IEO evaluation of the role of the IMF in the determination of the external financing envelope Highlights of an IEO workshop, 21 April 2006

Notes by Carol Healy, Trocaire

Opening remarks

Richard Manning, OECD Development Assistance Committee

• There has been a 4-5 per cent increase in ODA in the last 4-5 years
• Issues of absorptive capacity are not critical yet
• DAC is working with the World Bank to see where funds will go
• Role of IMF and World Bank: Keeping donors honest; Giving advice to donors; Looking at how to improve predictability

Kwesi Botchwey, former Ghanaian finance minister

In countries that are not well performing, does the Fund play a useful role? The fund has a role to establish conditions for improved performance.

Session 1: Macro-economic policies and external financing in IMF supported programmes in sub-Saharan Africa: evolution over time

Markus Berndt

Of the 48 countries in Sub Saharan Africa, 29 have a PRGF. Trends: Donors giving more to social sectors rather than infrastructure and productive sectors; PRGF versus ESAF - programme expenditures in PRGF don't show as steep a decline as they did in ESAFs; The Fund is concentrating more on fiscal management, tax policy and less on civil society expenditure.

Jim Broughton: IMF historian

IMF's role in Africa - 4 stages

1. Late 50s: 53 African countries in IMF (1/3 of total membership)
2. 3 seats on the Executive board for African Directors - under-represented in terms of its growing membership
3. Early lending: didn't have a lot of conditions - financing rather than a reform effort. After 1979: more high conditionality lending. Late 80s: 11 countries were declared ineligible to borrow.
4. Long decade effort to develop a more comprehensive strategy: SAPs, ESAFs. Late 1980s: increased dialogue with the UN. Policy framework papers: premature at the time it was introduced, replaced by PRSPs. Problem of arrears to Fund would not go away: therefore it took on a rights accumulation programme to draw in financing from other countries to help.

Debt relief with HIPC: MDGs created new context for the Fund. The Monterrey Consensus in 2002 led to a growing effort to have a comprehensive framework.

Rick Rowden, ActionAid International USA

Inflation policy: if macroeconomic policies are too tight, it undermines poverty reduction. Sacrifice ratio - how high is too high for inflation? But how low is too low? Once inflation is in low single digits, it becomes contractionary rather than expansionary as a policy.

Pierre Jacquet, Agence Francaise de Développement

Global financing envelope: includes domestic spending, private and official flows.

Role of external finance

• Market failures: opportunities not financed
• Not enough capital in developing countries, not enough human capital. Therefore external finance can provide that and make it profitable for investment flows.
• Developing countries are prone to shocks
• Information failures for investment: analyse a risk of investment.

Identify users of ODA, what are the market failures that we are using ODA to address? Rationale for using tax payers money for this?

IMF roles: Provide funds; provide knowledge; Quality - improve the quality of the macro-economic and micro policy environment. Need to separate the different sorts of roles that the fund is playing.

Lamin Manneh, UNDP

The UNDP is involved with the IMF and World Bank in supporting scaling-up efforts in Africa. Africa is at a crossroads: countries have shown the capacity for more effective leadership. Broad thrust: we should derive encouragement from this and step up assistance to the continent.

23 countries have over 5 per cent GDP growth, which is a positive trend. However, it is below the 7-8 per cent rate of growth needed to achieve the MDGs.

Duties:

1. Support: Capacity is an important constraint, which is related to accountability problems. The continent needs a higher level of support.
2. Ownership and leadership in Africa: these issues have been negatively impacted.
3. Strategic planning: if we have to accelerate efforts in Africa, we need to look at this.
4. Macro economic policy coherence - the macro economic framework is like a jacket - it needs to fit. There's a need to free up fiscal space for pro poor investment to take place.
5. Resource mobilisation and management: implement the Paris Declaration.
6. Actively look at accountability issues.
7. Results oriented monitoring and evaluation system: monitoring is very weak in Africa. We need to actively apply lessons learnt from Fund programs - ownership should be embedded.

Discussion

The Fund's approach is paternalistic; there is no sense of partnership. There needs to be a profound sense of interchange to improve collective ownership.

Social spending: has not been the historical role of the Fund, but it is important that the Fund's policies take account of the social impact of policies put forward. The Fund needs to see itself as a catalyst to create the right environment in which domestic resources can be mobilised.

Role of the Fund: Knowledge provision is one of the roles of the Fund. The Fund has an important role in helping to put ideas out in ways that are correct, readable and comprehensive.

Economic and political power is very unequal. The Fund has an essential role to play. The purpose of the international financial system is to the world trading system; to increase access to private lending so that emerging markets will become more of a partner.

African leaders have a vested interest in rehabilitating the image of the Fund.

Short term versus long term: Will evaluation address the tension between short term PRGFs and long term national development plans?

Session 2: Aid supported health and other social priorities in PRGFs: What do the numbers show?

Alexander Preker, Lead Economist, World Bank

More money and better spending is needed to achieve the MDGs. If we want to achieve some MDG goals, it has to be a balanced, holistic portfolio with all goals in synergy, including infrastructure.

Donor aid: There is no steady funding flows, which has led to a real problem of fungibility. Every $1 in health sector translates into 0.20 cents actually going to health.

Budget pooling: In an unnamed country, there was an increase in government funding, where 40 per cent of the health budget comes from donors. But donor aid is falling through budget support. This fact is based only on 3 months evidence, but if it continues, it could be a major problem.

Another major problem is the lack of data to do tracking and analysis.

Maureen Lewis

There is the assumption that money leads to better performance. Donors are undermining good budget management and creating pools of what they think is important.

There has been an increase in vertical programmes, as donors see they can have links with what they spend and what happens. However, AIDS money is swamping the money for total healthcare and can't be properly managed because of issues around absorptive capacity. Vertical inflows are very damaging because they absorb the good people.

Proposal: stabilisation framework where you can put money and keep it for a long time, and draw down on it when you need it.

Tony Killick

The bias in the allocation of aid towards social sector has gone too far. The degree of donor focus on MDGs has gone too far. The needs in the social sector are enormous, but the pendulum has swung too far. This is wrong:

1. Earmarking of aid is bad, and is inconsistent with the principle of ownership
2. Problems in allocating into vertical funds - problems in progress in aid harmonisation. It's an old-fashioned way of creating the old parallel structures.
3. HIPC: debt sustainability idea: if look at average terms and taking into account issue of productivity of investments. It is clear there is a need for more investments that will raise productivity
4. Macro economic effects of doubling aid to Africa: what sort of problems might arise? To deal with overcoming short run macro economic problems, you need a vigorous response on the supply side. If there is only a small percentage of aid going to the productive sector, and if it continues, the supply side response will be more difficult.
5. Lack of infrastructure is a major issue, resulting in closed economies.
6. Diminishing returns of increasing aid. As aid increases, there is a bigger potential danger of diminishing returns due mainly to absorptive issues.
7. MDGs are a fall out from the overriding concern with poverty. Dominant influence is economic growth. Therefore if funds are diverted away from growth inducing sectors, they are not being pro poor.

Sarah Hague, Save the Children UK

Macro economic stability is a prerequisite for growth. However, in Ethiopia, there are trade offs between macro economic stability and needs within education. Middle scenario: country needs triple the current budget to achieve education for all. The wage cap is not the most pressing issue in Ethiopia, the major issue is capacity for training teachers, which is very limited.

Recommendations:

1. Look at macro-economic issue focused on short term, there is often little focus on improving institutions.
2. Realistic costing of resource needs in each country
3. Impact of IMF programmes: PRGFs don't monitor expenditure changes: impact analysis of macro economic frameworks. For example, in Rwanda in 2001, the government was keen to increase funding, boost domestic consumption. However, the IMF disagreed.
4. Examine issues around predictability
5. Allow for ownership

Peter Heller, IMF

The IMF has emphasised the importance of social spending. In the last few years, there has been scaling up of social sectors, and the IMF has relied on the World Bank to advise governments on PER, and what the balance of spending should be across sectors.

Global Fund for AIDS, TB, and malaria. The government is a part of this. Therefore the government has put forward proposals to spend on malaria. Spending on health and education is critical. There should be more aid and more going to infrastructure but without a diminishing of aid in health and education.

Session 3: Implications for the current evaluation

Martin Kaufman, IEO Unit

What do previous sessions imply for the evaluation?

• Historical context is very important (need to take stock of the evolution of the role of the Fund in low income countries)
• But zeroing on more recent period, to focus on changes needed at this stage
• And focusing on various potential channels of Fund impact on aid, and to extent possible on implications for intermediate outcomes

Main evaluation questions

Did the Fund inappropriately block the use of external resources?

Criticisms have highlighted Fund impact on: Overall envelope of external financing (excessive emphasis on stabilisation, fiscal discipline, etc); and constraints to composition of expenditures

Was the Fund sufficiently ambitious in analysis of higher aid levels?

• Tension between ambition and realism highlighted early on in the PRSP/PRGF framework
• Fund role was expected in the process of envisioning stepped up reforms and resources
• Alternative scenarios as the envisaged vehicle

Issues for the evaluation:

• Analysis of current 'available' absorptive capacity
• Potential macro economic impact and needed policy and institutional reforms in the future
• Underlying development goals
• Incorporation into assessment and programme work
• How alternative scenarios are communicated and used with authorities and donors.

How did/does the Fund engage with authorities and donors?

In the PRSP era, the Fund is expected to: Engage on the basis of country strategy, with appropriate fiscal flexibility and selective structural conditionality; and have a role in providing macro signals to donors

Issues for the Evaluation:

• Substance and style of interaction with authorities
• Discussions of policy framework and design of programme (did change happen?)
• Contribution to build country capacity to design/manage the programme
• Signalling to donors
• Texture of signal when programme is off-track
• Nature of signal in era of budget support, vertical programmes, scaling up?

David Bevan. Oxford university

If a country is facing a set of difficulties, how helpful has the Fund been?

Issues:

1. Can't think of envelope in a narrow way
2. Forward view of scale of external financing. Relationship between pledges and commitments. Sensible forward planning mechanism but commitments don't get disbursed, therefore need to be discounted. Strike balance between reasonable expectations and extent to which the Fund concerns itself with issue
3. The envelope is not a given, it is contingent on bunch of things (signalling, gatekeeping)
4. Debt sustainability: evidence of calculations having serious purchase in the decrease of flows of resources donors make available and recipients are allowed to accept. It is not clear if debt sustainability is a well-posed concept in Africa.
5. How planned spending programme is related to central forecast of resource availability. Attempt to spend estimated resources? OR the cautious view: adjust to shortfalls is more damaging than dealing with excesses. There is a lot of merit in the arguments that the Fund has had an asymmetric view.
6. Volatility:Donors need to fix the problem, but they haven't, therefore how to handle it? Can the Fund do enough thinking on how the volatility issue can be handled and whether or not it can be solved at source.
7. Fiscal financing issue: research shows that there are pay offs in getting below double-digit inflation. There is a lag between research and the point being acknowledged. Did the Fund actually push countries to below double digit inflation?
8. Domestic debt. Private credit: is the private sector capable of expanding its use of private credit? Raft of issues concerning role of domestic financing.
9. Pattern of spending that follows from decisions on totals. Concerns among many economies of event of swing of pendulum to social sectors. If the Fund buys into poverty reduction and growth, then it should take the view as to whether the pattern adopted is prejudicial in some way.
10. Difficult issue to finesse: people accuse the Fund of being 'one size fits all', but the Fund is often very different in different countries.

Mark Plant, IMF Policy Development and Review department

IMF thinking is changing, and the problems are also changing. Now it's a different problem, it’s no longer an adjustment problem where a gap needs to be filled.

The IMF is now encouraging donors to spend more and confront constraints on doing that. No-one has a good concept of where the constraint of diminishing returns is. The diminishing return analysis needs to be done sector by sector.

Difference between HIPC and new framework. HIPC was backward looking, DSF is forward looking.

Size of government: The Fund is not always 'one size fits all', but they don't have a view on the size of the government for each country, and what the role of government should be. The Fund may not be the place to treat that, but they do need to have some concept of it.

Architecture of aid: IMF encouraged budget support, but not to be so connected to funds signalling. IMF wiped debt, and now has a loose relationship, with a large area for potential borrowing. The IMF places a lot of demands on countries, but without the capacity to do the analysis.

China: is coming into countries with old time development loans for interests of the Chinese and there is plenty of room for them to do that.

The evaluation should look at Fund's transition, which pieces of transition need to be made, and what tools are needed. What does the past tell us about what kind of tools we need?

David Goldsbrough, IEO

Message of the 2004 PRGF evaluation:

1. The IMF had not absorbed the message of poverty reduction strategy and what that meant for its own way of doing business. It hadn't drawn from lessons on the partnership approach. The way you go about discussions on policy framework has to be more open and transparent. There is a need to put the Fund's intellectual capital on the table for debate. The Fund has not done this, it hasn't opened to different stakeholders for dialogue, but it is getting better.
2. The Fund needs to be careful in a world of considerable uncertainty about Dutch disease, absorptive capacity etc. Has the IMF assumed it knows more than it does? Only way to deal with it is to do so in broader partnership discussion.
3. Inflation targets: good empirical evidence. What the Fund does seems reasonable. Stylised facts: if inflation is less than 10 per cent, the Fund designs a programme to reduce it. If inflation is less than 5 per cent, the Fund designs projects to increase it rather than reduce it.
4. Signalling conditionality: we're in a very different world now. Donors are in for the long term, unless something goes wrong. The IMF is sending cautionary signals, not 'on' and 'off' signals. More in the nature of a dialogue. Predictability of aid: don't want Fund to exacerbate the problem.
5. How to set priorities and trade-offs. Most PRSPs are not operational papers. The detailed projections in PRSP are beside the point. The question is are they a strategic guide? Most of them aren't. IMF is not doing enough to say PRSP is not a hard strategic decision.

This text may be freely used providing the source is credited.

This page is: <http://brettonwoodsproject.org/art.shtml?x=537019>

Published: 8 May 2006 , last edited: 27 May 2010

Viewings since posted: 4304

Επίκεντρο η Ελλάδα (Articles in Greek)
http://www.brettonwoodsproject.org/el/
Με αφορμή την χωρίς προηγούμενο δραστηριότητα του ΔΝΤ στην Ελλάδα, το Bretton Woods Project παρέχει ορισμένα απο τα άρθρα του στα Ελληνικά.