Public Information Notice No. 11/95

Public Information Notice: IMF Executive Board Discusses the Macroeconomic and Operational Challenges in Countries in Fragile Situations

July 21, 2011

On July 7, 2011, the Executive Board of the International Monetary Fund (IMF) held discussions of staff findings and proposals set forth in a paper entitled: “Macroeconomic and Operational Challenges in Countries in Fragile Situations.”

Background

The Fund’s engagement with fragile states was last discussed by the Executive Board in March 2008. Directors saw merit in a “graduated, flexible, programmatic approach” to engage effectively in fragile states. The staff paper describes the key characteristics of fragile states (both low and middle income countries); reviews the Fund’s past engagement in fragile states; and, on that basis, presents a number of proposals to boost the effectiveness of Fund work in such situations.

Executive Board Assessment

Executive Directors welcomed the opportunity to review the Fund’s engagement with countries in fragile situations. They recognized that these countries face unique challenges, including weak institutional capacity, high vulnerability to shocks, and a volatile political environment.

Directors were heartened that, overall, Fund engagement with countries in fragile situations has focused on the Fund’s areas of expertise and helped strengthen macroeconomic frameworks, build up institutional and human capacity, and secure debt relief. However, they noted that program implementation has been uneven, owing in part to overly ambitious program targets in some cases. Against this background, Directors saw merit in considering some changes to the modalities of the Fund’s engagement. They stressed, however, that—to be effective—efforts should remain focused on the Fund’s core mandate and continue to be closely coordinated with the international community.

Most Directors supported, or were open to considering, a more flexible use of the Rapid Credit Facility (RCF) for low-income countries in fragile situations as a stepping stone to upper-credit-tranche (UCT) arrangements. Where needed, the approach could allow for a more gradual adjustment during the critical initial phases of the transition to a less fragile situation. Nevertheless, given the protracted balance of payments needs typically faced by countries in fragile situations, UCT arrangements should remain the main vehicle of Fund engagement. At the same time, some Directors were unconvinced, and asked for more evidence that the RCF in its current form is not sufficiently flexible to meet its objectives. Moreover, these Directors considered that, in cases of extremely weak governance and absorptive capacity, non-financial engagement by the Fund, such as staff-monitored programs combined with technical assistance, may be more appropriate.

Many Directors saw merit in the proposal to establish an RCF-like non-concessional facility that would provide emergency assistance to middle-income countries in fragile situations. However, a number of other Directors remained unconvinced of the need for a new instrument, and considered that existing emergency facilities provide adequate venues for assistance to these countries.

Most Directors were open to considering the staff proposal to increase the cumulative access under the RCF, noting that better tailoring the pace of reforms to implementation capacity could help mitigate risks to the Fund. A few Directors suggested that a more ambitious increase would better meet the needs of members in fragile situations. Some Directors suggested exploring the appropriateness of higher annual access levels in specific cases. A number of Directors expressed concern, however, that a more protracted use of the RCF would expose the Fund to additional risks, and called for further reflection on how to maintain appropriate safeguards to the Fund.

Directors generally welcomed the call for greater flexibility in program design to better reflect the limited implementation capacity in states in fragile situations. At the same time, they underlined that the conditionality standards applicable to different financing facilities should be maintained. Directors stressed the importance of designing programs that both foster macroeconomic stability and deliver “quick wins” to populations, to spur support for reforms. They highlighted, however, that such “quick wins” often lay in areas outside the Fund’s expertise, and close cooperation with the World Bank and other development partners is particularly important. More broadly, most Directors underscored the need to work more closely with donors, especially in the field.

Directors agreed that Fund financing should taper out over the medium term, and that the long-term financing needs of countries in fragile situations should largely be met by concessional donor resources. In this regard, many Directors noted that Fund engagement could catalyze budget support through country-specific Multi-Donor Trust Funds, and welcomed the proposal to link such assistance to performance under Fund-supported programs or Fund monitoring. A number of Directors, however, were unconvinced, pointing to the operational difficulties of such a proposal and emphasized the merits of a case-by-case approach.

Most Directors welcomed the staff’s increased emphasis on the political and social context in countries in fragile situations, which could inform the assessment of the risks of Fund engagement. However, a few Directors cautioned that such political and social issues lay outside the Fund’s expertise.

Directors stressed the importance of technical assistance (TA) in lifting countries out of fragile situations. In this regard, they saw the need for grounding Fund TA in realistic and adequately-supported medium-term plans, including reliance on resident advisors and continued training of country officials. They also took note of the important role played by regional technical assistance centers and topical trust funds.

Directors welcomed the staff proposal to prepare an operational guidance note for work on countries in fragile situations and some Directors called for the Fund to provide its own robust definition of fragile situations. They also looked forward to further discussions on concrete proposals to enhance Fund engagement with these countries, including a more flexible RCF and a possible new RCF-like facility for middle-income countries. A few Directors considered that the reformed instruments should also be accessible to states where fragility may emanate from their small size and extreme vulnerability to external shocks. Directors also saw merit in strengthening human resource policies to increase the attractiveness of working on countries in fragile situations.