Appendix I. Documentation And Review Process
This appendix summarizes documentation requirements and procedures for a typical mission cycle to a middle- or low-income country in a fragile situation. The basic requirements vis-à-vis Policy Notes, Briefing Memorandums, and Staff Reports, the review process, Management clearance, and other requirements are the same as those for non-fragile states. This appendix highlights any additional issues of relevance to countries in fragile situations. The guidance below should be interpreted flexibly and sensibly. In particular, one would expect discussions of issues pertaining to the overall approach to Fund engagement—e.g., characteristics of fragility, political and social context, capacity, and willingness to implement reforms—to be extensive at the initiation of a new program or when unexpected developments call for a re-evaluation of important elements of Fund engagement or policy design. While treatment of such matters would likely be lighter when recent developments were broadly in line with expectations.
Appendix II. Examples Of Fund Engagement In Countries In Fragile Situations
Appendix III. Experience With Close Non-Financial Engagement In Countries In Fragile Situations
This appendix provides examples where non-financial engagement in countries in fragile situations was closer, given that a financial arrangement was precluded either because of protracted arrears, lack of sufficient policy commitment, or absence of financing needs that could be met by the Fund.
Appendix IV. Experience With Staff-Monitored Programs (SMP) In Countries In Fragile Situations
This appendix provides examples where SMPs proved the most effective mode of Fund engagement in some countries in fragile situations.
Appendix V. Good Practices In Program Design In Countries In Fragile Situations
This appendix provides examples of good practices pertaining to program design, broadly based on the pillars discussed in the third section of the guidance note.
Appendix VI. Good Practices In Understanding The Political Context
This appendix provides a summary of existing material from the Fund, the World Bank, and development agencies on political and socio-economic issues.1 It provides general good practices in understanding the political and social context in countries.
1.A deeper understanding of the political context in countries in fragile situations is important to improve the design of Fund-supported policies, particularly the pace of adjustment and reform, and to have a more informed judgment of the risks of engagement. According to the World Bank, development practitioners are increasingly aware of the role that social and political structures play in shaping countries’ development paths and results. Failure to anticipate political and institutional challenges is a chief cause of unsuccessful policy reform processes. Recognition of these relationships has prompted the donor community to explicitly address how social and political factors shape economic development and vice versa. In this context, various donor agencies have developed and piloted individual approaches to macro-level social and political analysis. The World Bank has developed and piloted Country Social Analysis (CSA). CSAs examine relevant social, political, and institutional factors to identify significant opportunities, constraints, and risks to development. Based on this analysis of a country’s social and political context, they provide policy recommendations for achieving more inclusive and accountable institutions and for mitigating country-level social and political risks.
2.Fund staff should collaborate with donors and other IFIs to share information on (subject to confidentiality procedures), and understand, the political economy in countries in fragile situations. Fund staff, especially resident representatives, should also conduct their own evaluation of the political situation and social context, where and when possible. According to the Fund’s guidance, it is legitimate for Management to seek information about the political situation in member countries as an essential element in judging the prospects for policy implementation. It may also be helpful for staff to be aware that, according to the World Bank and DfID, the main areas to consider when analyzing the main drivers of political decisions in countries can include:
Political process in the country concerned, including the distribution of power, interest groups, and incentive structures and how these generate particular policy outcomes that may encourage or hinder development;
The role that formal institutions (e.g., rule of law, elections) and informal social, political, and cultural norms play in shaping political and economic competition.
The effect of existing social and cultural groups on access to assets, services, and public goods, in order to better determine sources of growth. This can also help assess the social risks that may have a bearing on economic policy.
Broad social expectations and the capacity of the state that may impact economic policy-making and the capacity or ability to implement policies under Fund-supported programs. Where possible, studying the main fault lines in society may help in better understanding political behavior and public policy. This could include the impact and strength of values and ideas, including political ideologies, religion, and cultural beliefs.
3.Strengthening the Fund’s outreach is also key to improving the general understanding of Fund involvement in the reform process. Mission chiefs and resident representatives can familiarize themselves with the Fund’s communication toolkit and draw on the experience of Media Relations at the External Relations’ Department.
Appendix VII. Good Practices In Donor Coordination On Reforms
This appendix provides an example of good practices pertaining to donor engagement and prioritized program reforms, broadly based on the discussion in the seventh section of the guidance note.
Appendix VIII. Example Of A Multi-Donor Trust Fund (MDTF)
This appendix gives an overview of the Afghanistan Reconstruction Trust Fund.1
1.The Afghanistan Reconstruction Trust Fund (ARTF) is a partnership between the international community and the Afghan government to improve the effectiveness of the reconstruction effort. The ARTF was established in 2002 to support the government’s national priority programs and to contribute to the achievement of the Afghanistan National Development Strategy (ANDS) goals. The ARTF has developed into the main multilateral funding mechanism for the government’s core budget and is positioned to be the key funding source for the ANDS implementation. Its main national-level impact is therefore its contribution toward greater coherence of the delivery of development assistance in Afghanistan.
2.The main role of the ARTF is to provide a coordinated financing mechanism for the government’s budget for spending on priority sectors and investment projects. The specific objectives of ARTF are to:
Position the national budget as the key vehicle to align the reconstruction program with national development objectives;
Promote transparency and accountability of reconstruction assistance;
Reduce the burden on limited government capacity while promoting capacity-building;
Enhance donor coordination for financing and policy dialogue.
3.The ARTF’s fiduciary framework has contributed to the strengthening of the government’s PFM systems. Disbursements are based on eligibility criteria agreed with the government in line with the broader fiduciary framework for public expenditures. Overall, the ARTF also contributes to broader coherence of operations by:
Channeling resources in line with Afghan priorities—thereby strengthening the ownership and accountability of the Afghan government for the resources deployed.
Channeling resources through the Afghan budget—thereby strengthening the budget as the main policy tool for directing and allocating resources for priority needs.
Offering a collective platform for donor funding—thereby reducing the transaction costs of government dealing with 30 plus donors bilaterally.
Offering a collective platform for donor/government dialogue—thereby creating leverage on the government on critical reform points.
Offering an efficient channel for funding scale up of national priority programs—which are considered to be more effective mechanisms for development than individual projects.
4.The ARTF is managed by the Management Committee (MC) consisting of the World Bank (as the administrator), the IDB, the Asian Development Bank (ADB), and the UN (UNAMA and UNDP). The Management Committee meets regularly in Kabul, with the Ministry of Finance as an observer, to carry out the day-to-day business of the fund. Once a quarter, ARTF Donors meet to discuss broader strategy with the government and ARTF Management.
5.Donors contribute funds into a single account, held by the World Bank.The MC makes decisions on proposed allocations at its monthly meeting, and those decisions are translated into funds through Grant Agreements signed between the World Bank and the Government of Afghanistan. ARTF allocations are made through two windows: the Recurrent Cost Window and the Investment Window. The Recurrent Cost Window reimburses the government for a certain portion of eligible and non-security related operating expenditure every year. The Investment Window provides grant financing for national development programs in the development budget. Since early 2002, 30 donors have contributed over $3 billion, making ARTF the largest contributor to the Afghan budget.
6.The Recurrent Cost Window: Domestic revenues continue to be insufficient to cover the costs of government. The ARTF Recurrent Cost Window has therefore ensured the basic functioning of government including the payment of salaries and the delivery of services such as healthcare and education. ARTF financing of recurrent budget expenditures would be based on the government of Afghanistan’s macroeconomic and budget framework that would be reviewed by the Fund and the World Bank, and there would be close coordination with bilateral and multilateral donors who are also providing budgetary support for recurrent expenditures.
7.The Investment Window: The Investment Window has in the last two years increased significantly in volume and in scope, thanks to increased levels of donor contributions. Decentralized and national rural development programs, such as the National Solidarity Program, the National Rural Access Program, and microfinance programs, have been strongly supported by the ARTF. Other expanding areas that are attracting donor funding include the education sector, capacity building, justice sector reform, power, and urban development (roads, water, and sanitation). A three-year financing strategy was recently developed and agreed by the donors and the government to better align ARTF support with longer-term government priorities and to move the ARTF away from annual allocations toward more predictable multiyear financing.
8.Donor contributions: Donors generally make annual pledges which are paid in during the Afghan Solar Year (March to March). The ARTF has developed a system of “preferences”. A preference is not an earmark. It is a formal recognition by the Administrator of the donor’s preference to allocate a certain portion of a contribution toward a particular project. There are some key rules that guide this system, as follows:
The ARTF will not accept preferencing in excess of 50 percent of a donor’s contribution in a solar year.
This rule is lifted for all donors once sufficient un-preferenced funds have been paid in to cover the Recurrent Cost Window obligation.
Geographic preferencing is not accepted by the ARTF.
Preferences must be for ongoing, on-budget, national priority programs, that have a clear funding gap.
Brinkerhoff, D.W. 2007. Capacity Development in Fragile States. European Center for Development Policy Management. Discussion Paper 58D, Maastricht.
Collier, P. and Chauvet, L. 2008. What are the Preconditions for Turnarounds in Failing States? Conflict Management and Peace Science, 25.
Organization for Economic Cooperation Development, 2008. Concepts and Dilemmas of State Building in Fragile Situations. From Fragility to Resilience. OECD/DAC Discussion Paper, Paris.
Overseas Development Institute (ODI), 2010. Accelerating the Transition out of Fragility: The Role of Finance and Public Financial Management Reform. M. Manuel, S. Gupta, and P. Ackroyd. The Sixth Annual CAPE Conference, November 2010, London.
Prepared by Nisreen Farhan under the guidance of Dominique Desruelle and Bhaswar Mukhopadhyay (all SPR). SPR gratefully acknowledges inputs from, and helpful exchanges with, Sean Nolan, Enrique Gelbard, Chris Lane, and Jean Le Dem (all AFR), Ron van Rooden and Todd Schneider (both MCD), and Meron Makonnen (LEG). Country examples were also provided by respective country teams in AFR, MCD, and WHD.
This note provides guidance on engagement with countries in fragile situations that are members of the Fund and have authorities that are recognized by the international community. Other cases—i.e., non-members and members without recognized authorities—are not covered here.
Under the Fund’s Articles of Agreement, the Fund has an obligation to conduct surveillance and all member countries have an obligation to collaborate with Fund in its surveillance activities. In general terms, country surveillance focuses on assessing whether countries’ policies promote domestic and external stability and the associated risks and vulnerabilities. See The New Decision on Bilateral Surveillance over Member Policies, June 2007.
The use of Fund resources for budgetary support needs to be consistent with the Fund’s legal framework and the Fund’s mandate to provide balance of payments financing.
While the World Bank uses an average CPIA score of 3.2 and below to classify a state as fragile, teams can make a case for a more flexible approach to assessing institutional and policy implementation capacity based on other tangible information. Where a CPIA score is not available, such as in MICs, the assessment of institutional and policy implementation capacity would have to be made on a case-by-case basis.
For example, available fragility indicators are discussed in the German Development Institute/UNDP User’s Guide on Measuring Fragility (2009).
See Conditionality Guidelines.
As evidenced by delays in completing reviews and programs going off track (see Macroeconomic and Operational Challenges in Countries in Fragile Situations), the authorities’ commitment to an ambitious macroeconomic program that they do not have the capacity or the political commitment to deliver on, does not necessarily help mitigate risks to Fund financing.
There are a few cases where Fund engagement was not immediately possible, or was minimal, due to security concerns. Some examples include Somalia, Democratic Republic of Congo in 1997, Liberia in 2000–03, and Cote d’Ivoire in 2003. Fund staff has sought to overcome security obstacles through discussions with the authorities in third-party countries or special security measures. Some recent examples include Afghanistan, Yemen, Pakistan, and Iraq.
See also footnote three on member obligations under the Surveillance Decision. This option is available for all members. In practice, the extent of its use by Fund departments reflects, on the supply side, priorities and budget constraints and is subject to Management approval.
See The Handbook of IMF Facilities for LICs (The Handbook) for more information on track records under the RCF and SMPs.
The terms and conditions of use of the RCF are set in the PRGT Instrument (see Decision No. 8759-(87/176)).
See A New Architecture of Facilities for Low-Income Countries and The Handbook for more information and for the criteria for approving RCF financing.
Access norms and limits differ for each Fund financial facility and is largely determined by balance of payments needs, the strength of the program, and capacity to repay the Fund (see paragraph below on Access).
Repeated use must be consistent with the rules set in the PRGT Instrument and would be subject to access limits under the policy.
See The Handbook for eligibility and qualification under the RCF.
The treatment of external arrears in Fund arrangements is governed by four inter-related policies: financing assurances, the non-toleration of sovereign arrears to official creditors, the lending into arrears, and disputed claims. See The Handbook and the Review of Fund Policy on Arrears to Private Creditors. In cases where use of the RCF is envisaged in the presence of external arrears, area department staff should contact SPR and LEG to discuss requirements stemming from these policies.
In principle, the Paris Club only offers rescheduling to countries with a UCT arrangement in place. However, there have been very few exceptions to this rule (e.g., Iraq 2004), where an agreement was reached on the basis of an EPCA.
See The Fund’s Financing Role: Reform Proposals on Liquidity and Emergency Assistance and Executive Board Decision No. 15015-(11/112) of November 21, 2011 for more information and for the criteria for approving RFI financing.
See footnote 18.
See The Handbook.
See The Role of the Fund in Governance Issues and the Fund’s Conditionality Guidelines.
For example, DFID is providing financing under a three-year program to station resident advisors in six countries in fragile situations in the Middle East and Central Asia region, to help with building capacity in key economic institutions.
The IMF institute works with a large number of regional training organizations and with the RTACs when deciding on course topics, which are highly demand driven.
The intention is not to have the Fund manage MDTFs, but rather that any such MDTFs are linked to Fund-supported programs, in order to help donors channel budget support to governments through MDTFs. A good example would be the Afghanistan Reconstruction Trust Fund, which is administered by the World Bank (see Appendix VIII for details).
In complex situations, teams can include a political diagnostic as an attachment to the Policy Note and refer to that diagnostic as needed to justify specific policy design features.
For further details, see The Handbook and GRA lending toolkit and conditionality.
The usual requirements for a PRSP and the PRS process apply as per thhttp://www.imf.org/external/np/pp/eng/2005/063005.htme Updated Staff Guidance on Poverty Reduction Strategy Documents.
See The Handbook and Implementation of the Joint Management Action Plan on Fund-Bank Collaboration.
The suspension of TA has subsequently been lifted also in (i) macroeconomic statistics; (ii) PFM; and (iii) anti-money laundering and combating the financing of terrorism.
Country Report 04/84: Liberia-Report on Post-Conflict Economic Conditions and Economic Program for 2004/05.
After extensive negotiations with donors, the Fund, the World Bank, and the transitional government set up the GEMAP in 2005. The program invited external financial controllers into key revenue collecting agencies (including the central bank). This was seen as a critical early foundation for the successful SMP and subsequent ECF (see Appendix III)
The token monthly payment to the Fund was increased from $50,000 to $60,000.
The de-escalation policy applies a case-by-case approach. The guideline for the length of the evaluation period that would lead to the restoration of voting and related rights is about two years while that for lifting the declaration of non-cooperation is about one year.
See Review of the Fund’s Policy on Overdue Financial Obligations.
See the Fund’s The Role of the Fund in Governance Issues and the Fund’s Conditionality Guidelines. For a detailed guide on political economy analysis, see The World Bank Understanding Socio-Economic and Political Factors to Impact Policy Change for a summary of the approaches of major donor agencies to political economy analysis. See also the DfID How To Note on Political Economy Analysis, June 2009.
See the World Bank Afghanistan Reconstruction Trust Fund website.