The International Monetary Fund’s approach to engaging with Low-Income Countries: The case of Djibouti.

Introduction:

Djibouti is an impoverished small country located at the Horn of Africa at the southern end of the Red Sea. The country has very limited natural resources, fertile land, rainfall, and underground water. With two-thirds of its 830.000 citizens living in its capital city (DjiboutiCity), the country is more or less a city-state. Djibouti’s wealth emanates from revenues generated by the activities of the modern port of the capital, the rental of military bases, and services associated with both. Concerning the services, they account for 77 percent of GDP (World Bank 2008, p.9).

Despite a per capita income of US$1,024, the country has some of the poorest social indicators in the world. A surge in the phenomenon of poverty has been witnessed with extreme monetary poverty rising from 34.5 percent in1996 to 42.2 percent in 2002. This has been doubled by the raising of the relative poverty from 64.9 percent to 74.4 percent over the same period. In addition to this, life expectancy at birth was only 54 years in 2002, the IMR (Infant mortality rate) and IJMR (Infant juvenile mortality rate) were 94.6 and 106.2 per thousand respectively, also a 35 percent primary school completion rate, and a high prevalence of HIV (World Bank 2008, p.10).

The remedy for these problems requires sustainable economic growth but, the country would have faced significant challenges in meeting its development objectives while maintaining a sustainable debt position (provided it could find external willing creditors). Happily, low-income countries such as Djibouti have found an ally in the Heavily Indebted Poor Countries (HIPC) Initiative[1] which has lead following its review in 1999, to the endorsement by the Interim and Development Committees of the World Bank and IMF of an enhanced framework for poverty reduction. The rationale for this framework was:

that country-owned poverty reduction strategies should provide the basis of all World Bank and IMF concessional lending, and should guide the use of resources freed by debt relief under the enhanced HIPC Initiative (The World Bank 2000, p.3).

Under this new framework, a country-owned strategy would be presented in the Poverty Reduction Strategy Paper (PRSP), prepared by the country authorities with broad participation of key stakeholders.

The proposal of this framework and its endorsement have resulted in a clear mandate for the IMF to integrate the objectives of poverty reduction and growth more fully into its operations for the poorest countries and to base these operations on national poverty reduction strategies. Reflecting this new approach, the IMF has established the Poverty Reduction and Growth Facility (PRGF).

In what follows, I will describe the nature and characteristics of the PRGF and explain how this differs from other lending facilities of the IMF. I will also comment on the PRSP and explain how this is linked to the PRGF. Finally, I will make some references to at least four distinct aspects of the IMF’s engagement in low-income countries.

The PRGF Theory:

As stated above, the IMF established in 1999 the Poverty Reduction and Growth Facility (PRGF). The aim was to make poverty reduction efforts among low-income members a key and more explicit element of the renewed growth-oriented economic strategy. The essence of the PRGF, in this context, was to be an effective concessional lending instrument that supported the role of the Fund. It is the reason why the underlying program design had to more closely reflect the nature of low-income economies and their needs for pro-poor growth. More precisely, the raison d’être of the facility was “to support programs to strengthen substantially and in a sustainable manner balance of payments position and to foster durable growth, leading to higher living standards and a reduction in poverty” (IMF 1999, p.1).

In acknowledging the link between macroeconomic policies, growth, and poverty reduction policies, the PRGF program design was meant to provide a balanced framework for these elements to synergistically interact.

–  The PRGF nature and characteristics

These programs were designed to enforce targets and policies that have directly been derived from the low-income member poverty reduction strategy. In the case of Djibouti, the country had completed in January 2008 its National Initiative for Social Development (INDS) which was launched twelve months earlier. The INDS document which covers the period 2008-11 includes an assessment of the previous poverty reduction strategy (PRS-I), covering the period 2004-6, and outlines the second PRS (Poverty reduction Strategy). The authorities’ objectives include: (a) reduction of poverty, (b) acceleration of growth while safeguarding macroeconomic stability, (c) achievement of universal access to basic services while guaranteeing the reduction of disparities, (d) promotion of harmonious and balanced land development, and (e) improvement of governance and capacity building (IMF 2009, p.32).

This meant that the Fund’s discussions with the member on the macroeconomic framework were to become more open and iterative. The consequences of this new process have lead to the emergence of a number of distinctive features of the new facility. They include:

–  Broad participation and greater ownership.

–  Embedding the PRGF in the overall strategy for growth and poverty reduction.

–  Budgets that are more pro-poor and pro-growth.

–  Ensuring appropriate flexibility in fiscal targets.

–  More selective structural conditionality.

–  Emphasis on measures to improve public resources management/accountability.

–  Social impact analysis of major macroeconomic adjustments and structural reforms. (IMF 2002, p.5).

Broad participation and greater ownership:

Although not very tangible, a move toward greater ownership implies that PRGF-supported programs are derived from the PRSPs that have been produced in a transparent process involving broad participation. This, however, is “subject to some “chicken-and-egg” controversy” (IMF 2002, p.11). Another way of demonstrating country ownership is through increased flexibility in policies to accommodate country priorities in program design. This means that governments should be given more space in determining the timing and context of policies in accordance with their priorities and assessment of what is feasible.

In Djibouti, the authorities have followed a participatory process in developing the INDS. Various stakeholders were consulted in several workshops that were open to the press. The stakeholders included the sectoral ministries, parliamentary representatives, the Chamber of Commerce, trade unions, nongovernmental organizations, and international donors (IMF 2009, p.4).

Embedding the PRGF in the overall strategy for growth and poverty reduction:

Embedding the PRGF in the overall strategy for growth and poverty reduction was also a request of the low-income countries. These have expressed the view that PRGF programs should both place sufficient emphasis on growth as a means of poverty reduction and that the emphasis on poverty reduction should be higher than under previous supported programs (IMF 2002, p.11). Because growth is critical for achieving poverty reduction, attention to the source of growth is essential in developing appropriate policies and projections. In fact, the measures adopted should be based on fully integrated macroeconomic, structural and social policies (IMF 1999, p.3).

In discussion with the authorities, the PRGF-supported program which was derived by the INDS of Djibouti aims at fostering sustainable and balanced economic growth and reducing poverty. It envisages measures to maintain macroeconomic stability, improve competitiveness, reduce inflation, and strengthen the external position (IMF 2009, p.5). It particularly focuses on:

(a) bringing the overall fiscal position to a balance in the medium term while  increasing the share of social and infrastructure projects in total spending; (b) strengthening financial sector soundness; (c) improving competitiveness mainly through a reduction in domestic production costs; and (d) building institutional capacity, particularly strengthening the statistical framework, fiscal transparency, and public sector governance (IMF 2009, p.22).

Budgets that are more pro-poor and pro-growth:

Countries with PRGF-supported programs are expected to develop budgets that are directed toward poverty-reducing activities and outlays that foster the development of human and physical capital. This means that a share of total government spending should be earmarked for public sector activities such as education and health care. This shift must be accompanied by improvements in efficiency and targeting to significantly improve social outcomes. Finally, pro-poor and pro-growth budgeting requires tax reforms that simultaneously improve efficiency and equity. However, as the scope for fighting poverty through redistributive taxation is limited, focus was largely made on improving the efficiency of the tax system and tax administration (IMF 2002, p.8).

In Djibouti, the authorities have given a relative importance in the development of human and physical capital. The principal objective in the area is to ensure equitable access to: (a) quality education, (b) employment, especially for young people, and (c) essential services such as health care, water resources, energy, etc. (IMF 2009, p.36).

Ensuring appropriate flexibility in fiscal targets:

Another characteristic of the facility is the requirement for fiscal targets to be flexible. This should allow increases in public expenditures to accommodate the government’s poverty reduction strategy within a stable macroeconomic framework. The increase should be largely financed by higher grants and revenues (IMF 2002, p.7). This being said, indication should be made on how choices were made regarding the balance between the public and private sectors in the allocation of total credit expansion.

In Djibouti, the government fiscal policy under the PRGF program aims at balancing the budget in the medium term while increasing spending for the poverty reduction. The aim is to create fiscal space for poverty reducing expenditure without compromising macroeconomic stability and increasing fiscal vulnerability (IMF 2009, p. 22-23).

More selective structural conditionality:

As for the conditionality, it should be selective and focused on the Fund’s core areas of expertise. This covers areas such as tax and foreign regimes, fiscal management, budget execution, fiscal transparency, and tax and customs administration. The Fund’s staffs are also required to justify the structural conditions they incorporate in arrangements. Conditionality should not be applied in areas outside the IMF’s mandate and expertise unless it is critical to achieve the macroeconomic objectives of the program (IMF 2002, p.31).

In Djibouti, the conditionality in terms of performance criteria and benchmarks falls within the Fund’s areas of expertise. The country is required to narrow its current account deficit in the medium term, lower its high unit labour costs to a level in line with competing countries, tighten its fiscal policy, and undertake structural reforms in order to reduce other productive costs such as utilities (IMF 2009, p.6).

Improve public resources management/accountability:

An area of importance for greater focus and conditionality in PRGF programs is improved accountability for public expenditure management (PEM). On average, four or five new measures to strengthen PEM are included in each PRGF-supported program request or review. Most of these measures focus on strengthening budget execution, especially with respect to the operations of the treasury and improving expenditure procedures. This implies to a certain extent a need to strengthen the monitoring of fiscal performance under the program (IMF 2002, p.36). Also related to PEM, a number of countries have been aiming to improve budget classification.

Djibouti was recommended to implement an investment and debt management strategy in order to improve debt management, the aim being to boost donor confidence and ensure the availability of financing on highly concessional terms. The country is also recommended to work on multi-year public expenditure framework as soon as possible. It will, as it is believed, improve the programming of the expenditure as well as the monitoring of the investment (IMF 2009, p.9).

Social impact analysis:

Regarding the poverty and social impact analysis (PSIA), it is required that a country’s program incorporates countervailing measures when it is expected that specific measures built in these programs could have significant adverse effects on groups of the poor. PRGF-supported programs report both more PSIA and a large share of countervailing measures for almost all types of reforms. Although the coverage by type of reforms varies, it includes contractionary expenditure, trade and exchange rate reform, domestic pricing reform, revenue measures, and civil service reform and privatization (IMF 2002, p.40).

Djibouti has received a safeguard assessment (SA) mission. It was expected to be completed in August 2009 at the end of the first year of the PRGF program. It was agreed that based on the SA recommendations, a strategy addressing any potential shortcomings would be developed. These countervailing measures have not been publicised.

PRGF differences with other IMF Lending facilities:

Unlike the PRGF which are supported by the Fund’s concessional facilities, there are other types of programmes supported by the General Resources Account (GRA). These include (CeFiMs 2010, p.27):

–  Stand-By Arrangements (SBA): They are designed to deal with any temporary

balance of payments problem. They generally last between 12 to 18 months.

–  The Extended Fund Facility (EFF): They were established to provide medium

term assistance to countries suffering serious payments imbalances and characterised by slow growth and an inherently weak balance of payments position. The length of this arrangement is typically three years.

When a member state faces external financing difficulties and external and internal imbalances, requiring stabilisation measures, it must either adjust, obtain financing from official sources or, restructure its external obligations. Most of the time, some external adjustment and financing are required. The IMF uses the above programmes as financing instruments to help the member state ease the adjustment burden. However, it attaches conditions to its financing and, the strongest form of it, is the Performance Criteria (PCs)[2]. There are two types of Pcs (CeFiMs 2010, p.30):

–  Quantitative performance criteria: these include setting a floor or minimum level of net international reserves, limiting the size of the country’s budget deficit and; setting a maximum level of non-concessional external borrowing permissible.

–  Structural performance criteria: They include reforms such as new banking legislation, establishing of a new bankruptcy law, etc.

Contrary to these types of programs, the primary objectives of the PRGF are to raise growth and reduce poverty. It mainly focusses on improving the member country’s macroeconomic and financial governance and, includes policies to monitor the impact of the financing arrangement on poverty and on social sector delivery and performance[3] (CeFiMs 2010, p.5).

PRSP and its link to the PRGF:

As highlighted above, the Poverty Reduction Strategy was adopted by the Executive Boards of the World Bank and the Fund in order to make more effective the support of low-income members in bringing sustainable poverty reduction. This approach was based on the principles of a proposition made in 1999 by the World Bank; it was called the Comprehensive development Framework (CDF). At that time, the Bank through the CDF arrived at the conclusion that countries can manage knowledge and resources to design and implement effective strategies for economic development and poverty reduction (IMF 2005, p.6).

Using CDF principles, the PRSP integrates poverty reduction policies into a coherent, growth oriented framework balancing good macroeconomic and financial management with sound social, structural and human policies. It is prepared by national governments with the participation of domestic and external partners. The external partners, who assist the national authorities, are also encouraged to link their development efforts to them (IMF 2008, p.4).

In this sense, the IMF who uses the PRGF programs in assisting low-income members draws the broad macroeconomic and macro-relevant objectives set out in the supported programs from those underpinning the PRSPs (IMF 2002, p.12).

Distinct Aspects of the IMF’s engagement:

–  Debt Relief

Debt relief mechanisms were started by commercially-orientated creditors, particularly by the Paris Club creditors, in the early 1990s in order to alleviate the burden of mounting external debt levels of low-income countries. The rationale at the time was to replace unrealistic medium-term repayment schedules with more realistic ones. At that time, debt relief and aid allocation decisions were kept separate.

Building on the Paris Club creditors’ idea, the IMF and World Bank have launched in 1996 the Heavily Indebted Poor Countries (HIPC) initiative. The objective was to reduce eligible countries’ external debt burdens to sustainable levels and eliminate any debt overhang that might be a hindrance to growth and investment. Reviewed in 1999, the initiative was enhanced to provide faster and deeper debt relief to a large number of countries. This initiative has also created a link between debt relief and aid allocation decisions. As a matter of fact, the resources freed up by debt relief were to be channelled toward social expenditure and other poverty reduction programs (IMF 2001, p.5).

In 2005 however, a new initiative was proposed by the G-8 to the Fund, the International development Association (IDA), and the African Development Fund (AfDF). The initiative was commonly known as the Multi-Lateral Debt Initiative (MLDI) and proposed to cancel 100 percent of their claims on countries having reached, or upon reaching, the completion point under the enhanced HIPC Initiative. The objective was to complete the process of debt relief for HIPCs by providing additional resources to help these countries reach the Millennium Development Goals (MDGs) (IMF 2005, p.3).

–  The role of the IMF technical assistance

Regarding the low-income countries, the role of the Fund is to help them produce a poverty reduction strategy integrating into a coherent framework of macroeconomic, structural and social policies; planned actions to raise growth and reduce poverty. In practice, the Fund staff must advice national authorities in Fund’s traditional mandate and responsibility areas, including promotion of prudent macroeconomic policies, exchange rate and fiscal policies reform, budget execution, fiscal transparency and tax and customs administration (IMF 1999, p.6).

–  IMF policies on countries in conflict and arrears

The IMF uses EPAC (Emergency Post-Conflict Assistance) supported programs to assist countries in situation of conflict or post conflict. These programs are limited to situations where a country cannot develop and implement a comprehensive economic program resolving its urgent balance of payments need because its capacity has been damaged by a conflict. It must conserve, however, sufficient capacity for planning and policy implementation (IMF 2004, p.3).

Conclusion:

Assisting low-income countries in achieving sustainable growth and reducing poverty is certainly an honourable initiative. What remains questionable; however, are the conditionalities imposed on Djibouti for the implementation of the PRGF.  Requiring to lower the unit of labor cost and also public labor cost in a country where extreme monetary poverty has risen to 42.2 percent in 2002 seems to be in contradiction with the objectives of poverty reduction.

Bibliography:

1)      IMF, 2009. “Djibouti: Poverty Reduction Strategy Paper” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 18/09/2010].

2)      IMF, 2009. “Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) – Status of Implementation” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 19/09/2010].

3)      IMF, 2008. “Staff Report for the 2008 Article IV Consultation and request for the Three-Year Arrangement Under the Poverty Reduction and Growth Facility” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 18/09/2010].

4)      IMF, 2008. “The Role of the Fund in Low-Income Countries Background Paper” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 09/09/2010].

5)      IMF, 2005. “The IMF’s Role in Low-Income Countries: Issues and Challenges” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 09/09/2010].

6)      IMF/The Policy Development and Review Department, 2004. “Fund-Supported Programs – Objectives and Outcomes” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 12 August 2010].

7)      IMF/The Policy Development and Review Department, 2004. “The Design of Fund-Supported Programs – Overview” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 12 August 2010].

8)      IMF, 2003. “Debt Relief, Additionality, and Aid Allocation in Low-Income Countries” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 19/09/2010].

9)      IMF, 2003. “Role of the Fund in Low-Income member Countries over Medium Term-Issues Paper for Discussion” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 09/09/2010].

10)  IMF, 2002. “Review of the Key Features of the Poverty Reduction and Growth Facility – Staff Analysis” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 11/09/2010].

11)  IMF, 2002. “Review of the Poverty Reduction and Growth facility: Issues and Options” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 11/09/2010].

12)  IMF, 2001. “Debt relief Under the HIPC Initiative: Context and Outlook for Debt Sustainability and resource Flow” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 21/09/2010].

13)  IMF, 2001. “Poverty Reduction Strategy Papers – Progress in Implementation” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 12/09/2010].

14)  IMF, 1999. “Heavily Indebted Poor Countries (HIPC) Initiative – Strengthening the Link between Debt Relief and Poverty Reduction” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 19/09/2010].

15)  IMF, 1999. “Poverty Reduction Strategy Papers – Operational Issues” [Online], IMF, available from: http://www.imf.org/external/pubind.htm [Accessed 11/09/2010].


[1] This initiative will be explained below, in the essay.

[2] Imposing such conditionality in a country already in financial turmoil can be viewed as behaving like the “Arsonist-Fireman”.

[3] Normally, the conditionality imposed with such programmes should only be limited to structural reforms. However, it appears that the IMF also imposes quantitative performance criteria.

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