01/06 IMF Lending to Poor Countries—How does the PRGF differ from the ESAF? By IMF Staff April 2001

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Contents

How the PRGF Differs from the ESAF

Key Features of PRGF-Supported Programs

Progress in Implementing the New Approach

Conclusion

In September 1999, the IMF embraced a new anti-poverty focus for its work in low-income countries. As part of this move, the IMF terminated its Enhanced Structural Adjustment Facility (ESAF) and replaced it with a new lending facility for low-income countries, the Poverty Reduction and Growth Facility (PRGF). The core aim of the PRGF is to arrive at policies that are more clearly focused on economic growth and poverty reduction and, as a result of better national ownership, more consistently implemented. More than just a change in name, the new facility has brought with it a number of innovations designed to ensure that lending programs are pro-poor and in line with each country's own strategy for reducing poverty. These innovations are complemented by a stronger partnership with the World Bank to increase the effectiveness and sustained impact of our efforts to reduce poverty.

How the PRGF Differs from the ESAF

The replacement of the Enhanced Structural Adjustment Facility (ESAF) by the Poverty Reduction and Growth Facility (PRGF) raised expectations about the role of the International Monetary Fund in the struggle against poverty in the world's poorest countries. The change involved not just a new label, but also important changes in the Fund's operations designed to ensure that the IMF would deliver on its new commitment to fight poverty. At the time the PRGF was introduced, there were 33 lending arrangements in place with member countries under the ESAF. It has taken time for the Fund to develop new approaches and new methodologies for these and subsequent loans, and for the countries concerned to develop the poverty reduction strategies on which PRGF lending is to be based. Nevertheless, the key elements that distinguish the PRGF from its predecessors are already clear.

The most important innovation has been the PRSP process. Poverty reduction strategy papers (PRSPs) are prepared in all low-income countries intending to borrow from the IMF or World Bank or access debt relief under the Initiative for Heavily Indebted Poor Countries (HIPC). National authorities base PRSPs on extensive consultation with stakeholders, including civil society and donors, rather than on negotiations with IMF or World Bank staff. The aim is to integrate the authorities' macroeconomic framework with an assessment of the poverty situation and plans to reduce poverty. Because this can be time-consuming, countries are producing Interim PRSPs that cover existing policies and plans and explain how the more participatory full PRSP will be developed. PRGF programs can therefore incorporate some of the improvements of the new process even before full PRSPs are completed.

The core aim of the PRGF is to arrive at policies that are more clearly focused on economic growth and poverty reduction and, as a result of better national ownership, more consistently implemented. To achieve this, PRGF-supported programs are being derived from the PRSPs, and are readily contrasted with ESAF-supported programs:

• The objective is different: The PRGF explicitly makes poverty reduction a central goal, whereas under the ESAF poverty reduction was an implicit by-product. Hence, policies now have to be weighed in terms of their contribution to poverty reduction.

• The relationship with the country's strategy is different: The specific measures supported by a PRGF loan arrangement have to derive from the poverty reduction strategy described in the country's PRSP, which is also the basis for all other official creditor support. The PRGF is therefore part of a more coherent and country-led approach to poverty-reduction policies, with the macroeconomic and poverty-reduction elements of the economic program better integrated than in the past.

• The way programs are formulated is different: The Policy Framework Papers (PFP), the basis of ESAF loan arrangements, were prepared jointly by country officials and IMF and World Bank staff without broader consultation. PRSPs, and thus PRGF-supported policy programs, are country-led and incorporate contributions to policy design from across society. Because PRGF-related documents are published more extensively than under the ESAF, programs are more transparent, enabling other donors to use PRSPs as the basis of their support as well.

• The nature of conditionality is different: The PRGF's emphasis on country leadership and enhanced collaboration with the Bank mean that IMF conditionality is less extensive and more focused on the Fund's core areas of responsibility than before.

• The link with the World Bank is different: the Bank and Fund jointly assess the PRSP, which then serves as the basis for concessional lending by both institutions. That way, the two institutions can tailor assistance to fit their respective areas of responsibility in supporting the PRSP strategy. Thus, there is both more collaboration and a clearer division of labor.

Some changes are already evident in a number of ways: greater transparency; a pro-poor shift in public expenditures; more focus on governance and accountability for public resources; streamlined conditionality; and willingness by some donors (such as the United Kingdom and the European Union), to use the PRSP as a basis for their aid. Other changes are occurring and will become more evident over time, as participatory processes take hold and full PRSPs are completed.

Key Features of PRGF-Supported Programs

As use of the PRGF has evolved, a number of distinctive features of the new facility have emerged. Foremost among them is broad public participation and increased national ownership. Basing a PRGF-supported program on the country's PRSP should ensure that civil society has been involved in formulation of the program, that the country authorities are the clear leaders of the process, and that the program is properly embedded in the overall strategy for growth and poverty reduction. Thus, IMF staff are required to explain to the Executive Board how these programs derive from the poverty reduction strategy and how they are complementary to the World Bank's activities and conditionality.

An important outcome of the new approach is that more attention is being given to the economic aspects of governance than in the past. At the same time, more attention is being given to the social impact of major reforms under the program. Where there are expected to be major reforms, analysis of the impact on the poor has to be conducted (normally by the World Bank where governments lack the capacity to do this work themselves), and, where necessary, countervailing measures incorporated in the PRGF-supported program. With improved country ownership, PRGF conditionality can and should be more selective, focusing on measures central to the success of the country's strategy, particularly in the macroeconomic and financial areas.

Public Participation

A good start has been made in developing participatory processes for PRSPs. Efforts have been made by governments to include stakeholders and development partners in the discussions underpinning the development of PRSPs, even in countries where there is little tradition of this. Some national stakeholders and donors have suggested that they be brought into the process earlier and be provided with more information in advance of discussions, and Fund and Bank staff have been encouraging countries to address these concerns.

While the PRSP process is "country-owned", it is clearly "government-led". The IMF can only support strategies that effectively address the needs of the poor and have a credible chance of implementation. Concerns were initially raised that participatory processes could potentially undermine the legitimacy of governments, but there is no sign that this is occurring. It is for governments to decide whom to consult and how, and to determine the final content of their strategies. Each country needs to develop its participatory process in light of its unique circumstances and find an appropriate balance.

Economic aspects of governance

Under the new approach, more attention is devoted to public resource management and to the economic aspects of governance more generally. Government budgets under PRGF-supported programs need to be more pro-poor and pro-growth. Government spending is being shifted toward activities that demonstrably benefit the poor, especially where debt relief under the HIPC Initiatives is releasing funds previously used for debt service. At the same time, tax reforms aim to improve both equity and efficiency. Equally important is ensuring appropriate flexibility in fiscal policy, including in targets for fiscal balances. There should be scope to react to commonly experienced shocks, such as deteriorating terms of trade or poor harvests. And, when it is clear that it could be used productively, there needs to be scope to spend new foreign aid that may become available in the course of the fiscal year.

Emphasis is also being placed on measures to improve accountability in public resource management. Strengthening fiscal governance to improve public services and ensure proper use of HIPC debt relief and other government resources is a key objective of PRGF-supported programs.

Conditionality

An important corollary to basing the PRGF-supported programs on the national poverty reduction strategy is that conditionality must take into account the need to promote country ownership and program effectiveness. Conditionality should aim to reinforce the priorities set out in the country's strategy, and be applied more sparingly--on a few priorities rather than many details. The close involvement of the World Bank in PRGF countries also requires that there be a clear division in the conditionality applied by the two institutions, with each focusing on its respective area of expertise and responsibility. The Bank has established the Poverty Reduction Support Credit (PRSC) to enable it to link its lending directly to the implementation of a PRSP.

Early progress in streamlining conditionality under new PRGF arrangements (those negotiated since the new approach came into effect) has been promising. Virtually all structural conditions in these programs are confined to four core Fund areas: fiscal management (expenditure control, accounting, auditing); tax reform; financial sector reform; and governance. Programs in some countries, such as Benin, Guinea-Bissau, and Niger, have no structural conditions outside the fiscal area. And the number of conditions is generally well below the average under ESAF. But more detailed conditionality continues to be applied where it is needed: the programs for Kenya and Cameroon, for example, have quite detailed conditionality in the governance area, reflecting country circumstances.

Progress in Implementing the New Approach

The new approach is beginning to take hold in many countries, but progress is dependent to a certain extent on country progress in formulating PRSPs. Most PRGF-eligible countries are still in the early stages of developing poverty reduction strategies. To date, the Executive Boards of the IMF and World Bank have reviewed four PRSPs (Burkina Faso, Mauritania, Tanzania, and Uganda), though by the end of 2001, some two dozen countries (18 of them HIPCs) are expected to have completed PRSPs. In the meantime, however, 32 Interim PRSPs, which integrate existing poverty data with government policies formulated in a less participatory manner, have been completed.

Interim PRSPs have varied widely in terms of both content and process, but there has been a substantial degree of government ownership of the documents. Each of them has laid out a road map for developing a PRSP in a participatory manner. Generally, the process has advanced most quickly in countries that already had some kind of inclusive national development forum or plan, such as Ghana, Uganda, and Tanzania.

Conclusion

It is too early for the PRSP approach to have had a visible impact on growth and poverty reduction. However, there have been real and important changes in the IMF-supported programs put together under the new approach. PRGF-supported programs, by drawing on participatory poverty reduction strategies, should be much better able than past IMF programs to make a positive difference in the lives of the world's poorest people.