Third High-Level Forum on Aid Effectiveness Accra, Ghana September 2-4, 2008 Statement by Mr. Murilo Portugal Deputy Managing Director International Monetary Fund

Introduction
1. We are now at the midpoint to the 2010 target date for implementing the Paris Declaration, and also at the halfway point toward reaching the Millennium Development Goals (MDGs) in 2015. This Forum is therefore an opportune occasion to reconfirm our commitments made in Monterrey and Paris to improve the effectiveness of aid; to assess progress to date and identify areas that need more effort. Above all, it is an opportunity to take the political decisions that are needed to accelerate progress toward these objectives.

2. This is not an easy task. The development community accepts the need to improve the effectiveness of aid, and has agreed on how this can be done. But the experience of the past three years has shown how difficult it is to bring about all the necessary changes to processes, preferences, and priorities of both donors and aid recipients that have existed for decades.

3. We have made some progress since Paris, mostly on technical procedures. It is less than expected, but it provides a solid foundation to accelerate the pace of improvement. Thus, the challenge of Accra is to go beyond the technical preparations and decisions to the political commitments that are needed to overcome the remaining obstacles and ensure that the goals we set for ourselves 3 years ago can be achieved. Importance of the Paris Declaration

4. The Monterrey Consensus established improved aid effectiveness as one of the pillars of the new paradigm of development assistance. Demonstrating the effectiveness of aid helps to justify the scaling up of assistance-it is thus essential to the achievement of the MDGs. The Paris Declaration established the standards and good practice principles to which both parties to the aid relationship should be held, as well as a blueprint for improvement, with concrete and measurable targets. Because of its practical approach, reflecting past experience and a joint analysis of existing problems, the Paris Declaration has gained currency across a broad range of recipient countries, donor countries, and institutions that goes well beyond the relatively small group that started the process in 2002.

5. In the three years since its adoption, the Paris Declaration has cemented , country ownership and leadership of the development effort at the heart of all aid relationships. Recognizing that development cannot be imposed, but only facilitated, motivates efforts to align donor support behind partner country , priorities and programs. The Paris Declaration is the organizing framework for efforts to coordinate, simplify, and harmonize donor interventions in-country. It has led to the establishment of harmonization action plans by partner countries and donors alike that are intended to translate these principles into practice. It has encouraged donors to delegate authority to field offices, to form joint donor/government coordination groups and formal partnership frameworks. It has focused attention on the consequences of bypassing country systems and underscored the need for joint and shared analysis of the weaknesses of those systems, as well as coordinated support to strengthen them. And it has sparked reconsideration of a broader range of issues, notably, how aid decisions can most appropriately be linked to results and how mutual accountability between donor and recipient, and among the different stakeholder groups, should underpin development relationships.

6. All this being said, the pace of implementation remains too slow. Aid recipient countries still have not sufficiently asserted their ownership and leadership. Many of them still lack the well articulated, prioritized and costed strategies that would provide the foundation for donor alignment. Accountability relationships are still skewed toward the external partners, rather than the internal constituencies, allowing donors to push through their preferences often at the expense of supporting the recipient's priorities. In many cases, country systems are still weak enough to justify donors' reluctance to use them. Bureaucratic inertia, lack of appropriate incentives, and failure to change internal procedures or fiduciary requirements lead to excessive insistence on individual donor reports and analysis. This prevents donors from achieving faster progress on harmonization. The transactions costs of aid thus remain unacceptably high.

7. There are other challenges as well. Despite the nascent progress on donor complementarity and the division of labor, there remains a problem of rising concern as the landscape of development finance becomes more diverse and complicated. Conditionality remains a bone of contention and can be difficult to reconcile with country ownership. And, as a result of the slow progress in many areas, predictability of aid commitments and disbursements remain elusive. Enhancing Predictability-A Critical Challenge

8. Enhancing the predictability of aid, particularly over the medium term, remains one of the central challenges of the aid effectiveness agenda. Recipient countries need reliable medium-term indications of available financing to " facilitate planning and programming, and to link development strategies with medium-term budgetary frameworks to ensure effective implementation. Clarity on the likely envelope of available resources enables recipient governments to identify gaps, analyze sustainability issues, establish realistic performance objectives, and ultimately, manage aid effectively for development results.

9. Donors, too, need clarity about the commitment of recipients to their medium-term development objectives and spending priorities. A consistent track record of implementing development programs gives donors the confidence that recipients will sustain their efforts over the longer term, and can manage public resources effectively.

10. The consequences of a lack of predictability are both manifest and indirect. An unpredictable aid relationship prevents effective planning and implementation of development programs. In aid-dependent countries, it can make it difficult to establish macroeconomic stability, and thus hinder growth and poverty reduction. The management of the macroeconomic impact of the scaling up of aid is also complicated. Macroeconomic instability adds another hurdle to the already difficult task of making aid work effectively.

11. What is needed, therefore, are firm predictable commitments of mediumŽ, term support, and a reliable partnership framework within which mutual obligations are well established and clearly defined, and not subject to major unanticipated changes. Predictability is the bedrock of mutual accountability between countries and their external development partners, and is a necessary complement to other efforts to facilitate true ownership.

12. There are many factors constraining the medium-term predictability of aid. Most donor aid budgets are appropriated annually, making it difficult to pledge support formally over the medium term. Aid allocation criteria may not be well-defined and may vary over time, and donor agencies are increasingly called upon to demonstrate the effectiveness of aid as a prerequisite of longerŽ term engagement. As donors further concentrate their support on their relationships with priority countries, it can be difficult to provide predictable commitments to non-priority countries. Shifting political priorities in both donor and recipient countries can make donors reluctant to commit to medium Žterm spending; this is particularly true when issues of governance or corruption loom large.

13 . Yet there are many examples of how predictability can be enhanced. Medium-term planning of aid programs with priority partner countries, and the discussion of those plans with the partners, allows donors to make at least indicative commitments for planning purposes. Effective support for building the capacity of recipient country institutions and systems-to enhance good governance and the transparent, effective use of public resources, and to improve the overall management of aid--create the conditions for medium-term support and help prevent slippages that disrupt disbursements. Some donors have found that combining both a fixed and a variable tranche allows them to retain the flexibility to react to changes in performance while enhancing the overall certainty of their disbursements. Outreach in donor countries, and especially to parliaments, can raise awareness of the importance of predictability and the adverse effects of volatile aid flows. And finally, precise definition of the fundamental principles of the aid relationship clarify the circumstances under which a financial engagement will be sustained or suspended. Rationalizing conditionality according to the principles of simplicity, criticality, feasibility and parsimony can render disbursement conditions consistent with country ownership and foster program alignment. This minimizes the extent to which conditionality contributes to a lack of predictability . Predictability and the IMF

14. Enhancing predictability is one of the most important aspect for the Paris agenda from the perspective of the IMF. When aid commitments are unclear, or not made in time, governments cannot budget effectively. Nor can they implement their spending plans when external financing falls short of commitments without incurring domestic debt or arrears, both of which can have adverse effects on macroeconomic stability and development outcomes.

15. At the country level, the IMF helps to enhance predictability by clarifying the adverse budgetary and macroeconomic effects of uncertain aid commitments and unpredictable aid flows. Through its technical assistance programs, the IMP supports country efforts to strengthen their PFM systems, as well as their ability to formulate medium-term plans and budgetary frameworks linked to their national development strategies, so that donors know what they would be committing themselves to support over the medium term. And by providing advice on how to absorb and spend effectively high volumes of aid, the IMP helps to remove one element of uncertainty that could contribute to donor reluctance to make medium-term commitments. The IMF is working with countries, such as Niger, Togo, Rwanda, and Benin to develop scaling-up scenarios that can help countries manage future aid flows effectively, but which also demonstrate the opportunity costs of unpredictable aid in terms of foregone expenditure and potential disruptions to macroeconomic stability and development outcomes. The Fund also provides extensive assistance to countries in their efforts to mobilize more resources internally to support development efforts so that they are less vulnerable to aid uncertainty and unpredictability.

16. At the international level, the IMP has called repeatedly on donors to enhance the medium-term predictability of their aid commitments, pointing out the negative impact of failure to do so on country efforts to scale up toward meeting the MDGs. More recently, the IMF has co-chaired with the OECD- DAC Thematic Group on Aid Predictability within the UN's Africa MDG Steering Group. This Group has made several concrete suggestions on how to , enhance aid predictability. And finally, we are continuing to rationalize and streamline our conditionality in ways that will facilitate country ownership and successful program execution. Further reforms of donor conditionality, in line with the principles of alignment, criticality, parsimony, and feasibility, would contribute significantly to enhancing predictability of future aid commitments.

17. The Paris agenda is ambitious. It aims to reformulate development relationships in terms of ownership and mutual accountability and to recast the modalities of aid to enhance its overall effectiveness. This requires changes in habits and processes established over the last forty years. It is not surprising that progress has been difficult. But much of the groundwork has now been laid . The challenge we all face here at Accra is to provide the political impetus needed to achieve fully the objectives of the Paris Declaration. Further progress in anyone area will reinforce progress in all the others, and this is particularly true in the case of enhancing aid predictability. Both donors and partner countries face obstacles in contributing to more predictable aid flows, but these are surmountable, and the benefits of doing so will be considerable.