IMF involvement helps poor countries attract foreign aid

Debate continues over the role of the International Monetary Fund (IMF) in poor countries. What role should the Fund play in helping to achieve poverty reduction targets? And how does having an IMF programme in place affect a country’s ability to attract foreign aid?

Research from the Universityof Surrey, in the UK, and Carleton University, in Canada, examines therelationship between IMF involvement in poor countries and foreign aid flows.The researchers analyse the effects of different types of IMF lending in 48low-income developing countries between 1974 and 2000.

The IMF has various lendingfacilities designed to address different circumstances in its member countries.Low-income countries can borrow at concessional interest rates through thePoverty Reduction and Growth Facility (PRGF). The Fund also provides non-concessionalloans (charged at market interest rates), including Stand-by Arrangements (SBA)and the Extended Fund Facility (EFF).

The PRGF replaced theEnhanced Structural Adjustment Facility (ESAF) – formerly the StructuralAdjustment Facility (SAF) – in 1999. PRGF loans support countries as they makethe economic, structural and social changes considered necessary to encouragepro-poor growth. The loans come with conditions: policies and measures that acountry must agree to implement in order to receive financing (this is known asconditionality).

The research finds thathaving an IMF programme in a country is linked with higher foreign aid inflows,but this is only true for the IMF’s concessional lending to poor countries. Theresearchers show that it is the conditionality attached to concessional lendingthat matters.

Key findings of the researchinclude:

Non-concessionalSBA and EFF lending does not affect aid flows to poor countries.

The SAF, ESAF andPRGF are strongly linked to higher aid flows.

The amount of aiddoes not increase in line with the amount of IMF lending (suggesting that it isthe conditionality, rather than the injection of finance itself, that mattersto donors).

However, donorsdo not penalise countries with a poor past record of implementing IMFconditions.

It appears that having an IMFprogramme in place is a sign that donors are comfortable supporting a country’sdevelopment strategy. Many of the main donor countries are represented on theIMF Board, which approves and regularly reviews the institution’s lending. Theresearch therefore suggests that the IMF has a strategically important role to playin helping to achieve the Millennium Development Goals (MDGs)and should continue to be involved in poor countries.

Key implications of theresearch for the IMF include:

A combination ofIMF involvement and foreign aid could be the best way to achieve the MDGs.

It could limitits activities to endorsing and monitoring programmes, without actuallylending.

It could also becomemore active in encouraging donors to give aid.

It could tacklesome of the problems associated with aid, such as instability.

It should alsoreview quick-disbursing lending facilities to help poor countries when theyface sudden economic shocks.