Saturday, October 25, 2014
   
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Program Update

Holding the IMF and Governments Accountable for Subsidy Reform

IMF Findings for Subsidy Reform in Middle East and North Africa (MENA)



The International Monetary Fund (IMF) conducted a study that identified factors for successful subsidy reform in MENA. These factor should be considered the minimum Governments and the IMF should be held accountable to these minimum standards when developing subsidy reforms.

The IMF focused on aspects particularly relevant for MENA – namely political economy factors (type of government), macroeconomic environment and fiscal pressures, and social safety nets and mitigating measures. The IMF gathered 22 country case studies with 28 reform periods.

The IMF defines a reform as successful if it leads to a durable increase in prices of subsidized goods, thus reducing fiscal costs and freeing resources to better support the poor, even if it does not fully bring up prices to international levels. The IMF recommends developing well-targeted measures to mitigate the impact of price increases on the poor, a crucial component for building public support for subsidy reforms. The IMF does not discuss how to design effective mitigation measures, but this should be done in close consultation with civil society and impacted communities.



How the IMF judges the success of a reform:

o   Unsuccessful (Score=0): reform attempts were short-lived (the initial price increase was reversed or reduced)

o   Partially Successful (Score=1): initial price adjustments at time of implementation of the reform were sustained and/or when there were significant adjustments of domestic prices but not enough to reduce the price gap

o   Successful (Score=2): the initial price adjustment was followed by additional adjustments leading to a significant reduction of the subsidy burden and the price gap







Key Factors for Successful Subsidy Reform



Factors essential to successful subsidy reform:
*associated with a successful outcome in 100% of cases

1.     Cash and in-kind transfers were granted

2.     Other mitigation measures (e.g. social safety nets) were implemented

3.     Subsidies targeted specific groups

4.     Government ownership and commitment is strong

5.     Government tried to build consensus

6.     Government developed communication strategy and undertook a public information campaign



Other factors that the IMF highlights as having very high rates of success:

§  Sufficient analysis of subsidy incidence is associated with a successful outcome in 86% of cases

§  Gradual price increases are associated with a successful outcome in 75% of cases

§  Technical assistance by international partners is associated with a successful outcome in 88% of cases










6 Factors in Successful Subsidy Reform



Factor for Success

Components

Case Studies & Indicators

Good reform preparation, gradual pace of adjustment, and breadth of reform

Well prepared reforms which draw on accurate diagnostics and allow for gradual pacing

1983 reform of subsidies on cereals in Tunisia, where a 100 percent price increase led to riots and forced the cancellation of the price increases



Sufficient analysis of subsidy incidence, which contributes to good policy discussion and targeting of mitigating measures



86% of the cases where the authorities conducted an incidence analysis were associated with a successful outcome

Gradual pace of reform (versus a shock approach)

·         subsidy is phased out slowly (5 years or more)

·         Price increases are modest (less than 50%)



Case studies indicated that gradual price increases (defined as less than 50% at the start of the reform) are more likely to be successful. 75% of the cases where price increases were gradual were associated with a successful outcome



Breadth of reform: more comprehensive of a scope, targeting a wide range of fuel or food products. In the case of fuel products, the development of substitute forms of energy is often effective when the new product offers a lower-cost alternative that also has economic benefits. When countries are not ready to implement a comprehensive subsidy reform, phasing in price increases and sequencing them differently across energy products may be appropriate





Examples include reforms that improve service delivery or product availability in exchange for tariff and price increases, such as electricity tariff adjustment and power sector restructuring in Mauritania

Strong government leadership and consensus building

Effective communication strategy that underlines the costs of the subsidy, who benefits from it, what are the reform benefits, and why other options for assisting the poor (other than subsidies) are better. Comparison with peer countries more advanced in the reform process can be useful

A well-planned communications strategy is essential to help generate broad political and public support. For example, a government awareness campaign preceded price adjustments in Tunisia’s 1991 successful food subsidy reform. Newspapers also focused on the weight of food subsidies on the budget and compared food prices in Tunisia with those in neighboring countries



Stakeholder consultation and consensus building: parliament outreach plays a positive role in reform. Outreach to influential beneficiaries, who are directly affected by subsidy reform, is also necessary to manage vested interests

For example, fuel subsidies may be intended to lower transportation, heating, and cooking costs for the poor but may actually have benefits that accrue to only a limited segment of society (and not necessarily the intended target group) – policymakers must consult with these key stakeholders



Transparency: communication is more credible when accompanied by a systematic effort at improving transparency overall. Transparency helps avoid conflicts of interest, reduces the power of vested interest groups, and allows for identification of political and economic relationships



In the case of fuel, it is useful to explain the composition of the prices at the pump and corresponding tax, the size of subsidies, and the functioning of automatic pricing mechanisms

Introduction of mitigating measures to soften the impact of the reform on the poor

Reforms were more successful when governments introduced measures to mitigate the impact of the price increase on the poor and most vulnerable. For this reason, the introduction of alternative measures, appropriately designed to mitigate impact on those most affected by subsidy removal, is crucial

One means for doing so would be compensating the immediate impact of the subsidy removal in the short term and replacing the subsidy model of social support with a different model centered on targeted social safety nets in the longer term. These measures can include cash and in-kind transfers. Mitigation measures are associated with successful outcomes in 100% of cases

Reform follow-up: governments must keep the reform momentum to resist the push-back from the vested interests that are likely to mobilize when the effects begin to be felt

In Iran, the reform was preceded by a broad communication campaign to educate the population on the growing costs of low energy prices. However, following its implementation, the government did not provide equally extensive public official information about the de facto implementation and outcome of the reform which limited the program’s success



Support from international partners, particularly technical assistance

Collaboration with and support from international partners such as international financial institutions, multilateral agencies, and donors can be essential. They provide political legitimacy, peer pressure, research and technical assistance, sharing of best practices, establishment of rules, financial support, and increased accountability



88% of the cases where the reform was undertaken with technical assistance were associated with a successful outcome

Favorable economic conditions, particularly higher economic growth

Growth

Reforms launched in the context of low growth were less successful than reforms undertaken in an environment of high economic activity



Inflation and international commodity prices

A high level of initial inflation was associated with least successful outcome. Commodity prices do not seem to play a significant role



Public finances

Reforms have been more successful when they are part of a broad-based fiscal strategy to reduce fiscal deficits and free resources toward social spending and infrastructure



Presence of a coalition government at the time of reform

Political conditions

More successful reforms were associated with a multiparty government. Under a minority government, reforms are less likely to be revered because their implementation likely required support of the opposition

   

IMF Releases Preliminary Considerations for Lending Framework and Sovereign Debt

The IMF has released a paper detailing the preliminary considerations for the Fund’s lending framework and sovereign debt following the Executive Board’s June 13 discussion on the issue. Here are some brief highlights/analysis:

1)      The paper proposes an alternative to restructuring sovereign debt that will permit the Fund to finance member countries under its exceptional access policy. The proposed approach – which the Executive Board strongly supports – is a “reprofiling” of sovereign debt. Reprofiling is limited in nature and a “light touch approach,” under which there will be a “short extension” of maturities, but no reduction in the principal or interest.

2)      Creditors will still be required to agree to this operation and the transparency of negotiations between the Fund, the sovereign and the creditors will be critical to ensure that the terms – regarding both reprofiling and adjustment measures – protect all actors, especially the citizens of the affected country. Collective action problems may still exist under this method but the IMF indicates that collective action clauses (CACs) will remain a solution to this issue.

3)      Countries in debt distress will be required to accompany the limited reprofiling with a “strong adjustment program” in order to restore market access and debt sustainability. The Fund envisions that this adjustment program will include fiscal consolidation, but that these measures will be less harsh (less procyclical) than similar adjustments paths that are undergone without reprofiling. The reprofiling method is expected to allow a buffer so that the governments can put forward moderate adjustment measures as opposed to severe ones. The IMF claims that this operation would help to propel growth and reduce economic dislocation.

4)      The paper also states that the “systemic exemption” to the fund’s 2002 lending framework could possibly be eliminated, the reasons for this being that it is seen to be “inequitable” and “excessively open-ended”. More importantly, the Fund asserts that the unevenness and uncertainty that arise from this exemption worsens issues and risks of contagion.

To read the entire document, click here: ”The Fund’s Lending Framework and Sovereign Debt – Preliminary Considerations
   

Development Groups Urge IMF to Protect Poor in Debt Workouts

June 12, 2014



Board of Executive Directors

Office of the Executive Director

International Monetary Fund

1900 Pennsylvania Ave NW, Washington, DC, 20431



Dear Member of the Board,

As you are aware, the IMF Executive Board is engaging in conversations around the Fund’s Lending Framework and

Sovereign Debt policy. During this discussion, we strongly encourage you and your peers on the Board to debate

how international debt restructuring can be independent, comprehensive, transparent, predictable, accountable

and arbitrated neutrally.

We understand that in initial conversations, solutions are sought to limit or eliminate extreme predatory and

hold-out behavior that violates global debt relief policies, debt restructuring and sound operation of the financial

system. We welcome your efforts on these extreme issues and your further discussions of supporting solutions to

international financial crises.

The global economy is still fragile and recovery remains uneven. Many countries, in an effort to restore economic

growth, have sought external financing. This has led to a buildup of sovereign debt. This is a particular concern for

emerging markets and developing economies, which have already endured the financial crisis and its subsequent

monetary easing, currency fluctuations and speculative activity of investors.

As an Executive Director at the IMF, you understand these problems and the consequences they have for sovereign

debt. If countries trying to finance development experience turmoil – either economic or political – and need to

restructure their debt, what are they to do?

We need a reliable process to resolve debt crises. We both lead organizations that work to ensure that finance

serves all of us, not just the interests of a few. IMF Executive Board discussions must move beyond the position of

creditors and consider the positions of those who ultimately pay the price for sovereign debt crises – the poorest

and most vulnerable.



Sincerely,

Jo Marie Griesgraber, Ph.D, Executive Director, New Rules for Global Finance

Eric LeCompte, Executive Director, Jubilee USA

   

Investing in Interns Initiative

   

Letter to Congress Urging IMF Reform (with Signatures)

Read more »

   

IMF Makes Progress in Transparency

IMF Executive Board Reduces Lag of Public Access to Executive Board Minutes

Press Release No. 14/86
March 7, 2014

The Executive Board of the International Monetary Fund (IMF) today agreed to reduce the lag for public access to most Board meeting minutes from five to three years, while retaining the five-year lag only for minutes of discussions that involve Use of Fund Resources or a Policy Support Instrument. The decision offers a significant improvement in public access to the minutes of most IMF Board meetings, while mitigating the risks of prematurely disclosing information in the cases of ongoing IMF-supported programs.

The reduction of the lag for public access in respect of Board minutes - the fourth such reduction since 1996 – was discussed in the most recent Review of the Fund’s Transparency Policy, when the Executive Board endorsed new measures aimed at increasing the amount, timeliness, and accessibility of information that the IMF makes available to the public and agreed to consider options to further reduce the time lag – a request that was frequently mentioned during the consultations for the Review, including from Civil Society Organizations.

The Board considered that the decision strikes the right balance between informing the public about the Executive Board’s views, maintaining the candor of Board discussions, and ensuring that access to Board meeting minutes does not jeopardize ongoing Fund operations.

In order to allow time for the Fund and members to implement the new rules, the Board agreed to a transition period of six months; the new rules will therefore become effective for the minutes of all Board meetings taking place on, or after, August 27, 2014.

 

http://www.imf.org/external/np/sec/pr/2014/pr1486.htm

   

IMF Consultation - Triennial Surveillance Review

Dear Friends and Colleagues,

The IMF has just launched a public consultation for their “Triennial Surveillance Review.” They are welcoming input from CSOs on how to improve the effectiveness of their policy advice. New Rules plans to submit some comments, which we will share, but we encourage you to submit your own comments/recommendations and to share with other groups.

Consultation information available here http://www.imf.org/external/np/exr/consult/2014/tsr/index.htm

   

Insight into the Markets in Financial Instrument Directive (MiFID II)

Read more »

   

Are Free Trade Agreements Undermining Financial Stability?

Read more »

   

FSB Transparency Evolves; Leaves Information Gaps

 

Read more »

   

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Program Updates

  • Holding the IMF and Governments Accountable for Subsidy Reform
    July 17, 2014 
  • IMF Releases Preliminary Considerations for Lending Framework and Sovereign Debt
    June 20, 2014 
  • Development Groups Urge IMF to Protect Poor in Debt Workouts
    June 13, 2014 
  • Investing in Interns Initiative
    May 12, 2014 
  • Letter to Congress Urging IMF Reform (with Signatures)
    March 10, 2014 
  • IMF Makes Progress in Transparency
    March 07, 2014 
  • IMF Consultation - Triennial Surveillance Review
    February 25, 2014 
  • Insight into the Markets in Financial Instrument Directive (MiFID II)
    January 28, 2014 
  • Are Free Trade Agreements Undermining Financial Stability?
    January 23, 2014 
  • FSB Transparency Evolves; Leaves Information Gaps
    January 10, 2014 
  • New Rules Annual Report 2013
    December 16, 2013 
  • FSB Watch Workshop: Bring Civil Society Agenda to the FSB
    December 12, 2013 
  • Ensuring IMF Programs Reduce Poverty
    December 12, 2013 
  • Increasing Africa's Voice in the IMF: Sign-On Letter
    November 19, 2013 
  • Global Financial Governance & Impact: 2013 Overall Assessment
    October 30, 2013 

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