IMF's Independent Evaluation Office Announces Release of Report on Prolonged Use of IMF Resources

Mr. Montek Singh Ahluwalia, Director of the Independent Evaluation Office (IEO) of the International Monetary Fund (IMF), today released the IEO's first evaluation report on the Prolonged Use of IMF Resources.

The report finds that prolonged use has expanded considerably over the last two decades, to the point that a third of current users of IMF resources can be categorized as prolonged users and they account for a quarter of its resource commitments in 2001. The report points out that the expansion of prolonged use is in part a reflection of conscious decisions by the international community to expand the mandate of the IMF to assist low-income countries to deal with their balance of payments problems which are structural in nature and therefore require a longer time to overcome. However, the expansion in prolonged use cannot be explained entirely by this development. While most prolonged users are low-income countries, prolonged use is also significant among users of the IMF's general resources and in recent years it is the latter group which has accounted for the bulk of resources absorbed by prolonged use cases.

The report finds prolonged use to be quite persistent. As a result, IMF resources lent to prolonged users revolved very slowly; for example, the most prolonged user of all, the Philippines, has had obligations outstanding to the IMF since 1967.

The expansion of prolonged use is accounted for by three sets of factors, some of which reflect deficiencies in the way IMF policies are formulated or implemented.

• Country specific factors: prolonged users are typically countries facing large and deeply-rooted economic difficulties when they first come to the IMF. Since these difficulties often take longer to solve than the short-term horizon of IMF arrangements, they lead to prolonged use.
• Institutional factors, both systemic and internal to the IMF: the international community's decision to expand the mandate of the IMF to include assisting low income developing countries facing structural, deep-seated balance of payments imbalances is one factor explaining expansion in prolonged use. The report argues that, while this decision might be justifiable under the circumstances, its implications for the approach to program design and the appropriate time frame of IMF involvement were not adequately recognized until relatively recently. The role of IMF lending arrangements as providing a "seal of approval" which is necessary for the flow of many other sources of financing, including debt restructuring, is another factor contributing to prolonged use. The need for a program generates pressures, on both member countries and the IMF, to agree to programs even when the probability of success is low, thus increasing the likelihood of failed programs and repeat access. Internal institutional factors also contribute to prolonged use in various ways, e.g.: the diminished effectiveness of surveillance in an extended program environment; the lack of sufficient opportunities for candid stock taking and ex post assessments of programs; the absence of an explicit exit policy for prolonged users. The report notes that there is also the occasional case where political considerations appear to have led to the approval of IMF-supported programs with a low probability of success.
• Program-related factors: deficiencies in program design and implementation can lead to persistence of balance of payments problems which encourage prolonged use. Specific design flaws identified in the study are: excessive optimism in macroeconomic projections; insufficiently prioritized and sometimes poorly designed conditionality; underestimation of the importance of ownership and of capacity constraints; and insufficient adaptability in response to shocks or deviations from the projected path. In many cases, difficulties in implementing core institutional reforms were at the heart of the protracted adjustment difficulties that led to prolonged use.

The report emphasizes that, while prolonged use may be justified in some circumstances, it can have significant adverse implications, both for prolonged users and for the IMF, which have not been adequately recognized. For the countries involved, prolonged use gives the IMF an excessive presence in policy formulation which can hinder the development of robust domestically driven policy formulation processes. In some cases, the expectations of continued IMF financial support may have reduced incentives for countries to act decisively to address long term adjustment problems also.

There are also negative effects on the IMF. The direct financial impact in terms of pre-emption of resources have been limited to date but the phenomenon clearly reduces the revolving character of IMF resources. There is also some evidence that prolonged use weakens the credibility of the "seal of approval" provided by IMF-supported programs.

The report notes that the problem of prolonged use has been discussed in the IMF Executive Board on several occasions and the Board has also approved various elements of a strategy for addressing the problem. However, the report finds that this strategy was not implemented on a consistent basis.

The report concludes with a series of specific recommendations, including the following:

• The Executive Board should adopt an explicit definition of prolonged use, as this would ensure automatic triggering of due diligence procedures designed to avoid prolonged use. The IMF should also be more willing to refrain from providing support where programs have a low probability of success. It should also outline more explicit "exit" strategies for prolonged user cases.
• The IMF should also seek to reduce the reliance on its lending arrangements as a "gatekeeper" by seeking to offer the international community a broader mix of tools, including strengthened surveillance, to deliver seals of approval to donors and creditors.
• To strengthen program design and implementation through enhanced ownership, the IMF should move toward a situation where the normal procedure is for the authorities to have the initial responsibility for proposing a reform program as the starting point for negotiations. To the extent possible, the core elements of a program should be subject first to a debate within the country's own policy-making institutions.
• Programs should be more selective in content with greater emphasis on fostering key institutional changes and on assessing and strengthening implementation capacity, and the IMF should refrain from imposing an excessive number of conditions.
• Internal IMF governance should be strengthened through more systematic ex post assessments of programs and more opportunities to step back and reconsider the overall strategy, including through strengthened surveillance, in prolonged use cases.
• The IMF should also improve its ability to analyze political economy issues as an input to program design and take steps to reduce the excessive turnover of staff working on countries.
• To reduce the appearance of undue political intervention, a more transparent separation between technical assessments and political judgments in lending decisions is needed, with accountability for the latter clearly at the level of the Executive Board.

The report was reviewed by the IMF's Executive Board on September 20, 2002. Directors welcomed it and generally expressed support for most of its analyses and recommendations, noting that some recent initiatives, such as the revision to conditionality guidelines, were already moving in the same direction. They welcomed the IMF's management decision to establish a task force that would study the policy and operational implications of the IEO's recommendations and would report to the Board early next year with specific proposals for implementation.

The full text of the report and summing up of the Board discussion are available on the IEO's website at www.imf.org/np/ieo/2002/pu/index.htm.

IEO Contacts: David Goldsbrough, Tel. (202) 623-4735
                       Isabelle Mateos y Lago, Tel. (202) 623-7219