Responses: Louise Holly - Acting Director, RESULTS UK

Recent figures released by the IMF state that fiscal deficits have increased this year, by an average of 2%, in 80% of African countries in which the IMF has programmes. These figures are generally being presented as evidence that the Fund is allowing 'counter-cyclical' policies. In addition, a recent PIN from the Fund (July 29th) stated that increased flexibility of conditionality for low-income countries in the last few months has led to programmes 'targeting higher levels of pro-poor spending, and accommodating higher overall spending levels and fiscal deficits.'

RESULTS UK remains concerned that little evidence has been presented for the claim that recent programmes allow higher overall spending levels and higher levels of pro-poor spending. The relaxation of fiscal deficit targets by 2% comes at a time when tax receipts are falling, in some countries very sharply, and therefore may well represent simply increased borrowing to cover existing levels of spending.

2% is a fairly modest increase in any case; Justin Yifu Lin, the World Bank Chief Economist, recommends that a counter-cyclical fiscal stimulus in low-income countries should be 3% to 5% of GDP. In the context of falling government incomes the small size of the increase is even more worrying, and we would encourage the G20 to obtain further information about the relationship between this figure and actual spending levels, which would be able to show whether significant increases have occurred or not. Without this information it is not possible to conclude that the IMF is allowing counter-cyclical spending in Low Income Countries (LICs) – just that they are showing limited flexibility to avoid spending cuts in the face of falling tax revenues.

It is very difficult to obtain good quality data on this issue. For this reason, we believe that DFID should commission an independent review into the matter, ensuring that there is an opportunity for civil society to comment and give feedback on the framework of the review.

We welcome the limited flexibility that the IMF is showing on fiscal deficits – it would be very damaging to allow the crisis to lead to cuts in the already limited social spending of LICs – however, it is necessary, even while we remain within the crisis, to look beyond the immediate picture to consider long-term requirements for scaling up spending to reach the Millennium Development Goals (MDGs). Programmes instigated during the crisis need to take into account the investment needed now in education and health workers to reach the goals and set a firm basis for future development. For this to happen upfront investments that will lead to big returns over the medium to long-term need to be financed by much larger increases in spending than we have so far seen. We remain concerned that IMF restrictions on fiscal deficits and inflation targets unnecessarily constrain low-income country spending on the vital social sector workers who could deliver on the MDG targets. This issue must be tackled now, not left until a later date because of the crisis.

The case of Tanzania, judged by the IMF to be a ‘mature stabiliser’, is illustrative. Maternal health is a particular problem in Tanzania – President Kikwete this month announced that it is unlikely Tanzania can meet MDG5. The health worker shortage is a significant contributor to barriers to achieving MDG5, and in 2005, there were 35,202 professional health staff employed in Tanzania (in both public and private health facilities), against an estimated need for 124,924. This means that Tanzania was only able to employ 24% of the necessary health workers.¹ Clearly, further spending on the recurrent costs of health worker salaries is necessary. There is a fundamental mismatch between the macroeconomic policy environment and the number of health workers needed to provide health services that tackle poverty in Tanzania.

Tanzania’s engagement with the IMF is currently through a Policy Support Instrument (PSI). A recent report by Oxfam looking at the process of formulating PSIs across Africa² concluded that ‘There was generally very little analysis of the poverty and social impact of the PSI, in particular of its overall macroeconomic framework – except to the degree that it would produce growth and therefore was assumed to reduce poverty. Some analysis was conducted of individual controversial policies such as privatisations, or specific issues such as the amount of spending on specific social sectors or programmes (for example wage ceilings). This of course was similar to the situation under the PRGF, where only one “macroeconomic PSIA” analysis has ever been done, in Rwanda funded by DFID.’

IMF programmes, particularly the macroeconomic indicators set within programmes, remain insufficiently linked into wider poverty reduction efforts and do not allow space for upfront investments in crucial social sectors. The G20 should call on the IMF to include poverty and social impact assessments of the broad macroeconomic framework of all programmes, including those that do not include a financial relationship.

In terms of current debates within donor countries and the IMF, SDR transfers (if done in an affordable and sustainable manner) could finance increases in spending to provide genuinely counter-cyclical policies – current facilities are not demonstrating sufficient flexibility to do this.

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It is as yet difficult to assess how well the proposed reforms of IMF lending to LICs meet the needs of these countries, because at the end date of this consultation the full policy paper has not yet been released and it is as yet unclear what conditionality will be attached to the reformed facilities.
However, from early indications we are concerned that facilities designed to deal with shocks originating from exterior events, not from countries’ own policy decisions, are likely to come with ‘upper-credit tranche conditionality’. The ‘Stand-by Credit Facility’ for example, is designed to address balance of payments problems caused by external shocks, among other causes. It is not appropriate that a country be forced to meet conditions indirectly related to the external shock in order to access funding under this stream, because the external shock, by definition, could not be prevented by country policy.
It is clear from take-up patterns for the Exogenous Shocks Facility (ESF) that countries have been reluctant to draw on the upper tranche of funding due to the conditionality attached. There is no evidence to suggest that this problem will be addressed by the proposed reform of the upper access portion of the ESF into a ‘Stand-by Credit Facility’. The G20 should push for a reformed ESF to attach conditionality limited to only that directly addressing the shock at all levels of access.
We are disappointed that the recent review did not consider the option of creating a system that will either allocate SDRs on the basis of need or enable and encourage rich countries to transfer their SDR allocations to the low-income countries that need them most. This option offers the most promising solution to the difficulties LICs are facing due to the crisis – it would present less of a debt burden to LICs and would be available without inappropriate conditions, which could require LICs to cut or hold static spending on social sectors in the face of a global recession.
SDR allocations would therefore be the most counter-cyclical method of funding to meet the financing shortfalls of LICs in the short-run. To make this option affordable for LICs the IMF would need to agree a system for eliminating or subsidising interest rates for low-income countries. We believe that the G20 should strongly support this option, providing political leadership to give real help to countries that are desperately in need.