Chapter

CHAPTER 5 Poverty Reduction and Debt Relief for Poor Countries

Author(s):
International Monetary Fund
Published Date:
September 2000
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The Committee urges all those with a stake in the HIPC Initiative to work for faster and effective implementation, and to give the HIPC process the highest priority so that as many countries as possible can reach the decision point by the end of the year. The Committee welcomes the progress made in developing-country-owned poverty reduction strategies as the framework for IMF and World Bank concessional lending and for linking debt relief under the enhanced HIPC Initiative to concrete poverty programs and growth strategies, so as to ensure that the resources freed are directed to key poverty reduction measures. The Committee urges all countries involved to move ahead as quickly as possible with the preparation of Poverty Reduction Strategy Papers in a participatory manner, integrating priority measures for poverty reduction and structural reforms within a growth-oriented macroeconomic framework.

–Communique of the International Monetary and Financial Committee, April 16, 2000

Over the past fifteen years, the IMF’s role in helping its poorest member countries achieve sustainable improvements in their balance of payments positions, economic stability, and living standards has increased considerably. Beginning with the Structural Adjustment Facility (SAF) in 1986 and then the Enhanced Structural Adjustment Facility (ESAF) in 1987, concessional assistance to poor countries has become a major feature of the IMF’s work.

This focus has also brought with it growing attention to the social impact of IMF-supported economic adjustment programs and to the broad range of requirements for economic development and poverty reduction, including trade policy reform.

But the persistence of poverty—and mounting public pressure—underscored that more had to be done. While the design of antipoverty programs remains the primary responsibility of member countries with the assistance of the World Bank and other development agencies, the IMF plays an important role, particularly in the areas of macroeconomic and financial sector policies. The IMF and World Bank are cooperating closely, and working with governments in individual countries, on a new approach that strengthens the links among poverty reduction, economic growth, and debt relief.

For the IMF, the centerpiece of the strategy is its concessional loan facility, the Poverty Reduction and Growth Facility (PRGF). In effect, the IMF transformed the ESAF into the PRGF to make poverty reduction a key element of a growth-oriented, country owned strategy by combining concessional lending from the IMF in support of appropriate macroeconomic policies with antipoverty assistance from the World Bank and other development agencies. The programs supported by the PRGF are framed around a comprehensive poverty reduction strategy developed by the authorities of the country in consultation with civil society and supported by the international community. Macroeconomic stabilization and external viability—central goals of IMF lending—are fundamental to the approach because they are essential to sustainable economic growth, the key to poverty reduction.

The PRGF is being combined with a stronger effort to bring debt relief to heavily indebted poor countries (HIPCs). During FY2000, the joint World Bank-IMF HIPC Initiative was enhanced to provide deeper, broader, and faster assistance to eligible countries that are following sound economic policies, to help them reduce their external debt burdens to sustainable levels in a way that promotes effective poverty reduction.

Notwithstanding the broad support for the enhanced HIPC Initiative, by the end of the financial year more remained to be done on the issue of financing for the Initiative: about 60 percent of contributions pledged by many industrial, developing, and transition member countries had either been received or were being contributed according to an agreed schedule. (See Chapter 6 for further information on financing the PRGF and the HIPC Initiative.)

To underline their support for strong coordination to implement the enhanced HIPC Initiative and Poverty Reduction Strategy Paper (PRSP) process, the IMF and World Bank announced the establishment of a Joint Implementation Committee as of May 1, 2000. The Joint Committee will oversee implementation of the enhanced HIPC Initiative and PRSP programs so as to ensure that both are carried out smoothly. The Committee, co-chaired by senior IMF and World Bank staff, will monitor progress in carried out both programs and coordinate the production of regular reports and briefings to the Executive Boards of the two institutions.

Debt Relief

The international community recognized, in the mid-1990s, that the external debt situation for a number of low-income countries, mostly in Africa, had become extremely difficult. Without comprehensive debt relief, most of these countries would remain indefinitely dependent on exceptional financing in the form of flow reschedulings of official bilateral debt, even with the continued provision of concessional financing and their pursuit of sound economic policies.

Launched in 1996, the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) marked the first time that multilateral, Paris Club, and other official bilateral and commercial creditors united in a joint effort to reduce the debt stock of the world’s most debt-distressed poor countries to sustainable levels. Central to the Initiative is the debtor country’s continued effort toward macroeconomic adjustment and structural and social policy reforms. The Initiative also seeks to ensure additional financing for social sector programs—including basic health and education.

Assistance under the HIPC Initiative is limited to countries eligible for PRGF and World Bank International Development Association (IDA) loans that have established strong track records of policy performance. This strong track record is intended to ensure that debt relief is put to effective use. Currently, of the 80 members of the IMF that are PRGF-eligible, as many as 37 might qualify for assistance under the enhanced HIPC Initiative (Table 5.1).

Table 5.1Expected Beneficiaries of the Enhanced HIPC Initiative1
Decision points reached

or expected by end-20002
Decision points expected

for 2001 or later
Benin3Burundi
Bolivia4Central African Republic
Burkina Fasos5Congo, Democratic Republic of the
CameroonCongo, Republic of
ChadEthiopia
Côte d’lvoire5Gambia, The
GuineaLiberia
Guinea-BissauMadagascar
Guyana%6Myanmar
HondurasNiger
MalawiSão Tomé and Príncipe
Mali5Sierra Leone
MauritaniaSomalia
Mozambique4Sudan
NicaraguaTogo
Rwanda
Senegal3
Tanzania
Uganda7
Zambia

Ghana and Lao P.D.R. have indicated that they do not intend to request assistance under the enhanced HIPC Initiative.

As of April 30, 2000, five countries had reached their decision points under the enhanced HIPC Initiative: Bolivia, Mauritania, Mozambique, Tanzania, and Uganda.

Countries not requiring assistance under the original HIPC Initiative, but eligible for reconsideration under the enhanced HIPC Initiative.

Countries that received assistance under the original HIPC Initiative (i.e., that reached the completion point) and have qualified for additional assistance under the enhanced Initiative.

Countries to which assistance had been committed under the original HIPC Initiative (i.e., that reached the decision point).

Guyana had already reached the completion point under the original HIPC Initiative.

Uganda has reached the completion point under the original and the enhanced HIPC Initiatives.

Ghana and Lao P.D.R. have indicated that they do not intend to request assistance under the enhanced HIPC Initiative.

As of April 30, 2000, five countries had reached their decision points under the enhanced HIPC Initiative: Bolivia, Mauritania, Mozambique, Tanzania, and Uganda.

Countries not requiring assistance under the original HIPC Initiative, but eligible for reconsideration under the enhanced HIPC Initiative.

Countries that received assistance under the original HIPC Initiative (i.e., that reached the completion point) and have qualified for additional assistance under the enhanced Initiative.

Countries to which assistance had been committed under the original HIPC Initiative (i.e., that reached the decision point).

Guyana had already reached the completion point under the original HIPC Initiative.

Uganda has reached the completion point under the original and the enhanced HIPC Initiatives.

Enhancing the HIPC Initiative

Under the original HIPC Initiative, a country seeking debt relief had to complete a two-stage qualification period that normally could run up to six years before disbursement of debt relief. During the first, three-year stage, the country had to work with the IMF and the World Bank to establish a track record of sound economic and social policies. The end of the three-year period triggered a “decision point,” when the IMF and the World Bank together with the debtor country reviewed the country’s debt burden to determine whether it was “unsustainable” (see Figure 5.1).

Figure 5.1Enhanced HIPC Initiative Flow Chart

1 Recognizing the need for flexibility in exceptional cases.

For most countries potentially eligible for debt relief under the original HIPC Initiative, debt generally was deemed “unsustainable” if it exceeded 200-250 percent of exports and if debt service exceeded 20-25 percent of exports.1 But in the case of a country with a large export sector, the debt sustainability thresholds could be lowered. To qualify for the lower thresholds under the original HIPC mechanism, a country had to have an export-to-GDP ratio of at least 40 percent and a fiscal-revenue-to-GDP ratio of at least 20 percent. Assuming these criteria were met, the debt-to-export target for the country was set at a level to achieve a 280 percent ratio of debt to fiscal revenue on arriving at the “completion point,” which was generally reached three years later.

The completion point also marked the point at which debt relief promised at the decision point was actually delivered. The period between decision and completion points under the original HIPC Initiative has been shortened to less than three years for countries with an extended track record of sound economic performance.

In response to calls for restructuring the HIPC Initiative to provide faster, broader, and deeper debt relief, the IMF and the World Bank reviewed the Initiative in early 1999, consulting with civil society organizations and public officials. In June 1999, the Group of Eight (G-8) at the Cologne Summit recommended relaxing the eligibility criteria to provide speedier and deeper debt relief to more countries.

In September 1999, the International Monetary and Financial Committee and the Development Committee endorsed—subject to the availability of funding—enhancements to the HIPC framework.

The enhanced HIPC Initiative seeks to provide deeper debt relief by lowering several of the mechanism’s qualifying thresholds:

  • Under the external window, the debt-to-export target is now 150 percent, down from 200-250 percent.
  • Under the fiscal window, the debt-to-fiscal-revenue target is now 250 percent, down from 280 percent; the exports-to-GDP ratio is now 30 percent, down from 40 percent; and the fiscal-revenue-to-GDP ratio is now 15 percent, down from 20 percent.

Moreover, the amount of debt relief determined at a country’s decision point is now based on actual data available at the decision point, rather than on projections for the country’s completion point.

The enhanced HIPC Initiative aims to deliver debt relief more quickly by introducing “floating” completion points not linked to a rigid timeframe, but rather focusing on a set of predefined reforms. In addition, under the enhanced Initiative, interim relief is provided between a country’s decision and completion points—as well as faster provision of relief as soon as the completion point is reached in many cases. The main aim is to free up more funds more rapidly to be reallocated to poverty reduction.

The pace at which countries have qualified for debt relief has been slower than hoped, primarily because of armed conflicts, political unrest, and delays in countries’ reform programs. IMF and World Bank staff are taking all steps to ensure speedy implementation; the Joint Implementation Committee seeks to smooth this process and to ensure that implementation receives the highest priority.

The enhancements to the HIPC Initiative framework also result in broadening debt relief by expanding the number of eligible countries. While up to 20 countries are expected to qualify for debt relief by the end of 2000 (see Table 5.1), timing depends on countries’ progress toward implementing IMF- and World Bank supported programs and developing nationally led poverty reduction strategies. (For the status of some country cases, see Table 5.2 and Box 5.1.)

Table 5.2HIPC Initiative: Status of Country Cases Considered Under the Initiative, May 2000
CountryDecision

Point
Completion

Point
NPV-of-

Debt-to-Export

Traget

(in percent)
Assistance Levels1

(in millions of U.S. dollars, present value)
Percentage

Reduction in NPV of Debt2
Estimated

Total Nominal

Debt-Service

Relief
Satisfactory

Assurances

from Other

Creditors
TotalBilateralMultilateralIMFWorld

Bank
Completion point reached under enhanced framework
Uganda1,0031838201605171,950
Original frameworkApr. 97Apr. 98202347732746916020650Received
Enhanced frameworkFeb. 00May 0015065611054691357371,300Being sought
Decision point reached under enhanced framework
Bolivia1,302425876841942,060
Original frameworkSep. 97Sep. 98225448157291295314760Received
Enhanced frameworkFeb. 00Floating15085426858555141301,300Being sought
MauritaniaFeb. 00Floating137362226136147100SO1,100Being sought
Mozambique1,9701,2357361414344,300
Original frameworkApr. 98Jun.992001,7161,076641121381633,700Received
Enhanced need frameworkApr. 00Floating1502541599516539600Being sought
TanzaniaApr. 00Floating1502,0261,0061,020120695543,000Being sought
Completion point reached under original framework
GuyanaDec. 97May 99107*25691165352724410Received
Decision point reached under original framework
Burkina FasoSep. 97Spring 002051152194104414200Being sought
Core d’lvoireMar. 98Mar. 0114133451631S2239164800Being sought
MaliSep. 98Spring 002001283790144410250Being sought
Total assistance provided/committed7,7673,4224,34463452,14614,070
Preliminary HIPC document issued6
Ethiopia20063622541122214231.300
Guinea15063825638337173341.150
Guinea-Bissau20030014815387373600
Honduras1373569208361188518900
Nicaragua1502,5071,4161,09132188665,000
No assistance required under original framework—to be reassessed under enhanced framework
BeninJuly. 97
SenegalApr. 98
Sources: IMF and World Bank Board decisions, completion point documents, decision point documents, preliminary HIPC documents, and staff calculations.

Assistance levels are at countries’ respective decision or completion points, as applicable.

In percent of the net present value of debt at the decision or completion point (as applicable), after the full use of traditional debt-relief mechanisms.

Eligible under fiscal criteria; figures provided show the ratios of debt-to-exports that correspond to the targeted debt-to-revenue ratio. For Guyana and Côte d’lvoire, a 280 percent NPV-of-debt-to-revenue ratio was targeted at the completion point; for Honduras and Mauritania, a 250 percent ratio was targeted at the decision point.

Nonreschedulable debt to non-Paris Club official bilateral creditors and the London Club, which was already subject to a highly concessional restructuring, is excluded from the NPV of debt at the completion point in the calculation of this ratio.

Equivalent to SDR 472 million at an SDR/US$ exchange rate of 0.744.

Figures are based on preliminary assessments at the time of the issuance of the preliminary HIPC document and are subject to change. Assistance levels for Ethiopia and Guinea-Bissau were based on the original framework and applied at the completion point; for Nicaragua, Guinea, and Honduras targets are based on the enhanced framework and assistance levels are at the decision points.

Sources: IMF and World Bank Board decisions, completion point documents, decision point documents, preliminary HIPC documents, and staff calculations.

Assistance levels are at countries’ respective decision or completion points, as applicable.

In percent of the net present value of debt at the decision or completion point (as applicable), after the full use of traditional debt-relief mechanisms.

Eligible under fiscal criteria; figures provided show the ratios of debt-to-exports that correspond to the targeted debt-to-revenue ratio. For Guyana and Côte d’lvoire, a 280 percent NPV-of-debt-to-revenue ratio was targeted at the completion point; for Honduras and Mauritania, a 250 percent ratio was targeted at the decision point.

Nonreschedulable debt to non-Paris Club official bilateral creditors and the London Club, which was already subject to a highly concessional restructuring, is excluded from the NPV of debt at the completion point in the calculation of this ratio.

Equivalent to SDR 472 million at an SDR/US$ exchange rate of 0.744.

Figures are based on preliminary assessments at the time of the issuance of the preliminary HIPC document and are subject to change. Assistance levels for Ethiopia and Guinea-Bissau were based on the original framework and applied at the completion point; for Nicaragua, Guinea, and Honduras targets are based on the enhanced framework and assistance levels are at the decision points.

In its discussions on the HIPC enhancement, the Executive Board emphasized retaining the basic elements that guided the original HIPC Initiative—including participation by all creditors—and maintaining the financial integrity of multilateral institutions and support for strong policies of adjustment and reform. Directors also stressed that the financing of the enhanced framework had to be secured before it could be implemented.

Linking Debt Relief and Poverty Reduction: The Poverty Reduction Strategy Paper

At the September 1999 Annual Meetings, the Interim Committee (now the International Monetary and Financial Committee) and the Development Committee sought to strengthen the link between debt relief and poverty reduction by making HIPC debt relief an integral part of broader efforts to implement result soriented poverty reduction strategies. The new approach was the focus of intensive work by the IMF and World Bank staffs, as well as of formal and informal Board discussions during the fall of 1999.

The Committees endorsed the adoption of the Poverty Reduction Strategy Paper (PRSP)2 as the central mechanism for developing and coordinating concessional lending to poor member countries under the Poverty Reduction and Growth Facility and International Development Association—including the commitment of resources under the enhanced HIPC Initiative.

The PRSP is formulated by the country with the participation of stakeholders, including central and local government, civil society, donors, and international organizations. It describes and diagnoses the causes of poverty in a country and outlines a medium term action plan to reduce poverty based on explicit antipoverty measures, as well as faster and more inclusive economic growth. The PRSP is intended to provide a framework for concessional assistance from the IMF and the Bank, and it is hoped that bilateral donors and other multilateral financial institutions will link their support to this strategy.

Box 5.1Country Cases Under the Initiative for Heavily Indebted Poor Countries

During FY2000, five countries1 reached their decision points under the enhanced HIPC framework—Bolivia, Mauritania, Mozambique, Tanzania, and Uganda—with total commitments estimated at $12.6 billion. This represented an average stock-of-debt reduction of more than 50 percent on top of traditional debt relief mechanisms. Earlier in the year, Guyana and Mozambique had reached the completion point under the original Initiative.

Bolivia

Bolivia is the first country in Latin America to be declared eligible for debt relief under the enhanced HIPC Initiative. Under the enhanced Initiative, the debt relief to Bolivia will amount to $854 million in net present value terms. This amount is in addition to the $448 million relief committed under the original Initiative. Over the past decade, Bolivia has experienced a dramatic improvement in its macroeconomic performance. Inflation fell from hyperinflationary rates in 1985 to just 3.1 percent in 1999; official international reserves and foreign direct investment have increased significantly; and the external debt burden—while still high—has eased significantly. Although annual growth has increased from virtual stagnation in the previous decade to an average of about 4 percent in real terms during the 1990s, it remains below potential, and about 70 percent of Bolivia’s population still lives in poverty.

Guyana

On reaching the completion point under the original Initiative in May 1999, Guyana received $410 million in debt-service relief ($256 million in net present value terms). Agreement on the economic and social framework to be supported by the enhanced Initiative is expected to be reached in the second half of 2000.

During the mid-1990s, Guyana reduced financial imbalances substantially while implementing major structural reforms aimed at increasing efficiency through market-oriented policies. Real GDP growth increased to an average annual rate of 7 percent and inflation fell to 3½ percent from more than 100 percent. In 1998, the economic program went off track, in part because of sizable public sector wage increases. The government’s firm resolve to implement the programmed wage policy in 1999 prompted a two month strike by civil service unions, which led to a binding arbitration tribunal award of large wage increases for 1999 and 2000. The authorities contained other expenditures to reduce the overall public sector deficit in 1999 and made substantial progress in implementing the structural reforms (particularly privatization) envisaged in the 1999 program. The authorities remain committed to reducing poverty and achieving sustainable growth over the medium term. To this end, they are discussing with IMF staff a revised medium-term economic program that could be supported by the second arrangement under the Poverty Reduction and Growth Facility.

Mauritania

On reaching the decision point under the enhanced HIPC Initiative in February 2000, Mauritania qualified for $1.2 billion in debt relief ($622 million in net present value terms).

Mauritania has established a good track record of adjustment and reform on the macroeconomic, social, and political fronts. It has implemented substantial structural reforms and achieved fiscal consolidation. Reflecting this effort, GDP has grown by an annual average of close to 5 percent since 1992, with significant improvement in social indicators. Still, 50 percent of the population lives in poverty.

Mozambique

In April 2000, Mozambique qualified for total relief under the enhanced HIPC framework equal to $600 million ($254 million in net present value terms). This amount was in addition to the $3.7 billion relief committed under the original HIPC Initiative.

Mozambique has made substantial progress in implementing economic reforms. During the previous four years, average annual inflation fell to 2 percent from about 47 percent, while real GDP grew by almost 10 percent a year on average. Mozambique has also made a strong structural adjustment effort in recent years, including in the areas of fiscal management, governance and public administration, and private sector development. While 68 percent of the population was still living in poverty in 1996–97, substantial improvements in social indicators have been recorded during the 1990s, most notably in rising school enrollment and a falling infant mortality rate. Household food security has also improved.

In response to the emergency brought on by the extensive floods in the first quarter of 2000, both the World Bank and the IMF decided to rephase the delivery of debt relief; as a result, Mozambique’s debt service to the IMF will be zero for the next 12 months.

Tanzania

In April 2000, Tanzania reached the decision point under the enhanced Initiative, qualifying for more than $2 billion in total relief (in net present value terms), reflecting Tanzania’s progress in macroeconomic stabilization and growth-oriented structural reform. During the past four years, inflation has come down to less than 7 percent, after exceeding 20 percent for many years, and the government has been repaying domestic debt, after many years of borrowing more than 3 percent of GDP annually. Tanzania has also made a strong structural adjustment effort in recent years, including far-reaching reforms in the external, financial, and public sectors. Poverty remains widespread, however, and the authorities are placing increasing emphasis on poverty reduction policies.

Uganda

In February 2000, Uganda reached the decision point under the enhanced HIPC Initiative qualifying for debt relief worth $656 million in net present value terms. This latest debt relief agreement for Uganda was in addition to $347 million in net present value terms of relief provided in April 1998 under the original HIPC Initiative. In early May 2000, the IMF and the World Bank Boards broadly endorsed Uganda’s Poverty Reduction Strategy Paper (PRSP), enabling the country to reach the completion point under the enhanced HIPC Initiative.

Uganda’s eligibility for debt relief under the enhanced HIPC Initiative acknowledges the effectiveness of Uganda’s poverty reduction strategy to date, the application of resources from debt relief under the original HIPC framework to its poverty reduction programs, the highly participatory process involving civil society in the formulation of the poverty reduction strategy, and the government’s continued commitment to macroeconomic stability.

In preparing poverty reduction strategies for its PRSP, Uganda was able to build on a considerable “base” in the form of a preexisting national plan for poverty alleviation: the Poverty Eradication Action Plan (PEAP), which had been launched in 1997 with the central goal of reducing poverty to 10 percent or less by 2017.

While Uganda remains one of the poorest countries in the world, analytic work supported by the World Bank indicates that poverty was reduced to 44 percent in 1996/97 from 56 percent in 1992/93, led by strong economic growth. The country’s various welfare indicators have also improved substantially, most notably in primary education, where the net primary enrollment rate rose to 94 percent in 1998/99 from 56 percent in 1995/96.

The full text of news releases and HIPC progress reports are available on the IMF’s website. In particular see The Heavily Indebted Poor Countries Initiative and Poverty Reduction Strategy Paper: Progress Reports, submitted on April 14, 2000, by the IMF and World Bank staffs to members of the International Monetary and Financial Committee and Development Committee.

1Up to 20 countries in all are expected to qualify for debt relief by the end of calendar year 2000 (see Table 5.1).

Under the PRSP process, key macroeconomic policies—including targets for growth and inflation, and the thrust of fiscal, monetary, and external policies, as well as structural policies to accelerate growth—will need to reflect the priorities identified in the participatory process. Key social and sectoral programs and structural reforms aimed at poverty reduction and growth also are to be identified and prioritized during the participatory PRSP process, and their budgetary impact costed, taking into account the need for efficient, well-targeted spending. The bottom-up approach to costing is to be reflected in the design of the macroeconomic framework, including the level and composition of government expenditures, and the fiscal and external deficits. In this, the authorities need to take into account effects on domestic demand, implementation capacity, and the need to maintain an adequate level of international reserves. They need to ensure that spending programs can be financed in a sustainable, noninflationary manner.

The new approach also places additional emphasis on improvements in governance as a fundamental underpinning for macroeconomic stability, sustainable growth, and poverty reduction. The primary focus is on improving the management of public resources, achieving greater transparency, active public scrutiny, and generally increased government accountability in fiscal management.

The new approach requires closer World Bank-IMF collaboration in assisting low-income members. At the same time, there is a sharp division of labor between the Bank and IMF in supporting preparation of PRSPs. The IMF’s role will be that of seeking to ensure that countries’ social and sectoral programs aimed at poverty reduction can be accommodated and sustainably financed within a supportive, growth-enhancing, low-inflation, macroeconomic and budgetary framework. The World Bank—along with the regional development banks and UN agencies—will take the lead in discussions with national authorities, civil society, and the poor themselves on how poverty reduction policies should be designed, and in lending in support of those policies. In reviewing a country’s PRSP, the Bank and IMF Boards will consider and broadly endorse the overall strategy as an integrated whole; each institution will focus on those policies and programs in its area of responsibility.

Operational Issues

At a December 1999 meeting to discuss PRGF operational issues, IMF Executive Directors stressed that poverty reduction strategies must be country-driven, developed and monitored with broad participation, and tailored to country circumstances, as such strategies were more likely to enjoy broad public ownership and result in effective and sustained policy implementation. These strategies should build on work already under way on poverty eradication in these countries and should be developed from an understanding of the nature and determinants of poverty and the links between public actions and poverty outcomes. Well designed strategies to achieve quantified medium- and long-term goals for poverty reduction—including key outcome and intermediate indicators—are necessary to ensure that policies are effectively carried out and monitored. Development of a poverty reduction strategy is also important in coordinating the work of the World Bank and the IMF, as well as that of regional development banks and other multilateral institutions, bilateral donors, and private sector organizations. The resulting strategy, Directors agreed, should integrate institutional, structural, and sectoral policies into a coherent macroeconomic framework.

The Board also strongly agreed that there could be no rigid blueprint for the PRSP process. Rather, PRSPs must reflect individual country circumstances. They should, however, emphasize consistency between macroeconomic policy and effective poverty reduction measures, and provide for sound use of additional resources released through debt relief. The process for developing and monitoring the PRSP is a participatory one, and Directors recognized that it would vary according to country circumstances and that governments would face challenges in developing these processes. Directors urged governments to ensure that the views of the poor were adequately represented, recognizing that this was an enormous challenge, both in terms of human and financial resources. The international community needs to support governments’ efforts to develop participatory processes.

Directors stressed the value of informal country specific briefings while the PRSP was being developed. This would help Directors formulate views on the emerging strategy, and would be particularly useful when the member-country-led process appeared to be generating policy options that might not have the support of the staff members or the Boards of the World Bank and IMF. Such briefings could also inform Directors of the nature of the participatory process. Directors generally agreed that the PRSP should be published by the country authorities prior to Board discussion to enhance the participatory process.

Avoiding Delays in Implementation: Interim PRSPs

The development of a PRSP with broad participation is likely to take time—as long as one to two years—depending on individual country circumstances. Thus, Directors saw an unavoidable tension, on the one hand, between PRSPs prepared with the participation of a broad spectrum of stakeholders and, on the other hand, the need to avoid delays in bringing as many countries as possible to their HIPC decision points within a timeframe appropriate to their need for debt relief, or in providing needed assistance through the IMF’s Poverty Reduction and Growth Facility or the Bank’s International Development Association. To address this problem, the Boards of the Bank and the IMF have agreed that countries may, for a transition period, prepare “Interim” PRSPs. The Interim PRSP covers many of the same basic elements as a full fledged PRSP, but it focuses mainly on where the country is at present and the steps it expects to take to complete a full PRSP.

As with full-fledged PRSPs, there is no single prescription for Interim PRSPs. At a minimum, they should include a statement by the government of its commitment to poverty reduction; a description of the main elements of its poverty reduction strategy consistent with available diagnostics; and a three-year macroeconomic framework and policy matrix, both focusing on poverty reduction and specifically noting that outer year commitments and targets are tentative and subject to revision as necessary in the full PRSP. Interim PRSPs should also contain a timeline and a description of the participatory process the government plans to adopt in preparing its full PRSP. While a broad participatory process is not a requirement for interim PRSPs, many are expected to involve at least some participation.

Experience with the Interim PRSPs for Bolivia, Mozambique, and Tanzania—considered by the IMF and World Bank Boards in FY2000–indicates that countries are addressing key proposed program elements.

  • As to poverty diagnostics, while the quality of data has varied, all the countries concerned have been able to provide poverty estimates that give a concrete sense of the size of the problems countries face, both absolutely and in terms of meeting International Development Goals by 2015 (Box 5.2). In Bolivia, for example, 70 percent of households are estimated to live below the national poverty line. In Tanzania, this proportion is about 50 percent, while in Mozambique it is about 68 percent.
  • Countries have also provided quantified long-term goals by 2010 for poverty reduction. In Bolivia, the goal is to reduce poverty to 45 percent of the urban population from 55 percent, and to 68 percent of the rural population from 80 percent; in Mozambique, the aim is to cut poverty to about 60 percent by 2004, and to about 50 percent by 2009.
  • All countries have identified key structural areas for reforms that are focused on poverty reduction; not surprisingly, there has been a high degree of commonality, with measures to promote sustainable economic growth and social sector improvements (education and health) generally prominent, including institutional reform, infrastructure, and agriculture; several countries have also identified improvements in the business environment, especially for small and medium-sized enterprises.
  • As to macroeconomic developments, countries in the group are targeting rapid GDP growth based on strong macroeconomic policies over the proposed three-year time horizon.
  • Finally, all country documentation has provided information on how to incorporate participatory processes into the program, building on existing arrangements and, in several cases, proposing well defined and time bound expansion of the process (Bolivia and Tanzania).

Most Interim PRSPs are expected to benefit from consultative processes. Bolivia has been able to benefit from the existence of a National Dialogue since 1997, which produced a document on “Proposals Against Poverty” as early as September 1998. Ghana and Honduras, among others, serve as examples of draft Interim PRSP preparation in close consultation with civil society and the donor community. Nicaragua plans to undertake similar consultations with civil society as part of its Interim PRSP preparation.

While reaffirming that, in principle, countries seeking relief under the enhanced HIPC Initiative should have a PRSP in place at the decision point, Directors noted that this could unduly delay assistance for early cases. In these early cases, Directors agreed that a decision point could be reached with an Interim PRSP in place. In general, however, countries should have adopted a participatory full-fledged PRSP and completed at least one year of satisfactory implementation, as evidenced in the government’s PRSP progress report, by the completion point.

Recognizing that this latter requirement could delay the provision of enhanced assistance under the HIPC Initiative to those countries that have already reached decision points, Directors agreed that some flexibility in the timing of debt relief was required in these cases.

Poverty Reduction and Growth Facility

In September 1999, the Interim Committee endorsed the transformation of the IMF’s concessional lending facility—the Enhanced Structural Adjustment Facility (ESAF)—into the Poverty Reduction and Growth Facility. The name of the facility was officially changed in November, and in December, Directors supported the thrust of the proposed policies and procedures for implementing the PRGF and for linking programs supported under the facility to the PRSP. They asked IMF staff to begin implementation quickly, recognizing that it would involve considerable experimentation and innovation. At the end of FY2000, 80 low-income member countries were eligible for assistance (Table 5.3).

Table 5.3Countries Eligible for the Poverty Reduction and Growth Facility, as of April 30, 20001
AfghanistanKyrgyz Republic
AlbaniaLao P.D.R.
AngolaLesotho
ArmeniaLiberia
AzerbaijanMacedonia, FVR
BangladeshMadagascar
BeninMalawi
BhutanMaldives
BoliviaMali
Bosnia and HerzegovinaMauritania
Burkina FasoMoldova
BurundiMongolia
CambodiaMozambique
CameroonMyanmar
cape VerdeNepal
Central African RepublicNicaragua
ChadNiger
China, People’s Republic of2Nigeria
ComorosPakistan
Congo, Democratic RepublicRwanda
of theSt. Lucia
Congo, Republic ofSt. Vincent and the Grenadines
Côte d’lvoireSamoa
DjiboutiSaã Tomé and Príncipe
DominicaSenegal
EgyptSierra Leone
Equatorial GuineaSolomon Islands
EritreaSomalia
EthiopiaSri Lanka
Gambia, TheSudan
GeorgiaTajikistan
GhanaTanzania
GrenadaTogo
GuineaTonga
Guinea-BissauUganda
GuyanaVanuatu
HaitiVietnam
HondurasYemen, Republic of
IndiaZambia
KenyaZimbabwe
Kiribati

The Poverty Reduction and Growth Facility (PRGF) replaced the Enhanced Structural Adjustment Facility (ESAF) effective November 22, 1999.

China has indicated that it does not intend to use ESAF (now PRGF) resources.

The Poverty Reduction and Growth Facility (PRGF) replaced the Enhanced Structural Adjustment Facility (ESAF) effective November 22, 1999.

China has indicated that it does not intend to use ESAF (now PRGF) resources.

The PRGF and Poverty Reduction Strategies. Regarding the framework linking the PRGF and the poverty reduction papers, Directors emphasized that IMF arrangements under the PRGF must support and be consistent with the country’s poverty reduction strategy. That strategy would be country-owned, with the World Bank taking the lead—between the Bank and the IMF—in helping the country formulate the antipoverty strategy and in lending to support it. A current poverty reduction paper that had been broadly endorsed by the Boards of the World Bank and IMF would be a condition for IMF approval of a PRGF arrangement, or for completion of a review there under. Such a framework would ensure that IMF resources support a comprehensive poverty reduction strategy.

Box 5.2Development Goals for 2015

The 1990s saw a series of world conferences organized by the United Nations on international development goals. Based on agreements at these meetings on the steps needed to reduce poverty and achieve sustainable development, seven goals have been proposed, most to be reached by 2015.

Economic well-being

  • Reduce extreme poverty by half relative to 1990 levels.

Social development

  • Ensure universal primary education.
  • Eliminate gender disparity in education (2005).
  • Reduce infant and child mortality by two-thirds relative to 1990 levels.
  • Reduce maternal mortality by three-fourths relative to 1990 levels.

Environmental sustainability and regeneration

  • Implement a national strategy for sustainable development in every country by 2005, so as to:
  • Reverse trends in the loss of environmental resources by 2015.

Timing. Directors generally agreed that discussion of poverty reduction papers could take place at the same time as a PRGF discussion, and at the time of requests for new three-year PRGF arrangements or yearly reviews. They also generally agreed that a prerequisite for a new PRGF arrangement, or completion of a review, would be endorsement of a PRSP or progress report by both IMF and World Bank Boards within the preceding 12 months.

Midyear reviews under the PRGF would normally take place without a simultaneous discussion of a PRSP or progress report. In such situations, Directors agreed that management would recommend Board action only if it felt that implementation of the poverty reduction strategy remained satisfactory, or sufficient corrective measures had been taken to put it back on track. IMF staff and management would continue to assess the progress in macroeconomic and structural areas within the IMF’s mandate. For social policies, most poverty reducing measures, and other structural policies that fall within the World Bank’s primary mandate, the IMF staff should ascertain whether the Bank staff had any major outstanding concerns about the adequacy of implementation before IMF management determined whether to recommend Board approval of disbursements under the PRGF arrangement. Directors welcomed the proposal that IMF staff reports would record the views of Bank staff regarding implementation of the poverty reduction strategy in areas within their mandate.

In cases where Board consideration of a poverty reduction paper (or progress report) and a PRGF arrangement (or a review) do not coincide, the PRGF documents should assess whether unexpected developments had affected the relevance of the latest paper. Any proposed departure from the poverty reduction strategy framework in the PRGF-supported program would have to be identified, agreed with the relevant country authorities and Bank staff, and reconciled in the PRSP when the PRSP was next prepared.

Reducing Overlapping Conditionality. Taking note of the new framework for very close cooperation and communication with the World Bank, Directors welcomed the proposals to reduce overlapping conditionality. They agreed that, for policies identified in the PRSP, the staffs of the Bank and the IMF would decide jointly—on the basis of established guidelines for their collaboration in assisting member countries—in which areas the Bank or the IMF would take primary responsibility for supporting the government’s policy formulation and for monitoring or, where appropriate, liaising with other interested development partners. On the basis of this division of responsibilities, there would be a presumption that PRGF letters of intent and policy memoranda would cover and reach understandings only in those areas where the IMF was primarily responsible (and in these areas conditionality would be used sparingly). Thus, conditionality in areas within the primary mandate of the Bank will be the responsibility of the Bank, except where a condition is judged to have such a direct, critical macroeconomic impact that the PRGF-supported program would be derailed if the measure were not implemented. Directors generally considered it appropriate that the IMF rely on the Bank to monitor implementation of structural reforms consistent with the PRSP in the Bank’s areas of expertise, and welcomed the sharpening of the lines of institutional responsibility and accountability. They emphasized that the IMF staff should not be expected to—and should not—offer assistance in areas that are primarily the responsibility of the Bank.

The macroeconomic conditions in PRGF arrangements would derive from the framework elaborated in the Poverty Reduction Paper, Directors agreed. Structural conditionality in IMF programs would be drawn from, or elaborate on, the structural measures identified in the paper, and would cover only those areas identified as being within the IMF’s area of responsibility, except as noted above.

Transitional Arrangements. During the transitional period needed for countries to prepare their first PRSP under a participatory process, Directors agreed that an Interim PRSP would underpin new PRGF arrangements or new yearly programs under the PRGF (see discussion above).

Review. The PRGF would be reviewed by the end of 2001, in conjunction with a general review of the PRSP approach. These reviews would include contributions from member countries, international institutions, other aid providers, and civil society.

Social Issues and Policies in IMF-Supported Programs

In September 1999 discussions, Executive Directors underscored the importance of economic growth for poverty alleviation, but recognized that the IMF had to be sensitive to the social implications of its policy advice. In particular, Directors noted that:

  • IMF-supported programs had tried to help members address the potentially harmful impact on vulnerable groups of their adjustment and reform efforts as well as external shocks;
  • such efforts in turn could make a vital contribution toward sustaining economic reforms and protecting living standards;
  • sound macroeconomic policies, coupled with effective social and infrastructure spending, foster faster long-term growth; and
  • social safety nets and appropriately targeted, productive public spending, particularly in the social area, could thus provide critical support for the success of members’ adjustment and reform programs.

Directors discussed broader requirements for raising living standards, including faster growth and employment creation and better integrating poorer countries into the international economy. They suggested that the international community should work to improve the access of these countries to industrial country markets and to halt the excessive flow of weapons to developing countries. Directors also emphasized the importance of good governance, transparency, and accountability for ensuring the effective use of public resources.

In discussing the IMF’s role with regard to social policies, the Board saw the need for mutually reinforcing macroeconomic and social policies. Directors emphasized the importance of closer integration, with the help of the World Bank, of social issues and poverty concerns into IMF-supported programs. Greater attention to social issues was necessary in the context of low income countries, including Heavily Indebted Poor Countries, where structural reforms were particularly critical.

The Board underlined that the World Bank and other relevant international organizations had the primary mandate and expertise with regard to social issues. The social components of countries’ IMFsupported programs should thus rely on the work of these institutions.

Trade, Development, and Poverty Reduction

Trade reform, broadly conceived, goes far beyond reducing border restrictions and plays a critical role in supporting growth and poverty reduction. The World Bank and the IMF both see trade policy reform as an important element of a more comprehensive framework for economic development and poverty reduction.

At its September 1999 meeting, the Development Committee called on the World Bank, the IMF, and the World Trade Organization (WTO) to cooperate with other parties in supporting enhanced trade performance and capacity building, especially with respect to the least-developed countries. In a follow-up report for the April 2000 meeting of the World Bank-IMF Development Committee, staff indicated that while the percentage of the world’s population living on less than $1 a day has fallen in recent years, the absolute number of people living in dire poverty in 1998 remained at nearly 1.2 billion. Taking a higher cut off point of $2 a day, the total number of poor was an estimated 2.8 billion in 1998–nearly half the world’s population.

Although these numbers conceal wide regional variations, projections for the coming decade are not encouraging. World Bank estimates suggest that under a “business as usual” scenario of continued relatively slow growth and intermittent crises, the number of people living on less than $1 a day would remain roughly constant, at about 1.2 billion, through 2008. Under a brighter scenario of steady, more rapid growth, the total would fall to about 700 million. Nonetheless, two regions—Latin America and the Caribbean and sub- Saharan Africa—would see little change; in fact, in sub- Saharan Africa, where the bulk of least-developed countries are concentrated, projections are for an increase of nearly 40 million, or about 14 percent. Can trade expansion help change the picture?

Trade, Growth, and the Speed of Integration

Economic growth alone cannot guarantee substantial and sustained reductions in poverty and inequality, but accelerated growth is necessary to make continuing progress in reducing poverty. A large body of empirical literature has suggested that more open economies tend to grow faster than closed ones. But available evidence suggests that many of the poorest developing countries have not as yet been able to integrate successfully into global markets, and, hence, to participate in the growth-inducing (and potentially poverty reducing) benefits of trade.

Priority Areas for Trade Reform

If economic growth is integral to poverty reduction, and if trade opening supports growth, then further trade reform is clearly a priority. Developing countries need to implement appropriately sequenced, outward oriented reforms that will allow trade expansion to help promote development and poverty reduction. Developed countries also have much to do to improve market access for developing countries’ exports. And the global trading system as a whole needs to be more inclusive. A quick examination of recent patterns in world trade suggests some priority areas for further reform.

Global trade expansion has far outstripped global GDP growth for many years. During the past decade, world trade grew at an annual average rate of 6.3 percent, compared with world output growth of 3.0 percent. Developing countries as a group have played a major role in this process, including by substantially, and often unilaterally, liberalizing their trade regimes. They now account for almost 20 percent of total goods exports and some 16 percent of services exports. Taking all developing countries as a group, manufacturing exports have increasingly dominated, now accounting for more than 70 percent of their total exports. Meanwhile, South-South trade has been growing from about 20 percent of developing countries’ total merchandise exports in the 1960s to more than 40 percent at the end of the 1990s. Developing countries have also tended in recent years to come together in regional groupings that liberalize intraregional trade and investment.

These groupings offer the promise of larger and more integrated markets, with the prospect of achieving increased returns to scale and greater foreign direct investment, and other dynamic benefits. Cuts in interregional tariffs, however, must be accompanied by lower external tariffs, if welfare-reducing trade diversion is to be avoided.

The recent improvements in some developing countries’ trade participation have taken place against the background of high, albeit declining, barriers to their export diversification, in both developed and in other developing countries. While average tariff rates in developed countries against developing countries’ manufactured exports are now relatively low (about 4 percent), they mask tariff peaks and escalation on products in which developing countries have a comparative advantage. Developing countries’ tariffs against other developing countries’ manufactures are higher—averaging nearly 13 percent.

For agricultural products, the situation is substantially worse. Industrial countries impose tariffs on developing countries’ agricultural exports exceeding 15 percent, on average. Developing countries’ tariffs against other developing countries’ agricultural exports are even higher—over 18 percent. In addition, developing country exports are frequently subject to nontariff barriers, such as restrictive quotas (for example, bananas); as well as to antidumping and other forms of contingent protection; and to competition from subsidized agricultural production. High trade barriers to agricultural exports clearly have not helped poor developing countries become increasingly integrated in world trade. Moreover, the least-developed countries, as well as the Heavily Indebted Poor Countries (HIPCs), depend disproportionately on agriculture for both national income and exports.

The past decade has been characterized by marked progress in trade liberalization around the world, including developing countries, and most notably, developing countries that are potentially eligible for International Development Association (IDA) and Poverty Reduction and Growth Facility assistance—many of which have substantially reduced tariffs and nontariff barriers. The data nevertheless suggest considerable scope for further liberalization by developing countries, especially the poorest. In addition, substantial new efforts by the international community to enhance the market access opportunities of poorer developing countries would be valuable. Agricultural liberalization is a prime candidate. Moreover, agricultural trade liberalization would actually create larger benefits in aggregate for industrial countries than for developing countries, through more efficient resource allocation, reduced budgetary costs, and enhanced consumer welfare. Quantitative analysis suggests that complete liberalization of global agricultural trade could yield benefits to developing countries of over $40 billion annually.

Further liberalization of trade in manufactures is also important because of their greatly increased weight in the exports of many (predominantly middle-income) developing countries, and because export diversification provides opportunities for the poorest countries to reduce their vulnerability to commodity price shocks. Within manufactures, textiles and clothing are of special significance, because they represent an area of comparative advantage for developing countries, are subject to many tariff peaks, and are seriously constrained by quotas. Industrial countries could abolish these quotas to the benefit of their own economies, and to the export opportunities of developing countries.

Special efforts may also be warranted to help the poorest developing countries. The current systems of trade preferences operated under the former Lomé Conventions3 and the Generalized System of Preferences (GSP) have benefited mainly the higher-income developing countries.4 Moreover, the benefits of many of these schemes to the poorest countries have been diminished by the exclusion of a number of so-called sensitive products, chiefly in the areas of agriculture, textiles, and footwear—the very areas in which many poor countries have the greatest potential to expand and diversify their exports. In addition, the schemes are complex and nontransparent, and the preferences can be withdrawn unilaterally in case, for example, imports from any country increase significantly. To be more effective, new market access initiatives for qualifying poor countries should be comprehensive, predictable, simple, and transparent.

The Director-General of the World Trade Organization has advocated granting duty-free and quota-free access for exports from least-developed countries, and members of the organization have been considering various proposals to this end. In the same vein, the President of the World Bank and the former Managing Director of the IMF have called upon members of the World Trade Organization to approve an initiative that covers all exports from least-developed countries and HIPCs as part of a coherent approach that would also include a reversal of the declining trend in foreign aid flows to these countries. This approach recognizes the critical importance of complementarity between debt relief and enhanced market access.

Supporting Trade Reform and Poverty Reduction

As noted above, economic growth, while essential, is not always sufficient for sustained poverty reduction. Equally, trade liberalization alone cannot guarantee economic growth. A strategy for trade expansion needs to embrace a far broader set of country-level initiatives, framed within an appropriate macroeconomic environment (including fiscal responses to change in tariffs) and a comprehensive approach to development goals and poverty reduction strategies. Specifically, attention needs to be paid to investments in the necessary infrastructure and human capital development that enhance the payoff to developing countries from trade liberalization. Supportive institutional reform efforts and improvements in the legal environment that increase investor confidence are also critical. Countries are likely to need substantial help from their development partners in undertaking these complementary efforts and investments.

In addition, the social dimension must be addressed. Countries need to have in place social programs including safety nets, retraining, and other transitional arrangements to offset the adjustment costs of freeing trade for those who may initially suffer as a result of moves toward liberalization. Increasingly, World Bank and IMF assistance strategies for a number of economies have supported liberalization efforts with measures to strengthen social safety nets.

The Poverty Reduction Strategy Paper will influence the formulation and implementation of trade reform in at least three ways. First, transitory adverse consequences that planned trade reforms may have on poor groups in the country will be made explicit and the PRSP will provide a framework to design appropriate policies to offset them. Second, the PRSP will be the result of a participatory process, which should strengthen the authorities’ and the public’s sense of ownership of the policies. This is particularly significant in the context of trade reform, because it should help to counter affected interest groups’ resistance to trade reforms and support the implementation of agreed policies. And third, the PRSP process includes monitoring of changes in poverty outcomes over time, as well as evaluation of the impact of key policies, which can be used to inform and enhance the ongoing dialogue about the impact of trade reform on different groups in the society.

Working with the WTO

The World Bank, the IMF, and the WTO share some common objectives and have taken steps to strengthen mutual coordination and policy coherence. The WTO concluded Cooperation Agreements with the IMF and the Bank in 1996–97. These provide for regular consultations between the heads of the three organizations; a High-Level Working Group on Coherence, consisting of senior staff of the three institutions; enhanced procedures for the exchange of documents; attendance by staff (as observers) at appropriate Board and Committee Meetings in the other institutions; and both formal and informal contacts among the staff, including the pursuit of joint research projects and seminars (see Appendix IV).

The three organizations have continued to explore ways to strengthen cooperation and coherence, each within its own jurisdiction and respecting its own mandate and expertise.

Trade-Related Technical Assistance

The World Bank and the IMF provide their developing country members with trade-related technical assistance to support trade policy reforms. IMF technical assistance tends to be in the areas of customs administration and reform, statistics, and broad-based tax reforms, including reduction of dependence on trade taxes. Bank technical assistance covers a wider range of areas, such as competition policy, infrastructure development, institution building, and elements of trade facilitation.

1Debt sustainability ratios measure debt in net present value terms: the discounted market value of debt if repaid in one lump sum. Sustainable debt-to-export levels are defined on a case-by-case basis within the relevant target ranges.
2The PRSP replaces the Policy Framework Paper (PFP) that underpinned reform programs supported by the IMF’s former Enhanced Structural Adjustment Facility.
3Lomé IV, signed in 1989 and replacing the previous Lomé trade and aid agreements, expired in February 2000. A successor to Lomé IV is to be signed in mid-2000.
4As an example, only 1 percent of U.S. imports under the GSP originate in Africa, with the main beneficiaries of the system being middle-income countries such as Brazil, Malaysia, the Philippines, and Thailand. For the European Union, the share of African products in EU imports is only 3.5 percent and has been declining.

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