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Report on Operations Under the Bretton Woods and Related Agreements Act -
2003: 1 - Table of Contents - Next - IntroductionThe Bretton Woods Institutions—the International Monetary Fund (the IMF or the Fund) and the World Bank (the Bank)[1]—were founded at a conference held at Bretton Woods, New Hampshire, in 1944. The IMF was established to promote the smooth functioning of the international monetary system, encourage international trade and support high rates of sustainable economic growth. To achieve these goals, it exercises a surveillance function by monitoring members’ economic policies, provides policy advice and technical assistance, and extends short- and medium-term financial assistance to countries faced with balance of payments difficulties. The World Bank’s goal is to reduce poverty by raising living standards and promoting sustainable development in developing countries. As the premier development institution in the world, it provides a wide range of assistance to developing countries, including economic policy advice and lending and technical assistance for projects that promote sustainable growth and an improved quality of life. Canada is the eighth largest member of the IMF (as measured by quotas), tied with China, after the six other Group of Seven (G-7) countries and Saudi Arabia. Along with China, Italy, Russia, India and Saudi Arabia, Canada is the sixth largest shareholder of the World Bank. On the Executive Boards of the two institutions, Canada represents Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Ireland, Jamaica, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines. On the Bank’s Executive Board, Canada also represents Guyana. Canada’s formal participation in the two institutions is authorized under the Bretton Woods and Related Agreements Act. Section 13 of the Act states that: The Minister of Finance shall cause to be laid before Parliament, on or before March 31 next following the end of each calendar year or, if Parliament is not then sitting, on any of the first thirty days next thereafter that either House of Parliament is sitting, a report containing a general summary of operations under this Act and details of all those operations that directly affect Canada, including the resources and lending of the World Bank Group, the funds subscribed or contributed by Canada, borrowings in Canada and procurement of Canadian goods and services. This report has been prepared in accordance with this provision. The sections that follow review the activities and operations of first the IMF and then the Bank for the year 2003. A final section deals with issues common to both institutions. The annexes contain detailed numerical summaries of the year’s activities. The 2003 spring and fall communiqués of the International Monetary and Financial Committee (IMFC) of the Board of Governors of the IMF and the Development Committee (DC) of the Boards of Governors of the World Bank and IMF are also appended for information. The IMFC and DC are the key policy committees of the IMF and Word Bank Boards of Governors, and their communiqués steer the policy direction of the two institutions.
International Monetary FundOverviewAs a major trading nation, Canada benefits from a strong international monetary system that facilitates the free movement of goods, services and capital. The IMF promotes international financial stability and economic growth through the provision of policy advice and financial and technical assistance to countries experiencing unsustainable external imbalances and related economic difficulties. Benefits of MembershipIMF membership provides a number of specific benefits:
Canada’s Priorities at the IMFGlobal Economic and Financial StabilityRecent emerging market financial crises have underscored the need to strengthen the global financial architecture—the global institutions and rules that govern international economic and financial cooperation. Motivated by the increased role of private capital flows in the global economy and the lessons drawn from recent financial crises, the IMF has been engaged over the past several years in a process of reform. The reforms underway are aimed at making the Fund more effective in promoting greater financial stability and helping countries benefit from the opportunities of global economic integration. In cooperation with its international partners, Canada has played an active role in identifying areas where reforms are required and taking steps to implement those reforms. To enhance the Fund’s effectiveness, reforms have focused on six main areas:
At its 2003 spring and fall meetings, the International Monetary and Financial Committee of the IMF welcomed the progress achieved and supported continued work by the Fund in these areas. Looking forward, a key objective for Canada is to ensure that the Fund has the tools to promote international financial stability. To meet this objective, Canada supports:
Canada continues to place a high priority on strengthening support for low-income countries. The IMF plays a crucial role in supporting macroeconomic stability as a key tool for poverty reduction in the poorest countries and is integrating its efforts with those of the World Bank. The Fund’s involvement in the key areas outlined above, and Canada’s priorities related to these efforts, are described in more detail in the section entitled "Efforts to Promote International Financial Stability," which follows the next section. Economic and Financial Developments in Emerging MarketsFinancial conditions in most emerging markets improved in 2003. JP Morgan’s Emerging Market Bond Index, which measures the yield spread between emerging market debt and comparable US Treasuries, narrowed steadily over the year, reaching near historical lows. This significantly reduced external debt service costs for many emerging market economies and enabled some to regain access to external sources of finance. Nevertheless, the IMF has expressed concern over the sharp increase in public debt in recent years across a broad range of emerging market economies. A sudden reversal of private capital flows to some emerging market countries could give rise to liquidity or solvency problems. Financial developments in Brazil, the IMF’s largest borrower with 29 per cent of credit outstanding, were favourable in 2003. Sound monetary and fiscal policies have supported a stable macroeconomic environment. The primary surplus reached 4.25 per cent of gross domestic product (GDP), putting the public debt on a more sustainable path, while monetary policy was successful in controlling inflation. Despite its strong performance, Brazil’s large external financing requirements left it vulnerable to a reversal in market confidence, and in December 2003 the IMF approved a 15-month extension and a US$6.7-billion augmentation to Brazil’s September 2002 Stand-By Arrangement. The Brazilian authorities have indicated that they do not intend to draw on the additional funds unless needed for balance of payments purposes. Under the new agreement, the IMF’s exposure to Brazil is expected to decline substantially over time. Economic and financial developments in Turkey, the IMF’s second largest borrower with 25 per cent of credit outstanding, were encouraging in 2003. Real gross national product (GNP) growth is estimated to have reached 5.3 per cent in 2003, above the 5.0-per-cent target in its IMF program. Consumer price inflation declined from 29.7 per cent in December 2002 (year-on-year) to 18.4 per cent in December 2003, the lowest level in more than two decades. The public debt burden declined substantially from 80.0 per cent of GNP in 2002 to 70.6 per cent in 2003, but remains high. Turkey’s current US$16-billion loan program, which was approved in February 2002, is set to expire at the end of 2004. Recent economic developments have been positive in Argentina, the IMF’s third largest borrower with 16 per cent of credit outstanding. The economic recovery was stronger than expected, with real GDP growth estimated at 7.8 per cent in 2003, following an 11-per-cent decline in 2002. Moreover, inflation declined from 41.0 per cent in December 2002 (year-on-year) to 3.7 per cent in December 2003, which is well below the IMF program target rate of 5.5 per cent. The sharp rebound in economic growth boosted tax revenues, which resulted in a primary surplus of 3.0 per cent of GDP in 2003, above the target level of 2.1 per cent. Argentina, however, has made little progress on fulfilling the key conditions of its latest IMF program, which was approved in September 2003. The program is intended to build on the previous eight-month transitional accord, which helped stabilize the economy. Over the period of the new program international financial institutions (IFI) exposure will stay broadly constant. The key terms of the new program include: (i) attaining a debt restructuring agreement with private sector creditors; (ii) banking sector reform; (iii) utility sector reform; and (iv) running a primary surplus sufficient to cover debt service obligations. Emerging markets in East Asia recovered rapidly from the SARS-related downturn in early 2003, and remained the world’s fastest-growing region for the year as a whole. Output growth in the region was supported by positive net trade developments due to increased external demand. Despite strong growth, the Philippines’ outlook was dampened by political turmoil ahead of the May 2004 presidential elections. The government’s deteriorating fiscal position resulted in the peso being Asia’s worst performing currency in 2003. The Philippines has been in an IMF Post-Program Monitoring framework since March 2001.
Efforts to Promote International Financial StabilityImproving Transparency, Accountability and OpennessCanada supports measures to enhance the transparency and accountability of the Fund’s own operations. This reflects the view that the IMF’s effectiveness depends in part on its ability to be transparent and fair in the provision of policy advice to its members, accountable for its advice and lending decisions, and open to external input and dialogue. The IMF has adopted a series of measures in recent years to improve transparency, including guidelines in 2000 under which the Fund now publishes most of its own policy papers and detailed information about its operations and finances. The key initiatives and recent developments include:
The Fund is also working to deepen its understanding of international capital markets and financial flows. In 2001 it established the International Capital Markets Department in order to enhance its ability to identify crises early enough to address them effectively. This new department is also strengthening the Fund’s ability to help countries gain access to international capital markets, an important step in helping the poorest countries make a breakthrough in poverty reduction. The department’s research is summarized quarterly in a new publication, the Global Financial Stability Report. In addition, the Capital Markets Consultative Group was established to promote a better dialogue between member countries and private investors and creditors. With respect to accountability and openness, the IMF has established the Independent Evaluation Office (IEO) to undertake objective assessments of the IMF’s operations, policies and programs. The IEO operates independently of IMF management and at arm’s length from the Fund’s Executive Board.
Strengthening Surveillance and Crisis PreventionMaking Surveillance More EffectiveThrough its surveillance role, the IMF monitors economic and financial developments and policies in member countries and at the global level. Fund surveillance is critical, as it can identify emerging problems and policy imbalances before they become crises. Improved surveillance at the IMF—leading to better information for sound economic analysis, including better pricing of risk, which leads to more stable capital flows—is central to crisis prevention. The IMF completed a comprehensive review of surveillance in 2002. The review noted that in light of large-scale private capital flows, the IMF has shifted the nature and scope of its surveillance. In recent years the IMF has:
At its September 2003 meeting, the IMF’s International Monetary and Financial Committee emphasized the need for the Fund to continue to improve the quality and effectiveness of its surveillance, including by bringing a fresh perspective to its assessments. Canada supports further efforts to strengthen surveillance by encouraging comprehensive and candid analysis of risks and vulnerabilities to improve program design and outcomes. In particular, it supports improving the framework for assessing the debt sustainability of countries to help diagnose potential debt servicing problems earlier. Strengthening Institutional CapacityThe Fund is also working with other members of the international community on initiatives designed to improve the institutional capacity of countries to support strong macroeconomic frameworks and more resilient financial systems. These initiatives, which complement the Fund’s surveillance framework, include work on standards and codes, data provision, strengthening financial sectors, and technical assistance. Implementation and Assessment of International Codes and StandardsTo help improve economic policy making and strengthen the international financial system, the international community has called upon the IMF and other standard-setting agencies to develop standards and codes covering a wide range of economic and financial areas. In this effort, the Fund is responsible for its core areas of expertise. To date the Fund has adopted a data dissemination standard, a code on fiscal transparency and a similar code with respect to monetary and financial policies. Implementation is being encouraged, among other things, through the provision of targeted technical assistance in accordance with countries’ domestic priorities and circumstances. There is a general consensus that the IMF has a key coordinating role in assessing observance of codes and standards through its Reports on the Observance of Standards and Codes (ROSCs), as well as through the joint IMF-World Bank Financial Sector Assessment Program (FSAP). Recent developments regarding FSAPs are covered in the "Joint Issues" section. The Fund has developed a modular approach to ROSCs whereby comprehensive assessments of members’ adherence to a range of internationally recognized standards can be built up over time, standard by standard. ROSCs summarize the extent to which countries observe these standards, focusing primarily on the areas of direct operational concern to the IMF, such as data dissemination and fiscal transparency. ROSC modules for the financial sector are now being derived as a by-product of the FSAP process. Canada was the first country to publicly release as a ROSC the assessment of compliance with international standards conducted during its FSAP. Canada has undertaken ROSCs in the areas of banking and insurance supervision, fiscal policy transparency, monetary and financial policy transparency, payments systems and securities regulation. Additionally, Canada completed a data ROSC in October 2003. Overall, close to half of the IMF’s 184 member countries have completed at least one ROSC module.[2] In 2002, Fitch Ratings reported a significant relationship between publication of ROSCs and changes in sovereign ratings over the previous three years, suggesting a positive impact of compliance with standards and transparency on perceptions of creditworthiness. More generally, a recent IMF staff study found that transparency reforms introduced by the IMF in the late 1990s, such as publication of Article IV reports and ROSCs and compliance with the IMF’s data standard, have created more informed markets and reduced borrowing costs for the emerging market economies that adopted them. Strengthening Financial SectorsThe financial crises experienced by emerging market economies in recent years highlighted the critical importance of concerted action to strengthen the international financial system. In recent years the Fund has developed a comprehensive approach to promoting the stability of members’ domestic financial sectors as an element of efforts to safeguard the stability of the international system (the main developments in this area are covered in the "Joint Issues" section). In addition, the IMF is involved in international efforts on financial abuses that threaten the integrity and stability of the international financial system. In particular, the Fund has:
In November 2002 the Fund:
At its September 2003 meeting, the International Monetary and Financial Committee welcomed the actions taken by the international community to combat money laundering and the financing of terrorism and the progress with the 12-month pilot program of anti-money laundering/combatting the financing of terrorism assessments, and looked forward to a full report at the conclusion of the pilot program. Technical AssistanceIn addition to its policy advice and financing, the IMF provides technical assistance to member countries in its areas of expertise—including macroeconomic policy, monetary and foreign exchange policy and systems, fiscal policy management, external debt and macroeconomic statistics. It has been agreed that technical assistance should play a central role in supporting the work of the IMF in crisis prevention and management, debt relief and poverty reduction, and capacity building in low-income and transition countries. Since the demand for IMF technical assistance normally exceeds the resources available, the IMF takes a number of considerations into account in setting priorities for country requests. Under guidelines approved in 2001, priorities for technical assistance are set in accordance with the IMF’s core areas of specialization, its main program areas and its key policy initiatives, which enables a more systematic alignment of resource commitments with institutional priorities. In recent years the IMF has adopted a regional approach to the delivery of technical assistance and training. The IMF already operates two regional technical assistance centres, in the Pacific and the Caribbean. As part of its new Africa Capacity-Building Initiative, the Fund increased its technical assistance to the African continent while focusing it more squarely on capacity building. Under this Initiative, the IMF is establishing regional African technical assistance centres (AFRITACs) to provide capacity-building assistance through a team of resident experts, supplemented by short-term specialists in the core areas of the IMF’s expertise. The East AFRITAC opened in Tanzania in October 2002 and the West AFRITAC opened in Mali in May 2003. Canada is a major financial contributor to the AFRITAC program. In Afghanistan, the role of the IMF has been to provide policy advice and technical assistance in establishing an overall road map for reforms. The Fund has also provided specialized assistance in areas such as currency conversion, financial sector and tax legislation, and the strengthening of statistical capacity. In Iraq, the Fund has been providing technical expertise to help create a stable macroeconomic environment and rebuild Iraq’s economic and financial infrastructure. The Fund is performing a debt sustainability analysis for the Paris Club of creditors (of which Canada is a member) before it undertakes debt negotiations. The Fund has also established a donor-sponsored Technical Assistance (TA) Subaccount, and is a member of the International Advisory and Monitoring Board, which oversees the work of the auditors of the Development Fund for Iraq. Finally, the Fund has committed to providing between US$2.5 billion and US$4.25 billion in financing over the next three years, as the situation permits. Canada is a key donor in the IMF’s TA Subaccount for Iraq, which is focused on rebuilding the institutional macroeconomic capacity in the country. Enhancing Crisis ResolutionOne of the IMF’s primary goals is to reduce the frequency and severity of international financial crises. Despite its crisis prevention efforts, however, financial crises will still occur. The IMF is therefore engaged in the search for possible reforms to improve its capacity to manage and resolve financial crises. The Fund is focusing on five areas:
Canada welcomes ongoing efforts to advance crisis resolution initiatives, as these efforts will ultimately promote a stronger, more stable and efficient international financial system. Promoting the Adoption of Collective Action ClausesCollective action clauses are an effective crisis prevention and resolution mechanism, as they facilitate more timely, orderly debt restructurings by helping to address the coordination failures among private creditors. The IMF is promoting the inclusion of collective action clauses in international sovereign bond contracts in jurisdictions where they were not yet market standard by holding an active dialogue with emerging market issuers and private sector participants, and by answering questions regarding areas of potential concerns by issuers. Significant progress has been made in this area, with several emerging markets borrowers adopting collective action clauses in theirrecent bond issues. The IMF is doing further work to analyze the design and use of collective action clauses by sovereign bond issuers. Implementing the New Access Policy FrameworkIn addition, the IMF is working with its membership to establish clearer rules for determining exceptional access to its resources (i.e. loans that are larger than what is normally allowed under IMF lending rules) for countries that face financial crisis. Greater clarity will help shape the expectations of members and markets alike, provide a benchmark for decisions regarding program design and access, safeguard the IMF’s resources, and ensure uniformity of treatment of members. In September 2002 the IMF’s Executive Board endorsed the following criteria that would, at a minimum, need to be met to justify exceptional access for member countries facing a capital account crisis:
The Board also expressed support for strengthening procedures for decision making on exceptional access proposals, including:
Canada supports the full implementation of these criteria and procedures, and encourages the IMF to continue to assess whether further refinements are required. Clarifying the Policy on Lending Into ArrearsThe Fund’s arrears policy allows the IMF to "lend into arrears" in cases where a debtor member needs more time to reach agreement on a financial restructuring package with private creditors. That is, the Fund stands ready to provide resources to members that are in arrears to private creditors, when prompt support for the successful implementation of the member’s adjustment program (including appropriate policy reforms) is essential, and the member is making a good faith effort to reach an agreement with its creditors. The Managing Director noted in his report to the International Monetary and Financial Committee in the fall of 2003 that the content and application of this good faith criterion may need to be revised when greater clarity emerges regarding the precise content and comprehensiveness of a code of conduct currently being envisaged (the possible role of a code is outlined below). In particular, the principles contained in the code regarding the compliance mechanisms and the degree of information sharing between a sovereign debtor and its creditors may require that the good faith criterion be reassessed. Strengthening Surveillance ActivitiesThe IMF is strengthening its framework for assessing the ability of countries to carry debt. A strengthened framework should help diagnose potential debt servicing problems earlier and inform the design of economic programs. It is expected that the framework will lead to more credible debt sustainability assessments. Canada strongly supports rigorous debt sustainability analysis to increase the probability of success of Fund programs. This includes testing the robustness of programs to a range of different assumptions about key economic variables such as interest and growth rates. Examining the Legal Framework for Sovereign Debt RestructuringCanada has long been a strong advocate of the need to put in place tools and mechanisms to facilitate the more timely, orderly restructuring of unsustainable sovereign debts. The IMF has an important role to play in this regard, given its position at the centre of the international financial system and, more importantly, its ability to help facilitate a more orderly and cooperative resolution of international payment problems. Canada welcomed the IMF management’s proposal to develop a sovereign debt restructuring mechanism, analogous to domestic bankruptcy regimes. However, at the spring 2003 meeting of the International Monetary and Financial Committee there was insufficient consensus among IMF members to move it forward. The Fund is still conducting work on several important issues raised in these discussions, such as inter-creditor equity, aggregation and the scope of debt. Assessing the Possible Role of a Voluntary Code of ConductEfforts are underway to develop a voluntary code of conduct to guide sovereign debtors and their creditors in the restructuring of sovereign debt. The IMF has conducted some research on the problems associated with the current debt-restructuring framework and areas where a code could help improve the process. The international community, including representatives from both the private sector and emerging markets, has also held discussions on the potential benefits of a code of conduct. Canada supports the work being done to develop a code, provided it includes broad support from emerging market borrowers and their creditors. Improving IMF LendingA major focus recently has been to examine how resources can be used more efficiently to meet the needs of member countries in promoting economic reform. To that end, the IMF has adopted new guidelines on the conditions attached to its loans and streamlined the structure of its lending facilities. Focusing Conditionality and Fostering OwnershipAn important feature of IMF arrangements is the "conditionality" that borrowing countries undertake to correct their underlying balance of payments problems and to restore their ability to repay the Fund. Over time conditionality had broadened in scope and become more complex, leading to concerns about its impact and effectiveness. In the fall of 2002 the IMF approved new guidelines on the design and implementation of conditionality in Fund-supported programs. The new guidelines represent the outcome of a comprehensive review of conditionality that was launched in 2000. The new guidelines, the first revision since 1979, were developed following an extensive process of consultation with the public. The review was undertaken with the aim of streamlining and focusing conditionality so as to enhance the success and effectiveness of Fund-supported programs and promote national ownership of reforms. The new guidelines emphasize the need to focus conditionality on policies that are critical to achieving the macroeconomic objectives of programs. The guidelines are based on several interrelated principles, including national ownership of reform programs, parsimony in the application of program-related conditions, effective coordination with other multilateral institutions, and clarity in the specification of program conditions. Conditions will normally consist of macroeconomic and structural measures that are within the Fund’s core areas of responsibilities. Where structural reforms that are critical to a program’s success lie outside the Fund’s core areas, the Fund should work with the World Bank and other international financial institutions, which have a comparative advantage in the design and monitoring of these measures. A key aspect is that the country should take primary responsibility for its own policies and that conditionality, if well designed and established through a mutually acceptable process led by the member, can strengthen and promote ownership. The IMF has observed that implementation of the new guidelines is leading to changes in the scope and design in Fund programs—structural conditionality is more focused on the Fund’s core areas of competence and the average number of structural conditions has declined. Contingent Credit Lines FacilityAs part of its crisis prevention efforts the IMF established the Contingent Credit Lines facility in 1999 to provide countries with demonstrably sound policies a precautionary line of defence against balance of payments problems that might arise from international financial contagion. However, the facility was not used and the IMF allowed it to expire on its scheduled sunset date of November 30, 2003. Technical issues related to the facility’s design, the strengthening of the international financial system, and the availability of other Fund facilities such as precautionary arrangements (which provide assurances of financing in the event of balance of payments need) discouraged use of the facility. In addition, many emerging market economies took measures to reduce their vulnerability to external shocks through reserve accumulation, the adoption of flexible exchange rates, and other reforms. Improved economic and financial information has also helped financial markets to better differentiate between borrowers, reducing the risk of contagion. Safeguarding IMF ResourcesIn 2000 the Fund adopted a multi-faceted approach to strengthening the safeguards on the use of IMF resources. Central banks of member countries making use of Fund resources will have to publish annual financial statements, independently audited in accordance with internationally accepted audit standards. If vulnerabilities are identified in a country’s ability to manage its resources, including IMF resources, IMF staff will propose remedies, including measures to be implemented before further disbursements of IMF funds. In 2002 the Fund adopted safeguard assessments as a permanent feature of IMF operations. Safeguarding the IMF’s Cooperative NatureThe IMF’s cooperative nature is reflected in its resource base, which is derived primarily from the quota subscriptions of member countries, and the consensus-based nature of its decision-making process. If the Fund is to promote international financial stability effectively, it must have adequate resources and ensure that its quota structure and governance arrangements are representative of the membership. Twelfth General Quota ReviewQuota reviews are held every five years to assess the adequacy of IMF resources. The Twelfth Quota Review was concluded in January 2003, but the broad support necessary for a quota increase did not exist. It was agreed during the Thirteenth Quota Review period to monitor closely and assess the adequacy of Fund resources, to consider measures to achieve a distribution of quotas that reflects developments in the world economy and to consider measures to strengthen the governance of the Fund. The IMF’s Executive Board reported to the International Monetary and Financial Committee in September that the Fund’s liquidity position was adequate; quota-related issues would continue to be considered by the Board, including in the context of regular assessments of the adequacy of Fund resources; and the Board would pursue voice and representation issues on two different tracks—quota-related topics and administrative and capacity-building initiatives. The Board noted the concrete measures the Fund had already taken to address staffing constraints in the offices of Executive Directors with large multi-country constituencies and was considering other steps. The administrative and capacity-building initiatives are covered more extensively in the "Joint Issues" section. IMF Lending CapacityBetter information on the activities of the IMF enhances the transparency and accountability of the institution. To provide a clearer understanding of the amount of its regular financing resources that is available for new lending, in December 2002 the IMF adopted a new method of measuring its liquidity. The new measure—the one-year forward commitment capacity—indicates the amount of quota-based and non-concessional resources available for lending to member countries. The one-year forward capacity reflects the IMF’s stock of usable resources minus undrawn balances for current lending arrangements, plus projected repayments by IMF borrowers over the coming 12 months. A prudential balance—to safeguard the liquidity of creditors’ claims and to take account of a potential erosion of the resource base—is also deducted to arrive at the final forward commitment amount. At the end of 2003 the IMF’s one-year forward commitment capacity amounted to SDR 54.2 billion (US$80 billion).
Strengthening Support for Low-Income CountriesThe IMF is fully committed to supporting low-income members in advancing towards the United Nations Millennium Development Goals through its poverty reduction and debt relief efforts. Canada places a high priority on reducing poverty and ensuring that debt relief does indeed go to the poorest, most heavily indebted countries committed to good governance. Although the World Bank is the central institution for poverty reduction, the IMF plays a role in promoting macroeconomic stability—a key condition for achieving poverty reduction and growth. Direct anti-poverty measures are playing a central role in programs supported by the IMF through its Poverty Reduction and Growth Facility. These programs are consistent with a comprehensive, nationally owned Poverty Reduction Strategy Paper prepared by the borrowing country and are based on a process involving the participation of civil society, NGOs, donors and international institutions. In September 2003 the International Monetary and Financial Committee reiterated the need for the IMF to remain engaged with low-income countries over the longer term through well-targeted technical assistance, capacity building, surveillance and, when warranted, temporary financial assistance. The Committee emphasized the importance of initiatives aimed at ensuring that macroeconomic policy frameworks support higher and sustainable growth and poverty reduction; improving governance and strengthening institutions to support growth and private sector development; reducing vulnerabilities to external shocks; and helping countries move beyond sustained reliance on IMF financial arrangements when ready. In 2004 the Fund will review its role in the low-income countries over the medium term, including an examination of its instruments and financing for these countries. Lending Developments in 2003A core activity of the Fund is to provide short- and medium-term financial assistance to members faced with balance of payments difficulties. The objective is to enable countries facing such difficulties to correct temporary payments imbalances with a minimum of disruption to the international monetary system. The provision of financing from the IMF, as well as the additional financing that an arrangement with the Fund often attracts from other sources, enables countries to undertake smoother economic adjustment. At the end of 2003 the IMF had lending arrangements worth SDR 63.5 billion in place for 57 member countries (see Annex 1). Drawings under lending commitments remained at a very high level in 2003, although decreasing slightly to SDR 21.1 billion. As disbursements continued to exceed repayments, non-concessional credit outstanding rose to a record SDR70 billion in September 2003, before declining to SDR 65 billion by year end. The bulk of the non-concessional lending took place under Stand-By Arrangements and remained concentrated in several members with large balance of payments needs. Brazil and Argentina received the largest disbursements, with some of Brazil’s financed through the Supplemental Reserve Facility, the Fund’s short-term lending facility that addresses crisis situations. The IMF approved 10 new Stand-Bys and one Extended arrangement in 2003. Of the current 17 Stand-Bys, 7 are being treated as precautionary, with borrowers having indicated that they do not intend to draw on the funds committed to them. Table 1
Lending decreased under the IMF’s concessional facility, the Poverty Reduction and Growth Facility (PRGF). About half of PRGF-eligible countries had PRGF arrangements in 2003, with 10 new arrangements approved during the year. No drawings were made under the Compensatory Financing Facility, one of the Fund’s other special-purpose facilities. Managing Canada’s Interests at the IMFThe Minister of Finance is Canada’s Governor at the IMF and is responsible for the management of Canadian interests at the Fund. The Minister exercises influence on IMF issues through Canada’s Executive Director at the Fund’s Executive Board, interventions at the spring and fall meetings of the International Monetary and Financial Committee, his plenary speech at the IMF and World Bank annual meetings, and periodic meetings with the Managing Director of the Fund (the Minister’s speeches are available on the Department of Finance Web site at www.fin.gc.ca). The Governor of the Bank of Canada is Canada’s Alternate Governor of the IMF. The Governor also attends the Fund’s spring and fall meetings. The management of Canada’s interests in the ongoing work of the IMF is the responsibility of the Executive Director, Ian E. Bennett, Canada’s representative on the Executive Board. He is one of 24 Executive Directors. In addition to Canada, he represents 11 other countries (Ireland and 10 Caribbean countries), which form a constituency at the Executive Board. Of the 24 members of the current Executive Board, 12 are from developing or transition countries and 12 from industrialized countries. As the main decision-making body of the Fund, the Board normally meets three times a week. The Department of Finance coordinates Canadian policy advice on IMF issues and Canada’s operational interests in the IMF. The Bank of Canada also provides advice on IMF issues to Canada’s Executive Director. Other involved government organizations include the Department of Foreign Affairs and International Trade and the Canadian International Development Agency. Within the Department of Finance, the International Trade and Finance Branch is responsible for conducting analyses and preparing advice on the policy issues and specific country programs that are brought before the Executive Board. The Department and Canada’s Executive Director’s office also work closely with Canada’s World Bank Executive Director’s office and meet regularly with Canadian NGOs. Parliament is informed of the activities and operations of the Bretton Woods Institutions through the tabling of the annual report on their operations and through appearances of the Canadian Executive Directors and departmental officials before parliamentary committees.
Canada’s Office at the IMFIn addition to the Executive Director, Canada’s office is staffed by two Canadian senior advisors and two advisors, one of which rotates with other members of the constituency. Ireland staffs the Alternate Executive Director’s position and the Caribbean countries staff a third senior advisor’s position. The primary responsibility of the Executive Director’s Office is to represent the interests of Canada and the other members of the constituency at the Fund’s Executive Board. The office participates in the Board’s discussions on a wide variety of policy, operational and administrative matters, including surveillance issues and country assistance requests and reviews.
Canada’s Financial ParticipationCanada’s financial participation in the IMF consists primarily of its quota subscription. Canada’s quota is SDR 6,369.2 million, or about 3 per cent of total quotas. Canada’s quota subscription is a government asset, which is made available to the Fund partly in Canadian dollars and partly in reserve currencies, such as US dollars or SDRs. These latter non-Canadian dollar amounts continue to be part of Canada’s foreign exchange reserves. As an asset, Canada’s quota subscription is not recorded as an expenditure item in the budget of the Canadian government. Only a very small portion of the Canadian dollar part of Canada’s subscription is actually held in cash by the IMF. The balance is held by the Bank of Canada in the form of demand notes, which are available to the Fund in the event it needs to draw upon additional resources. Canada earns interest on its quota subscription when the Canadian dollar is used in Fund lending operations, i.e. is drawn by other member countries. In 2003 Canada received SDR 39.2 million on its net creditor position in the IMF. The net income from Canada’s net creditor position with the Fund is paid into the Government of Canada’s Exchange Fund Account, adding to the foreign exchange reserves. Table 2
At the end of 2003 Canada’s holdings of SDRs amounted to SDR 564.0 million, or 72.4 per cent of Canada’s cumulative allocation of SDRs. In 2003 Canada held SDRs in an amount below its allocation, and so paid net interest of SDR 4.1 million.[3] Last year, in line with earlier commitments, Canada made further contributions to the IMF’s Poverty Reduction and Growth Facility. The facility provides financial support on concessional terms to low-income countries facing protracted balance of payments problems. Canada’s total commitment to the Poverty Reduction and Growth Facility is a loan of SDR 700 million and a grant of approximately SDR 190 million. At the end of 2003 loan payments under these arrangements totalled SDR 638.7 million of the SDR 700 million, and subsidy contributions equalled SDR 182.2 million of the SDR 190 million. In 2003 Canada received SDR 11.3 million in interest earned on loans to the Poverty Reduction and Growth Facility. Further, Canada is a participant in a financing arrangement established to supplement the Fund’s regular resources in the event of financial crises, the New Arrangements to Borrow (NAB), which was not activated in 2003 (see the box on the next page). Canada is also a participant in the General Arrangements to Borrow (GAB), an earlier credit arrangement established by the Group of Ten (G-10). Canada’s GAB commitment is the equivalent of SDR 892.5 million. This line of credit was not used in 2003.
Challenges AheadA key challenge for the Fund is to ensure that it meets the needs of an increasingly integrated global economic system. The evolution of the Fund’s place in the international financial system must continue to reflect changes in the world economy. In particular, there is a need to assess the role of the Fund in a world of large-scale private capital flows. To meet these challenges:
World BankBenefits of Membership to CanadaMembership in the World Bank (the Bank) affords Canada an important voice on key development issues in the world’s premier multilateral development institution. With 184 members, and loans and credits outstanding to 142 developing and transition member countries at the end of fiscal year (FY) 2003[4] totalling US$223.1 billion, the Bank has a far-reaching impact on global development and poverty reduction. It provides policy advice and financial support crucial to improving borrowing members’ longer-term development and poverty reduction prospects. It also assists members by providing concessional assistance and improved access to world financial markets for development purposes. Canada’s capital share of about 3 per cent gives it a seat on the Bank’s Executive Board and on the Development Committee of the Boards of Governors of the Bank and the IMF. Canada has the opportunity at the Executive Board, in dialogue with Bank staff, and at the annual meetings of the Board of Governors (and the Development Committee) to provide direct input into the formulation of Bank policies and operational decisions. Canada and other shareholders help to guide the Bank in improving developing countries’ economic, social and environmental performance. Through its engagement with the Bank, Canada’s influence in developing countries can be leveraged beyond what can be achieved through bilateral programs. For example, Canada has played a leading role in the Bank’s discussion of the implementation of the heavily indebted poor country debt relief initiative, in shaping the institution’s response to post-conflict countries, and in its efforts to assist developing countries combat terrorist financing and money laundering. Bank membership also provides the Canadian government with access to the institution’s research and policy work, which enriches our own understanding of international development. The Canadian International Development Agency (CIDA), for example, is able to draw on Bank analytic and technical expertise in order to gain a more comprehensive understanding of the social and economic policy environments that are conducive to effective aid delivery. CIDA is also able to leverage its own resources with those of the Bank through participation in a growing number of partnerships with, and in global programs led by, the Bank. Finally, Canada’s membership allows Canadian companies and individuals substantial procurement opportunities—in 2003 they provided goods and services worth US$139 million under Bank-financed contracts. Overview of Operations in 2003In FY 2003 the Bank committed loans and credits of US$18.5 billion to 88 developing and transition countries (see Annex 2). The International Bank for Reconstruction and Development (IBRD) committed US$11.2 billion in new loans in FY 2003, or roughly US$300 million less than in FY 2002. The Bank provided concessional lending through the International Development Association (IDA) valued at US$7.3 billion in FY 2003, down slightly from the US$8 billion recorded in FY 2002. Geographic and Sectoral Focus of LendingReflecting significant adjustment lending to large South American emerging market borrowers, new IBRD lending commitments in FY 2003 were highest in the Latin America and Caribbean region, which accounted for 50 per cent of all IBRD lending. The Europe and Central Asia region saw the next highest lending share at 19 per cent, followed by the East Asia and Pacific region at 16 per cent, the Middle East and North Africa region at 8 per cent and the South Asian region at 7 per cent. Given its non-concessional lending terms, the IBRD is not a major lender to African countries In FY 2003, at 51 per cent, Africa accounted for the largest share of IDA lending and exceeded IDA’s indicative target of having 50 per cent of its operations oriented to this continent. South Asia accounted for 29 per cent of IDA commitments and the East Asia/Pacific region and Europe/Central Asia region accounted for 7 per cent and 8 per cent respectively. The Bank’s strong commitment to investing in people is reflected in the sectoral breakdown of both IBRD and IDA lending operations. Support for social sector investments, in particular, remains a high priority. The areas of social protection, social development and human development accounted for 43 per cent of total World Bank commitments in FY 2003. The largest increases in sector lending over FY 2002 were in the education, health and other social services, and water, sanitation and flood protection sectors. Each of these sectors is a key element to reducing poverty and meeting Millennium Development Goal targets (see box on page 33). Approximately 38 per cent of IBRD commitments and 41 per cent of IDA commitments supported these three sectors. Non-Lending OperationsIn FY 2003 the Bank continued its strong focus on non-lending services in order to enhance the developmental effectiveness of its operations. The Bank provides a wide range of advisory, analytical, training and knowledge-related services in support of building domestic capacities. Through its non-lending activities, the Bank provides valuable policy advice that can bolster the effectiveness of its investment and adjustment lending.
Strengthening the World Bank’s Poverty Reduction FocusFocusing Operations on the Millennium Development GoalsThe recognition that the Millennium Development Goals (MDGs) can be achieved only through empowerment of the poor underpins the Bank’s approaches to countries and sectors. The MDGs now form the cornerstone of the Bank’s strategic planning and operational priority setting. The Bank is also working closely with the United Nations system and the Organisation for Economic Co-operation and Development in strengthening international monitoring of the progress being made towards achieving the MDGs. A key task for the Bank in this exercise will be to develop a framework for benchmarking performance among both developing countries and donor agencies. The Bank, together with the IMF and the UN system, is strengthening its country and thematic databases. Publicly available data will be posted on the Development Gateway (www.developmentgateway.org). As national capacity in gathering and assessing statistics is critical to efforts for monitoring progress towards the MDGs, in 2003 the Bank increased its focus on assisting developing countries develop their national statistical capacity.
The Bank is also working in partnership with developing countries, other aid agencies and civil society more directly to design and implement initiatives to support developing countries in their efforts to reach specific MDGs. These efforts include "fast-track" initiatives that will target Bank and donor resources on countries demonstrating strong commitment to improving social sectorprograms. Economic Prospects for Developing CountriesReal GDP in developing countries is estimated to have grown by 4.0 per cent in 2003, up from 2.8 per cent in 2002. Growth is projected to increase further in 2004 given the expected improvement in external demand in developed countries. Economic prospects, however, vary substantially both across and within regions. While growth is still low relative to other areas of the developing world, Latin America showed increasing evidence of a recovery during 2003. Real GDP growth throughout the region is estimated at 1.8 per cent in 2003, up from a 0.8-per-cent decline in 2002. The upturn has been mainly driven by renewed confidence in Brazil and a strong rebound in Argentina. These favourable developments in the region were partly offset by a 10.3-per-cent decline in real GDP in Venezuela, where the unresolved political crisis has had a major impact on economic activity. Latin America continued to be a major focus of World Bank operations in FY 2003. The World Bank committed US$1.2 billion in loans to the Brazilian government to support its financial sector and human development reform programs. Argentina received US$1.1 billion in FY 2003 to support the government’s efforts to restore economic growth. The focus of the Bank’s lending to Argentina is on reinforcing social programs to mitigate the adverse effects of the current financial crisis on the country’s poor. Recovering rapidly from the SARS-related downturn in early 2003, East Asia remained the world’s fastest-growing region for the year as a whole. Growth in the region was largely boosted by real GDP growth of 9.1 per cent in China. The World Bank provided substantial financing to China in FY 2003, with loans totalling US$1.1 billion on six different projects. In South Asia, a return to trend in agricultural production and a recovery in external demand led to an acceleration of growth in 2003. Reaping the benefits of last year’s good rainfall on agricultural production, India was one of the fastest-growing economies in the world, registering a growth rate above the government’s 8.0-per-cent target in 2003. As of June 2003, India was the largest single cumulative recipient of World Bank assistance, with lending totalling over US$59 billion. In FY 2003, the World Bank committed US$1.5 billion to develop income opportunities for the rural poor and support infrastructure development to promote private-sector-led growth. In Africa, subdued global economic growth, together with recurring civil strife, drought and the HIV/AIDS pandemic, continued to hamper real growth in 2003. Import demand from Europe, the region’s main trading partner, was particularly weak. Although most dollar-denominated commodity prices rebounded from recent lows, terms of trade of non-oil exporters have recovered little of their losses of the past few years. The World Bank committed more than US$3.7 billion in 27 African countries in FY 2003. The main priorities of the World Bank’s work in Africa are to tackle the HIV/AIDS pandemic, spur private sector development, help countries recover from conflict, and help create and share knowledge. Stronger Focus on Country OwnershipThe Bank continues to base its operations on the principles of country ownership that underpin the Comprehensive Development Framework (CDF).[5] Under the broad CDF approach, "homegrown" Poverty Reduction Strategy Papers (PRSPs)[6] are being developed by an increasing number of poor countries as the driver of their national development plans and poverty reduction policies. Increasingly, PRSPs are also driving operations of the Bank and Fund in the poorest countries. PRSPs are a continuous and evolving process, and many developing country governments have relied on extensive Bank support in this initial stage of design and implementation. In early 2002 the World Bank and IMF undertook a comprehensive review of the PRSP process. Results show that PRSPs are becoming a valuable tool for enhancing development outcomes. However, it is also clear that more attention needs to be paid to implementation challenges and to addressing bottlenecks in the process. These challenges include enhancing stakeholder participation; improving the link between PRSPs and national budgets and policy-making processes; and improving the coordination and harmonization of donor support. Adjustment LendingOne of the consequences of the shift in Bank operations to support country-owned development and poverty reduction strategies has been a high level of adjustment lending in overall Bank financing. Adjustment loans are used to support sector-wide reforms and restructuring. Since the early 1990s the share of adjustment lending in overall Bank lending has consistently been above the 25-per-cent notional level established by the Executive Board. In years when the Bank has been active in supporting major borrowers that are experiencing severe financial difficulties, adjustment lending is especially high. Adjustment operations accounted for 33 per cent of overall World Bank lending in FY 2003, compared to 50 per cent in FY 2002. This represents a return to previous levels of adjustment lending after a high volume of these loans in FY 2002. Poverty Reduction Support Credits (PRSCs), introduced in May 2001, represent a new type of adjustment operation that provides budgetary financing in support of the implementation of PRSPs. PRSCs ease administrative burdens on borrowers and encourage harmonization of donor practices. PRSCs are used in cases where clients have transparent budgetary and fiduciary processes and strong PRSPs in place. PRSCs have been approved for a number of developing countries. Adjustment lending is also often used to provide support to middle-income and emerging market economies that are experiencing acute financial problems. In FY 2003 the region encompassing Latin America and the Caribbean received 60 per cent of total adjustment-lending commitments, the largest regional share by a significant margin. Adjustment lending has been higher in the case of the IBRD than of IDA. In FY 2003, 37 per cent of IBRD commitments were in the form of adjustment loans, compared to 25 per cent for IDA. Monitoring and EvaluationThe Bank continues to adjust its system of project monitoring and evaluation. Many of the problems stem from both limited borrower capacity and a lack of incentives and guidelines for Bank staff. At Development Committee and other international meetings, Ministers have highlighted the importance of an enhanced focus on results in helping both developing countries and donors design and implement poverty reduction strategies. In response, Bank management has embarked on a process of developing a more comprehensive approach to measuring and monitoring development results. The Bank’s approach is focused both on tying its own performance benchmarks more closely with the development priorities of individual PRSPs and on increasing Bank support for statistical and public sector institutional capacity within developing countries. By the end of 2003, the Bank had launched a number of "results-based" Country Assistance Strategy (CAS) pilots. An assessment of the lessons learned from these pilots is underway and the results will inform how to mainstream results into all CASs going forward. Assessing PovertyTo ensure that poverty reduction remains at the heart of the institution’s operations, the Bank’s Poverty Reduction and Economic Management Network (PREM) undertakes country-specific poverty assessments and advises Bank country teams on the poverty reduction impacts of emerging policies, programs and individual projects. PREM has concluded country poverty assessments that cover a large majority of the world’s poor. The quality of poverty data, however, is uneven, and PREM continues to work to improve the consistency of its assessments.
The IDA13 Replenishment—Enhancing Support for Country OwnershipIn July 2002, 39 donor governments concluded negotiations on the 13th replenishment of the International Development Association (IDA13). Their report was endorsed by Bank Governors at the institution’s annual meeting in September 2002. The IDA13 period runs from July 2002 to June 2005. The IDA Deputies’ Report, which serves as the IDA13 policy framework, is available on the Bank’s Web site at http://siteresources.worldbank.org/IDA/Resources/FinaltextIDA13Report.pdf. Donors agreed to a total IDA13 replenishment of SDR 18 billion (roughly equivalent to US$23 billion). Donors will provide about 60 per cent of this amount. The remainder will be funded from repayment flows on outstanding IDA loans and net income transfers from the IBRD. Canada agreed to maintain its 3.75-per-cent donor share during the IDA13 period, which equates to C$690.4 million. This amount will be paid in three equal annual installments over the 2003–2005 period. This contribution makes Canada the seventh largest IDA donor. In terms of operational priorities, IDA donors and Bank management agreed that IDA will link its operations more closely to country-owned poverty reduction strategies. Within the framework of support for PRSPs, donors have stressed the need for IDA to invest in people, especially through education, health and basic infrastructure, and by strengthening public sector management. They reiterated the IDA12 objective of having Africa account for half of IDA allocations. Donors also agreed to a key innovation in IDA financing. During the IDA13 period, IDA for the first time is able to provide substantial grants, as opposed to interest-free loans, for certain specific purposes. After a series of difficult negotiations, in which Canada played a strong mediating role, donors agreed that IDA could provide grants in the range of 18 to 21 per cent of total IDA13 financing. Within the overall grants level of 18 to 21 per cent of IDA13 financing, donors have suggested that grants be directed at: 1. support for post-conflict countries (up to 100 per cent grants for this type of operation); 2. support for reconstruction following natural disasters (up to 100 per cent grants for this type of operation); 3. support for HIV/AIDS programs in all IDA countries (up to 100 per cent grants for the poorest, IDA-only clients and up to 25 per cent grants for richer, IDA-blend clients);[7] 4. support for IDA clients with per capita incomes under US$360 that are vulnerable to longer-term debt sustainability problems (up to 40 per cent grants for operations in these countries); and 5. support for other IDA clients with per capita incomes under US$360 (up to 23 per cent grants for operations in these countries). At the insistence of IDA donors, management has agreed to focus more heavily on measuring the development results of IDA operations. During the IDA13 period, management will develop specific outcome-based benchmarks for assessing the effectiveness of IDA assistance. IDA donors also urged IDA to be more selective in its operations and to work closely with other development partners, on the basis of comparative advantage. They reaffirmed the importance of IDA’s performance-based allocation mechanism, and especially the high weight it assigns governance. They also requested that management assess the impact of this allocation mechanism on poverty levels. At the same time, they recommended that IDA show greater flexibility with respect to allocations to post-conflict countries where there has been little opportunity to establish policy track records. Negotiations on the volume of financing and operational priorities for the 14th replenishment of IDA began in February 2004 and are expected to conclude by the end of the year. The 14th replenishment period will run from July 2005 to June 2008.
Canada’s Priorities at the World BankCanada’s positions are based on our international development goals and foreign policy priorities and on our strong interest in maintaining the financial integrity of the World Bank and its operations. Poverty Reduction and Human DevelopmentCanada has long been a key player in international efforts to assist the poorest and strongly supports poverty reduction as the overarching objective of the World Bank. As such, Canada endorses the Poverty Reduction Strategy Paper process, under which developing country governments develop and implement broad-based poverty reduction strategies in partnership with the donor community. The Bank has increasingly recognized that poverty reduction cannot be addressed in isolation. Private sector development, good governance, strengthening public expenditure management and the monitoring of non-productive expenditures (especially military), external debt and environmental sustainability are just a few of the factors that need to be considered in designing strategies to help improve the living standards of the poor. In the case of small states, the Bank has to take into account additional factors of economic and physical vulnerability and limited capacity. Canada strongly supports the Bank’s efforts to increase the prominence of social sector issues in macroeconomic stabilization programs. Good macroeconomic policy is key to boosting growth and reducing poverty. At the same time, adequate attention to social issues must be an essential part of macroeconomic stabilization and sustainable development goals. In 2003 the Bank’ s Executive Board approved an Infrastructure Action Plan to revitalize the Bank’s work in this area. The action plan signals management’s commitment to infrastructure and the recognition that intensified engagement in infrastructure is essential to begin to address the vast unmet needs for infrastructure service delivery. Infrastructure service delivery is a key to economic growth and poverty reduction, as well as the Millennium Development Goals. The Infrastructure Action Plan will guide the Bank Group’s infrastructure business for the next two to three years. Responding to recent trends—notably the decline in private investment in infrastructure in developing countries—requires further evolution of the Bank Group’s business model. The overarching premise will be to ensure efficient, affordable and sustainable delivery of infrastructure services by leveraging funds from the entire spectrum of public and private sources, supported by IBRD, IDA, IFC and MIGA products.
EducationCanada considers education to be a critical factor in development and strongly supports recent efforts by the Bank to increase support to this sector. Commitments to education in FY 2003 amounted to US$2.3 billion, up from US$1.4 billion in FY 2002, an increase of 70 per cent. The Bank also provides important non-lending support for education through its analytic and policy advisory work. The Bank has also focused heavily on girls’ education. Guinea provides a good example of the progress that can be made. With the support of Bank financing, Guinea has been able to expand girls’ enrolment in primary school by 12 per cent annually since 1991. This was achieved despite a very weak macroeconomic environment. Canada has worked in collaboration with the Bank and other agencies in support of the Education for All (EFA) Initiative. The Minister of Finance reinforced Canada’s support for EFA in statements to the World Bank-IMF Development Committee. Canada strongly supports the Bank’s efforts to develop a "fast-track" initiative to assist countries with good education strategies. The fast-track initiative (FTI) was developed by the Bank, in close cooperation with a special G-8 Education Task Force, and it was endorsed by Development Committee members in April 2002. Bilateral donors have pledged US$200 million in support for primary education for the 2003–2005 period. This additional aid will be directed to 10 FTI countries, including Burkina Faso, Gambia, Guinea, Guyana, Honduras, Mauritania, Mozambique, Nicaragua, Niger and the Republic of Yemen. To date, Canada has pledged C$135 million from 2003–2008 for FTI proposals from Tanzania, Mozambique and Honduras, over and above current commitments. Development EffectivenessEnsuring the effectiveness of the Bank’s operations has long been a key Canadian objective. This entails more than just reducing costs and saving money. Effectiveness requires selectivity, clear priority setting and efficient service delivery. The Bank needs to operate in those areas where its assistance can be productively used and where it has a clear comparative advantage. The Bank is exercising greater selectivity by focusing on reforming states and good performers. In the case of IDA credits, allocations are based on performance criteria. In order to monitor country performances in a meaningful manner, the Bank is focusing on incorporating poverty-related outcome indicators to measure real results, including such indicators as child malnutrition and child and maternal mortality. The Bank continues to strengthen its efforts to improve development effectiveness through a renewed emphasis on the quality of its project portfolio. More vigilance is now exercised at the project preparation and supervision stages, and this has led to an improvement in the number of projects that are meeting their development objectives. For FY 2003 the Operations Evaluation Department (OED) estimated that 83 per cent of Bank projects had satisfactory ratings in terms of meeting their development objectives. This represents a steady increase since 1997, when only 73 per cent of projects were rated satisfactory. Recent OED evaluations point to a particular improvement in the performance of projects in Africa, following a determined effort by Bank management to improve project management. Coordination and harmonization of programs is another critical element ofeffective development assistance. The World Bank, together with othermultilateral development banks and the Organisation for Economic Co-operation and Development/Development Assistance Committee, co-sponsored an international forum on harmonization in February 2003. Thebulk of the international donor community, as well as 30 developing nations, participated in the forum to produce the Rome Declaration on Harmonization. The Declaration sets out an ambitious program of activities to ensure that harmonization efforts are adapted to the country context and that donor assistance is aligned with the recipient’s priorities. The Declaration also promotes country-led efforts to streamline donor procedures and practices, and urges the adoption of policies, procedures and practices to ease harmonization. The harmonization focus has now shifted to in-country implementation. Fourteen countries have stepped forward to initiate harmonization efforts to join three pilot projects supported by the Bank. Gender IssuesCanada actively promotes gender issues as a priority for World Bank operations. World Bank lending in almost all sectors includes activities that specifically benefit women and girls. Following a review of its gender strategy, management committed to integrate gender issues into Bank Country Assistance Strategies and to work with developing countries and external partners to identify appropriate strategies to promote gender equality. In 2001 the Bank published a major policy research report, Engendering Development—Through Gender Equality in Rights, Resources, and Voice. The report, which informs the Bank’s gender strategy, concluded that there is strong empirical evidence that gender inequalities tend to slow development, while gender equality helps to lower infant mortality, improve nutrition, and lower fertility and HIV/AIDS transmission rates. CIDA continues to work closely with the Bank to improve the Bank’s capacity in gender equity issues. To expand the exchange of knowledge with its development partners, the Bank provides a number of statistical indicators on gender on its Web site. Private Sector DevelopmentThe private sector plays an important role in virtually all development challenges, from protecting the environment to assisting in privatization in transition economies. Canada has maintained that the Bank Group’s fundamental priority for private sector development is to create an enabling environment for investment and sound regulatory frameworks for the private sector to develop in a sustainable fashion. In 2001 the Bank Group began consultations with governments, the private sector, NGOs and multilateral agencies on a private sector development strategy. Based on this consultative process, the Bank Group’s Private Sector Development Strategy was formally endorsed by Executive Directors in February 2002. The strategy relates to two broad themes: extending the reach of markets and improving the delivery of basic services. The key elements of the strategy include fostering a sound investment climate; providing direct support for private firms; supporting private participation in infrastructure; increasing the role of the private sector in assisting public sector efforts to achieve universal and affordable access to social services; and creating a new approach to more effectively target subsidies to the poor to improve service delivery. Canada has encouraged this increasingly coordinated approach to private sector development. In 2003 the Bank published a report on regulatory environments in its member countries. Entitled Doing Business in 2004, the report will become an annual exercise. The project aims to motivate reforms through country benchmarking. The World Bank reports that this practice has been a powerful motivator for mobilizing society to demand improved public services, enhance political accountability and encourage better economic policy. In addition, this report has the objective of informing the design of reforms. Incidentally, this report rates Canada very favourably, in all categories, as a place to establish and conduct a business. In FY 2003 the IBRD and IDA together committed US$2,958 million in lending in support of financial and private sector development. An important example of the private sector’s role in development is the growing impact of microfinance operations (relatively small loans made to the poor by grassroots organizations such as the Grameen Bank in Bangladesh). With a small investment, these organizations have been successful in improving the living conditions of the poor—particularly women—in developing countries. Evidence from these operations is compelling; it shows that the poor can be very good entrepreneurs as well as very good credit risks. The Consultative Group to Assist the Poorest (CGAP), which includes the Bank, Canada, 25 other multilateral and bilateral donors and two private organizations, was established in 1995 to support the development and expansion of sustainable institutions that provide microfinancing services to the poor. In September 2002, CGAP members renewed the Group’s mandate for a third term (from 2003 to 2008).
Good Governance and Anti-CorruptionCanada is an advocate of strong Bank support for improved public and corporate sector governance. Over the past decade governance has been mainstreamed into the Bank’s adjustment and investment lending, and more recently into its country analytical work. The Bank’s governance strategy, Reforming Public Institutions and Strengthening Governance, stresses the need for the Bank to strengthen its tools for evaluating the quality of a country’s institutions and for assessing a country’s readiness to initiate specific governance reforms. The Bank’s Public Expenditure Reviews and Financial Accountability Assessments in individual countries will focus increasingly on institutions responsible for budget decision making and implementation, while the more recently introduced Institutional and Governance Reviews will facilitate institutional analysis in other areas of public sector reform. In FY 2003 the Bank produced over 150 separate reviews, studies and analytical products in support of these reforms. This constitutes nearly one-fifth of the Bank’s "knowledge" products. Since 1997 anti-corruption activities have been integral components of the Bank’s public sector management portfolio. The Bank has mainstreamed anti-corruption issues into its Country Assistance Strategies. The Bank has amended its procurement guidelines to strengthen the procedures for disqualifying bidders, temporarily or permanently, from future Bank-financed projects if it finds evidence of fraud or corruption. Since the inception of its anti-corruption policy, the Bank has debarred 134 firms or individuals from receiving Bank contracts because of their involvement in corruption or the misuse of Bank funds. In FY 2003, 56 companies or individuals were debarred from benefiting from contracts under World Bank-financed projects. In addition, the Bank issued five letters of reprimand to companies or individuals doing business under Bank-financed contracts. For many of the world’s poorest countries, where governance problems remain endemic, bilateral development cooperation agencies have been reducing aid flows. Moreover, IDA’s performance-based allocations also reduce World Bank concessional financing to these countries. Many of these countries, increasingly referred to as Low-Income Countries Under Stress (LICUS), are becoming marginalized from development assistance programming. Recognizing that engagement with the international community can promote reform, following a review of the Bank’s LICUS strategy, Executive Directors approved the establishment of a special LICUS Implementation Trust Fund in January 2004 that will be used to finance small demonstration projects aimed at improving governance and at strengthening institutional capacity. In March 2004 World Bank Governors approved the transfer of US$25 million from the Bank’s surplus account to the LICUS Implementation Trust Fund. In cases where LICUS government structures are particularly weak, Trust Fund financing will be delivered through NGOs. In its efforts to promote better governance practices, the World Bank Institute has established close working relations with the Parliamentary Centre in Canada and with international organizations. Environmentally Sustainable DevelopmentThe Canadian government, alongside Canadian civil society, has long been a vocal advocate of the need for the Bank to better integrate environmental considerations into its operations. Along with gender, this is an area that could be more strongly emphasized in Country Assistance Strategies and World Bank assessments of PRSPs. The Bank has estimated the economic costs of environmental degradation in many developing countries to be, on average, in the range of 4 to 8 per cent of GDP. Under its environmental strategy, the Bank is moving to improve its environmental safeguard system and to mainstream environmental policies and issues into its loan and policy dialogue work. The Bank also works closely with clients to help them introduce and implement their own environmental safeguard systems to help them manage their resources more sustainably. While the Bank is mainstreaming environmental considerations into the broad range of its operations, the number of direct environmental investments it supports varies from year to year. In FY 2003 the share of overall Bank lending directed to environmental and natural resource management increased to 6 per cent from 5 per cent in FY 2002.
The Bank has been particularly active in the area of climate change. As an implementing agency of the Montreal Protocol’s Multilateral Fund, the Bank supports projects in 18 countries and has committed US$479 million in financing since 1991 for some 785 projects to assist enterprises in developing countries convert to ozone-friendly technologies. Many developing countries face daunting water resource challenges as the needs for water supply, irrigation and hydroelectricity grow. As a consequence, there is a high and increasing demand for World Bank engagement. Accordingly, the Bank articulated its strategic directions for the water sector in a paper published in February 2003. As a result of this strategy, Bank investment in the Water, Sanitation and Flood Protection sector more than doubled in FY 2003 to 7 per cent of overall lending from 3 per cent in 2002. Overall, lending for water resources development and water-related services accounted for 16 per cent of World Bank lending over the past decade. Together with the United Nations Development Programme and United Nations Environment Programme, the Bank is an implementing agency of the Global Environment Facility (GEF). Through the GEF, the Bank supports projects in four key areas: climate change, biodiversity conservation, phase-out of ozone-depleting substances and protection of international waters. The World Bank has co-financed US$175.9 million worth of GEFprojects. The World Bank continues to strengthen its approach to ensuring sustainable development. Safeguard policies are a subset of World Bank operational policies that require that potentially adverse environmental and social impacts of Bank investment projects should be identified, avoided or minimized where feasible, and mitigated and monitored. Bank management first articulated the concept of safeguard policies in 1997 to stress the importance of this specific set of operational policies for achieving its environmental and social objectives and enhancing the quality of its operations. 2003 saw a strengthening in the implementation of safeguard polices. For example, 83 per cent of the new investment lending (in volume) has been submitted to varying levels of environmental assessment. In addition, disclosure of safeguard documents has increased now that the application of the Policy on Disclosure of Information is fully mainstreamed. The higher number of projects subject to environmental scrutiny, and the larger number of documents disclosed, reflect the increased mainstreaming of environmental and social concerns in the Bank’s lending portfolio.
Trade and DevelopmentCanada recognizes that the capacity of small nations, emerging economies and other developing countries to participate effectively in the global trading system is an important component of a comprehensive approach to growth and poverty reduction. Canada has stressed the need to incorporate trade sector capacity building in Bank Country Assistance Strategies and nationally developed Poverty Reduction Strategy Papers. The objectives of the Bank’s work in the trade area cover three distinct but complementary areas:
The failure of Ministers to reach an agreement at the World Trade Organization Cancun Ministerial in September 2003 presented a daunting challenge to the international trading system. In the wake of this failure, the World Bank pledged to continue aiding developing countries to increase their capacity to participate in world trade. Such assistance will finance government trade reform programs, including income maintenance, worker retraining, investments in ports and roads, and reform of trade-related institutions. As theDoha agreement begins to take shape, the Bank will work with countries to quantify ways they might be affected individually, and help tailor reform programs to their needs if requested. The Bank will also continue to play a strong advocacy role for developing countries on trade issues. In addition, the Bank is working with five other institutions in the context of the Integrated Framework for Trade-Related Technical Assistance (IF).[8] The IF has evolved into an important vehicle for mainstreaming trade issues into least developed country development strategies in a coordinated fashion, with the World Bank playing the role of lead institution. The Bank’s intellectual and financial commitment to this project is critical to the success of the IF in both the short and long term. Canada is a strong supporter of the IF and, in addition to providing policy advice, contributed C$1 million to the IF Trust Fund. Canada is also one of two donor representatives on the IF Working Group and as such is a full partner with the six agencies in setting future directions for the IF. Transparency and AccountabilityRecognizing that transparency and accountability are fundamental to ensuring the longer-term sustainability of the Bank Group’s operations and that the "demonstration effect" of the Bank’s own policies is important for developing country governments, Canada has been a major proponent of increased openness at the Bank. Canada and other donors have pushed the Bank and borrowing countries to improve consultations with local people—civil society organizations (CSOs) and NGOs—in borrowing countries, not only in the design and implementation of projects but also in the preparation of key policy documents, such as Country Assistance Strategies. The Bank has responded to concerns from shareholders by making public a growing number of documents. Following extensive Bank consultations with governments, civil society, the private sector and the media, the Bank’s revised disclosure policy came into effect in January 2002. Under this policy, the Bank now discloses to the public:
Substantial headway was made during the 13th IDA replenishment negotiations in expanding transparency and policy dialogue with borrowers and civil society. For the first time six representatives of IDA borrowers participated in formal discussions of the IDA policy framework. IDA donors also decided to release all of their background policy discussion papers to the public in draft form and took the unprecedented step of seeking public comment on their draft report, which defines the IDA13 policy framework. Discussions are underway amongst Bank shareholders on a timetable for the publication of individual country ratings under the annual IDA exercise to assess economic, social and governance indicators of IDA countries. It is anticipated that these country ratings will be released to the public at the outset of the IDA14 replenishment period in 2005. Transparency also requires better consultation with those affected by projects that the Bank supports. Under President James Wolfensohn, the Bank was the first multilateral organization to establish an independent panel to consider outside complaints. Any group that may be affected by a Bank-supported project has the right to request that the panel investigate whether the Bank has abided by its policies and procedures. Canada has been one of the major supporters of the work of the Inspection Panel. In 2003 the Inspection Panel received one new request for inspection relating to the Manila Second Sewerage Project in the Philippines. The requesters claim to be adversely affected by one component of the Manila Sewerage Project. The claimants allege that, in accordance with World Bank policy, "key questions raised by various sectors that would be potentially affected by the project have not been adequately addressed." On this issue, the committee was unable to make any recommendation due to the failure of the claimants to follow the correct procedure, whereby they first bring the problem to management’s attention and give management an opportunity to adequately respond to the complaint. The Bank engages with civil society across a broad range of activities, including providing input for poverty assessments, national environmental action plans and other key Bank analytical tools. Particular emphasis has been placed on expanding partnerships with outside groups as more Bank operations are framed in the context of Poverty Reduction Strategy Papers, which embody participatory approaches at the macro level. CSO and NGO representatives from developing countries are now consulted regularly in the preparation of Bank Country Assistance Strategies. Information on the participation of CSOs and NGOs is now included in Bank project appraisal documents. The NGO-World Bank Committee, a formal mechanism for policy dialogue established in 1982, has evolved into the World Bank-Civil Society Thematic Forum, which will convene a broader range of CSOs, including representatives from NGOs, trade unions, community organizations, small farmers’ groups, religious institutions and women’s organizations. Within Canada NGOs have participated in a regular series of government meetings and conferences on such issues as multilateral debt, the environment, IDA and Africa. The Canadian government has benefited greatly from the expertise and advice offered by Canadian NGOs on a broad range of development issues. Through this collaborative process, the views of Canadian NGOs have helped shape Canada’s position in Bank project and policy discussions. - Table of Contents - Next - |
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