Max Lawson, Oxfam GB
Soren Kirk Jensen, Eurodad
Francis Lemoine, Eurodad
Fabien Lefrancois, Bretton Woods Project
Alan Whaites, World Vision
We welcome the Fund’s efforts to open up debate and actively seek input on their research agenda. We can only encourage the IMF to step up such efforts and not just rely on internal research to shape and adjust its policies, but also fully acknowledge and use existing and future research carried out by other multilateral institutions and various groups of stakeholders. A further step could be for the IMF to delegate or ‘outsource’ parts of its research. Increased diversity, plurality of views and genuine options are key to ensure the IMF can contribute, even if it is not a development institution, to its stated objectives of poverty reduction and growth.
Realistic and better substantiated growth projections
We welcome the recognition in this staff note that growth projections in PRGF programmes and associated projections for export growth in HIPC countries have been consistently overly optimistic. As noted in the paper, overly optimistic assumptions regarding growth, exports and budget revenue can have severe adverse effects on countries. We would add that often the IMF exacerbates this problem by insisting on overly conservative spending targets even in the face of failed growth and export projections due to exogenous factors. This means that often the country is punished twice for factors that are beyond its control and should have been more realistically predicted by the IMF in the first place.
We also concur with the link between this over optimism and the need for a greater assessment of the sources of growth. We also recognise that internal institutional factors are of relevance in analysing sources of growth, and that optimism about institutional reform may have been one of the contributing factors to subsequent over-optimism regarding growth projections. However, we would stress that of greater importance to the failure of these projections is minimal analysis by the IMF of their uniform approach to growth based primarily on increased commodity exports in the majority of countries, and certainly on increased exports in all countries.
As such we agree that the fund should work closely with country governments and the bank on more systematic and realistic growth projections. These should in turn be linked to maximising growth that is pro-poor and sustainable, and not simply to maximising export growth reliant on highly volatile and protected markets. Most importantly the IMF should have a much more detailed and realistic analysis of commodity markets and projections, and should do this together with the bank.
Aligning macro-economic frameworks in PRSPS, National Budgets and PRGF supported programmes
While we welcome the recognition that the macro assumptions in PRGF programmes are indeed disconnected from the broader PRSP process, we are very concerned with the two-scenario response to this proposed in the guidance note (1).
Firstly it is important to note that in many countries the disjunct was not between the PRGF and the PRSP as such, but between the macro-framework of the PRSPs and their spending plans. In the majority of cases, the PRGF was agreed before the PRSP, and its macro-economic framework is based entirely on the agreed PRGF targets. As we have already discussed above, these combined a significant over optimism regarding growth and exports with continuing conservative and contractionary targets on deficits and inflation. There was minimal discussion of the macro-economic framework in any of the PRSP processes. At the same time spending plans in PRSPs often were drawn up in the absence of expenditure ceilings until very late in the process, and despite some prioritisation were often costed at far more than the resources available.
Given this existing disjunct, we are very concerned that the proposed division between a “business plan” PRSP and a “baseline macro-economic framework” would increase this division. Far from introducing greater realism and ownership to the PRSP process, it will instead make official the perception that the real decisions regarding resources are being made elsewhere, and that the PRSP is in fact redundant. For the IMF it would at the same time give a licence to continue with ‘business as usual’.
What has made the PRSP, despite all its flaws, more successful than previous initiatives such as the Vision 2020 approach, is the commitment to it by donors and the IFIs in the context of the new Monterrey agenda based on increasing resources to achieve the MDGs. If the IMF disengages from the PRSP, which is in reality what this discussion of a ‘baseline scenario’ would entail, then this crucial link to resources will be lost, and with it the credibility of the PRSP initiative.
It is indeed true that the PRSP has in many ways a contradictory mandate, between an optimistic vision for a country and a realistic plan on which to base actual budgets. However, it is this contradiction that is at the heart of moving to a new poverty reduction agenda. On the one side spending plans towards the MDGs need to be realistic and costed, and not just idealistic goals. However, equally on the other side macro-economic frameworks need to leave behind the knee-jerk contractionary agenda of the past and instead show maximum flexibility towards mobilising resources for the MDGs. This was clearly demonstrated by the clear consensus at the workshop that the current research focus of the fund on the potentially negative impacts of ODA on macroeconomic stability is overly negative and runs contrary to the broad Monterrey Consensus of optimising finance for poverty reduction.
As such, instead of the proposed two scenario approach, we would urge a return to the key features that were to distinguish the PRGF from previous fund lending, and particular two: fiscal flexibility and PSIA. The single macro-economic framework on which the 3-year PRSP is based should be based on a cautiously optimistic view of the resources available, and it is beholden on the IMF to assist the countries in producing this through broad debate around macro-options, and for this then to be the basis of the PRGF. In doing this, the IMF needs to be proactive in looking at alternative sources of finance towards the MDGs, such as the Education for All fast track initiative and where budget support and long term ODA is agreed this should be factored into macro-economic calculations to avoid excessively contractionary policies.
This does not mean that alternative contingencies or scenarios cannot be entertained within the PRSP; it is integral to good planning to have contingency plans in the event of a shortfall in resources or the more unlikely event of unanticipated additional resources. The point is instead that there should be one agreed central framework, based on ownership and PSIA, which forms the basis of the PRSP macroeconomic chapter and predicts the resources available for poverty reduction. The PRGF, MTEF and annual budgets should be all derived from this framework. This will ensure a greater realism on the part of the PRSP whilst also ensuring that the IMF delivers the key features of the PRGF, to clearly show it is doing everything it can to pursue the Monterrey agenda for poverty reduction.
Poverty and social impact assessments
Much of this topic has been discussed in the previous paragraphs, and is also discussed in the joint NGO paper ‘Where is the Impact?’ (2) . However, the following points still need to be made.
Overall we were disappointed that the paper does little to move forward the debate on PSIA, and certainly does little to address the failure of the IMF to deliver any real social impact analysis in any of its PRGF programmes to date. Given the critical importance of these analyses this is not acceptable.
While it is agreed that the World Bank should take the lead on analysing the impact of structural reforms, there is far more the IMF could be doing about taking the lead on PSIA of macro-economic reforms, and as such demonstrating fiscal flexibility (3). Firstly it must be recognised there is scope even in the lowest income countries for fiscal flexibility, and for impact analysis of different macro-options. Secondly it must also be recognised that considerable work is being done globally on developing different methods for modelling the impact of macro-economic reforms. As was discussed at the workshop, there is considerable debate over the extent to which economies and overall frameworks can be fully modelled. However, what is clear is that simple steps can be taken immediately to examine the impact of discreet macro-options, and that simple partial equilibrium models linked to household survey data are increasingly viable.
Given this we feel that the IMF should be moving to take a lead on PSIA of macro-reform options, drawing together the knowledge and learning going on globally, and using these studies to generate the ownership of macro-frameworks in the context of a country’s PRSP.
Developing more realistic debt and fiscal sustainability assessments
We welcome the commitment of the IMF and the World Bank to spend more resources on researching the determinants of debt sustainability in low-income countries and to systematise joint debt sustainability analyses (DSAs) for that category of borrowers. Moreover, the guidance notes presented at the workshop point to a number of significant steps towards addressing the flaws identified in the DSAs used for the HIPC Initiative. We support in particular, the recognition that both fiscal and external debt sustainability need to be simultaneously assessed, taking greater account of debt servicing constraints. The commitment to construct a wide range of alternative scenarios to reflect the specific vulnerabilities of low-income countries is also a step towards achieving more realistic forecasts. That being said, we remain concerned about some of the assumption, which form the building blocks of these DSAs.
First, both guidance notes propose to base debt sustainability assessments on the assumption that the countries studied will graduate from concessional lending in the next 10 to 20 years, which presupposes that they will “shift their primary balances from deficits in the near and medium terms to significant surpluses …” While this is an outcome that all would hope for, it seems rather overoptimistic for most countries, especially given the magnitude of the increase in pro-poor expenditures they will need to finance to reach the 2015 Development Goals. We would argue that DSAs should instead take the latter as the overall objective and assess whether a country’s debt level constitutes an obstacle to achieving and/or sustaining the MDGs. It is in fact unlikely that graduation will be possible for most of these countries before a significant degree of poverty reduction has been achieved, the priorities should thus be reversed.
Secondly, the choice to assess debt sustainability exclusively from a long-term perspective also risks over-looking the short-term constraints posed by unsustainably high levels of debt in reaching the MDGs, a problem that a number post-completion point HIPCs are already facing today and one that most post-conflict countries will certainly face in the near future. Although we disagreed with the 150% indicator chosen for the HIPC Initiative, the need to set an objective and commonly agreed threshold over which debts are recognised as unsustainable remains. As acknowledged in the World Bank’s guidance note, more work is needed to determine which indicator is best suited to play this role. We would add that in doing so, the World Bank and the IMF should give much more attention to poverty and social concerns and integrate them in their definition of debt sustainability, which should not be limited to a country’s ability to meet “current and future debt service obligations … without unduly compromising growth.”
Another area of concern relates to the status and use of debt sustainability assessments. While the discussions showed consensus over the need to build more realistic debt sustainability analyses, the policy implications of the results yielded by these analyses are still unclear. It is, for example, not clear whether debt sustainability analyses will be built to present highest probability outcomes or merely be based on the objectives set in Fund programmes. Furthermore, in terms of building alternative scenarios, the guidance notes remain evasive about the policy implications of downside risk scenario. In this regard, one should remember that the DSAs used for the HIPC Initiative already included downside risk scenarios, but this did not subsequently affect the process itself (at least ex-ante) (4) . To avoid this, it is crucial that the policy implications different scenario be clearly laid out ex-ante. More fundamentally, the World Bank and the IMF being major creditors of most low-income countries, their assessment of debt sustainability will always be subject to moral hazard. It is even more important in these circumstances that these assessments be made with maximum transparency and that a wider range of stakeholders be involved in the exercise.
sent on 1 May 2003
