Chapter

Chapter 5. Poverty Reduction and Debt Relief for Low-Income Countries

Author(s):
International Monetary Fund
Published Date:
October 2002
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Reducing poverty in low-income countries remains one of the foremost challenges of our time. There is unprecedented agreement in the international community about what needs to be done: a new cooperative partnership between low-income countries and the donor community based on mutual accountability, including more aid for countries with strong and demonstrable commitments to reform, and ensuring a more equitable distribution of the benefits of globalization. The IMF has been a key player in the overall endeavor and has undertaken numerous activities in the past year to reinforce and strengthen its support for low-income countries’ reform and development efforts.

Global Economic Environment and IMF’s Support for Low-Income Countries

As the year progressed, it became clear that the economic downturn in industrial countries was having an adverse impact on many developing countries, including low-income member countries (those eligible for support under the IMF’s Poverty Reduction and Growth Facility, PRGF, and the International Development Association). In the aftermath of September 11, which exacerbated the downturn, the IMF worked with low-income countries to assess the impact of the cyclical situation on external financing needs and necessary responses. The main channels through which the weaker global environment affected low-income countries were the decline in nonfuel commodity prices and the drop in travel and tourism receipts. Lower oil prices, however, helped to lessen the effects of shocks in oil-importing countries, as did strong policy frameworks. In 2001, within this group, sub-Saharan African countries with generally strong policies managed to sustain substantially higher per capita GDP growth than in the region as a whole.

Early analysis and consultation indicated an adverse but manageable impact on the external financing needs of many low-income countries, and IMF staff members continued to monitor the situation through ongoing consultations, including with authorities in more than 50 low-income countries by end-2001. The response to additional needs has been met through a combination of policy adjustment and additional financing from external sources, including modest PRGF augmentation. For 2002 and 2003, the outlook for developing countries was seen as depending heavily on the extent of the recovery in the industrial countries, commodity and oil price movements, and sound policy frameworks. In this uncertain environment, concessional financing by the donor community and the international financial institutions, particularly for countries pursuing good policies, would be an important safety cushion. The Managing Director of the IMF emphasized that the IMF stood ready to help if additional financing needs emerged in 2002.

Overall in 2001, the IMF committed new PRGF loan resources of $2.7 billion, a record high, partly reflecting approval of a few large new arrangements. Projections indicated that new commitments in 2002 could reach $2 billion. If high levels of new commitments continued thereafter, consideration would be needed about mobilizing new PRGF loan and subsidy resources. For subsidizing Post-Conflict Emergency Assistance, the IMF welcomed contributions (as of April 15, 2002, from Belgium, the Netherlands, Sweden, Switzerland, and the United Kingdom) that were sufficient to finance current and most prospective users of the facility (see Chapter 6).

Broader IMF Support for the Global Effort to Reduce Poverty

The Poverty Reduction Strategy Paper (PRSP) approach was devised as the nexus for bringing development partners, in-country and internationally, together to support a country’s poverty reduction and growth strategy. This approach—combined with sound policies to promote macroeconomic stability, debt relief under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC), and capacity building through technical assistance—is expected to put countries on a path to sustainable growth and poverty reduction and achievement of the Millennium Development Goals (see Box 5.1). The IMF worked proactively during the year to further these ends, through policy dialogue, support under the PRGF and enhanced HIPC Initiative, and technical assistance for capacity building (see below). In parallel with these efforts, the staffs and Executive Boards of the IMF and the World Bank completed a joint review of the PRSP approach. The Executive Boards of the IMF and the World Bank also discussed a paper on actions to strengthen the tracking of poverty-reducing public spending in HIPCs. This paper contained country action plans agreed with IMF and Bank staff to strengthen the capacity of HIPCs to track povertyreducing public spending in the short and medium term. In addition, the IMF’s Executive Board reviewed the implementation of the PRGF and considered the status of implementation of the HIPC Initiative and the HIPCs’ achievement of long-term debt sustainability.

Box 5.1Millennium Development Goals

All 189 member states of the United Nations have pledged to meet the following Millennium Development Goals by 2015:1

  • Curtail extreme poverty and hunger: cut by half the proportion of people living on less than a dollar a day;
  • Achieve universal primary education: ensure that all boys and girls complete a full course of primary schooling;
  • Promote gender equality and empower women: eliminate gender disparity in primary and secondary education—preferably by 2005, and at all levels by 2015;
  • Reduce child mortality: reduce by two-thirds the mortality rate among children under the age of five;
  • Improve maternal health: reduce by three-quarters the maternal mortality rate;
  • Combat HIV/AIDS, malaria, and other diseases: halt and begin to reverse the spread of HIV/AIDS; halt and begin to reverse the incidence of malaria and other major diseases;
  • Ensure environmental sustainability: integrate the principles of sustainable development into country policies and programs; reverse the loss of environmental resources; reduce by half the proportion of people without sustainable access to safe drinking water; achieve significant improvement in the lives of at least 100 million slum dwellers by 2020; and
  • Develop a global partnership for development: develop further an open trading and financial system that is rule-based, predictable, and nondiscriminatory (includes a commitment to good governance, development, and poverty reduction—nationally and internationally); address low-income countries’ special needs (includes tariff-and quota-free access for their exports; enhanced debt relief for the HIPCs; cancellation of official bilateral debt; and more generous official development assistance for countries committed to poverty reduction); address the special needs of landlocked and small island developing countries; deal comprehensively with developing countries’ debt problems through national and international measures to make debt sustainable in the long term; in cooperation with the developing countries, develop decent and productive work for youth; in cooperation with pharmaceutical companies, provide access to affordable essential drugs in developing countries; in cooperation with the private sector, make available the benefits of new technologies (especially information and communication technologies).
1 Where relevant, 1990 is used as the base year. More information on the Millennium Development Goals and the text of the UN General Assembly’s Millennium Declaration can be accessed on the Internet at www.un.org/millenniumgoals/index.html and at www.developmentgoals.com.

Finally, the IMF sponsored—jointly with the World Bank, Asian Development Bank, and the European Bank for Reconstruction and Development—an initiative to help the seven low-income countries of the Commonwealth of Independent States to promote poverty reduction and debt sustainability.

The PRSP Review

In their review of the PRSP approach in March 2002, Directors welcomed the contributions from representatives of low-income countries, international development agencies, and civil society organizations, both in written form and in the context of four regional conferences, as well as an international conference held in Washington in January 2002 (see Box 5.2). The conferences provided an important opportunity for an exchange of views among international partners on the PRSP process, including the role of the IMF in that process, particularly through the PRGF.

The Board’s review revealed an encouragingly broad-based endorsement of the PRSP approach as the umbrella framework and vehicle for organizing domestic and international efforts to achieve poverty reduction in low-income countries (see Box 5.3). Directors reaffirmed the underlying principles that national poverty reduction strategies should be country-driven, results-oriented, comprehensive, and long-term in perspective, and should foster domestic and external partnerships that improve the effectiveness of development assistance. The review also underscored the strong ownership of PRSPs among governments, more open dialogue with civil society, and greater prominence of poverty reduction in the policy debate. At the same time, Directors recognized that progress had been uneven, depending on each country’s starting point, capacity, and priorities, and that the design and implementation of country-owned poverty reduction strategies was a complex task that taxed countries’ limited institutional capacity. The PRSP approach was still evolving, and everyone involved was learning as they went along. The PRSP approach was a long-term approach that required patience, perseverance, and sustained effort.

Box 5.2International Conference on Poverty Reduction Strategies

Two years after the IMF and the World Bank adopted a new approach to poverty reduction based on broadbased country ownership of policies and programs, an International Conference on Poverty Reduction Strategies was held in Washington, D.C., during January 14–17, 2002. The conference—which brought together representatives from 60 lowincome countries, their devlopment partners, and civil society—provided an opportunity to take stock, share experiences and concerns, and fine-tune strategies in order to be better prepared for, and to ensure the achievement of, the programs’ objectives. The Poverty Reduction Strategy Paper (PRSP) approach embodies the principles of self-help, country ownership, and accountability. As such, the PRSP experience, its record to date, and means of enhancing its effectiveness were central themes of the discussions.

Prior to the conference, regional forums for low-income countries in Africa, East Asia, Latin America, Eastern Europe, Central Asia, and the Caucasus had brought government officials, parliamentarians, and representatives of civil society and the private sector together with multilateral and bilateral aid organizations to share early experiences on the design and implementation of the PRSP approach. Participants agreed that the early PRSPs had made poverty reduction a central component of policy development in these countries and had broadened participation in the formulation of strategies, as well as identifying the need to diagnose the nature and causes of poverty more systematically.

IMF Managing Director Horst Köhler described the PRSP approach as a work in progress where everyone is learning by doing. While underscoring the importance of self-help efforts to achieve peace, democracy, and good governance, Mr. Köhler stressed the need for official development assistance and encouraged donors to increase funding and better coordinate their aid efforts. In this context, PRSPs can serve as a framework within which to coordinate and direct resources toward antipoverty efforts. Donors have strongly supported the PRSP approach and are increasingly linking their financial assistance strategies to it.

In addition, the IMF is stepping up its efforts to help countries with capacity building, making them better equipped to tackle poverty and achieve sustainable growth (see Chapter 7).

While progress to date had been encouraging, Directors stressed that there was more that could be done. The main challenges ahead for improving the preparation, content, and implementation of poverty reduction strategies were:

  • To encourage and broaden the systematic participation of stakeholders in developing and monitoring PRSPs;
  • To strengthen the content and implementation of PRSPs, notably with respect to developing pro-poor growth policies, through greater specificity on macroeconomic targets and linkages between policies and poverty outcomes, systematically undertaking poverty and social impact analyses of major policy choices, and strengthening public expenditure management systems;
  • To align donor strategies and assistance fully behind the PRSP approach; and
  • To improve monitoring and evaluation of the effectiveness of poverty reduction strategies and progress toward growth and poverty reduction targets, including the Millennium Development Goals where relevant.

Directors noted that participatory processes were beginning to take hold in PRSP countries but that the process needed to be strengthened to include a broad range of domestic stakeholders and development partners. In particular, while government leadership must be respected, there was greater scope for including parliaments, the business community, trade unions and other workers’ groups, and groups representing the poor. There was also scope for more openness and transparency in decision making and in the dialogue among governments, stakeholders, and their partners.

The key challenge that remained was to improve the quality of countries’ policies and institutions and the political commitment that must underpin sustained implementation. Country poverty reduction strategies, Directors emphasized, needed to focus systematically on how to ensure sustainable pro-poor growth, establish an enabling environment for the private sector, and strengthen the linkages between macroeconomic and structural/sectoral policies and poverty outcomes. Particular attention needed to be placed on designing appropriate measures to respond to both endogenous and exogenous shocks. Public expenditure management systems also needed to be improved to ensure that poverty-reducing spending is effectively delivered and monitored. Finally, Directors stressed the need for development partners to assist countries in undertaking systematic poverty and social impact analysis of major policy choices, and in designing compensatory measures whenever the adverse effects of policies could not be avoided. In all these areas, there was a complementary agenda for research and the development of better analytical tools.

Donors also needed to better align their assistance behind country-led poverty reduction strategies. There was a pressing need for donors to reduce the cost for low-income countries of mobilizing and utilizing aid, so that both aid resources and limited country capacity could be used more effectively. Directors urged donors to harmonize and simplify procedures and reporting requirements, and to align assistance with national cycles of government decision making, including annual budget cycles. In addition, more information on aid commitments and greater predictability in aid flows, especially to those countries implementing sound policies, would help low-income countries to plan and carry out their strategies.

As countries and development partners gained more experience in the implementation of PRSPs, it would be possible to assess more fully the impact on poverty outcomes and indicators. The success of the PRSP approach would ultimately be judged by results—namely, the delivery of sustainable growth and poverty reduction. At the country level, monitoring and evaluation capacity needed to be strengthened, and attention should be directed to developing indicators that could monitor progress toward key objectives—an area where the assistance of development partners would also be needed.

Review of the Poverty Reduction and Growth Facility

The Board’s review of the PRGF in March 2002 allowed the IMF the opportunity to look carefully at the content of recent IMF-supported programs and its work in support of low-income countries. Directors noted that since the facility was introduced in 1999, more than 40 countries have had new PRGF arrangements or have had arrangements under the Enhanced Structural Adjustment Facility (the predecessor of the PRGF) transformed to reflect the new features of the PRGF. Given that it was too early to make an assessment of the PRGF’s direct impact on poverty, the review focused on the design of PRGF-supported programs to see if they had met the expectations set out for them (see Box 5.4).

Directors agreed that there had been good progress to date in aligning program design with the goals of the facility. Policy goals, including macroeconomic frameworks in PRGF-supported programs, were generally derived from and consistent with those of PRSPs. There had been an increased allocation of budgetary resources toward poverty-reducing spending, and fiscal frameworks were accommodating higher spending to support country-defined poverty reduction goals.

Structural conditionality had been streamlined to focus primarily on measures critical to the success of PRGF-supported programs, and within the IMF’s area of expertise, while providing better coordination and definition of the IMF’s role vis-à-vis that of the World Bank. The IMF would avoid becoming involved in micromanagement, but would promote the ownership of programs. Directors were of the view that outcomesbased conditionality would give the authorities greater flexibility and accountability in choosing how to achieve the desired results. In short, these efforts at streamlining conditionality were creating greater scope for national choices in program design and implementation.

There was, however, a need to build on this progress in several specific areas:

  • An increased focus on the sources of pro-poor growth and the design of policies to facilitate such growth;
  • Further efforts to improve the quality and efficiency of government spending;
  • More systematic treatment of poverty and social impact analysis;
  • Broader and deeper discussion and analysis of macroeconomic frameworks and structural policies;
  • Greater emphasis on the risks of program implementation, including those related to growth projections, vulnerability to external shocks, and shortfalls in financing;
  • Better coordination of program design and conditionality with the World Bank; and
  • More effective and extensive communications with authorities, donors, and civil society in PRGF countries.

Box 5.3What Is a PRSP?

Poverty Reduction Strategy Papers (PRSPs) are prepared by low-income countries through a participatory process involving domestic stakeholders as well as external development partners, including the IMF and World Bank. Updated periodically (up to five years) with annual progress reports, PRSPs describe the country’s macroeconomic, structural, and social policies and programs over a three-year or longer horizon to promote broad-based growth and to reduce poverty, as well as associated external financing needs and major sources of financing.

Recognizing that preparation of a PRSP is a lengthy process, the World Bank and IMF have agreed to provide concessional assistance on the basis of Interim PRSPs. I-PRSPs summarize the current knowledge and analysis of a country’s poverty situation, describe the existing poverty reduction strategy, and lay out the process for producing a fully developed PRSP in a participatory fashion.

The country documents, along with the accompanying IMF/World Bank Joint Staff Assessments (JSAs), are made available on the IMF and World Bank websites in agreement with the member country. PRSPs and I-PRSPs, as well as policy documents related to the PRSP approach, can be found on the IMF’s website.

Box 5.4Key Features of Programs Supported by the Poverty Reduction and Growth Facility

As use of the PRGF has evolved, distinctive features of the facility have emerged:

  • Broad public participation and increased national ownership;
  • Embedding the PRGF in the country’s overall strategy for growth and poverty alleviation;
  • National budgets that are more favorable to the poor and economic growth;
  • Ensuring appropriate flexibility in fiscal targets;
  • More selective structural conditionality;
  • Emphasis on measures to improve public resource management and accountability; and
  • Poverty and social impact analysis of major macroeconomic adjustments and structural reforms.

These features are closely related, and the overall approach is similarly cohesive. Basing a country’s PRGFsupported program on the Poverty Reduction Strategy Paper (PRSP) aims to ensure that civil society has been involved in formulating the program, that the national authorities are the clear leaders of the process, and that the program is properly embedded in the country’s broader strategy for growth and poverty reduction. IMF staff are required to explain to the Executive Board how PRGF-supported programs derive from the poverty reduction strategy and how they complement the World Bank’s activities and conditionality.

An important outcome of the approach is greater attention to the economic aspects of governance. Still, greater emphasis needs to be given to the social impact of major reforms under PRGF-supported programs, including the impact on the poor (normally undertaken by the World Bank or other donors, where governments lack the capacity to do this work themselves). Where necessary, measures to offset harmful effects on the poor should be incorporated in programs. Given improved country ownership, PRGF conditionality can and should be more selective, focusing on measures central to success of the country’s strategy, particularly in the macroeconomic and financial areas.

Economic growth was critical for achieving poverty reduction, Directors stressed. Attention to the sources of growth would therefore be essential in developing appropriate policies and projections. It would be important to underpin the growth projections in PRGF-supported programs with better analysis of the associated structural reforms to develop the private sector, improve property rights, increase foreign and domestic investment, enhance external competitiveness, diversify exports, and increase labor productivity. Good governance and strong institutions, moreover, would be important to ensuring growth prospects.

Almost all PRGF-supported programs had placed substantial emphasis on strengthening public expenditure management. But a substantial reform agenda remained, Directors noted, including with respect to the comprehensiveness of budgetary data, executing and reporting budget outcomes, and disseminating this information to the public. For HIPCs, in particular, action plans designed with the collaboration of the IMF and World Bank would need to be implemented to strengthen capacity to track poverty-reducing spending, and public spending more widely (see above). IMF staff are now required to report on the implementation of these action plans in program documents sent to the Executive Board.

Directors welcomed the progress made in incorporating poverty and social impact analysis but indicated that these assessments should be done for more PRGF-supported programs. Documents for more than half of the current programs provide such analyses. Going forward, the approach would be progressively strengthened so that a description of the assessment being carried out in the country—including a qualitative description of the likely impact of major macroeconomic and structural measures on the poor and a summary of countervailing measures being implemented—would become a routine feature of program documentation.

Both the PRSP and PRGF reviews underscored the importance of considering alternative policy choices and the constraints and trade-offs involved. The aim was for PRGFsupported program documentation to set out clearly the program’s role in the context of the country’s overall poverty reduction strategy, as well as the options that were considered and the commitments made by the authorities in the context of the program. However, in their discussion, Directors stressed that this would need to be done in a manner consistent with demonstrating the IMF staff’s support for the program and respecting the need for frank and confidential discussions between IMF staff and the authorities.

In their review of the PRGF, Directors also pointed to the need for better communication among all the partners involved in the development and execution of countries’ poverty reduction strategies. In this regard, IMF staff should stand ready to support national authorities in their efforts to explain to a broader audience the analysis on the links between the macroeconomic framework and growth and poverty reduction outcomes in the context of PRGF-supported programs.

The Board’s PRGF review underscored the diverse needs of low-income countries for IMF support and recommended further work on the adequacy of current facilities in meeting these needs. As such, during the coming year the IMF should also examine issues surrounding the structure of the PRGF and how to adapt the current structure of IMF financial assistance for the poorest countries, including those affected by commodity price or other shocks, countries emerging from conflict, and countries with little or no balance of payments need.

HIPC Initiative and Debt Sustainability

Debt relief can contribute to poverty reduction in significant ways. In April 2002 the Executive Board reviewed the status of the HIPC Initiative and the HIPCs’ attainment of long-term external debt sustainability. Directors noted that, as of the time of their discussion, 26 countries had reached their decision point under the enhanced HIPC Initiative (see Figure 5.1), with commitments for $40 billion (in nominal terms) of debt relief (see Table 5.1). By cutting the ratio of debt service to exports by about a third, HIPC relief would provide annual budgetary savings for these countries varying between ½ of 1 percent and 1½ percent of GDP, allowing for significant increases in pro-poor spending. Directors expressed concern that, for developing countries as a whole, the recent global economic slowdown, coupled with a significant decline in many primary commodity prices over the past two years, had weakened the HIPCs’ growth and export performance. Moreover, the slowdown had led to a deterioration of the external debt indicators for many, but not all, HIPCs. There were considerable differences in the evolution of the debt indicators among the HIPCs, reflecting differences in implementation of economic reform programs and in exposure to shocks. The impact of these unfavorable developments on the outlook for debt sustainability of the HIPCs would depend on a number of factors, notably the adequacy of policy responses and supporting resource transfers. The outlook for the sustainability of external debt had worsened for most of the 21 countries in the interim period (that is, the period between their decision and completion points) at end-April 2002, primarily because of lower exports, but had not necessarily been seriously impaired. The ratio of the net present value of debt to exports at the completion point was projected to be above the 150 percent threshold in 8–10 countries; deviations for 6 of these had already been anticipated at the time of the decision points, although to a lesser degree. For these countries, the debt in excess of the HIPC threshold could range from $0.5 billion to $0.9 billion in net present value terms.

Figure 5.1Enhanced HIPC Initiative Flow Chart

1Recognizing the need for flexibility in exceptional cases.

Table 5.1Progress Status of Countries Under the Enhanced HIPC Initiative, as of end-April 2002
Completion

Points Reached (5)
Decision Points

Reached (21)
Decision Point

Not Yet Reached (12)
Sustainable

Cases (4)
BoliviaBeninMalawiBurundiLao P.D.R.Angola
Burkina FasoCameroonMaliCentral African Rep.LiberiaKenya
MozambiqueChadMauritaniaComorosMyanmarVietnam
TanzaniaEthiopiaNicaraguaCongo, Dem. Rep. ofSomaliaYemen1
UgandaGambia, TheNigerCongo, Rep. ofSudan
GhanaRwandaCôte d’Ivoire2Togo
GuineaSão Tomé and Príncipe
Guinea-Bissau
GuyanaSenegal
HondurasSierra Leone
MadagascarZambia
Sources: HIPC documents; and IMF and World Bank staff estimates.

Yemen reached its decision point in June 2000. Its debt sustainability analysis indicated that the country has a sustainable debt burden after the application of traditional debt relief mechanisms. The Paris Club provided a stock-of-debt operation on Naples terms in July 2001.

Côte d’Ivoire had reached its decision point under the original HIPC Initiative, but has not yet reached its decision point under the enhanced Initiative.

Sources: HIPC documents; and IMF and World Bank staff estimates.

Yemen reached its decision point in June 2000. Its debt sustainability analysis indicated that the country has a sustainable debt burden after the application of traditional debt relief mechanisms. The Paris Club provided a stock-of-debt operation on Naples terms in July 2001.

Côte d’Ivoire had reached its decision point under the original HIPC Initiative, but has not yet reached its decision point under the enhanced Initiative.

For countries in the interim period, Directors pointed out, the enhanced HIPC Initiative allows some flexibility in exceptional cases to top-up debt relief at the completion point for countries where exogenous factors have caused fundamental changes in their economic circumstances. The enhanced HIPC Initiative thus provides for the possibility of additional debt relief at the completion point. However, Directors stressed that potential additional HIPC relief was not meant to compensate for slippages in policy reform, nor could it be provided on an ongoing basis to deal with future economic shocks. In the near term, to help countries deal with the deterioration in the external environment, some countries might require additional donor support, and increased interim relief might be helpful. Providing any additional debt relief at the completion point would raise the overall costs of the HIPC Initiative, Directors noted, and the financing implications of this would need to be explored in due course. In addition, HIPCs would need to improve their debtmanagement capacity, with donor assistance.

Capacity Building

Both the PRSP and PRGF reviews underscored that capacity building is critical for full ownership and effectiveness of the reform agenda in PRGF countries as national expertise is developed (including in policy choices, expenditure management, and poverty and social impact analysis). In low-income countries, it is often not a lack of political will that impedes reform but a lack of implementation capacity. Thus, the IMF has continued to strengthen its capacity-building technical assistance and training activities in the institution’s core macroeconomic and financial areas of responsibility, including public finance and administration, financial sector development, development of sound statistical systems, and promotion of data dissemination (see Chapter 7). The PRSP approach is increasingly providing a means of coordinating the IMF’s efforts with those of other technical assistance providers. Regional initiatives in the Pacific and in the Caribbean are allowing the IMF to make more efficient use of its limited resources for technical assistance, while ensuring that activities are closely aligned with local and regional priorities identified through IMF surveillance and, where available, PRSPs. In this vein, the IMF intends to establish two pilot regional technical assistance centers in sub-Saharan Africa in the second half of 2002 (see Chapter 7), as part of IMF support for the New Economic Partnership for Africa’s Development (see Box 5.5). These centers aim to raise the effectiveness of the IMF’s technical assistance projects by fostering ownership, enhancing accountability, increasing responsiveness, and strengthening coordination among technical assistance providers.

CIS Initiative

In FY2002 the IMF worked with the World Bank, the Asian Development Bank, and the European Bank for Reconstruction and Development on an Initiative to accelerate growth and poverty reduction in seven low-income countries of the Commonwealth of Independent States (Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova, Tajikistan, and Uzbekistan) to accelerate growth and poverty reduction. Primary responsibility for intensifying their development and reform efforts would rest with the CIS-7 countries themselves, but the Initiative calls for the international community to provide strong complementary support to countries following sound reform policies—to help these countries strengthen the conditions for growth, poverty reduction, and debt sustainability—both through international and regional institutions and through governments acting bilaterally.

Under the Initiative, the CIS-7 countries would undertake reforms to:

  • Promote policy and institutional reform more consistently and resolutely, within the framework of fully participatory poverty reduction strategies;
  • Strengthen the capacity of their governments, build greater public accountability, and strive to reduce corruption;
  • Ensure macroeconomic stability, promote the transparency of public finances, strengthen tax collection, and adopt appropriate policies (including debtmanagement policies) to ensure that debt levels are sustainable;
  • Implement growth-promoting structural reforms, including energy sector reform (through unbundling, setting tariffs that reflect costs, and eliminating arrears and noncash settlements), maintaining open trade regimes, and creating a favorable investment climate to encourage the growth of small and medium-sized enterprises;
  • Target scarce resources to priority social services and safety nets, including by ensuring the adequate provision of health and education services and by acting now to counter the problems of HIV/AIDS, tuberculosis, malaria, and drug trafficking and abuse; and
  • Work with their neighbors, with the support of the international community, to resolve conflicts and foster regional cooperation, especially in trade and transit, water, and energy.

The role of trade and development partners and creditors under the Initiative would be to extend support to those CIS-7 countries implementing strong reforms, including:

  • More concessional financial support, as well as debt restructuring or debt relief where needed, in conjunction with strong reform programs, so that resources are well used;
  • Increased access for CIS-7 countries to industrial countries’ markets, and promotion of direct investment;
  • Improved coordination between development agencies, anchored in country-led poverty reduction programs; and
  • Added support from international and regional institutions through technical assistance, policy advice, and concessional financial assistance (including grants) in support of the reform efforts of the CIS-7 countries.

Support by the International Community

The IMF’s work to improve development outcomes in its low-income member countries increasingly takes place within a larger, and complementary, international effort. The IMF is committed to help support the Millennium Development Goals agreed by the international community (see Box 5.1). In November 2001, the Managing Director of the IMF and the President of the World Bank proposed, at the Ottawa meetings of the IMF and Bank, a two-pillar approach for fighting global poverty: first, low-income countries must help themselves by implementing sound policies, strengthening institutions, and improving governance; second, for those countries that help themselves, the international community must provide strong support through greater trade opportunities as well as increased, and better delivery of, aid flows. The IMF will also be guided by the “Monterrey Consensus,” which emerged from the United Nations Conference on Financing for Development in March in Monterrey, Mexico (see Box 5.6).

Box 5.5Africa Initiatives

IMF Managing Director Horst Köhler has called for a “two-pillar approach” to the war on poverty. The first pillar is based on the recognition by developing nations that they themselves have primary responsibility for tackling poverty and that this requires a commitment to good governance and accountability. The second pillar is based on increased and better-coordinated support from the industrial countries, and a willingness to open their markets to the exports of poorer nations and remove subsidies.

Mr. Köhler sees African initiatives, such as the New Economic Partnership for African Development (NEPAD), as an integral part of this two-pillar approach. Conceived by leaders from the member states of the Organization of African Unity (OAU), working together to achieve economic growth for all African nations and to reduce widespread poverty, the partnership’s core objectives are to:

  • encourage peace, democracy, and good governance;
  • design and implement action plans to develop key pro-poor sectors: health care, education, infrastructure, and agriculture;
  • achieve economic integration at the regional and global levels by building a strong private sector and fostering a climate conducive to domestic and foreign investment; and
  • develop more productive partnerships with Africa’s bilateral and multilateral development partners.

In order to help sustain the commitment of African nations to growth and poverty reduction, the IMF has launched a complementary Capacity-Building Initiative aimed at strengthening economic governance and the domestic capacity of governments to carry out sound economic poverty-reducing policies. Two new IMF technical assistance centers in sub-Saharan Africa (see Chapter 7) will assist governments to achieve these goals, including through developing effective poverty-monitoring systems, implementing accountability mechanisms, and identifying more effective ways to involve local governments in decision making.

To garner international support, the IMF is calling for more development assistance; thus far, the United States and the European Union have committed to increase their aid to countries with strong policies. Efforts to help African nations achieve economic integration at the regional and global levels include promoting greater involvement of the private sector through initiatives such as investors’ councils and motivating investment through sound economic and fiscal frameworks. At the same time, the IMF is strongly encouraging industrial nations to remove subsidies and eliminate trade barriers for African exports.

The IMF has been working hard to promote true national ownership of programs. African countries themselves have shown the way forward by the progress they have made.

  • Mozambique and Uganda, once devastated by war, are now among the most rapidly growing African countries.
  • In Botswana and Cameroon, revenues from diamonds and oil are being used to help build more diversified economies.
  • Mauritius and Tanzania have achieved noteworthy success in promoting stronger private sectors and attracting foreign investment.
  • In Burkina Faso, policies to increase agricultural production and cotton exports are raising growth performance and improving the incomes of the rural poor.

The Poverty Reduction Strategy Paper (PRSP) approach is the guiding framework for the IMF’s partnership with Africa, acting as a core mechanism to help these nations incorporate regional poverty reduction priorities into their national programs and to coordinate international support. As of end-April 2002, over two dozen countries in sub-Saharan Africa were preparing PRSPs with IMF and World Bank assistance, and 23 African countries had qualified for debt relief under the enhanced HIPC Initiative.

The international community must open markets and phase out trade-distorting subsidies, especially in areas where developing countries have a comparative advantage, such as agriculture, processed foods, textiles and clothing, and light manufactures. Greater transparency about and public awareness of the costs of the status quo to the world’s poor are especially important if the political ground is to be prepared for serious reform.

In keeping with the outcomes of Monterrey and Doha, the IMF has stepped up its surveillance of issues related to market access (see Chapter 2) in the context of its Article IV consultations with member countries. Low-income countries need support to strengthen their ability to take full advantage of the opportunities of the global market and the multilateral trading system. As a participating agency under the Integrated Framework for Trade-Related Technical Assistance, the IMF is helping by providing diagnostics of the trade environment in low-income countries, by identifying policy and assistance priorities, and by providing technical assistance in its areas of expertise (see Chapter 7).

Effective monitoring of progress toward the Millennium Development Goals is key to staying on track and for building sustained support for greater international assistance to poor countries. At the global level, a comprehensive and transparent system to monitor progress toward achieving the Millennium Development Goals is being developed, and the IMF has welcomed the efforts being undertaken by the United Nations to this end. The IMF participated in an interagency working group (including the World Bank, OECD, and UN agencies) led by the UN to agree on the targets and indicators to monitor progress toward the Millennium Development Goals. These will form the basis of the UN Secretary-General’s first Millennium Report to the General Assembly in September 2002. The IMF’s specific input to this global monitoring system is the provision of data on HIPC debt relief and contributions to the monitoring of the indicators on market access (both part of the “global partnership for development” Millennium Development Goal). As part of this process, the respective responsibilities of poor countries and their development partners—donor countries, international institutions, the private sector, and civil society—will need to be identified more clearly. On this basis better accountability can be established.

Looking Ahead

The financial year saw slowdown, sudden shocks, and uncertainty—but it also witnessed the arrival of an unprecedented degree of agreement about what is required to overcome world poverty. The Monterrey Consensus defined the right priorities and made it clear that durable progress is not possible without good governance, respect for the rule of law, and policies and institutions that unlock creative energies and promote investment—including foreign direct investment. It also recognized that the international community should provide faster, stronger, and more comprehensive support to those low-income countries that provide this environment.

Box 5.6Conference on Financing for Development, Monterrey, Mexico

Putting development issues at the center of the global agenda—an important goal of developing and developed nations alike—was the theme of the International Conference on Financing for Development held in Monterrey, Mexico, March 18–22, 2002. The conference served as a catalyst for various elements of the new development partnership being forged among debtor and donor governments, aid organizations, international financial institutions, and the private sector—a partnership based on mutual accountability and commitment to promoting growth and reducing poverty. The Monterrey Conference affirmed that the best way to help developing countries is to improve the environment for international trade. The emphasis on coherence between aid and trade policies echoed the key message of the Doha Declaration of the WTO Ministerial Meeting, held in November 2001 in Doha, Qatar (see Box 2.2 in Chapter 2). The consensus at the Doha Ministerial Conference was that the best defense against aid dependency and recurrent debt problems is to build prosperity by expanding and diversifying exports and attracting foreign direct investment. Estimates of the possible benefits to low-income countries from increased trade are substantially higher than current concessional flows.

The Monterrey Conference welcomed the commitments by the European Union and the United States to increase aid flows but noted that more needs to be done. Well-directed aid, combined with strong reform efforts, can greatly reduce poverty. However, building strong public support in donor countries for increased aid will require greater understanding of aid as an investment in peace, stability, and shared prosperity and—equally important—a demonstration by poor countries that they are putting aid to good use.

The World Summit on Sustainable Development in Johannesburg, South Africa, in late August 2002 is expected to follow up on some of the accomplishments of the Monterrey Conference.

To meet the Millennium Development Goals, progress must be made simultaneously on many fronts by many actors. The implementation of the Monterrey Consensus should be a next chapter in international efforts to create a better world, and the IMF remains committed to contribute—in its areas of expertise—to this global effort to combat poverty.

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