Recommendations of IEO Evaluation Report on Prolonged use of IMF Resources 15
I. Recommendations on the Rationale for IMF Involvement
1. The Executive Board should adopt an explicit definition of prolonged use, as a trigger for the adoption of automatic due diligence procedures. The definition could use different criteria for the general and concessional resources.
2. In view of the experience with ineffectively implemented programs, greater efforts should be made at judging when countries are ready to implement programs, especially in situations of prolonged use. On this basis, the IMF should be willing to be more selective in extending financial support.
3. The IMF should aim to provide the international community with credible alternatives to the current situation where IMF-supported programs have become a precondition for the provision of many other sources of financing by donors and creditors. This could be done by developing a mix of tools (e.g., strengthened surveillance, PRSP assessments, precautionary arrangements, or shadow programs) to deliver seals of approval suited to the varied needs of donors and creditors.
4. An explicit "exit strategy" should be developed for identified prolonged users, although without setting rigid limits on the duration of IMF program involvement.
5. A differentiated rate of charge could be considered for prolonged users. While there is no evidence that cost of IMF resources is a factor in prolonged use, it would serve as a signaling device that could possibly provide at least a political incentive against prolonged use.
II. Recommendations for Program Design and Implementation
6. Since implementation is critically dependent on ownership, it would be desirable to evolve specific operational procedures to ensure that program design places greater emphasis on ownership and the nature of the domestic policy formulation process. This approach is already embedded in initiatives currently under way. The following specific suggestions are offered to operationalize the process.
The IMF should move toward a situation where the normal procedure would be for the authorities to have the initial responsibility for proposing a reform program, which should be the starting point for negotiations. The speed at which this can be done will vary from country to country, depending on administrative capacity. Such an approach should not be an additional prerequisite for financial support, but countries should be encouraged to adopt it.
The aim should be to move as soon as possible to a situation in which the core elements of a program are subject first to a domestic policy debate within the member country's own policymaking institutions.
As is already "best practice," Article IV surveillance reports should actively seek to present alternative policy options and to analyze the trade-offs between them so as to encourage an open debate on alternative policy options.
7. Programs should give much greater emphasis to fostering key institutional changes and to strengthening implementation capacity. Staff reports should include an explicit assessment of key implementation challenges foreseen and ways to address them.
8. There should be greater selectivity in program content, based on a clearer prioritization of conditionality and a better integration of the latter in program design. This is the essence of ongoing efforts to streamline conditionality, which we strongly support. To reach this objective, the following steps would be key:
A deepening of operational collaboration with the World Bank, to ensure an effective meshing of priorities and time frames of the two institutions on key issues. Recent initiatives in this area are welcome, but substantial changes in operating approach and sustained emphasis by management will be needed to make collaboration effective.
Systematically incorporating into program documents more in-depth analyses of real economy responses to the key policy elements of programs and of the sources of growth, while spending proportionately less time fine-tuning traditional financial programming exercises. Such analyses would draw, where appropriate, on the expertise of the World Bank.
Using conditionality as a means to direct attention to critical reforms and emphasizing substantive rather than formal progress toward the program's objectives both in selling conditionality and in assessing compliance with it. Greater selectivity in the use of conditionality should be accompanied by less recourse to waivers.
Making greater efforts to tailor the effective time frame of program design to the foreseeable length of the reform and adjustment process, not necessarily by lengthening the time frame of arrangements themselves, but by casting individual arrangements within a longer-term strategic framework and recognizing up front the need for repeat arrangements where adjustment is expected to be protracted. This approach would build on the existing internal country strategy papers, but with the core elements included in reports to the Executive Board.
9. UFR reports should include more explicit discussions of the major uncertainties faced by the program and of how policies will be adapted if underlying assumptions are not borne out by subsequent developments, To counteract any bias to over optimism, the reports should discuss explicitly how programs would be adapted if other available forecasts were to prove more accurate.
III. Recommendations for IMF Governance
10. Systematic ex post assessments of programs should be undertaken, with the key messages reported to the Executive Board, as part of a broader effort to disseminate more effectively "best practices" and lessons learned, and to maximize the effectiveness of the review process. As part of this process, the following points deserve emphasis:
Staff reports, especially those involving UFR requests by prolonged users, should provide more perspective on the history of the IMF's program involvement in the country, highlighting what has been achieved and where previous programs have fallen short of their objectives.
More follow-up monitoring should be undertaken when programs go off-track, especially for prolonged users. This will require improvements to the existing (MONA) database.
11. Steps should be taken to strengthen further surveillance in prolonged use cases, going beyond the recent revisions to surveillance guidelines aimed at improving surveillance in program countries. Further steps should include:
A clarification of the expectations on the role of surveillance in program cases, going further than the simple reassertion of existing, but unevenly implemented guidelines and stressing the need for ex post assessments of programs' achievements.
There is a case for creating greater operational separation between UFR and surveillance missions in prolonged use cases, although implementing this separation raises delicate trade-offs. The appointment of a mission chief chosen from outside the area department for surveillance missions to prolonged users could be considered provided there are suitable continuity and coordination safeguards.
There is merit in seeking a second opinion--including from outside the IMF--on key policy issues that appear to be contributing to prolonged use.
The precise frequency of Article IV consultations with program countries is less important than that they take place at times when a "fresh look" would be most valuable.
12. The IMF should strengthen the ability of its staff to analyze political economy issues in order to achieve a better understanding of the forces that are likely to block or enhance reforms and to take these into account in program design.
13. A broad review of explicit and implicit incentives facing IMF staff should be undertaken, in particular with a view to reducing the excessive turnover of staff working on countries and to fostering increased candor in staff reports and greater accountability.
14. The appearance of undue political intervention in the IMF's decisions to grant a country access to its resources undermines the credibility of programs. Procedures should be evolved so that political considerations, which are inevitably present in these decisions, are seen to be taken into account in a transparent manner, with decisions and accountability clearly at the level of the Executive Board on the basis of a candid technical assessment by staff of the risks and potential trade-offs.
Evaluation of the Prolonged Use of Fund Resources (SM/02/87, Volume I, 9/6/02).
Statement by the Managing Director on the Evaluation by the Independent Evaluation Office of Prolonged use of Fund resources (BUFF/02/150, 9/13/02).
Summing Up by the Acting Chair, Evaluation by the Independent Evaluation Office of Prolonged use of Fund resources (BUFF/02/164, 9/25/02).
Participants in the Task Force included Timothy Geithner (chair), Michael Deppler, Margaret Kelly, Mohsin Khan, John Odling-Smee, Teresa Ter-Minassian, Ulrich Baumgartner, Carlo Cottarelli, Donal Donovan, R. Anthony Elson, Oleh Havrylyshyn, Richard Hemming, Saleh Nsouli, Scott Brown, Godfrey Kalinga, Eliot Kalter, Timothy Lane, Markus Rodlauer, Miguel Savastano, and Alexandros Mourmouras.
Programs supported by the ESAF were to “involve a substantial effort to strengthen the external payments position in a sustainable manner, and in particular to assure substantial progress during the three-year period toward an overall position and structure of balance of payments that is consistent orderly relations with creditors and a reduction in restrictions on trade and payments.” Chairman’s Summing Up of the Discussion on the Enhancement of the Structural Adjustment Facility—Operational Arrangements (SUR/87/260, 12/17/87).
“Directors reviewed the circumstances in which long-term Fund involvement can be an appropriate response to help countries sustain strong macroeconomic policies and address, through structural reforms, deep-seated problems that, by their nature, require many years to resolve. Many considered that for low-income and transition economies, the key challenge is to design sound programs and ensure their implementation on the basis of strong ownership and close monitoring, rather than to avoid prolonged use per se. For low-income countries relying on concessional financing administered by the Fund, most Directors did not consider the relatively high incidence of prolonged use analyzed in the report as necessarily indicating a problem that needs to be corrected. A few Directors, however, called for a reassessment of the Fund’s strategic role with respect to low-income countries and possible further delineation of the respective mandates of the Fund and World Bank.” Summing Up of Executive Board Discussion on the IEO Evaluation of Prolonged Use of IMF Resources (BUFF/02/164, 9/25/02).
See “Conditionality in Fund-Supported Programs — Issues and Review of Experience — Draft of Acting Chairman’s Summing Up and Decision” (EBS/91/101, Supplement 2, 7/29/01); and “Selected Operational Issues Related to Use of Fund Resources” (EBS/91/108, 7/3/91).
“Review of Access Policy in the Credit Tranches and Under the Extended Fund Facility—Background Paper” (EBS/01/134, 8/10/01), pp. 24-27.
It is clear that the Fund should not take limits on institutional capacity as a fixed parameter, and be actively engaged in capacity-building in its core areas, through advice and well-targeted technical assistance. But it must also take a view about a country’s capacity during the program period, as well as its record of utilizing past technical assistance.
To facilitate follow-up monitoring when programs have gone off-track, the IEO also recommended enhancements of the internal MONA database for program monitoring. An improved database system is now at an advanced stage of development and should become operational in the near future.
IEO Evaluation of the Prolonged Use of IMF Resources (SM/02/287, 9/6/02), Volume I, pages 13-15.
One of these countries, Pakistan, is on both the PRGF list and the list of prolonged users of the Fund’s general resources.
This additional resource requirement would correspond to about 5 staff years in FY 2004 and 2005, declining to about 2 staff years thereafter.
The Facilities Review used a different definition of prolonged use of Fund resources: countries having programs supported by upper credit tranche arrangements in at least 5 of the previous 15 years, excluding countries eligible to use the Fund’s concessional facilities.
Quote from Evaluation of the Prolonged Use of Fund Resources (SM/02/87, Volume I, 9/6/02), pp. 13-16.