The Policy Support Instrument Early Experience

1. The Policy Support Instrument Early Experience Tom Dorsey Policy Strategy and Review Department IMF

2. The Policy Support Instrumentin brief • A shadow program for low-income IMF members that do not need or want IMF resources. • A framework for structuring policy dialogue between members and the IMF. • A means of signaling donors, investors, and others of a member’s program design and its implementation.

3. Key Features of the Policy Support Instrument (PSI) • Programs modeled on PRGF-supported programs. • Fixed schedule of reviews to ensure regular and timely assessments. • No IMF financing, but designed to facilitate rapid transition to an arrangement if a balance of payments need arises.

4. The Prehistory of PSI • Staff Monitored Programs • Both signaling and track record purposes for a single instrument • A light approach to documentation leading to limited Executive Board involvement and uneven public information. • Low-access PRGF arrangement • No precautionary PRGF arrangements possible. • Signals the lack of balance of payments need, but not a record of successful policy implementation (e.g., “graduation”).

5. An Instrument for Mature Stabilizers Mature stabilizers have: • achieved a reasonable growth performance; • low-underlying inflation (comparable to that obtaining in their major trading partners); • have an adequate level of official international reserves; and • begun to establish (external and net domestic) debt sustainability. • Emphasis on “second generation” structural reforms implies a threshold of institutional and policy quality. Policy Support and Signaling in Low-Income Countries June 2005).

6. Has the PSI been Used by Mature Stabilizers? YES • Quantitative thresholds set for each of the criteria at or around the average levels for PRGF-eligible members. • Mature stabilizers are defined as those members that exceed the thresholds for all five criteria. • 19 of 78 PRGF-eligible members are mature stabilizers by this definition. • All but one of the PSI users were mature stabilizers; the exception missed only a single criterion.

7. Has Conditionality Under the PSI Been Lighter than Under the PRGF? YES • Fewer benchmarks and assessment criteria than under PRGF-supported programs for other mature stabilizers or PRGF-supported programs in general

9. Has Program Implementation Been Better Under the PSI than Under the PRGF? YES • A higher percentage of benchmarks and assessment criteria were met in PSI-supported programs than under PRGF-supported programs for other mature stabilizers or PRGF-supported programs in general

11. Topics for Structural Benchmarks and Assessment Criteria • The heaviest concentration of structural measures in PSI-supported programs is in debt and expenditure management. • Other areas with significant structural measures are banking and financial sector reforms, revenue mobilization, and transparency and governance.

13. Authorities’ Views • The usefulness of the PSI for promoting closer policy dialogue with the IMF and providing effective signals to donors and markets are best assessed by PSI country authorities. • In a survey, country authorities gave the PSI generally good marks. • The satisfaction with the PSI was highest on promoting policy dialogue but more lukewarm on attracting private sector interest.

15. Summary • Early evidence suggests a successful launch of the PSI. • The PSI seems to be achieving the expectations set out for it in 2005. • Caveats: A small sample, seven programs in six countries with most programs still ongoing.