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IMF and Africa: Africa: Sustaining the Momentum

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 2007
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Sub-Saharan Africa is experiencing its fourth year of strong growth. Higher oil revenues, strong commodity prices, and increased debt relief are being used to make inroads into poverty. While parts of Africa are plagued by wars and tarnished by corruption, elsewhere improved macroeconomic performance and better policies are helping countries put their economies on a firmer footing.

The challenge is to keep things going. The record shows that it is much easier to start a period of high growth than to maintain the pace: growth surges that last only a few years are quite frequent in Africa, as elsewhere. What is rarer is when these growth periods endure.

Leaders of the 53-member African Union met in Ghana July 1-3 to discuss ways to accelerate regional integration and link the continent more closely to the global economy—steps that are essential for spurring further growth, boosting employment, raising living standards, and reducing poverty and deprivation. An increasing focus will need to be placed on implementing the structural reforms that will help foster vibrant market-based economies.

What is the IMF doing to help African countries take advantage of this opportunity? After all, without faster and more sustained growth, poverty will not see much reduction in the continent. Thus, growth must accelerate if Africa is to edge closer toward achieving the Millennium Development Goals (MDGs).

IMF’s role in Africa

The IMF has long helped African countries achieve and maintain macroeconomic stability, improve public financial management systems (which promote good governance), and develop an effective financial sector that helps foster growth spearheaded by the private sector. Although most countries in the region are enjoying strong growth and benign inflation, many are still falling short of meeting any of the MDGs.

Making a permanent dent in poverty and achieving progress toward the MDGs will take not only higher overall donor resources but also the steadfast implementation of growth-critical reforms, the targeted and efficient use of available resources, and improved coordination of macroeconomic policies to increase the absorption of higher aid inflows.

The IMF is trying to help address these challenges. Its Medium-Term Strategy renews the IMF’s commitment to helping low-income countries in its core areas of expertise through policy advice, capacity building, and financial assistance, and seeks to improve the IMF’s effectiveness.

Refining the tool kit

The IMF is reviewing the effectiveness of its policy advice and program design and continuing to refine its tool kit for low-income countries. It is discussing how to take on board recommendations in two recent reports—one, “IMF and Aid to Sub-Saharan Africa,” from the IMF’s own watchdog, the Independent Evaluation Office, and the second from the External Review Committee on Bank-Fund Collaboration.

To help countries that want IMF support and endorsement of their economic policies without a borrowing arrangement, the IMF has introduced the Policy Support Instrument (PSI). In June, Mozambique became the fifth African country to opt for a PSI (see box). The Fund also introduced the Exogenous Shocks Facility (ESF), which provides policy support and financial assistance to low-income countries facing external shocks, and is reviewing how to better assist so-called fragile states.

The IMF is also reviewing how to help ensure that countries have the budgetary leeway (“fiscal space”) to expand priority spending on social services and infrastructure, and is looking for ways to increase their capacity to absorb aid and debt relief effectively. Countries must achieve these aims while trying to preserve the hard-fought gains provided by macroeconomic stability and avoiding past debt-related problems.

Expanding fiscal space

Countries can expand fiscal space by mobilizing resources from domestic revenue, external grants, and domestic and external loans; and by increasing the efficiency of spending, including by reducing untargeted and low-priority expenditures.

Increased resources need to be spent wisely, and such spending, particularly on social services and infrastructure, is being accommodated in all IMF-supported programs in Africa unless it would threaten macroeconomic stability. Fiscal and financing targets in IMF-supported programs will continue to be designed to accommodate higher poverty-reducing spending. Indeed, many programs include floors (or minimum levels) for poverty-reducing spending, for example in Rwanda, Sierra Leone, and Uganda.

“The scaling up of aid promised at the economic summit in Gleneagles has not yet materialized. The IMF will continue to remind donors of the need to live up to their commitments.”

Mobilizing domestic and external resources. In countries where revenue is inadequate to meet national policy challenges, the IMF provides advice and technical assistance to increase tax revenue by widening the tax base, improving tax policy design, and strengthening tax and customs administration.

The Fund also plays an important role in the mobilization of external resources. It lowered countries’ debt under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative and, most recently, under the Multilateral Debt Relief Initiative.

External loans increase resources for development. However, countries need to avoid falling into the debt trap of the past. The IMF and the World Bank have refined their debt sus-tainability framework to help countries implement debt management strategies that will avoid a renewed buildup of unsustainable debt.

But more needs to be done. The scaling up of aid promised at the economic summit in Gleneagles has not yet materialized.

Mozambique’s new PSI

The IMF’s Executive Board approved on June 18 a Policy Support Instrument (PSI) for Mozambique under the IMF’s PSI framework, which is intended to support the nation’s economic reform efforts. The PSI for Mozambique is aimed at maintaining macroeconomic stability as foreign aid is scaled up, promoting structural reforms, and implementing the broader policy agenda as envisaged in the Mozambican authorities’ national poverty reduction strategy.

Approval of Mozambique’s PSI signifies IMF endorsement of the policies outlined in the program. The IMF’s framework for PSIs is designed for low-income countries that may not need, or want, IMF financial assistance but still seek IMF advice, monitoring, and endorsement of their policies.

PSIs are voluntary and demand driven. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper. This is intended to ensure that PSI-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. Members’ performance under a PSI is normally reviewed semiannually, irrespective of the status of the program.

The IMF will continue to remind donors of the need to live up to their commitments and will give a candid assessment when it thinks that macroeconomic conditions allow for an increase in aid inflows.

Increasing the effectiveness of spending. Well-functioning public expenditure management (PEM) systems are essential if countries are to use public resources effectively to achieve and sustain high rates of growth. They also improve governance by making public expenditures more transparent (including to citizens) and help assure donors that their resources are being used for the intended purposes.

The IMF provides advice and technical assistance on expenditure policy and PEM systems, including medium-term fiscal frameworks, treasury management, and budget control. In this context, programs have also relied on the use of wage bill ceilings to prevent macroeconomic imbalances when the wage policy is not coordinated with sectoral priorities and overall resources.

A recent IMF study concluded that wage bill ceilings have not restricted the use of available donor funds, but also found that they are not the best instrument for addressing the underlying problems of budget control. As PEM systems are strengthened, these ceilings increasingly become redundant. The IMF has already strongly reduced reliance on such ceilings and, going forward, is committed to using them only selectively and transparently.

Increasing absorption of aid

A key objective of IMF-supported programs is to ensure that conditions are favorable for the effective absorption of aid. In general, this requires that various macroeconomic policies (monetary, fiscal, and exchange rate) be well coordinated and that key reforms in areas such as trade, the financial sector, governance, and public financial management be implemented.

The IMF’s analysis of the scope for using aid takes into account many factors, not just inflation and reserves. Important considerations are aid volatility, the incidence of shocks, debt sustainability, export competitiveness, the domestic debt burden, and microeconomic capacity constraints to higher spending.

Ulrich Jacoby

IMF African Department

See the IMF Survey Magazine online for related articles: “Rwanda’s Task: Manage More Aid,” “Central African Republic: Recovering from Conflict,” and “Africa’s Better Policies Are Paying Off”—an interview with Abdoulaye Bio-Tchané, Director of the IMF’s African Department.

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