February 9, 2000

Strengthening the HIPC Initiative
Country-Owned PRSP
The PRGF and PRSP
Financing PRGF and HIPC

At the new millennium, the IMF, along with the World Bank and member countries, has been trying to help developing countries better position themselves to speed up growth and eradicate poverty. For many developing countries, despite decades of their own efforts and assistance from the international community, progress has been woefully inadequate, especially in poverty reduction.

The IMF has worked hard to help countries adopt economic policies that can help raise the growth rate of per capita incomes on a sustainable basis. But faster growth alone will not be enough to lift living standards to acceptable levels. Developing countries also need to adopt policies that are directed specifically at reducing poverty. Hence the IMF has for many years emphasized social policies--namely, social safety nets and crucial public spending, such as on education and health. To this end, we have been working closely with the World Bank and other organizations, whose primary mandates and expertise lie more in the social realm than that of the IMF. We have also started to broaden our dialogue to include elements of civil society.

Most recently, the IMF and World Bank invited the public to share their views on beefing up the debt relief initiative for the heavily indebted poor countries (HIPCs). Comments and proposals were solicited through the IMF website (www.imf.org), and a number of consultative meetings were held around the world. As a result of these consultations, and discussions and analysis within the IMF and the World Bank, ambitious proposals on enhancements to HIPC debt relief and strengthening the link with poverty reduction were put forward. They were discussed and supported by the Executive Directors of the two institutions and adopted by the first-ever joint meeting of the Interim Committee and Development Committee on September 26. Proposals related to transforming the IMF's Enhanced Structural Adjustment Facility (ESAF) were also welcomed by the IMF's Executive Board and were adopted by the Interim Committee.¹ Signifying this change, the ESAF was renamed the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined.

This overview briefly describes all the changes and how they are interrelated--all part of a coherent strategy to help poor countries move on to a sustainable faster growth path, bringing a substantial reduction in poverty. Running through them is an increased emphasis on ownership, transparency, and broad-based participation, as well as a much greater emphasis on more effective social policies.

Policies on social safety nets are now incorporated in most IMF-supported programs, although there is much scope for improvement in their design and implementation. In addition, the evidence is clear that over the past decade, education and health care outlays have risen in most countries with IMF-supported programs², hand-in-hand with improvements in social indicators. But, here, too, there is much scope for further progress, particularly in the efficiency and targeting of these outlays.

Strengthening the HIPC Initiative

So what is being done to strengthen the HIPC Initiative? In response to the international community's desire to grant faster, deeper, and broader debt relief, the IMF and World Bank have approved major changes to the framework of the HIPC Initiative, which was originally agreed in September 1996. The Initiative is aimed at helping countries that pursue prudent economic policies to reduce their external debt burden to sustainable levels; that is, to levels that will enable them to service external debt through export earnings, aid, and capital inflows.³ The key changes include:

• deeper debt relief through lower debt sustainability targets, lower qualifying thresholds, and calculations based on earlier actual data rather than projections; and

• faster debt relief, including through the earlier provision of front-loaded assistance to free up resources for poverty-reducing spending, such as on health and education.

These modifications should also result in a broadening of debt relief, expanding the likely number of participants from 29 to 36 HIPCs, and possibly more. In addition, these changes will provide a greater safety margin for achieving debt sustainability and free up additional resources for poverty reduction. Of course, a more generous HIPC Initiative will entail higher costs, and it is estimated that overall costs will more than double to $28 billion⁴ from $12.5 billion, with the IMF's share rising to $2.3 billion from $1.2 billion. At the same time, the IMF and World Bank have agreed to a new framework to strengthen the link between HIPC debt relief and poverty reduction. It will make HIPC debt relief an integral part of broader efforts to reduce poverty--efforts that will be articulated for each country in a Poverty Reduction Strategy Paper (PRSP).

Country-Owned PRSP

The PRSP will be produced by the government, in close collaboration with Bank and IMF staff. It will be focused on poverty reduction, be prepared in an open and consultative process, and ultimately provide the framework for all IMF and World Bank concessional lending operations to low-income countries. It will aim at ensuring consistency between the country's macroeconomic, structural, and social policies, and its goals for poverty reduction and social development. It will also identify the key obstacles to poverty reduction and faster growth--which is key to lasting poverty reduction--formulate appropriate policies, and specify mechanisms for monitoring and policy adaptation.

Needless to say, this new approach will entail important changes in the ways the IMF and the World Bank operate and collaborate--not only with each other but also with governments, civil society, donors, and creditors. IMF and Bank staff will need to cooperate more closely than in the past.

The PRGF and PRSP

Another major change is that the objectives of the IMF's concessional lending facility for low-income countries--which serves as the vehicle for the IMF's participation in the HIPC Initiative--is being broadened to include poverty reduction explicitly, and reflecting this, the ESAF has been renamed the Poverty Reduction and Growth Facility (PRGF). In response to recent evaluations of the ESAF, efforts are being made to improve the effectiveness of the IMF's concessional lending facility as a policy instrument to foster growth and reduce poverty. These efforts focus on:

• generating higher saving, reducing inflation, accelerating key structural reforms, and shifting public expenditures to health and education from unproductive uses;

• better protecting the poor from any short-term negative effects of economic adjustment and reform;

• improving ownership of programs by the countries themselves;

• better assessing the ability of countries to implement the programs;

• improving the monitoring of program implementation;

• giving more budget flexibility to countries that are able to absorb and spend wisely larger amounts of foreign assistance; and

• strengthening Bank-Fund collaboration.

Although it is too early for a full evaluation, the early results of these efforts are promising--for example, the dialogue between IMF staff and member countries is steadily becoming more open and broad-based. In addition, 1995-98 data for countries with ESAF-supported programs suggest that they are beginning to see real payoffs from the reforms they have adopted.⁵ Real per capita GDP growth picked up from an average of -2.3 percent a year (or about zero, when transition countries are excluded) in 1991-95 to 2.5 percent in 1996-98. Moreover, during 1995-98, ESAF users experienced markedly higher per capita GDP growth than other developing countries.

The IMF wants to build on these successes by giving a new prominence to poverty reduction in countries' programs supported by the PRGF. The key change is that the complementarity of macroeconomic, structural, and social policies will now be given greater recognition. The PRSP will provide a new vehicle to integrate these policies in a mutually reinforcing manner. Importantly, the strategy in each country will be geared much more to the objective of improvements in social indicators. The PRSP will use monitorable intermediate indicators (such as school enrollment and adequate health facilities) to measure progress toward these longer-term goals for which data are available only with long lags.

How will this shape the PRGF? Certainly, the PRGF-supported programs will retain many of the key features of the ESAF and avoid a proliferation of conditionality. But there will be some changes in design and objectives:

• The costs associated with poverty-reduction programs will more directly influence the design of the macroeconomic framework--this means first, pinpointing the social outlays needed (and here, the IMF will rely on the World Bank), then ensuring that these outlays and the commensurate financing will be consistent with macroeconomic stability and faster sustained growth.

• Good governance--especially full transparency and effective monitoring of government budgets--will be emphasized to ensure that public resources are used effectively and for their intended purposes.

• Third, the poverty reduction strategy is likely to highlight key measures that are critical to achieving the government's social goals--such as price or land reform, or eliminating obstacles to better health and education services--which will then appear prominently in the programs.

In essence, the PRSP will make explicit what has always been implicit: the goal of supporting sustainable and faster economic growth, with the objective of producing lasting poverty reduction.

Financing PRGF and HIPC

Following extensive discussions on financing of the HIPC and PRGF initiatives, in September 1999, agreement was reached on the complete financing package that will enable the IMF to make its contribution to the HIPC Initiative and to continue concessional lending in support of poverty reduction and sustainable growth in its low-income member countries. The total cost to the IMF of these initiatives is estimated at $3.5 billion in end-1998 net present value terms, with the HIPC Initiative accounting for two-thirds of the total financing requirements. The main elements of the financing package comprise contributions to the PRGF-HIPC Trust by a wide-cross section of member countries and by the IMF itself.

On December 8, 1999, the Executive Board of the IMF took the decisions necessary to enable the IMF to begin to make its contribution to the PRGF-HIPC Trust, including the decision to undertake off-market gold transactions of up to 14 million ounces. The investment income from the profits generated by these gold transactions will be used to provide debt relief under the HIPC Initiative. The IMF has already completed two off-market gold transactions for a total of 7.7 million ounces of gold. The IMF has also begun to receive bilateral contributions to the PRGF-HIPC Trust, and further significant amounts of contributions are expected in the period ahead.

Financing for other multilateral institutions is critical to assure rapid implementation of the enhanced HIPC framework. Another important source of this financing is the HIPC Trust Fund, which is administered by the World Bank's International Development Association (IDA). By early September 1999, the HIPC Trust Fund had received approximately $330 million in contributions from bilateral donors. Subsequently, donors announced or reconfirmed pledges to the HIPC Trust of nearly $1.8 billion.