strategy

Reforming foreign aid policy

Context:

The need for policy reform has been highlighted by the external shocks that have affected many developing countries and is accepted by both donors and recipients. A World Bank report entitled [Toward Sustained Development in Sub-Saharan Africa] observes that: "Neither the essential objectives of Africa's development nor the policy issues that must be addressed to achieve them are in dispute... the emerging consensus on policy issues dwarfs any remaining areas of dissent". What has to be decided is the timing and detail of reform and the finance that donors will provide to support it.

Implementation:

A key role has often been played by the IMF in promoting policy reform in countries which face severe balance of payments problems. Many developing countries, however, face large and growing repayments obligations to the IMF. IMF financing is relatively short-term and thus needs to be complemented by longer-term concessional and nonconcessional finance from private and official sources. For example, in 1981 the World Bank launched a structural adjustment loan programme to provide longer-term support for policy reforms. The main IMF instrument for assisting member countries has, since the early 1960s, been the standby arrangement, whereby the IMF makes available a specified amount of its resources, usually for a year but sometimes up to 3 years. The member may use these resources in support of an agreed programme of economic adjustment designed to reestablish a viable balance of payments position. The funds are not available all at once. Instead, drawings are phased over the life of the arrangement and are contingent on the country fulfilling its programme. The IMF was given new responsibilities for firm surveillance of members' exchange rate policies and of domestic policies impinging on exchange rates following the adoption of floating exchange rates by most major countries in the early 1970s. This surveillance is mainly carried out through annual consultations with members on their economic and financial policies that might have an impact on exchange rates.

Other IMF facilities have been set up in response to members' specific needs. The [Compensatory Financing Facility] allows members to make drawings on the IMF to support their balance of payments when they face temporary export shortfalls. This facility has been liberalized several times, both in the access to resources that it provides and in the range of compensatable shortfalls, which now include exports of services and cereal imports. The [Buffer Stock Financing Facility] which allows members with balance of payments difficulties to draw on the IMF to finance their contributions to international buffer stocks that meet certain criteria. Having recognized that a short-term standby arrangement is not always the most appropriate form of assistance for members which have deep-seated balance of payments problems, the IMF created the [Extended Fund Facility] to provide larger loans in support of 3-year adjustment programmes for members whose balance of payments problems were occasioned by a distorted structure of production and trade, with widespread cost and price distortions. The IMF also temporarily adapts its policies in response to specific problems arising in the international economy, as in the case of the IMF oil facilities of 1974 and 1975. Similarly, members' quotas may be increased in response to the particularly difficult balance of payments and adjustment problems.

Broader:

Buffering
Reforming policy
Restructuring foreign aid
Improving effectiveness of foreign aid

Narrower:

Improving policy coherence for foreign aid
Debating foreign policy

Facilitates:

Funding policy decisions
Increasing aid to developing countries
Using overseas development aid to reduce international migration

Facilitated by:

Assessing development assistance
Adapting financial aid to needs of recipient countries

Values:

Aid
Foreign

Subjects: