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International Monetary Fund’s Financial Assistance Policies: Pros and Cons

Gina-Marie Cheeseman - 7/8/2007

Created alongside the World Bank in 1944 during a conference in Bretton Woods, New Hampshire, the International Monetary Fund consists of 185 member countries. According to the IMF’s website, it was established “to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment.” The operations of the IMF involve surveillance, financial assistance, and technical assistance.

The IMF defines surveillance as encouraging “a dialogue among its member countries on the national and international consequences of their economic and financial policies, to promote external stability.” Surveillance is conducted through two programs: the financial sector assessment program (FSAP) and medium-term strategy (MTS). The FSAP allows both the IMF and World Bank to make assessments of countries’ financial strengths and weaknesses. MTS monitors economies and assesses countries’ policies to determine if they are consistent with the international community’s interest and their own interest.

The IMF gives countries technical assistance in order to “strengthen their capacity in both human and institutional resources, and to design appropriate macroeconomic, financial, and structural policies.” Membership in the IMF includes technical assistance, which is usually provided free to member countries. Low and lower-middle income countries receive 90 percent of the IMF’s technical assistance. Technical assistance is provided through regional assistance centers, located in the Pacific; the Caribbean; East, West and Central Africa; and the Middle East.

The IMF policies which receive the most praise and criticism fall within the financial assistance operations. For that reason the rest of this article will focus on those policies, namely the Heavily Indebted Poor Countries (HIPC) Initiative, Structural Adjustment Policies (SAPs), the Poverty Reduction and Growth Facility (PRGF), the Exogenous Shocks Facility (ESF), and the Multilateral Debt Relief Initiative (MDRI).


Heavily Indebted Poor Countries (HIPC) Initiative

Created in 1996 by the IMF and World Bank, the Heavily Indebted Poor Countries (HIPC) is an agreement between creditors to help the poorest and most indebted countries reduce their debt burden. Poor countries owe a combined debt of over $2 trillion to rich countries. The HIPC Initiative enables poor countries to focus on “building the policy and institutional foundation for sustainable development and poverty reduction.” Along with reducing debt, the Initiative reduces poverty, and helps a country’s fiscal and monetary performance.

HIPC is open to the poorest countries that meet the following requirements:

1. A per capita income below $785.
2. Eligibility for assistance from the World Bank’s International Development Association.
3. Have such high debt that they cannot sustain it even after applying debt relief devices.
4. A track reform of trying to reduce poverty and building economic growth.


About the Initiative, the IMF website states, “Even if all of the external debts of these countries were forgiven, most would still depend on significant levels of concessional external assistance, since their receipts of such assistance have been much larger than their debt-service payments for many years.” In other words, HIPC is not a panacea, but an aid for the poorest countries.

Matthew Martin, director of the non-profit organizations Debt Relief International and Development Finance International, discusses the pros and cons of the HIPC Initiative:

Creditors and international institutions have made exaggerated claims of its successes, based on the assumptions that all its promises have been fulfilled. NGOs and civil society organizations dismiss HIPC as a total failure or a means of imposing additional conditionality on developing countries without providing enough funding. The truth is that HIPC has the potential to achieve much more if reinforced and surrounded by other initiatives.

Amar Bhattacharya, senior advisor of the World Bank’s Poverty Reduction and

Economic Management Network, also discusses the pros and cons of the Initiative:

Implementation is progressing steadily but more slowly than anticipated…The HIPC program can be considered to bring debt levels…to the same level as other poor countries and…eliminate the excessive debt overhang that posed a constraint to growth and poverty reduction. Although the reduction of the debt burden under the HIPC Initiative reduces the debt burden significantly, it cannot guarantee a net increase in external financing.

Geske Dijkstra, associate professor in economics at the Erasmus University Rotterdam in the Netherlands, cites three problematic aspects of the HIPC Initiative,

1. Donors continue to extend large amounts of loans, thereby perpetuating debt problems;
2. The limited additionality of debt relief;
3. The conditionality associated with the HIPC Initiative.


Dijkstra says, “The first two imply that debt problems are not likely to be solved by the Initiative, the third implies that adverse selection in the aid allocation is likely to continue.”


Structural Adjustment Policies (SAPs)

Structural Adjustment Policies (SAPs) are conditions countries must meet in order to obtain IMF and World Bank loans. Eligibility for loans from the IMF requires governments to be in compliance with the IMF’s Structural Adjustment Programs (SAPs), which aim to reduce a government’s budget deficits through decreasing government expenditure. Among the conditions are increasing exports, devaluing overvalued currencies, trade liberalization, balancing budgets, price controls, privatization, and fighting corruption.

Sarah Anderson, Director of the Global Economy Program of the Institute for Policy Studies in Washington, D.C., says “Although the Bank and Fund have promoted SAPs as a virtual religion for nearly 20 years, they cannot even claim that they have achieved a reduction in the developing world's debt burden. Between 1980 and 1997, the debt of low-income countries grew by 544%, and that of middle-income countries by 481%.”

Carol Welch, coordinator of the U.S. efforts for the United Nations' Millennium Campaign, criticizes the dominant role the U.S. plays in the global economy to “impose SAPs on developing countries,” and opening “their markets to competition from U.S. economies.” She believes SAPs are “based on a narrow economic model that perpetuates poverty, inequality, and environmental degradation.”

Gerry Nkombo Muuka, associate professor of management and assistant dean of the College of Business and Public Affairs at Murray State University in Kentucky, counters criticism of SAPs by stating that the overall objective of SAPs is “to increase an economy's exports, to reduce both rural and urban poverty, and ultimately to induce…a high and sustainable rate of economic growth.”

According to Muuka, the IMF “has a right to safeguard the resources transferred to them by member governments.” Although the conditions of SAPs are controversial, “it is hard to deny that those who provide assistance and loans can legitimately take an active interest in the design of the recipient country’s policies.”


Poverty Reduction and Growth Facility (PRGF)

The Poverty Reduction and Growth Facility (PRGF) provides low-interest lending for low-income nations. The PRGF was established September 1999 in order for poverty reduction and growth to become “more central to lending operations in its poorest member countries.” The governments of participating countries prepare Poverty Reduction Strategy Papers (PRSPs), and the executive boards of the IMF and World Bank consider the PRSPs as the basis for loans and debt relief.

In 2002 the IMF conducted a review of the PRGF. The review found both positive and negative results. The review found “marked success” in the area of policy goals, particularly with macroeconomic frameworks in PRGFs which are “generally consistent with those of the supporting PRSPs.” It also found an “increased allocation of budgetary resources toward poverty-reducing spending,” and accommodation of higher spending by fiscal frameworks to “support country-defined poverty reduction objectives.”

The review found there is “scope for further improvement.” Among the improvements suggested are “more systematic incorporation of poverty and social impact assessments” in PRGF programs, and a need for more progress on public expenditure issues. The review also suggested there should be more “openness and flexibility on the part of the Fund.”

The Catholic Relief Services (CRS) contributed to the PRGF review. The CRS found that the PRSPs continue to have “considerable potential for reorienting development planning and resources on the part of both donors and developing countries…with broad public participation.” However, the CRS also found that PRSPs have “fallen short of this potential,” and recommended that “immediate and significant improvements” be made to the “PRSP framework.”

Carlos Pacheco Alizaga of the Center for International Studies in Nicaragua, views SAPs as “rigid macroeconomic goals” which do not allow countries to expand their “health and education budget allocations.” In his opinion the PRGF:

in no way attacks the fundamental problem that lies in the exploitation of the Economies of the countries in the South, in the transference of wealth and resources from the South towards the North…the PRGF tries to dilute the central discussion which is the lack of a new model of development for the impoverished countries and the creation of a new world trade system that should not be controlled by the rich countries of the North and their transnational companies.


Exogenous Shocks Facility (ESF)

Through the Exogenous Shocks Facility (ESF) the IMF provides policy support and financial assistance to countries facing exogenous shocks. An exogenous shock is “an event that has a significant negative impact on the economy and that is beyond the control of the government.” The ESF is available to countries eligible for PRGF which do not have a PRGF program, and offers quick-disbursing loans.

The Policy Development and Review Department of the IMF prepared a “Guidance Note” on the ESF. Of the ESF the Note found that it serves three key functions:

1. Facilitates quick access to concessional financing
2. Helps member countries design and implement a policy framework that adequately can adjust to shocks
3. Serves as a catalyst for more concessional donor financing


The African Forum and Network on Debt and Development (AFRODAD) recognizes that “an ESF has been established in the IMF in order to provide quick disbursing, concessional assistance to low-income countries facing unanticipated shocks to their balance of payments.” AFRODAD lists four positive aspects of the ESF: