V Conclusions

Jan Martijn, Gabriel Di Bella, Shamsuddin Tareq, Benedict Clements, and Abebe Aemro Selassie
Published Date:
July 2006
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In sum, macroeconomic outcomes in the low-income countries reviewed in this paper have been robust in recent years, with inflation reduced to single digits, the highest per capita income growth rates for many years, and improved public finances. But notwithstanding these improvements, the foregoing discussion highlights several areas where adjustments to the design of IMF-supported programs could be considered.

First, the economic growth rates that have been registered to date must be sustained; indeed, still higher rates of growth are necessary for stronger inroads in poverty reduction consistent with the MDGs. The modest increase in investment levels in the sample of mature stabilizer countries in recent years is encouraging. But whether higher growth rates can be achieved remains an open question, which depends much more on further changes to economic and political institutions.1

Second, external viability and fiscal sustainability remain elusive in most of the mature stabilizers. Some two-thirds of the countries in the sample either already have high external debt burdens that make them susceptible to a heightened risk of debt distress or are maintaining current account deficits that will soon put them in this situation. For this set of countries, the stance of fiscal policy clearly needs to heed debt sustainability considerations. Higher grant resources (either through direct grants or more highly concessional loans) are required to meet the twin objectives of debt sustainability and providing sufficient funding for spending related to the MDGs. In the other one-third of the mature stabilizers, though, there would seem to be somewhat more scope for additional poverty-reducing spending—subject to absorptive capacity constraints being overcome. Further, where debt burdens are more moderate, the pace at which countries accumulate new debt will need to be monitored carefully to avoid the reemergence of debt problems.

Third, improving the quality of public spending as well as public expenditure management systems will be a major challenge in the coming years. Mature stabilizers have been underexecuting their capital budgets in recent years. For example, planned increases in public investment under PRGF-supported programs in the sampled countries have generally failed to materialize. In this context, scaling up aid is unlikely to be productive unless it is also matched by efforts to tackle absorptive capacity constraints.

Finally, the broad objective of monetary policy in PRGF-supported programs should continue to be keeping inflation in the single-digit range. There is evidence from the mature stabilizer sample that with inflationary pressures receding, money demand has increased markedly. This increase in money demand needs to be more systematically accommodated in the design of monetary programs. Where double-digit inflation has resurfaced, it has generally been associated with supply shocks. Given the prevalence of such shocks in low-income countries, IMF-supported programs could consider either targeting a measure of core inflation (where this is practicable) or a target range for inflation (with the midpoint of this range being used for operational purposes).

1See IMF (2005b).

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