Public Information Notice No. 02/31

Public Information Notice: IMF Executive Board Reviews the Poverty Reduction Strategy Paper (PRSP) Approach

March 15, 2002

On March 8, 2002, the Executive Board of the International Monetary Fund (IMF) concluded its review of the Poverty Reduction Strategy Paper approach.

Background

In late 1999, the IMF—along with the World Bank—approved a new approach to the challenge of reducing poverty in low-income countries based on country-owned poverty reduction strategies. These strategies were expected to be country-driven, results-oriented, comprehensive and long-term in perspective, and foster domestic and external partnerships in line with the principles that underpin the Comprehensive Development Framework. They were to be embodied within a Poverty Reduction Strategy Paper (PRSP), which was expected to serve as a framework for development assistance beyond the operations of the Fund and Bank. At that time, the Executive Boards of the IMF and World Bank called for a comprehensive joint review of the PRSP approach after two years, drawing on contributions from member countries, international agencies, other development partners, and civil society.¹

In the full spirit of the PRSP approach, the Review was conducted in an open and inclusive manner, with a concerted effort undertaken to elicit the views of low-income country governments, development partners, and other stakeholders. The focus of the Review was on countries' experience to date in developing, implementing, and monitoring their poverty reduction strategies, recognizing that most countries are still at the early stages of the process. The joint IMF/World Bank staff papers for the Review—Review of the Poverty Reduction Strategy Paper Approach: Main Findings and Early Experiences with Interim PRSPs and Full PRSPs—drew on a wide range of inputs, including: (i) contributions from country PRSP teams and national civil society organizations (including at four regional PRSP events in Africa, Europe and Central Asia, East Asia, and Latin America); (ii) the views of development partners and other stakeholders (through some 50 papers and a series of seminars and outreach activities); (iii) Bank/Fund staff contributions; and (iv) an international conference which brought together representatives from 60 low-income countries, their development partners, and civil society. Background material and submissions regarding the Review can be found at: http://www.imf.org/external/np/prspgen/review/2001/index.htm.

Executive Board Assessment

Directors welcomed the open and inclusive process through which the review of the Poverty Reduction Strategy Paper (PRSP) approach was conducted. They acknowledged the important contributions made by representatives from low-income countries, development agencies, and civil society organizations, as well as the useful role that the regional and international conferences played in facilitating an open exchange of views about the PRSP approach.

Directors noted that broad-based country-led processes are taking hold in some 60 low-income countries and are being widely embraced by these countries' external development partners. They agreed that the principles and objectives of the PRSP approach remain valid, that there have been improvements over time in both process and content, and that the PRSP process can improve joint efforts aimed at poverty reduction. At the same time, Directors recognized that the design and implementation of country-owned poverty reduction strategies is a complex task, and that the experience has varied with each country's own starting point, capacities, and priorities. Because of these complexities, dialogue among all stakeholders is important, and in this connection it is essential that the need for policies to deliver sustainable growth be taken into account, while realizing that policy tradeoffs are inevitable. At the same time, once the various options for program design have been discussed and understanding is reached on the macroeconomic framework, the decision taken by the authorities needs to be respected. Directors considered that there is still considerable room for strengthening the PRSP approach, based on the experience of the past two years, in order to better achieve the goals of higher economic growth and lower poverty. Directors stressed that sources of sustainable growth, and policies to facilitate such growth, must be placed at the center of the PRSP process.

Directors noted most countries are only at the early stages of developing their PRSPs, and that it is too early to draw firm conclusions about the development impact of the approach. They stressed that further actions are needed to improve the preparation and content of PRSPs, including openness and transparency in countries' dialogue with stakeholders, broader civil society participation, realism in the setting of goals and targets, and improved alignment of donor policies with PRSPs. In addition, they called for greater emphasis on credible and measured growth strategies, better prioritization and sequencing of goals and policies, greater specificity of macroeconomic targets and policies, improved public expenditure and debt management practices, and development of short-term monitorable indicators that could demonstrate whether key objectives are being met. They believed that a range of good practices could be gleaned from the early experience, which could prove to be useful for countries and their partners in the PRSP process. Nevertheless, Directors agreed that, given the importance of country ownership, rigid guidelines should be avoided.

Directors emphasized the importance of country ownership and leadership in the development and implementation of poverty reduction strategies, but admitted that this task constitutes a major challenge for low-income countries with limited technical and institutional capacity. They therefore believed that support of capacity building should be a high priority for donors. Directors also recognized that a concerted international effort will also be required to enhance the knowledge base and understanding of sources of pro-poor growth, linkages between public policies and poverty outcomes, costing of priority public actions, assessing inter-sectoral trade-offs, analyzing the poverty and social impact of public policies, and addressing vulnerability and external shocks. They called upon the international community, including the Fund and the Bank, to provide the necessary technical and financial support in a timely fashion.

Directors stressed that countries must follow through on the policy commitments laid out in their PRSPs, particularly regarding macroeconomic and structural policies, improving the investment climate, good governance, healthy institutions, and investment in human capital and infrastructure. Developed countries, too, have a critical role to play by increasing aid and aligning it with country-led poverty strategies, by opening markets to developing country exports, and by phasing out trade-distorting subsidies. Directors stressed that only through such concerted actions could the fight against poverty be effectively sustained and the challenge of meeting the Millennium Development Goals (MDGs) for 2015 be attained.

Directors were encouraged that participatory processes were beginning to take hold in PRSP countries. They noted, however, that the role of Parliaments in the preparation, approval, and monitoring of country strategies has generally been limited, and that the involvement of other stakeholders has been uneven. Despite these deficiencies in early PRSPs, Directors believed that standards or guidelines on participation were neither desirable nor feasible.

Directors emphasized the essential role of faster sustained growth in reducing poverty, and called on countries to place greater emphasis on the sources of such growth. In this regard, they stressed the importance of developing an enabling environment for private sector investment and development. Directors expressed concern over the lack of prioritization and specificity of the public actions for poverty reduction in PRSPs, but acknowledged that this was due in part to inadequate methodologies for "costing" and for assessing inter-sectoral trade-offs between policies. They suggested that this is an area for priority technical assistance.

Directors called for PRSPs and JSAs to give greater emphasis to the risks of implementation, including those related to growth projections, vulnerability to external shocks, and shortfalls in financing. Directors urged countries to include in their PRSPs ex ante contingency spending plans to respond to these shocks and shortfalls.

Directors noted that in many countries public expenditure management systems need to be upgraded to facilitate a more meaningful presentation of the overall public expenditure program in the PRSP and to monitor implementation. As emphasized during their recent discussion of tracking poverty reducing public spending, Directors urged countries to strengthen their capacity to track poverty-reducing spending and to move swiftly to implement measures, to broaden the coverage of government accounts, upgrade budget classifications, and report budget outturns more frequently. Directors stressed importance of continued donor assistance in support of capacity building for public expenditure management, but acknowledged improvement in this area would take time.

Directors stressed the need for development partners, including the Bank and the Fund, to assist countries in undertaking more systematic PSIA of major policy choices, and acknowledged that progress in this area will be gradual and dependent upon available resources. Most Directors agreed that the Bank should continue to be the lead agency on PSIA since these analyses generally focus on structural and social issues within the Bank's core areas of expertise. A few Directors, however, underscored the need for the Fund to take a lead role in assessing the impact of macroeconomic polices. Directors considered that, at a minimum, PRGF documents should provide a qualitative description of the likely impact of major macroeconomic and structural measures on the poor.

Directors were encouraged that nearly all donors have agreed in principle to align their programs with PRSPs. They urged donors to harmonize and simplify their procedures and reporting requirements, and to align assistance as much as possible with national cycles of government decision making, particularly annual budget cycles. Directors noted that while programmatic lending is a potentially important instrument for alignment with PRSPs, there is considerable scope for alignment even without it. A few Directors emphasized that bilateral programmatic lending should be targeted to strong performers with adequate fiduciary procedures. Directors urged donors to provide information on medium-term aid commitments on a timely basis and to make aid flows more predictable, but acknowledged that predictability is also related to the commitment of countries to sound policies.

Directors reaffirmed that debt relief should be provided within a framework that would ensure that resources are used effectively for poverty reduction, and most agreed, therefore, that the Bank and Fund should retain the presumption of a one-year period of satisfactory PRSP implementation before reaching the completion point under the HIPC Initiative. Many Directors suggested, however, that some flexibility in timing could be allowed in cases where there has been satisfactory progress in implementing the PRSP, the other completion point triggers have been met, and the financial cost of delaying the completion point is significant. However, a number of Directors expressed concern that such flexibility would be inconsistent with the intentions of the HIPC instrument. They stressed that prior to considering such flexibility regarding a specific country case, the Board would need to first take a decision on the proposed policy change.

Directors agreed that countries should continue to have the option of preparing I-PRSPs and PRSP Preparation Status Reports as a basis for access to Bank/Fund concessional assistance until their first full PRSP is completed. Directors also concurred that countries should determine the appropriate periodicity of their full PRSPs within a range of two to five years, in line with their own planning cycles and capacity constraints, and that they continue to prepare annual PRSP progress reports in order to access Bank/Fund concessional resources. Directors noted, however, that the longer the period between updates of the PRSPs, the more governments would be expected to rely on annual progress reports to make any adjustments needed to their strategies.

Directors drew particular attention to the exceptional circumstances of conflict-affected countries, which face additional constraints in preparing a full PRSP due to weak administrative capacity, a continued weak security situation, and a fractured social and political environment. Most Directors believed that the existing PRSP framework is, in principle, sufficiently flexible for the special needs of conflict-affected countries, but urged the staff to be sensitive to these needs and to apply the JSA guidelines with appropriate flexibility in such cases.

Directors requested that the next review of experience with developing and implementing poverty reduction strategies be carried out at the latest before the 2005 Spring Meetings, with external participation from low-income countries, international organizations, other aid agencies, civil society, and the business community. Directors agreed that staff reports on progress in implementing the PRSP approach should henceforth take place on an annual cycle beginning with the September 2002 Annual Meetings.