IMF InFocus magazine

Information about Asia and the Pacific Asia y el Pacífico
Journal Issue

Poverty Reduction And Debt Relief: striving for a Better Life

International Monetary Fund. External Relations Dept.
Published Date:
August 2006
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Information about Asia and the Pacific Asia y el Pacífico
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The world economy has grown steadily since World War II, bringing widespread prosperity and lifting many millions out of poverty, especially in Asia. Nevertheless, daunting challenges remain. In Africa, in particular, progress in poverty reduction has been limited in recent decades, and some countries have fallen back. Looking ahead, in the next 25 years, the world’s population is projected to grow by about 2 billion, mostly in developing economies. Many of these people will be doomed to poverty without concerted efforts both by the low-income countries themselves and by the international community.

Coordinating development assistance

The IMF plays a critical role in low-income countries, where the central goal of its work is to help promote economic stability and growth, and thereby achieve deep and lasting poverty reduction. In this task, the IMF works closely with the World Bank, the lead international agency on poverty reduction. Together they are helping these countries make progress toward the Millennium Development Goals (MDGs) (see box on opposite page) through policy advice, technical assistance, lending, debt relief, and support for trade liberalization.

A woman with her son in Sumbe, Angola.

The pressures to meet the MDGs by 2015 have further focused the IMF’s efforts on helping countries scale up both their own policy efforts and external financial support in a context of macroeconomic stability. In this context, it encourages countries to develop and analyze alternative frameworks for achieving the MDGs and to use these to underpin their poverty reduction strategies. The IMF also offers low-income countries advice on how to manage the economic impact of aid inflows, which is crucial given that, in 2005, major donor countries indicated they would significantly increase the amount of external assistance they provide to developing countries in the next decade. On the donor side, the IMF is working with multilateral development partners to enhance the predictability of aid flows and achieve greater policy and administrative coherence on the part of development partners.

Since 1999, three initiatives have been instrumental in boosting the financial support of the IMF and the World Bank to low-income countries:

  • Poverty Reduction Strategy Papers (PRSPs), written by each borrowing country and setting out its homegrown policy strategy to provide the basis for the IMF’s and the World Bank’s concessional lending;
  • the Heavily Indebted Poor Countries (HIPC) Initiative, introduced in 1996 and enhanced in 1999, whereby creditors provide debt relief, in a coordinated manner, with a view to restoring debt sustainability; and
  • the Multilateral Debt Relief Initiative (MDRI), under which the IMF, the International Development Association (IDA) of the World Bank, and the African Development Fund (AfDF) canceled 100 percent of their debt claims on certain countries to help them advance toward the MDGs.

The PRSP is a comprehensive country-based strategy for poverty reduction. It aims to provide the crucial links between low-income countries, their donor partners, and development policies needed to meet the MDGs. PRSPs provide the operational basis for IMF and World Bank concessional lending and for debt relief under the HIPC Initiative. In the case of the IMF, loans are provided through its Poverty Reduction and Growth Facility (PRGF).

Low-income countries prepare their strategies with the participation of domestic stakeholders and external development partners. Updated periodically (at least once every five years) and with annual progress reports, PRSPs describe the macroeconomic,

structural, and social policies that countries plan to pursue and how they will finance them. Once a country has developed a PRSP, it becomes eligible for loans from the PRGF trust and for HIPC debt relief.

The HIPC Initiative was enhanced in 1999 to provide faster, deeper, and broader debt relief to low-income countries and to strengthen the links between debt relief and poverty reduction, particularly through social policies. Countries’ continued efforts toward macroeconomic stability and structural and social policy reforms—including increased spending on such social sector programs as basic health care and education—are central to the enhanced HIPC Initiative.

To date, 29 countries have reached the decision point under the enhanced HIPC Initiative, and $59 billion in nominal debt service has been committed to them by the international community. HIPC Initiative assistance is expected to reduce the debts of these countries by two-thirds in net present value terms. Nineteen HIPCs have also reached their completion points, when debt relief is to be delivered irrevocably by all creditors. Eleven additional countries have recently been identified as meeting the Initiative’s income and indebtedness criteria using end-2004 data and might wish to be considered for HIPC Initiative assistance.

The Millennium Development Goals

The heads of 189 countries signed the Millennium Declaration in September 2000, adopting the Millennium Development Goals (MDGs), a set of eight objectives incorporating specific targets for reducing income poverty, tackling other sources of human deprivation, and promoting sustainable development. The eight MDGs seek, by 2015, to

(1) halve extreme poverty and hunger relative to 1990;

(2) achieve universal primary education;

(3) promote gender equality;

(4) reduce child mortality;

(5) improve maternal health;

(6) combat HIV/AIDS, malaria, and other diseases;

(7) ensure environmental sustainability; and

(8) establish a global partnership for development.

A follow-up meeting of world leaders in Monterrey, Mexico, in March 2002 established a shared understanding of the broad strategy needed to achieve the MDGs. The Monterrey Consensus ushered in a new compact between developing and developed countries that stressed their mutual responsibilities in the quest to meet the development goals. It called on developing countries to improve their policies and governance and on developed countries to step up their support, especially by providing more and better aid and more open access to their markets.

The MDRI supplements the assistance provided under the HIPC Initiative. It became fully effective in the IMF on January 5, 2006. Countries eligible to receive MDRI relief from the IMF include all HIPCs that have met their completion point under the Initiative (that is, they have reached the point at which they can receive full HIPC relief), as well as non-HIPCs with a per capita income of $380 or less.

To date, debt relief in the amount of $3.7 billion has been provided to 21 countries: 19 post-completion point HIPCs (Benin, Bolivia, Burkina Faso, Cameroon, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda, and Zambia) and two non-HIPCs (Cambodia and Tajikistan). More countries may qualify for MDRI relief from the IMF in the course of 2006. Malawi, Sao Tome and Principe, and Sierra Leone are expected to reach their HIPC completion point, and thus qualify for MDRI relief, in 2006.

While the HIPC Initiative is designed to restore debt sustainability for the most heavily indebted poor countries, the MDRI goes further by providing the full cancellation of eligible debt (in the case of the IMF, that disbursed by end-2004 and still outstanding at the time the country qualifies for MDRI relief) to free up additional resources to help these countries reach the MDGs. Unlike the HIPC Initiative, which entailed coordinated action by all creditors, the MDRI does not propose any parallel debt relief on the part of official bilateral or private creditors or multilateral institutions beyond the IMF, IDA, and AfDF. Modalities of implementation of the MDRI also vary across institutions.

For countries to realize the potential benefits of debt relief, it will be critical to help them avoid excessive borrowing in the future. Countries must balance their need to step up spending to meet the MDGs against the risks of a new round of over-indebtedness. The debt sustainability framework for low-income countries, developed jointly by the IMF and the World Bank in 2004, can help creditors and debtors assess the risks of an unsustainable debt buildup. The framework traces the path of key debt indicators with respect to given debt thresholds (linked to the quality of policies and institutions in debtor countries), as well as their behavior in the face of shocks. It has already become an important tool guiding the IMF’s policy advice to low-income countries.

Further steps

Although countries that have, or have had, PRGF arrangements show marked improvements in macroeconomic performance, most low-income countries are far from attaining the sustained high growth necessary for achieving the MDGs by 2015. The IMF and the World Bank, in their third annual Global Monitoring Report—which tracks countries’ progress—say that advances have been uneven. The good news is that the report found evidence of reduced child deaths in 9 out of 10 developing countries surveyed and of the first decline in HIV/AIDS infection rates in high-prevalence countries such as Haiti, Uganda, and Zimbabwe. It also noted rapid gains in primary school enrollment. However, many countries, especially in Africa and Latin America, are still not making strong inroads into poverty reduction, and South Asian countries have made insufficient progress on human development indicators. Published in 2006, the report highlights that economic growth, more and better-quality aid, trade reforms, and better governance are essential for achieving the MDGs.

For its part, the IMF continued to reflect on the adequacy of its instruments for engaging low-income members. Although the PRGF remains the main instrument for assisting them, for those that have recently made significant progress toward economic stability and no longer require its financial assistance, the IMF introduced the Policy Support Instrument (PSI) in October 2005. The PSI enables the IMF to support these low-income countries by helping them design effective economic programs. Once approved by the IMF’s Executive Board, these programs will signal to donors, multilateral development banks, and markets the IMF’s endorsement of a member’s policies. Such policy support for and “signaling” about countries’ performance and prospects can be used to inform the decisions of outsiders and may, for example, affect the flow of external assistance, including debt relief and other aid.

In December 2005, the IMF also introduced the Exogenous Shocks Facility to provide policy support and concessional financial assistance to low-income countries facing shocks beyond their control (see page 23). For low-income countries that face balance of payments difficulties as a result of natural disasters or multilateral trade reforms or are emerging from conflict, the IMF has activated mechanisms that provide support—the subsidized Emergency Natural Disaster Assistance, and the Trade Integration Mechanism (TIM) and Emergency Postconflict Assistance—on concessional terms.

Under the IMF’s Medium-Term Strategy (see page 7), endorsed by its membership at the 2006 spring meeting, the institution will further refine its role in low-income countries. First, it will focus on issues that are critical for each country’s pursuit of macroeconomic stability, streamline its division of labor with the World Bank, and offer more flexible conditions under lending facilities. Second, the IMF will assess whether projected aid flows are consistent with macroeconomic stability and the estimated costs of achieving countries’ development goals, and will also be more forthcoming with donors. Third, it will help ensure that the beneficiaries of debt relief do not again accumulate excessive debt.

Trade issues and the Doha Round

Trade is potentially much more important than aid in helping developing countries prosper, and the IMF continues to stress the global importance of the Doha Round of trade negotiations (begun in 2001). Without a Doha agreement, global growth would be slower and the world economy could be less resilient in the face of shocks. In the context of achieving the MDGs, the IMF is keen to see an ambitious and successful outcome to the Doha Round. Poverty reduction efforts stand to gain from an agreement that would fully realize Doha’s development promise—particularly a major reform of agricultural trade policies in high-income countries. During its 2006 spring meeting, the IMF appealed to members to reach an agreement that would allow poor countries to take full advantage of the opportunities of global integration through ambitious trade liberalization. It called for the Round to be completed by the end of 2006.

The IMF has been doing its part to support an open international trading system. In FY2005, the IMF activated the TIM to help countries cope with balance of payments shortfalls resulting from the implementation of the Doha Round and, more generally, nondiscriminatory trade liberalization by other countries. The TIM allows IMF members to request financial assistance under the IMF’s existing facilities to meet temporary trade-related balance of payments needs.

When the World Trade Organization’s Agreement on Textiles and Clothing expired at the end of 2004, for example, the Dominican Republic obtained support under the TIM, making it the second country to do so, following Bangladesh in 2004. Discussions with other member countries are under way Availability of assistance under the TIM should help assuage concerns of some developing countries that an ambitious outcome to the Doha Round could place undue adjustment pressures on them.

To help ensure that member countries can take full advantage of the opportunities of multilateral trade liberalization, the IMF has

  • provided technical assistance in such areas as customs reform, tax and tariff reform, and data improvements;
  • contributed to diagnostic studies of obstacles to trade integration in less-developed countries as part of an interagency effort led by the World Bank;
  • identified potential risks and helped countries understand the benefits of international integration; and
  • assessed how countries are affected by trade reforms—for example, the implications of reduced agricultural subsidies, preference erosion, and the phasing out of textile quotas.

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