IMF and poverty: strange bed fellows

29 March 2004

The IMF’s capacity and legitimacy to address poverty have been debated by many analysts within the context of the Fund’s actions in low income countries. The IMF’s original mandate was to provide short-term financing to help countries overcome temporary balance of payment deficits and thus ensure macroeconomic stability. This role has expanded substantially over time to include the contentious structural adjustment lending of the 80s. The most recent expansion was the launch in 1999 of the Poverty Reduction and Growth Facility (PRGF), a financing mechanism to embody a new poverty focus.

Is the IMF pro-poor?

Analysis of the PRGF in terms of its signalling influence over development financing, core policy content and quantity and quality of flows available casts doubts over its ability to deliver on poverty reduction.

The IMF has been criticised for unrealistic growth projections. A uniform macroeconomic policy design emphasises trade liberalisation, privatisation and a reduced role for the state. Export-oriented growth prescriptions fail to consider the effects of the volatile international market and unfair trading system.

Disputes with the IMF over teachers' salary increases have cost Honduras 4 million

A meaningful focus on poverty reduction requires increased levels of aid within a longer term framework for lending. This is in sharp contrast to the IMF’s typically short-term lending geared towards macroeconomic stability. A survey of IMF country programmes by Oxfam and EURODAD confirms a disconnect between their short-term objectives of macroeconomic stability and other donors’ longer term focus on impact outcomes. At the heart of IMF programmes is a focus on macroeconomic stability and economic growth. Tension remains between these and poverty reduction.

IMF fiscal targets often lead to diminished social spending. According to a World Vision policy paper, “the PRGF ends up contradicting the PRSP objectives”.

Evidence of the devastating effects of IMF conditionality on low income countries can be seen in the case of Honduras. According to Oxfam: “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 programmes to educate all children in Honduras three times over”.

The Fund retains the right to assign a clean bill of health which affects investment from all sources. A PRGF programme has a signalling effect on other aid flows into a country, determining financing for development and the attainment of outcomes such as those envisaged by the Millennium Development Goals.

Poverty and Social Impact Analysis: mitigation?

PSIAs offer the opportunity to better align the PRGF to PRSPs and can potentially deepen ownership of policy choices. Ostensibly they are a key feature of the PRGF. However, progress has been very slow. Commenting on preliminary findings from an ongoing Independent Evaluation Office (IEO) evaluation deputy director David Goldsborough concedes: “PSIAs are still not mainstreamed by the IMF as part of the policy debate”.

The IMF’s recent announcement of the formation of a PSIA unit provides an opportunity for the Fund to address some of the content and process concerns raised by its lending. PSIAs’ effectiveness will depend, however, on their independence, timing and methodology. Minimum standards should include the establishment of multistakeholder groups to define PSIA topics and the exploration of policy options through scenario building and the use of independent research. Many groups conclude however that no amount of four letter acronyms starting with ‘P’ will turn the IMF into an institution that understands poverty.