WORLD TRADE  
ORGANIZATION  WT/AFT/W/4 
25 April 2006 
 
 (06-1949) 
Aid for Trade Task Force Original:   English 
  
 
COMMUNICATION FROM THE INTERNATIONAL MONETARY FUND 
  
 The following communication, dated 20 April 2006, is being circulated to the Aid for Trade 
Task Force at the request of th e International Monetary Fund. 
 
 
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RESPONSES TO WTO TASK FORCE ON AID FOR TRADE 
  
I. WHAT IS THE CURRENT SCOPE AND CONTENT OF YOUR AID FOR TRADE 
PROGRAMMES?  WHAT ARE THE LESSONS LEARNED? 
1. The Fund has developed several initiatives to  support trade reforms and the ability of 
developing countries to take full advantage of th e opportunities of the global economy.  As endorsed 
by the IMF's Executive Board in Nove mber 2005, the Fund's initiatives cover: 
• Augmentation of financial support through the Tr ade Integration Mechanism (TIM), adopted 
in 2004.  The TIM is available in the contex t of regular Fund arrangements to provide added 
financial assurance where members are concer ned about potential balance-of-payments 
shortfalls as a result of trade liberalization by other countries (e.g., due to preference erosion, 
changes in food terms of trade or the eliminati on of textiles quotas).  The additional financial 
support is not limited a priori , subject of course to the overall maximum access limits of the 
underlying Fund arrangements, but must be commensurate with the expected size of the shock and appropriate adjustment .  Support under the TIM has so far been made available to 
Bangladesh and the Dominican Republic for an aggregate amount of US$ 180 million. 
 
• Financial support through floating tranches, a policy re-endorsed by the Board in 2005 
specifically with a view to trade policy reforms.   Like the TIM, floating tranches can be made 
available in the context of regular Fund arra ngements for members concerned about potential 
balance of payments and underlying fiscal imbalances resulting from liberalization of their own trade regimes.  Floating tranches become available as members implement trade reform 
policies at a time of their choosing, rather th an meeting policy conditions at pre-set points in 
time.  Floating tranches have not so far been  requested, but are under discussion with one 
member intending to liberalize its trade regime autonomously.   
 
• Financial support through the E xogenous Shocks Facility (ESF) , a new concessional facility 
created in December 2005 to provide policy sup port and financial assistance to low-income 
countries facing exogenous shocks (e.g., adverse changes in the terms of trade or in 
commodity prices, etc.).  It is available to  countries eligible for the Poverty-Reduction and 
Growth Facility (PRGF) – the IMF's main instru ment for financial assistance to low-income 
countries – but that do not have a PRGF programme in place.  As a result, ESF programmes WT/AFT/W/4 
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  are one to two years in length, shorter than unde r the PRGF (usually three years).  No support 
under the ESF has been requested so far.   
 
• Diagnostic support and policy dialogue, e.g., asse ssment of the implications for the fiscal 
accounts and the broader macroeconomic frame work, of multilateral and autonomous trade 
liberalization, and resulting adjustment needs.  Such support is also available to assess the 
impact on individual member countries of financial services liberalization, and the implications for financial sector regulatory an d supervisory frameworks.  This assistance can 
take a variety of forms.  For instance, Fund mi ssions have analyzed the impact of the expiry 
of quotas under the ATC and discussed policy optio ns with several member countries.  Staff 
have conducted model simulations of the fiscal  revenue impact of different Doha Round 
liberalization formulae;  the results will inform the bilateral policy dialogue in the context of 
forthcoming Article IV consultations.   
 
• Stepped-up technical assistance for customs and tax reform, including in the context of trade 
facilitation.  The Fund has been providing assistance to member countries with the redesign of tax systems in the face of tariff revenue loss, as well as on customs administration reform and 
modernization.
1  Fund staff are currently participating, together with the World Customs 
Organization, in a project, led by the World Bank, designed to improve understanding of the 
potential costs and implementation issues that are likely to face developing and LDC members when a trade facilitation agreement is completed.  The Fund's involvement in this 
project will also inform future work on the possible reorientation of Fund technical assistance in customs administration, including priorities for the short to medium term, and lead to a 
better understanding of the linkages between the work on trade facilitation at the WTO, the 
Integrated Framework and the Aid-for-Trade initiative.   
 2. Regarding lessons learned, it is still quite early  to draw firm conclusions – the TIM and ESF 
were introduced in April 2004 and December 2005, respectively, floating trade policy tranches were 
endorsed in March 2005, and diagnostic work on prefer ence erosion etc. has a similarly short track 
record.  Nevertheless, there may be a variety of r easons for the relatively low intensity of demand so 
far for financial support.   
3. On the one hand, of course, while there have been significant changes in global trade policies 
during this period (textiles, sugar, bananas), the possible adverse impact of a Doha Agreement on 
vulnerable countries has yet to be felt.  In other cases, despite concern by trade negotiators about the 
size of any financial needs from liberalization, th e impact may be considered manageable by the 
Fund's finance ministry counterparts.  For example, the balance-of-payments position may be strong overall even though some exports are subject to pr eference erosion.  In such cases, the Fund would 
generally expect neither demand for, nor would it be  in a position to supply, financial support.  Even 
where countries experience a moderate weakening of  their balance of payments, the authorities may 
not perceive the problem to be sufficiently sever e as to enter into a comprehensive macroeconomic 
adjustment programme with the Fund – especially wh ere they do not wish to take on additional debt, 
or where Fund-supported programmes are judged to be  politically inconvenient.  These considerations 
suggest that it is important to develop a clear  understanding on the need for Aid for Trade between 
relevant agencies within developing countries, a nd to avoid a purely Geneva-centered approach.   
4. Where there is no request for financing, the F und stands ready nevertheless to assist in 
diagnosing the problem, discussing possible policy responses with the authorities, and helping to explore the case for financial support from other – e.g., concessional – sources.  For example, the 
                                                     
 
1 Over the period 2000-2004, the Fund provided technical assistance through 140 missions and 
257 expert months in these areas.  Note that these figures do not include TA delivered through regional technical 
assistance centres (TACs).    WT/AFT/W/4 
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  World Bank and the Fund are examining, with a view to potentially endorsing, a programme of 
comprehensive trade and trade-related reforms deve loped by one member country, which is seeking 
financial and other support with im plementation from a variety of sources.  And on 27 April, the Fund 
will host a workshop for financial secretaries of Cari bbean sugar and banana e xporters to review the 
macroeconomic implications of preference erosi on in these products, based  on detailed background 
work – the intention here is to facilitate interac tion between affected countries and potential donors by 
providing unbiased analyses.  The workshop will su bsequently be followed up by Fund missions at 
the bilateral level.   
II. ARE THERE, IN YOUR VIEW, IMPORTANT OUTSTANDING TRADE-RELATED 
NEEDS THAT ARE NOT MET TODAY? 
5. With respect to policy and financial support fo r trade-related adjustment, a broad range of 
instruments is in principle available from multilat eral and bilateral sources,  though, as noted above, 
demand for assistance from the Fund in this area has been  rather modest in recent years.  We believe 
that these instruments should be tested more extens ively before considering the need for additional 
forms of support, or modifications to existing instruments.   
6. The joint Bank-Fund Development Committee paper on Aid for Trade in September 2005 
suggests that there may be potentially deserving dema nds in two other areas that go unmet.  First, it 
sets out reasons for why cross-border and regional tr ade-related projects might attract limited funding 
in an aid process driven by national priorities.  A review of this question is currently underway and 
results are scheduled to be reported to the Deve lopment Committee at its September 2006 meeting in 
Singapore.  Second, follow-up capacity-building priorities and demand for project preparation work 
identified in Diagnostic Trade Integration Studies (DTIS) have often drawn a slow donor response.  
The joint Bank-Fund paper therefore proposes endow ing the Integrated Framework for Trade-Related 
Technical Assistance (IF) with a larger trust fund, subject to other necessary enhancements in the IF 
structure and governance processes.  As you are aware,  these issues remain under discussion by the IF 
Task Force.   
III. HAS TRADE, AS A VEHICLE TO PROMOTE GROWTH, DEVELOPMENT AND 
POVERTY REDUCTION, BEEN ADEQUA TELY ADDRESSED IN COUNTRIES' 
DEVELOPMENT PLANS AND POVERTY REDUCTION STRATEGIES?  IF NOT, WHAT ARE THE MAIN REASONS AND HOW COULD THIS BE CORRECTED? 
7. Based on joint research by Bank and Fund staff, countries with a well-articulated growth 
strategy in their PRSPs overwhelmingly included trad e as part of that strategy.  However, though 
more frequent in recent PRSPs, su ch growth (and trade) strategies continue to be absent in many 
cases.  Furthermore, even where strategies are spelt out, they tend to lack a systematic presentation of 
specific, time-bound and monitorable trade-related po licies, projects and capacity building.  The likely 
reasons for these shortcomings are varied, including capacity constraints in-country, but also the history of PRSPs which have grown out of a need to  spell out spending priorities rather than policy, 
and are thus institutionally dominated by the spendi ng ministries.  This issue has been flagged in 
successive reviews of the PRSP process conducted by  the Bank and the Fund, and recent years have 
witnessed an improvement in PRSP growth policy cont ent.  Institutional support for trade ministries, 
as proposed in the context of the re form of the Integrated Framework, could go some way to further 
ensuring that trade-related priorities are given due consideration in national strategy debates.   
8. The research suggests that the DTIS conducted under the IF have had a positive impact on the 
quality of the trade discussion in subsequent PRSPs , although the track record remains short (and we 
have no systematic information on follow-up donor  support for projects).  Over time, this hopefully 
could result in a more consistent trade orientation in the PRSPs of LDCs, especially if complemented 
by efforts of donors and agencies to raise trade i ssues in their bilateral dealings with country WT/AFT/W/4 
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  authorities.  However, the key to addressing tr ade in PRSPs lies with the developing-country 
authorities themselves, who must ultimately decide  whether trade-related reforms and assistance 
represent, indeed, a national priority.   
IV. HOW, IN YOUR VIEW, SHOULD TRADE-RELATED NEEDS AND PRIORITIES 
BE IDENTIFIED? 
9. In the LDCs it is clear that the IF can play an important role in this regard, through its support 
for diagnostic work and the principle of country-dri ven priorities determined in national workshops.  
The comprehensive approach under the DTIS might need  to give way over time to a more flexible and 
targeted diagnostic capacity.  As proposed in th e joint Bank-Fund Development Committee paper on 
Aid for Trade, consideration should be given to ex tending the IF, or an approach based on similar 
principles, to poor non-LDCs. 
V. IS THE EXISTING SYSTEM OF DELIVERY MECHANISMS FOR AID FOR 
TRADE ADEQUATE?  IF NOT, WHERE ARE THE GAPS, AND WHAT OPTIONS 
MIGHT EXIST TO ADDRESS THESE GAPS? 
10. As argued in the joint Bank-Fund Development Committee paper on Aid for Trade last 
September, we see the existing bilateral and multila teral delivery mechanisms largely as adequate as 
long as donors are committed to providing assistance in  this area and recipient countries give priority 
to such assistance.   
11. However, the paper argues for enhancing the IF and extending it, or creating a similar 
approach, for poor non-LDCs.  A mechanism such as the IF can help with operationalizing Aid for 
Trade requests by developing countries, and with ensu ring that the issue receives adequate attention at 
the national policy level (the "dema nd side").  In order to sustain the momentum on Aid for Trade on 
the part of donors and agencies (the "supply side ") beyond the Doha nego tiations, consideration 
should be given to the periodic review of implem entation through an appropriate, WTO-based peer 
review mechanism (perhaps the current T ask Force in a permanent capacity?).   
VI. IS THERE A NEED FOR STRENGTHENING MONITORING AND EVALUATION?  
IF YES, HOW CAN THIS BE DONE? 
12. OECD/DAC already gathers information on over all commitments for trade-related assistance, 
although the scope of that informati on should be reviewed in light of the Task Force's definition of 
Aid for Trade and cover cross-border or regional proj ects as appropriate.  In view of the interest in 
Aid for Trade, and the likely demand for inform ation from any WTO monitoring/review mechanism, 
it would be helpful if such data gathering at the a ggregate level continued.  In addition, an enhanced 
IF should surely seek to gather systematic in formation on Aid for Trade implementation at the 
recipient country level.  In the absence of a sim ilar mechanism for non-LDCs, such information would 
need to be provided by WTO Members individually. 
13. As in other areas of foreign assistance, the eval uation of concrete Aid for Trade projects will 
also be essential, and is most likely to take place under each donor's and agency's own rules.  It would 
seem that rigorous project evaluation is particul arly important in this case since donors have 
announced plans for a significant and rapid increase in commitments on Aid for Trade, which may stretch delivery capacity (on the part of donors) and ab sorption capacity (on the part of recipients).    WT/AFT/W/4 
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  VII. WHAT SHOULD BE THE ROLE OF THE PRIVATE SECTOR IN IDENTIFYING 
NEEDS AND IN IMPLEMENTING RESPONSES? 
14. Although the private sector should play a critical role in identifying assistance priorities in the 
context of national DTIS workshops, as well as de velopment and poverty reduction strategies, the 
approach so far has often been token, with much rh etoric but little actual private sector involvement.  
Considered assessments by the private sector of wh ich forms of services and support can be provided 
on a commercial basis would be particularly valuable.   
VIII.  HOW SHOULD AID FOR TRADE REINFORCE THE PRINCIPLES OF AID 
EFFECTIVENESS AND COHERENCE, AS AGREED IN THE PARIS DECLARATION AND AS EMBODIED IN INDIVIDUAL POVERTY REDUCTION 
STRATEGIES?   
15. Aid for Trade needs to be firmly grounded in the principles of development assistance, per the 
Paris Declaration on Aid Effectiveness, and delivered through established mechanisms of 
development assistance.  In particular, country owne rship should not be undermined.  Such principles 
were the point of departure of the "revamped IF" in 2001 and led to the design of the IF's multistage, 
catalytic approach to donor funding based on diagnos tic studies and action plans validated in national 
workshops.  While time-consuming, this approach  is conceptually sound, and should ideally be 
applied to non-LDC settings as well.  Certai n suggestions for improving the operation and 
effectiveness of the IF were made in the Bank- Fund Development Committee Paper on Aid for Trade 
and are under consideration by the IF Task Force.   
 
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