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In the news: IMF gains new tools in fight against poverty

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
October 2005
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To bolster the IMF’s work in low-income countries, the International Monetary and Financial Committee (IMFC), the IMF’s policy steering committee, approved a new set of measures—including assurance of adequate financing for the IMF’s main concessional loan facility, a new lending facility, a new tool to support policy programs without financing, and debt cancellation for the heavily indebted poor countries (HIPCs). The hope, the financial officials said, is to strengthen the IMF’s role in helping poor countries achieve sustainable growth, reduce poverty, and reach the Millennium Development Goals (MDGs).

“The growing consensus that aid must be increased and debt must be reduced gives us a great opportunity to make a difference to the lives of billions of people,” IMF Managing Director Rodrigo de Rato told the IMF’s Board of Governors. De Rato added that the IMF’s work in low-income countries should tap the organization’s core strengths by focusing on macroeconomic policies, including debt sustainability, aid absorption, public expenditure management, and tax policies.

Ensuring financing for the PRGF. The IMFC confirmed that the Poverty Reduction and Growth Facility (PRGF) will remain the IMF’s main instrument for financial assistance for poor countries and agreed that concessional lending should be financed at an appropriate level. The IMF will incorporate the lessons of a recent review of PRGF program design and look toward a clearer division of labor with the World Bank.

Policy Support Instrument (PSI). This new tool will allow any PRGF-eligible country that does not need, or want, financial assistance to seek the IMF’s advice, monitoring, and endorsement of its policies. Eligible countries should have a poverty reduction strategy in place along with a policy framework for consolidating economic and debt sustainability, and be working on deepening structural reforms in key areas. On-track performance under the PSI, which means that conditionality standards equivalent to those set under an upper credit tranche drawing (over 25 percent of quota) are met, would be a signal that the country has sound economic policies.

Several countries have already expressed interest in the PSI, which will complement, not replace, the PRGF. Nigeria is expected to make the first request shortly after final IMF Executive Board approval of the implementation details of the instrument, as a successful track record under the PSI would pave the way for Paris Club debt reduction.

Shocks facility. This new window in the PRGF Trust will provide concessional financial support to low-income members facing exogenous shocks—such as adverse commodity price swings (including sharp oil price changes), natural disasters, and conflicts and crises in neighboring countries. “We agreed that, because poor countries and poor people should not be left defenseless against oil price shocks, the IMF should stand ready to provide assistance,” said Gordon Brown, IMFC Chair and U.K. Chancellor of the Exchequer. This shock-absorbing facility would complement existing instruments such as the Trade Integration Mechanism, which is available to assist countries in dealing with the temporary costs of trade liberalization.

Debt relief. The cancellation of 100 percent of multilateral debt owed by the HIPCs (see page 290) is expected to free up significant resources for countries’ efforts to reach the MDGs and reinforce long-term debt sustainability. Stressing that there are only 10 years left to meet the MDGs, Brown said that the international community must now follow through on its commitment to provide additional resources, just as developing countries must implement policies that foster sustainable growth and reduce poverty.

For additional information on initiatives to strengthen the IMF’s support for low-income countries, see the IMF’s website at http://www.imf.org/exter-nal/np/exr/ib/2005/092015.htm.

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