Press Release No. 19/217

IMF Executive Board Supports New Strategy for Engagement on Social Spending

June 14, 2019

On May 2, 2019, the Executive Board of the International Monetary Fund (IMF) discussed a policy paper outlining a strategy to guide IMF engagement on social spending issues to enhance its effectiveness.

The paper A Strategy for IMF Engagement on Social Spending outlines the scope, objectives, and boundaries of engagement and provides guidance on when and how to engage on social spending. The strategy was informed by background analysis, broad consultations, and the Executive Board-endorsed recommendations of the 2017 Independent Evaluation Office (IEO) Report on “ The IMF and Social Protection.”

The paper notes that interest in social spending issues intensified over recent decades—especially in the aftermath of the global financial crisis—reflecting concerns about rising inequality and the need to support poor and vulnerable households. Social spending is also a key policy lever for meeting the global commitment to support inclusive growth through the 2030 Sustainable Development Goals (SDGs) and for addressing emerging challenges from demographic shifts, technological developments, and climate change.

Against this backdrop, the paper documents the scaling up of the IMF’s work on social spending. Analytical work has highlighted the relationship between inequality and growth, the important role of social spending in promoting sustained and inclusive growth, and the resource requirements for achieving the SDGs in education and health. Accordingly, the IMF surveillance and lending operations have increasingly emphasized inclusive growth, including through the use of social spending “floors” in IMF-supported programs. There has also been enhanced engagement on inequality issues in surveillance, as well as increased technical assistance to expand fiscal resources available for social spending.

The paper sets forth a strategy based on best practices for more effective IMF engagement on social spending issues, including: (i) engagement guided by an assessment of the macro-criticality of a specific social spending issue and consideration of that issue in an IMF-supported program context, and by the existence of in-house expertise; (ii) enhanced collaboration with International Development Institutions; (iii) strengthened program design and conditionality; (iv) clearer guidance on the use of targeted and universal transfers in the context of a broader discussion on the effectiveness of the social safety net; and (v) better communications, including by leveraging input from a broad set of stakeholders.

Implementation of the strategy will be accompanied by granular and gradually evolving guidance to staff, reflecting the evolving nature of social spending issues and emerging lessons from cross-country experiences.

Executive Board Assessment [1]

Executive Directors welcomed the proposed strategy to guide Fund engagement on social spending issues. They noted that the Fund has made considerable progress in its treatment of social spending over recent years and that the proposed framework is expected to strengthen the Fund’s engagement on social spending issues by making it more systematic and effective in surveillance and Fund‑supported programs. Directors welcomed that the strategy reflected consultations with a broad set of stakeholders, including civil society, academics, and international development institutions (IDIs).

Directors observed that social spending issues have become increasingly important for the Fund’s membership, reflecting a growing emphasis on inclusive growth, especially in the aftermath of the global financial crisis. They noted that social spending plays an essential role in protecting vulnerable groups, supporting social and political stability, addressing inequalities of both income and opportunity, smoothing consumption over the life cycle, and stabilizing demand in the face of economic shocks. Directors saw social spending as critical to achieving the commitments under the 2030 Sustainable Development Goals (SDGs) and to tackling policy challenges from demographic, technological, and structural changes.

Directors appreciated that the proposed strategy will be guided by an assessment of the macro‑criticality of specific social spending issues. They agreed that social spending can become macro‑critical through three key channels: fiscal sustainability, spending adequacy, and spending efficiency. In this context, Directors underlined the need for a sufficiently granular framework to assess macro‑criticality. Directors emphasized that staff should continue to provide policy advice on sustainable financing of social spending with an increased focus on the quality of such spending for improving social outcomes. Directors also highlighted the importance of underpinning both surveillance and program policy advice on social spending with in‑depth analytical work as appropriate and supported by capacity development where necessary. Directors noted the importance of technical assistance to help ensure adequate data availability and quality, and to help create fiscal space—both through domestic revenue mobilization and improved spending efficiency— to finance increases in social spending where needed. A number of Directors noted that the distributive effects of taxation and other revenue sources should be considered together with the effects of social spending.

Directors welcomed the clarification of the Fund’s advice on the use of universal and targeted social benefits, which should be discussed in the context of the overall effectiveness of the social safety net. They noted that the use of universal and targeted transfers should depend on country preferences and circumstances while being consistent with fiscal and administrative constraints.

Directors concurred that the design of Fund‑supported programs and conditionality could be strengthened—both in PRGT and GRA‑supported programs—through greater focus on measures to offset the adverse effects of adjustment on poor and vulnerable households, and to enhance the political and social sustainability of programs, thereby contributing to program success. They also noted that specific conditionality on social spending may be necessary to ensure its adequacy and underscored the importance of evenhandedness. In this context, Directors also called for appropriately sequencing reforms to cushion the impact on the vulnerable while noting that the nature and extent of conditionality should be informed by a country’s macro‑fiscal context, political economy considerations, and social objectives.

Directors called for improved collaboration with IDIs, notably with the World Bank. They noted that while staff may need to develop some in‑house expertise, the Fund would also need to rely on other development partners to address social spending issues outside of its areas of expertise. Directors called on the Fiscal Affairs Department to act as a hub to help ensure that country teams can effectively draw on IDI and other relevant external resources. They agreed that staff need to engage early with relevant IDIs to align institutional priorities.

Directors noted that communication is an essential element of the strategy on social spending issues. They stressed that good communications would enhance effectiveness of Fund policies by promoting understanding and setting realistic expectations of the institution’s role. In this context, they noted that communications should discuss social spending issues in the broader macroeconomic setting, explain policy trade‑offs and financing constraints, while emphasizing country ownership.

While Directors noted that staff is expected to strengthen its focus on social spending in line with the agreed strategy, they acknowledged that more granular guidance is necessary to effectively implement the strategy. They looked forward to the forthcoming Staff Guidance Note to be issued by end‑2020, which should explain in greater detail how to consistently apply the key concepts, including macro‑criticality, in country‑ and sector‑specific settings. Directors noted that consultations with relevant stakeholders would take place in the preparation of the Staff Guidance Note.