Memorandum submitted by the Bretton Woods
Project
INTRODUCTION
1. The Bretton Woods Project is an independent
NGO established by a network of UK-based NGOs in 1995 to take
forward their work of monitoring and advocating for change at
the World Bank and IMF. See www.brettonwoodsproject.org/about
for more details.
2. This year's many events on aid effectiveness,
from Accra to Doha have many agenda items, and the UK, as one
of the biggest donors, will play a key role. However there is
an aspect of the aid agenda which often gets overlooked: the role
the International Monetary Fund (IMF) plays in aid utilisation.
While most attention is focused on the World Bank and bilateral
donors in relation to aid, the IMF's policy and advice has significant
effects on the way aid is received, saved and spent.
3. We hope that this hearing will provide
an excellent opportunity to air some critical questions on the
IMF's approach to aid. As this submission will elaborate, we believe
that the IMF impinges on the successful utilisation of aid according
to country priorities and that HMG policy towards the IMF is not
robustly addressing these problems at the global level.[35]
THE ROLE
OF THE
IMF IN AID
EFFECTIVENESS
4. The IMF is a signatory to the Paris Declaration.
However the OECD Development Assistance Committee (DAC), which
is the main official monitoring mechanism for donor compliance
with Paris Declaration principles, does not monitor the IMF.[36]
The IMF releases no information on its own compliance with the
Paris principles.
5. The IMF formally breaks down its role
in all member countries into three categories: lending, technical
assistance and surveillance. In practice however, IMF involvement
with member countries often blurs these neat categories.
6. IMF loans to low-income countries, delivered
under the Poverty Reduction and Growth Facility (PRGF), also set
out low-income country governments' economic policies. These economic
policies should be informed by a Poverty Reduction Strategy Paper
(PRSP). However the PRSP usually does not set out the macroeconomic
framework that the country operates under. The short- and medium-term
macroeconomic frameworks are usually determined jointly by the
IMF and country authorities. These frameworks developed by the
IMF and implemented through conditions in the PRGF agreements
set the level of spending by the government in both the short-
and medium-term. This is a violation of the Paris principle on
ownership (Indicator 1), and alignment (Indicator 3).
7. As aid is a significant portion of budgets
of low-income countries, the estimate of aid levels used in preparing
the budget is a key factor in determining the use of aid. However
the IMF does not specialise in aid issues, and until recently
has simply used signed donor commitments as their estimates of
aid, disregarding planned or promised aid that was not fully agreed
upon. The IMF has plans to change this approach[37],
but these have yet to be implemented. This aid pessimism has been
blamed for low delivery of aid because donors do not get signals
that countries can use more aid.
8. IMF programmes also contribute to undermining
ownership by reducing the ability of recipient countries to manage
aid inflows. With the IMF and country authorities setting the
budget in advance, the IMF has been inflexible in accommodating
increases in aid. The IMF's Independent Evaluation Office (IEO)
found that when recipient governments received aid increases,
the IMF did not allow them to be spent.[38]
The study finds only 28% of aid increases for low-income countries
actually went to spending, with the rest being saved as reserves
or used to pay down debt.[39]
The figure is even lower for so-called weak performers with inflation
above 5% or "low" reserves. The IEO's findings show
the IMF's lack of concern for the principles of ownership and
alignment (Indicator 3) with donors, who certainly planned for
their aid increases to be spent on poverty-reducing programmes.
9. Finally the IMF in some ways acts as
a donor, by giving loans and through technical assistance. The
OECD definition of Official Development Assistance (ODA) requires
loans to have a grant element of least 25%. PRGF loans can be
considered concessional if the calculation of the grant element
conforms to certain assumptions.[40]
10. The problems faced by low-income countries
are long-term and/or structural in nature and not based on temporary
balance of payments needs. However, the traditional business of
the IMF is to address the temporary disequilibria in balance of
payments of its member countries. PRGF loans are typically disbursed
only over three years and have a repayment schedule of five years.
This has created a mismatch between country needs and policy recommendations
that can be overly restrictive and curtail policy space for developing
countries as well as impinging on ownership.
11. IMF lending assistance also sometimes
does not conform to Paris principles on predictability (Indicator
7). IMF disbursements are subject to IMF board review before each
disbursement. Bureaucratic delays in scheduling board discussion
of programme reviews can delay disbursements. Additionally PRGF
loan disbursements are not predictable because IMF staff may declare
that the country has failed to meet IMF-set conditionality in
any of a wide-range of areas, putting them "off-track"
in their PRGF and suspending disbursements.[41]
This is equally a problem in IMF-administered debt relief.[42]
IMF disbursement volatility compounds volatility of donor disbursements
as discussed in the next section.
12. Technical assistance (TA) is also a
type of aid, and should be treated the same as other kinds of
aid for the purposes of aid effectiveness and the Paris Declaration.
However IMF technical assistance does not conform well to the
relevant indicators. The IMF's TA agenda for each country is set
by the Fund after economic monitoring missions (Article IV missions),
loan reviews, or other surveillance operations. It is not set
through national priorities determined in a national development
strategy and it generally does not flow through coordinated programmes
with other donors[43]
(Indicator 4).
13. IMF TA certainly does not flow through
country procurement systems, as required under Indicator 5 of
the Paris Declaration. IMF TA has been provided free of charge
until now, which can be considered part of the reason for not
flowing through procurement systems. TA that is aligned to national
priorities and driven by country demand should be directed through
country procurement systems. The IMF is considering charging for
technical assistance as part of the reforms to its income model
recommended by an expert committee last year.[44]
A recent leaked document from the IMF managing director's office
confirms that the IMF wants to implement varying charges for TA
and to manage trust funds of donor resources (aid money) to reimburse
the IMF for TA for low-income countries.[45]
This is an express violation of Indicator 5 of the Paris Declaration.
DONOR RELIANCE
ON THE
IMF
14. Another problematic area of intersection
between the IMF and aid effectiveness is in the IMF's signalling
role. Donors use the existence and status of an IMF programme
as a tool to judge whether they should continue aid disbursements.
This puts aid-dependent low-income countries in the position of
needing the IMF's stamp of approval on their macroeconomic policies.
This stamp of approval is provided by a country having a loan
from the IMF or having approval through the IMF's Policy Support
Instrument. Macroeconomic assessments are provided by the original
IMF mission when such a loan or programme is proposed and updated
every six months in the programme reviews.
15. Without this stamp of approval, the
low-income country faces the prospect of being cut off from aid
from donors, particularly aid from the European Commission (EC).
This aid architecture prevents full ownership of economic programmes
and poverty reduction strategies, as the government must, by definition,
negotiate their economic policies (incl. budgets, borrowing levels,
and structural policies) with the IMF.
16. In a recent IEO report on conditionality,
the lack of progress in reducing conditionality at the IMF was
blamed on this signalling role.[46]
The IEO finds that donors using IMF programmes as signals pressure
the IMF to place conditions on recipients according to donor wishes
in order to monitor compliance for other purposes, including the
EU accession process.
17. Examples of problems with donor reliance
on IMF programmes and assessments can be found in many countries.
Uganda delayed accepting funds from the Global Fund for AIDS,
Tuberculosis and Malaria (GFATM) out of fear of violating IMF
conditionality and thus being branded off track, delaying a scale-up
of HIV/AIDS treatment in the country.[47]
Reports from Ghana and Malawi indicate suspension of AIDS treatment
financing because donor resources were used for meeting IMF conditions
on the level of international reserves.[48]
In Nicaragua in 2005 the IMF declaration of the country programme
going off-track led to the suspension of aid and grants from the
IDB, the World Bank, the European Commission, the United States
and Sweden. A similar situation was documented in Honduras over
IMF conditions holding up debt relief.[49]
More recently the problem was faced by Sierra Leone, where donors
did not deliver $25 million in promised budget support because
the country did not meet IMF conditionality in 2006.[50]
18. Donors should not consider non-compliance
with IMF macroeconomic conditionality to automatically mean instability.
For example, Mozambique is increasingly vulnerable to exceeding
fiscal and monetary targets set by the IMF because of the impacts
of floods. A graduated response that considers budgetary purposes
of aid as well as the macroeconomic implications of interruptions
must be undertaken. Suspending aid flows in accordance with IMF
off-track signals only contributes to unpredictability and volatility
of aid, leaving recipient countries vulnerable and poor populations
at risk.[51]
19. The DfID is the only donor agency that
explicitly states that its aid decisions are not linked to the
existence of an IMF programme.[52]
The Norwegian aid agency NORAD has a similar though unwritten
policy. In contrast the EC explicitly links its aid disbursement
to the existence of an IMF programme. There is clearly a lack
of coherence between HMG policy in this area and the policy of
the EU.
20. Furthermore, there is worry that there
are gaps in the implementation of this policy on the part of DfID.
The department has few economists with macroeconomic experience
on its staff. The decision on whether the macroeconomic environment
is conducive to efficient aid usage is made by country economists,
who are rarely experienced macroeconomists. Thus while the policy
written in London is clear, de facto country economists
may simply defer to the IMF's judgement in most cases without
a thorough independent assessment.
21. There is concern that IMF signals and
assessments are not being made on the correct basis. To determine
if aid should be provided, the overriding goals should be those
of the Paris Declaration preamble: "reducing poverty and
inequality, increasing growth, building capacity and accelerating
achievement of the MDGs." However the IMF's assessments are
based solely on their own definition of macroeconomic stability,
which has sometimes seemed to be at odds with the empirical evidence
on what macroeconomic conditions are necessary for growth and
poverty reduction.
22. IMF staff, generally with backgrounds
in macroeconomics, do not have expertise in addressing the many
obstacles to development faced by low-income countries and subsequently
most IMF programmes do not assess or monitor their impact on poverty
reduction or sustainable development. Additionally the IMF does
not have the expertise to make assessments of whether countries
are able to effectively use more aid, though their signals invariably
impact whether more aid is delivered.
23. The UK government has until now pursued
a bilateral approach that seeks to minimise conditionality on
aid, promoting ownership and alignment behind recipient country
priorities and strategies. However in the multilateral arena,
the government has done less to ensure adherence to the Paris
principles. At the IMF there has been insufficient effort by the
Treasury and its representatives to force the IMF to abide by
Paris principles, and no move to reconsider fundamentally the
IMF's role in aid effectiveness to eliminate it as an impediment
to the realisation of recipient country development objectives.
SOME IDEAS
FOR IMPROVED
AID EFFECTIVENESS
IN RELATION
TO THE
IMF
24. The IMF is not suited to being a donor
agency, as it does not have the expertise, the monitoring systems,
or lending practices to allow compliance with the Paris principles.
The concessional finance arm of the IMF, the PRGF, could be closed
to new applications and the resources in the PRGF Trust transferred
to another more suitable agency that can use those resources to
support recipient-country strategies in compliance with the Paris
Declaration.
25. The IMF should not be the signalling
agency that determines when more aid would be effective, as it
does not have expertise in this area. Macroeconomic assessments
on aid absorptive capacity that can be used by donors to determine
the effectiveness of the delivery of more aid need to be made
by an agency suited to this task, such as the UNDP, UNDESA or
UNCTAD.
26. Donors should de-link their aid from
the existence of IMF programmes. Donors that have already done
so, such as the UK, should work to convince other donors and multilateral
agencies to adopt the same practice. Donors are rightfully interested
to ensure that their aid is well-spent and effective for maximum
development impact. To strengthen recipient government ownership
of the aid process, the recipient governments need greater ownership
of the signalling and macroeconomic assessment process, which
is currently controlled by the IMF and donors.
27. One potential mechanism to achieve this
is to create a market for aid-related macroeconomic assessment.
The recipient country, using a pool of donor resources would bear
responsibility for contracting out the assessment process and
providing access to information and data to the assessing agency,
much as corporate auditing is done. The assessment would focus
on macroeconomic stability and aid absorptive capacity.
28. Instead of the monopoly on such assessments
currently held by the IMF, recipients would be free to choose
an assessor, which could come from the private sector, an international
financial institution, or another multilateral agency such as
the UNDP. Donors and recipients would agree to respect the results
of the independent assessment. This would enhance ownership and
should help to reduce volatility.
29. All technical assistance, including
IMF TA, should conform to the same principles and practices as
aid as outlined in the Paris Declaration. Funding to pay for TA
should be routed through country procurement systems. Recipient
countries should be free to choose which TA projects it wants
and who will undertake the project.
SPECIFIC QUESTIONS
FOR THE
COMMITTEE
— How will the UK government address
the contradiction within the leading donor governments who pursue
a scaling up of aid agenda on the one hand while supporting IMF
macroeconomic conditionality which forces spending restraint on
the other hand?
— How will the UK work to ensure coherence
between its policy on linking aid to IMF programmes and the policy
of multilateral institutions such as the European Commission and
the World Bank?
— Will the government instigate a process
to review how donors can de-link aid flows from the IMF's signals?
— Will the UK work to make the Paris
process include indicators to measure the impact of IMF economic
conditionalities on aid effectiveness and absorption or ensure
measurement of IMF compliance with Paris Declaration principles?
— Since "conditionality"
is a cross-cutting agenda item to be addressed by all Roundtable
discussions in Accra, will the government work to have the Paris
process invite the IMF to present justification for the restrictive
economic conditionalities, and propose a range of more flexible
options to enable the scaling up of aid and increasing public
spending to meet national development priorities?
— Will the UK commit to ensuring that
all technical assistance delivered by multilateral agencies of
which it is a member including the IMF abides by the Paris Declaration
principles?
February 2007
35 For a fuller discussion of the issues raised in
this submission please see a UK NGO joint policy briefing on this
topic: Reforming the role of the IMF in low-income countries,
Joint Policy briefing paper, Christian Aid, Save the Children
and Bretton Woods Project, October 2007, http://www.brettonwoodsproject.org/doc/wbimfroles/IMF_LICs_oct07.pdf. Back
36
See the OECD DAC website on monitoring aid effectiveness at http://www.oecd.org/dac/effectiveness/monitoring. Back
37
See "IMF board discusses operational implications of aid
inflows for IMF advice and program design", IMF, Public Information
Notice (PIN) No. 07/83, http://www.imf.org/external/np/sec/pn/2007/pn0783.htm.
For analysis and discussion of this decision see "Fund loosens
the aid noose . . . but just a little", Bretton Woods Project,
Bretton Woods Update 57, August 2007, http://www.brettonwoodsproject.org/art-555455. Back
38
For further discussion of the IEO report on IMF and aid to Sub-Saharan
Africa see "Evaluation finds that IMF misleads the public
about its role in Africa", Bretton Woods Project, Bretton
Woods Update 55, April 2007, http://www.brettonwoodsproject.org/art-552131. Back
39
The IMF and Aid to Sub-Saharan Africa, Independent Evaluation
Office, 2007. Back
40
For example a PRGF on a 10-year repayment cycle and five-and-a-half-year
grace period with a particularly specified discount rate yields
a grant element of 27 per cent. See Debt Relief International,
"The effectiveness of aid to Africa since the HIPC initiative:
issues, evidence and possible areas for action", August 2004,
http://www.hipccbp.org/files/en/open/Advocacy/DRIdocs/DFI_Aid_Effectiveness.pdf. Back
41
See "Volatility of Development Aid: From frying pan into
the fire?", Ales Bul-«r and A. Javier Hamann, IMF Working
Paper WP/06/65, June 2006, http://www.imf.org/external/pubs/ft/wp/2006/wp0665.pdf. Back
42
See "Debt relief and poverty reduction: Do we need an HIPC
III?", Matthew Martin, in Africa Report: Assessing the
New Partnership, Roy Culpepper ed, North-South Institute,
2003, http://www.nsi-ins.ca/english/pdf/africa_report/ch4_martin_e.pdf. Back
43
The primary exception is technical assistance to the financial
sector, which is often done in conjunction with the World Bank
and donors as part of the Financial Sector Reform and Strengthening
(FIRST) Initiative. See the FIRST website at
http://www.firstinitiative.org. Back
44
This was a recommendation of the expert committee, the so-called
Crockett Committee, which was commissioned to study the IMF's
finances. See "Putting the cart before the horse: Rightsizing
the IMF's budget", Bretton Woods Project, February 2007,
http://www.brettonwoodsproject.org/art-550974. Back
45
See the memos from the IMF managing director to the IMF board
and to IMF staff at http://www.ifiwatchnet.org/sites/ifiwatchnet.org/files/IMFbudgetcuts.pdf.
For discussion of these developments see "Staff in black:
IMF faces structural adjustment", Bretton Woods Project,
Bretton Woods Update 59, http://www.brettonwoodsproject.org/art-559960. Back
46
An IEO Evaluation of Structural Conditionality in IMF-Supported
Programs, Independent Evaluation Office, 2007. Back
47
See Blocking Progress: how the fight against HIV/AIDS is being
undermined by the World Bank and International Monetary Fund,
ActionAid International, 2004, http://www.actionaidusa.org/pdf/blockingprogress.pdf. Back
48
See "The Macroeconomic Framework & the Fight Against
HIV/AIDS in Africa", African Forum and Network on Debt and
Development, Policy Brief No. 3/2007, http://www.afrodad.org/downloads/HIV%20Policy%20Brief%202007.pdf.
The full case studies are available at
http://www.afrodad.org/downloads/publications/FINAL%20HIV%20Malawi.pdf
and
http://www.afrodad.org/downloads/publications/FINAL%20HIV%20Ghana.pdf. Back
49
See "From `Donorship' to Ownership? Moving towards PRSP Round
Two", Oxfam Briefing Paper 51, January 2004, www.oxfam.org.uk/resources/policy/debt_aid/downloads/bp51_prsp.pdf. Back
50
See "Old habits die hard: Aid and accountability in Sierra
Leone", Eurodad and Campaign for Good Governance, January
2008, http://www.eurodad.org/uploadedFiles/Whats_New/Reports/Old%20habits%20die%20hard.%20Aid%20and%20
accountability%20in%20Sierra%20Leone.pdf. Back
51
"Evaluation of General Budget Support: Synthesis Report,
A Joint Evaluation of General Budget Support, 1994-2004,"
By IDD and Associates (UK), May 2006,
http://www.oecd.org/dataoecd/42/38/36685401.pdf. Back
52
Partnerships for poverty reduction: rethinking conditionality,
UK policy paper, March 2005, para 5.35. Back
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