Public Information Notice No. 04/113

Corrected Public Information Notice: IMF Executive Board Reviews Poverty Reduction Strategy Papers-Progress in Implementation

September 30, 2004

On September 3, 2004, the Executive Board of the International Monetary Fund (IMF) considered a joint IMF/World Bank staff paper reviewing progress in the implementation of the Poverty Reduction Strategy Papers (PRSP).¹

Background

PRSPs present low-income countries' macroeconomic, structural and social policies and programs over a two- to five-year horizon aimed at promoting broad-based growth and reducing poverty. PRSPs form the crucial link between national public actions, donor support, and development outcomes. The Monterrey Consensus has underlined the centrality of nationally owned poverty reduction strategies in making progress towards the Millennium Development Goals. PRSPs provide the operational basis for Fund concessional lending and for debt relief under the Enhanced Heavily Indebted Poor Country (HIPC) Initiative.

The core principles underlying the PRSP are that poverty reduction strategies be: (i) country-driven, with broad-based participation by civil society in the adoption and monitoring of the poverty reduction strategy (PRS); (ii) results-oriented and focused on outcomes that benefit the poor; (iii) comprehensive in recognizing the multidimensional nature of poverty; (iv) partnership-oriented, aimed at improved coordination between all development partners; and (v) based on a long-term perspective of the challenges of, and need for commitments to reduce poverty.

The Executive Boards of the IMF and Bank have asked the staff of the two institutions to prepare annual reports on progress in implementing the PRSP approach. The paper considered by the Boards in September 2004 constitutes the latest in this series.

There has been a significant accumulation of experience in the preparation and implementation of national poverty reduction strategies across all regions since the 2003 report on progress in implementation was considered by the Executive Boards of the Fund and the Bank. The total number of PRSPs under implementation has now reached 42, with 10 PRSPs completed over the past year. There have also been a further 21 annual PRSP Progress Reports (APRs) prepared during the year, bringing to 23 the number of countries with one or more APRs. One other country has produced an Interim PRSP since last September.

Executive Board Assessment

Executive Directors noted with satisfaction the broad-based acceptance of the Poverty Reduction Strategy Paper (PRSP) as the operational framework for development of country-owned strategies to promote growth and reduce poverty, and thus contribute to country progress toward the Millennium Development Goals (MDGs). They welcomed the continued progress in implementing the PRSP, particularly in addressing its more technical challenges. They urged countries to redouble their efforts to surmount the more complex and institutionally difficult challenges that remain. Directors urged the staffs to continue their close collaboration in supporting these efforts, and to work closely with the authorities in countries with difficult environments, to enable these to prepare and implement appropriate poverty reduction strategies.

Directors underscored the importance of the country-driven nature of the PRSP approach, and of country ownership as the key to its success. While several countries had made considerable progress in customizing the MDGs to country-specific goals, there was still a need for closer linkages between the PRS process and its integration with country-specific decision-making processes and institutions, particularly the medium-term expenditure framework and the annual budget. Directors saw this linkage as critical to maintaining the operational relevance of the PRSP, improving country ownership of the poverty reduction process and the MDGs. It would also facilitate the prioritization of the country's objectives in the PRSP.

Directors noted the increasing involvement of parliaments and other domestic stakeholders in the PRS process, including in monitoring and evaluating progress. Most Directors felt there was scope for more broad-based discussion of macroeconomic policy alternatives. Directors agreed that greater capacity among parliaments and other domestic stakeholder groups to monitor and evaluate progress in implementing the poverty reduction strategy was crucial to engage in constructive dialogue and debate on policies. This would further cement the participatory processes engendered by the PRSP approach. Mechanisms for effectively transmitting feedback from country stakeholders to country policy-makers also should be improved.

Directors welcomed the more frequent discussions of growth and its distributional implications in recent PRSP documents. However, they underscored the need to improve the understanding of the sources of, and impediments to, growth in PRSPs.

Directors also considered that the linkages between the macroeconomic frameworks of PRSPs and the medium-term objectives of the PRS needed to be better grounded. Greater use of contingency planning and alternative scenarios could help make the macroeconomic frameworks more effective, particularly in response to shocks. Some Directors noted that alternative scenarios could also be used to demonstrate how a country would scale up its efforts and use additional external resources to speed up progress toward the MDGs, while maintaining the operational realism of the PRSP framework. Given the complexity of the task and the technical capacity constraints faced by most low-income countries, however, Directors saw a critical role for external partners, including the World Bank and the IMF, in helping countries to develop and implement policies to allow increased aid resources to be utilized more effectively.

Directors welcomed the rising use of poverty and social impact analysis (PSIA) to inform policy choices and underpin PRS design. They agreed on the need for realistic expectations as to what could be covered by PSIA, given the relatively poor data and the considerable resource requirements of this work, and supported the staffs' call for selectivity in the choice of reforms to be analyzed. They called on Fund staff to step up efforts to integrate PSIA into PRGF program design, focusing Fund efforts on the impact of macroeconomic policy on poverty, and to report regularly on the results of this work in staff reports.

Directors emphasized the need for countries to set priorities among the many objectives and goals of their poverty reduction strategies. This would be critical to fully integrating the programs and policies of the PRSP into the annual budgets, thus raising the likelihood of their implementation. Directors noted that the increase in directly poverty-reducing expenditures in budgets and actual spending demonstrated governments' commitment to poverty reduction. However, more needed to be done to make the PRS the front-end of the national budget process, and to deepen its alignment with budget cycles. The further strengthening of public expenditure management systems would be a critical element in this effort.

Directors welcomed the progress made in many countries in improving the collection of data and the definition and use of appropriate indicators for monitoring progress. This would strengthen the focus on results and allow countries progressively to refine their strategies. Directors saw this as another area where concerted donor support would be necessary to achieve the requisite improvements.

Directors underscored that increasing the volume of aid and enhancing its overall effectiveness, in the context of adequate consideration of country priorities, was critical for success in PRS implementation and in achieving the MDGs. They noted the considerable progress made in donor harmonization and alignment in those countries where the PRS approach is more established and is being driven by the government. They urged other low-income countries to make more active use of the PRSP as a vehicle for donor coordination, including in the provision of capacity building support. Directors noted that greater operational detail in PRSP documents and strengthened domestic monitoring systems would facilitate donor alignment and encourage donors to use domestic systems, reducing the overall transaction costs of aid. They called on donors to step up their efforts to harmonize their procedures and reporting requirements, and to align their support more closely with recipient country priorities and processes.

Directors underscored the importance of country ownership for the PRS process and the need for strong operational links between the PRS and assistance from the Bretton Woods Institutions (BWIs). They therefore welcomed the opportunity to discuss the staffs' proposals for modifying the joint staff assessment (JSA) and clarifying the role of the annual progress report (APR) to this end.

Directors broadly supported the suggested redefinition of the objectives and audience of the JSA. They agreed that the primary objective should be to provide detailed feedback to the country authorities on the strengths and weaknesses of their PRSs, including those aspects that would require further work in order to provide a framework for BWI assistance. They also supported the staffs' proposal to conclude the JSA with a paragraph that raises issues for discussion by the Boards.

Directors considered that eliminating the requirement of a standard statement in the JSA that the PRSP is a suitable basis for concessional assistance could contribute to reducing the perception of Washington "sign-off." Directors therefore supported the staffs' proposal to lift the requirement for an explicit endorsement of the PRSP by the Executive Boards both in connection with the approval of a new PRGF arrangement or review decisions under an existing arrangement, and for decisions concerning the decision point, completion point and stand-alone decisions on interim assistance under the HIPC Initiative. Directors nevertheless still supported the initial aim of the PRSP approach that nationally-owned poverty reduction strategies should provide the basis for IMF (and Bank) concessional lending. Staff will circulate to the Board for its consideration in the near future the necessary decisions implementing these changes, both for purposes of the HIPC Initiative and for PRGF lending operations.

Directors agreed that program documents should clearly discuss the links between the proposed assistance provided by the Fund and the Bank, and the strengths and weaknesses of the PRSP as discussed in the JSA. Most Directors concurred that the inclusion of appropriate specific language in the Board's decision would establish the links between the PRSP and the proposed arrangement and would provide a suitable replacement for the explicit Board endorsement of the PRSP. This change would become effective with the amendments to the relevant instruments.

With regard to the annual progress report, Directors agreed that it should ideally be closely aligned with domestic processes, and produced as an integral part of the country's own monitoring of its progress in implementing its PRS. They agreed that the APR's content should be determined in part by the way the authorities intend to use it, but agreed that it should contain at a minimum the elements proposed by the staff, namely: (i) an evaluation of performance; (ii) an overview of the coming year's policy intentions; and most importantly, (iii) a report on how shortcomings identified in previous JSAs have been addressed. More flexible APRs could also facilitate further donor coordination. Directors urged staff to coordinate closely with the country authorities in their preparation of the APRs

Most Directors agreed that there would be no need to discuss an APR and the accompanying JSA explicitly, as long as progress in implementing the PRS was deemed broadly satisfactory, and this was clearly signaled in program review documents.

Directors broadly concurred with the approach suggested for the 2005 progress review and with the proposed topics, as well as suggesting that it should cover Poverty and Social Impact Analysis, and further progress in donor harmonization and alignment. They encouraged staff to seek the views of as broad a range of external stakeholders as possible. In particular, the views of country authorities on the effectiveness of the PRSP approach in reducing poverty and supporting progress toward the MDGs would be of great interest.