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IMF Survey - September 2007

IMF Survey - September 2007

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U
nder scrutiny from critics andits own official watchdog for itsapproach to the use of aid in low-income countries, the IMF is taking stepsto clarify its role in advising members inthe face of high and volatile aid inflows.At issue is the need to achieve higherlevels of economic growth to reducegrinding poverty in many parts of theworld while avoiding destabilizing lurchesin the economy triggered by suddeninflows of aid that can highlight eco-nomic bottlenecks and cause inflation andexchange rate volatility, which could makethe poor even worse off.The IMF’s Executive Board met on July 6to consider how the 185-member institu-tion can promote the effective and sustain-able use of aid, and endorsed a numberof recommendations about how to makemaximum and best use of such aid.The discussion was based on two setsof staff papers published on July 19—oneon overall program design issues (“AidInflows—The Role of the Fund andOperational Issues for Program Design”)and the other on fiscal policy issues(“Fiscal Policy Response to Scaled-UpAid”). The outcome of this discussion
Magazine
VOL. 36, nO. 11
www.mf.or/mf.survy
inTeRnaTiOnaL MOneTaRY FUnD
 T 
he IMF plans to follow up on its firstmultilateral consultation, aimed atreducing imbalances in the globaleconomy while maintaining robust worldgrowth, by monitoring the policy commit-ments of the five major players involved:China, the euro area, Japan, Saudi Arabia,and the United States.IMF estimates suggest that, once imple-mented, these policies could result in areduction in the U.S. current accountdeficit of about 1–1¾ percent of GDP,accompanied by reductions in surpluseselsewhere.In July, the IMF’s Executive Board metto take stock of the experience with thefirst round of multilateral consultations,conducted between June 2006 and March2007, and to draw lessons for the future.The 24 Directors, who together repre-sent the IMF’s 185 member countries,said the consultation had helped deepenagreement on a coherent medium-termapproach that would reduce the imbal-ances while supporting global growth.In 2000, when the IMF first warnedpolicymakers that imbalances in the globaleconomy could derail global growth,the U.S. current account deficit stoodat 4 percent of GDP. Today, that deficithas risen to more than 6 percent of GDPand is matched by large current accountsurpluses elsewhere, especially in China,Japan, and oil-producing countries.
iMF Bcks Pl to Rduc globl imblcs
iMF Movs to Clrfy ad Rol
(continued on page 165)
   A   F   P
also  ths ssu
166 Financial Globalization168 African Growth170 Fiscal Management172 Central America174 IMF Reform176 News Briefs
(continued on page 162)
September 2007
IMF Managing Director Rodrigo de Ratosaid on August 22 that despite recentfinancial market turbulence, the globaleconomy is still expected to perform wellthis year, but uncertainty remains aboutthe implications of the ongoing liquid-ity sqeeze for financial markets and forthe real economy. The IMF is expectedto publish its next forecast for the worldeconomy in mid-October.
   E  r   i  c   M   i   l   l  e  r   /   P   i  c   t  u  r  e   d  e  s   k
World growth Sold amd Mrkt Frs
Market in Rwanda, a country already receivingsome scaled-up aid.
Updt
Oil producers could help tackle imbalances byboosting spending.
 
The
IMF Survey 
(ISSN 0047-083X) is published inEnglish, French, and Spanish by the IMF 12 timesa year. Opinions and materials in the
IMF Survey 
 do not necessarily reflect official views of theIMF. Any maps used are for the convenienceof readers; the denominations used and theboundaries shown do not imply any judgment bythe IMF on the legal status of any territory or anyendorsement or acceptance of such boundaries.Text from the
IMF Survey 
may be reprinted, withdue credit given, but photographs and illustra-tions cannot be reproduced in any form. Address editorial correspondence to:Current Communications DivisionRoom 7-106, IMF, Washington, DC 20431 U.S.A.Tel.: (202) 623-8585; or e-mail any comments toimfsurvey@imf.org.To request an
IMF Survey 
subscription ($15.00annually for private firms and individuals) or IMFpublications, please contact:IMF Publication Services, Box X2007, IMF,Washington, DC 20431 U.S.A.Tel.: (202) 623-7430;fax: (202) 623- 7201;e-mail: publications@imf.org.The
IMF Survey 
is mailed first class in Canada,Mexico, and the United States, and by airspeedelsewhere.
Laura Wallace
Editor-in-Chief
Jeremy Clift
Managing Editor
Elisa Diehl
Production Editor
Camilla AndersenJames RoweSimon Willson
Senior Editors
Lijun Li
Senior Editorial Assistant
Kelley McCollum
Senior Production Assistant
Randa Elnagar
Editorial Assistant
Luisa Menjivar
Creative Director
Julio PregoBob Lunsford
Compositors
Michael Spilotro
Photographer
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
iMF Clrfs ad Rol
(from page 161)
162
 IMF SURVEYSEPTEMBER 07
notc to Subscrbrs
Because of rising mailing costs, we would liketo ensure that all subscriptions to the
IMF Survey 
are current.If you would like to continue to receive theprint edition of the
IMF Survey 
, please visitwww.imfbookstore.org/imfsurvey and signup using our secure website, or write to IMFPublications Services at the address in the boxabove. If you have not signed up to receive the
IMF Survey 
, your name may be deleted fromthe mailing list at the end of 2007.Additional articles and expanded informa-tion are available through our web edition,which is updated several times a week.Please see www.imf.org/imfsurvey.
Red Cross immunization line at Tchadoua, Niger:
 
SEPTEMBER 07
 
IMF SURVEY 
163
aimed at maximizing the effective use of aid while maintaining macroeconomicstability and debt sustainability.In general, it was established that IMF-supported programs should promotethe full use of aid—that is, the spendingand absorbing of aid—provided mac-roeconomic stability is maintained andcountry-specific circumstances and devel-opment needs are taken into account. Thespending of aid (by the government) isreflected in a widening of the fiscal deficit,while aid absorption is defined as a widen-ing of the current account deficit, reflect-ing the transfer of resources from abroadthrough higher imports.For countries not in a position to useaid fully (for example, when doing sowould jeopardize macroeconomic stabil-ity), the IMF will provide advice on howto address constraints. Program docu-ments will also be expected to explainclearly how programs are designed and to justify deviations from a full spend-and-absorb approach.In an environment of scaled-up aid, mac-roeconomic policy formulation should bebased on a longer-term view of spendingplans and resource availability. These plansshould be consistent with available financingfrom all sources—public and private. Giventhat aid disbursements are often volatileand uncertain, there is merit in smoothingexpenditures over time so that all programsundertaken are adequately funded.Effective use of aid flows may requirethat in certain cases some of the aid besaved temporarily. Limited absorptivecapacity—macroeconomic, sectoral, andadministrative—may constrain somelow-income countries’ ability to use aideffectively in the short run. Saving apart of the aid flows to finance higherexpenditures in the future, when capac-ity constraints are less severe, may be anappropriate initial policy stance for thosecountries to an increase in foreign aid.However, there can be limits to how muchaid a country can save. For example, thescope for saving project aid would belimited because its use depends on theproject cycle. In addition, donors may bereluctant to continue providing aid if itis consistently used to build up reserves.Finally, aid recipients face domestic pres-sures to spend aid to improve economicand social outcomes.Beyond the emphasis on spending andabsorbing, the paper lays out best practicesfor program design in a number of morespecific areas. These include:Aid projections should reflect the bestestimate of likely assistance based onall available information, not solely onfirm commitments by donors. Deliberateover- or underprojection of aid should beexplicitly justified.IMF staff should stand ready to helpcountries design alternative aid scenariosthat would be consistent with macroeco-nomic stability. These scenarios are expectedto be presented in Poverty ReductionStrategy Papers and/or IMF annual assess-ments known as Article IV reports.
   I  s  s  o  u   f   S  a  n  o  g  o   /   A   F   P
The IMF Executive Board clarified policies aboutthe use of wage bill ceilings in IMF-supportedprograms. Wage bill ceilings are caps on gov-ernment spending on civil service wages. Theproportion of programs with wage bill ceil-ings under the IMF’s Poverty Reduction andGrowth Facility (PRGF) has declined from40 percent during 2003–05 to about 32 percentas of June 2007.Only 3 out of 28 PRGF arrangements—thosefor the Central African Republic, Chad, andMalawi—had limits on the wage bill as a quanti-tative performance criterion; another 6 programsinclude them as indicative targets (a weaker formof conditionality).Wage bill ceilings can help restrain wagespending in cases where such expendituresthreaten macroeconomic stability andsqueeze out other priority spending (such ason medication and schoolbooks). Althoughdesigned as a short-term measure, such ceil-ings have tended to persist in programs andhave not always been efficient in achievingtheir objectives. Although wage bill ceilingshave been implemented flexibly, they havebeen criticized on the grounds that they haveprevented countries from increasing employ-ment in critical sectors such as health andeducation.As countries strengthen their budget andpayroll systems and formulate fiscal policy using medium-term frameworks, the needfor wage bill ceilings as a means for control-ling wage and employment costs is diminish-ing. However, developing these systems inlow-income countries will take time. In theinterim, there may be a need for wage bill ceil-ings on occasion. Such ceilings will be used inexceptional circumstances and will be basedon the following criteria:
 
Clear justification.
The rationale for wagebill ceilings should be guided by macroeco-nomic considerations. Program documentationshould justify their use in a transparent manner,including their consistency with the MDGs.
 
 Limited duration
. Wage bill ceilings are atemporary device. Governments should tacklethe root causes of wage-related fiscal problems,such as the need for civil service reform andstrengthened payroll management.
 
Sufficient flexibility 
. Wage bill ceilingsshould be flexible enough to accommodatespending of scaled-up aid, particularly for sus-tainable donor-financed employment in prior-ity sectors such as education and health.
 
Periodic reassessments
. The need andrationale for wage bill ceilings should be reas-sessed at the time of program reviews.
W Cls: For excptol Us Oly
Governments often lack information on private aid flows.
(continued next page)

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