Journal Issue

Poverty reduction: Supporting country-led, country-specific efforts

International Monetary Fund. External Relations Dept.
Published Date:
September 2003
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In September 1999, the IMF established the Poverty Reduction and Growth Facility (PRGF), which replaced its Enhanced Structural Adjustment Facility (ESAF). The PRGF broadened the objectives of the IMF’s concessional lending to include a more explicit focus on poverty reduction in the context of a growth-oriented strategy. Demand for PRGF resources has been high. In recent years, more than 40 countries have had PRGF Arrangements or have transformed ESAF Arrangements to include the new features of the PRGF. During financial year 2003, the Executive Board approved 10 new PRGF arrangements (for Albania, the Democratic Republic of the Congo, The Gambia, Guyana, Nicaragua, Rwanda, Senegal, Sri Lanka, Tajikistan, and Uganda), with commitments totaling SDR 1.2 billion.

The IMF and the World Bank support strategies that low-income borrowing countries elaborate in a poverty reduction strategy paper (PRSP). These PRSPs are prepared through a participatory process that involves domestic stakeholders and external development partners. The papers are then broadly endorsed by the IMF and the World Bank as providing a sound basis for concessional lending. Updated periodically (up to five years) with annual progress reports, PRSPs describe the country’s macroeconomic, structural, and social policies and programs over a horizon of three years or longer. PRSPs also specify the external financing needed to implement the strategy.

Recognizing that the preparation of a PRSP is a lengthy process, the World Bank and the IMF have agreed to provide concessional assistance on the basis of interim PRSPs. These interim strategy papers 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.

Aligning the PRSP and the PRGF

The PRSP approach has become widely accepted by low-income countries and the donor community as an effective way to mobilize broad input into, and develop ownership of, national poverty reduction strategies. The PRSP is still a relatively new instrument, however, and its content and procedures are evolving in response to lessons learned and the needs and capacities of individual countries. Since the Executive Board review of the PRSP process and the PRGF in financial year 2002, increased attention is being paid in country programs to creating the right environment for investment and growth. In addition, efforts are under way to bring poverty and social impact analysis more systematically to bear in the formulation of poverty reduction strategies and PRGF lending and to strengthen public expenditure management in collaboration with the World Bank.

The PRSP and PRGF reviews also focused on the tension between the ambitious objectives set out in the PRSPs and the need for a realistic framework on which to base national budgets and PRGF-supported programs. In May 2003, the Executive Board discussed important new steps to help align the PRSP approach and PRGF-supported programs, including

• incorporating more realistic projections and assumptions;

• rationalizing documentation under the PRGF loan program to demonstrate clearly how the PRGF supports the goals of the PRSP plan, indicating how policy choices have been made, and reducing overall reporting requirements;

• providing greater coherence between PRSP plans and the budget process and more closely synchronizing the cycle of PRGF-supported programs with those of the PRSP and national budgets; and • improving public expenditure management, which would facilitate the effective use of aid inflows, enhancing the poverty and social impact analysis for PRSPs and PRGF-supported programs, and scaling up the provision of technical assistance and donor support for countries’ capacity building in PRSP-related areas.

The harmonization of donor procedures with the budget and the PRSP processes will have a critical role to play in the success of this effort. In the coming months, the IMF will be deepening its work on related analytical issues, including the linkages between macroeconomic and structural policies and growth in low-income countries.

Better market access

There is now wide consensus that improved market access for developing country exports and the removal of trade-distorting subsidies in advanced economies are essential elements in the fight against world poverty. Action by industrial countries will be particularly important, but developing countries can also benefit from lowering their own trade barriers. The IMF has vigorously supported an increased emphasis on open trade. It has issued a report on progress with the Doha agenda (see box below); will review its trade policy advice during the remainder of 2003; has stepped up its surveillance of market access issues facing developing countries and of regional and multilateral trade negotiations; and is encouraging countries to integrate trade policy considerations more fully into their poverty reduction strategies.

The IMF has also cooperated with the World Trade Organization (WTO) on ways to coordinate some of their activities, including through technical assistance for customs administration and for coping with the revenue implications of tariff reforms. The IMF has indicated its readiness to support countries facing balance of payments difficulties as a result of changes in the trade environment. In addition, the IMF has provided technical notes to the WTO on areas of IMF expertise. These notes conclude, among other things, that trade restrictions remain a distinctly second-best policy for dealing with balance of payments pressures, including those arising from the capital account; that the erosion of preferential treatment is likely to cause significant losses to relatively few of the least-developed countries (and compensatory financing would be best provided in the context of an adjustment program); that trade liberalization, when complemented by a strengthened domestic tax system, need not worsen revenue performance in developing countries; and that there is no compelling case for developing country exporters to receive concessional finance because their own capital markets are distorted.

Doha trade round

The multilateral trade negotiations that the World Trade Organization (WTO) launched in late 2001 were termed the Doha Development Agenda, reflecting both the site where agreement was reached and the importance of developing countries and development objectives in the world trading system.

The development potential of the Doha Round depends on a lowering of barriers affecting imports from developing countries, especially the least developed. While the world’s trading system is far more liberal than it was 40 years ago, it still discriminates against lowincome countries, particularly those dependent on sectors such as agriculture that are most affected by tariffs and other trade restrictions.

Millennium Development Goals

At its spring 2003 meeting, the IMF-World Bank Development Committee considered a framework, prepared jointly by the two institutions, for regular monitoring of the policies and actions that are required for making progress toward achieving the Millennium Development Goals (see box below). This annual global monitoring exercise consists in tracking and assessing the adequacy of policies, institutions, and governance in developing and transition countries; evaluating the appropriateness of macroeconomic, aid, and trade policies in developed countries (policies essential for fostering a global partnership for development); measuring the quality and effectiveness of development assistance; and gauging the effectiveness of international financial institutions in promoting a strong global economic environment and supporting country efforts to meet their development goals. The IMF-World Bank framework is designed to complement and support the monitoring efforts of the United Nations and other agencies working toward achieving the Millennium Development Goals.

Greater voice for developing countries

As developing countries’ participation in the global economy grows, their voice in international institutions must grow correspondingly. Strong and effective participation in World Bank and IMF decision making has several dimensions. The most straightforward of these is voting strength. Another important dimension is the degree to which countries are able to make themselves heard in policy discussions. This latter dimension of “voice” is quite important for large multicountry constituencies—especially those with a significant number of heavily indebted poor countries or countries with IMF-supported programs, given the volume and complexity of associated issues requiring their input.

In their initial discussion of a joint World Bank-IMF background paper on this topic, Executive Directors underscored the importance of enhancing the voice and participation of developing and transition countries. They highlighted the initiatives that have already been taken to enhance the voice of developing countries and improve the listening culture in the IMF—including the ongoing development of the PRSP process, strengthened support for capacity building, and emphasis on country ownership of reforms—and looked forward to building on these efforts.

Because more rapid progress can be made on a number of possible administrative measures for enhancing voice, the IMF’s Board has already begun to consider steps that could be taken to address the staffing and technological constraints of the two sub-Saharan African constituencies, whose needs are most pressing. The World Bank and the IMF will discuss progress on this goal at their 2003 Annual Meetings, based on their discussions in connection with the Thirteenth General Review of Quotas.

Millennium Development Goals

The Millennium Development Goals form an ambitious agenda for reducing poverty and improving lives. World leaders agreed on the goals at the UN Millennium Summit in September 2000. The eight goals, most to be achieved by 2015, are as follows:

• Eradicate extreme poverty and hunger.

• Achieve universal primary education.

• Promote gender equality and empower women.

• Reduce child mortality.

• Improve maternal health.

• Combat HIV/AIDS, malaria, and other diseases.

• Ensure environmental sustainability.

• Develop a global partnership for development.

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