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The IMF needs to radically change the way it works in low income countries. It must finally move on from an outdated focus on exclusively short-term macro-stability and pessimism about aid to one based on long-term poverty needs and the MDGs. If it does this it can play a vital, proactive and dynamic role as a key partner in poverty reduction. If it does not, the much hailed new poverty focus of IMF programmes in low income countries risks being largely discredited.
Summary
The International Monetary Fund (IMF) plays a key role in defining how much governments can spend. The Fund's view of what defines the macro economic stability of a country is the authoritative one for all development partners. Given this, the Fund could and should be playing a dynamic, proactive role in establishing the financing conditions for achieving the Millennium Development Goals.
The (MDGs) have been endorsed by the UN, world leaders, the World Bank, regional development banks, developing country
governments and the IMF. They set minimum standards to combat poverty, hunger, disease, illiteracy, environmental
degradation and discrimination against women. With aid at current levels however, many countries will not even meet
these minimum standards. If present trends continue there will be 10 million child deaths in 2015, compared to half
that if the target is met.1 Countries have massive financial gaps standing between them and achieving the MDGs.2
Women continue to bear the majority of the burden this lack of financing entails. At the Monterrey Financing for
Development (FFD) conference in 2002, donors pledged an extra $16 billion dollars in aid. This falls far short of
what is needed, but at least it does signal the willingness of donors to halt the drastic decline in aid flows that
occurred in the 1990s.3
Against this background it is critical that poor countries have as much support as possible from the international community to absorb and manage rising aid flows as they increasingly become available. The IMF has a crucial role to play. Unfortunately, there are 3 main areas where the IMF is failing to play this role, and where a radically new approach is needed:
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The Fund needs to show greater flexibility in its economic targets, demonstrating a longer-term focus on poverty reduction and analysing the trade-offs this entails for short-term economic policy.
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The Fund needs to end its pessimism towards increasing aid flows to poor countries and stop designing economic policy around this view. Instead it should play a dynamic role, working with others to measure the financing needs to achieve the MDGS, and proactively mobilising higher aid flows. It should use its technical expertise working with Governments to design macroeconomic frameworks that can accommodate these increased resources.
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The influence of the Fund as 'gatekeeper' for poverty focussed aid needs to be decreased. The IMF has a key role in achieving the MDGs, but as one partner in a broad alliance for poverty reduction, and not as the all powerful on/off switch for aid and debt relief.
A survey of IMF programmes in 20 countries by Oxfam and Eurodad shows that for the IMF financial inflexibility and aid
pessimism are still the norm. For example, The IMF requires Cameroon to achieve a fiscal surplus by 2005. At the same
time the Cameroon Poverty Reduction Strategy Paper (PRSP) shows that under current expenditure ceilings infant mortality
in 2015 will be 44% higher than required in the MDGs.4 The targeted reduction in the deficit would be enough to double the
health budget.5
In Mozambique the IMF is predicting declining aid flows despite rising donor support and evidence that more aid can
be productively absorbed. These spending and aid projections became the basis of the PRSP, sending out negative signals to donors about the financing required to tackle poverty and deliver the MDGs. Instead of the poverty needs driving the macroeconomic framework, the opposite was the case.
The negative impact of this inflexibility and conservatism is compounded by the continued role of the IMF as
gatekeeper for donor aid and debt relief. For example,
disputes with the IMF over teachers' salary increases have cost Honduras $194 million dollars in delayed debt relief and
donor aid cuts. Ironically this money could fill the financing gap in the programme to educate all children in Honduras three times over.
Over the next six months the IMF is seeking to review its role in poor countries. At the same time, the IMF's Independent Evaluation Office (IEO) is currently evaluating the role of the IMF in the PRSP process.
As such the time is ripe for the IMF to redouble its commitment to poverty reduction and the MDGs. The Fund needs to radically change its role and the way it works in poor countries and truly deliver on its previous commitments to poverty reduction made when introducing the Poverty Reduction and Growth Facility (PRGF). It must finally move on from an outdated focus on exclusively short-term macro-stability to one based on long-term poverty needs and the MDGs. If it does this it can play a vital, proactive and dynamic role in achieving poverty reduction. If it does not, the new poverty focus of IMF programmes in poor countries risks being largely discredited.
To ensure the IMF really contribute to the achievement of poverty reduction and the MDGs, Oxfam recommends the following:
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A new approach to designing IMF programmes
- In designing their new programme in poor countries, the IMF should take 12 months to work with partners identifying the optimal financing package for achieving the MDGs, and the ideal level of aid. The IMF should actively engage with donors and support the Government in lobbying for optimum levels of donor assistance
- As part of this process the Fund should also open up the debate on what the optimal macroeconomic framework would be to enable rapid progress for a country towards the MDGs. This debate should be based on an independent poverty and social impact analysis (PSIA) of alternative macroeconomic scenarios and the different trade offs involved, how resources can be maximised, and what options are available. PSIA must be carried out on every IMF macroeconomic framework as a matter of due dilligence, in line with the key features of the PRGF
- At the end of the 12 month period the IMF and other PRSP stakeholders should seek broad agreement on an optimum macroeconomic framework. This scenario, rather than a conservative 'baseline' scenario, would then become the basis of the IMF programme, fully aligned with the PRSP and the country budget
- Any prediction of declining aid flows in IMF programme targets should be fully justified based on clear and transparent analysis and evidence from donors
- Fiscal deficit targets and inflation targets should be backed up by independent analysis and broad agreement that this is the best option for poverty reduction. No IMF programme should aim at inflation below 5% without an independent analysis and broad agreement that this is the best option for poverty reduction.
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Limiting the IMF's gatekeeper role for aid and debt relief
- Aid and Debt relief should be de-linked from the IMF programme and should instead be based on the implementation of the PRSP and the PRSP progress report. The PRSP progress report should be discussed at the annual Consultative Group meeting of all donors in a country and this should be open to all stakeholders.
Footnotes:
- Last Chance at Monterrey Oxfam International March 2002
- While this paper focuses on the amount of spending available to developing country governments, Oxfam also
acknowledges that increased aid levels alone will not achieve the MDGs. Also necessary will be more accountable
use of aid, greater efficiency of development programs, greater coherence of donor programs and an increased role
for civil society in ensuring accountability. Oxfam is engaged actively in supporting work around accountability
of donors and governments with partners in large numbers of countries around the world, particularly on work around
PRSPs and country budgets.
For further information see www.oxfam.org
- An upcoming paper prepared by the World Bank for the Development Committee for the September 2003 Annual Meetings estimates that aid levels would have to double in order for the MDGs to be achieved.
- See the Cameroon PRSP August 2003 Chapter 4, Macroeconomic and Sectoral Framework
http://www.imf.org/external/pubs/ft/scr/2003/cr03249.pdf
- The reduction targeted is from -0.7 to 0.7% of GDP, a total of 1.4%. The health budget in 2003 will be 1.1% of GDP.
Figures from the IMF PRGF and from the Cameroon PRSP.
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