Mark Allen, Director of the IMF Policy Development and Review Department, speaks to the IMF Survey about how the Multilateral Debt Relief Initiative will be implemented and why debt sustainability remains a priority.
In addition, we have used resources that donor countries had previously put in trust to the Fund to provide subsidy resources for PRGF [Poverty Reduction and Growth Facility] operations. These donor resources—which can be used as the donors see fit—are being used to finance debt relief for those HIPCs whose per capita income is above $380 a year. Part of the agreement with donors was that any shortfall in our concessional resources would be made up. In fact, the G8 [Group of Eight] countries are contributing the subsidy resources we need to maintain our capacity to lend under the PRGF.
The IDA and the ADF have different issues related to financing and may have different cutoff dates, and later, different implementation dates. We are operationally independent as far as this is concerned. The speed with which the IDA gives its debt relief has no direct implication for our operation, nor does our operation, in any sense, open a door for the IDA. I trust that the judgments we make will be similar. Assessing the 20 countries discussed by the Executive Board has been an exercise in close IMF-World Bank collaboration. We obviously will continue to collaborate with the Bank.
We have also recently put in place the Exogenous Shocks Facility. If member countries that don’t have a PRGF arrangement are hit by an external shock and have a balance of payments need, we now have the capacity to lend under this new facility.
Together with the Bank, we will pay particular attention to these countries’ debt problems. We hope that the MDRI will have a substantial impact on countries’ debt sustainability, but debt sustainability is not something you gain once and for all. It’s something you need to work at regularly to ensure that you don’t move into another bout of unsustainable borrowing. That is something we are going to need to watch quite carefully, and, along with the Bank, we’ve been strengthening our analytical framework to do so.
Also, the IMF is currently undertaking a strategic review of its work, including its role in low-income countries. Obviously, we will be looking at the implementation and the impact of the MDRI and these other initiatives in the broader context of this strategic review. The Fund plays an important role—and will continue to do so—in helping these countries deal with their problems. We just hope we’re in a better position to do this now because of this debt relief operation.
New tools to help low-income countries
Over the past few months, the IMF has introduced several new instruments to expand the range of tools the organization has on hand to assist its low-income member countries. These include the Policy Support Instrument and the Exogenous Shocks Facility.
Policy Support Instrument (PSI). In October 2005, the IMF introduced the PSI, which is a new means to help low-income countries that do not need or want IMF financial assistance. In recent years, several low-income countries have made significant progress toward economic stability and have no longer needed financial assistance from the Fund. Nevertheless, they have often still sought Fund advice, monitoring, and endorsement of their economic policies.
The PSI is designed for countries that have achieved a reasonable growth performance, have low underlying inflation and adequate official international reserves, and have begun to establish external and net domestic debt sustainability. To be eligible, countries must be eligible for the IMF’s Poverty Reduction and Growth Facility (PRGF), have a poverty reduction strategy in place, and a policy framework focused on consolidating macroeconomic stability with a view to faster growth and poverty reduction. The PSI is voluntary, demand-driven, and supported by strong country ownership. Once approved by the IMF’s Executive Board, a PSI provides a visible signal of IMF endorsement of a member’s policies.
The PSI is intended to promote a close policy dialogue between the IMF and a member country, provide more frequent IMF assessments of economic and financial policies than are provided through the regular consultation process, and deliver clear signals on the strength of these policies.
Exogenous Shocks Facility (ESF). The ESF, approved by the Executive Board on November 25, 2005, is designed to enhance the IMF’s ability to assist low-income members that experience harmful economic shocks beyond their control. It will be established within the Poverty Reduction and Growth Facility (PRGF) Trust. Programs will range from one to two years, and disbursements will have the same interest rate (0.5 percent) and repayment terms (maturity of 10 years) as other PRGF arrangements.
External shocks can inflict serious damage on low-income countries, especially those with less diversified economies and a limited ability to build up reserves. Recent evidence suggests that foreign assistance can be particularly effective following a shock but must be made available quickly. Moreover, the assistance needs to be associated with sound adjustment policies, which would be set out in a program supported by the ESF.
Executive Directors chose not to predefine the shocks that would qualify for assistance under the ESF, although likely candidates are adverse terms of trade movements, natural disasters, and sudden and unexpected drops in demand for exports. The ESF is intended to provide financial support for temporary balance of payments needs, and Directors recognized that PRGF programs remain the main instrument to support members’ ongoing policy reforms.