Global Policy Forum

Failing to Deliver for Low Income Countries

The International Monetary Fund (IMF) plays a key role in defining how much governments can spend. The Fund's view of what defines the macro economic stability of a country is the authoritative one for all development partners. Given this, the Fund could and should be playing a dynamic, proactive role in establishing the financing conditions for achieving the Millennium Development Goals (MDGs).

The (MDGs) have been endorsed by the UN, world leaders, the World Bank, regional development banks, developing country governments and the IMF. They set minimum standards to combat poverty, hunger, disease, illiteracy, environmental degradation and discrimination against women. With aid at current levels however, many countries will not even meet these minimum standards. If present trends continue there will be 10 million child deaths in 2015, compared to half that if the target is met. Countries have massive financial gaps standing between them and achieving the MDGs. Women continue to bear the majority of the burden this lack of financing entails. At the Monterrey Financing for Development (FFD) conference in 2002, donors pledged an extra $16 billion dollars in aid. This falls far short of what is needed, but at least it does signal the willingness of donors to halt the drastic decline in aid flows that occurred in the 1990s.

Against this background it is critical that poor countries have as much support as possible from the international community to absorb and manage rising aid flows as they increasingly become available. The IMF has a crucial role to play. Unfortunately, there are 3 main areas where the IMF is failing to play this role, and where a radically new approach is needed:

1. The Fund needs to show greater flexibility in its economic targets, demonstrating a longer-term focus on poverty reduction and analyzing the trade-offs this entails for short-term economic policy.

2. The Fund needs to end its pessimism towards increasing aid flows to poor countries and stop designing economic policy around this view. Instead it should play a dynamic role, working with others to measure the financing needs to achieve the MDGs, and proactively mobilizing higher aid flows. It should use its technical expertise working with Governments to design macroeconomic frameworks that can accommodate these increased resources.

3. The influence of the Fund as ‘gatekeeper' for poverty focused aid needs to be decreased. The IMF has a key role in achieving the MDGs, but as one partner in a broad alliance for poverty reduction, and not as the all powerful on/off switch for aid and debt relief.

A survey of IMF programs in 20 countries by Oxfam and Eurodad shows that for the IMF financial inflexibility and aid pessimism are still the norm. For example, The IMF requires Cameroon to achieve a fiscal surplus by 2005. At the same time the Cameroon Poverty Reduction Strategy Paper (PRSP) shows that under current expenditure ceilings infant mortality in 2015 will be 44% higher than required in the MDGs. The targeted reduction in the deficit would be enough to double the health budget.

In Mozambique the IMF is predicting declining aid flows despite rising donor support and evidence that more aid can be productively absorbed. These spending and aid projections became the basis of the PRSP, sending out negative signals to donors about the financing required to tackle poverty and deliver the MDGs. Instead of the poverty needs driving the macroeconomic framework, the opposite was the case.

The negative impact of this inflexibility and conservatism is compounded by the continued role of the IMF as gatekeeper for donor aid and debt relief. For example, disputes with the IMF over teachers' salary increases have cost Honduras $194 million dollars in delayed debt relief and donor aid cuts. Ironically this money could fill the financing gap in the program to educate all children in Honduras three times over.

Over the next six months the IMF is seeking to review its role in poor countries. At the same time, the IMF's Independent Evaluation Office (IEO) is currently evaluating the role of the IMF in the PRSP process. As such the time is ripe for the IMF to redouble its commitment to poverty reduction and the MDGs. The Fund needs to radically change its role and the way it works in poor countries and truly deliver on its previous commitments to poverty reduction made when introducing the Poverty Reduction and Growth Facility (PRGF). It must finally move on from an outdated focus on exclusively short-term macro-stability to one based on long-term poverty needs and the MDGs. If it does this it can play a vital, proactive and dynamic role in achieving poverty reduction. If it does not, the new poverty focus of IMF programs in poor countries risks being largely discredited.

To ensure the IMF really contribute to the achievement of poverty reduction and the MDGs, Oxfam recommends the following:

1. A new approach to designing IMF programs