Weakest link or missing link?

25 May 2003

In April, the IMF, the World Bank and the UK government organised a two-day workshop in Washington, DC to identify and prioritise medium-term areas of research on macroeconomic issues confronting low-income countries, especially the macroeconomic analysis underlying Poverty Reduction Strategy Papers (PRSPs). The IMF has proposed five priority areas: increasing growth outcomes; assessing the macroeconomic impact of large aid flows; assessing debt sustainability; addressing vulnerability and exogenous shocks; and accessing private international capital markets.

Meeting participants were concerned about further evidence that the IMF is not aligning its funding behind countries’ priorities. An IMF paper “Aligning the PRGF and the PRSP approach – issues and options” admits that the Poverty Reduction and Growth Facility (PRGF), the Fund’s concessional lending instrument for low-income countries, is disconnected from the PRSP process. Many observers have complained that numerous supposedly ‘country-owned’ anti-poverty strategies have mimicked IMF macro-economic prescriptions. However the Fund argues that in many PRSPs to date, the macro framework is very ambitious and differs markedly from more ‘realistic’ annual budgets that are more in line with targets specified in IMF loan agreements.

The IMF paper initially proposed to reconcile the current tension by “explicitly adopting in PRSPs two frameworks: each of which would serve a different purpose”. One would be the “ambitious ‘business plan'” putting forward the country’s vision, the other one an “operating plan”, a “baseline framework” of what can realistically be achieved in light of existing constraints. This would risk reinforcing the existing disjunction, as some NGOs have pointed out in a subsequent letter. Another option, more in line with the idea behind the PRSP approach, would be to allow greater flexibility in targets of IMF programmes and policy options, therefore allowing countries to align their immediate priorities – including their budget – with the objectives they have defined.

This search for the ‘missing link’ between what countries consider desirable and necessary and what the IMF considers realistic signals the Fund’s willingness to learn the lessons of its own overoptimistic growth projections. However it also shows how difficult it is to reconcile the Fund’s commitment to the Millennium Development Goals and its recent emphasis on country ownership, with its reluctance to cede control over the macroeconomic policies of borrowing countries.

The IMF’s Board echoed the concerns voiced by meeting participants. The wording of the IMF’s paper has since been revised, but still advocates a two-scenario approach, with lending programmes built around the “baseline scenario”. This would risk reinforcing defiance towards the PRSP exercise and in fact make it redundant.

Workshop papers available from the Bretton Woods Project on request.