IMF responds to Action Aid

IMF responds to the recent Action Aid report- highlights below;

"We believe that our responsibility lies primarily in helping these governments achieve faster growth; increase their capacity to absorb aid; raise revenues; and encourage pro-poor spending. All of this must be achieved while trying to preserve the hard-fought gains provided by macroeconomic stability. To do so, scrutinizing public sector wage bills in many of these countries is simply unavoidable. These bills have too often been a source of macroeconomic imbalances because of unplanned, excess spending, and poor expenditure control...

We have described the many reasons for including wage bill ceilings in a paper that you often quote, Aid Scaling Up: Do Wage Bill Ceilings Stand in the Way?. We concluded that, based on country case studies for 2003-05, wage bill ceilings have not restricted the use of available donor funds, and offered a number of suggestions for increasing the flexibility of wage bill conditionality in PRGF-supported programs to respond to higher aid flows. But the paper also described how ceilings are not the best way to solve the underlying problems of a poor country's total wage bill. This is one of the reasons why, as we mentioned in our meeting (and as detailed in this recent article in the IMF Survey) the Fund is committed to use ceilings more selectively and transparently..

Going ahead, we are focusing more on working with governments and development partners to address the underlying issue of civil service reform...

Your paper also addressed other key questions, such as the Fund's policy advice on aid absorption. The recent IEO report on aid to SSA found that for countries with low reserves (below 2.5 months of imports), incremental aid is on average used for strengthening the reserve position, and that when inflation exceeds 5-7 percent, programmed aid-based spending had on average been limited. The IMF does not have a specific policy threshold on aid absorption and does not apply rigid rules or one-size-fits-all: no across-the-board rule for using aid could do justice to the many aspects involved, and be appropriate for all countries. The Fund's analysis of the scope for using aid takes into account many factors, not just inflation and reserves: important considerations are aid volatility, the incidence of shocks, debt sustainability concerns, export competitiveness, the domestic debt burden and microeconomic capacity constraints to higher spending to ensure the aid can be effectively spent.

We are currently drafting two papers that look at the implications of scaling up on Fund program design and on fiscal policies."

Some of the critics seem to forget that a lot of these countries are already in trouble when they call on the Fund.

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