Reading from the script

the IMF’s PSI invades Africa

31 January 2007

The decisions by Ghana and Tanzania to use the Policy Support Instrument (PSI) reflect the IMF’s success in convincing countries to accept conditionality without any financing, despite the evidence from Uganda and elsewhere that PSI conditions are numerous and will be enforced.

The PSI, inaugurated in October 2005 (see Update 48), is designed for low-income countries that do not need Fund money but acceptFund involvement and advice in policymaking. Despite not providing funds, the PSI does include conditions which are updated during programme reviews every six months. The PSI also serves as a signal to donors that the IMF endorses the country’s economic programme. The PSI, like the PRGF, is supposed to draw its conditions from the country’s poverty reduction strategy paper.

Ghana announced its decision to not negotiate another Poverty Reduction and Growth Facility (PRGF) in May (see Update 51), citing excessive conditionality related to government debt levels. However, as a follow-up to the PRGF, finance minister Kwadwo Baah-Wiredu has opted to remain within the confines of IMF conditionality by adopting the PSI. In the 2007 budget report released in parliament in November, Baah-Wiredu said that “government sees this as a major turning point in the economic history of Ghana and will be approaching it with all the necessary precautions”. But in justifying the decision to use the PSI, the budget report copied about half of its text word-for-word from the IMF’s factsheet on the PSI. It is not yet clear when the PSI negotiations will commence nor whether conditions on external indebtedness will be included in the PSI programme.

the budget report copied half of its text word-for-word from the IMF’s factsheet on the PSI

According to Taaka Awori, a member of the Growth and Poverty Forum, a coalition of Ghanaian development NGOs, there is normally no consultation with civil society in advance of such decisions. She said: “it is unclear what the implications of this move are for poverty reduction or participation by civil society in Ghana”. Awori thought it was something that civil society organisations would be examining this year.

Tanzania signed up

PSI negotiations were concluded in Tanzania during the final PRGF review in September. The IMF executive board was meant to approve the PSI in January, but the board session was inexplicably delayed until February. Tanzania will become the fourth country to use the PSI after Nigeria, Uganda and Cape Verde (see Updates 48, 52).

Regardless of the delay, the Tanzanian PSI is a fait-accompli, but the implications are unclear. The Tanzanian parliament and CSOs have not considered the conditions attached to the programme, and will not see them until after the IMF board approves the programme.  The East African newspaper commented: “rather than provide financial support, the IMF’s role will be more or less that of an international credit rating agency that tells other donor agencies whether or not to lend to Tanzania. …Thus, even without receiving IMF funds, the country will still be subject to IMF conditionalities.”

Rose Mushi, country director for ActionAid International Tanzania, guardedly welcomed Tanzania’s move as it signalled an end to the government’s reliance on the Fund for financial support. But she cautioned that “it depends on the capacity of the government of Tanzania to negotiate policy advice with the IMF.”

Enforcement stepping up?

While some see the PSI as a weaker version of IMF involvement in the economic policy of a developing country, it is not clear that this is the case. A survey of the six publicly available PSI programme documents – two from Uganda, three from Nigeria, and one from Cape Verde – reveals that on average the agreements contained 12 structural conditions (assessment criteria or benchmarks). This compares unfavourably to the review of PRGF conditions conducted by Brussels-based NGO Eurodad in 2006, which found on average 11 structural conditions per PRGF review. Three privatisation conditions, one of the most controversial forms of economic policy conditionality, were included in each Nigerian PSI review.

Table 1: Structural conditionality in PSI programmes

Country Prior Actions Structural Criteria Structural Benchmarks Total Structural Conditions
Nigeria 0 6 8 14
Uganda 0 3 8 11
Cape Verde 0 1 7 8
Nigeria 0 8 10 18
Uganda 1 2 4 7
Nigeria 0 7 6 13
Average 0.2 4.5 7.2 11.8

The IMF seems willing to use the PSI process to convince countries to follow its policy prescriptions, though they can no longer withhold funding. In Uganda the IMF review mission expressed its disapproval of a rural lending scheme proposed by the government. The East African reports that the Bonna Bagagawale scheme, a new programme designed to give subsidised loans to Uganda’s rural poor, was characterised by the Fund as “directed lending”.

In December the IMF board completed its first six-month review of the Ugandan PSI, changing the programme length from 16 months to three years. But in its public notice of the decision, the deputy managing director akatoshi Kato indicated “it will be important for the government to avoid directed lending”. As part of the PSI the government committed to not increasing the funding allocated to rural credit cooperatives.

The IMF’s division head for Uganda, John Green, indicated that the PSI programme supports rural credit provision and expanded services in rural areas, but that at the time of the IMF mission, the government’s early proposals were not well defined and not within the confines of the budget. Despite the Fund’s concerns, the programme seems likely to go ahead. An official in the Ugandan ministry for microfinance, Ruhinda Maguru, disputed that the scheme was directed lending: “The government is looking at the Bonna Bagagawale programme as a way of bridging the gap caused by market failures by providing financial services where the normal banking system has failed to reach, at affordable interest rates”. There is some indication that the ministry is trying to attract the support of donor countries to be able to expand the programme, which is to be run through the post office network rather than traditional rural credit cooperatives.

Soren Ambrose of Kenyan NGO Solidarity Africa Network questions the rationale for adopting the PSI, calling it most useful for politicians who “use the PSI as a political point of pride – they can boast that they are making progress in weaning their countries from the IMF. But in fact the conditions remain the same, and just as strong.”