Global Policy Forum

The IMF's Independent Evaluation Office has just released a major new report on the PRSP process. The report argues that PRSPs have the potential to encourage country-owned development, but that achievements so far fall considerably short of their potential. This echoes findings in the World Bank's recent evaluation of PRSPs. The report calls for greater country ownership of the process and a more country-specific flexible approach to policy design. Demands for the process to be firmly embedded in domestic institutional processes are made, with countries gaining greater control over procedures and monitoring arrangements. It is also recognized that there is a need to ensure policy is tailored to individual countries. Finally, the report calls for greater clarity as to the IMF's exact role in the process. Highlighting that though donors clearly want an IMF signal on the quality of the macro-economic environment, this does not necessarily have to also involve the IMF providing financing and conditionality

The report looks at PRSPs in general, the IMF's specific role in the process and the longer term role of the IMF in Low Income Countries (LIC). It includes comments from IMF management, staff and the Board of Director and draws on case studies from Guinea, Mozambique, Nicaragua, Tajikistan, Tanzania, and Vietnam

Key findings of report:

Greater broad based participation in the formulation of PRSPs, but failure to translate this into strengthening existing domestic institutional processes: The report found that overall the PRSP process was perceived as more participative than previous IFI strategies by numerous stakeholders. However, it noted that "participatory processes were typically not designed to strengthen existing domestic institutional processes for policy formulation and accountability (e.g., through parliament)" (p7). The report recommends greater work to ensure these are strengthened (see recommendations below).

Limited success in embedding the PRGF in the PRSP: "Success in embedding the PRGF in the overall strategy for growth and poverty reduction has been limited in most cases" (p9). The report attributes this failure partly on shortcomings in the strategies themselves. Nevertheless, the report does note some positive changes in PRGF program design, highlighting the incorporation of greater fiscal flexibility to accommodate aid flows, for example. Some readers may be surprised to note that the report also finds no evidence of generalized "aid pessimism" or a systematic "disinflation" bias.

IMF structural conditionality streamlined, but report unable to reach a definitive conclusion on aggregate IMF-World Bank conditionality: The report finds that though IMF conditionality has streamlined, there is a serious question mark over whether overall there has been a reduction in IMF and World Bank conditionality, indicating that perhaps the Bank is taking up many previous IMF conditionalities.

Lack of meaningful discussions of alternative policy options with respect to the macroeconomic frameworks and structural reforms: Firstly, the report found that IMF staff typically did not actively inform domestic stakeholders about the policy debate on macro issues during the PRS formulation process. This was attributed to IMF staff generally interpreting the emphasis on country ownership as implying that involvement on their part should be limited. However, the report also highlighted a general failing to explore alternative macro-economic policy options. Importantly, the report highlights that in the relatively few cases where a broader debate did occur there was a positive impact on policy outcomes.

Failure to understand macro-micro linkages has led to agreement to conduct ex ante Poverty and Social Impact Analysis within the IMF, but this has yet to be streamlined into program design: The report highlights that PRSPs are weak on exploring the linkages between growth, poverty incidence and macroeconomic policies at the individual country level. The IMF in response has called for ex ante PSIA, but the report notes that this call has not yet translated into mainstreaming such analysis in program design.

Recommendations:

1. Introduce greater flexibility in the implementation of the PRS approach to fit better the needs of countries at different stages of the process and with different capacities and political and administrative systems.
The report notes that the PRS approach would have greater value added if it was made more flexible in practice to fit different country situations. The report highlights that countries need to be put even more firmly in the driver's seat by determining themselves how the policy formulation, implementation, and monitoring processes will be conducted and built up over time. Specifically, the report recommends that progress of PRSPs should be monitored against an explicit set of country-determined intermediate benchmarks (see recommendation 3). Finally, the output of these processes in terms of documents and timing should rely as much as possible on domestic institutional arrangements, with minimal IMF-imposed requirements.

2. Shift the emphasis of the initiative from the production of documents to the development of sound domestic policy formulation and implementation processes.
The report recommends building in greater results-orientation, with countries encouraged to establish substantive criteria for judging progress towards key intermediate objectives. The report cites the existing public expenditure management (PEM) benchmarking exercise as an example. The report also highlights the need for a shift in the emphasis of the incentives faced by countries away from procedural aspects and production of documents to achieving substantive changes in domestic processes and policies.

3. Clarify the purpose of the Joint Staff Assessment and redefine the vehicle accordingly.
The report notes that despite its failings the JSA - an assessment by Bank and Fund staff of the adequacy of the PRSP - is a useful concept whose potential has not been realized. The report notes the need for a greater focus on the adequacy of domestic policy choices and the quality of domestic processes, as well as actual progress towards intermediate objectives. The report also calls for making explicit the criteria and benchmarks used by staff to form their judgments and reporting on the views of third parties (especially local stakeholders and donors) when available.

4. Clarify what the PRS approach implies for the IMF's own operations and strengthen the implementation of the agreed role.
The report recommends that the Fund place greater emphasis on activities that help to better inform broad based policy discussions in its areas of competence. Guidelines to staff, it notes, need to be clarified so as to encourage more active inputs to such discussions, including analyzing alternative policy options and tradeoffs. One possible approach suggested is that IMF staff prepare a short note on key macroeconomic issues that need to be addressed in the broader growth and poverty reduction strategy, which the authorities could make public if they wished.

The report also highlights that rather than establish uniform "standards" for the IMF's role, expectations should be tailored to country-specific circumstances, including the government's wishes. It is noted that this is also likely to require a combination of: (i) more "stand alone" missions, set apart from program negotiations, and (ii) enhancing the role of resident representatives.

In relation to the PRGF the report calls for the rationale for IMF policy recommendations and program design to be subject to broader scrutiny and debate. The report also calls for greater clarify over the approach to be taken by the IMF in those cases where the PRS approach has not yet produced an operational road map or the necessary institutional framework for PRGFs to be based on.

5. Strengthen prioritization and accountability on what the IMF itself is supposed to deliver within the broader partnership framework, built around the priorities emerging from the PRS process, and ensure resources match commitments.
The report calls for the IMF to tailor its involvement more closely to country needs, taking into account the contributions from other partners. Because these needs vary widely and because resource constraints on the IMF will remain tight, a more systematic approach is needed to (i) setting priorities on what the IMF itself will deliver; and (ii) ensuring appropriate coordination of key inputs from other stakeholders.

6. The IMF should encourage a strengthening of the framework for establishing the external resources envelope as part of the PRS approach.
The report highlights that the present "architecture" of the PRS approach does not provide a clear framework for helping countries and donors decide what is an appropriate medium term resource envelope in which the macroeconomic strategy should be derived. The evaluation recognizes that it has not yet produced sufficient evidence for it to recommend a particular "right" approach on this issue. However, the IEO indicates that it does not favor a greatly expanded role for the IMF that would risk taking it beyond its comparative advantage.

Comments on longer term role of the IMF in Low-Income Countries (LIC):

The report summarizes some key decisions that need to be taken when exploring the longer term role of the IMF in LICs and suggests a number of principles that should be borne in mind when taking them. Below are some of the key questions it raised, others are contained within report.

What should be the signaling role of the IMF in the longer term and how should it be provided? The report notes that donors clearly want an IMF signal on the quality of the macro-economic environment. However, the report questions whether this signal necessarily also has to involve IMF providing financing and conditionality, and calls for greater clarity in identifying what roles the IMF are being asked to fulfill.

What should be the IMF's financing role in low-income countries and what should be the criteria for "exit" from such financing? The report highlights that the current criteria used for financing in LIC is incredibly vague (protracted balance of payment crisis) and does not provide effective guidance for when the IMF should shift its support from traditional lending arrangements to other forms of engagement. The report calls for unbundling the various non-lending functions that the IMF is expected to perform under the PRS approach and making clear that the IMF can remain very substantially involved in the PRS process without providing baseline financing over long periods.

It is helpful that this major IEO study has echoed much of what civil society groups have been arguing for some time. While it is an official part of the IMF the IEO does not, however, have any power to force acceptance of its recommendations. This relies on members of the IMF board and staff responding favourably, and to pressure that can be created by civil society groups. Eurodad recently coordinated a sign-on letter to the IMF Managing Director and all IMF Executive Directors and is initiating discussions with colleagues on other ways to ensure the useful messages of the review are followed up.