Public Information Notice No. PIN No. 05/128

Public Information Notice: IMF Executive Board Reviews The Poverty Reduction Strategy Approach

September 20, 2005

On September 9, 2005, the Executive Board of the International Monetary Fund (IMF) considered two joint IMF/World Bank staff papers providing an in-depth review of experience in implementing the Poverty Reduction Strategy (PRS) approach.¹

Background

Under the PRS approach, governments in low-income countries prepare Poverty Reduction Strategy Papers (PRSPs) through a participatory process involving domestic stakeholders as well as external development partners, including the IMF and the World Bank. PRSPs present countries' macroeconomic, structural and social policies and programs over a two- to five-year horizon, aimed at promoting broad-based growth and reducing poverty. PRSPs form the crucial link between national public actions, donor support, and development outcomes. The Monterrey Consensus has underlined the centrality of nationally owned poverty reduction strategies, and of the mutual accountability between developing countries and their development partners, in making progress toward the Millennium Development Goals. PRSPs provide the operational basis for Fund concessional lending and for debt relief under the Enhanced Heavily Indebted Poor Country (HIPC) Initiative.

The core principles underlying the PRS approach are that poverty reduction strategies be: (i) country-driven, with broad-based participation by civil society in the adoption and monitoring of the PRS; (ii) results-oriented and focused on outcomes that benefit the poor; (iii) comprehensive in recognizing the multidimensional nature of poverty; (iv) partnership-oriented, aimed at improved coordination between all development partners; and (v) based on a long-term perspective of the challenges of, and need for commitments to reduce poverty.

At the request of the Executive Boards of the IMF and the Bank, since the approach was initiated in 1999, the staff of the two institutions have prepared annual reports on progress in implementing the PRS approach. Following an in-depth assessment conducted for the 2002 review, the Boards requested that the staffs prepare another in-depth assessment of progress in three years. The papers considered by the Boards in September 2005 are the second such in-depth assessment.

Executive Board Assessment

Executive Directors commended the staff of the Fund and the Bank for an excellent report that reflects in a comprehensive and balanced way the progress made under the PRS approach during the past five years, while highlighting the remaining challenges. In particular, they welcomed the focus on cross cutting issues supported by wide-ranging case studies and extensive outreach efforts. Directors encouraged the Fund and Bank to continue incorporating the views and assessments of different stakeholders so as to identify best practices and recommendations that can be of relevance for all parties involved in the PRS process.

Directors welcomed the continued widening acceptance of the PRS approach by low-income countries and the donor community. They noted that several countries have already completed, or are in the process of completing, the revision of their original strategies. Directors encouraged countries that have not yet completed a poverty reduction strategy to do so.

Directors underscored that the core principles underlying the PRS approach—of country ownership, participation, results-orientation, and partnership—remain relevant and continue to provide a useful framework for further strengthening this approach and achieving sustainable results. They reiterated that developing countries themselves should continue to take the lead in the fight against poverty. The main responsibility of the international community, including the Fund and the World Bank, remains to support the countries' own efforts and to contribute to enhanced aid effectiveness, including through improved donor coordination. These actions were seen as particularly important as the international community steps up its efforts to provide development assistance and debt relief.

Directors agreed that the PRS approach should be strengthened in ways that reinforce the mutual accountability for development results embodied in the Monterrey Consensus. They considered that the proposed improvements in the PRS process would support a better balance between domestic and external accountabilities. The PRS approach should also provide the framework for scaled-up efforts to achieve the Millennium Development Goals (MDGs) at the country level.

Directors observed that the PRS approach continues to provide a useful operational framework for governments to set their development priorities, and to mobilize domestic and external support. They agreed that the priority going forward should be to renew the focus on the PRS core principles and ensure their even application. Directors stressed the importance of tailoring emerging good practice to individual country circumstances.

Directors supported the focus of the PRS approach on addressing country-specific constraints to development by strengthening domestic processes and systems. Domestic accountability would be reinforced by embedding the PRS process into existing domestic decision-making processes and systems, including the annual budget; strengthening monitoring and evaluation systems; and engaging in an open discussion of national priorities with domestic stakeholders and external partners.

Directors stressed the importance of clearly defined and prioritized goals in the PRS, and of linking them to specific policy actions. These goals could be derived from a longer-term vision for development, such as the MDGs, appropriately customized to reflect the specific country circumstances. In this regard, several Directors noted that poverty reduction strategies often describe economic and political objectives in general terms without indicating specifically how these goals can be achieved. Directors agreed, therefore, that the PRSs should be made more operational, with clearer links between the goals and the policies intended to achieve them. These considerations point to the need for further analytical work to define these links. Given the long-term nature of many of the PRS's goals, Directors noted the importance of defining appropriate intermediate indicators to measure and evaluate progress, so that policies could be adapted and refined in implementation.

Directors considered that closer attention should be given to deepening the country-specific understanding of the sources of growth and its relationship to poverty reduction. They therefore welcomed the increasing centrality of growth in PRSs, and considered it important to sharpen the pro-poor focus of PRSs. Directors also called on countries to step up efforts to improve their national monitoring systems, particularly their statistical systems. Development partners, including the Fund, should provide well-coordinated support for building this capacity, as well as for filling analytical gaps.

Directors underscored the importance of linking the PRS to the medium-term expenditure framework and to the annual budget. This would help translate the goals of the PRS into concrete, monitorable, and prioritized public actions. Such linkages would also make the government's policy intentions clear to parliaments and to other domestic stakeholder groups, as well as to external development partners.

Directors welcomed the increasing involvement of parliaments in the PRS process. Their active engagement in all stages of the PRS process would contribute to a more active debate on national development objectives and policy priorities. Directors encouraged the country authorities to pursue efforts to involve other stakeholder groups more actively in the PRS process, including business and other private sector representatives.

Directors saw scope for broader dialogue and debate on macroeconomic issues and alternative policy options in PRSPs. Governments should establish an appropriate framework for dialogue on macroeconomic policy. Directors welcomed the increasing use of PSIAs to inform the debate on, and design of, macroeconomic policies. Together with their development partners, governments should work to strengthen the capacity of the public to understand policy constraints and formulate feasible alternatives.

Directors took note of continued progress in efforts to improve the effectiveness of aid and to align it with the objectives of PRSs. They called on donors to make firm and early commitments of their support, including where possible over the medium term, and to disburse their assistance in a predictable and timely manner. PRSPs should be strengthened as the framework for mobilizing external assistance and to enable closer donor alignment with country priorities. Countries should also take a strong leadership role in their relations with donors.

Directors concurred that the PRS should provide the operational framework for scaling up efforts to reach the MDGs. At the same time, PRSs must be grounded in realism to be a useful basis for policy formulation and day-to-day implementation. Directors considered that the use of alternative scenarios in PRSs could bridge the gap between realism and ambition, and provide a credible framework for scaling up assistance at the country level. They concurred that Fund staff should help those countries that sought assistance in preparing such scenarios. Scaled up assistance heightens the importance of more predictable and coordinated aid from donor countries.

Directors stressed that effective scaling up would require improvements in the ability of countries to absorb more aid effectively. Donors would need to provide effective support for country efforts to overcome human, physical, and institutional capacity constraints. Directors considered that the Fund would play a critical role in helping countries to analyze this impact and adapt the macroeconomic framework appropriately to accommodate higher aid inflows.

Directors agreed that the PRS approach should be carefully tailored to the special requirements of fragile or conflict-affected states. In such countries, coordinated and sustained donor support would be critical, but capacity constraints would be particularly binding, as governments would have only limited capacity to organize participatory processes, and to formulate and implement prioritized PRSs. These countries would also need to integrate political, humanitarian, and security concerns into their PRSs. In tailoring their interventions to these specific circumstances, development partners should be careful not to create unsustainable dependencies and parallel structures.

Finally, Directors considered that further improvements are necessary to make PRSs a more effective framework for guiding country and donor efforts to foster growth and reduce poverty. They suggested that the important lessons from the present review and from previous reviews be taken on board in developing and refining PRSs. At the same time, Directors highlighted specific aspects of the PRS process that should be strengthened. In particular, good practices and lessons that emerge from PRS implementation across countries should be identified and applied more widely. Directors therefore considered that selective and targeted reviews of specific aspects of the PRS process would be of greater value for effective implementation than periodic comprehensive reviews of the PRS approach as a whole.