Untitled Document

IMF Enhances Crisis Prevention, Poverty Reduction and Conditionality

The IMF's International Monetary and Financial Committee (IMFC) and the World Bank's Development Committee met jointly on April 29 in Washington, D.C. The two committees discussed better preparation and monitoring to prevent financial crises, the focus of conditionality, and policies and programs aimed at poverty reduction. The goal of these changes seems to be to redirect the IMF's efforts more toward prevention rather than reacting to crises by offering bailouts. A few countries would like to see a weakening of the conditions for borrowing, but this position does not enjoy broad support. There certainly is no desire on the part of the US Treasury to weaken macroeconomic or structural conditionality, but it will not be so easy to streamline it as proposed. Undoubtedly, any simplifications will be welcomed by member countries.

Crisis Prevention
This portion of the discussion involved many issues related to debt reduction, poverty and sustainable development. The IMFC reiterated that strong crisis prevention is a top priority. It noted the managing director's decision to create an International Capital Markets Department to deepen understanding of the markets and give early warning of potential crises in member countries. The new department will complement the Capital Markets Consultative Group in dialogue with the private sector. The IMF also recently agreed on a list of international codes and standards for Article IV surveillance consultations, the modalities of their implementation and release of their results to the public. It has deepened its implementation of transparency policy, allowing voluntary publication of country staff reports and other materials.

The IMF has strengthened financial sector surveillance in cooperation with the World Bank in a Financial Sector Assessment Program (FSAP) which provides a comprehensive framework to determine vulnerabilities, priorities, needs and appropriate policy responses. The fund now carries out Financial System Stability Assessments, which are derived from FSAP findings through Article IV consultations and are the instrument for improved monitoring of financial systems.

Conditionality and Governance
The IMFC supported the IMF's recent review of conditionality, especially as it applied to the details of structural reforms by member countries seeking financial support. However, it also raised the need for conditionality combined with financial support of members policy adjustment programs. The committee endorsed the fund's practice of focusing conditionality on those economic measures, including structural, that are critical to achieving the macroeconomic objectives of the programs. The IMF is committed to streamlining conditionality to make it more efficient and effective, and to working toward better collaboration and division of labor. especially on structural reforms, with the World Bank and other institutions. It is also committed to take into account the capacity of some members' decision-making and administrative ability and to assist in strengthening these areas to sustain structural reforms. Maximum scope was accepted for the ability of members to make their own policy choices, while protecting the fund's resources and ensuring support for needed policy adjustments.

The IMF is addressing particular cases of poor governance and corruption with specific measures. The IMFC asked the fund to "keep under close review the use of specific remedial measures, which should be applied with careful judgment and flexibility." It also urged follow-up on implementation of OECD-led initiatives to combat bribery of foreign officials. Both committees pledged to redouble efforts to identify and combat money laundering in the international financial system.

Poverty Reduction
The World Bank Development Committee discussed creation of a health fund (within the World Bank) initially to focus on providing drugs and vaccines to combat tuberculosis, AIDS and malaria. This idea is strongly supported by the governments of Italy and Great Britain, which also favor disease research, especially in tropical areas. The fund would be administered by the World Bank and coordinate closely with the World Health Organization and the United Nations. Part of the goal is to consolidate several health-related funds into one fund. Although a hopeful sign, it is still too early to judge whether or not it will be effective at combating the contagious diseases that are ravaging the poorest of the developing countries.

The IMF and World Bank also produced a joint progress report on their efforts to assist the poorest member countries. The stated goal is to ensure that the benefits of globalization are shared by all and to promote awareness of the role of poverty reduction in achieving world peace and stability. The two organizations led the effort to consider enhancing the highly indebted poor countries (HIPC) official debt reduction in the Paris Club framework to cover post-conflict countries (11) and providing additional debt forgiveness and rescheduling for needy countries that already benefited from the first stage (22). The IMFC noted the successful creation and operation of the Poverty Reduction and Growth Fund, which offers a soft loan (0.5%, 5.5 yrs grace, 10 yr term) to IDA eligible countries ($885 per capita GDP or less). These nations apply based on need and preparation of a poverty reduction strategy paper that has been consulted internally with civil society. Member countries are eligible to borrow 140% of their quota or in special cases up to 185%.

World Economy
Finally, the IMFC and the Development Committee discussed the slowing down of the world economy and the specific crises in Turkey and Argentina. The Mexican economy is slowing down, and the Fox administration is talking to the IMF about future use of CCL (Contingent Credit Lines). The consensus opinion was that the slowdown will turn around in the last quarter and accelerating growth rates will return. The committees reiterated the importance of further trade liberalization to benefit the world economy, and particularly the poorest countries.