1 WHAT IS THE POINT OF THE POLICY SUPPORT INSTRUMENT ? Matthew Martin Director Development Finance International IMF Seminar, Spring Meetings 24 April 2009

2 BACKGROUND AND STRUCTURE Study commissioned by Oxfam in parallel with and to inform inputs to IMF review of PSI Main focus on testing opinions of African policymakers on PSI – principally the countries with PSI experience, but also countries with continuing PRGFs or no IMF programme, some of whom discussed but decided against PSIs Countries covered: Cape Verde, Ethiopia, Ghana, Mali, Nigeria, Senegal, Tanzania, Uganda, Zambia Two phases – desk-based analysis of design and impact of PSI, followed by questionnaires/interviews for 40 African policymakers, donor officials, Fund staff (percentages quoted are of African policymakers)

3 ISSUES COVERED Process of negotiations – why PSI, how negotiated etc – slightly more open than PRGF Conditionality – macro/structural, fiscal space – little different from PRGF (slight streamlining) Signalling – did PSI affect aid or investment – no significant impact compared to PRGF/no program Growth and Poverty Reduction Impact – no major difference (not the intention) Suggestions for Changing the PSI – many ! Much more detail in report, as well as Oxfam Position Paper – please read !

4 CONCLUSIONS View of 43% of policymakers – as currently structured, little point to PSI – “We might as well move straight from PRGF to Article IV” Though, if this to be feasible, need to clarify donor reaction (had not been negative in Ghana or Ethiopia), and facilitate “rapid re-entry” to PSI/ESF if shock necessitated, as well as not penalising non-programme countries by reducing TA and diagnostic assistance Majority view (57%) that PSI could be useful if very substantially reformed to be much more tailored to needs of LICs and very different from PRGF

5 HOW TO REFORM THE PSI ? Negotiation process government-led: government suggesting conditions, writing own letters of intent, full consultation of parliament and civil society (supported by information and capacity-building) about decision to move to PSI Poverty and Social Impact Analysis of PSI conditions Clear time frame (3 years) and criteria for move to Article IV Conditions dramatically streamlined compared to PRGF.  Replace macroeconomic quantitative performance criteria with overall progress judgment  Virtual abolition of structural conditions (extremely low numerical ceiling, core areas) Presupposition of aiming for higher growth rates, MDG- related spending, and fiscal space, for “mature stabilizers”. Donors decide a clear position on PSI signalling - ie duration, attitude to Article IV, circumstances for “re-entry” to PSI

6 LESSONS FOR WIDER LIC REVIEW Where should the PSI fit ? LIC review currently assumes four circumstances for IMF support: 1. little or no adjustment need, and little or no financing need due to low immediate risks to the economy, or a precautionary need for financing due to higher risks 2. a combination of short-term financing and adjustment to combat exogenous shocks and domestic factors such as policy slippages 3. a combination of medium-term adjustment and financing to achieve economic stability 4. emergency financing (against exogenous shocks, natural disaster or post-conflict circumstances) but for countries which do not have capacity to implement strong policy adjustments.

7 LESSONS FOR WIDER LIC REVIEW First set of circumstance is where Fund sees place for PSI, for countries which do not need Fund financing. The most important aspect attribute of this circumstance is that countries already have a strong policy framework (ie are “mature stabilisers”). For countries with strong policies, conditionalities should be minimal (whether they need no finance, precautionary finance, or short-term financing to combat an exogenous shock). In this context, the Fund must make a far more fundamental tailoring of conditionality a key part of its LIC review, if it is to be taken seriously in “modernising” conditionality and “destigmatising” IMF programme relationships

8 LESSONS FOR WIDER LIC REVIEW However, as one African policymaker put it, “the most fundamental change needed is in the way the Fund does business with all low-income countries”. IMF engagement in LICs should: focus on efforts to enhance growth, poverty reduction and government spending to support these ends, by working with governments and donors to develop macroeconomic frameworks different scenarios for scaling-up aid and investment to achieve the MDGs, accelerating growth, spending, and fiscal space, and working with governments to mobilise resources to finance the MDGs and highlight gaps or quality problems in donor assistance. support genuine democratic ownership of policies, by drawing all conditions from the government’s own economic programme, limiting numbers of quantitative targets and structural conditions (even more tightly in ‘mature stabiliser’ countries) and confining them to IMF core areas, allowing governments to write their own letters of intent, and subjecting the decision to take up an IMF program, and its form and content, to consultation with stakeholders including parliamentarians, trade unions and civil society groups. Delink IMF TA, diagnostic and other advisory services from programmes, and base their availability on country need.

9 LESSONS FOR WIDER LIC REVIEW Ultimately, the IMF’s role in low-income countries should be as short-lived as possible, and the best way to ensure this is for countries to design and implement their own accelerated growth and development strategies. As one policymaker put it: “It is an illusion to think that Fund-supported programmes will solve our country’s problems and allow it to develop its economy. Our government has to develop its own policies and be accountable to its people for their implementation. Everything the Fund does should be judged on the basis of whether it is helping that to occur.”