The Middle East and North Africa (MENA) is an economically diverse region that shares

a common cultural and institutional heritage as well (see box, page 4).

The region benefited immensely from the sharpincrease in oil prices in the 1970s. The resultingwealth financed an explosion of investment andgrowth in the oil-exporting countries. This invest-ment, in turn, helped boost worker remittances,trade, and capital flows in other countries in theregion. But as oil prices and production softened,the boom faded, prompting a slowdown and, inmany cases, a decline in growth rates in the 1980s.

Deteriorating economic conditions brought aboutpressures for reform. In the mid-to-late 1980s andearly 1990s, a number of countries introduced fiscalreforms, strengthened monetary

InternationalMonetary FundVOLUME 32Supplement2003

In this issue

1Overview

Middle East andNorth Africa

2IMF highlights

7Surveillance

10Crisis resolution

13IMF lending

14Financing facilities

16Conditionality

17Poverty reduction

20HIPC Initiative

22Technical assistance

23AFRITACs

25IMF’s financialresources

SDRs

26IMF quotas

28Overdue payments

29Organization

30Executive Board

31IndependentEvaluation Office

32IMF at a glance

1

The partial recovery of world economicgrowth seen in 2002, following the

slowdown of the previous year, hasbeen broadly sustained in 2003, withsome indications in recent monthsthat it has gained strength. The out-look is for growth to strengthen fur-ther in late 2003 and 2004, but the balance of risks is still slanted to thedownside, though less so than earlier thisyear. Risk factors weighing on the outlookinclude global payments imbalances (particularlythe large U.S. current account deficit) and the possi-bility of continuing repercussions of the bursting of the equity market bubble and of further increasesin long-term interest rates following their recentsharp upturn.

Against this backdrop, the IMF hasfocused on promoting policies that sup-

port economic recovery and raisegrowth prospects. In addition to itstraditional surveillance, lending, andtechnical assistance operations, theIMF has been strengthening theframework for preventing crises and

for resolving the crises that do occur.To strengthen surveillance and crisis

prevention, the IMF is sharpening its analysis ofvulnerabilities, such as debt sustainability, and empha-sizing financial sector surveillance, including throughthe joint IMF–World Bank Financial Sector AssessmentProgram. The IMF is paying increased attention at thecountry, regional, and global levels to the externalimplications of national

Overview

IMF focuses on supporting economic recovery,strengthening crisis prevention and resolution

www.imf.org/imfsurvey

Middle East and North Africa

MENA region strives to reinvigorate growth and strengthen links to the global economy

Traditional agriculture is a significant source of income inthe Middle East and North Africa. Above, Palestinianfarmers empty bags of olives into a press.

(Please turn to following page)

(Please turn to page 4)

Supplement 2003

2

20022002September 6 IMF approves new Stand-By Arrangement for Brazil, the

largest in the institution’s history.

September 6Executive Board tight-

ens the standards for

approving financial

support to members

in excess of normal

limits in relation to their

quotas.

September 25First report of the

Independent Evaluation

Office reviews pro-

longed use of IMF

resources. In response,

the Managing Director

establishes a task force to implement IEO recommenda-

tions aimed at strengthening the effectiveness of IMF-

supported programs.

September 26Adoption of new conditionality guidelines aimed at promot-

ing national ownership of policy reforms and streamlining

and focusing conditionality.

October 2IMF launches website on statistical practices related to

foreign direct investment to meet the needs of researchers,

financial analysts, and journalists.

October 24East Africa Regional Technical Assistance Center (AFRITAC)

opens in Dar es Salaam, Tanzania, as part of IMF’s response

to Africa’s request for help in strengthening institutions and

in designing and implementing better policies.

November 22 Approval of 12-month pilot project to support interna-

tional efforts to prevent money laundering and the

financing of terrorism.

20032003January 24IMF approves financial support enabling Argentina to defer

$6.6 billion in repayments to the IMF.

February 4 Twelfth General Review of Quotas is concluded without a

proposal to increase IMF quotas, which remain unchanged

at SDR 218.5 billion ($300 billion).

March Management takes steps to enhance the capacity of the

offices of African constituencies on the Executive Board as

a first step toward ensuring adequate voice and representa-

tion for all members.

policies. It is also encouragingcountries to include collectiveaction clauses in sovereignbond contracts (as Mexico andUruguay have done in theirrecent bond issues) and is sup-porting efforts by debtors andcreditors to develop a volun-tary code of conduct duringdebt restructuring.

Meanwhile, to make itslending decisions in crisesmore predictable for membercountries and financial mar-kets, the IMF has clarified the

criteria for access to its resources. The guidelines for thepolicy conditionality associated with IMF lending havebeen revised to enhance the country ownership andeffectiveness of the policy programs the IMF endorses.

The IMF remains fully committed to achievingthe UN Millennium Development Goals. It has con-tinued its work on reinvigorating the fight againstpoverty in low-income countries, primarily throughthe poverty reduction strategy paper (PRSP) process,which emphasizes national ownership of policystrategies. Working closely with the World Bank, theIMF supports its poorest members through its low-interest lending facility, the Poverty Reduction andGrowth Facility (PRGF). As part of that effort, it isseeking to align its PRGF-supported programs more

At the press briefing on the IndependentEvaluation Office’s first report are (from left)Montek Singh Ahluwalia (IEO Director), DavidGoldsborough, and Isabelle Mateos y Lago.

IMF committed to Millennium Development Goals(Continued from page 1)

Abdoulaye Bio-Tchané, Director ofthe IMF AfricanDepartment (left),IMF ManagingDirector HorstKöhler, andMadagascar’sPresident MarcRavalomanana visita market inAntananarivo.

I M F H I G H L I G H T S

Supplement 2003

3

April 12International Financial and Monetary Committee decides

against establishing a statutory sovereign debt restructur-

ing mechanism and shifts the IMF’s focus toward finding

other methods for the orderly resolution of financial

crises.

April 13Development Committee approves a joint IMF–World

Bank project to monitor the policies and actions needed

for the achievement of the Millennium Development

Goals by 2015.

May 29 West AFRITAC opens in Bamako, Mali, to serve

10 West African countries.

May 29 Agustín Carstens’ appointment to the position of

IMF Deputy Managing Director is announced.

May 30 IMF announces it will conduct a fact-finding mission to

Iraq to enable it to offer the country technical assistance

and advice in its areas of expertise.

July 2 IMF announces that Raghuram Rajan of the

University of Chicago Graduate School of Business

will succeed Kenneth Rogoff as IMF Economic

Counsellor and Director of the Research Department.

July 30 IMF announces a reorganization of its area

(regional) departments, effective November 1.

The European II Department will be dissolved,

and the responsibility for countries of the former

Soviet Union will be absorbed by two departments

that will be renamed the European and the Middle

East and Central Asia Departments.

closely with members’ poverty reduction strategies.In addition, to help its poorest member countriesburdened with unsustainable debt, the IMF continuesto provide debt relief, in collaboration with the WorldBank, through the enhanced Heavily Indebted PoorCountries Initiative.

Emphasizing that trade can play a key role inhelping low-income countries reduce poverty, theIMF has reiterated its support for a successful con-clusion of the Doha Round of multilateral tradeliberalization. It has also stressed the need forincreased aid, encouraging donor countries to meetthe UN target of 0.7 percent of their GNP.

The IMF also provides technical assistance andtraining to developing and transition countries tostrengthen their capacity to design and implementpolicy. In 2002–2003, the IMF opened technical assis-

tance centers in Tanzania and Mali and providedtechnical assistance to countries establishing orreestablishing institutions after periods of conflict,including Afghanistan, Iraq, and Timor-Leste.

Raghuram Rajan

September 2002–August 2003

West AFRITAC islaunched at a ceremonyin Bamako, Mali, on May 29.

The IMF is fully committed to the achievement of theUN Millennium Development Goals, one of which isuniversal primary education.

Supplement 2003

4

policy frameworks, liberalized trade regimes,encouraged foreign direct investment, and pursuedmore flexible exchange rates. As a result, fiscaldeficits have narrowed since the mid-1980s to levelsthat are well below those of other developing coun-tries; the size of the government has declined con-siderably; inflation has been low and was on thedecline for most of the 1990s; and the region hasweathered the financial crises that plagued otherregions during the past two decades.

Growth resumed in the 1990s, with faster growthrates in reforming countries such as Egypt andTunisia. But the region as a whole did not grow as

quickly as expected, and, more important, it laggedother developing countries throughout the decade(see chart, this page).

Thus, while the region has maintained macroeco-nomic stability, it has failed to generate the high andsustained growth rates needed to create jobs for itsyoung and growing population. It has also beenunable to reap the benefits of globalization that otherdeveloping countries have enjoyed.

To address these challenges, the region must takeurgent steps to reinvigorate growth, reignite thereform process, and strengthen its links to the globalcommunity.

Challenges aheadAlthough there are significant differences among theregion’s 24 economies—notably between oil produc-ers and non–oil producers and between early reform-ers and late reformers—all countries face, to varyingdegrees, several key challenges.

Increase productivity growth. The region’s popula-tion is one of the fastest growing in the world. It hasnearly quadrupled since 1950 and is expected todouble over the next 50 years. But jobs have not keptpace with the region’s work force: unemploymentrates are high, and underemployment (inadequatejob opportunities for skilled workers) is pervasive.A young, productive labor force can boost economicgrowth, but only if there are adequate jobs, comple-mentary factors of production, and a business-friendly environment. The region’s performance has

The Middle East and North Africa region comprises the

Arab states of Algeria, Bahrain, Djibouti, Egypt, Iraq,

Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco,

Oman, Qatar, Saudi Arabia, Somalia, Sudan, the Syrian

Arab Republic, Tunisia, the United Arab Emirates, and

Yemen, plus the Islamic State of Afghanistan, the Islamic

Republic of Iran, Pakistan, and the West Bank and Gaza.

Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the

United Arab Emirates formed the Gulf Cooperation

Council in the early 1980s and launched a customs union

in January 2003, with plans to establish a monetary union

by January 1, 2010.

The region’s 24 countries and territories, which are

grouped together here for analytical purposes only, hold

about 7.7 percent of the world’s population. Its GDP is

approximately $2 trillion (measured at purchasing power

parity exchange rates) or 4.3 percent of world GDP, also

measured at purchasing power parity exchange rates.

About 75 percent of the world’s proven reserves of

crude oil are located in the region, and the GDPs of

the oil-exporting countries account for about two-thirds

of the region’s GDP. Thirteen countries export oil:

Algeria, Bahrain, the Islamic Republic of Iran, Iraq,

Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan,

the Syrian Arab Republic, the United Arab Emirates,

and Yemen.

The dominant religion is Islam, although there are

sizable religious minority groups (particularly Christian)

in several countries, including Egypt and Lebanon. Arabic

is the principal language spoken in the region, except in

Afghanistan, Iran, and Pakistan, which account for almost

half of the region’s population. French is spoken along

with Arabic in the Maghreb countries of Algeria,

Mauritania, Morocco, and Tunisia.

Middle East and North Africa: facts and figures

Challenges ahead for MENA region(Continued from page 1)

also been constrained by weak, often negative, pro-ductivity growth.

Continue political and institutional reforms.Despite its geopolitical significance, the region’simpact on the global economic system remains weak.Political fragmentation, recurring conflicts, andauthoritarian rule have hampered the development of democratic institutions and remain major obsta-cles to economic reforms.

The demarcation between the public and the pri-vate sector in many countries is often unclear, encour-aging conflicts of interest, rent seeking (that is, lobby-ing policymakers for purely private gains), and wide-spread corruption. Although there are exceptions,transparency in government is poor, and accountabili-ty remains problematic (see chart, this page).

Although the public continues to perceive gover-nance as inadequate, some progress has been made.In most countries, elections for representative legisla-tures are becoming more open and meaningful.A growing number of countries are also strengthen-ing their economic institutions with the assistance of international financial institutions.

Further rationalize public sectors. Fast economicand population growth in the 1970s fueled a signifi-cant expansion in the size of central governments, asmeasured by the ratio of central government spend-ing to GDP. Although the size of government hasdeclined since then, by the end of the 1990s itremained relatively high by international standards.

In the face of continued slow economic growthand high unemployment, the public sector hasincreasingly served as the employer of last resort,inflating public payrolls and wage bills. In addition,several countries in the region maintain extensivegeneralized subsidies and devote large portions oftheir budgets to military spending.

Confronted with persistent deficits since the early1970s, some countries have pursued tax reforms(Lebanon and Sudan) and improved transparencyand expenditure control (Pakistan and Mauritania).And some progress has been made on privatization,particularly in the region’s telecommunications sec-tor. Nonetheless, the process of rationalizing the roleof the state and adapting it to the requirements of amodern, competitive economy remains incomplete.

Strengthen education reforms. The region hasmade significant progress in raising the education lev-els of its population—in a sample of 12 countries, theaverage years of schooling increased from 1.3 years in1970 to 41/2 years in 2000, and access to good schoolshas increased dramatically as well. But the quality ofeducation and training has not advanced correspond-ingly. Education systems are characterized by frag-

mented management structures spread across severalministries, inflated administrative bureaucracies, and a spending bias toward higher, rather than primary,education. While in some countries—such as Jordan,Lebanon, Syria, and Tunisia—male-to-female educa-tion ratios are converging, in many other countries,enrollment rates, years of schooling, and literacy ratesremain distinctly lower for females. More needs to bedone to close the gap between male and female accessto education.

Modernize financial markets. From the 1970sthrough the mid-1980s, the region made significantstrides in financial sector development. Some coun-tries, such as the Gulf Cooperation Council (GCC)countries, Lebanon, and Jordan, now possess well-developed banking sectors. Overall, however, theregion’s financial markets remain fragmented and aredominated by traditional banking activity. As a result,financial sectors have not played the intermediationrole needed to accelerate the pace of investment andgrowth. While the region has been a net exporter ofcapital for the past 30 years, the financial sector hasfailed to develop the capacity to channel a significantportion of these savings into long-term productive

Supplement 2003

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Supplement 2003

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investment. In many cases, banking systems are pre-dominantly owned or controlled by the state, withconsiderable exposure to government debt, weakregulatory and enforcement capacity, inadequatemanagement skills, and weak links to internationalcapital markets.

Continue trade liber-alization. Trade regimesvary across the region.Many countries—notablythe GCC countries,Mauritania, and Yemen—are generally open to freetrade, but several contin-ue to maintain relativelyhigh tariffs and nontariffbarriers, despite recenttrade liberalizationefforts. Overall, theregion has a higherdegree of trade restric-tiveness than otherregions, although there

has been improvement over the past six years. Interms of nontariff barriers, the countries are not thatdifferent from developing countries as a group.

Adopt appropriate exchange rate policies.About half of the countries in the region have fixedexchange rates, and another one-fourth haveexchange rate regimes that are near-fixed, such aspegs or moving pegs with narrow bands. While somecountries, such as those of the GCC, have benefitedfrom using a pegged exchange rate, the choice of anexchange rate regime has not always been appropri-ate. Countries have tended to delay adjustment inthe presence of clear real exchange rate appreciationor have hesitated to exit an inflexible arrangementwhen this was called for.

Inappropriate exchange rate policies and theinability to successfully address the closely relatedphenomenon of the “resource curse,” typically asso-ciated with countries with rich natural resources orlarge foreign exchange inflows, contribute to the slowgrowth of non–oil exports from the region. Inflexibleexchange rate policies, among other factors, may alsohave delayed the development of monetary policyframeworks (for example, inflation targeting) thatare more suitable for emerging market economiesseeking to integrate more fully into the world econo-my. Such economies include those of Egypt, Jordan,Lebanon, Morocco, and Tunisia.

Some countries—for instance, Egypt and theIslamic Republic of Iran—have recently madeprogress in making their exchange rate policies more

flexible. Such flexibility is important for the continu-ing efforts of these countries to undertake structuralreforms that promote economic efficiency and stim-ulate trade and investment.

Boosting growth, creating jobsWhat can the region do to reignite and sustain highoutput and employment growth, better integratewith the global economy, and better manage thebooms and busts in oil prices?

Over the past 20 years, the region has made clearprogress on macroeconomic reforms and has movedon structural reforms, but these have not gone farenough to address deep-rooted problems or seri-ously tackle the area’s governance and institutionalreform issues. Accelerated and broad action is need-ed on these fronts, including a fundamental reassess-ment of the role of the state in the economy and thecreation of a rules-based regulatory environment.

Greater efforts are also needed to accelerate tradeliberalization, reform financial and labor markets,and improve transparency, governance, and the qual-ity of state institutions. Economic liberalizationshould seek to ensure fair and open competition inwhich market forces could create opportunities fora more efficient allocation of resources and supportprivate sector investment and growth.

Oil-exporting countries need to cushion theeffects of booms and busts in the oil markets and,over the longer term, take into account intergenera-tional equity considerations in mapping out strate-gies for government spending, investment, andfinancing of government operations.

While all countries in the region need to maintainmacroeconomic stability and pursue structuralreforms, it is the reform of public and private sectorinstitutions that, in the final analysis, will make thedifference. A more determined and sustained driveby MENA countries toward a more open and demo-cratic society, embracing fundamental structural andinstitutional reform, appears to be the best assurancethat the region, with its rich civilization and abun-dant natural resources, can achieve its potential forhigher growth rates and a decent and dignified lifefor the 500 million human beings who live in it.

Afghanistan is receiving considerable assistance to addresssevere poverty andurgent health careneeds.

Photo credits: Denio Zara, Padraic Hughes, and Michael

Spilotro for the IMF, pages 1, 2, 3, 17, 19, 21, 24, 29, and

31; Ahmed Jadallah for Reuters, page 1; Government of

Mali, page 3; Leila Gorchev for AFP Photo, page 4;

Romeo Ranoco for Reuters, page 6; AFP, page 18; Aizar

Raldes for AFP Photo, page 20; George Mulala for

Reuters, page 22; IMF staff, pages 22 and 23. Illustrations:

Massoud Etemadi, pages 8–9; Miel, 13–15.

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IMF surveillance of national and global economicand financial developments has intensified in

recent years. In today’s global economy, economicdevelopments and policy decisions in one countryare more likely than in the past to affect other coun-tries significantly, and financial market informationis transmitted around the world instantaneously.In such an environment, it is more important thanever before that developments and policies be moni-tored so that tensions and imbalances are identifiedbefore major problems or crises arise. The IMF fillsthis need by holding regular dialogues with its mem-ber countries about their economic and financialpolicies and by continuously monitoring and assess-ing economic and financial developments at thecountry, regional, and global levels. Through its sur-veillance operations, the IMF seeks to signal dangerson the economic horizon and enable its membercountries to take early corrective policy action.

Country surveillance. The IMF holds regular con-sultations—normally once a year—with each mem-ber country about its economic policies. (These“Article IV consultations” are required by Article IVof the IMF’s Articles of Agreement.) The consulta-tions focus on the member’s domestic demand pres-sures, inflation, and unemployment; developments in exchange rate, fiscal, and monetary policies; its balance of payments and its external liabilities andassets; the influence of its policies on the country’sexternal accounts; the international and regionalimplications of its policies; and the identification ofpotential vulnerabilities. As financial markets aroundthe world have become more integrated, IMF surveil-lance has become increasingly focused on capitalaccount and financial and banking sector issues.Institutional issues, such as central bank independ-ence, financial sector regulation, corporate gover-nance, and policy transparency and accountability,have also become increasingly important to IMF sur-veillance in the wake of financial crises and in thecontext of member countries’ transition fromplanned to market economies.

Global surveillance. The Executive Board’s conductof global surveillance relies heavily on two staffreports—the semiannual World Economic Outlook andthe Global Financial Stability Report—and also onmore frequent discussions of world economic andmarket developments. The World Economic Outlookoffers a comprehensive analysis of prospects for the

world economy, individual countries, and regions andexamines policy issues. It also explores selected topicalissues in depth. The Global Financial Stability Reportwas introduced in March 2002—building on earlierinternational capital market reports—to provide time-ly and comprehensive analysis of developments inboth mature and emerging financial markets and toidentify potential fault lines in the global financialsystem that could lead to problems and crises.

Regional surveillance. The IMF also exam-ines policies pursued under regional arrange-ments. It holds regular discussions with suchregional economic institutions as theEuropean Union, the European CentralBank, the West African Economic andMonetary Union, the Central AfricanEconomic and Monetary Community,and the Eastern Caribbean CurrencyUnion. The IMF also takes part in policy dis-cussions of finance ministers, central bank governors,and other officials in such groups as the Group ofSeven major industrial countries, the Asia-PacificEconomic Cooperation forum, and the Maghrebcountries associated with the European Union.

Improving surveillance’s effectivenessThe IMF has taken a variety of measures in recentyears to enhance the effectiveness of its surveillance.Successive internal and external reviews have point-ed to five key ingredients of effective surveillance:timely, comprehensive, and accurate information;focused, high-quality analysis; openness to differ-ent perspectives to minimize the risk of “tunnelvision”; effective communication of assessmentsto the authorities and the public; and desiredimpact on members’ policy decisions.

To strengthen its surveillance, the IMF hastaken steps to

• improve the data that members provideto the IMF and the data that are dissemi-nated to the public;

• provide more systematic financial sector sur-veillance, particularly through the joint IMF–WorldBank Financial Sector Assessment Program (FSAP);

• create a new analytical framework for debt sus-tainability assessments, which is being used in sur-veillance reports for members with significant capitalmarket access, as well as in reports on members’requests for IMF loans;

Effective surveillance and crisis prevention

Helping IMF members reduce vulnerabilities,promote stability, and foster growth

Supplement 2003

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• strengthen the assessments of policy frameworksand institutions in the context of internationally rec-ognized standards and codes;

• significantly expand the IMF’s contribution toefforts to combat money laundering and the financ-ing of terrorism, including through a 12-month pilotprogram begun in October 2002;

• improve the transparency of countries’ policiesand data; and

• strengthen surveillance in countries with IMF-supported programs to help ensure that economicconditions and policies are reassessed from a freshperspective.

The IMF has identified six areas in which furtherwork and reflection would be useful. First, there is acontinuing need to build on progress with vulnerabili-ty assessments and better calibrate the IMF’s policyadvice on buffers against outside shocks. Second, theIMF will look at ways to integrate insights from cross-country experiences more systematically into surveil-lance. Third, the IMF will seek to enhance its analysisand reporting of political issues relevant to economicpolicies. Fourth, more attention should be given to the

impact of economic poli-cies of countries that aresystemically and regionallyimportant, including theglobal effects of their tradepolicies. Fifth, the IMFmust continue to ensurethe candor of the diagno-sis and policy recommen-dations in the staff ’s sur-veillance reports whilemaking further efforts toboost publication of thesereports. Sixth, the IMFshould continue looking

for ways to enhance the role of surveillance in pro-gram countries.

Data provision. Comprehensive, timely, and accu-rate economic data are critical for well-informednational policymaking and for effective surveillance.Over time, with the extension of the coverage of sur-veillance and the need for more continuous monitor-ing, data requirements for surveillance have expanded.In recent years, attention has focused on timely provi-sion of data on external reserves, foreign currency liq-uidity, and external debt and on other data needed forin-depth assessments of vulnerability to crises.

Financial sector surveillance and the FSAP. TheFSAP, which began in 1999, is the international com-munity’s key tool for strengthening the monitoring offinancial systems. The FSAP provides a comprehen-

sive framework for identifying financial sector vul-nerabilities, strengthening the analysis of linksbetween macroeconomic and financial sector devel-opments, and identifying development needs in thefinancial sector. It is a major source of inputs for IMFsurveillance on financial sector policies, institutions,and vulnerabilities and is complemented by a rangeof instruments designed to enable more continuousand effective financial sector surveillance. Among theinstruments are focused updates, work undertakenduring Article IV consultations, and continuousmonitoring of financial sector developments at IMF headquarters.

The IMF uses many of the diagnostic tools devel-oped for the FSAP in its work on offshore financialcenters. This work helps members identify gaps andreduce potential vulnerabilities in their financial sys-tems and improves the statistical coverage of theactivities of offshore financial centers. Reviews ofthese centers evaluate financial regulation and super-vision in jurisdictions with significant offshore finan-cial activity to help safeguard the stability and integri-ty of their financial systems.

Improving sustainability analysis. In June 2002,the Executive Board discussed and endorsed a newframework for judging debt sustainability—that is,whether a country’s external and public debts can beserviced without an unrealistically large correction toits balance of income and expenditure. The newframework provides a check of the baseline projec-tions on which sustainability is assessed. It does thisby clarifying the underlying assumptions about keyvariables, including GDP growth, real interest rates,exchange rates, and primary fiscal or external imbal-ances, and by highlighting their implications. It intro-duces standardized parameters for stress testing theprogram baseline to identify the extent to which sus-tainability hinges on a macroeconomic outcomemore favorable than those experienced in the pastand to help ensure the robustness of the programagainst plausible shocks. In July 2003, following areview of the framework, several enhancements wereadopted, including the use of scenario analyses tocomplement stress tests and strengthened treatmentof contingent liabilities.

International standards. The standards and codesinitiative is part of the international community’sstrategy to improve the stability of the global finan-cial system. It is designed to strengthen countries’financial and economic institutions, promote goodgovernance and transparency, enhance the accounta-bility and credibility of economic policy, and reducevulnerability to financial crises. The initiative alsocontributes to enhancing coverage of institutional

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issues in IMF surveillance. Accelerated in the wake ofthe Asian financial crises of the late 1990s, the initia-tive began with the establishment of the IMF’s SpecialData Dissemination Standard (SDDS) in 1996 andnow covers 12 key policy areas, offering policymakersbenchmarks of good practice.

The standards can be grouped into three main cat-egories: transparency (focused on data and on fiscal,monetary, and financial policy); financial sector(banking supervision, securities, insurance, paymentsystems, and the combating of money laundering andthe financing of terrorism); and market integrity forthe corporate sector (corporate governance, account-ing, and auditing).

Voluntary assessments of member countries’observance of standards and codes in these 12 areas(through Reports on the Observance of Standardsand Codes (ROSCs)), initiated in 1999, have sincebecome established in the IMF and the World Bank.The standards initiative has also attracted growingattention from financial market participants andratings agencies.

Combating money laundering and the financingof terrorism. Money laundering is the process ofmoving or concealing assets obtained or generated bycriminal activity. Terrorist activities are sometimesfunded from the proceeds of illegal activities, andperpetrators attempt to find ways to launder thefunds to use them without drawing the attention ofthe authorities. Detecting and tracing such funds canbe extremely difficult, and even the best anti–moneylaundering measures are not always effective. TheFinancial Action Task Force (FATF) has primaryresponsibility for developing a worldwide frameworkfor combating money laundering, in close coopera-tion with relevant international organizations.

Over the past year and a half, the IMF has signifi-cantly intensified its contribution to internationalefforts to combat money laundering and extended that contribution to combat the financing of terrorism.In cooperation with the World Bank, it has

• added the FATF 40 recommendations and 8 spe-cial recommendations on anti–terrorist financing tothe list of areas and associated standards and codesuseful to the operational work of the IMF and forwhich ROSCs can be prepared;

• begun, in October 2002, a 12-month pilot projectassessing country efforts to combat money launder-ing and the financing of terrorism. These assessmentstake place in the context of ROSCs and involve theparticipation of the IMF, the World Bank, the FATF,and FATF-style regional bodies; and

• substantially increased technical assistance tomembers to help them strengthen their financial,

regulatory, and supervisory frameworks and preventmoney laundering and terrorism financing.

Transparency. The IMF’s Executive Board hasadopted a series of measures to improve the trans-parency of members’ economic policies and financialdata and to enhance the institution’s own transparencyand external communications. In taking steps toenhance the IMF’s transparency, the Executive Boardhas had to consider how to balance the IMF’s responsi-bility to oversee the international monetary system withits role as a confidential advisor to its members. As partof its regular reassessment of this balance, inSeptember 2002, the Board reviewed experi-ence with the IMF’s transparency policy.The key elements of this policy for docu-ments are

• voluntary publication (that is, withthe consent of the country concerned) ofstaff reports on Article IV consultationsand use of IMF resources;

• a presumption that letters of intent,memorandums of economic and financialpolicies, and other documents stating agovernment’s policy intentions will bepublished;

• publication of poverty reduction strat-egy papers (PRSPs), interim-PRSPs, andPRSP progress reports, required for manage-ment to recommend their endorsement by theExecutive Board;

• voluntary publication of public informationnotices (PINs) following Article IV consultations andBoard discussions on regional surveillance papers,concluding mission statements, background docu-mentation for Article IV consultation discussions, anddocumentation for staff-monitored programs;

• a presumption that staff reports on policy issueswill be published, together with PINs; and

• public access, in the IMF’s archives, to ExecutiveBoard documents that are over 5 years old, to min-utes of Executive Board meetings that are over 10 years old, and to other documentary materials thatare over 20 years old, subject to certain restrictions.

Surveillance in countries with IMF-supported programs. Countries with IMF-supported programsneed periodic reassessments of economic conditionsand policies in light of changing domestic and globalconditions. To help ensure that IMF surveillance doesprovide such reassessments from a fresh perspective,the IMF is clarifying the substantive content of surveil-lance for countries with IMF-supported programs andis modifying the timing of Article IV consultations sothat they take place when policy reassessments will bemost useful.

Crisis prevention is the primary focus of theIMF’s reform agenda, but work is also continu-

ing on ways to improve the management and resolu-tion of the financial crises that do occur. Indeed, astronger and clearer framework for crisis resolutionis expected to help lessen the number and severity of crises. The IMF is seeking to combine a clearerpolicy on access to IMF resources and greater selec-tivity in its lending with an examination of possibleapproaches to strengthening the mechanisms forrestructuring unsustainable sovereign debt.

Clearer, more predictable accessIncreasing international integration of financial mar-kets in recent decades has helped emerging marketcountries finance investment and economic activitybut has also exposed these countries to the risk of

crises caused byrapid reversals ofcapital flows. Insome cases, the IMFhas supportedmember countries’efforts to resolvesuch crises by pro-viding largeamounts of financ-ing. In Mexico in1995, during theAsian crises of1997–98, and subse-quently, the IMF has

provided financing in amounts well above the accesslimits normally applied to Stand-By and ExtendedFund Facility arrangements.

Large access will sometimes continue to be neces-sary if the IMF is to provide meaningful assistance tomembers facing capital account crises, but the policyon exceptional access has needed to be strengthenedto ensure that such access remains exceptional.The IMF’s Executive Board reviewed the policy frame-work for exceptional access in early 2003 and agreedthat more clearly defined criteria for such access incapital account crises were needed to help shape theexpectations of members and markets, set up bench-marks for difficult decisions about program designand access, safeguard IMF resources, and ensure uni-form treatment of members. At a minimum, theBoard agreed, the following criteria would need to be

met to justify exceptional access in a capital accountcrisis:

• The member must be experiencing exceptionalbalance of payments pressures on the capital account,resulting in a need for IMF financing that cannot bemet within the normal limits.

• A rigorous and systematic analysis must indicate a high probability that debt will remain sustainable.

• The member has good prospects of regainingaccess to private capital markets within the time IMFresources would be outstanding, so that the IMF’sfinancing would provide a bridge.

• There is a reasonably strong prospect that notonly the member’s policies but also its institutionaland political capacity are sufficiently strong to imple-ment adjustment.

The IMF’s Executive Board also agreed on strongerprocedures for decision making on all requests forexceptional access. These procedures include a higherburden of proof in indicating the justification for thescale of access, early consultations with the ExecutiveBoard on program negotiations (based on a concisestaff note outlining the considerations), and evalua-tion of programs with exceptional access within ayear of the end of the arrangement. The ways inwhich these criteria and procedures are applied inpractice will, however, be decisive, and a review ofimplementation is planned by the end of 2004.

Clarifying policy on arrearsWhen a member is experiencing difficulties in servic-ing its debt obligations to its external private creditors,discussions on restructuring that debt can be difficultand protracted, and an agreement may not be reachedbefore the emergence of arrears. In such a case, theIMF stands ready to provide resources to the memberwhen prompt support is essential for the success ofits adjustment policies and the member is making agood-faith effort to reach a collaborative agreementwith its creditors.

In September 2002, the IMF’s Executive Boardreviewed recent experience in restructuring sovereignbonds and the application of the good-faith criterion.It agreed that greater clarity about the good-faith dia-logue between a debtor and its creditors could betterguide the application of lending into arrears and, moregenerally, promote a better framework for the engage-ment of debtors and creditors in the restructuring ofsovereign debt.

Crisis resolution

Work continues on strengthening IMF framework for crisis resolution

Supplement 2003

10

Supplement 2003

11

To guide the dialogue between debtors and theirprivate external creditors, the Board considered thatthe following principles would strike an appropriatebalance:

• When a member decides that a restructuring ofits debt is necessary, it should engage in an early dia-logue with its creditors and continue this dialogueuntil the restructuring is complete.

• The member should share relevant, nonconfiden-tial information with all creditors on a timely basis.This information should allow creditors to evaluatethe member’s need for a restructuring and itsconsistency with proposed adjustment policies andthe financing envelope.

• The member should provide creditors with anearly opportunity to give input on the design ofrestructuring strategies and individual instruments.In complex cases that warrant an organized negotiat-ing framework and where creditors have been able toform a representative committee on a timely basis, it isexpected that the member will enter into good-faithnegotiations with this committee.

Unsustainable sovereign debtIn relatively rare cases, however, sovereign debt canbecome unsustainable. The IMF has been engaged inan active debate on how best to deal with these cases.There are several challenges to a successful restructur-ing. Sound macroeconomic and structural policies areclearly critical. Transparency and predictability in therestructuring process are also important to permit bet-ter informed due diligence and decision making andto ease the task of achieving adequate intercreditorequity. Another challenge is effective collective actionby creditors. In particular, there is a danger that indi-vidual creditors will decline to participate in a volun-tary collective restructuring in the hope of recoveringpayment on the original contractual terms. Creditorsas a group are best served by agreeing to a restructur-ing, but the “free rider” problem can make it more dif-ficult to reach agreement on a restructuring.

Given that protracted restructurings are in noone’s best interests, the IMF has been working onpossible approaches to improving the existing frame-work for resolving sovereign restructuring cases—in particular through the inclusion of collectiveaction clauses in sovereign bond contracts. The IMFalso worked on the design of a statutory frameworkfor sovereign debt restructuring, a sovereign debtrestructuring mechanism.

These approaches could be complemented by avoluntary code of conduct—a set of standards fortransparency and best practices—that could helpguide debtors and their creditors in a broad spectrum

of circumstances, ranging from relative tranquility toacute stress. The IMF welcomes private and publicsector initiatives in this area and supports their devel-opment. It is clear, however, that a code can be effec-tive only if it is able to attract broad support fromdebtors and their creditors.

Collective action clauses. Collective action clauses(CACs) in international sovereign bond instrumentsare designed to facilitate more orderly and rapid debtrestructuring in the rare cases of unsustainabilitywhen a sovereign needs to restructure its debt.CACs are provisions in bond contracts that enablethe sovereign and a qualified majority of its bond-holders to make decisions that become binding onall bondholders within the same issuance.

The IMF has long recognized the role of CACs inhelping to resolve the collective action problem. It pro-motes the more widespread use of those types of pro-visions that already exist in many international sover-eign bond contracts. Perhaps the most important pro-vision is the majority restructuring provision, whichenables a qualified majority of bondholders within thesame issuance to bind all bondholders to the terms ofa restructuring agreement, either before or afterdefault. In addition, majority enforcement provisionsenable a qualified majority of bondholders to preventindividual creditors from taking disruptive legal actionbefore a restructuring agreement is reached. Whilemajority restructuring provisions currently exist insovereign bonds governed by English law, bonds gov-erned by New York law (which represent the largestportion of the emerging market sovereign bond mar-ket) have traditionally not included these provisions.

The IMF has been encouraged by developmentsover the past year with respect to both the design ofmajority restructuring and majority enforcementclauses and the incorporation of such clauses intobonds governed by New York law (see box, page 12).However, given the outstanding stock of bonds thatdo not include CACs, it will take some time beforethese clauses are included in most internationalbonds.

The IMF’s Executive Board has agreed that theorganization should more actively promote the use of CACs through its bilateral and multilateral surveil-lance and its outreach work. All member countries,both advanced and developing, should be encour-aged to include CACs in their international bondinstruments. IMF staff has been encouraged to hold a more active dialogue with emerging market issuers,with a view to promoting the use of CACs in theNew York market as well as in other markets, such asGermany, where CACs are not the norm. Progress bymature market economies in the use of CACs in

international bond issuance would further strengthenthese efforts. In the latter part of 2003, the IMF staffis expected to hold workshops with key issuers andlegal practitioners on ways to promote CACs.

Sovereign debt restructuring mechanism (SDRM)The second approach pursued by the IMF for resolvingunsustainable sovereign debt situations—an SDRM—would differ from CACs in two key ways: it would cre-ate a legal framework that would allow collective actionfor all instruments, including those that required una-nimity to restructure the financial terms; and it wouldaggregate the votes of similarly situated creditors hold-ing participating debt instruments, allowing a singlevote to restructure multiple debt instruments.

While the International Monetary and FinancialCommittee’s April 2003 communiqué emphasizedthat the extensive analysis and consultation undertak-en in developing the SDRM proposal had served topromote better understanding of the issues to beaddressed, it recognized that it was not feasible at thattime to move forward to establish an SDRM. Thecommittee agreed that work should continue onissues of general relevance to the orderly resolution offinancial crises. These issues include intercreditorequity considerations, enhancing transparency anddisclosure, and aggregation. The IMF’s ManagingDirector will report on progress at the Committee’sSeptember 2003 meeting.

Collective action clauses: latest developments

In September 2002, a Group of 10 working group proposed

a set of clauses, based on English law, that reflect the princi-

ples of fostering early dialogue, ensuring effective recon-

tract, and minimizing litigation by minority creditors.

In early 2003, the group published its work on a set of

model clauses designed to illustrate how these recommen-

dations could be implemented. A group of private sector

capital trading associations also published proposals for

developing model clauses.

There have also been a number of steps in both mature

and emerging markets on the use of CACs. In September

2002, European Union (EU) finance ministers stated that,

beginning in June 2003, their member countries committed

to issuing bonds in foreign jurisdictions with CACs that

reflect the recommendations of the Group of 10 working

group on contractual clauses. Italy has already launched

such bonds. Although these bonds represent a small part of

the overall bonds issued by EU countries, the EU represents

a sizable portion of the global bond market and, thus, could

influence market practice in the jurisdictions of New York

and Germany, which traditionally have not included

majority restructuring provisions.

At the end of 2002, international sovereign bonds with

CACs issued by emerging markets amounted to about

30 percent of total sovereign bonds issued by these mar-

kets. In March and April 2003, Mexico twice issued bonds

governed by New York law that included majority restruc-

turing and majority enforcement provisions. (Lebanon

(2000), Qatar (2000), and Egypt (2001) had also issued

bonds with majority restructuring provisions governed

by New York law, but the earlier inclusion of these clauses

went unnoticed by the markets.) Mexico’s issuances were

successful in that they were oversubscribed, and an analy-

sis of the Mexican sovereign yield curve provided no evi-

dence that the price, either at the

launch or in secondary market trading,

reflected a yield premium for the inclu-

sion of CACs.

Also in April 2003, a global bond

issuance by Brazil—governed by New

York law and including CACs—was

heavily oversubscribed and again

showed no evidence that there was a

cost associated with the use of CACs.

Other emerging market issuers—South

Africa, Korea, and Belize—followed

with new international bonds governed

by New York law and including CACs.

In May 2003, Uruguay issued New

York law bonds with CACs following

the successful completion of a debt

exchange operation, marking the first

time a sovereign issued such bonds in the context of a

distressed restructuring. Uruguay’s bonds also included

an aggregation clause, allowing bondholders to bind any

future restructuring agreement across multiple issues.Supplement 2003

12

Emerging markets sovereign bond issuance1

2001 2002 20032_____________________________ _____________________________ _____________________

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Issues with CACs1

Number 14.0 10.0 2.0 10.0 6.0 5.0 2.0 4.0 9.0 15.0 0Volume (billion U.S. dollars) 5.6 4.8 1.8 2.2 2.6 1.9 0.9 1.4 5.6 11.6 0

of which: New York law 1.5 1.0 5.9

Issues without CACs1

Number 16.0 17.0 6.0 18.0 17.0 12.0 5.0 10.0 14.0 5.0 3.0Volume (billion U.S. dollars) 6.7 8.5 3.8 6.1 11.6 6.4 3.3 4.4 8.1 3.4 1.0

Data: Capital Data.

1With CACs are English and Japanese law bonds where relevant. Without CACs are German and New York law bonds.2Data for 2003-Q3 are as of July 15, 2003.

Supplement 2003

13

The volume of financing that the IMF has provid-ed to its members has fluctuated significantly

over time. The oil shocks of the 1970s and the debtcrisis of the 1980s were followed by sharp increases inIMF financing. In the 1990s, the transition in Centraland Eastern Europe and the former Soviet Unionfrom centrally planned to market economies and thecrises in emerging market economies led to furthersurges in the demand for IMF financing. Only mem-ber countries of the IMF can borrow from it.

How does the IMF provide financing?The IMF provides temporary financial assistance tomembers with balance of payments problems, in sup-port of policies aimed at correcting them. Unlikedevelopment banks, the IMF does not providefinancing for specific purposes or projects (see “IMFat a glance,” page 32). The IMF’s financial assistancemust be approved by the Executive Board.

The IMF extends its financing through two mainchannels:

• Nonconcessional financial assistance is madeavailable—subject to interest at or above the IMF’sstandard rate of charge—through a number of poli-cies and facilities designed for specific balance of pay-ments problems. The applicable rates of charge andthe repurchase (repayment) periods vary by policy or facility.

• Concessional (low-interest) loans are providedthrough the Poverty Reduction and Growth Facility(PRGF) Trust to qualifying low-income membercountries encountering protracted balance of pay-ments problems to help them foster durable growthand reduce poverty while addressing balance of pay-ments problems.

The IMF can also create international reserveassets by allocating SDRs (see page 25) to members,which they can use to obtain foreign exchange fromother members and to make payments to the IMF.There has been no allocation of SDRs since 1979–81.

Nonconcessional financing is provided under dif-ferent facilities and policies (see page 14). The mainones are the credit tranche policies, which provide thebasis for Stand-By Arrangements intended to addressmembers’ short-term balance of payments difficul-ties, and the Extended Fund Facility (EFF), the basisfor extended arrangements that focus on externalpayments difficulties associated with longer-termstructural problems that call for deeper reforms.Financing under these facilities can be supplemented

with very short term resources under theSupplemental Reserve Facility (SRF) to assist mem-bers experiencing sudden and disruptive losses ofaccess to international capital markets. The amountof financing a member can obtain from the IMF isgenerally based on the size of its capital subscription(or quota).

The IMF has also developed special facilities toprovide assistance for certain specific balance of pay-ments difficulties, such as those that occur after aconflict or a natural disaster.

To discourage excessive reliance upon IMFresources and to ensure the revolving character of its resources, the IMF levies surcharges on financ-ing outstanding above a certain level. The IMF alsolevies surcharges onSRF resources.

The IMF intro-duced acceleratedrepurchase sched-ules—“repurchaseexpectations”—toencourage early repay-ment of IMF financ-ing. Members areexpected to repurchaseon the acceleratedschedule (in advanceof the standard repur-chase schedule).Members unable tomeet the accelerated repurchase schedule may requestan extension, but not beyond the standard repurchaseschedule.

IMF financing in 2002/2003New IMF loan commitments in financial year2002/2003 (ended April 30, 2003) were dominated bya large Stand-By Arrangement for Brazil. In addition,large new arrangements for Colombia and Argentina,as well as two augmentations of the existing arrange-ment for Uruguay, kept the level of total commit-ments in the financial year relatively high, with newcommitments amounting to SDR 29.4 billion com-pared with SDR 39.4 billion in financial year2001/2002.

Under the IMF’s nonconcessional financing facilities, the IMF approved 10 new Stand-ByArrangements involving commitments totalingSDR 27.1 billion, and the commitment to Uruguay

IMF lending

Helping members pursue sound policies

under the Stand-By Arrangement already in placewas augmented by SDR 1.5 billion. In addition,two EFF Arrangements were approved in financialyear 2002/2003: SDR 0.7 billion for Serbia andMontenegro and SDR 0.1 billion for Sri Lanka.Burundi, Grenada, and Malawi made small pur-chases under the IMF’s policy of emergency assis-tance. No commitments were made under theIMF’s Compensatory Financing Facility (CFF) or Contingent Credit Lines (CCLs) during the year.

During financial year 2002/2003, the IMF disbursedSDR 21.7 billion in loans from its quota resources. Theamount of new financing exceeded the repurchase ofamounts extended in earlier years. Total repurchaseswere SDR 7.8 billion, including early repurchases byCroatia (SDR 0.1 billion, which eliminated its out-standing IMF financing), Thailand (SDR 0.1 billion),Estonia, the Kyrgyz Republic, and Lithuania. Thus,IMF financing outstanding at the end of the financialyear amounted to a record high of SDR 66 billion,SDR 13.9 billion more than a year earlier.

Supplement 2003

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IMF financial facilities: terms and conditions

Stand-By Arrangement and Extended Fund Facility• Stand-By Arrangement (1952): Addresses short-

term balance of payments difficulties; the length ofarrangements is typically 12–18 months, with a legalmaximum of 3 years.

Normal access limits: Annual: 100 percent of quota;cumulative: 300 percent of quota in combination withExtended Fund Facility.

Maturities (expected repayment)/(obligatory repay-ment): 21/2–4 years / 31/4–5 years.

Charges: Basic rate of charge + level-based surchargesin combination with Extended Fund Facility of 100basis points on amounts above 200 percent of quota,and 200 basis points above 300 percent of quota.

Conditions: Member adopts policies that provide con-fidence that its balance of payments difficulties will beresolved within a reasonable period.

Phasing and monitoring: Quarterly purchases contin-gent on observance of performance criteria and otherconditions.

• Extended Fund Facility (1974): Provides longer-term assistance to support structural reforms thataddress longer-term balance of payments difficulties.

Normal access limits: Annual: 100 percent of quota;cumulative: 300 percent of quota in combination withStand-By Arrangement.

Maturities (expected repayment)/(obligatory repay-ment): 41/2–7 years / 41/2–10 years.

Charges: Basic rate of charge + level-based surchargesin combination with Stand-By Arrangement of 100 basispoints on amounts above 200 percent of quota and200 basis points above 300 percent of quota.

Conditions: Member adopts 3-year program, withstructural agenda and provides annual detailed state-ment of policies for the next 12 months.

Phasing and monitoring: Quarterly or semiannualpurchases contingent on observance of performance criteria and other conditions.

Special facilities• Supplemental Reserve Facility (1997): Provides short-

term assistance for balance of payments difficulties relatedto a sudden and disruptive loss of market confidence.

Access limits: None; this facility is available only whenaccess under associated regular arrangement would oth-erwise exceed either annual or cumulative limit.

Maturities (expected repayment)/(obligatory repay-ment): 2–21/2 years / 21/2–3 years.

Charges: Basic rate of charge + 300 basis points risingto 500 basis points after 21/2 years. The SupplementaryReserve Facility surcharge is 300 basis points initially,rising by 50 basis points one year after the first purchaseand every six months thereafter, up to a maximum of500 basis points.

Conditions: Available only in context of a regulararrangement with associated program and with strengthened policies to address a loss of market confidence.

Phasing and monitoring: Facility available for oneyear; front-loaded access with two or more purchases;subject to conditionality.

• Contingent Credit Lines (1999): Serve as a precau-tionary line of defense for members with strong trackrecords of good policies in normal times to help themresist external financial contagion. The IMF will reviewthis facility prior to its expiration in November 2003.

Access limits: None, but in practice expected to be300–500 percent of quota.

Maturities (expected repayment)/obligatory repay-ment): 1–11/2 years / 2–21/2 years.

Charges: Basic rate of charge + 150 basis points risingto 350 basis points after 21/2 years. The CCL surcharge is150 basis points initially, rising by 50 basis points oneyear after the first purchase and every six months there-after, up to a maximum of 350 basis points.

Conditions: Commitment criteria: at the time of com-mitment, unlikely to need to use IMF resources and not

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facing defined balance of payments difficulties; positiveassessment of policies by the IMF; constructive relationswith private creditors and satisfactory progress in limiting external vulnerability; satisfactory economic program.

Phasing and monitoring: Resources approved for up to one year. Small purchase (5–25 percent of quota)available on approval. Presumption that one-third ofcommitted resources will be released on activation, withthe disbursement of the remainder determined by apostactivation review.

• Compensatory Financing Facility (1963): Covers a shortfall in a member’s export earnings and servicesreceipts as well as an excess in cereal import costs thatare temporary and arise from events beyond the mem-ber’s control.

Access limits: Maximum 45 percent of quota for eachelement––export shortfall and excess cereal importcosts––and a combined limit of 55 percent of quota.

Maturities (expected repayment)/(obligatory repay-ment): 21/4–4 years / 31/4–5 years.

Charges: Basic rate of charge; not subject to surcharges.

Conditions: Available only when a member has an arrangement with upper credit tranche condition-ality or when its balance of payments position, apartfrom its export shortfall or import excess, is otherwisesatisfactory.

Phasing and monitoring: Typically disbursed over aminimum of six months and in accordance with thephasing provisions of the arrangement.

• Emergency assistanceNatural disasters (1962): Provides quick, medium-

term assistance to members with balance of paymentsdifficulties related to natural disasters.

Postconflict (1995): Provides quick, medium-termassistance for balance of payments difficulties related to the aftermath of civil unrest or international armedconflict.

Access limits: 25 percent of quota, although up to an additional 25 percent of quota can be made availablein exceptional cases.

Maturities (expected repayment)/(obligatory repay-ment): No early repayment expectation/31/4–5 years.

Charges: Basic rate of charge; not subject to sur-charges; possibility of rate of charge subsidy if financingis available; rate of charge only for low-income countriesreceiving emergency postconflict assistance.

Conditions: Notably, reasonable efforts to overcomebalance of payments difficulties, and focus on institu-tional and administrative capacity building to pave theway toward an upper credit tranche arrangement or anarrangement under the Poverty Reduction and GrowthFacility Trust; IMF support would be part of a concertedinternational effort to address the aftermath of the con-flict in a comprehensive way.

Phasing and monitoring: Typically none.

Facility for low-income members• Poverty Reduction and Growth Facility (1999):

Provides longer-term assistance for deep-seated,structural balance of payments difficulties; aims at sustained, poverty-reducing growth (replaced theEnhanced Structural Adjustment Facility, created in 1987).

Access limits: 140 percent of quota; exceptional maxi-mum, 185 percent.

Maturities (expected repayment)/(obligatory repay-ment): No early repayment expectation/51/2–10 years.

Charges: Concessional interest rate: 1/2 of 1 percent a year; not subject to surcharges.

Conditions: Based on a poverty reduction strategypaper (PRSP) prepared by the country in a participatoryprocess, and integrating macro, structural, and povertyreduction policies.

Phasing and monitoring: Semiannual (or occasion-ally quarterly) disbursements contingent on obser-vance of performance criteria and completion reviews.

In February 2003, the repurchase expectationsintroduced at the time of a review of IMF facilitiescompleted in financial year 2001 began to take effect.In financial year 2002/2003, repurchase expectationsarose for four members: Argentina, Bosnia andHerzegovina, Pakistan, and Turkey. In February–March 2003, Bosnia and Herzegovina, Pakistan,and Turkey repurchased SDR 0.1 billion on theexpectations schedule. For Argentina, repurchaseexpectations arising in financial year 2002/2003 (SDR 0.3 billion) and in financial year 2003/2004

(SDR 0.4 billion) have been extended by one year inthe context of the arrangement granted by the IMFin January 2003. Repurchase expectations arising infinancial year 2003/2004 have also been extended forEcuador, Sri Lanka, and Uruguay. As of April 30,2003, IMF financing amounting to SDR 32.9 billionwas sub-ject to early repurchase expectations underthe policies adopted in November 2000; in addition,SDR 28.7 billion was subject to the new surchargeson high levels of IMF financing also introduced atthat time.

Supplement 2003

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When the IMF provides financial support to amember country to help it resolve balance of

payments problems, its support is conditional on thecountry’s implementation of the policy adjustmentsand the reforms needed to correct the problems thatgave rise to the balance of payments difficulties.

How does conditionality work?A country requesting financing from the IMF pre-pares a “Letter of Intent” outlining the authorities’policy intentions during the program period.In many cases, the authorities also undertake policyactions prior to the IMF Executive Board’s approvalof the requested financing, as a condition for thatapproval. The IMF’s financing is usually providedin installments; each installment is conditional on the country’s meeting specified performance criteriathat indicate whether the policies envisaged havebeen carried out.

In addition, the IMF periodically reviews a coun-try’s progress in relation to the program objectives.Such reviews are often guided in part by structuralbenchmarks against which progress can be assessed.A program review must be completed to the satisfac-tion of the Executive Board for the IMF’s financing to continue.

Why is it necessary?IMF financing helps to solve a country’s balance ofpayments problems temporarily. A lasting solution,however, requires policy adjustments and reforms.Conditionality ensures that IMF financing goeshand in hand with corresponding policy actions andis thereby used to support a lasting solution to a country’s balance of payments problems. By thesame token, the country is assured that if it contin-ues to implement appropriate policies, it will con-tinue to receive IMF financing.

How has IMF conditionality evolved?Conditionality has evolved over the IMF’s history as the circumstances and challenges facing its mem-bers have changed. Since the 1950s, the IMF hasattached conditions to its financing arrangements,focusing initially on monetary, fiscal, and exchangerate policies.

Beginning in the late 1980s, the IMF becameincreasingly involved in providing assistance to coun-

tries whose institutional weaknesses and structuraldistortions were central to their macroeconomicproblems. This was particularly true in low-incomecountries and in countries in transition from cen-trally planned economies. To an increasing extent,IMF financing was made conditional on these coun-tries’ efforts to tackle their institutional and structuralproblems. This change in emphasis was reflected in the average number of structural conditions inIMF-supported programs, which climbed from 2 or 3 structural conditions a year in the mid-1980sto 12 or more by the second half of the 1990s.

The increase in the number of structural condi-tions raised concerns that the IMF might be over-stepping its mandate and expertise. Excessivelydetailed policy conditions can undermine a coun-try’s sense that it is in charge of its own reforms.Without such “ownership,” reform will not happen.Moreover, poorly focused conditionality can over-burden countries if they attempt to implementnonessential reforms at the expense of reforms trulyneeded for economic growth and a sustainableexternal position.

What are the new guidelines?In September 2000, the IMF’s Managing Directorissued interim guidelines on streamlining structuralconditionality that set out general principles. InSeptember 2002, the Board approved new condition-ality guidelines, the first revision since 1979. The newguidelines emphasize the need to focus conditionalityon policies that are critical to achieving the macro-economic objectives of IMF-supported programs.They also aim to establish a clearer division of laborwith other international institutions, especially theWorld Bank. The guidelines are based on an increas-ing recognition of the importance of several inter-related principles, including

• national ownership of policy reforms;• parsimony in the application of program-related

conditions;• tailoring of programs to the member’s circum-

stances; and• clarity in the specification of conditions.

How should conditionality be applied?Conditions should be focused on policy measures thatare critical to achieving the program objectives and

Conditionality

IMF approves new conditionality guidelines,emphasizes country ownership of reforms

Supplement 2003

17

should be applied sparingly. Applying these principlesrequires an approach that is tailored to each country’scircumstances and problems while treating all IMFmembers uniformly. A note by IMF staff providingadditional explanation and context for the conditional-ity guidelines was released along with the guidelines.

Can country ownership be strengthened?Country authorities should be involved in the earlystages of designing a policy program to be supportedby IMF financing. They must themselves be con-vinced that the reforms can be achieved and are inthe country’s best interests. Moreover, ownershipshould involve not only the executive branch of acountry’s government but also its parliament andother major stakeholders.

In the new guidelines, the IMF recognizes thatbuilding domestic consensus on economic policies isthe responsibility of the authorities. The guidelinesoutline ways that the IMF can help ensure that policyprograms are adequately supported in the countryand are likely to be implemented:

• IMF staff should undertake an effective dialogueon feasible policy options.

• IMF staff should be aware of political factors thatare likely to influence the prospects for implementa-tion and should provide the Executive Board with acandid assessment of ownership.

• The IMF should be open to programs that differfrom the staff ’s preferred options, as long as the coreobjectives of the program are not compromised.

• IMF technical assistance should be directedtoward the medium and long terms and aim at building countries’ capacity to formulate and imple-ment policies.

• The IMF can play a supporting role in commu-nicating with the public about economic policies;thus, IMF staff has, to an increasing extent, beenengaging in dialogue with a wider range of govern-mental institutions, with civil society, and with themedia.

• Finally, if there is an inadequate level of owner-ship for a viable policy program, the IMF should becautious in providing financial support.

In September 1999, the IMF established the PovertyReduction and Growth Facility (PRGF), which

replaced its Enhanced Structural Adjustment Facility(ESAF). The PRGF broadened the objectives of theIMF’s concessional lending to include a more explicitfocus on poverty reduction in the context of agrowth-oriented strategy. Demand for PRGFresources has been high. In recent years, more than40 countries have had PRGF Arrangements or havetransformed ESAF Arrangements to include the newfeatures of the PRGF. During financial year 2003,the Executive Board approved 10 new PRGF arrange-ments (for Albania, the Democratic Republic of theCongo, The Gambia, Guyana, Nicaragua, Rwanda,Senegal, Sri Lanka, Tajikistan, and Uganda), withcommitments totaling SDR 1.2 billion.

The IMF and the World Bank support strategiesthat low-income borrowing countries elaborate in apoverty reduction strategy paper (PRSP). These PRSPsare prepared through a participatory process thatinvolves domestic stakeholders and external develop-ment partners. The papers are then broadly endorsedby the IMF and the World Bank as providing a soundbasis for concessional lending. Updated periodically(up to five years) with annual progress reports, PRSPsdescribe the country’s macroeconomic, structural, and

social policies and programsover a horizon of three years orlonger. PRSPs also specify theexternal financing needed toimplement the strategy.

Recognizing that the prepa-ration of a PRSP is a lengthyprocess, the World Bank andthe IMF have agreed to provideconcessional assistance on thebasis of interim PRSPs. Theseinterim strategy papers summa-rize the current knowledge andanalysis of a country’s povertysituation, describe the existingpoverty-reduction strategy, andlay out the process for produc-ing a fully developed PRSP in aparticipatory fashion.

Aligning the PRSP and the PRGFThe PRSP approach has become widely accepted bylow-income countries and the donor community asan effective way to mobilize broad input into, anddevelop ownership of, national poverty reductionstrategies. The PRSP is still a relatively new instru-

Poverty reduction

Supporting country-led, country-specific efforts

Young boys play inAddis Ababa.Ethiopia is receivingIMF assistanceunder a PRGFArrangement.

ment, however, and its content and procedures areevolving in response to lessons learned and theneeds and capacities of individual countries. Sincethe Executive Board review of the PRSP process andthe PRGF in financial year 2002, increased attentionis being paid in country programs to creating theright environment for investment and growth.In addition, efforts are under way to bring povertyand social impact analysis more systematically tobear in the formulation of poverty reduction strate-gies and PRGF lending and to strengthen publicexpenditure management in collaboration with theWorld Bank.

The PRSP and PRGF reviews also focused on thetension between the ambitious objectives set out in

the PRSPs and the need for arealistic framework on which tobase national budgets andPRGF-supported programs. InMay 2003, the Executive Boarddiscussed important new stepsto help align the PRSP approachand PRGF-supported programs,including

• incorporating more realisticprojections and assumptions;

• rationalizing documentationunder the PRGF loan programto demonstrate clearly how thePRGF supports the goals of thePRSP plan, indicating how policy choices have been made,and reducing overall reportingrequirements;

• providing greater coherencebetween PRSP plans and thebudget process and more closelysynchronizing the cycle ofPRGF-supported programs with

those of the PRSP and national budgets; and• improving public expenditure management,

which would facilitate the effective use of aid inflows,enhancing the poverty and social impact analysis forPRSPs and PRGF-supported programs, and scalingup the provision of technical assistance and donorsupport for countries’ capacity building in PRSP-related areas.

The harmonization of donor procedures with thebudget and the PRSP processes will have a criticalrole to play in the success of this effort.In the coming months, the IMF will be deepening itswork on related analytical issues, including the link-ages between macroeconomic and structural policiesand growth in low-income countries.

Better market accessThere is now wide consensus that improved marketaccess for developing country exports and theremoval of trade-distorting subsidies in advancedeconomies are essential elements in the fight againstworld poverty. Action by industrial countries will beparticularly important, but developing countries canalso benefit from lowering their own trade barriers.The IMF has vigorously supported an increasedemphasis on open trade. It has issued a report onprogress with the Doha agenda (see box below); willreview its trade policy advice during the remainder of2003; has stepped up its surveillance of market accessissues facing developing countries and of regionaland multilateral trade negotiations; and is encourag-ing countries to integrate trade policy considerationsmore fully into their poverty reduction strategies.

The IMF has also cooperated with the World TradeOrganization (WTO) on ways to coordinate some oftheir activities, including through technical assistancefor customs administration and for coping with therevenue implications of tariff reforms. The IMF hasindicated its readiness to support countries facingbalance of payments difficulties as a result of changesin the trade environment. In addition, the IMF hasprovided technical notes to the WTO on areas of IMFexpertise. These notes conclude, among other things,that trade restrictions remain a distinctly second-bestpolicy for dealing with balance of payments pres-sures, including those arising from the capitalaccount; that the erosion of preferential treatment islikely to cause significant losses to relatively few of theleast-developed countries (and compensatory financ-ing would be best provided in the context of anadjustment program); that trade liberalization, when

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The multilateral trade negotiations that the World Trade

Organization (WTO) launched in late 2001 were termed

the Doha Development Agenda, reflecting both the site

where agreement was reached and the importance of

developing countries and development objectives in the

world trading system.

The development potential of the Doha Round

depends on a lowering of barriers affecting imports from

developing countries, especially the least developed.

While the world’s trading system is far more liberal than

it was 40 years ago, it still discriminates against low-

income countries, particularly those dependent on sec-

tors such as agriculture that are most affected by tariffs

and other trade restrictions.

Doha trade roundA watermelon vendor in Ho ChiMinh City. Vietnam’sstructural reforms arebeing supported by a PRGF Arrangementfrom the IMF.

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complemented by a strengthened domestic tax sys-tem, need not worsen revenue performance in devel-oping countries; and that there is no compelling casefor developing country exporters to receive conces-sional finance because their own capital markets are distorted.

Millennium Development GoalsAt its spring 2003 meeting, the IMF–World BankDevelopment Committee considered a framework,prepared jointly by the two institutions, for regularmonitoring of the policies and actions that arerequired for making progress toward achieving theMillennium Development Goals (see box below).This annual global monitoring exercise consists intracking and assessing the adequacy of policies, insti-tutions, and governance in developing and transitioncountries; evaluating the appropriateness of macro-economic, aid, and trade policies in developed coun-tries (policies essential for fostering a global partner-ship for development); measuring the quality andeffectiveness of development assistance; and gaugingthe effectiveness of international financial institutionsin promoting a strong global economic environmentand supporting country efforts to meet their develop-ment goals. The IMF–World Bank framework isdesigned to complement and support the monitoringefforts of the United Nations and other agenciesworking toward achieving the MillenniumDevelopment Goals.

Greater voice for developing countriesAs developing countries’ participation in the globaleconomy grows, their voice in international institu-tions must grow correspondingly. Strong and effectiveparticipation in World Bank and IMF decision mak-ing has several dimensions. The most straightforwardof these is voting strength. Another importantdimension is the degree to which countries are able tomake themselves heard in policy discussions. This lat-ter dimension of “voice” is quite important for largemulticountry constituencies—especially those with asignificant number of heavily indebted poor coun-tries or countries with IMF-supported programs,given the volume and complexity of associated issuesrequiring their input.

In their initial discussion of a joint WorldBank–IMF background paper on this topic, ExecutiveDirectors underscored the importance of enhancingthe voice and participation of developing and transi-tion countries. They highlighted the initiatives thathave already been taken to enhance the voice ofdeveloping countries and improve the listening cul-

ture in the IMF—including the ongoing developmentof the PRSP process, strengthened support for capaci-ty building, and emphasis on country ownership ofreforms—and looked forward to building on theseefforts.

Because more rapid progress can be made on a number of possible administrative measures forenhancing voice, the IMF’s Board has already begunto consider steps that could be taken to address thestaffing and technological constraints of the twosub-Saharan African constituencies, whose needsare most pressing. The World Bank and the IMFwill discuss progress on this goal at their 2003Annual Meetings, based on their discussions inconnection with the Thirteenth General Review ofQuotas.

The Millennium Development Goals form an ambitious

agenda for reducing poverty and improving lives. World

leaders agreed on the goals at the UN Millennium Summit

in September 2000. The eight goals, most to be achieved by

2015, are as follows:

• Eradicate extreme poverty and hunger.

• Achieve universal primary education.

• Promote gender equality and empower women.

• Reduce child mortality.

• Improve maternal health.

• Combat HIV/AIDS, malaria, and other diseases.

• Ensure environmental sustainability.

• Develop a global partnership for development.

Millennium Development Goals

Children at Kenya’sfirst hospice for HIV positive orphans.Combating thespread of HIV/AIDSis one of the UNMillenniumDevelopment Goals.

The IMF plays a central role, through its policyguidance and financial support, in helping mem-

ber countries cope with external debt problems.The IMF’s ultimate objective is toensure that debtor countriesachieve sustainable growth andbalance of payments viability andestablish normal relations withcreditors, including gaining accessto international financial markets.The basic elements of the IMF’sdebt strategy have remained thesame over time, even though theinstruments it uses have evolved:

• promoting growth-orientedadjustment and structural reformin debtor countries,

• maintaining a favorable globaleconomic environment, and

• ensuring adequate financialsupport from official (bilateral andmultilateral) and private sources.

Paris ClubDebtor countries seeking to reschedule their officialbilateral debt typically approach the Paris Club, aninformal group of creditor governments, mainlythose belonging to the Organization for EconomicCooperation and Development. Under such agree-ments, debtor countries generally reschedule theirarrears and the current maturities of eligible debtservice, with repayment stretching over many years.To ensure that such relief helps countries restore bal-ance of payments viability and achieve sustainableeconomic growth, the Paris Club links debt relief tothe formulation of an economic program supportedby the IMF. In deciding on the coverage and terms ofindividual rescheduling agreements, Paris Club credi-tors also draw on the IMF’s analysis and assessmentof countries’ balance of payments and debtsituations.

Over the past two decades, rescheduling has helpedsome distressed middle-income countries return tofinancial stability. For low-income countries, the ParisClub began not only to reschedule but also to reducedebt in the late 1980s.

New approach neededAlthough the terms of Paris Club reschedulingsbecame increasingly concessional over the years to

bring more lasting relief, many poor countries didnot grow as rapidly as had been hoped, and their debtremained high. For these low-income, heavily indebt-ed countries, creditors recognized the need for a newapproach.

The original Heavily Indebted Poor Countries(HIPC) Initiative, launched in 1996, marked the firsttime that multilateral, Paris Club, and other officialbilateral and commercial creditors combined effortsto reduce the external debt of the world’s most debt-laden poor countries to “sustainable levels”—that is,levels that would allow these countries to servicetheir debt through export earnings, aid, and capitalinflows without compromising long-term, poverty-reducing growth. This exceptional assistance, whichentails a reduction in the net present value (see boxbelow) of the public external debt of the indebtedcountry, aims to free up resources that debtor coun-tries can use to reduce poverty and invigorategrowth.

Assistance under the HIPC Initiative is limited tocountries that have per capita incomes low enough toqualify for World Bank and IMF concessional lendingfacilities and face unsustainable debt burdens evenafter traditional debt relief. The vast majority of theeligible countries are in Africa.

Modifying HIPCFollowing a review of the HIPC Initiative and exten-sive public consultations, a number of modificationswere approved in 1999 to provide deeper, broader,and faster debt relief to eligible countries and tostrengthen the links between debt relief, povertyreduction, and social policies.

HIPC Initiative

Helping poor countries qualify for debt relief

The face value of the external debt stock is not a good

measure of a country’s debt burden if a significant part

of the external debt is contracted on concessional terms

with an interest rate below the prevailing market rate.

The net present value of debt takes into account the

degree of concessionality. It is defined as the sum of all

future debt-service obligations (interest and principal)

on existing debt, discounted at the market interest rate.

Whenever the interest rate on a loan is lower than the

market rate, the resulting net present value of debt is

smaller than its face value, with the difference reflecting

the grant element.

Net present value of debt

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Bolivia, wherenearly 43 percent of peasants live inpoverty, has reachedits completion pointunder the IMF’senhanced HIPCInitiative andreceived a reductionin its stock of debt.

But the enhanced HIPC Initiative is no panacea.Debt relief—no matter how generous—is only thefirst step to economic recovery for heavily indebtedpoor countries. These countries can achieve long-term debt sustainability only if they directly addressthe underlying causes that triggered the debt prob-lem in the first place. To avoid slipping back into asituation where poverty-reducing investments aresacrificed to mounting external debt repayments,these countries must use the debt-relief proceeds tocreate the basis for sustained growth and povertyreduction.

What has the initiative achieved?The enhanced HIPC Initiative has made substantialprogress in meeting its objective of reducing debtburdens and in providing deeper and earlier debtrelief to heavily indebted poor countries. In July2003, the Democratic Republic of the Congo met animportant milestone when it reached its decisionpoint (see box, this page). That brought to 27 thenumber of countries that have reached their decisionpoints under the enhanced HIPC Initiative, withcommitments for the equivalent of over $51 billionin debt relief (in nominal terms) over time. ThisInitiative, along with other debt relief, will reducethese countries’ external debt by about two-thirds,from $77 billion in net present value terms to$26 billion. The Initiative has lowered the averageratio of debt service to exports for the 27 decision-point countries from 16 percent in 1998–99 to about9.9 percent in 2002. With these reductions in debtand debt-servicing costs, more resources are beingallocated to education; health care, includingHIV/AIDS prevention and treatment; rural develop-ment and water supply; and road construction.

Eight countries—Benin, Bolivia, Burkina Faso, Mali,Mauritania, Mozambique, Tanzania, and Uganda—have reached their completion points under the HIPCInitiative and had their stock of debt reduced, but theyhave not all received the envisaged debt relief. Another19 countries have passed their decision points andhave begun to receive interim debt relief. Many ofthese countries are well placed to reach completionpoints in 2003 and 2004.

The remaining 12 eligible countries are havinggreater difficulties reaching their decision points, par-ticularly because many of them are still experiencingpolitical turmoil or are emerging from armed conflicts.More generally, the process has taken longer thanexpected in many cases, owing to the time needed toprepare poverty reduction strategies, difficulties inachieving stable macroeconomic positions, and slower-than-expected implementation of the necessary social

and structural reforms. Notwithstanding the delays,once these challenges are met, the links between debtrelief, poverty reduction, and social policies will bestronger, which is an important objective of theenhanced HIPC Initiative.

Remaining challengesThe first challenge is to bring more heavily indebtedpoor countries to their decision points. What makesthis challenge particularly difficult is that many of thecountries that have not yet qualified for HIPC reliefare either engaged in, or have recently ended, domes-tic or cross-border armed conflict. Their need fordebt relief is especially acute because they suffer fromabject poverty and face major reconstruction tasks.Many are also struggling with severe governanceproblems. These countries require help to develop a

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To qualify for HIPC assistance, a country must pursue

strong economic policies supported by the IMF and the

World Bank. Its efforts are complemented by concessional

aid from all relevant donors and institutions and tradi-

tional debt relief from bilateral creditors and the Paris

Club.

During this first phase, the country’s external debt situ-

ation is analyzed in detail. If its external debt ratio, after

the full use of traditional debt relief, is above

150 percent for the net present value of debt to exports

(or, for small open economies, above 250 percent of gov-

ernment revenue), it qualifies for HIPC relief. At the deci-

sion point, the IMF and the World Bank formally decide

on the country’s eligibility, and the international commu-

nity commits to reducing the country’s debt to a sustain-

able level.

Once it qualifies for HIPC relief, the country must con-

tinue its good track record with the support of the interna-

tional community, satisfactorily implementing key structur-

al policy reforms, maintaining macroeconomic stability, and

adopting and implementing a poverty reduction strategy.

Paris Club bilateral creditors reschedule the country’s obli-

gations coming due, with a 90 percent reduction in net

present value, and other bilateral and commercial creditors

are expected to do the same.

A country reaches its completion point once it has met

the objectives established at the decision point. It then

receives the balance of the debt relief committed. This

means all creditors are expected to reduce the net present

value of their claims on the country to the agreed sustain-

able level.

The IMF and the World Bank and some other multilater-

al creditors provide interim relief between the decision and

completion points.

How the HIPC Initiative works

track record of good policy perform-ance that will allow them to movetoward their decision points and beginreceiving interim debt relief.

The second challenge is to keep thecountries that have reached their deci-sion points on track to implementsound, poverty-reducing policies sothat they can reach their completionpoints under the HIPC Initiative andachieve sustainable growth.

Why not just forgive all the debt?There have been repeated appeals to theinternational community to simplyerase all the debt of the world’s poorest

countries, but such a step would not be the most effec-tive or equitable way to support the fight against pover-ty with the limited resources available. Today’s greatestdevelopment challenge––reducing worldpoverty––requires a comprehensive strategy that

includes the efforts of the poorest countries to helpthemselves, as well as increased financial assistancefrom the international community and improvedaccess to industrial country markets. Debt relief underthe HIPC Initiative is only one element of the interna-tional support for poor countries that removes debt asan obstacle to growth. For many years to come, thesecountries will continue to need financial support onconcessional terms to help them implement theirgrowth and poverty reduction strategies and stand ontheir own feet.

Total debt cancellation would imperil the funds thatmultilateral creditors would have for future lending andwould come at the expense of resources available toother developing countries, some of which are equallypoor but have less external debt. Over 80 percent ofthe world’s poor live in countries that are not HIPCs.For the IMF, total debt cancellation would exhaust theresources that finance the Poverty Reduction andGrowth Facility (PRGF) and the HIPC Initiative, andthe IMF would have to stop providing concessionalsupport to its poorest members.

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Women carry foodfrom the market inArusha. Like Bolivia,Tanzania hasreached itscompletion pointunder the HIPCInitiative.

Technical assistance

Sharing the collective knowledgeof the IMF and its membership

The IMF provides technical assistance to its mem-ber countries in policy areas within its core man-

date––namely, macroeco-nomic, monetary and for-eign exchange, fiscal,external debt, and statis-tics. The IMF began pro-viding technical assistancein 1964 in response torequests from newly inde-pendent African andAsian countries establish-ing central banks andministries of finance.

The IMF’s technicalassistance activities grew

rapidly, and, by the mid-1980s, the number of staffyears devoted to these activities had almost dou-bled. In the 1990s, many countries––those of theformer Soviet Union as well as a number of coun-tries in Eastern Europe––moved from command tomarket economies, turning to the IMF for technicalassistance. Later in that decade, to improve crisisprevention and resolution following the Mexicancrisis of 1994–95 and the Asian crisis of 1997–98,

the IMF stepped up its technical assistance as partof its efforts to strengthen the international finan-cial system. More recently, as part of the interna-tional community’s drive to combat money laun-dering and the financing of terrorism, the IMF tookthe lead in designing a comprehensive assessmentprocess and began providing technical assistance forremedial measures.

The IMF has also helped countries and territoriesreestablish government institutions following civilunrest or war––for example, in Afghanistan,Albania, Bosnia and Herzegovina, Kosovo, andTimor-Leste. In addition to supporting the work ofcrisis prevention and management, and the restora-tion of macroeconomic stability in postcrisis situa-tions, the IMF provides assistance to countries thatare following up on recommendations from finan-cial sector assessments, adopting international stan-dards and codes, and improving their tracking ofpublic expenditures (see table, page 24).

The IMF’s technical assistance has grown from justunder 70 person-years in 1970 to approximately 355 person-years in financial year 2003 and representsabout 25 percent of the IMF’s total administrativebudget. In recent years, the regional distribution of

The IMF’s AkeLönnberg (left) showsU.S. dollars and coinsto central bank andpostal staff in Timor-Leste after the dollarwas declared legaltender.

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technical assistance has shifted gradually from thetransition economies to Africa (see chart).

Types of technical assistanceThe IMF provides technical assistance in three areas:

• designing and implementing fiscal and mone-tary policies;

• drafting and reviewing economic and financiallegislation, regulations, and procedures; and

• institution and capacity building in centralbanks, treasuries, tax and customs departments, andstatistical services.

Technical assistance is provided through missions,short- and long-term assignment of experts, andregional technical assistance centers. Regional tech-nical assistance centers have been established to serve the small island economies of the Pacific, theCaribbean Community countries and the Domini-can Republic, and, as part of the IMF’s AfricaCapacity-Building Initiative, countries in East andWest Africa (see box below). In addition, the IMFtrains officials from its member countries throughcourses offered at its headquarters in Washingtonand through a number of overseas regional institutesand programs (see box, page 24).

External cooperationIn recent years, technical assistance projects havegrown both larger and more complex, requiring mul-tiple sources of financing. Large projects may involvemore than one IMF department and more than one

development partner. Donors with which the IMFcooperates include the Asian Development Bank, theEuropean Commission, the Inter-AmericanDevelopment Bank, the United NationsDevelopment Program, the World Bank, and the gov-ernments of Australia, Canada, China, Denmark,France, Germany, Italy, Japan, Luxembourg, theNetherlands, New Zealand, Norway, Russia, Sweden,Switzerland, the United Kingdom, and the UnitedStates.

The government of Japan also makes generousannual contributions to IMF scholarship programs.

African regional technical assistance centers foster capacity building

In response to a request made by African heads of state for

enhanced IMF support in fostering capacity building, and

drawing on positive experience with regional technical

assistance centers in the Pacific and the Caribbean regions,

the IMF established two regional technical assistance cen-

ters (AFRITACs) in collaboration with bilateral and multi-

lateral donor partners and participating African countries.

The first center, serving 6 countries in East Africa and

based in Dar es Salaam, opened in October 2002. The sec-

ond, serving 10 countries in West Africa, began operations

in May 2003. West AFRITAC, which was originally to have

been based in Abidjan, has been temporarily relocated to

Bamako, Mali, because of civil unrest in Côte d’Ivoire.

Each center has a team of resident experts who cover the

core areas of the IMF’s competence and help member

countries develop and implement their capacity-

building programs, guided by each country’s poverty reduc-

tion strategy paper (see page 17). The centers help imple-

ment and monitor ongoing tech-

nical assistance programs; facilitate

donor coordination of ongoing

capacity-building activities; and

provide technical advice.

Each center works under the

policy guidance of a steering com-

mittee consisting of representatives

of member countries and donors

to ensure full ownership of the

individual country activities, as

well as accountability to, and close

coordination with, donor partners.

After an independent evaluation of

these two centers, the IMF will

consider whether to establish addi-

tional centers to cover the rest of

sub-Saharan Africa.

Eduardo Aninat, former IMF DeputyManaging Director(left), and TanzanianPresident WilliamMkapa at the EastAFRITAC opening.

Hugo Juan-Ramon,Deputy Chief of theIMF Institute’s WesternHemisphere Division,lectures Instituteparticipants in June.

Such cooperative arrangements with multilateral andbilateral donors not only support activities financiallybut also help prevent conflicting advice and redun-dant activities and have led to a more integratedapproach to the planning and implementation oftechnical assistance. As the demand for technical assis-tance in macroeconomic and financial managementgrows, such arrangements will become even morevaluable.

In response to the ever-increasing demand fortechnical assistance, the IMF sets clear priorities sothat its resources can be allocated among membercountries and regions in the most effective and effi-cient manner. The IMF’s area (regional) depart-

ments are instrumental in identify-ing countries’ technical assistanceneeds, and an interdepartmentalcommittee of senior IMF staff. TheTechnical Assistance Committee,which is chaired by a DeputyManaging Director, takes part inthis process. The Office of TechnicalAssistance Management has beenestablished to help IMF manage-ment develop policies guiding thedelivery of technical assistance andthe coordination of technical assis-tance within the IMF, as well as thecollaboration with donor partnersand technical assistance providers.

A number of conditions have beenidentified as being crucial for thesuccessful implementation of techni-cal assistance—in particular, com-mitment of the country authoritiesto policy and institutional reforms,a stable and cohesive macroeconomic

environment, and an adequate adminis-trative structure and local counterparts with appro-priate skills.

New developmentsAt its July 2002 meeting to review IMF technicalassistance policy and experience, the ExecutiveBoard endorsed measures to

• introduce an institution-wide methodology formonitoring and evaluating technical assistanceactivities, and for implementing a formal three-yearrolling program of evaluations; and

• set up a comprehensive systems to managetechnical assistance resources.

The IMF Institute has been training officials from member

countries since 1964. Its courses and seminars, focused on the

IMF’s core areas, are delivered by Institute staff or by staff from

other IMF departments, occasionally assisted by academics

and other experts. In selecting participants for its training pro-

grams, the IMF Institute gives some preference to officials

from developing and transition countries.

The IMF Institute also offers courses and seminars through

overseas regional institutes and programs in cooperation with

the Joint Regional Training Center for Latin America, the Joint

China-IMF Training Program, the Joint Africa Institute, the

Joint Vienna Institute, the IMF–Arab Monetary Fund Regional

Training Program, and the IMF-Singapore Regional Training

Institute.

IMF Institute

More than half of IMF’s technical assistance focused on poverty reduction and regional work in FY2003(Field delivery in person-years)1

FY 2003

Main program areasCrisis prevention 35.2Poverty reduction 60.7Crisis resolution and management 30.5Postconflict 26.5Regional 41.4Total 194.3

Key policy initiatives and concernsStandards and codes,

excluding FSAP 18.1FSAP-related 6.0HIPC-associated 16.8Safeguarding IMF resources 0.5Offshore financial centers and AML/CFT 10.4Policy reform/capacity building 142.5Total 194.3

Note: FSAP = Financial Sector Assessment Program; HIPC = Heavily Indebted Poor CountriesInitiative; AML/CFT = Anti–Money Laundering and Combating the Financing of Terrorism.

1Excludes headquarters-based activities related to technical assistance.

Data: IMF Office of Technical Assistance Management

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Financial resources

IMF introduces new measure of capacity to make loans

The IMF is a cooperative financial institutionthat provides assistance to member countries

that encounter balance of payments problems. All184 member countries of the IMF are eligible forfinancial assistance (provided their access to IMFfinancing has not been suspended), but loans aresubject to the approval of the IMF Executive Board.The IMF provides financing under a range of poli-cies and facilities (see page 13), and service orinterest charges and repurchase (repayment) peri-ods vary (see page 14). In the past year, the bulk of IMF financing has gone to five countries:Argentina, Brazil, Indonesia, Turkey, and Uruguay.While the IMF—unlike its sister organization,the World Bank—does not finance specific devel-opment projects, it does provide concessional loansand debt relief to qualified low-income countriesthat are seeking to reduce poverty and fostergrowth.

How does the IMF differ from other financing institutions?While sharing certain characteristics of otherfinancing institutions, the IMF distinguishes itself

by being a “reluctant financier.” Profit-orientedbanks welcome long-term borrowing, but the IMF encourages repayment as quickly as possible.The IMF also lends to countries when other insti-tutions are unwilling to take the risk. And, unlikeother lenders, the IMF has a responsibility toassemble a viable package of assistance with soundeconomic policy recommendations for the recipi-ents of its financing.

Where does the IMF get its money?The IMF’s financing is funded primarily from apool of resources formed by its members’ sub-scriptions, equal to their quotas. A member’squota is largely determined by its economic andfinancial position relative to other members andtakes into account members’ GDPs, currentaccount transactions, and official reserves. Thesize of a member’s quota also determines its vot-ing power in the organization. Members pay up to25 percent of their quota subscription in widelyaccepted international currencies (U.S. dollars,euros, Japanese yen, or pounds sterling) and SDRs(see box below) and the rest in their own curren-

What is the SDR?

In 1969, the IMF created the SDR as an international

reserve asset to supplement members’ existing reserve

assets. The SDR is valued on the basis of a basket of key

international currencies and serves as the unit of account of

the IMF and a number of other international organizations.

The SDR is not a currency, nor is it a claim on the IMF.

Instead, it is potentially a claim on the freely usable curren-

cies of IMF members, as holders of SDRs can exchange

their SDRs for these currencies. The SDR’s value as a reserve

asset derives from the commitments of member countries

to hold and accept SDRs and to honor various obligations

connected with the operation of the SDR system.

The IMF allocates SDRs to its members in proportion to

their IMF quotas, and these SDRs may in turn be used to

obtain foreign exchange reserves from other members and

make payments to the IMF. Member countries can use

SDRs to meet a balance of payments financing need with-

out undertaking economic policy measures or repurchase

obligations. However, a member that uses its SDRs pays the

SDR interest rate—based on market interest rates—

on the amount by which its allocations exceed its hold-

ings. A member that acquires SDRs in excess of its alloca-

tion receives interest.

The basket of currencies on which the SDR value is

based is reviewed every five years to ensure that the cur-

rencies included are representative of those used in inter-

national transactions and that the weights assigned to

them reflect their relative importance in the world’s trad-

ing and financial systems. The basket currently consists

of the euro, the Japanese yen, the pound sterling, and the

U.S. dollar; the last review of the SDR valuation took place

in October 2000.

The SDR interest rate provides the basis for calculating

the rate of charge on nonconcessional IMF financing

and the interest paid to creditor members of the IMF.

The SDR interest rate is determined weekly and is based

on a weighted average of representative interest rates on

short-term debt in the money markets of the SDR basket

currencies.

Supplement 2003

26

cies. Members with strong balance of paymentsand reserves positions are obliged to convert theIMF’s holdings of their currencies into widelyaccepted international currencies as needed by theIMF to fund its loans.

The IMF also maintains two standing borrowingarrangements with official lenders—the GeneralArrangements to Borrow (GAB) and the NewArrangements to Borrow (NAB). The IMF can alsoborrow from private markets but has not done sofor organizational and operational reasons. Underthe GAB and the NAB, a group of member coun-tries (and their institutions) have agreed to lend,in exceptional circumstances, specific amounts oftheir currencies to the IMF at market-related inter-est rates. The NAB and the GAB function as linesof credit and pose no cost to the IMF unless acti-vated. The IMF has not had to draw upon eithersince 1998.

How much can the IMF make available?The portion of the IMF’s own resources available for financing is smaller than the total pool of IMFresources, which is about $300 billion. Only IMFmembers with strong balance of payments andreserves positions can make available to the IMF thewidely accepted international currencies that areneeded for members with balance of paymentsproblems. In early 2003, resources for IMF financingwere provided by 44 members. This group of credi-tor countries is not fixed, however, and memberscan switch from debtor to creditor status as theireconomic situations improve. Recently, India,Malaysia, Mauritius, and Mexico shifted fromdebtor to creditor status vis-à-vis the IMF.On April 30, 2003, outstanding IMF financing was $91 billion (SDR 66 billion).

The IMF recently introduced a more transparentmeasure of its capacity to make new financing avail-

Afghanistan, Islamic State of 161.9Albania 48.7Algeria 1,254.7Angola 286.3Antigua and Barbuda 13.5

Argentina 2,117.1Armenia 92.0Australia 3,236.4Austria 1,872.3Azerbaijan 160.9

Bahamas, The 130.3Bahrain 135.0Bangladesh 533.3Barbados 67.5Belarus 386.4

Belgium 4,605.2Belize 18.8Benin 61.9Bhutan 6.3Bolivia 171.5

Bosnia and Herzegovina 169.1Botswana 63.0Brazil 3,036.1Brunei Darussalam 215.2Bulgaria 640.2

Burkina Faso 60.2Burundi 77.0Cambodia 87.5Cameroon 185.7Canada 6,369.2

Cape Verde 9.6Central African Rep. 55.7

Chad 56.0Chile 856.1China 6,369.2

Colombia 774.0Comoros 8.9Congo, Dem. Rep. of the 533.0Congo, Rep. of 84.6Costa Rica 164.1

Côte d’Ivoire 325.2Croatia 365.1Cyprus 139.6Czech Rep. 819.3Denmark 1,642.8

Djibouti 15.9Dominica 8.2Dominican Rep. 218.9Ecuador 302.3Egypt 943.7

El Salvador 171.3Equatorial Guinea 32.6Eritrea 15.9Estonia 65.2Ethiopia 133.7

Fiji 70.3Finland 1,263.8France 10,738.5Gabon 154.3Gambia, The 31.1

Georgia 150.3Germany 13,008.2

Ghana 369.0

Greece 823.0Grenada 11.7Guatemala 210.2Guinea 107.1

Guinea-Bissau 14.2Guyana 90.9Haiti 81.9Honduras 129.5Hungary 1,038.4

Iceland 117.6India 4,158.2Indonesia 2,079.3Iran, Islamic Rep. of 1,497.2Iraq 504.0

Ireland 838.4Israel 928.2Italy 7,055.5Jamaica 273.5Japan 13,312.8

Jordan 170.5Kazakhstan 365.7Kenya 271.4Kiribati 5.6Korea 1,633.6

Kuwait 1,381.1Kyrgyz Rep. 88.8Lao People’s Dem. Rep.. 52.9Latvia 126.8Lebanon 203.0

Lesotho 34.9Liberia 71.3Libya 1,123.7

IMF quotas(million SDRs)

Member Quota1 Member Quota1 Member Quota1

1 As of August 12, 2003.Data: IMF Finance Department

Supplement 2003

27

able. This new measure—the “one-year forwardcommitment capacity” (FCC)—indicates howmuch money the IMF has available for financing inthe coming year. It takes into account that some ofthe IMF’s available resources have already beencommitted and that a prudential balance is neededto safeguard the liquidity of creditors’ claims on theIMF and guard against any potential erosion of theIMF’s base of available resources. The one-yearFCC includes amounts that are projected to berepaid to the IMF over the coming 12 months. TheIMF’s one-year FCC amounted to $84 billion at theend of April 2003.

What is charged on IMF financing?The main cost to the IMF of financing is theremuneration it pays to creditor members on out-

standing IMF loans. The IMF, in turn, leviescharges (set as a proportion of the weekly SDRrate) on members using nonconcessional financ-ing. In cases where the IMF provides high levels offinancing to a member, a surcharge is levied. TheIMF’s costs—and thus the rate at which it providesfinancing—are lower than they otherwise wouldbe because a portion of the resources provided bycreditor countries constitutes reserves.

So that the cost of overdue financial obligations is not borne entirely by any subset of IMF mem-bers, a burden-sharing mechanism is in place.Under this mechanism, when repurchases are notmade on a timely basis, debtor countries pay slight-ly higher charges on their outstanding loans andcreditor countries receive slightly less in remunera-tion on the resources they have made available.

Lithuania 144.2Luxembourg 279.1

Macedonia, FYR 68.9Madagascar 122.2Malawi 69.4Malaysia 1,486.6Maldives 8.2

Mali 93.3Malta 102.0Marshall Islands 3.5Mauritania 64.4Mauritius 101.6

Mexico 2,585.8Micronesia, Fed. States of 5.1Moldova 123.2Mongolia 51.1Morocco 588.2

Mozambique 113.6Myanmar 258.4Namibia 136.5Nepal 71.3Netherlands 5,162.4

New Zealand 894.6Nicaragua 130.0Niger 65.8Nigeria 1,753.2Norway 1,671.7

Oman 194.0Pakistan 1,033.7

Palau 3.1Panama 206.6

Papua New Guinea 131.6Paraguay 99.9Peru 638.4

Philippines 879.9Poland 1,369.0Portugal 867.4Qatar 263.8Romania 1,030.2

Russia 5,945.4Rwanda 80.1St. Kitts and Nevis 8.9St. Lucia 15.3St. Vincent and the Grenadines 8.3

Samoa 11.6San Marino 17.0São Tomé and Príncipe 7.4Saudi Arabia 6,985.5Senegal 161.8

Serbia and Montenegro 467.7Seychelles 8.8Sierra Leone 103.7Singapore 862.5Slovak Rep. 357.5

Slovenia 231.7Solomon Islands 10.4Somalia 44.2South Africa 1,868.5Spain 3,048.9

Sri Lanka 413.4Sudan 169.7Suriname 92.1Swaziland 50.7

Sweden 2,395.5

Switzerland 3,458.5Syrian Arab Rep. 293.6Tajikistan 87.0Tanzania 198.9Thailand 1,081.9

Timor-Leste 8.2Togo 73.4Tonga 6.9Trinidad and Tobago 335.6Tunisia 286.5

Turkey 964.0Turkmenistan 75.2Uganda 180.5Ukraine 1,372.0United Arab Emirates 611.7

United Kingdom 10,738.5United States 37,149.3Uruguay 306.5Uzbekistan 275.6Vanuatu 17.0

Venezuela, República Bolivariana de 2,659.1

Vietnam 329.1Yemen, Rep. of 243.5Zambia 489.1Zimbabwe 353.4

Total 212,794.0

Member Quota1 Member Quota1 Member Quota1

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Overdue payments

IMF strategy consists of three pillars—prevention, collaboration, and remedial steps

To maintain the IMF’s cooperative nature andprotect its financial resources, members must

meet their financial obligations to the IMF. If a mem-ber does fall behind in its debt-service obligations, itis expected to settle its arrears as quickly as possible.

The IMF has a three-pronged strategy to helpcountries avoid and, if need be, resolve arrears.

Prevention. To prevent new cases of arrears fromemerging, the IMF attaches conditions (see page 16)on the use of its resources, assesses members’ capacityto repay, assures the adequacy of balance of paymentsfinancing for members under IMF-supported pro-grams, carries out safeguard assessments of the cen-tral banks of members receiving IMF resources, andprovides technical assistance to members.

Intensified collaboration and the rights approach.Intensified collaboration helps members design andimplement economic policies to resolve their bal-ance of payments and arrears problems. Thisprocess also provides a framework for members inarrears to establish a track record of policy and pay-ments performance, mobilize resources from inter-national creditors and donors, and become currentin their obligations to the IMF and other creditors.

In some cases, a country’s economic policies areformulated in the context of a “rights-accumulationprogram.” This program allows a country in pro-tracted arrears—owing amounts to the IMF thatare overdue by more than six months—to accumu-late “rights” to future drawings of IMF resourcesthrough its adjustment and reform efforts. Futuredrawings are made only after the member has com-pleted the program and cleared its arrears and theIMF has approved a successor arrangement. Only11 IMF members are eligible for the rightsapproach. Of those countries, only Liberia, Somalia,and Sudan remain in arrears. Of the countries thathave resolved their arrears to the IMF, 3 used therights approach, while 5 used other means.

Remedial measures. If a member does notactively cooperate with the IMF in seeking a solu-tion to its arrears problems, a timetable of remedialmeasures of increasing intensity is applied.Remedial measures start with suspending a mem-ber’s access to the use of IMF resources in thePoverty Reduction and Growth Facility (PRGF)Trust or Heavily Indebted Poor Countries Initiative.If the country fails to take appropriate measures,the Executive Board then issues a declaration of

noncooperation in the case of arrears to the PRGFTrust. Ultimately, in the case of overdue financialobligations to the General Resources Account, themember’s withdrawal from the IMF is compulsory.Most recently, further remedial measures wereapplied to Liberia and Zimbabwe, when their vot-ing and related rights in the IMF were suspended inMarch 2003 and June 2003, respectively.

DevelopmentsProtracted arrears to the IMF decreased in financialyear 2003 to SDR 2.01 billion, from SDR 2.36 billiona year earlier. This reflected mainly the clearance ofarrears by the Democratic Republic of the Congo inJune 2002 and by the Islamic State of Afghanistan inFebruary 2003.

The clearance of the Democratic Republic of theCongo’s arrears (SDR 404 million) was facilitatedby bridge loans from Belgium, France, South Africa,and Sweden. Immediately after the clearance of thatcountry’s arrears, the Executive Board approved aPRGF Arrangement for it. Part of the proceeds ofthe first PRGF disbursement was used to repay infull the bridge lenders. The Democratic Republic ofthe Congo subsequently also cleared its arrears tothe World Bank Group, while its arrears to theAfrican Development Bank were handled in thecontext of a partial clearance and partial consolida-tion mechanism.

Afghanistan settled its overdue financial obliga-tions (SDR 8.1 million) to the IMF as part of acoordinated plan under which Afghanistan alsocleared arrears to the Asian Development Bank andthe International Development Association. Thecoordinated arrears-clearance operation was sup-ported by grants from Italy, Japan, Norway, Sweden,the United Kingdom, and the AfghanistanReconstruction Trust Fund.

However, the arrears of other countries (with theexception of Sudan) continued to rise. The mostnotable of these is Zimbabwe, which is the first newcase of significant arrears to the IMF’s GeneralResources Account since 1993 and the first case ofprotracted arrears to the PRGF Trust. The two coun-tries with the largest protracted arrears to the IMF—Sudan and Liberia—account for more than 78 per-cent of the total overdue financial obligations to theIMF—with Somalia and Zimbabwe accounting formost of the remainder.

AREA FUNCTIONAL AND SPECIAL INFORMATION SUPPORTDEPARTMENTS SERVICES DEPARTMENTS AND LIAISON SERVICES

Supplement 2003

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Organization

Articles of Agreement shape IMF structure

The decision to establish the IMF was made at a conference held in Bretton Woods, New

Hampshire, in July 1944. The IMF came into officialexistence on December 27, 1945, with the signing ofits Articles of Agreement. It commenced financialoperations on March 1, 1947.

How is the IMF organized? The chain of command runs from the governmentsof its member countries to the IMF. This accounta-bility is essential to its effectiveness.

Board of Governors. The top link of the chain ofcommand is the Board of Governors, which is com-posed of ministers of finance or heads of centralbanks (or other officials of comparable rank) fromeach of the IMF’s 184 member countries. Apart from

those Governors who are represented on theInternational Monetary and Financial Committee(IMFC), the Governors gather only on the occasionof the IMF–World Bank Annual Meetings to dealformally with IMF matters. During the rest of theyear, they communicate their governments’ viewsabout the IMF’s day-to-day work through theExecutive Director who represents them on theExecutive Board (see page 30).

The International Monetary and FinancialCommittee. The IMFC consists of 24 Governors rep-resenting constituencies or groups of countries corre-sponding to those of the Executive Board. It meetstwice a year, on the occasions of the IMF–World BankAnnual and Spring Meetings, to advise the IMF on thefunctioning of the international monetary system.

Horst Köhler, German, is Managing Director.

Anne O. Krueger,a U.S. national, is First DeputyManaging Director.

Board ofGovernors

IndependentEvaluation Office

Executive Board

Managing Director__________________

Deputy ManagingDirectors

Office ofBudget

andPlanning

InvestmentOffice-StaffRetirement

Plan

Office of InternalAudit andInspection

Office ofTechnicalAssistance

Management

Asia and PacificDepartment

European I Department1

European II Department1

Middle EasternDepartment1

Fiscal AffairsDepartment

International CapitalMarkets Department

Monetary and FinancialSystems Department

StatisticsDepartment

Policy Development andReview Department

Research Department

External RelationsDepartment

Regional Office for Asiaand the Pacific2

IMF OfficeUnited Nations2

Human ResourcesDepartment

Technology andGeneral Services

Department

1On November 1, the country responsibilities of the European II Department will be distributed to the renamed European Department and the Middle Eastand Central Asia Department.

2Attached to the Office of Managing Director.

Joint AfricaInstitute

Joint ViennaInstitute

SingaporeTraining Institute

IMFInstitute

Western HemisphereDepartment

Offices inEurope: Paris,

Brussels,Geneva2

African Department LegalDepartment

Finance Department

Secretary’sDepartment

Agustín Carstens,Mexican, is DeputyManaging Director.

Shigemitsu Sugisaki,Japanese, is DeputyManaging Director.

Organization of the IMF(as of August 2003)

Executive Board. The Executive Board consists of24 Executive Directors appointed or elected by theIMF’s 184 member countries. The Board, which isbased at IMF headquarters in Washington, D.C., isresponsible for the day-to-day business of the IMFand meets about three times a week in formal session.At present, 5 Executive Directors are appointed by themembers with the largest IMF quotas: the UnitedStates, Japan, Germany, France, and the United

Kingdom. The other 19 Executive Directors are elected by one country or a group of countries.The Executive Board rarely makes its decisions on the basis of formal voting, relying instead on the formation of consensus among its members.

Managing Director. The Managing Director ishead of the IMF staff and chairs the Executive Board.The Managing Director is appointed by the ExecutiveBoard.

IMF Executive Board(as of August 26, 2003)1

DIRECTOR

AlternateCasting votes1 of(percent of IMF total)

NANCY P. JACKLIN

Meg LundsagerUnited States

(371,743–17.14 percent)

KEN YAGI

Michio KitaharaJapan

(133,378–6.15 percent)

KARLHEINZ BISCHOFBERGER

Gert MeissnerGermany

(130,332–6.01 percent)

PIERRE DUQUESNE

Sébastien BoitreaudFrance

(107,635–4.96 percent)

THOMAS W. SCHOLAR

Martin A. BrookeUnited Kingdom

(107,635–4.96 percent)

YAGA V. REDDY (India)R.A. Jayatissa (Sri Lanka)BangladeshBhutan

(52,112–2.40 percent)

MURILO PORTUGAL (Brazil)Roberto Steiner (Colombia)BrazilColombiaDominican

RepublicEcuador

(53,634–2.47 percent)

GuyanaHaitiPanamaSurinameTrinidad and

Tobago

GUILLERMO LE FORT (Chile)A. Guillermo Zoccali (Argentina)ArgentinaBoliviaChile

(43,395–2.00 percent)

ParaguayPeruUruguay

ABBAS MIRAKHOR

(Islamic Republic of Iran)Mohammed Daïri (Morocco)Afghanistan,

Islamic State ofAlgeriaGhana

(53,662–2.47 percent)

Iran, Islamic Rep. ofMoroccoPakistanTunisia

DAMIAN ONDO MAÑE (Equatorial Guinea)Laurean W. Rutayisire (Rwanda)BeninBurkina FasoCameroonCape VerdeCentral African

RepublicChadComorosCongo, Dem. Rep. ofCongo, Rep. ofCôte d’IvoireDjiboutiEquatorial Guinea

(30,749–1.42 percent)

GabonGuineaGuinea-BissauMadagascarMaliMauritaniaMauritiusNigerRwandaSão Tomé

and PríncipeSenegalTogo

IndiaSri Lanka

JEROEN KREMERS (Netherlands)Yuriy G. Yakusha (Ukraine)ArmeniaBosnia and

HerzegovinaBulgariaCroatiaCyprusGeorgia

(105,412–4.86 percent)

IsraelMacedonia,

FYR ofMoldovaNetherlandsRomaniaUkraine

LUIS MARTÍ (Spain)Mario Beauregard (Mexico)Costa RicaEl SalvadorGuatemalaHondurasMexico

(92,989–4.29 percent)

NicaraguaSpainVenezuela,

RepúblicaBolivariana de

A. SHAKOUR SHAALAN (Egypt)Oussama T. Kanaan (Jordan)Bahrain EgyptIraqJordanKuwaitLebanonLibya

(64,008–2.95 percent)

MaldivesOmanQatarSyrian Arab RepublicUnited Arab EmiratesYemen, Republic of

IAN E. BENNETT (Canada)Charles X. O’Loghlin (Ireland)Antigua and

BarbudaBahamas, TheBarbadosBelizeCanadaDominica

(80,636–3.72 percent)

GrenadaIrelandJamaicaSt. Kitts and NevisSt. LuciaSt. Vincent and theGrenadines

MICHAEL J. CALLAGHAN (Australia)Michael H. Reddell (New Zealand)AustraliaKiribatiKoreaMarshall IslandsMicronesia, Fed.

States ofMongoliaNew Zealand

(72,423–3.34 percent)

PalauPapua New GuineaPhilippinesSamoaSeychellesSolomon IslandsVanuatu

Ismaila Usman (Nigeria)Peter J. Ngumbullu (Tanzania)AngolaBotswanaBurundiEritreaEthiopiaGambia, TheKenyaLesothoMalawiMozambique

(65,221–3.01 percent)

NamibiaNigeriaSierra LeoneSouth AfricaSudanSwazilandTanzaniaUgandaZambia

SRI MULYANI INDRAWATI (Indonesia)Ismail Alowi (Malaysia)Brunei DarussalamCambodiaFijiIndonesiaLao PDRMalaysia

(69,019–3.18 percent)

MyanmarNepalSingaporeThailandTongaVietnam

WANG XIAOYI

GE HuayongChina

(63,942–2.95 percent)

WILLY KIEKENS (Belgium)Johann Prader (Austria)AustriaBelarusBelgiumCzech RepublicHungary

(111,696–5.15 percent)

PIER CARLO PADOAN (Italy)Harilaos Vittas (Greece)AlbaniaGreeceItaly

(90,968–4.19 percent)

MaltaPortugalSan MarinoTimor-Leste

1As of August 26, 2003, members’ votes totaled 2,168,501 and votes in the Executive Board amounted to 2,168,289. This total does not include the votes of Liberia, Somalia, or Zimbabwe.

VILHJÁLMUR EGILSSON (Iceland)Benny Andersen (Denmark)DenmarkEstoniaFinlandIceland

(76,276–3.52 percent)

LatviaLithuaniaNorwaySweden

SULAIMAN M. AL-TURKI

Abdallah S. Al Azzaz Saudi Arabia

(70,105–3.23 percent)

ALEKSEI V. MOZHIN

Andrei Lushin Russia

(59,704–2.75 percent)

FRITZ ZURBRÜGG (Switzerland)

Wieslaw Szczuka (Poland)AzerbaijanKyrgyz RepublicPolandSerbia and

Montenegro

(61,827–2.85 percent)

SwitzerlandTajikistanTurkmenistanUzbekistan

KazakhstanLuxembourgSlovak RepublicSloveniaTurkey

Supplement 2003

31

The Independent Evaluation Office (IEO) wasestablished in July 2001 to give the IMF objec-

tive and independent evaluations on crucial issues.It is intended to complement the institution’s long-standing internal review and evaluation processes.The IEO’s work is expected to enhance the learningculture within the IMF, strengthen the institution’sexternal credibility, promote greater understanding of the IMF’s work throughout the membership, andsupport the Executive Board’s institutional gover-nance and oversight responsibilities. The office isindependent of IMF management and operates atarm’s length from the IMF’s Executive Board.

First three studiesDuring financial year 2003 (May 1, 2002–April 30,2003), the IEO’s work program consisted of threeevaluation projects: the prolonged use of IMF finan-cial resources and its implications; the role of theIMF in three recent capital account crisis cases(Brazil, Indonesia, and Korea); and fiscal adjustmentin IMF-supported programs in a group of low- andmiddle-income countries. Its report on prolongeduse, broadly endorsed by the Executive Board inSeptember 2002 and subsequently published, offereda series of recommendations designed to minimizeprolonged use and its adverse consequences.These recommendations covered the rationale forIMF-supported programs (including the need foralternative methods of signaling an IMF “seal ofapproval” to other donors and creditors), programdesign, strengthening of political information andanalysis, and human resource management.

Following up on these recommendations, IMFmanagement set up a staff task force to proposehow best to address issues raised by the evaluation.The IEO provided the task force with commentsreceived through its external outreach. TheExecutive Board discussed the task force report inMarch and agreed to specific follow-up steps:

• the rigorous implementation of IEO recom-mendations to improve surveillance, conditionality,and program design (including the need for greaterrealism in program objectives and assumptions,along with a more strategic approach to IMFinvolvement);

• additional measures to strengthen “due dili-gence” for prolonged users and to enhance informa-

tion for decision making, including a systematiceffort to undertake ex post assessments of achieve-ments in prolonged-use cases (a specific definitionof prolonged use was adopted as a trigger for theseenhanced due diligence efforts); and

• further substantive consideration of issuesraised by the IEOin the context offuture discussionson surveillance,program design,and the role ofthe IMF in low-income countries.

In May, theExecutive Boarddiscussed theIEO’s report onthe three capitalaccount crisiscases. The evalua-tion report, along with the summing up of the Boarddiscussion, has now been published. This evaluationmade six recommendations, encouraging the IMF to

• incorporate in its annual consultations withmembers a stress-testing approach to the analysis ofcountry exposure to potential capital account crises;

• make staff assessments more candid and moreaccessible to the public, thus increasing the impactof surveillance;

• undertake a comprehensive review of the IMF’sapproach to program design in capital accountcrises;

• ensure that the terms of the financing packageare credible so as to generate confidence, sincerestoration of confidence is the central goal;

• act as a proactive crisis coordinator, providingcandid assessments if some elements of a strategyare lowering the probability of success; and

• ensure that “centers of expertise” on crisis man-agement issues are established to allow for rapidapplication of relevant expertise to emerging crises.

The evaluation on fiscal adjustment in IMF-supported programs was circulated to the ExecutiveBoard in July 2003 and was discussed on August 29.

What’s next?Following extensive consultation with a broad rangeof internal and external stakeholders and subse-

Independent Evaluation Office

Lessons sought from experience with PRSPs andPRGF, Argentina crisis, and IMF technical assistance

Tsidi Tsikata (left),Montek SinghAhluwalia, andDavid Goldsboroughbrief the press on the IEO’s review of prolonged use of IMF resources.

Supplement 2003

32

quent review and support from the Executive Board,the IEO’s work program for financial year 2004 wasfinalized by IEO Director Montek Singh Ahluwalia.In the course of the current financial year, the IEOwill evaluate the IMF’s experience with povertyreduction strategy papers (PRSPs) and the PovertyReduction and Growth Facility (PRGF); the IMF’srole in Argentina, assessing the 2000 and 2001 pro-grams but also taking a longer view of the IMF’sinvolvement from 1991 onward; and IMF technicalassistance.

The evaluation of the PRSP and the PRGF isalready well under way. It is being conducted in par-allel with a review of the PRSP process by the WorldBank’s Operations Evaluation Department. The finalterms of reference for this study have been posted onthe IEO website, following consultations with internaland external stakeholders on an earlier issues paper.The evaluation will draw upon six detailed countrystudies (Guinea, Mozambique, Nicaragua, Tajikistan,Tanzania, and Vietnam) as well as a cross-countryanalysis of the full sample of countries with PRSPs.

Work has also commenced on the evaluation of theIMF’s role in Argentina. The issues paper for thatevaluation, finalized after broad-based consultations,is available on the IEO’s website. The issues paper forthe evaluation of IMF technical assistance will beposted on the website for comments in September.

In the course of its work, the IEO continues toundertake wide-ranging outreach efforts, includingbuilding ties with the academic and aid evaluationcommunities and with representatives of civil society.It organized a series of seminars to disseminate theresults of its evaluation of prolonged use of IMFresources, and similar events will be held for the othertwo completed evaluations. The IEO website is nowbeing used by a wide range of subscribers, and signifi-cant efforts have been made to ensure that key issuespapers, reports, and other material produced by theIEO are available in English and other languages.

More information on the scope of the IEO’s proj-ects and work program, as well as access to the pub-lished evaluation reports, is available on the IEO’swebsite (www.imf.org/ieo).

Laura WallaceEditor-in-Chief

Sheila MeehanManaging Editor

Elisa DiehlAssistant Editor

Christine Ebrahim-zadehAssistant Editor

Natalie HairfieldAssistant Editor/

Production Manager

Maureen BurkeEditorial Assistant

Philip TorsaniArt Editor/Graphic Artist

Julio PregoGraphic Artist

_______

Prakash LounganiAssociate Editor

The IMF Survey (ISSN 0047-083X) is published in English,French, and Spanish by the IMF22 times a year, plus an annualSupplement on the IMF and anannual index. Opinions andmaterials in the IMF Survey donot necessarily reflect officialviews of the IMF. Any mapsused are for the convenience ofreaders, based on NationalGeographic’s Atlas of the World,Sixth Edition; the denomina-tions used and the boundariesshown do not imply any judg-ment by the IMF on the legalstatus of any territory or anyendorsement or acceptance of such boundaries. Text fromthe IMF Survey may be reprint-ed, with due credit given, butphotographs and illustrationscannot be reproduced in anyform. Address editorialcorrespondence to CurrentPublications Division, RoomIS7-1100, IMF, Washington, DC20431 U.S.A. Tel.: (202) 623-8585; or e-mail any commentsto imfsurvey@imf.org. The IMFSurvey is mailed first class inCanada, Mexico, and the UnitedStates, and by airspeed else-where. Private firms and indi-viduals are charged $79.00annually. Apply for subscrip-tions to Publication Services,Box X2003, IMF, Washington,DC 20431 U.S.A. Tel.: (202)623-7430; fax: (202) 623-7201;e-mail: publications@imf.org.

IMF at a glance

When was the IMF set up? Founded in 1945, it began financial operations on March 1, 1947

What is its current membership? 184 countries

What are its governing bodies? Board of Governors and Executive Board

Who heads the IMF? Horst Köhler is Managing Director

How many staff work at the IMF? About 2,700 individuals from 141 countries

What are its total resources? SDR 218.5 billion (about $300 billion,as of April 30, 2003)

Primary purposes• Promote international monetary cooperation.• Facilitate the expansion and balanced growth of international trade.• Promote exchange stability and maintain orderly exchange arrangements among member countries.• Assist in establishing a multilateral system of payments for current transactions between member

countries as well as in eliminating foreign exchange restrictions that hamper the growth of world trade.• Make available to member countries the IMF’s general resources on a temporary basis to enable them to correct

balance of payments difficulties without resorting to measures that would harm national or international prosperity.• Shorten the duration and lessen the degree of disequilibrium in the international balances of payments of member countries.

Main areas of activity• Surveillance, or appraisal, of its members’ macroeconomic policies within the framework of a comprehensive

analysis of both the general economic climate and each member’s policy strategy.• Financial assistance, in the form of credits and loans to member countries with balance of payments problems,

to support adjustment and reforms.• Technical assistance consisting of IMF expertise and financial support for member countries in several broad areas,

including design and implementation of fiscal and monetary policy, institution building (such as central banks and treasuries), collection and refinement of statistical data, and training of government officials.