Speech

The IMF's Medium-Term Strategy for Low-Income Countries, Remarks by Rodrigo de Rato, Managing Director of the International Monetary Fund

March 16, 2006

As Prepared for Delivery

1. Thank you very much, Minister Magande, for that kind introduction.

2. This visit is a most welcome one for me because it gives me a much anticipated opportunity to meet with policy makers from various countries of the region at a time when efforts to accelerate growth and development, in pursuit of the Millennium Development Goals, are in high gear. The IMF is intent on doing everything it can to complement those efforts with efforts of its own and to be a dependable partner in the quest for growth and development. This is my first chance to visit sub-Saharan Africa since the IMF began to extend complete debt relief under the Multilateral Debt Relief Initiative. I welcome in particular the opportunity to exchange views with you about how these resources are going to be used to promote growth and achieve lasting poverty reduction. I look forward to hearing from you about how to meet the many challenges. But first let me talk a little about how I think the Fund can complement your efforts.

3. Over the last few months, we have been working on developing a medium-term strategy for the IMF. An important element of this is the Fund's work with low-income countries. The strategy will determine the Fund's contribution to the central challenges of growth and poverty reduction that low-income countries face. I would like to talk through the strategy with you because it is here in sub-Saharan Africa that the challenges are most profound and the need for help is most urgent. I want to reaffirm my commitment and the commitment of the IMF's membership to work with low-income country governments, with civil society, and with the international community to help your countries meet these challenges.

4. The international community's work on low-income countries is now at a critical point. Much progress has been made in addressing the debt issue, first through the HIPC Initiative and most recently through the Multilateral Debt Relief Initiative. There is a renewed commitment by donors to increase aid significantly to help low-income countries achieve the Millennium Development Goals. But for many countries, unfortunately, achievement of the MDGs remains a long way off. Growth in sub-Saharan Africa has been over 5 percent in each of the last two years—an encouraging development indeed, for which governments deserve much credit. But growth needs to be higher still if most African countries are to meet the income and poverty MDGs. I recognize, of course, that sub-Saharan Africa is far too vast and diverse to generalize and this is why I put the emphasis on "most". Meanwhile, the number of people in sub-Saharan Africa affected by HIV/AIDS rose to over 25 million, and last year some 2½ million people died of AIDS and about 1 million of malaria. Even more sadly, many of them were children. And many parts of Africa were hit by another year of drought, locusts and poor crop harvests that led in some areas to famine.

5. The most important contribution that the IMF can make to help African countries meet the challenges facing them is to provide our best advice on macroeconomic policies that will support growth, reduce poverty, and enable governments to make best use of aid from outside the continent. It is in this spirit, and with this philosophy that we have crafted the medium-term strategy.

6. We begin with the recognition that the resources that the IMF can bring to bear, both financial and human, are limited, and we must use them wisely. In practice, this will require a sharpened focus on policies and economic institutions that are critical to economic and financial stability and on policies and institutions that are critical to growth and fall within the core competencies of the IMF. In the past, our advice has sometimes been spread too thinly and our conditionality set too broadly. We have been working on sharpening our focus for some time, but I believe that in the future, we need to go further in focusing on what is essential and on areas where the IMF has a comparative advantage.

7. To help achieve this, I would like to see a more systematic division of responsibilities among the international financial institutions and donors in helping low-income countries. Too often, policy advice is uncoordinated and the Fund is by default pulled into policy areas that are important but are not really within our area of expertise, to the detriment of work on areas where the Fund should be taking the lead. The international community is already making important efforts to enhance the coordination of assistance to low-income countries, but clearly much more needs to be done. Together, we could build on this work, in close consultation with the country authorities. Ideally, in each low-income country, Fund and World Bank staff, together with the country authorities and other development partners, should identify the critical issues that need to be resolved to allow strong, sustainable growth and on which the authorities need assistance, and agree on a division of labor, making explicit commitments on what they will do to support the objectives of the authorities.

8. What should the Fund then be doing? I expect the Fund to take responsibility for areas that are critical to growth and that that fall within its macroeconomic and financial expertise. These include fiscal, monetary, and exchange rate policies; trade policy; other reform measures and institutions relevant to macroeconomic and financial stability—for example, financial sector soundness; debt management; and advice on how to adapt macroeconomic policy to handle the anticipated higher aid flows. The IMF's support would take the form of policy advice centered around Poverty Reduction Strategy Papers, financial assistance, where needed, through the Poverty Reduction and Growth Facility, and capacity building through technical assistance and training targeted at key economic policies and institutions.

9. Let me give you some examples of areas where I think the Fund's support can be most useful.

10. First, debt sustainability. As part of the Multilateral Debt Relief Initiative or MDRI, the IMF moved quickly to give 100 percent debt relief on debt owed to it by 19 poor countries, 13 of which are in sub-Saharan Africa. Ten other sub-Saharan African countries could qualify for debt relief when they reach the HIPC Initiative completion point. The dimensions of Fund relief vary greatly—it is actually highest as a percentage of GDP here in Zambia, at about 8 percent of GDP—but combined with the expected debt relief from the World Bank and African Development Fund, total relief from the MDRI will be substantial. But the countries concerned and the international community must make sure that the debt that is removed is not quickly replaced with new debt, possibly on worse terms, for there will be many lenders who will rush in now that debt has been reduced. The experience of some of the countries of the former Soviet Union, which started out with no debt in the early 1990s and quickly became some of the most heavily indebted countries in the world, is testimony to this. The IMF can help both borrowers and lenders. We can help countries design medium-term debt strategies based on sustainable debt and we can advise official creditors when debt or debt service levels are likely to become a problem.

11. Better outcomes from debt relief and from the increases in aid flows that are anticipated over the next decade will also depend on effective use of the additional resources. The IMF is again well placed to advise on the macroeconomic implications of scaled-up aid flows, and on how to deal with them. The problems that higher aid flows can pose for macroeconomic stability are well known, but their extent is rarely clear in individual countries. A crucial issue is to ensure that macroeconomic frameworks are designed in a way that allows scaled-up resource flows to reach their targets, especially education and health, including HIV/AIDS pandemic. The macroeconomic problems arise when the amounts, timing, and effects of higher aid are uncertain. The IMF can advise countries on how to handle the increased complexity of managing monetary, fiscal, and exchange rate policies when this is the case. We can also advise on how to deal with the risks that higher aid will adversely affect a country's competitiveness by causing an appreciation of the currency or higher inflation—the so called "Dutch disease" phenomenon. It is key that policy makers focus on removing bottlenecks to improve productivity and productive capacity in the non-tradable goods sector of the economy. While sectoral experts are best placed to advise on detailed policies, the Fund can advise on the macroeconomic impact of such measures. A paper produced by the IMF's African Department on Scaling Up Aid to Africa is now available, and you may find this useful.

12. Another area where the IMF can help is on financial sector reform, something that is particularly important in African countries. One of the key elements of the Fund's medium-term strategy is the recognition that understanding financial sectors is going to be critical in a world of globalized capital movements. Financial sectors in low-income sub-Saharan Africa are among the least developed in the world. The development of this sector can reduce poverty by increasing growth and by removing credit constraints on the poor, for whom financial market access is often unavailable.

13. I want to emphasize that the areas where the IMF can take the lead are not the only ones that are important. Far from it. Take for example, governance, an area where the IMF can make a contribution, but only a limited one. For example, the IMF can advise on improving Public Expenditure Management systems, which are a critical element of managing higher aid flows and which contribute to good governance by helping citizens ensure that public resources are used transparently and efficiently. But on governance and on many other issues, the international community must work together if policies are going to be effective. We are already talking with our colleagues at the World Bank about the division of responsibility between the two institutions. I look forward to discussing this approach further with the rest of the international community.

14. The Fund supports its membership not only through surveillance and lending, but also through the development and assessment of countries' standards and codes in core macroeconomic areas, through technical assistance, and through training of country officials. These three activities share the common objectives of assisting Fund members in developing sound policies and strengthening their core macroeconomic institutions, as well as the quality of their economic data. Thus, they complement and support the other core Fund activities. Another part of the medium-term strategy is to review these activities to strengthen their alignment and synergies with surveillance and lending, improve their effectiveness through close monitoring and evaluation, and enhance country ownership of them. We are entering an era in which capacity building will be increasingly important and we need to make sure that we are able to support our members in this area. But as I said at the outset, our resources are limited. Thus, in view of the foreseeable pressures on Fund income, we are considering attempts to mobilize additional donor support for these activities and are also considering levying some charges for these services, consistent with countries' ability to pay for them. This would also encourage users to send clear signals about what services they want most, and subject Fund advice to a market test.

15. The medium-term strategy for the Fund covers all areas of our activities. But I believe that it is especially important that we do the best work we can on low-income countries. The needs are great here, but so are the opportunities for improvements in people's lives. To fulfill the Fund's commitment to low-income countries, as spelled out in the medium-term strategy, will require devoting additional resources to this work. In particular, assisting you in your efforts to meet the Millennium Development Goals and to effectively manage the increased aid currently being promised by donors will require increasing the Fund's presence in your countries. We intend to do this. Indeed, this week I announced the forthcoming establishment of a new Africa Regional Technical Assistance Center for central Africa.

16. Finally, I would like to emphasize that the medium-term strategy for the Fund also covers the Fund's own governance, including the issues of quotas and voice. With regard to voice, I hope that the IMF has shown that it listens to concerns expressed by low-income countries. Certainly, I believe that we have reflected these concerns in recent policy initiatives, such as the Policy Support Instrument and the Exogenous Shocks Facility. And this visit and my previous visits should be seen as evidence of my commitment to the region and the continent. However, I also believe that our members must find ways to give more voice to low-income countries whose share in the world economy has declined, but for whom the role of the Fund is large. I hope that this will be a feature of the discussion on quotas and voice in the months ahead.

17. The Fund's commitment is strong. I am pleased that I was able to come to Zambia to lay out my views on what the Fund can do. Now I look forward to hearing your views.

18. Thank you very much.