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Developing Countries

Volume 450: debated on Tuesday 10 October 2006

To ask the Secretary of State for International Development what assessment he has made of the impact of policies of the International Monetary Fund and World Bank which have the effect of capping the amount of public spending in developing countries receiving aid from those institutions. (88617)

The policies of the International Monetary Fund (IMF) and World Bank are designed to support country led development strategies, including their public spending plans. These include policies to support economic stability, promote the effective use of higher levels of aid and to build the capacity of public services.

Economic stability is important if poverty is to be reduced. It is a foundation for growth, for avoiding inflation that harms the poor and for ensuring countries can sustain long term investments in public services. All countries face constraints in deciding on appropriate levels of domestic deficits and borrowing. The IMF's dialogue and advice helps countries establish budget policies that achieve and maintain stability. This includes agreeing with countries on the budget limits that are central to their fiscal policies. These limits avoid unsustainable deficits that will force countries to cut back on their future spending. These policies support long-term spending plans that are central to strengthening public services.

The IMF and the World Bank are both committed to helping developing countries manage larger aid flows to support public service investments that reduce poverty. The IMF helps countries with advice on policies to manage the macroeconomic consequences of larger aid flows. It promotes long term predictable aid that can finance higher public spending without excessive borrowing and adjusts the fiscal targets in its programmes to support higher aid backed spending. The World Bank plays a leading role in supporting countries' own poverty reduction strategies. It is a major global provider of aid to finance these strategies. The Bank also plays a central role in helping countries mobilise further aid to support their spending plans by coordinating overall donor support and ensuring aid is provided in an effective manner. The Bank is heavily involved in international efforts to strengthen key public services such as the Fast Track Initiative for education. All these policies provide direct support for public service investments. The IMF and the World Bank have made a further major contribution with the resources they have committed through the Multilateral Debt Relief Initiative. This will help provide developing countries with the long-term predictable funding they need to help finance critical services like health and education.