ESAF review: new IMF strategy urged

15 April 1998

More flexibility and a new approach was suggested in the external review of the Enhanced Structural Adjustment Facility (IMF loans to poorer countries) published in March. The review – by consultants led by Kwesi Botchwey, former Finance Minister of Ghana – recommends greater ownership of reform programmes; more selectivity; prior analysis of programmes’ social impacts, and monitoring throughout implementation.

The report finds little evidence to suggest systematic negative impacts on the poor but finds that some groups, such as those not engaged in market activities, may experience long-term declines in income. It recommends that the IMF should draw on the expertise of the Bank to analyse the social impacts of proposed reforms and to design more carefully targetted safety-nets. Social impacts should be monitored during programme implementation; and the programme should be reexamined if they are larger than expected.

The review also urges better understanding of the political contexts of IMF work; that ESAF programmes need to be framed in a long-term perspective; and that different approaches are needed for countries moving into post-stabilisation phases.

This latter recommendation is one of the furthest reaching. The evaluators suggest the IMF should focus on encouraging greater investment in countries that have moved beyond stabilisation, by loosening tight budget requirements and providing more money over the longer-term to signal to private investors that these countries have good investment climates. They also suggest alternative forms of conditionality to prevent investment and growth levels declining. Executive directors appear to agree that the IMF should provide clearer signals, but both the Board and Fund staff are unsure about increasing funding to stabilised countries.

Other options being discussed by the executive board include:

  1. a “stand-by” ESAF, to give post-stabilisation countries access to ESAF resources in the event of macroeconomic instability;
  2. IMF “seal of approval” and technical assistance without finance in the post-stabilisation period; and
  3. a new financing facility to address long-term development goals.

Temporarily loosening budget controls in the post-stabilisation phase would allow governments to increase their investment spending. The IMF has been widely criticised for its over-stringent budget requirements that prevent governments – such as Mozambique’s – from using donor grant money to supplement their spending and allow it instead to pile up as reserves. Joseph Stiglitz, World Bank Chief Economist, remarked in a recent speech

“in an economy where profitable government investments can be made, for example in social sectors, and budget deficits can be financed by a steady and reliable stream of aid finance, then they should be allowed to increase.”

Also in the post-stabilisation phase, the review recommends that the IMF should adopt “ex post conditionality”. Few details are provided, but this would specify key objectives rather than policies to achieve them. This would give governments greater flexibility, hopefully causing fewer programme breakdowns and less stop-go financing. Some IMF staff have expressed strong reservations about this.

The evaluators recommend that the IMF should encourage and assist governments to first develop their own national development plans and to build national consensus behind them before seeking finance from the IMF. Greater flexibility should also be introduced into ESAF programmes by identifying several policy reform routes from which governments could choose. The report also recommends that governments should form economic management teams (EMTs) drawn from across the government to coordinate reforms, and use national conferences to reach out to the public.

IMF staff, in a written response, supported the use of EMTs and conferences but remarked that “ownership is an important but not a sufficient condition for successful reform”, and that it did not matter whether the IMF or the government wrote the first draft of policy framework papers because they would be very similar. The staff also expressed reservations about whether more than one feasible route to achieve adjustment goals exists.

IMF staff are now producing a “synthesis report” pulling together the recommendations from both the internal and external reviews and identifying how they can be taken forward. This report will be discussed by the Board in June.

  • The UK Department for International Development is funding a social development advisor post at the IMF.

The ESAF External Review and staff response are available from the IMF publications department or on the website:

A brief summary of the key recommendations is available from the Bretton Woods Project.