Policy support instrument: Helping hand or more thumb screws?

21 November 2005

In October, the IMF board approved the establishment of a Policy Support Instrument (PSI), a non-lending programme which will provide policy advice to poor countries and send a signal to donors and markets about the quality of a country’s economic policies. Critics suspect the instrument is little more than a new way “to extend Fund domination”.

Fund staff are to draw both macroeconomic and structural conditions of the PSI from the country’s Poverty Reduction Strategy (only low-income, PRGF-eligible countries will be eligible for the PSI initially). They will assess the implementation of the chosen reforms twice a year, with the programme lasting from one to four years. If a country fails two consecutive assessments, the PSI will automatically be terminated.

Supporters of the PSI say that the new tool will prevent the IMF lending unnecessarily to countries which do not have balance of payments problems but where donors require an IMF programme to validate the country’s policy framework. However, the 50 Years is Enough network has questioned the need for a new tool which they believe duplicates existing IMF programmes. To understand why yet another tool was needed, analyst Soren Ambrose suggests that Article IV consultations are not viewed by donors as sufficiently strong signals of a country’s creditworthiness, and that the PSI will be more palatable to developing countries than staff-monitored programmes which are seen as overly intrusive. Ambrose suggests that the real targets of the PSI may ultimately be middle-income countries who have “mostly left the IMF behind but because of debt or the need to attract other creditors remain vulnerable to its coercion.”

extend Fund domination

The first country to pilot the PSI will be Nigeria, where the new instrument was deemed an acceptable alternative to a full IMF programme in order to qualify for the recently-announced cancellation of $20 billion in debts owed to the Paris Club group of creditors. The next country to take up the new instrument will be Uganda, after the completion of its three-year PRGF. Even within the ranks of IMF staff there are varying predictions about the level of demand expected for the PSI. Publication of PSI documents will be voluntary but presumed. A board review of the experience with the PSI will be conducted in three years time.

New facility for countries experiencing economic ‘shocks’

Along with the PSI, Fund staff unveiled at the annual meetings a new instrument to provide quick-disbursing funds to countries experiencing ‘exogenous shocks’ (such as a rise in oil prices or a sudden fall in the price of an important export commodity). This will be an additional financing window in the Poverty Redcution and Growth Facility (PRGF); for non-PRGF countries a stand-by window would be created from which countries could draw up to 50 per cent of their quota at concessional interest rates for one to two years.

Most analysts agree that the Fund needs to do a better job in responding in a timely manner to countries experiencing external shocks. However the devil is in the detail. In discussions of the new facility, the IMF board did not distinguish types of shocks or define what constituted a shock, preferring to leave this to a case-by-case analysis. When pressed at the annual meetings on the nature of conditions likely to be attached to the new facility, Fund staff replied that for “temporary, one-off shocks, a looser fiscal policy would be allowed than for a long-term programme” and that “macroeconomic conditions are more likely than structural conditionality”.

In a recently published book on the IMF’s role in low-income countries, professor Graham Bird argues that aside from a dedicated shocks facility, regular Fund programmes should include “shadow programmes” to cover a range of eventualities: “these would allow the fundamentals of an agreed economic strategy to be protected from the consequences of short-term illiquidity” caused by a shock.

Details of the Fund shocks facility await completion of the IMF debt cancellation package. A final decision on the shocks facility is expected by the end of November. Implementation will then await funding, either from internal or external sources.