Underpinning stability

The PSI encourages countries to deepen and broaden their ownership of the policy agenda. As much as possible, policy strategies and objectives draw on domestically produced documents, including budget documentation and Poverty Reduction Strategy Papers. Nigeria’s PSI, for example, is based on the National Economic Empowerment and Development Strategy, the country’s homegrown poverty reduction strategy. The authorities chose to present their policies to the Fund in their own policy statement rather than in the format of a conventional letter of intent. Uganda’s initial PSI and its new three-year PSI incorporate macroeconomic targets based on its existing medium-term expenditure framework and reflect the priorities and strategies set out in the country’s Poverty Eradication and Alleviation Plan.

Similarly, the PSIs for Cape Verde and Tanzania have been developed in coordination with these countries’ overall development and poverty reduction strategies. In support of domestic ownership, PSI countries typically pursue a range of measures to strengthen local skills and capacities. For example, measures to increase capacities in such areas as public sector financial management, delivery of public services, and resource mobilization are prominent in the current PSIs.

Tailored strategies

Under their PSIs, countries have the flexibility to specify policy objectives and design reform strategies that are tailored to their economic conditions. In general, policies aim to consolidate macroeconomic stability and push ahead with structural reforms, addressing, in particular, critical bottlenecks to private sector-led growth and poverty alleviation. The reform agenda often includes measures to improve public sector management, strengthen the financial sector, and move forward in other areas consistent with the IMF’s medium-term strategy. Under some of the current PSI-supported programs, countries can borrow on less concessional terms for high-quality projects, broadening their financing options and helping them move away from aid dependency. Within each program, however, there is substantial flexibility as to the specific areas of emphasis:

• Uganda began with a 16-month PSI centered on preserving its long record of macroeconomic stability. The country then decided on a new three-year PSI that would both sustain this macroeconomic progress and give particular attention to financial market development—both longer-term financing for businesses and access to financial services in rural areas—together with energy security and transportation infrastructure as the keys to future prosperity. Uganda’s PSI also makes special provisions for nonconcessional financing for hydroelectric dam construction, which is a critical part of solving the country’s electricity crisis.

• The PSI for Cape Verde aims to support the country’s strong economic performance and prospects—as reflected, for example, in high and rising inflows of foreign direct investment. Particular attention is given to reducing macro-economic risks and providing a safety margin against exogenous shocks, including through the reduction in public debt and further buildup of official foreign reserves.

• In Nigeria, the PSI recognizes the large infrastructure gap that is a major obstacle to private sector development while emphasizing the need for continued efforts to safeguard the country’s oil wealth and macroeconomic stability.

• The recently approved PSI for Tanzania seeks to support sustained growth and poverty reduction by enhancing public resource mobilization and the efficiency of spending, increasing the financial sector’s contribution to growth and the effectiveness of monetary policy, and improving the business climate.

Signal to donors

The PSI also provides an important signal—to bilateral donors, multilateral development banks, and financial markets, among others—that a country’s economic policies have been discussed with and endorsed by the IMF. Successful performance under the PSI has allowed Nigeria to implement an agreement with its Paris Club creditors, leading to a substantial reduction of its external debt. Such signals were also viewed as particularly important in Cape Verde, which continues to face significant needs for external assistance to support infrastructure development and other efforts to increase growth and reduce poverty. The signaling role of the PSI is reinforced by the regular, six-monthly review cycle of PSI-supported programs, coupled with the expectation that the country’s staff report and other program documents will be published following each review.

In summary, the PSI offers low-income countries a flexible tool for articulating their policy priorities with the support of a continuing, close dialogue with the Fund and for signaling their policy commitments to the international community. Experience under the PSI to date has been positive, both among the countries and among their development partners. These favorable responses may well continue in the period ahead, with countries that graduate from PRGF arrangements finding that the PSI provides an appealing framework for focusing on the broader outcomes sought from their policy agendas and for exploring alternative approaches to reaching these goals.

Maitland MacFarlan and John Green

IMF African Department