Evaluation finds that IMF misleads the public about its role in Africa

2 April 2007

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A report released by the Independent Evaluation Office (IEO) of the IMF criticises the role of the IMF in managing aid inflows to Sub-Saharan Africa, but fails to address more fundamental questions about the Fund’s role in low-income countries.

The evaluation of the IMF and aid to Sub-Saharan Africa pointed to a clear mismatch between the IMF’s rhetoric on poverty reduction and its actual work on the ground, which has focused more on fiscal discipline. It faulted both the management and the executive board for failing to reach consensus on how the IMF should approach the issue of aid, leaving the IMF without a clear policy on encouraging aid or developing alternative fiscal scenarios based on increasing aid volumes. It reaffirmed earlier criticisms of the lack of collaboration between the World Bank and the IMF, which has prevented appropriate analysis of how aid could be invested. Civil society critics found the report useful but incomplete in its recommendations.

Underlying the theme of disconnect is a larger issue of attempted – but ultimately unsuccessful – institutional change

The report was based on research into Poverty Reduction and Growth Facility (PRGF) programmes, the IMF’s concessional lending instrument for low-income countries, in 29 Sub-Saharan African countries between 1999 and 2005. Interviews were held in six countries and a survey of Fund and Bank staff, donors, country authorities and African civil society organisations was conducted across the region. The IMF board welcomed the report but delayed endorsement of its recommendations pending management’s submission of implementation proposals with estimates of the costs of carrying out the reforms.

More PR than poverty

The IEO did point out that country fiscal and economic performance had improved in the study period – citing lower inflation, lower deficits and high average growth rates – and attributed this “in part to the advice and actions of the Fund”. However it was careful to point out that the gains were more due to the action of country authorities, and also came in the context of increases in aid and a relatively benign global economic environment.

The report’s sharpest criticism was directed at the mismatch between the goals of the PRGF and its actual performance. “Underlying the theme of disconnect is a larger issue of attempted — but ultimately unsuccessful — institutional change. When the PRGF was introduced, it was meant to be more than a name change. … But in the face of a weakening consensus in the Board and a staff professional culture strongly focused on macroeconomic stability—and, most important, changes in senior management and a resulting lack of focused institutional leadership and follow-through—the Fund gravitated back to business as usual.”

This business-as-usual approach in its relationships with country authorities and Bank staff has meant that the Fund was ineffective in using poverty and social impact assessment (PSIA) in designing PRGF programmes and was unimaginative in its application of aid absorptive capacity and alternative aid scenario analyses. The IEO found that the major change was not in the direction of a focus on poverty reduction but instead “Fund staff have pursued improvements in the accountability and transparency for the management of public resources the most aggressively.

The report mitigates this criticism of the lack of attention to poverty reduction and aid scenarios by citing the lack of IMF policy in this field and lack of consensus at the board level. Instead it was the public relations aspect of the Fund’s work that was cited as being out of line. “IMF communications on aid and poverty reduction have contributed to the external impression that the Fund committed to do more on aid mobilization and poverty-reduction analysis.”

The main recommendations from the evaluation are for improved policy clarity and better communication. “The executive board should reaffirm and/or clarify Fund policies on the underlying performance thresholds for the spending and absorption of additional aid, the mobilization of aid, alternative scenarios, PSIA, and pro-poor and pro-growth budget frameworks.”

Additionally, the IEO recommends that IMF management improve its monitoring of the implementation of those policies. In particular the IEO has suggested that ex-post assessments, scrutiny of countries that have borrowed from the Fund over long periods of time, include an assessment of Fund staff and their implementation of Fund policy. Additionally, it recommends regular cross-country evaluations of policy implementation in the region.

Role of the IMF

Beyond these recommendations there is no discussion of what role the IMF should be playing in low-income countries. A separate independent committee report on collaboration between the IMF and the World Bank recommended that the IMF stop using the PRGF to provide development finance to low-income countries (see Update 55). The IEO report points in the same direction, but the lack of ‘big-picture’ thinking on aid and development finance questions may have prevented the IEO from suggesting greater reforms.

The IEO report buttresses the view that the Bank and Fund do not work well together. Despite board emphasis on the need for PSIA, the report finds that “PSIAs carried out by World Bank staff, DFID, and other agencies have not systematically informed PRGF programme design. During interviews, IMF staff said that most PSIAs prepared by other agencies generally lacked the necessary timeliness, relevance, and/or quality to underpin PRGF design.” It also stated “the findings of PSIAs carried out by IMF staff are now typically reported in PRGF documents, although there is less evidence of material influence on PRGF program design.”

In the areas of aid absorptive capacity, “PRGF attention to aid absorptive capacity constraints in education, health, or infrastructure, where the Bank is the lead agency, were rare, as was the integration of the individual dimensions into an overall assessment that takes account of synergies and tradeoffs across the individual dimensions.” This “suggests a missed opportunity for considering synergies and tradeoffs between areas where the Bank has the lead on one issue and the Fund on another ­– such as the Bank’s lead on infrastructure, with its obvious supply-side effects and the Fund’s lead on macro stability/sustainability, including exchange rate competitiveness.”

However, the headline recommendations of the report do not address this problem of disconnect between the institutions. Only in its response to the management statement on the report, does the IEO finally recommend that Fund staff be more proactive in communicating with Bank staff to secure analytic inputs such as PSIA and sectoral absorptive capacity determinations. The report fails to make recommendations for how the Fund staff could improve their provision of material to the Bank, despite finding that on average fewer than 40 per cent of Bank staff found their collaboration with Fund staff productive.

Given the Fund staff’s lack of expertise outside of its core mandate of macro stability, it seems more logical for the Bank to be the lead agency in low-income countries where macro-stability is less of a priority. While the IEO argues for the IMF to be a more engaged partner, many civil society groups want the Fund’s to be less actively involved in setting priorities for low-income country development strategies. There is much sympathy for ending the PRGF and shifting resources for development finance to institutions that do have the expertise and ability to tackle issues of poverty in the context of underdeveloped economies. The role of performing macroeconomic analysis might then be better filled by less orthodox economists with more experience of low-income countries at a UN agency such as UNDESA or UNDP.

Challenges on aid policy

The IEO report also brought to light IMF influence over when low-income countries are allowed to spend aid increases. Sub-Saharan African countries, whose budgets must be vetted by the Fund during PRGF reviews, need IMF approval of any spending increases or risk having their PRGF declared ‘off-track’ and thus jeopardising further aid flows.

The report found that the Fund generally only allows aid increases to be spent when countries have less than five to seven per cent inflation and foreign exchange reserves equal to two to three months of imports. The IEO suggested that the Fund needs clearer policy on these performance thresholds, and needs to justify when it allows deviations from these policies. It also reinforced civil society criticism on wage bill ceilings. While finding them not focused specifically on social sectors, the report said “they are not first-best solutions and clearly have sometimes had unintended consequences.”

The requirements for high levels of reserves, single digit inflation and tight fiscal policy have been characterised by civil society as unnecessarily restrictive and inflexible, especially when it comes to social sector spending. A forthcoming ActionAid International report on the IMF’s impact on education spending argues that these kinds of limits prevent low-income countries from fulfilling their obligations to provide good quality education to all children. One of the ActionAid report’s authors Akanksha Marphatia says, “Tighter controls on overall public spending and particularly low ‘ceilings’ on public sector wage bills have undermined the ability of countries to hire more teachers and health workers. Ceilings on wage bills must be determined by need for trained teachers, and the budget required to hire them set accordingly.”

Despite the controversy over how flexible macroeconomic policy should be, the IEO skipped any discussion of the appropriateness of the Fund’s aid absorption policy. It confined itself to confirming that staff had indeed followed the board’s directives in this regard. Ellen Verheul of Wemos, a Dutch NGO that produced a report on the effect of IMF macroeconomic policies on health sector budgets, argued that “Despite large gaps in the economic knowledge of how fiscal policies impact on economic growth, the IMF pretends to know the answer and simply ignores social tradeoffs as these are not in its mandate. This is unacceptable. The IEO calls for more transparency on the rationale for the IMF’s stance, to allow for public (and political) debate on these issues. But there is also a need for feasible alternatives in this debate, to challenge the conservative positions taken by the IMF.”

Additionally, the IEO report outlines problems with aid projections, finding that the IMF consistently underestimates aid provision over the medium term. It concurs with IMF critics that this may be prejudicing donors against greater aid increases. To remedy this it called for the IMF to analyse alternative aid scenarios and produce corresponding fiscal and macroeconomic frameworks. It also faulted the Fund for not making public its method of making aid forecasts and for not publicly revealing when donors did not live up to aid commitments.

These problems with aid are counterbalanced by the finding that country authorities are displeased with the composition of public expenditure, finding that it has become too focused on social sectors such as education and health. This is buttressed by a recent World Bank report on underinvestment in infrastructure in Latin America and Africa. While the IMF is responsible for verifying what portion of a country’s budget is pro-poor, the pressure for social sector spending seems to be emanating both from donors and from the rules attached to the use of resources freed up by HIPC debt relief.

Stakeholders at arms-length

The IEO does not touch upon the issue of the Fund’s transparency more generally, which impinges on the ability of external stakeholders to hold the Fund to account. While having clear policies on the aid performance thresholds is necessary, the Fund does not make public its operational guidelines that interpret board-level policy decisions for staff. Publishing these guidance notes would provide more clarity in relation to how staff are implementing board policy and would allow external stakeholders to monitor the implementation of Fund policy.

One of the consistent complaints by civil society is that they have not been consulted in setting the macroeconomic framework. The IEO’s survey confirmed the view that IMF staff feel their work should come before the participatory processes involved in creating a Poverty Reduction Strategy Paper (PRSP). “Less than 40 percent of surveyed [IMF] staff agreed that the PRSP provided the basis for the PRGF, with twice as many agreeing that the PRGF provided the macro basis for the implementation of the PRSP.”

As civil society is shut out of the design of macroeconomic frameworks and the PRGF, they point to the futility of consultation and participation on the PRSP. According to research from AFRODAD, a network of African civil society organisations active on development issues, “While the PRSP was open to discussion, the PRGF was clearly not – undermining the participation and ownership principle on which both the PRSP and PRGF are based on.”

Finally, the IEO finds that African civil society organisations (CSOs) have a dismal view of their interaction with the Fund. Only about 20 per cent of those surveyed thought that the Fund had increased its transparency and dialogue with CSOs. To remedy this problem the report suggests clarifying the role of IMF mission staff and resident representatives, as it finds that there are high expectations of their work with local donor groups and civil society but few resources committed.

Peter Henriot of the Jesuit Centre for Theological Reflection in Lusaka described the tokenistic consultations with civil society conducted by IMF missions to Zambia. He feels that “views are politely heard, reports made back to Washington that ‘consultations’ did indeed occur, and then recommendations are made and pressures are exerted that seem to take no recognition of the realities conveyed by the local Zambians.”

The IEO report brought Henriot to the conclusion that IMF staff should “pay attention to the political climate that is so highly-charged because of an economic situation of ‘progress’ coupled with a social situation of ‘stagnation’ or ‘decline’. And listen to a civil society that may be more in touch with ordinary life struggles than a bureaucracy caught up with maintenance of institutional and programmatic commitments carried over from the SAP era.”

Former IMF and IEO staffer David Goldsbrough feels that a key piece of the puzzle is debate on macroeconomic frameworks and spending priorities, which may nor may not be imposed by the IMF: “The national debate on these issues, and on key priorities, is too closed in most cases. This is mainly an issue for the governments themselves to act on, but the IMF could help by being more transparent about the rationale for its advice and being more open to analytical inputs from other groups.”

But given the Fund’s current budget crisis, there is a risk that management may use the IEO’s recommendation on the role of the resident representative to actually scale back expectations of participation and engagement with local civil society. Rather it should serve as a wake up call to increase the level of interaction between IMF staff who design PRGF programmes and country-level stakeholders such as local parliaments and civil society organisations.