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Poverty reduction: Supporting country-led efforts

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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In 1999, the replacement of the IMF’s concessional lending facility, the Enhanced Structural Adjustment Facility (ESAF), with the better-focused Poverty Reduction and Growth Facility (PRGF) raised expectations about the IMF’s role in the fight against poverty. Loans under the PRGF—like ESAF loans—carry very low interest rates, long repayment terms, and a grace period. The PRGF differs from the ESAF in that it is based more directly on the premise of a mutually reinforcing relationship between macroeconomic stability, structural reform, growth, and poverty reduction. Yet this focus on poverty was not entirely new: since the late 1980s, IMF advice to its members has increasingly emphasized pro-poor policies while recognizing that the IMF’s traditional focus on macroeconomic stabilization—especially on price stability—also benefits the poor.

Demand for PRGF resources has been high. In recent years, more than 40 countries have had new PRGF arrangements or had ESAF arrangements transformed to include the new features of the PRGF. Overall in 2001, the IMF committed new PRGF loan resources of $2.7 billion, a record high, up from $1 billion in 2000. Last year’s increase partly reflected approval of a few large new commitments. Current projections indicate that new commitments in 2002 could reach $2 billion. If high levels of new commitments continue, consideration will need to be given to mobilizing new PRGF loan and subsidy resources.

All poor countries seeking assistance under the enhanced HIPC Initiative or low-cost loans from the IMF or the World Bank are expected to prepare comprehensive poverty reduction strategies. These strategies—formulated by a country’s government based on wide-ranging participation, including by civil society, donors, and international organizations, and spelled out in a poverty reduction strategy paper (PRSP)—now provide the basis for all concessional lending by the IMF and the World Bank.

There is no single blueprint for a country to follow in preparing its poverty reduction strategy. Rather, each country’s PRSP should reflect its specific circumstances. But each PRSP should describe the poor’s main characteristics and specify strategies for the medium and long terms that would have the highest impact on poverty reduction. And it should also identify realistic and trackable poverty reduction goals and set out macroeconomic, structural, and social policies for reaching them.

Locally produced PRSPs are expected to generate fresh ideas about how shared growth and poverty reduction goals can be reached and should help create a sense of ownership and national commitment to those goals. The IMF and the World Bank participate in the process and, along with other multilateral and bilateral donors, provide advice and expertise. But the strategies and policies should emerge from national debates in which the voices of the poor, especially, are heard.

Taking stock: the PRSP and the PRGF

Although implementation of the PRSP approach and the PRGF is still at an early stage, it is not too soon to take stock of lessons learned so far. The IMF and the World Bank together recently reviewed the first two years’ experience with the PRSP approach, and the IMF reviewed experience with the PRGF. The reviews drew on internal evaluations and extensive external consultations, engaging those with firsthand knowledge of the PRSP process and PRGF-supported programs: participating governments, international organizations, other aid agencies, and civil society organizations worldwide. Respondents provided written evaluations and voiced their opinions at regional forums as well as at the “International Conference on Poverty Reduction Strategies,” held in Washington, D.C., in January 2002, organized by the IMF and the World Bank.

Review of the PRSP process

Because only 10 full PRSPs were completed at the time, the review focused primarily on process and offered a tentative assessment of emerging content. While countries are completing their full PRSPs more slowly than originally expected, there is still enough information to begin defining “good practices.” A second review, planned for 2005, should provide an opportunity to assess progress more fully, including the impact on poverty outcomes and indicators.

What were the review’s main findings? The central one is that there is widespread support for the PRSP approach and broad agreement that its objectives remain valid. Most donors have indicated their intentions to align assistance programs with PRSPs, but more needs to be done to improve practices, especially to reduce the cost for low-income countries of mobilizing and using aid. It is noteworthy that the PRSP process has carved out a more prominent place for poverty reduction in policy debates. Data collection, analysis, and monitoring are becoming more systematic.

Supporting this, there is a growing sense of country ownership and more open dialogue within governments themselves and also between governments and civil society groups—even in countries that lack a well-established tradition of consultation. Nevertheless, the review saw much room for improvement, the main challenge being to promote broader and more substantive participation by domestic stakeholders. The quality of participation has varied widely from country to country. Discussions have often been limited to a narrow set of issues related to targeted poverty reduction programs, effectively excluding civil society organizations from the broader debate over structural reforms and macroeconomic policies. The review recommended that development partners increase technical assistance to bolster civil society’s ability to participate fully and effectively in the PRSP process. The review also recognized the need to involve parliamentarians in preparing, approving, and monitoring country strategies.

Looking ahead, the focus must shift to implementation of PRSPs and the need to better understand the links between policies and poverty outcomes. The review suggested that efforts would have the biggest payoff in the following four areas:

  • Macroeconomicframeworks. Every country’s PRSP is underpinned by a macroeconomic framework in support of its growth and poverty reduction objectives. But attention needs to be given to setting more realistic growth targets that are in line with country circumstances and constraints, and more care needs to be given to identifying the sources of pro-poor growth underpinning these targets. Poor countries must also pay more attention to their heightened vulnerability to external shocks by identifying in advance potential areas of vulnerability and appropriate social safety nets or other relevant policy responses.

  • Prioritizingpolicyactions. Trade-offs and better prioritization of policy actions are needed to make poverty reduction strategies realistic, especially in the face of tight budget constraints. Uncertainties about their overall growth strategies, the costs of various actions, and available financial resources often make it difficult for PRSP countries to set priorities. Development partners need to provide more technical and financial assistance to countries building capacities for setting priorities.

  • Povertyandsocialimpactanalysis. National capacity constraints and technical difficulties can hinder countries’ ability to clearly link policy actions to either a comprehensive diagnosis of poverty or an analysis of their impact on the poor. Countries, with the assistance of development partners, should undertake more systematic poverty and social impact analyses of major policy changes.

  • Publicexpendituremanagementsystems. Countries need to assess the current state of these systems—which often face problems such as incomplete coverage, inappropriate classifications, limited capacity to track spending, and weak auditing—and develop realistic plans for improving them, seeking technical support as appropriate.

Review of the PRGF

Is the PRGF living up to expectations? To answer this, the IMF carried out a major review between July 2001 and February 2002 to assess the extent to which country ownership had been enhanced and PRGF-supported programs had been based on countries’ poverty reduction strategies. Since the PRGF is only a few years old and arrangements run three years, the review was necessarily limited and focused primarily on program design. An assessment of whether PRGF-supported programs are achieving their poverty-reduction or growth goals will have to await the later review scheduled for 2005. Among the major findings of the recent review were the following:

  • The composition of budgeted and actual public spending is becoming more pro-poor and pro-growth in countries with PRGF-supported programs. These countries are allocating a larger share of government spending to education and health care, and PRGF-supported programs are incorporating measures to improve the efficiency of spending in these areas.

  • PRGF-supported programs are characterized by greater fiscal flexibility—whereby the fiscal framework permits an increase in poverty-reducing spending when additional resources are available—than the preceding ESAF-supported programs. PRGF-supported programs target noninterest public spending that is 2 percentage points of GDP higher, on average, than that targeted under the preceding ESAF-supported programs. PRGF-supported programs also show greater flexibility by accommodating more spending when foreign financing (including grants) is greater than expected, or by allowing additional domestic financing to compensate for shortfalls in external financing.

  • Almost all PRGF-supported programs emphasize strengthening governance by improving public expenditure management. Most of these measures focus on budget control—in particular, keeping spending within the limits set in the budget. Others are designed to strengthen auditing procedures or anticorruption strategies.

  • Around three-fifths of the country authorities responding to the survey said that the PRGF provided more opportunity to influence program design than in the past and that IMF resident representatives and Washington staff were increasingly engaged in the national dialogue associated with the PRSP process.

  • Conditionality was substantially streamlined in PRGF-supported programs, in line with an overall streamlining of structural conditionality in all IMF arrangements. The review found that there were more performance criteria, prior actions, and structural benchmarks in PRGF arrangements than there had been for the same countries under the ESAF.

While the review concluded that PRGF-supported programs have had a promising beginning, it found that there is scope for a more systematic application of best practices:

  • More systematic discussion and analysis of macro-economic frameworks and policies are needed—including the sources of growth, alternative policy choices, and the constraints and trade-offs involved.

  • The IMF and the World Bank need to make continued improvements in differentiating between their roles and coordinating their activities. IMF documents and joint assessments should more fully report conditions set by other donors to provide a better picture of total donor conditionality.

  • Further efforts are needed on public expenditure issues—including improving the quality and efficiency of government spending, and strengthening public expenditure management systems.

  • Documentation should clearly set out the PRGF’s role in the country’s overall poverty reduction strategy as well as the options considered and the commitments made by government officials.

Beyond the design of PRGF-supported programs, the review pointed to other improvements that are needed, including

  • an increased focus on the sources of growth in PRGF-supported programs;

  • more extensive and effective communication with government officials, development partners, and civil society in countries on the policy options for PRGF-supported programs;

  • PRGF documents that routinely describe the poverty and social impact analyses being carried out, as well as discussions with country authorities on the social impact of key reforms;

  • further capacity building to develop and assess macroeconomic frameworks, analyze poverty profiles, and conduct poverty and social impact analyses; and

  • an examination of the structure of the PRGF and its adequacy in meeting the diverse needs of low-income countries.

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