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Poverty Reduction and Debt Relief: Striving for a Better Life

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2006
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The world economy has grown steadily since World War II, bringing widespread prosperity and lifting many millions out of poverty, especially in Asia. Nevertheless, daunting challenges remain. In Africa, in particular, progress in poverty reduction has been limited in recent decades and some countries have fallen back. Looking ahead, in the next 25 years, the world’s population is projected to grow by about 2 billion, mostly in developing economies. Many of these people will be doomed to poverty without concerted efforts both by the low-income countries themselves and by the international community.

To tackle these issues, the heads of 189 countries signed the Millennium Declaration in September 2000, adopting the Millennium Development Goals (MDGs), a set of eight objectives incorporating specific targets for reducing income poverty, tackling other sources of human deprivation, and promoting sustainable development by 2015 (see box opposite page). A follow-up meeting of world leaders in Monterrey, Mexico, in March 2002 established a shared understanding of the broad strategy needed to achieve the MDGs.

The Monterrey Consensus ushered in a new compact between developing and developed countries that stressed their mutual responsibilities in the quest to meet the development goals. It called on developing countries to improve their policies and governance and on developed countries to step up their support, especially by providing more and better aid and more open access to their markets.

Taking stock

The year 2005 represents an important milestone on the way to the MDGs. The United Nations Millennium Project Report, published in January 2005, marked the opening of a period of stocktaking on the progress made toward the MDGs and how to accelerate it, to be followed by discussions at the UN Summit Conference on Implementing the Millennium Declaration in September 2005.

The IMF and the World Bank, in the annual Global Monitoring Report, track the progress made toward the achievement of the MDGs and the obstacles remaining. The second report, published in 2005, focused on key areas of the policy agenda and paid special attention to Africa—the region most at risk of failing to achieve the MDGs. The report found that meeting the MDGs would require substantial increases in the amount of official development assistance reaching the poorest countries. Although aid volumes had risen since the Monterrey Conference, two-thirds of the increase was debt relief and technical cooperation. Given the reforms under way in many countries in the region, the poorest countries could effectively use a doubling of aid over the next five years, the report said.

Coordinating development assistance

The central goal of the IMF’s work in low-income countries is to help them promote economic stability and growth, and thereby achieve deep and lasting poverty reduction. In low-income countries, the IMF works closely with the World Bank, the lead international agency on poverty reduction. Together, they are helping these countries make progress toward the MDGs and contributing to the approach embodied in the Monterrey Consensus through technical assistance, lending, debt relief, and support for trade liberalization.

The IMF also offers low-income countries advice on how to manage the economic impact of aid inflows, which is crucial given the international effort to mobilize more aid for the MDGs. On the donor side, the IMF is working with multilateral development partnerships to enhance the predictability of aid flows and achieve greater policy and administrative coherence on the part of development partners.

Since 1999, two initiatives have been instrumental in boosting the support of the IMF and the World Bank to low-income countries:

  • The Poverty Reduction Strategy Papers (PRSPs), written by each borrowing country and setting out its homegrown policy strategy to provide the basis for the IMF’s and the World Bank’s concessional lending; and
  • An enhancement of the debt reduction program—the Heavily Indebted Poor Countries (HIPC) Initiative, introduced in 1996.

The PRSP is a comprehensive country-based strategy for poverty reduction. It aims to provide the crucial links between low-income countries, their donor partners, and the development policies needed to meet the MDGs. The PRSPs provide the operational basis for IMF and World Bank concessional lending and for debt relief under the HIPC Initiative. In the case of the IMF, loans are provided through its Poverty Reduction and Growth Facility (PRGF).

Low-income countries prepare their strategies with the participation of domestic stakeholders and external development partners. Updated periodically (at least once every five years) and with annual progress reports, PRSPs describe the macro-economic, structural, and social policies that countries plan to pursue and how they will finance them. Once a country has developed a PRSP, it becomes eligible for loans from the PRGF trust and for HIPC debt relief.

The Millennium Development Goals

The MDGs seek, by 2015, to

  • (1) halve extreme poverty and hunger relative to 1990;
  • (2) achieve universal primary education;
  • (3) promote gender equality;
  • (4) reduce child mortality;
  • (5) improve maternal health;
  • (6) combat HIV/AIDS, malaria, and other diseases;
  • (7) ensure environmental sustainability; and
  • (8) establish a global partnership for development.

Further steps

While improvements in macroeconomic performance have been especially marked in countries that have, or have had, PRGF arrangements, most low-income countries are far from attaining the sustained high growth necessary for achieving the MDGs by 2015.

What are the problems? Both the IMF staff and the IMF’s Independent Evaluation Office (see page 32) have identified a number of difficulties. The IEO concluded in a 2004 report that while PRSPs have significant potential and have had some success in improving country ownership of policy programs, enhancing participation, and providing better-quality strategies, achievements to date have fallen short of expectations. As for PRGF-supported programs, there have been changes in the right direction, but more effort is needed to ensure that the programs provide a sound basis for the sustainable long-term growth needed to meet the MDGs.

Partly in response to evaluations of the PRS process, the IMF and the World Bank have made several changes in the PRS architecture. These amendments—particularly the elimination of the requirement of Board endorsements of the PRS as the basis for IMF-World Bank concessional lending—aim at strengthening country ownership of the PRS process.

The IMF is considering further steps to refine its role in low-income countries. Under consideration are measures to meet the need for a new form of IMF engagement in low-income countries that would not involve IMF lending but that would support countries in their reform efforts while also providing the IMF’s assessment of countries’ policies and performance. Such assessments are often used by low-income countries and donors to demonstrate and assess the appropriateness and quality of economic policies, and they may affect the flow of external assistance, including debt relief and other aid. Also under discussion is a modification of the PRGF Trust that would enable the IMF to provide concessional financial assistance other than through the PRGF to low-income countries facing exogenous shocks.

For low-income countries that face balance of payments difficulties as a result of natural disasters or trade changes, the IMF has activated mechanisms that provide support—the subsidized Emergency Natural Disaster Assistance (ENDA), and the Trade Integration Mechanism (TIM)—on concessional terms.

Reducing debt burdens

The enhanced HIPC Initiative was introduced in 1999 to provide faster, deeper, and broader debt relief to low-income countries and to strengthen the links between debt relief and poverty reduction, particularly through social policies. Countries’ continued efforts toward macroeconomic adjustment and structural and social policy reforms—including increased spending on such social sector programs as basic health care and education—are central to the enhanced HIPC Initiative. In late 2004, the Initiative was extended to end-2006 to provide the opportunity for the remaining eligible countries to establish track records that would allow their consideration for HIPC relief (see table below). Many of the countries that would benefit from this extension have been affected by conflict, such as Liberia, Somalia, and Sudan.

Status of countries in the HIPC Initiative(as of August 2005)
Countries entitled to full debt

relief, having met all criteria (18)
Countries that have begun to

receive aid, but must meet additional

criteria for full debt relief (10)
Countries still to be considered (10)
BeninMauritaniaBurundiGuineaCentral AfricanLiberia
BoliviaMozambiqueCameroonGuinea-BissauRepublicMyanmar
Burkina FasoNicaraguaChadMalawiComorosSomalia
EthiopiaNigerCongo, Dem.São Tomé andCongo, Rep. ofSudan
GhanaRwandaRep. ofPrincipeCôte d’lvoireTogo
GuyanaSenegalGambia, TheSierra LeoneLao P.D.R.
HondurasTanzania
MadagascarUganda
MaliZambia

Debt relief is essential to enable low-income countries to free up resources for the social and infrastructure spending that they will need to make progress toward achieving the MDGs. Before the Initiative, eligible countries were, on average, spending slightly more on debt service than on health care and education combined. This is no longer the case in the 28 countries receiving HIPC relief. Under recent programs supported by the IMF and the World Bank, these countries have increased their expenditures on health care, education, and other social services to almost four times the amount of debt service payments, on average.

To realize the potential benefits of debt relief, it will be critical to help countries avoid excessive borrowing in the future. To that end, the IMF and the World Bank have introduced a new framework for debt sustainability for low-income countries, including such key elements as standardized forward-looking debt analysis and a consistent financing strategy.

Trade issues and the Doha Round

Trade is potentially much more important than aid in helping developing countries prosper. The IMF is continuing to press for the successful conclusion of the Doha Development Round of multilateral trade talks (begun in 2001) and, together with the World Bank, has urged participants from both developed and developing nations to make this a priority. The IMF and the World Bank have jointly emphasized the need for the liberalization of trade in agricultural products, for all countries to take on substantive obligations to liberalize trade, and for flexibility in areas that may result in heavy regulatory burdens on poor countries.

The IMF has been doing its part to support an open international trading system. In FY2005, the IMF activated the TIM to help countries cope with balance of payments shortfalls resulting from the implementation of World Trade Organization (WTO) agreements or nondiscriminatory trade liberalization by other countries. The TIM allows IMF members to request financial assistance under the IMF’s existing facilities to meet temporary trade-related balance of payments needs.

When the WTO’s Agreement on Textiles and Clothing expired at the end of 2004, for example, the Dominican Republic obtained support under the TIM, making it the second country to do so, following Bangladesh in 2004. Discussions with other member countries are under way. The availability of assistance under the TIM should help assuage concerns of some developing countries that an ambitious outcome to the Doha Round could place undue adjustment pressures on them.

How a better investment climate helps reduce poverty

One crucial element in the strategies to promote growth and reduce poverty are reforms to improve the environment for businesses in low-income countries. Experience has shown that persistence, rather than perfection, is the key in translating investment climate reforms into increased private investment, stronger growth, and faster poverty reduction. Significant progress can be achieved by addressing the most important obstacles in a way that gives businesses confidence to invest and assures them that improvements will continue.

A case in point is Uganda, which initiated reforms in the early 1990s in many areas that affected the investment climate: expropriations by a previous government were reversed, trade barriers were reduced, tax and court systems were strengthened, and the economy was stabilized. The persistent reform efforts boosted the government’s credibility, which in turn gave businesses the confidence to invest. As a result, private investment as a share of GDP more than doubled, from just over 6 percent in 1990 to 15 percent in 2002. This strengthened per capita income growth (which averaged 4 percent a year in 1993-2002—eight times the average in sub-Saharan Africa) and reduced poverty from 56 percent in 1992 to 35 percent in 2000.

To help ensure that member countries can take full advantage of the opportunities of multilateral trade liberalization, the IMF has

  • provided technical assistance in such areas as customs reform, tax and tariff reform, and data improvements;
  • helped countries incorporate trade reforms in their Poverty Reduction Strategies;
  • identified potential risks and helped countries understand the benefits of international integration; and
  • assessed how they are affected by trade reforms, such as the implications of reduced agricultural subsidies, preference erosion, and the phaseout of textile quotas.

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