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will be integrated with related work inthe Fund, such as last year’s update of thedebt sustainability framework, to presenta comprehensive operational frameworkfor guiding the Fund’s role in low-incomecountries.
Unpredictable aid flows
The international community has commit-ted to supporting low-income countriesin their efforts to meet the MillenniumDevelopment Goals (MDGs) by scaling upaid and improving aid delivery.Although official development assistanceto low-income countries fell slightly in 2006compared with the previous year, aid from“emerging donors” and other private flows,particularly from health funds, are on therise (see “Where’s the Money?” page 164).External assistance can offer additionalresources for countries to pursue develop-ment goals, but can also be unpredictableand can create challenges for macroeco-nomic management, including if aid vol-umes were to increase sharply.The IMF plays an important role by assisting countries in creating and main-taining an enabling macroeconomicenvironment for the effective use of aid.Helping countries design policy frame-works that support sustained growth andpoverty reduction while maintaining mac-roeconomic stability and debt sustain-ability is an integral part of the Fund’sMedium-Term Strategy (MTS).In particular, the MTS calls upon theIMF to help low-income countries put inplace the policies and economic institu-tions that will permit them to make use of scaled-up aid in a sustainable manner.
Accommodating the use of aid
Since the launch in 1999 of the Poverty Reduction and Growth Facility (PRGF)—the IMF’s primary lending instrumentfor low-income countries—Fund policieswith respect to aid have evolved in a num-ber of important ways.IMF-supported programs have becomemore accurate—that is, less cautious—inpredicting aid flows.
Programs have increasingly allowedthe spending and absorption of aid (seebelow).Increasingly, unanticipated aid flowscan be spent, and unexpected aid short-falls can be offset through higher domes-tic borrowing or reserve drawdown.Concerns related to competitiveness(often referred to as “Dutch disease”—meaning the harmful effects on exportsof a sizable worsening of a country’scompetitiveness as a result of boominginflows of foreign exchange) have not ledto limits on the use of aid.
Response to concerns
The recent Board discussion respondedin part to concerns raised by the IMF’sIndependent Evaluation Office (IEO)about the IMF’s role in aiding sub-SaharanAfrica. Its report, released in February,noted that there was scope for clearer guid-ance on a number of issues, such as aidprojection, accommodation of additionalaid flows, and the examination of alterna-tive scenarios in assessing the amount of aid that can be absorbed effectively.Building on the experience with IMF-supported programs, the Board endorseda number of program design principles
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IMF SURVEYSEPTEMBER 07
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Red Cross immunization line at Tchadoua, Niger: