Press Release No. 15/371

Press Release: IMF Executive Board Reforms the Fund’s Policy on Poverty Reduction Strategies in Fund Engagement with Low-Income Countries

August 6, 2015

Press Release No. 15/371
August 6, 2015

The Executive Board of the International Monetary Fund (IMF), on June 22, 2015, discussed and adopted the proposed reform set out in a Board paper on “Reform of the Fund’s Policy on Poverty Reduction Strategies in Fund Engagement with Low-Income Countries—Proposals.”

Executive Board Assessment¹

Executive Directors welcomed the opportunity to consider the proposed reform of the Fund’s policy on poverty reduction strategies (PRS) in Fund engagement with low-income countries. They concurred that the near-completion of the IMF-World Bank HIPC Initiative, the recent trends in PRS documentation by member countries, and the World Bank’s delinking of its IDA concessional lending from the PRS process warrant a reform of the Fund’s PRS requirements. These requirements have currently been centered around the Poverty Reduction Strategy Paper (PRSP) used in the context of the HIPC Initiative, as well as the Fund’s concessional financing and the Policy Support Instrument (PSI). In this regard, Directors supported the proposed reforms to the Fund’s PRS policy in the context of ECF arrangements and PSIs. Directors noted that the proposed reform does not entail any modification to the HIPC Initiative Instrument.

Directors reiterated the importance of anchoring Fund-supported programs for low-income countries in strategies to achieve sustained poverty reduction and growth, and emphasized the need to adhere to the objectives underlying the PRGT Instrument. Directors welcomed the key objectives of the reform approach that would: (i) maintain a clear link between a member’s PRS and its policies under a Fund-supported program with streamlined PRS documentation; (ii) preserve national ownership of the PRS process; and (iii) allow flexibility in PRS procedures to reflect country circumstances. In considering these reforms, some Directors felt that it would be useful to assess the impact of the PRS process and the PRGT on poverty reduction in member countries in the past. A few Directors also suggested incorporating guidance in defining and setting social spending.

For ECF arrangements and PSIs, Directors supported the transmittal to the Fund of an Economic Development Document (EDD) that could comprise an existing national development plan or strategy document or a newly-prepared document on a member’s PRS elaborated for Fund-supported program purposes. The latter could take the form of an entirely new PRS document or a streamlined document based on an existing national PRS document, along the lines proposed by staff.

Directors endorsed the proposed minimum standards and good practice guidelines for EDD content, noting that they provide enough flexibility and scope to member countries in documenting their PRS based on specific country circumstances. Some Directors considered it important to incorporate elements of the guidelines into the minimum standards, and some others saw a need to provide an incentive for countries to observe the guidelines in addition to the minimum standards. Directors concurred that existing PRSPs at the time of adoption of the new policy would be deemed to satisfy the new policy for EDDs subject to the requirements proposed by staff with respect to the coverage and expiration of the PRS set out in the EDD.

Directors emphasized the value of participatory processes in elaborating national poverty reduction strategies. Many Directors agreed that countries should be strongly encouraged to pursue participatory processes in line with the good practice guidelines for EDDs, but without making participatory processes mandatory under the new PRS policy. Many other Directors, however, expressed concern that making participation by stakeholders non-mandatory could weaken ownership of the PRS. Some of these Directors suggested that participatory processes should be a minimum standard and that the minimum standards should incorporate some other good practices.

Most Directors concurred that an EDD should be required for completion of the first and every subsequent review under an ECF arrangement or a PSI along the lines proposed by staff. This requirement would help ensure close alignment, in terms of timing and substance, between Fund-supported programs and the member’s poverty reduction strategy. Some Directors expressed concern, nevertheless, regarding the scope for countries with limited capacity to prepare PRS documentation by the first review. They stressed the need for effective outreach and early engagement by staff to avoid potential delays in Fund support and ensure good-quality documentation.

Most Directors agreed that the PRS set out in an EDD should not normally be older than five years (exceptionally six years) to qualify for the completion of a review. A few Directors did not support the use of PRS that are more than five years old as basis for an EDD, especially if the requirement for the PRS to be forward-looking is also eliminated.

Most Directors concurred that Joint Staff Advisory Notes outside the HIPC Initiative context should be eliminated. In this regard, Directors welcomed the proposed approach under which Fund staff’s assessment of the member country’s poverty reduction strategy would be provided in program documentation. Directors further welcomed staff’s intention to conduct a PRS implementation review around the mid-point of an ECF arrangement or PSI, with findings reported in program documentation. Most Directors also agreed that member countries would inform the Board of PRS implementation through program documentation and discontinue the preparation of Annual Progress Reports.

Directors stressed the importance of close Fund-World Bank collaboration on poverty reduction and growth issues, including in evaluating the quality of the member country’s poverty reduction strategy. Most Directors welcomed the proposed approach under which World Bank staff’s views would be communicated to the Board through an assessment letter. A few Directors, however, continued to see merit in a consensus-based assessment of a country’s PRS by Fund and Bank staff. Directors agreed that concerns raised by Bank staff on the quality of the PRS would need to be reflected in Fund staff’s analysis.

Director supported the transitional arrangement through end-December 2015 along the lines proposed by staff.

Directors looked forward to a review of the new PRS policy as part of the next Review of the Fund’s Facilities for Low-Income Countries expected in 2018.

Background

The IMF and the World Bank introduced the Poverty Reduction Strategy (PRS) approach in the context of their joint Initiative for Heavily Indebted Poor Countries (HIPC). The approach, centered on the Poverty Reduction Strategy Paper, has also been a cornerstone for Fund concessional financing, currently the Extended Credit Facility (ECF), and the Policy Support Instrument (PSI), the non-financing instrument for Low-Income Countries.

The IMF Board paper proposes a new Fund policy on the content and process of PRS documentation, which is warranted by recent developments. Most countries eligible for concessional financing under the Fund’s Poverty Reduction and Growth Trust have now completed the HIPC process, and are no longer required to produce HIPC-related PRS documentation to qualify for debt relief. In parallel, countries have been increasingly producing PRS documentation for their own domestic purposes on timelines determined by national needs. Moreover, reflecting these developments, the World Bank delinked its concessional financial support from the PRS process.

The proposed policy presents a new PRS approach that is more flexible and streamlined, with a focus on macro-relevant aspects of the PRS. It is based on an Economic Development Document (EDD) that can take the form of an existing national development plan or strategy document on the country’s PRS or a newly prepared document on the PRS. Minimum standards apply to the content of the EDD and good practice guidelines are expected to be followed, while taking into consideration specific country circumstances. Participatory processes in developing EDDs are encouraged but no longer required, and Fund staff assessment of the PRS will be provided in program documentation. The collaboration between the World Bank and the Fund on poverty reduction and growth will continue with, in particular, World Bank staff requested to circulate an assessment of the PRS for the information of the Fund Executive Board. EDDs are required for the first and subsequent reviews under an ECF arrangement or a PSI, and the PRS set out in an EDD should not normally be older than 5 years, and may exceptionally be valid for up to 6 years. Monitoring of the PRS implementation will be in the context of program reviews and a PRS implementation report no later than the fourth review under an ECF arrangement or a PSI. The new policy includes transitional arrangements through end-2015 designed to ensure that near-term reviews under ECF arrangements or the PSI are not jeopardized by the change in PRS policy. It does not modify PRS requirements under the HIPC Initiative for the remaining countries that have not reached the HIPC decision or completion points.

¹ An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.