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Poverty Reduction And Debt Relief: Striving for a Better Life in Poor Countries

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 2004
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The world economy has grown steadily since World War II, bringing widespread prosperity and lifting many millions out of poverty, especially in Asia. Nevertheless, daunting challenges remain. In Africa, in particular, progress in poverty reduction has been very limited in recent decades and some countries have fallen back. Looking ahead, in the next 25 years, the world’s population is projected to grow by about 2 billion, mostly in developing economies. Many of these people will be doomed to poverty without concerted efforts both by the low-income countries themselves and by the international community.

To tackle these issues, the heads of 189 countries signed the Millennium Declaration in September 2000—leading to the adoption of the Millennium Development Goals (MDGs), a set of eight objectives incorporating clear targets for reducing income poverty, tackling other sources of human deprivation, and promoting sustainable development (see page 31). A follow-up meeting of world leaders in Monterrey, Mexico, in March 2002 established a shared understanding of the broad development strategy and policies needed to achieve the MDGs. The Monterrey Consensus ushered in a new compact between developing and developed countries that stressed their mutual responsibilities in the quest to meet the development goals. It called on developing countries to improve their policies and governance and on developed countries to step up their support, especially by providing more and better aid and more open access to their markets.

The first Global Monitoring Report, prepared by the World Bank in 2004 with input from IMF 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 do more, as set out in the Monterrey Consensus.

How the IMF helps

The central goal of the IMF’s work in low-income countries is to help them achieve deep and lasting poverty reduction through policies that promote growth, generate employment, and target assistance to the poor. In low-income countries, the IMF works closely with the World Bank, the lead international agency on poverty reduction. Together, they are helping these countries make progress toward the MDGs and contributing to the approach embodied in the Monterrey Consensus through technical assistance, debt relief, lending, and support for trade liberalization.

Coordinated development assistance

In 1999, the IMF and the World Bank announced two initiatives to boost their support for low-income countries:

  • The introduction of Poverty Reduction Strategy Papers (PRSPs), written by each borrowing country and setting out its “homegrown” policy strategy to provide the basis for the IMF’s and the World Bank’s concessional lending;

  • The enhancement of the debt reduction program—the Heavily Indebted Poor Countries (HIPC) Initiative—introduced in 1996.

The PRSP approach involves a comprehensive country-based strategy for poverty reduction. It aims to provide the crucial links between donors, recipients, and the development objectives required to meet the MDGs. The PRSPs provide the operational basis for IMF and World Bank concessional lending and for debt relief under the HIPC Initiative. In the case of the IMF, loans are provided through its Poverty Reduction and Growth Facility (PRGF).

Low-income countries prepare their strategies with the participation of domestic stakeholders and external development partners. The strategies are subject to endorsement 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 the macroeconomic, structural, and social policies that countries plan to pursue and how they will finance them. Once a country has developed a PRSP endorsed by the IMF and the World Bank, it becomes eligible for loans from the PRGF trust and for HIPC debt relief.

How is this approach working? In many low-income countries, growth of output and per capita incomes has increased markedly since the late 1990s. Bangladesh, Benin, Cambodia, Mali, Mozambique, Tanzania, Uganda, and Vietnam, for example, have seen real GDP growth averaging 5 percent or more a year for the past five years. Internal and external imbalances in these countries have been reduced: inflation has fallen to single digits—the lowest in two decades—and international reserves are at their highest levels since the 1980s. Improvements in macroeconomic performance have been especially marked in countries that have, or have had, PRGF Arrangements.

Nevertheless, while progress has been heartening, most low-income countries are far from attaining the sustained high growth necessary for global achievement of the MDGs by the 2015 deadline.

What are the problems? Both IMF staff and the IMF’s Independent Evaluation Office (see page 32) have identified a number of difficulties. The IEO issued a report in July 2004 analyzing the experiences of countries with PRSPs completed by end-2002, with in-depth studies of Guinea, Mozambique, Nicaragua, Tajikistan, Tanzania, and Vietnam. It concluded that, while PRSPs have significant potential and have had some success in improving country ownership of policy programs, enhancing participation, and providing better-quality strategies, achievements to date have fallen short of expectations. As for PRGF-supported programs, there have been changes in the right direction, but countries are not fully incorporating them in their growth and poverty reduction strategies. Among other changes, the IEO called for greater flexibility in the way PRSPs are formulated to accommodate diverse political and administrative systems and constraints.

(For more information, see www.imf.org/ieo.)

Reducing debt burdens

The HIPC Initiative, launched in 1996, is designed to help low-income countries reduce their external debts while improving their policies so as to avoid further debt problems. It aims to ensure that no poor country carries a debt burden it cannot manage. The Initiative coordinates debt relief provided by multilateral organizations and governments. 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 such social sector programs as basic health care and education—are central to the enhanced HIPC Initiative.

Status of countries in the HIPC Initiative(as of July 2004)
Countries entitled to full

debt relief, having met all

criteria (14)
Countries that have begun

to receive aid, but must

meet additional criteria for

full debt relief (13)
Countries still to be

considered (11)
BeninMauritaniaCameroonMadagascarBurundiLao PDR
BoliviaMozambiqueChadMalawiCentral AfricanLiberia
Burkina FasoNicaraguaCongo, Dem.RwandaRepublicMyanmar
EthiopiaNigerRep. ofSão Tomé andComorosSomalia
GhanaSenegalGambia, ThePrincipeCongo, Rep. ofSudan
GuyanaTanzaniaGuineaSierra LeoneCôte d’lvoireTogo
MaliUgandaGuinea-Bissau

Honduras
Zambia
Honduras

The 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 IMF encourages low-income countries to use the Poverty Reduction Strategy Paper process to set out realistic plans to achieve the MDGs by strengthening domestic policies and securing additional external financing. Several low-income countries do not have the institutional capacity to absorb large amounts of external aid that could help finance additional spending needed to achieve the MDGs. Accordingly, IMF staff regularly examine and discuss with country authorities the potential macroeconomic implications of a possible substantial increase in aid and of fluctuations in aid flows. In this work, the IMF pays close attention to the implications of increasing and fluctuating aid flows for fiscal policy and debt sustainability.

At the same time, the IMF encourages rich countries to honor their commitments to increase development assistance, step up debt relief to poor countries, and eliminate trade practices that disadvantage developing countries.

Debt relief is essential to enable low-income countries to free up resources for the social and infrastructure spending that they will need to make progress toward achieving the MDGs. 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 recent programs supported by the IMF and the World Bank, these countries have increased their expenditures on health care, education, and other social services to almost four times the amount of debt service payments, on average.

As of end-April 2004, about $52 billion had been committed in debt service relief to the 27 countries that have met the criteria to start receiving aid (see table on page 30). The debt stocks of these countries are projected to decline by about two-thirds as a result.

Trade issues and the Doha Round

Trade is potentially much more important than aid in helping developing countries prosper. The IMF is continuing to press for the successful conclusion of the Doha Development Round of multilateral trade talks (begun in 2001) and, together with the World Bank, has urged participants from both developed and developing nations to make this a priority. The IMF and the World Bank have jointly emphasized the need for the liberalization of trade in agricultural products, 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.

The IMF 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, to help countries cope with balance of payments shortfalls resulting from the implementation of World Trade Organization (WTO) agreements or nondiscriminatory trade liberalization by other countries. Under the new policy, the IMF will provide access to its resources, within its existing facilities, to help countries meet balance of payments needs resulting from specific trade measures taken by other countries.

To help ensure that member countries can take full advantage of the opportunities of multilateral trade liberalization, the IMF has

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

  • helped countries incorporate trade reforms in their poverty reduction strategies;

  • identified potential risks and helped countries understand the benefits of international integration; and

  • assessed how they are affected by trade reforms, such as the implications of reduced agricultural subsidies, preference erosion, and the phaseout of textile quotas.

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