Public Information Notice No. 04/36

Public Information Notice: IMF Discusses Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality--Progress Report

April 7, 2004

On March 17, 2004, the Executive Board of the International Monetary Fund (IMF) discussed a Progress Report on Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality. The report was prepared jointly by the staff of the IMF and the World Bank.

Background

In September 2000, the Managing Director of the Fund and the President of the World Bank set out a shared vision for closer cooperation.¹ This vision emphasizes the importance of national ownership of reform programs, the need for a coherent approach to supporting reform priorities based on an efficient division of labor, and focusing conditionality on measures critical to program success. In operational terms, this vision is embodied in a framework for collaboration at the country level, centered on the Heavily Indebted Poor Countries Initiative (HIPC) and the Poverty Reduction Strategy Paper (PRSP) for low-income countries, and buttressed by an intensified dialogue between the Bank and the Fund on thematic policy issues.

Reflecting convergent orientations in the Fund on the streamlining of its conditionality and in the Bank on strategic selectivity, the Boards of the Bank and the Fund welcomed the proposals for a stronger operational framework for collaboration set out in an August 2001 joint paper, Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality. This was followed by a staff guidance note, which provides a systematic structure for staff cooperation that stresses three key principles: division of labor based on the concept of a lead agency, discussions and coordination at early stages of formulating policy advice and conditionality (upstream engagement), and effective information sharing among staff and with the Boards of the two institutions while maintaining the accountability of each institution for its own financing.

A progress report on IMF-World Bank collaboration was discussed by the Boards of the Bank and the Fund in September 2002. The report presented the results of a survey of Fund mission chiefs and Bank country directors. At that time, both Boards requested to be kept abreast of Bank-Fund collaboration at the country level and requested that the next progress report be based on a similar survey, preferably expanded to include the views of national authorities. The present report reviews collaboration on country programs and conditionality based on new survey results and proposes measures to enhance collaboration including on thematic issues.

Executive Board Assessment

Executive Directors welcomed the opportunity to review progress on IMF-World Bank collaboration on country programs and conditionality, the second review of its kind since the new operational framework on collaboration was set out in August 2001. They reiterated that close collaboration between the Bank and the Fund is indispensable for providing effective support to member countries in promoting financial stability, sustainable growth, and poverty reduction. Bank-Fund collaboration is of particular importance to ensure the effectiveness of the Fund's efforts in assisting low-income countries with the implementation of reform programs, based on strong country ownership, in the context of the PRGF/HIPC Initiative framework, and helping them make progress toward the Millennium Development Goals. In this context, several Directors also highlighted the importance of effective collaboration between IMF/World Bank staff, on the one hand, and other multilateral and bilateral organizations, on the other hand.

Directors emphasized that effective collaboration between the Bank and the Fund requires a clear demarcation of responsibilities based on their respective mandates and comparative advantages. They also stressed that the focus of conditionality should be on reforms that are critical to program success. Directors highlighted the importance of two main elements of the coordination framework: the designation of one of the two institutions as lead agency in particular policy areas; and systematic information-sharing between the institutions. They underscored the need for early engagement between Bank and Fund staffs to harmonize the two institutions' respective roles.

Directors found it useful to discuss the current state of Bank-Fund collaboration on the basis of survey responses from national authorities and from Bank and Fund staff, while noting that the results of these surveys need to be interpreted with sufficient caution. They were encouraged by indications that Bank country directors and Fund mission chiefs typically share a common perspective regarding the country's critical areas for reform, and that the division of labor is now clearer than in the past.

Directors were encouraged by the indications—in the responses of national authorities—that Bank-Fund collaboration is increasingly serving to strengthen national ownership, while stressing that continued progress in this area remains critical to the success of reform programs. Both institutions also appear to be showing increased sensitivity to social and political constraints, and close collaboration between them is helping to reduce the time spent in program negotiations. At the same time, Directors underscored that national authorities perceive a need for further progress in aligning program design and conditionality with a country's own reform priorities and implementation capacity.

While the survey results provide renewed support for the existing operational framework on collaboration, Directors stressed that there is no room for complacency. They noted that the survey results point to scope for further improvements with regard to the implementation of the agreed division of labor, the coordination in the interaction with government authorities with a view to further strengthening country ownership, and the information-sharing between the staffs of the two institutions. In particular, the survey findings reinforce some perceptions of continued tensions in the collaborative process regarding the coverage and application of conditionality and the scope and pace of reforms. Directors recognized that some of these findings may reflect differences in the responsibilities and organizational structures of the two Bretton Woods institutions. Given these differences, sustained efforts to strengthen collaboration within the agreed framework remain indispensable. In particular, increased upstream engagement, including during surveillance or pre-program situations, and coordination in program design should help ensure that priorities are appropriately set and the division of labor is clearly established, while ensuring that all important reform areas are adequately covered. Directors stressed that strong cooperation at the country level remains key to effective Bank-Fund collaboration, with some Directors highlighting the importance of providing the right incentives to the staffs in this regard.

Most Directors welcomed the decision by the Bank and Fund managements to strengthen the role of the Joint Implementation Committee (JIC) as a mechanism for collaboration at the senior staff level, while cautioning against creating bureaucratic layers. They expected the revamped and streamlined JIC to be an effective instrument for monitoring and further improving collaboration and communication between the staffs of the two institutions, including on cross-country analytical work where close collaboration is required. Accordingly, the JIC, which will now be expanded to cover matters affecting both low- and middle-income countries, is called on to be a useful complement to the broad-based mechanisms for institutional coordination that already exist at the management and staff levels. Some Directors noted that further enhancements of collaboration should duly take account of resource constraints. It was also noted that formal mechanisms for collaboration should not substitute for early and informal consultations between the two staffs and the authorities to enhance communication and avoid duplication of work.

Directors welcomed the emphasis on thematic areas for Bank-Fund collaboration. Important progress in this area is already underway in the context of the joint work on public expenditure and financial management, carried out by Bank and Fund staff with the participation of other development partners. Most Directors looked forward to strengthened coordination on the preparation of poverty and social impact analysis (PSIA), which they viewed as a critical instrument to help ensure the effectiveness of the Fund's role in low-income countries. Directors underscored that the Fund should look to the Bank to assist on PSIA for reforms in Fund-supported programs, as this would be the best way of fully utilizing the relative strengths of each institution. At the same time, most Directors acknowledged that some in-house capability in this area will be necessary, in particular, to facilitate the integration of PSIA into PRGF-supported programs. Directors also suggested several other thematic areas in which strengthened Bank-Fund collaboration could usefully be pursued, and which will be carefully considered going forward.

Directors highlighted the important role that the formal mechanisms for collaboration, embedded in the PRSP process, are playing in strengthening Bank-Fund collaboration on low-income countries. They recognized that formal arrangements are not always well suited for middle-income countries, given the diversity of these countries' circumstances and the differences in the degrees and timing of the engagement by each institution in these countries. They reaffirmed, however, that the principles for collaboration remain the same: a coherent program of support based on a country-owned strategy; early consultation on program conditionality and effective information sharing; and a clear division of responsibilities based on respective mandates.

Directors underscored that, consistent with the lead agency concept, the Executive Board of each institution needs to be kept well-informed of the other institution's views in relevant policy areas. Documents prepared for each Board need to specify the areas in which the Bank and the Fund have a leading role and provide a candid analysis of the policy challenges faced by member countries. They should report on the other institution's engagement in specific reform areas and its views regarding reform priorities, program conditionality, and progress with program implementation. Directors looked forward to continued rigorous implementation of the guidance provided to the staff regarding best practices for the preparation of annexes on Bank and Fund relations in Board documents. To ensure that these annexes present each institution's most current assessment, they supported the proposal to use assessment letters to convey the Fund's views of macroeconomic conditions of member countries in cases in which the PIN or the Chairman's statement is not sufficiently up-to-date. To further strengthen the lead agency concept, while at the same time facilitating donor coordination, some Directors saw merit in keeping under review the possibility of including in Fund staff reports a comprehensive policy table of structural reforms being undertaken in a country, identifying the lead agency and the sequencing and timing of the reform steps.

Directors stressed that progress on Bank-Fund collaboration will remain an ongoing challenge, requiring steady implementation and sustained commitment, in particular by the country teams of each institution. They looked forward to keeping progress under review, and considered that, to usefully allow for sufficient additional experience under the enhanced framework for collaboration, the next review should take place by 2007. In this context, it was suggested that future reviews should include a larger set of case studies to continue to draw lessons from a variety of experiences. Directors also looked forward to reviewing progress on collaboration in the context of the periodic reviews of the two institutions' work on thematic issues. Some Directors suggested that, at some point, an external review of Fund-Bank collaboration might be useful. The forthcoming review of conditionality will also provide an opportunity to return to several issues raised today, including on country ownership and the streamlining of conditionality.