Contents

I. Introduction

1. This paper is meant to frame the Fund's policy agenda for low-income member countries in the coming months. It presents a statement describing the role of the Fund in low-income member countries (Section II). It then raises a set of current policy issues stemming from that statement (Section III). Finally, the work program for the coming six months is presented referencing the relevant policy issues (Section IV). It does not include all the activities in which the Fund is engaged in its work with low-income member countries, nor is it a catalogue of the Fund's policies as regards low-income members.

II. The Role of the Fund in Low-Income Member Countries

2. The recently formed Committee on Low-Income Country Work,¹ chaired by the First Deputy Managing Director, set as one of its first tasks the crafting of a succinct statement on the role of the Fund in low-income countries. It drew on previous Board documents² and the recent study by the IEO on Poverty Reduction Strategy Papers (PRSPs) and the Poverty Reduction and Growth Facility (PRGF).³ It also drew on extensive staff discussions over the last few years with officials of low-income countries, multilateral and bilateral institutions, and civil society. This statement is preliminary and will be revised as the work program outlined in Sections III and IV is implemented. The Board will have an opportunity to discuss any revisions before the 2005 Spring Meetings of the IMFC. The statement is as follows:

A. Proposed Statement on the Role of the Fund in Low-Income Countries

3. The International Monetary Fund supports the efforts of its low-income members to address their central economic policy problems: creating an environment conducive to growth and development, improving living standards and reducing poverty. It is the responsibility of low-income member countries themselves to put in place the policies and institutions needed for their development. The Fund focuses its support on its core expertise-helping members establish and maintain macroeconomic and financial stability, which is essential to foster durable growth and reduce poverty. The Fund endeavors to have the deepest possible understanding of the impact of macroeconomic policies on growth and poverty reduction, so as to be able to give its members the best policy advice available. It works with its member countries-rich and poor-and other international institutions to help deliver coherent and effective policy advice, financial assistance, and technical support to low-income members. The Fund endorses the Millennium Development Goals (MDGs) and is committed to playing its part in the Monterrey Consensus. Members' Poverty Reduction Strategies will serve as the operational framework for the Fund's work with its low-income member countries.

4. The Fund supports its low-income members in three complementary ways-policy advice, including in the context of surveillance, capacity building, and financial assistance:

• The policy advice of the Fund focuses on the macroeconomic policies needed in low-income countries if they are to achieve high growth and poverty reduction over the medium term. Drawing on its expertise in monetary, fiscal, and international economics, the Fund's advice is centered first on achieving and maintaining macroeconomic stability as an essential ingredient to growth and poverty reduction. The Fund, together with other international organizations, assists its low-income members to implement policies needed to improve resource allocation, rationalize trade regimes, promote financial sector development, and deal with external shocks. The Fund helps countries establish the appropriate environment for private sector development. Moreover, it advises member countries on how to strengthen governance in its core areas of expertise to ensure transparency, accountability and efficiency in the use of public resources. The Fund assists low-income member countries achieve and maintain debt sustainability by providing the tools for members to analyze and monitor their debt and manage their borrowing. The Fund tailors its policy advice to member countries' circumstances and encourages policies that give its members sufficient flexibility to adjust to changing conditions.
  
  
• The Fund assists low-income member countries in building the capacity to formulate and implement macroeconomic and financial policies. Capacity building takes many forms, including technical assistance, training of country officials, and working with country authorities in formulating and executing macroeconomic reforms. In particular, the participation of its resident representatives and missions in the PRSP process is instrumental in assisting low-income countries to engage a broad range of partners in discussing macroeconomic policy choices. These efforts enable the Fund to contribute to building the macroeconomic and financial institutions and knowledge to ensure the sound development, implementation, and monitoring of macroeconomic policies and reforms.
  
  
• Fund financing can ease the adjustment path for members with macroeconomic imbalances or where structural impediments hamper more rapid growth. The Fund recognizes that such adjustment can take longer in low-income countries and thus can be evidenced in a protracted balance of payments problem, rather than an immediate balance of payments financing need. When macroeconomic imbalances need to be reduced, the Fund helps its members minimize the impact on national prosperity and on the poor. Given low-income members' limited capacity to service external debt, the Fund provides financing to them on concessional terms, and, where necessary, grants debt relief under the enhanced HIPC Initiative.

5. The Fund sees its mandate in the context of the international partnerships that are essential if low-income countries are to reach the MDGs. Within the policy frameworks established by the low-income members, the Fund takes the lead among donors in assisting low-income countries in its core competencies. The Fund recognizes that its contributions are enhanced by coordinating its work with bilateral donors and other multilateral institutions in the context of the Monterrey Consensus and through the Poverty Reduction Strategy process at the country level. Sound macroeconomic policies provide a framework for other policies necessary to build the human, institutional, and physical capital needed for development. Moreover, most low-income member countries require external development financial assistance for many years to meet the development challenge; the donor community and multilateral development banks, not the Fund, play the central role in providing such long-term financial assistance. Thus, the Fund helps to establish and maintain an appropriate economic policy environment vital for aid to be put to good use. Where needed, the Fund provides clear signals to the low-income member and its international partners concerning the quality of the macroeconomic policies and structural reforms in the Fund's areas of expertise. The Fund's capacity-building efforts are also complementary to efforts of others. The Fund maintains a dialogue with other partners in the Monterrey Consensus, including official agencies and civil society. The Fund keeps under close review its priorities in executing this role, as well as the adequacy of resources devoted to these tasks.

III. Areas of Work

6. The Executive Board and staff seek to align the Fund's policies to support its role in low-income member countries effectively and to ensure these policies are implemented consistently. The Fund is engaged in a continuous learning process, drawing on analytic work in macroeconomics and development as well as the Fund's experience in low-income countries.

7. Resource costs are an overarching constraint. The policy agenda is too extensive to tackle all elements at once. In the circumstances of strictly limited resource availability, it is critical to calibrate carefully the resource implications of work on the low income agenda and set priorities clearly. Given the current medium-term expenditure framework, the resources for additional new work will need to be found through reductions or efficiency gains in other activities. This makes it imperative that the contributions of the Fund in the global partnership to help low-income countries be scrutinized continuously as new initiatives are developed and that resource commitments are reviewed in the context of the forthcoming medium-term framework.

8. This section lays out the areas of policy work staff see as a priority in the immediate future. As noted above, it is not meant to be a comprehensive catalogue of all areas of Fund activity in low-income member countries. The three areas of Fund endeavor-policy advice, capacity building, and financial assistance-provide a useful way to organize the tasks before us, recognizing, however, that the three are inherently related. A fourth area of work-on how the Fund fits into the Monterrey Consensus-is also discussed.

A. Policy Advice

9. The Fund's policy advice will center on its core expertise-macroeconomic stability. As various Board papers have noted, many low-income members made considerable strides in the 1980s and 1990s in achieving macroeconomic stability, and very few question the need for macroeconomic and financial stability as a prerequisite to growth and poverty reduction. This progress must not be lost, so the basic messages of monetary and fiscal prudence will remain very much the center of the Fund's policy advice to low-income countries. The focus on poverty reduction and growth, which accompanied the establishment of the PRGF and the PRSP framework, as well as the international commitment to meet the MDGs, underscored the need for the Fund to be continuously alert as to how its policy advice can best assist low-income countries move to a path of high sustained growth and poverty reduction. Moreover, there have been calls for the Fund to broaden the macroeconomic policy debate in low-income countries by explaining the rationale for its policy advice and disseminating that information more widely.

10. The Fund must continue to make clear how macroeconomic stability translates into higher growth in low-income countries. Flexibility of macroeconomic policies has come to the forefront of the policy debate, which centers on how macroeconomic stability is gauged in highly volatile economies with weak macroeconomic institutions. The Fund must help its low-income members prepare for, and deal with, external shocks. Moreover, given the international effort to assist countries meet the MDGs, the Fund advises its low-income members on managing aid flows in a way that benefits the poor and enhances macroeconomic stability. In addition, Fund expertise is relevant in developing complementary policies to engender sustained growth. These include, but are not necessarily limited to, trade liberalization, financial sector development (including development of microfinance institutions and financial services), and governance. In many of these areas, close coordination with other partners, particularly the World Bank, is essential.

11. The Fund also needs to continue to consider how its policy advice works toward the reduction of poverty. Sustained poverty reduction is not possible without macroeconomic stability and growth. Beyond that, however, the Fund can play a role in ensuring government policies support poverty reduction. One area of continuing work is to help member countries ensure sufficient fiscal space is available for poverty reduction activities by improving efficient revenue mobilization and developing multi-year public expenditure monitoring systems. Another important component of this work is improving the understanding of the impact of macroeconomic policies on growth and poverty reduction. Here the variety of "Poverty and Social Impact Analysis (PSIA)" tools are helpful. While the World Bank and other donors have the lead in assisting low-income countries prepare PSIA, the Fund needs to incorporate relevant PSIA in its work with these members.

12. The Fund offers low-income countries advice on how to manage aid inflows, which is crucial given the international effort to mobilize more aid for the MDGs. The Fund does not have the expertise to judge whether higher levels of aid are used effectively within a country. But it can advise countries on issues of fiscal sustainability, including whether aid dependence erodes revenue-raising efforts and on the appropriate exchange rate policy and level of international reserves in the face of large and often volatile flows of aid. It also helps countries deal with the propensity to borrow excessively in the face of overwhelming human needs-a range of issues associated with debt sustainability. And it must help countries deal with the potential destabilizing effects of increase foreign currency inflows-so called Dutch disease effects.

B. Capacity Building

13. Capacity building is not merely the provision of technical assistance to low-income countries, but the complex of interactions between the Fund, its staff, and low-income member authorities that enhances their ability to develop, manage, and monitor macroeconomic policies. Of particular importance is the need to build strong financial and macroeconomic management institutions. The recent review of technical assistance by the Fund-to be complemented by a forthcoming IEO study-provided a framework for continuing the assistance given by FAD, ICM, MFD, STA, and other departments. The regional technical assistance centers will play an important role in these efforts, while the IMF Institute will carry on with its mission of training member countries' officials in the core areas of the Fund's competence.

C. Financing and Debt Relief

14. The Fund is tailoring its financial assistance to the needs of its low-income members. The recent changes in polices regarding Emergency Post-Conflict Assistance (EPCA), access norms, low-access PRGF arrangements, and blending, approved by the Board in March 2004, are important steps. Some issues raised in the March paper are still outstanding, including a shocks facility for low-income countries, subsidization of emergency natural disaster relief, post-program monitoring for PRGF-eligible countries, and projected PRGF resource requirements and financing availability over the medium term.

15. The role of the Fund in mobilizing the aid flows needed to meet the MDGs should be elaborated more clearly. As the statement in Section II indicates, the Fund does not provide the long-term development assistance needed to meet the MDGs. However, some believe that the Fund should help its members present their case for how much aid is necessary to meet the MDGs. While the World Bank and other bilateral and multilateral donors are better equipped to craft the estimates, the Fund could provide a coherent macroeconomic and financial framework that ensure that such flows do not undermine growth, stability or long-term viability. Some would have the Fund play an advocacy role in the international community by assessing how much aid has already been pledged, how much more is needed, how much debt a country can afford to service, and how the aid could be timed to minimize the potential for macroeconomic disruption. Others see a more limited role for the Fund, in which it concentrates on its macroeconomic advisory role in helping countries deal with aid inflows and does not act as an advocate for its low-income member. The IEO has raised similar issues. With the focus on MDG financing increasing in the international discussions of aid, further clarity will be important, with due consideration for resource costs.

16. A related issue is the Fund's role when its financial assistance is not critical to ensuring the country's balance of payments needs are met. Here the key issues pertain to the regular provision of macroeconomic advice-in the context of surveillance, or discussions on a Fund-supported program-and the type of signals sought by donors from the Fund to assure them that the macroeconomic policies of the country provide a sound basis for their aid. Issues of Fund support to, or endorsement of, a member's economic programs without providing financial assistance, precautionary arrangements, and intensified surveillance fall under this heading.

17. On external debt, the Fund is seeking ways to enable countries, especially HIPCs that have reached the completion point, to maintain debt sustainability over the medium term. The lack of grant financing to meet the MDGs heightens the tension between the development imperative and debt sustainability. The Fund remains committed to assisting HIPCs in reaching the completion point without undue delay. Recently multilateral debt relief beyond the HIPC Initiative has been raised as an issue.

D. The Fund and the Monterrey Consensus

18. Consistent with its mandate, the Fund coordinates its work with other international partners to succeed in our joint effort to assist low-income countries. Coordination needs to take place at two levels-the institutional level and the country operations level. The various institutions involved in assisting low-income countries must work to ensure that, with each operating within its own areas of expertise, low-income countries indeed have access to the range of policy advice, capacity building, and technical assistance they need to meet the MDGs. At the same time, country teams need to collaborate to ensure that the specific needs of each individual country are met. This is no small task at either level, given the complex web of governments, aid agencies, and development banks that are attempting to assist these countries.

19. The respective roles of the Fund and the Bank have been considered by the Board in the past, most recently in the paper on Bank-Fund collaboration (EBM/04/26, 3/17/04). This area merits continuous examination. With the recent revival of the Joint Implementation Committee (JIC) and in the context of the various joint Bank-Fund papers on low-income country policy (see Section IV), ample opportunity for the staffs and the Executive Boards exists to examine and refine two institutions' collaboration.

20. Coordination of financing for the MDGs figures prominently in the international agenda, especially over the next year as the international community prepares for the United Nations Summit on the Millennium Development Goals to be held in New York in September 2005. The Fund staff needs to understand the various international proposals for mobilizing more aid, such as global taxes and the international financing facility, and asses the impact they might have on all its members-rich and poor alike. The Fund recognizes the various global funds for poverty reduction (such as the Global Fund to Fight Aids, Tuberculosis, and Malaria) and other means of delivering aid to its low-income members. Country teams will need to collaborate with donors to know how much aid is in prospect, minimize disruptions in aid flows, and have flexible mechanisms to handle variable aid flows. Such donor coordination can be extremely resource intensive and the role of staff needs to be clearly spelled out.

21. At an institutional level, the Fund continues its dialogue with others on donor coordination and harmonization. Perhaps the most oft-repeated and enduring complaint of low-income countries is that donors set multiple and overlapping conditions for aid delivery. In the face of scarce administrative resources, low-income countries have difficulty meeting all these conditions, and thus aid is delivered erratically. The Fund has been engaged with multilateral and bilateral donors in discussing the institutional mechanisms needed to make the system more responsive to low-income country needs, while ensuring that aid is indeed used soundly.

22. Interactions in the PRSP process allow country teams to ensure that the Fund plays its part in the Monterrey Consensus in each country. Annual Reports on PRSP implementation and the report of the IEO have raised concerns about Fund engagement in the PRSP process at the country level. There is a tension between country ownership and Fund/Bank involvement that needs constant balancing, but the extent to which such balancing is currently appropriate has been questioned and bears further discussion now that the PRSP process is almost five years old. One issue is the role the Fund plays in the PRSP process itself-as observer, participant, or advisor-and how that role changes depending on the stage of the process, the capacity of the authorities, and the member's political and administrative systems. A second issue is the relation between the country's PRSP and the PRGF-supported program, including how the Board and staff are informed about the PRSP and how they inform the authorities of their opinions on the strategy set out in the PRSP. Documentation is an important aspect, especially the role of the Joint Staff Assessment in the nexus of relations between the country, the staff and the Board. The Fund staff's limited outreach to the donors, civil society, and the population at large on macroeconomic issues has also been raised as an issue. Macroeconomic and socio-demographic data need to be improved to permit adequate monitoring of economic performance and of progress in reducing poverty and other MDGs.

IV. Policy Work Program 2004-2005

23. This section presents a sketch of the various components of the work program in this policy area, from the perspective of the role and issues outlined in Sections II and III. These issues do not lend themselves easily to a single piece of analysis, nor would a single paper settle definitively all the issues related to the role of the Fund in low-income countries. Instead, work will proceed along various lines, with country experience informing policy development and institutional response in an iterative manner. The Spring and Annual Meetings will provide an opportunity to take stock and to raise new issues that require further examination.

24. Outreach is an important component in much of the work outlined below. Fund staff remains in close contact with bilateral and multilateral donors and is an active participant in international fora concerned with assisting low-income countries. In the past year, Fund staff has increased its interaction with the various bodies of the United Nations, including the Secretary General's Millennium Task Force, as well as the OECD. But the Monterrey Consensus reaches beyond official entities to civil society partners. The Fund staff has expanded its dialogue with civil society groups over the past few years and that dialogue will continue at the institutional and member country levels.

A. Papers for Consideration of the Board before the 2004 Annual Meetings

25. Financing and a concessional shocks facility. The Board will discuss two related issues-mobilizing additional PRGF loan resources and a concessional shocks facility (Section III.C, paragraph 14).

26. Subsidization of Emergency Natural Disaster Relief and Post-Program Monitoring. The Board will receive papers on these subjects for consideration (Section III.C, paragraph 14).

27. Annual Report on PRSP Implementation. This paper, prepared jointly with the World Bank, will look at the implementation of the PRSP process during 2003 and 2004, focusing on areas of concern raised in earlier reports and by IEO and OED reports. It will consider issues of the appropriate macroeconomic framework in PRSPs and how the macroeconomic framework fits in with the effort to meet the MDGs (Section III.A paragraph 10). It will take a preliminary look at issues of the Fund's contributions to the PRSP process (Section III.D, paragraph 22). Given their implications for the resident representative's role and possible resource implications, a more complete discussion will be postponed until after the Annual Meetings (see Section IV.B, paragraph 33). The paper will, however, make concrete suggestions to improve both the joint staff assessment and the country's annual PRSP progress report (Section III.D, paragraph 22).

28. HIPC Progress Report. This paper, prepared jointly with the World Bank, will provide an update to the Board on progress under the enhanced HIPC Initiative and make proposals to extend the sunset clause, which due to take effect at the end of 2004 (Section III.C, paragraph 17).

29. Operationalizing the Debt Sustainability Framework. This paper, prepared jointly with the World Bank, will refine the debt sustainability methodology put forward in March 2004 and explore the operational implications for the work of the Fund and the Bank as well as for Fund-supported programs in low-income countries. (Section III.C, paragraph 17).

30. Making the case for aid, aid effectiveness and financing the MDGs. This paper, prepared jointly with the World Bank, will consider the case for increased aid to meet the MDGs, how this aid can be used most effectively, and how it might be mobilized through such mechanisms as global taxes or an international finance facility (IFF) (Section III.D, paragraph 20). The Board will discuss this topic in seminar format.

B. Work Program Between the 2004 Annual Meetings and the 2005 Spring Meetings

31. Donor coordination and signaling in low-income countries. The issues of assisting members in formulating economic policies and endorsing those policies without providing financial support will be considered in the broader context the Fund's coordination of its country work with donors (Section III.C, paragraph 16 and Section III.D, paragraphs 20-21).

32. PRGF Program Design. This paper will consider the broad set of issues surrounding the Fund's macroeconomic policy advice to low-income countries, concentrating on those countries that have established macroeconomic stability and are searching for sustained high levels of growth and poverty reduction. The paper will consider how recent economic analysis by Fund researchers, the World Bank, academics and other experts should inform Fund policy advice. Areas of focus will include institutions and growth, monetary and fiscal policies, and dealing with aid inflows. It will also set an agenda for further research by the Fund and others (Section III.A, paragraphs 9-12).

33. Fund involvement in the PRSP process. This paper will draw on the experience of Fund staff, the reports of the IEO and OED, the review of the resident representative program and the observations of those outside the Fund and Bank who have looked at the PRSP process, to refine the ways in which the Fund involves itself in the PRSP process. As such involvement is inherently resource intensive, the report will consider the resource implications of any proposed changes in detail and will provide a backdrop for the FY2006 budget discussions (Section III, paragraph 7 and Section III.D, paragraph 22).

34. The Global Monitoring Report. The second annual global monitoring report, prepared jointly with the World Bank, will report on progress made by the international community in its work to meet the MDGs (Section III.D, paragraphs 18 and 20).

35. Report on strengthening public expenditure management systems in HIPCs. The Bank and the Fund are jointly undertaking a comprehensive assessment of the public expenditure management systems in 28 HIPCs with a view to ascertaining their capacity to track poverty-reducing expenditure effectively (Section III.A, paragraphs 11-12).

36. Review of the role of FAD in rebuilding fiscal institutions in post-conflict settings. This paper will analyze key priorities for rebuilding fiscal institutions in the early post-conflict period, on the basis of advice given by FAD technical assistance missions (Section III.A, paragraphs 11-12).

37. Conferences on macroeconomics and aid in low-income countries. Through the support of the United Kingdom and the Netherlands, the World Bank and the Fund have jointly sponsored macroeconomic research by academics and other professionals in low-income countries. The fruits of these efforts will be discussed at a conference to be held in February 2005 (Section III.A, paragraphs 9-12). Furthermore, the IMF Institute is in the process of organizing in early 2005 a high-level seminar on foreign aid and macroeconomic management.

C. Looking Beyond Spring 2005

38. 2005 will be an important year for the MDGs and the Monterrey Consensus. As 2005 is the fifth anniversary of the Millennium Summit, the United Nations will be hosting a summit in New York to discuss progress in meeting the MDGs. The Fund plans to play an active role in the summit itself, as well as the lead-up activities to it. Of note will be the follow-up to the 2002 Forum on Donor Harmonization, which will be held in Paris in March.

39. In the discussion of the 2002 reviews of the PRSP and PRGF, the Boards asked for a follow-up review of the PRSP in 2005. Staff is beginning to formulate ideas for this review, which, together with the Global Monitoring Report, will provide a basis for the Fund's contribution to the Millennium Summit.

V. Issues for Discussion

40. Directors may wish to consider the following questions:

• Do Directors agree with the statement on the role of the Fund in low-income countries contained in paragraphs 3-5?
  
  
• Do Directors agree that Section III raises appropriate issues for Fund staff to be considering in the next 12 months?
  
  
• Do Directors agree with the tentative work program set out in Section IV, recognizing that staff remains open to changes in the work agenda desired by the IMFC and Governors of the Fund?