To the President
of the House of Representatives
of the States-General
Binnenhof 4
The Hague

Re: The relationship with the members of the Dutch constituencies at the IMF and the World Bank

18 May 2004

In this letter we present an overview of the Netherlands' policy on the Central, South Eastern and Eastern European members of the Dutch constituencies at the IMF and the World Bank. This policy has been reviewed in the context of the policy document ‘Mutual interests, mutual responsibilities’ and refined in a number of ways. To achieve greater consistency in policy, constituency members which are also Dutch development co-operation partners have been treated together with those which are not development partners.

This letter begins by examining the diversity of this group of countries and the Netherlands' relationship with them. It then looks at the deployment of financial resources and technical assistance within the context of the constituency relationship. Attention is also focused on the main principles set out in 'Mutual interests, mutual responsibilities’. Lastly, it describes co-operation with the constituency members in deciding on the Netherlands' position on the Boards of Directors of the IMF and the World Bank and in relevant international policy discussions.

The Dutch constituency

The Dutch constituency comprises Armenia, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Georgia, Israel, Macedonia, Moldova, Romania and Ukraine. Israel and the Netherlands itself are donor countries (soon to be joined by Cyprus). The rest are recipient countries. Armenia, Bosnia and Herzegovina, Croatia, Georgia, Macedonia and Moldova have DAC Part I status. Bulgaria, Cyprus, Israel, Romania and Ukraine are on Part II of the DAC list[1].

For some of the Part 1 DAC countries – Bosnia and Herzegovina and Macedonia – the constituency relationship is just one aspect of a more extensive development co-operation relationship with the Netherlands. For Armenia, Georgia and Moldova, however, it is the crux of that relationship. Croatia and the Part II DAC countries in Central and Eastern Europe (Bulgaria, Romania and Ukraine) are not eligible for official development aid. However, the Netherlands can use its constituency relationship to provide assistance to these countries from the specially created HGIS (Homogeneous Budget for International Co-operation) facility for non-ODA constituency countries. The main factor in the relationship with Bulgaria and Romania is their status as EU candidate countries, and with Croatia, its aspiration to become a candidate country.

We believe that the Dutch seats on the Boards of Directors of the IMF and the World Bank are an important instrument in contributing to policymaking in both institutions. Thus, the Netherlands and other members of the constituency are in a position to effectively propagate their views on global macro-economic and financial stability and on development co-operation in a broader sense. The participation of the recipient countries in the constituency increases the Netherlands’ scope for deepening the development perspective on both Boards and for helping to achieve a realistic, sustainable and demand-driven policy. This is supported by the dialogue between the Netherlands and many of the constituency countries, through the development relationship and through the non-ODA support facility.

This letter does not provide a complete overview of the foreign policy instruments available for each constituency country, or of the initiatives of other actors. It focuses exclusively on the constituency relationship. However, Dutch activities in this respect should, of course, be seen in the context of the Netherlands’ objectives within and through multilateral frameworks and channels (EU, UN, OSCE, Council of Europe, NATO).

After consultations with the respective constituency countries, the relationship will be further elaborated in a multi-year strategic perspective.

[1]DAC-I: developing countries; DAC-II: countries in transition

The Netherlands’ contribution to the constituency relationship

The Netherlands contributes to the constituency relationship by providing the members with political support where possible and desirable, often in the multilateral context. In addition, there are a number of options for bilateral co-operation and support:

• Macro support or support to help countries get back on track with the IMF and the World Bank

The Netherlands can provide (macro) support to the Central, South Eastern and Eastern European constituency members. For the development co-operation partner countries, this support is funded from the ODA budget allocated annually for each country. Non-ODA countries can receive support under the ‘HGIS facility for non-ODA support in the context of the constituency relationship’.

Macro aid aims to support the entire development process in a specific country, and the recipient government’s development policy. To be eligible for macro aid, countries must meet certain criteria relating to good governance, institutional capacity, poverty reduction and macroeconomic policy, and should have reached agreement with the International Financial Institutions (IFIs) on their financial/economic policy. This entails particularly that these countries must be on track with their IMF-programme.

In recent years it has become clear that the Netherlands, as lead member of the constituency, needs to be able to provide specific support in the area of finance and economy to member countries which experience problems in their relationship (i.e. which go off track) with the IMF and/or the World Bank and are thereby disqualified from receiving macro support. The Netherlands wants a more stable – though not unconditional – relationship with the authorities in the constituency countries and wants to help them when they are off track to reach agreement again with the IFIs as quickly as possible. To this end, when a country goes off track, 50% of the funds reserved for macro support for that country can now be employed to support a financial/economic project or programme aimed at getting it back on track. This might be, for example, an IMF or World Bank programme aimed at strengthening the financial/economic or planning capacity of the authorities or improving public finance management.

To ensure the effectiveness of the Dutch effort, it is closely coordinated with the embassies, constituency offices, IMF/World Bank offices in the country concerned and in Washington, and any other organisations that may be involved. This kind of support is provided only if there is sufficient confidence in the political will and commitment of the authorities in the country concerned to get back on track with the IMF and the World Bank.

This option applies to both ODA funds and the HGIS facility for non-ODA constituency countries. The HGIS facility for non-ODA macro support has been renamed the ‘HGIS facility for non-ODA support in the context of the constituency relationship’. This change of name means that there are more opportunities with this support to link up with manifest Dutch policy activities relating to EU accession or external EU relations with the non-ODA constituency countries concerned.

• Interaction with the broader development co-operation programme

In the partner countries, the support described above is part of a broader programme of development co-operation. Other elements of this programme may also be relevant to the constituency relationship. The objective is to coordinate macro support (or the support provided to help bring the country back on track) as closely as possible with other forms of development co-operation spending. This is achieved primarily – and depending on the stage which the partner country concerned has reached in terms of economic, political and administrative transition – by devoting special attention in the broad development programmes to promoting good economic governance, public finance management and private sector development. As outlined in ‘Mutual interests, mutual responsibilities’, the aim is to achieve a flexible allocation of aid modalities: support to each constituency country will be reviewed annually to determine the best way to distribute resources across the different channels so as to obtain the most effective results, from the viewpoint of both the constituency relationship and the broader development partnership. The details of the relationship are specified in country or regional documents.

• Technical assistance provided by the Ministry of Finance and/or De Nederlandsche Bank (DNB)

In certain cases, the Ministry of Finance and DNB provide technical assistance to constituency countries. This occurs in close coordination with the Ministry of Foreign Affairs, Dutch embassies and the constituency offices to ensure coherence and compatibility with the overall Dutch effort and the activities of the IMF and the World Bank.

The assistance may be provided in such areas as budget policy, monetary policy, taxation, money transfer, supervision of banking, statistics, financial control, management and supervision, cash management, the capital market, national debt and the reorganisation of finance ministries. DNB runs an international seminar programme, and provides the IMF with expertise regarding the constituency countries and participates, together with other central banks, on a European level in Bulgaria and Romania. It has also developed an annual programme for technical assistance.

The activities of the Ministry of Finance and DNB can be financed in different ways: by the Ministry of Finance and DNB themselves, possibly with European support, or – in the case of the ODA constituency countries – partly from the development budget for the country concerned. In the latter case, the activities obviously must be compatible with the needs of the recipient country, Dutch development policy (including the basic principles of feasibility and sustainability) and the priorities of the IFIs. The main objective of the activities of the Ministry of Finance and DNB will always be to strengthen local capacity in the financial and economic sector.

• Specific co-operation with the member countries within the constituency
  

The constituency relationship is put into practice on a daily basis by the representatives of the member countries working at the constituency offices in New York and Washington. The staff at these offices are in a position to represent the interests of the constituency countries directly in their contact with the staff and management of the IMF and World Bank. This daily contact also means that they are able to advise the constituency countries in their dealings with the IMF and World Bank, for example during programme negotiations. In addition, the office staff can make use of the knowledge and expertise of the constituency countries during broad policy discussions at the IMF, the World Bank and their Boards of Directors.

In 1995 a small fund was set up, managed by the Dutch embassy in Washington, to provide technical assistance to the constituency countries. The fund supports a small number of activities each year, designed to solve problems in the constituency countries which hamper preparations for IMF and World Bank programmes and related activities. In the light of this objective, the emphasis is on advising the governments of the countries concerned. Study and research may also be financed with these funds. The activities must not be eligible for funding through the regular budgets of the IMF or World Bank. Given its great popularity among the constituency countries and the growing number of project proposals, in 2004 the fund was increased from €100,000 to €200,000 per year.

Apart from this, the Netherlands has a Trust Fund with the IMF for the provision of technical assistance on the fight against financing of terrorism and money laundering. This Trust Fund contains € 400,000, and is aimed at constituency countries.

In addition there are annual consultations between the constituency countries, at which from the Netherlands the Minister for Development Co-operation, the Minister of Finance, the Treasurer General and the DNB President are present. The purpose of these meetings is to evaluate co-operation within the constituency and ensure efficient interaction between the members. Furthermore, meetings take place during the spring meetings and annual meeting of the IMF and the World Bank. An effort is made to reach joint conclusions so that the constituency can present a united front at the IMF and the World Bank, and in international policy forums, such as the International Monetary and Financial Committee and the Development Committee. The constituency consultations are also a valuable platform for the exchange of experience with and knowledge about the IMF and World Bank, particularly as many of the members are transition countries faced with similar problems. The next constituency meeting is to take place in Sarajevo on 21-24 May 2004.