In the News: IMF Will Continue to Play Vital Role in Low-Income Countries

International Monetary Fund. External Relations Dept.
Published Date:
August 2006
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The hard-won gains from debt relief may be lost if countries take on new debt to finance expenditures that do not spur growth, IMF Managing Director Rodrigo de Rato cautioned in a July 31 appearance at the Center for Global Development (CGD) in Washington, DC. In fact, he said, one of the tasks before the IMF is “to ensure that there is not another debt crisis.” In outlining the Fund’s strategy for low-income countries, de Rato stressed that the IMF is “strongly committed to our low-income country members and to the international effort to reduce poverty.” He highlighted the Fund’s long advocacy of higher aid and its effective use, and the importance of protecting the voice and representation of poor countries in the IMF.

The Fund is also strongly committed to making sure that countries have the ‘fiscal space’ they need to expand social programs, especially in health and education.

—Rodrigo de Rato

Joining him for a debate on the IMF’s work in low-income countries were Kemal Dervis (Administrator, United Nations Development Program), Ricardo Hausmann (Director of Harvard University’s Center for International Development), and Dennis de Tray (Vice President, CGD). CGD’s Liliana Rojas-Suarez served as moderator.

IMF perspective

De Rato said that the IMF made an important contribution to reducing the debt of low-income countries when, under the Multilateral Debt Relief Initiative, it moved quickly to cancel the debts owed to it by 19 poor countries. But there are signs that new private and official lenders are rushing to provide new lending to these same countries. To help mitigate the risk of debt buildup, he said, the IMF and the World Bank have designed a forward-looking debt sustainability framework for low-income countries to assist them in their financing decisions. “We can also sound the alarm to official creditors when debt or debt-service levels are likely to become a problem,” he added.

As for alternative sources of finance, de Rato noted, the international community also needs to offer sufficient grants and highly concessional loans—with donors providing early and predictable commitments of support to allow low-income countries to plan successfully. The IMF can help improve the effectiveness of aid “by ensuring that macroeconomic frameworks are sound and that adequate public expenditure systems are put in place, so that scaled-up resource flows reach their targets,” he explained.

On the fiscal side, “the Fund is also strongly committed to making sure that countries have the ‘fiscal space’ they need to expand social programs, especially in health and education,” he said. Contrary to what some nongovernmental organizations assert, the Fund does not advocate cutting back on spending in these areas, even in times of fiscal restraint, he said. Indeed, many Fund-supported programs include floors on poverty-related spending.

On the trade front, he called the recent collapse of the Doha Round of trade talks “very painful,” saying that he hoped negotiators would try to preserve gains already made.

De Rato also stressed that the Fund’s legitimacy as a global institution demands that all its members have fair representation and a voice that can be heard. This issue will be taken up at the September IMF-World Bank Annual Meetings in Singapore.

Debating the Fund’s role

A lively debate among the panelists and de Rato followed. Dervis welcomed de Rato’s remarks on the voice and representation of poor countries in the IMF Executive Board. It worried him, however, that the IMF seemed less concerned with real exchange rate appreciation that sometimes results from capital inflows into middle-income countries than with real exchange rate appreciation that can result from aid inflows into low-income countries, calling the former a policy of “benign neglect” Rojas-Suarez noted that the multilateral organizations have not been very good in the past at preventing the buildup of unsustainable debt in low-income countries, and wondered what would make the future different and whether aid dependency was now replacing overindebtedness.

In Hausmann’s view, the international community’s strategy for low-income countries focuses too much on achieving the Millennium Development Goals and not enough on economic growth. He asked why, if Tanzania counts as a success story, is there so little investment, infrastructure, or nontraditional exports? De Rato stressed that macroeconomic stability is part of a growth strategy—economies cannot grow with high inflation and unsustainable debts. All economic policy making involves tradeoffs, he said, and decisions on these tradeoffs must be made by the countries themselves.

De Tray expressed the view that the IMF has been very successful in crisis management—he saw this first-hand in Indonesia in the late 1990s—and promoting macroeconomic stability. But he questioned whether the Fund was flexible and open enough at the country level to contribute significantly to long-term development. It seemed to him that changes in the IMF’s culture were needed and that these would take a long time.

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