operational work should be enriched by future work on program design, including research efforts, focusing on links between structural reforms and program objectives.Regular conditionality reviews will monitor progress.
The August 2005 Review of PRGF Program Design examined the role of institutions in supporting growth and avoiding crises.
Greater selectivity in program content with (1) further strengthening collaboration with the World Bank; (2) a more differentiated use of conditionality;(3) greater efforts to tailor the time frame of program design to foreseeable length of reform and adjustment;(4) more in-depth analysis of real economy responses to key policy elements and less attention to fine-tuning financial programming.Directors were encouraged that recommendations on streamlining of IMF conditionality and need for more effective collaboration with the World Bank were already being internalized as part of the review of conditionality.The Task Force agreed with the IEO recommendations, many of which were already incorporated into the revised conditionality guidelines. Directors stressed importance of continued efforts to improve program design, including improved collaboration with the World Bank. Directors looked forward to further work by the staff on the relationship between external financing, adjustment, and sustainability; on the analytic framework for program design; on trade-offs between macro-economic and structural policies; and on the parameters for assessing program success.The 2005 review of the conditionality guidelines found major shifts in the coverage of structural conditionality, consistent with a greater focus on critical measures.
Design of IMF-Supported Programs, discussed by the Board in December 2004, examined in detail issues regarding program success, financing, adjustment and debt sustainability, analytical frameworks used in program design, and specific macroeconomic and structural policies.
Systematic ex post assessment of programs, with priority to identified prolonged users and key messages reported to the Board. Key internal database on program targets and outcomes (MONA) should be upgraded to facilitate such assessments.Directors endorsed the recommendations.The Task Force proposed that a process of ex post assessment and strategic planning would take place for all prolonged users, with lessons presented to the Executive Board.Policy adopted. As of end-June 2006, 42 ex post assessments had been completed. A number of these assessments were led by staff from outside the area departments.
The MONA database is being upgraded.
Steps should be taken to further strengthen surveillance in program cases. A case exists for greater institutional separation between surveillance and programs, especially in the context of prolonged use.Regular IMF surveillance of program countries should reassess economic developments and strategy from a fresh perspective.The Task Force agreed with the overall thrust of the IEO recommendations, which it believed would be best addressed through continuing implementation and refinement of recently revised (i.e., 2002) surveillance guidelines. These guidelines proposed that surveillance should assess more carefully social and political realities; reach out more widely to legislative bodies and line ministries and ensure that timing of consultations is such as to enable them to influence policy.Progress will be monitored as part of regular biennial reviews of surveillance. At the 2004 review, Directors concluded that the quality of surveillance in program countries had improved since 2002.6
Directors concurred with the priority given to increasing effectiveness of surveillance, including the need to combine clarity and candor with recognition of social and political realities. They highlighted the importance of efforts to ensure that Article IV consultations in program countries “step back” from program context.
Internal governance issues
The ability of staff to analyze political economy issues should be strengthened.Most Directors encouraged the staff to enhance its analysis and reporting of political economy issues in staff reports. Some Directors cautioned that IMF should be careful in venturing into this area, given its comparative advantage in technical analysis and the need to avoid intruding on internal political matters.The Task Force recommended an effort to enhance reporting and analysis of political issues, when it has important implications for economic policy. Staff capacities could be strengthened through a modest investment in training.Training courses in political economy have now been established.
Procedures should be evolved to help avoid the appearance of political interference in determining whether programs deserve support. All programs should be prefaced by an explicit assessment of implementation risks. When management suggests risks are high, the Executive Board should be given an opportunity to express on the record its own assessment of the trade-offs.Directors underscored the importance of distinguishing clearly between technical and political judgments and that staff should be candid in its assessment of risks.The Task Force noted that there can be no question about the responsibility of management for recommending and the Executive Board for considering and approving, all requests for the use of IMF resources. Staff nonetheless has an important responsibility for providing candid technical assessment of risks and trade-offs, and should continue to strengthen both substance and presentation of this material.Greater candor on risks is being adopted in presentations to the Executive Board. Staff reports increasingly emphasize the risks to the IMF, including the political risks to implementation.
A review of internal incentives facing staff should be undertaken with a view to minimizing turnover of staff working on countries and to foster increased candor and accountability.Recommendations are largely management responsibility. They have important implications for internal governance and deserve careful consideration.While overall personnel policies do not need to be changed, management should consider guidelines and incentives to reduce excessive mobility in country teams. The best way to guard against excessive mobility would be to reestablish spare staff capacity to absorb changing demands.The Human Resources Department, at the request of management, is developing a more centralized approach to mobility. As part of an effort to ensure appropriate incentives, the Human Resources Department, in collaboration with departmental senior personnel managers, provides career counseling that emphasizes the acquisition of new competencies rather than frequent mobility.

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