The Role of IMF in Post Conflict Settlement

Abstract

This paper focuses on the efforts made to build a new financial system in post-conflictsettlement such as Afghanistan. It focuses on the role of IMF technical assistance rendered from October 2001 toMay 2003 when staff of the Monetary and Financial Systems Department and contracted expertsprovided comprehensive advice and support in restoring and transforming central bankingservices as well as setting up emergency payment systems. The paper outlines the role of IMF in reforming the payments and banking systems in post-conflicteconomies, drawing upon critical events and milestones in practical applications from previousIMF technical assistance to Kosovo and East Timor. It emphasizes that the sequencing of actionswithin a graduated approach is crucial, including early decisions on the choices of a legal tenderand exchange rate regime; operation of a rudimentary payment system on an emergency basis;preparation of financial legislation in line with international best practices as adapted to locallegal traditions; the licensing, regulation, and supervision of banks and nonbank financialinstitutions; and eventual restoration of central banking functions in a two-tier banking system.

INTRODUCTION

The objective of the IMF's technical assistance program is to contribute to the development of the productive resources of member countries by enhancing the effectiveness of economic policy and financial institutions and management. Providing technical assistance to member states has been one of many tasks assigned to the IMF by its Articles of Agreement (IMF, 1944).Support to member states from MFD is provided as direct technical assistance through MFD led missions, staff and expert visits, expert secondment and headquarters research (Lonnberg, 2001:2). These visitation are done to ensure that the best strategy is adopted in the course of intervening in post conflict settlement.

International Monetary Fund in Post-Conflict Settings

IMF deals with economies going through difficult times, which in some casesleads to crises and chaos. A post-conflict situation tends to differ from other troubledsituations in several respects, including the following:

(i) Social and military conflicts, internal or in combination with externalinterference, almost always have created emergency conditions.

(ii) Great social turmoil has killed or dislocated large sections of the population,thereby, severely impairing the effective efforts of human capital.

(iii) Central administrative, economic, and political functions have been destroyedor significantly disrupted.

(iv) Local capacity and capabilities have been so fundamentally reduced that theywould be unlikely to recover on their own.

(v) Broad consensus exists that the international community should becomeinvolved to reestablish peace, law and order and to take steps to rebuild theeconomy.

(vi) Existing needs for institution-building may well go beyond merely restoringthe previous order and call for new permanent institutions to be constructed insome important ways different from the old.

Together, these factors create a complex situation, characterized by inter-related weaknessesthat render the post-crisis economy incapable of handling its own problems. In such cases,the international community—sometime represented by a UN transitional administration—iscalled upon to intervene during a transitory period to cope with the immediate emergencyhumanitarian situation, and to act as interim government, laying the foundations for therestoration of civil society, for an economic revival, and for an eventual return to aconstitutional political system (Sundararajan and et. al, 1995:4).

In such post-conflict situations, traditional central authorities—including the central bank—would have, by and large, ceased to function. Public institutions as well as banks and manyprivate enterprises may have been physically destroyed and further incapacitated by largescaledesertion of management and trained staff. Institution-building is thus a key element ofreform in post-conflict economies, but the mix of recovery and reform is one of the criticalpolicy issues and judgments that must be made.

In one extreme form, the task may also involve assistance in nation-building, which is evenmore complex. In the other extreme form, the inclination would be to reestablish old—evenif inefficient—structures before moving on with much reform. Whatever the scope of work,it is typically neither possible, nor appropriate, to reestablish old structures in post-conflictsituations if the preconditions for those former structures have changed irreversibly. Giventhe inevitability of change, the opportunity should not be missed to form new structures thatare more effective, more transparent, and characterized by better governance to replace theprevious ones. In this task of transforming the old institutions, or establishing new ones, localparticipation and acceptance of the reforms are critical. Without local ownership, the reformprocess is unlikely to be implemented with any success (Sundararajan and et. al, 1995:4).

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The International Monetary Fund (IMF) expands its scope of its policies on disaster management to post-conflict countries experiencing severe balance of payments difficulties, subject to the recipient government's capacity and commitment to plan and implement on an acceptable economic program. For instance, in October 1995 the IMF expanded the scope of its traditional emergency assistance program beyond provision for natural disasters to include carefully defined post-conflict situations. The requirements for use of emergency assistance include a statement of economic policies; a quantified macroeconomic framework; and a statement by the authorities of their intention to move as soon as possible to a PRGF financing (Lonnberg, 2001:6).

The IMF normally extends its assistance as part of an internationally coordinated effort, while focusing on re-establishment of macroeconomic stability. The components of this coordinated support may include: (i) Technical assistance – focused on rebuilding capacity (e.g. monetary and exchange institutions) to help restore payment, credit, and foreign exchange operations and ensure effective use of aid resources. The UNDP, bilaterals, and other multilaterals may jointly finance such assistance. (ii) Policy advice – covering the full range of macroeconomic policies, as well as needed structural measures. (iii) Financial assistance – by way of quick-disbursing financial assistance, and dependent on country-specific factors such as how quickly the political situation is clarified, capacity to formulate and implement an economic program, time needed to mobilize donor support, and where, relevant, the clearance of arrears to multilaterals(El Qorchi and et. al. , 2003:15).

In so doing, the IMF has developed Fund- and Staff-Monitored Programs to help countries in arrears establish a track record on policies and payments, leading to eventual clearance of arrears to the Fund. Fund-Monitored Programs contain targets and policy intentions and are reviewed and endorsed by the Board. On the other hand, Staff-Monitored Programs provide a basis for the Fund to engage in intensive policy dialogue with members in arrears that may not be able to adopt and implement programs. These approaches, supported by the provision of technical assistance, have been instrumental in assisting countries design and implement appropriate economic policies and progress toward the normalization of financial relations with external creditors, including the Fund (BIS, 1999: 4).

IMF and Technical Assistance Coordination

The rebuilding of an Afghan financial system has a strong bearing on the fiscal side to restorean operative Treasury function of the Ministry of Finance. The restorationof commercial banks and nonbank financial institutions, key legal issues must be addressed. The advice should, therefore, be closely coordinated with assistance also from experts in those areas. Moreover, close coordination is needed with several other international financial institutions and major technical assistance providers. (Lonnberg, 2001:3).

Another issue of importance for technical assistance coordination arises from the very possible limited capabilities of the authorities to formulate, prioritize, and handle technical assistance. This can also include limitations on the counterparts' physical capability. Even for this, external advice and assistance may be needed. On occasion, the authorities will request the IMF or another major technical assistance provider to take the lead in coordinating the assistance to avoid duplicating efforts (Lonnberg, 2001:23).

POLICY FRAMEWORK AND GUIDELINES FOR FUTURE SUPPORT INTERNATIONAL MONETARY FUND (IMF)

Guiding Principles

There is an emerging consensus within the international development community over the need to deal with the problems created by violent conflicts in a concerted manner. Peace building and conflict resolution are now seen as integral parts of the body of international public goods necessary for effective global governance. As a leading player in development, the IMF has to be a part of this international effort. Given its field knowledge of the post-conflict assistance its accumulated experience of involvement in post-conflict assistance will need to be visible and, when appropriate, play a lead role in post-conflict assistance in the continent (Maimbo, 2002: 6).

The IMF intervention in conflict and post-conflict countries emanates from the Bank's mandate and overarching objectives of poverty reduction. The primary mission of the IMF is to promote the social and economic development of its regional member states by mobilizing internal and external resources for investment in its regional member countries. This mission can only be discharged in a safe and secure environment -- war and conflict are inimical to the long-terms goals of social and economic development. By virtue of this mandate, the IMFhas a duty to engage in finding solutions to the problems of post-conflict countries. IMF recognizes that poverty remains the underlying cause of conflict and is exacerbated at the post-conflict stage. IMF involvement in post-conflict situations will therefore be in consonance with the Vision and will be a further contribution to the promotion and enhancement of the riches of local bank priorities.

Most regional member countries affected by conflict have built up substantial arrears in their repayment obligations to IMF. Such arrears not only affect the financial standing of local Banks with the international financial markets, but also prevent the possibility of continuing to do business with these countries. Arrears have made it increasingly difficult for such countries to access Bank lending. It is therefore critical for the Bank, in collaboration with the BWIs, to provide assistance to post-conflict countries to enable them regularize their relationship with the international community in the areas of resource mobilization, arrears clearance and debt relief, and program support. These policy guidelines above seeks to address these and other related concerns and provide meaningful assistance to post-conflict countries that are committed to the restoration of peace and the resumption of broad-based economic growth and poverty reduction. According to Maimbo(2002:16), the IMF post-conflict assistance will, therefore, be guided by the following six guiding principles:

Comparative Advantage and Selectivity: First, the needs of post-conflict countries are very diverse and IMF cannot intervene in all post-conflict situations. In view of its limited comparative advantage, Bank interventions will therefore be based on the principle of focus and selectivity. The IMF support will focus primarily on the provision of basic social and economic infrastructure; reconstruction and rehabilitation; institutional reform and capacity building; and the promotion of good governance. Poverty reduction and restoration of economic growth will provide the general framework within which Bank's post-conflict assistance will be provided. In other areas such as maintaining peace and political stability on the continent as well as in the provision of humanitarian emergency relief assistance, the Banks recognizes the lead role of the United Nations and its specialized agencies, and regional.

In areas where other agencies have comparative advantages, the IMF would, however, play a supportive role through policy analysis and dialogue and through designing and financing projects and programs that address the root causes of conflicts.

Partnership, Coordination and Participatory Approach: Second, the IMF is convinced that post-conflict recovery programs have greater chances of success when developed and managed in partnership with other stakeholders and through a participatory approach. The needs of post-conflict countries are beyond the capacity of any single institution, and the recovery of post-conflict societies, therefore, calls for a comprehensive and coordinated approach by both local and international actors. The IMF interventions will be based on open and transparent interactions with other actors so as to maximize synergies and avoid duplications. The IMF support to post-conflict countries will therefore be within a framework broadly endorsed and agreed upon by all donors based on national recovery needs assessments. In doing so, IMF will continue to promote the involvement of civil society and local communities in post-conflict recovery.

Country Ownership: Third, Every effort will be made to ensure that IMF supported post-conflict projects and programs will be under the ownership, responsibility and control of concerned countries. The IMF's role is to provide assistance, besides lending, of advisory services and actively participate in the design of national recovery reforms and plans, via policy dialogue, technical assistance, and other non-lending activities.

Early and Sustained Engagement: Fourth, the IMF recognizes the importance of early and sustained engagement for the quick resumption of normal economic and social activities. The IMF, together with other donors, will therefore act rapidly in post-conflict situations where conditions allow. Where possible, the IMF's post-conflict assistance should be maintained until normalcy is restored and the country becomes eligible for normal IMF assistance. However, the Bank will regularly review the situation, based on political and social developments on the ground. Such a review will be the basis for determining whether support should be continued or suspended as well as adjusting the nature and level of assistance to changing situations.

Regional Dimension: Fifth, the IMFis aware that conflicts in Afghanistan often take a regional dimension due to ethnic and religious links and in some cases affecting a whole sub-region. The IMF's post-conflict assistance will therefore take into account the regional dimension of conflicts, and will also promote political, economic, and social cohesion among neighbours through its regional integration and governance policies. This will be done, where possible, with the cooperation of regional and sub-regional organizations. Therefore, increased efforts will be made to promote greater regional and sub-regional cooperation, through financing multinational institutions that promote peace and economic development.

Flexibility and Case-by-Case Approach: Sixth, IMF views each post-conflict situation as complex, and the IMF post-conflict recovery support will be tailored to fit each country's unique requirements and environment. Bank interventions will be sensitive to the political and social contexts of each post-conflict situation. The specific circumstances will determine the priority areas suitable for IMF assistance.

In summary, the IMF recognizes the logical link between the immediate/short term, medium-term, and the longer-term recovery needs. It views the recovery effort as a continuous and coherent package. The IMF engagement under this policy will, therefore, be guided within a framework of a more multi-sectoral and integrated approach whereby the pressing needs and aspects of the different recovery phases will be addressed. IMF post-conflict interventions will, however, be selective and based on well-thought-out designs and preparatory work, which take into account the possibility of change in the initial commitments. Where possible, the IMF will engage at most stages/activities until the full normalization of the countries' relationship with the donor agencies has been restored. This however does not imply that the IMF will commit resources or execute projects at all areas of the recovery phases.

By way of conclusion, the role of IMF in post-conflict settlement have been more of humanitarian service rendered to rebuild economies or financial system of post-conflict settlement through the provision of traditional emergency in natural disaster, re-establishment of macroeconomic stability which include rebuilding capacity to help restore payment; credit and foreign exchange operations, policy advice covering macroeconomic policies as well as needed structural measures, financial assistance, clearance of arrears to multilaterals and restoration of commercial banks and nonfinancial institution. These roles are evident in Afghanistan which was used as a case study for this paper.

 

 

 

 

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Bank for International Settlements(1999)Core Principles for Systemically

 

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Lonnberg, Ake (2001) "Post-Conflict Economies: Lessons from Restoring and TransformingPayments and Banking Systems in Kosovo and East Timor," (unpublished;Washington: International Monetary Fund).

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