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Fourth
quarter 2007
IMF programme
redesign in the spotlight
Zambia is among 16 countries that are not allowed to spend their increased
aid under the IMF's Poverty Reduction and Growth Facility programme.
Here, think tank the
Bretton Woods Project looks at modifications to the programme made
recently by the IMF board and weighs up their implications on aid
spending.
After reviews of its engagement with low-income members the IMF is in the
process of redesigning its programmes, but its recent changes on dealing
with aid inflows have not satisfied critics of the Fund's
inflexibility in allowing the scaling-up of social spending.
The design of the Fund's Poverty Reduction and Growth
Facility (PRGF) programmes, lending instruments for low-income countries,
was reviewed in light of the planned increase in aid from developed
countries and modified by the IMF board at the beginning of July. The
review brought no fundamental changes to the PRGF, but did tweak the
expectations of how IMF staff will handle the spending of aid, aid
projections and the use of wage bill ceilings.
Spending of aid increases has been a hot political issue since the
Independent Evaluation Office (IEO) issued its report on aid to
Sub-Saharan Africa, which found that in many cases the IMF was requiring
low-income countries not to spend increases in aid, but instead use them
to accumulate international reserves or pay down domestic debt.
The IMF has committed itself to generally support the full
spending and absorption of aid, provided that macroeconomic stability is
maintained. The board refused again to clarify how the idea
of macroeconomic stability was determined, saying that the Fund should
use, a conceptual framework to guide country teams in giving
advice to LICs on a case-by-case basis, without specific quantitative
performance thresholds for the spending and absorption of additional
aid. The policy paper drawn up by Fund staff listed several reasons why
increases in aid might not be spent: A policy of partial
spending and absorption is appropriate for countries with low reserves
and/or high external debt, the authorities may
also choose to smooth the use of aid over time , and an absorb but do not spend approach can be used to lower
domestic public debt and/or reduce inflation .
Critics of the Fund have said that
de facto
the Fund applies overly stringent targets on reserves and inflation levels
before allowing the spending of aid. They also complain of the
Fund's restrictions on borrowing to finance aid shortfalls
and spending of unanticipated increases in aid.
The Fund policy paper admitted that the institution has not fully
addressed these concerns there has been a
partial move toward accommodating the spending of unanticipated aid and
offsetting unanticipated shortfalls but still
demands countries comply with its definition of macroeconomic stability
before being allowed to spend aid.
The background paper gave details of how aid spending has or has not been
allowed in the current PRGF countries. The following countries were not
allowed to spend any of their increased programme, as opposed to project,
grants: Burundi, Cambodia, Dominica, Ethiopia, Guyana, Kenya, Malawi,
Nepal, Niger, Rwanda, Sierra Leone, Tajikistan, Uganda and Zambia.
Gorik Ooms of health NGO Medecins Sans Frontieres
has called the IMF requirements a tax on aid. The word "tax"seems appropriate, because
we are talking about aid flows that were intended to be
absorbed and spent most often to increase public expenditure
to achieve the Millennium Development Goals and the IMF
arbitrarily levied a substantial part of it, to be used as international
reserves (unabsorbed aid), or as public savings (unspent aid). ... It is
not clear if the IMF ever asked the permission of the donors of these aid
flows for the application of this tax. Much of the concern over the ability to spend aid increases would be
alleviated if the increases were planned for in the first place. Countries
with PRGF programmes must submit their budgets to the IMF for approval,
and if aid increases were programmed into the budgets, then there would be
less debate over whether they were allowed to be spent or not. The IMF has
consistently blamed donors and aid volatility for this problem. Aid
volatility has also been the scapegoat for the need to build buffers and
reserves, with the new policy indicating that the size of
the buffer should be determined on a case-by-case basis but could vary
from 50 to 100 percent of annual aid-financed spending. The IMF has faced accusations of
aid pessimism in the past, and this review of PRGF design has sought to address that
complaint. Still the policy paper claims the costs of overly
optimistic aid forecasts are likely to be higher than the costs of overly
pessimistic ones, as aid shortfalls might entail fiscal
adjustment. It is not clear whether they have included the
costs to citizens of foregone social spending on health and education when
pessimistic forecasts mean aid increases can not be spent.
Another area of recent controversy addressed in the paper was the use of
wage bill ceilings in IMF programmes. Wage bill ceilings are limits placed
by the IMF on the overall spending by governments on civil service
salaries. Health and education advocates have argued that these ceilings
restrict the ability of developing countries to hire nurses and teachers.
The Fund has recently agreed that the use of wage bill ceilings should be
limited.
The new policy paper admits: although wage ceilings have
been conceived as short-term measures, in practice they have shown a high
degree of persistence. Recent Fund guidance emphasises the need for
avoiding the use of wage bill ceilings over extended periods of time, for
flexibility in its application (with adequate safeguards for priority
sectors), and for clear justification in programme
documents. (The Bretton Woods Project)
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