Wage bill ceilings, fiscal and monetary policies and absorbing aid inflows – updates and next steps

World Bank-IMF annual meetings 2007

26 October 2007 | Minutes

Sponsor: ActionAid International
Speakers: John Hicklin, IEO; David Goldsborough, CGD; Akanksha Marphatia, ActionAid; Jan Kees Martijn, IMF
Moderator: Peter Chowla


John Hicklin – main messages

  • Recap of the report
    • Conclusions on spending of aid increases
    • Policy is consistently implemented by not well communicated
    • Limited links between PRGF and PRSP
    • Limited sectoral analysis of aid and growth, aid absorptive capacity

Recommendations: Clarify policies on macro policy, aid scenarios, PSIA, engagement policy, budget framework etc

      • Transparent mechanisms for M&E
      • Clarify expectations for staff in dealing with CSOs and donors
  • What happened and follow up since then:
    • Board clarifies some policies, but left the macro targets question flexible
    • Support for good communications, and strengthened CSO engagement, but not sure on resources
  • Questions remaining:
    • Management’s monitoring, evaluation, and implementation
      • Need monitoring frameworks to start now to feed into 2010 PRGF board review
    • Ultimate impact of the de facto inflation and reserves threshold

David Goldsborough – main messages

  • 3 key messages of the CGD report:
    • Macro-frameworks are unduly conservative and risk adverse
    • Ambiguous and unclear approach of the IMF’s aid projections and aid spending programmes
    • Wage bill ceilings are overused and don’t work
  • Going forward
    • Recent papers go a long way to address some of the issues
    • Correct: absorb and spend all aid; expenditure smoothing; build some reserves cushion at some point; make best estimates of aid; dumping wage bill ceilings
    • Should the IMF have a catalytic role to encourage higher aid? But not clear what benchmark to use. Could it be Gleaneagles commitments? A Gleaneagles-based scenario would be a good start
  • Shortfalls remaining
    • The IMF way of doing business
      • Interaction with other players like the World Bank – especially getting and using Bank analysis
      • Conditionality
      • The goal should be that the IMF does NOT have 10 more years of programmes in Africa
    • With stability need to adjust framework
      • Knowing sectoral/micro analysis becomes even more important.
      • The IMF has very limited and incomplete information in some cases – it needs to get more from outside

Akanksha Marphatia – Options and Opportunities

  • We acknowledge step forward on the wage bill – but the IMF needs to explain how and when it will drop remaining ceilings; there is incoherence between policy and implementation.
  • Still inflation and fiscal targets force the decline of the wage bill, regardless, Mozambique as an example.
  • Alternative scenarios – only look at what happens if more aid
    • Aid is not all, domestic revue can be mobilized, others can do scenarios
    • We should think about using needs-based scenarios
  • Gender is also completely absent from IMF analysis
  • Need more policy space and autonomy for experimentation; countries need to be able to analyse the trade-offs between growth and macro policies

Jan Kees from the IMF

  • The IMF agrees with the main thrust of the IEO and CGD recommendations, that is why we clarifies policies; we are still developing guidance notes, this will be important
  • We have no time schedule for dropping wage bill ceilings, it is a country-by-country decisions; have to wait until alternative systems are in place
  • Expenditure smoothing is key, you have to build reserves before we can expenditure smooth; flexible adjusters are needed
  • Fund programmes are more flexible already, there is lots of improvement
    • Look at Rwanda, Mozambique and Zambia; where inflation is something high and it isn’t always stable but we allowed aid spending anyway
  • Quantitative analysis in the IEO report is wrong
    • It only focuses on aid increases and measure whether it is spent in the same year
  • The IMF’s goal is the full use of aid over time – not instantly – have to smooth expenditure, develop medium-term expenditure frameworks, and address weak absorptive capacity
  • Maybe the only thing to debate is the speed and pace of reform to the Fund’s role
  • The role of the IMF is not to mobilise aid; besides donors are not delivering on the scaling up commitments; the MD has called for donors to meet commitments
    • The Africa department is doing scenarios more often
  • The IMF does not discuss budget allocation with governments – we have no expertise – we do have a role to help improve tax policies so countries can eventually become aid independent.
  • On macro targets and fiscal space
    • Yes deficits can increase fiscal space, but this has to be paid for somehow – either in the future or through crowded out domestic investment
    • There is no evidence that high inflation increases fiscal space, only though inflation tax
    • We aren’t driving inflation down from 7% to 3%
  • I have no expertise on gender – can only say that this should be debated in the PRSP

Second round of discussions

John Hicklin

  1. How will the IMF implement aid scenarios
  2. On overall macroeconomic pictures -> IEO used averages, of course there will be country cases that are opposite
  3. African institutions (finance ministries and central banks) themselves are very cautious – how can the Fund help this?
  4. Monitoring – the practice of board discussion on implementation plan is good

David Goldsborough

  • The IMF originally targeted declining aid in Africa – this has thankfully changed
  • Inflation targets are a red herring – maybe IMF brought down inflation too fast, but going forward should not try to build in inflation to try to increase growth
  • There are a wide range of possible fiscal paths because of the debt relief packages
    • Choice of which path is optimal depends on effective expenditure; the IMF knows nothing about this
  • On communication and participation – it is difficult to improve because mission teams have conflict of incentives
  • The solution we are pointing out is simply that the IMF should have fewer programmes!

Akanksha Marphatia

  • The IMF needs to justify its wage ceilings better; and involve others in the process of determining them because of the long-term impacts of the decisions
  • The PRSP is not coherent with the PRGF
  • Policy space is the key question – who really has control?

Peter Chowla

  • How does the Fund know absorptive capacity – they have no idea?
  • How to mobilise domestic revenue – clarify between increase tax take of static domestic pie and increasing domestic pie
  • Would it help if Fund had more local staff?

Jan Kees

  • No new system yet on alternative scenarios – the guidance notes are being prepared now; sometimes alternative scenarios don’t have to be be formally done, they are simple quick analyses
  • We can have fixed inflation thresholds because it depends on if the inflation is from the demand side or supply side or something like central bank policy or domestic debt -> need flexible policies
  • Debt Sustainability Analysis – it is a joint exercise with the Bank who do the long term growth analysis. We should be careful. Previous debt crises came because growth projections too ambitious, not because lending was greater than expected
    • We do stress-tests for growth-criticality of debt assessments
  • Fund will justify wage bill ceilings from now on
  • PRSP-PRGF link – talk to governments, they set the agenda for the PRSP
  • Sometimes problems on the use of aid is bad coordination between the Central Bank and Finance ministry
  • WB has sectoral experts, not us, don’t expect the Fund to do the analysis
  • On growth – macro stability is key to growth, so to get domestic growth, the IMF is a key player by creating macro stability
  • It might help if staff were local but our contribution is really cross-country experience and analysis

Open discussion

Rick Rowden

  • No one is proposing inflation tax
  • Fund’s definition of macroeconomic stability is key. How do they define it and based on what evidence?
  • We aren’t talking about inflation in a vacuum, inflation is important because the instrument is interest rates, low inflation targets mean high interest rates, this means low private sector investment

Roberto Bissio

  • The interest rate and growth nexus is obvious in Latin America. Just look at Brazil’s slow growth
  • The IMF tells us aid can’t be spent because it is not reliable
  • Harmonisation trends are worrying because country ownership is lost

Nancy Alexander

  • The IMF is deeply divided over poverty and the IMF’s goals
  • The IMF seems to be providing the whole framework for conditions for multi-donor support groups