Enhancing the IMF’s focus on Growth and Poverty Reduction in Low-Income Countriess
by Matthew Martin and Richard Watts
Development Finance International
April 2012
EXECUTIVE SUMMARY
1. Background, Objectives and Methodology
In July 2009, the IMF changed its concessional financing for LICs, introducing the Poverty Reduction and Growth Trust (PRGT) which can lend via the Extended Credit Facility (ECF), the Standby Credit Facility (SCF) and the Rapid Credit Facility (RCF). These facilities were intended by the IMF to have “an enhanced focus on growth and poverty reduction”, and the Norwegian government provided financing to support the SCF and RCF windows.
A coalition of Norwegian NGOs commissioned this report from Development Finance International, to analyse whether the new facilities are living up to this objective, and allowing countries to move faster towards the Millennium Development Goals. They asked DFI to look particularly closely at impact on the health sector. The paper analyses all 37 PRGT agreements, and presents case studies of Honduras, Malawi and Sierra Leone, written by local experts closely involved in IMF-government discussions. As the new facilities began only in 2010, this assessment should be seen as preliminary.
The report makes clear that the IMF is not, and should not be, a long-term development lender. However, it has committed to enhancing its focus on growth and poverty reduction through the PRGT, and donors have provided concessional funding to the IMF to support the PRGT on this basis: the facilities should therefore be judged on whether they are achieving this goal. The report also makes clear that it is analysing trends resulting from IMF-government agreements, not ascribing “responsibility” to the IMF for all trends and their impact on MDG prospects.
2. Conclusions and Recommendations
Overall, the report concludes that there is only very limited evidence of an enhanced focus on growth and poverty reduction compared to the previous PRGF facility programmes. There have been some steps forward showing increased flexibility by the Fund, but most of these were introduced before the PRGT, and some look increasingly fragile. As a result, the report recommends 7 important steps to enhance the PRGT’s focus on poverty reduction and growth.
There is no evidence of a broader “enhanced focus on poverty reduction and growth” in the content of PRGT documents. They are broadly the same as PRGFs, and there continues to be little or no analysis of the likely poverty or distributional impact of programmes.
RECOMMENDATION 1: The Fund should produce an annual PRGT review report specifying exactly how programmes are accelerating poverty reduction and growth, how it is analysing and acting on the fundamental drivers of such acceleration, and how it is analysing the poverty and social impact of its macro and structural conditions. In addition, each programme document should analyse how it is accelerating growth, combating poverty/inequality, and assessing the poverty and social impact of the programme.
LICs have made only very limited use of SCF and RCF: they prefer the ECF because they need longer-term loans; and because the low-conditionality RCF provides only very limited resources which are woefully insufficient as a response to external shocks.
RECOMMENDATION 2: There should be early discussion of whether Norway should continue to limit its funds to RCF/SCF and if so, whether it should advocate a sharp increase in RCF loan sizes and a frontloading of SCF disbursements.
IMF programmes have long been criticised for excessively restrictive macroeconomic frameworks, seen as constraining MDG spending and growth/poverty reduction in order to reduce budget deficits and inflation. Global inflation shocks and the financial crisis seemed to be changing the IMF mindset, with a limited trend to higher spending and inflation targets in 2009 pre-PRGT programmes. However, the PRGT did not explicitly aim to make macroeconomic frameworks more flexible. In 2010-12, most IMF programme countries are cutting overall and health expenditure as a % of GDP, whereas most non-IMF programme countries are not. By the end of 2012, PRGT countries will have expenditure/GDP only 0.6% higher than in 2008 (compared to 2.3% for other LICs). However, this trend is not due to the PRGT. As explained by the IMF in its publications, it reflects a view that any counter-crisis stimulus should be temporary and followed by a focus on reducing deficits to ensure long-term fiscal sustainability; as well as a changing attitude of some major Board members which since 2009 have become sceptical about anti-crisis stimulus.
RECOMMENDATION 3: There should be a transparent debate between the IMF, LIC policymakers and civil society, at global and national level, on planned spending levels, with the aim of:
- Allowing deficit levels after grants to stay at up to 5% of GDP until the MDGs are reached, provided that grants or repayable levels of loans are available to fund such deficits;
- Demonstrating that spending is sufficient to allow accelerated growth and MDG progress;
- Showing that there is an adequate balance between investment and recurrent spending,(including wage/employment levels necessary to recruit and retain key anti-poverty workers).
- Explaining why any cuts are needed to avoid early unsustainable budget deficit or debt levels;
- Telling donors which MDGs will suffer without more aid, and encouraging higher flows;
- Enhancing efforts to increase tax revenues – through growth and economic diversification, as well asraising taxes on income and wealth; reducing tax avoidance through tax havens and transfer pricing; getting a fair share of taxes and royalties from large companies exploiting natural resources; and reducing tax preferences and exemptions given to investors.
In terms of inflation targets, IMF programmes set slightly higher inflation targets in the light of global food and fuel price spikes in 2007-08 and 2010.PRGT programmes seem to be slightly more flexible than their (pre-crisis) counterparts in 2003-07, by bringing inflation down more gradually and letting it stay at levels above 5%. However, this flexibility springs from the 2008 global food/fuel price increases: gradually (and not in all countries) the IMF has come to think that temporary global shocks should be treated more flexibly, and the focus should be on measuring “core” inflation excluding food and fuel shocks. However, as the impact of the shocks has persisted and especially where inflation goes above 10%, the IMF is increasingly recommending fiscal cuts to cut inflation.
RECOMMENDATION 4: The IMF should change its inflation targeting to keeping “core” (non-food/fuel) inflation at 8-10% levels during periods of exogenous shocks; target much more gradual inflation reduction (to 5-10% only over 3 years); rely much more on supply-side measures rather than fiscal tightening to achieve inflation targets; and provide more evidence to prove monetary and fiscal tightening can reduce inflation in a country before such measures are recommended. It should also encourage LIC central banks to target employment or other real sector variables as well as inflation, to ensure that they are not focusing excessively on inflation reduction.
As regards structural conditionalities, major reforms in these (dropping issues such as privatisation and trade liberalisation which were outside the IMF’s core mandate; and scaling back the use of ceilings or “caps” on wage spending) also predated the PRGT. However, wage caps have remained in 10% of PRGT programmes, where the IMF argues wage levels are so high that they are essential. In addition, the Fund still agrees wage forecasts with all countries, most of which plan reductions as a % of GDP, and 29% of programmes have “structural benchmarks” for measures which need to be taken to reduce the overall wage bill. It is unclear how MDG-related wage spending and employment levels are protected in these circumstances, and PRGT documents do not analyse this issue.
RECOMMENDATION 5: The IMF should analyse explicitly in all programme documents how anti-poverty expenditures will provide adequate funding for employment and wage levels needed to attain the MDGs, as well as proof that overall wage bill cuts (whether in ceilings or forecasts) and benchmarks will not lead to anti-poverty sector wage or employment cuts.
Minimum “poverty related” or “social” spending “floors” (in order to track and protect spending) were included in 35% of pre-PRGT programmes in 2008-10. They have been much more extensively used under the PRGT, in 70% of programmes. However,
- it is unclear why 30% of programmes still do not have a floor;
- 16% of countries with floors are not publishing data on floors or their performance;
- half of countries are not reaching their floors – and because they are only “indicative targets”, this has no impact on their programme reviews, and IMF documents do not analyse why.
- in 16% of countries, floors have been revised downwards in PRGT reviews, and it is not clear why this is happening or how it is compatible with the MDGs.
- the spending covered by the floors (and by structural benchmarks in a few countries) varies widely, in some countries including all health spending, and in others virtually none.
- floors only assess all social expenditure covered, making it impossible to analyse whether spending in individual sectors (such as health) is being protected.
RECOMMENDATION 6: The IMF should improve poverty reduction spending floors by:
- Adopting such floors in all PRGT programme countries
- Publishing standard and transparent data on floors and actual spending for all countries
- Analysing the floors (including any changes to targets) and country performance on attaining them in all programme review documents
- Enhancing efforts towards a more uniform definition of floors in programmes, and to monitoring a standard basket of anti-poverty spending across all low-income countries;
- Publishing more detailed data disaggregated by sector to facilitate analysis of country spending on the MDGs, and avoid spending cuts in some sectors to protect others.
Before the PRGT, the IMF introduced the practice of allowing some spending to be “adjusted” if donors provided more or less money than expected. The use of adjusters has not changed significantly since the PRGT, and it remains unclear why some countries still d not have them. However, the case studies show clearly that adjusters work most effectively where strong global pressure for free health care initiatives and improved health systems, has translated into strong national-level sector programmes with additional donor support. This has allowed large increases in health spending and improvements in MDG indicators, though there is evidence that cuts in other anti-poverty spending mean that heath is crowding out other MDGs, and that even the strongest programmes suffer “gaps” between phases, or suspensions of disbursements when countries go “off track” with IMF programmes, which lead to volatile aid and spending.
RECOMMENDATION 7: Donors and developing countries should expand sector-wide initiatives for free health care to a much wider range of countries, enhance similar initiatives in other MDG sectors (education, water and sanitation, agriculture and food security) to avoid health crowding out other MDGs, and ensure that new phases of programmes are prepared and funded more quickly. The IMF should use adjusters to absorb increased spending in all LIC programmes, and donors should detach all disbursement decisions (especially on sector but also on general budget support) more clearly from IMF programme reviews
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