Front Matter

Front Matter

Author(s):
Claire Liuksila
Published Date:
December 1995
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    © 1995 International Monetary Fund

    Cover design by IMF Graphics Section

    Joint Bank-Fund Library Cataloging-in-Publication Data

    External assistance and policies for growth in Africa / editor, Claire Liuksila — Washington, D.C.: International Monetary Fund, 1995.

    p. cm.

    “Papers presented at a seminar held in Paris, February 13–14, 1995, organized by the International Monetary Fund and the Ministry of Finance of Japan.”

    ISBN 9781557755254

    1. Economic assistance — Africa. 2. Investments, Foreign — Africa. 3. Debts, External — Africa. 4. Africa — Economic policy. I. Liuksila, Claire. II. International Monetary Fund. III. Japan. Õkurashõ.

    HC800.E98 1995

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    External Assistance and Policies for Growth in Africa

    Editor

    Claire Liuksila

    Papers presented at a seminar held in Paris

    February 13-14, 1995

    International Monetary Fund

    Ministry of Finance of Japan

    Washington • 1995

    Preface

    On February 13-14,1995, senior officials from over 20 African, Asian, and European countries gathered with staff from the IMF, World Bank, and development organizations to participate in a seminar sponsored by the Government of Japan entitled “External Assistance and Policies for Growth in Africa.” This followed a seminar held in Tokyo in March 1994 on “Policies for Growth in Africa”

    The last three decades have witnessed a marked diversity in the economic development, reliance on external aid, and institutional strengths of developing countries. In Asia and Latin America, progress has been greatest. The poorest countries in Africa, in contrast, are increasingly lagging behind other developing countries in generating domestic savings and investment, and achieving higher economic growth. While progress in policy reforms has been made, government savings for sub-Saharan Africa as a whole continue to be negative. At the same time, Africa remains highly dependent on external flows, while private flows—which have shown a resurgence in Asia and Latin America—have continued to bypass sub-Saharan Africa.

    Against this background, this seminar provided an opportunity for leading policymakers from African, Asian, and European countries to share their first-hand experiences, and consider how some of the lessons of the “East Asian miracle” can be tailored to the particular needs of African countries. This provided an important contribution to the more general rethinking of the adjustment strategy in Africa, and what can be done to accelerate the pace of sustainable—and equitable—growth. There was general agreement that the four topics chosen for the seminar—(i) private sector development; (ii) how to boost domestic savings; (iii) the enhancement of aid effectiveness; and (iv) sound debt management policies—are essential ingredients for generating higher sustainable growth. I feel sure that the participants took home with them many useful ideas that will be reflected in policy dialogues both within individual countries and between country authorities and the Bretton Woods institutions.

    The links between growth and economic policies—both in the macro-economic and structural areas—are difficult to establish with any precision. Nevertheless, there is now a consensus on the key elements of the policy framework that are the sine quo non for rapid sustainable growth. Experience points to the critical importance of macroeconomic stability; mobilizing domestic and foreign savings alike to finance efficient investment in physical and human capital; a leading role for the private sector; outward-oriented, market-based structural policies; efficient debt management; and the efficient utilization of aid resources.

    But at the same time, African economic policymakers face a number of new challenges. The seminar discussed, in particular, changes in the aid environment. Aid budgets in most of the major donor countries are under severe pressure—a trend that is unlikely to change in the near term—though there may be some reallocation of aid toward the poorest of developing countries. At the same time, donors are applying greater selectivity and concentrating aid among the stronger performing countries; the competition for scarce funds is becoming stronger. The seminar agreed that recipient countries must respond by demonstrating that aid is put to better use, including through improved revenue performance, closer scrutiny of public expenditure to reduce unproductive spending, and greater willingness to let go of public enterprises and transfer activities to the private sector.

    Finally, external debt remains high for many African countries. For most countries, mechanisms are in place which, if implemented flexibly, could bring the debt service profile to sustainable levels. But as progress is made in dealing with the problems of the heavily indebted countries, it is critical that governments put in place debt management policies that are complementary to their overall developmental objectives, and ensure that debt servicing difficulties do not re-emerge.

    Jack Boorman

    Director

    Policy Development and Review Department

    International Monetary Fund

    Acknowledgments

    This seminar was organized by Anupam Basu, Benedicte Christensen, Matthew Fisher, and Hiroyuki Hino of the International Monetary Fund; Yoichi Nemoto, Masato Matsui, and Shinpei Shiojiri of the International Finance Bureau of the Ministry of Finance of Japan; and Toshio Oya of the Office of the Executive Director for Japan in the International Monetary Fund. Help with the logistical arrangements in Paris was provided by Irene de Heurtaumont of the IMF’s Paris Office. Martha Bonilla of the IMF’s External Relations Department helped edit and prepare the volume for publication.

    Claire Liuksila

    Editor

    Opening Remarks

    Alassane D. Ouattara

    It is a great pleasure for me to address this seminar on policies for growth in Africa, with its special focus on domestic and external resource mobilization issues. In my view, this is a logical sequel to the seminar held in Tokyo in March 1994, which covered the key elements of macroeconomic and structural policies that are essential for the achievement of sustainable economic growth and development in Africa. I would like to commend and thank the Japanese authorities for organizing the two seminars. Their efforts are helping to focus the attention of the international community on the adjustment and reform programs of African countries, thereby fostering a search for more practical ideas on how to achieve rapid economic progress. Today’s seminar, like its predecessor, will seek to draw lessons from the experiences of Asian countries and how these can best be adapted to the issues of reform in Africa. I hope that the discussions in this seminar will leave us all with a clear sense of what needs to be done better, and how it can be achieved in the real world.

    As I see it, there are four broad themes for the seminar. First, how to enable the private sector to play a lead role in the growth process in Africa, a role that is indeed vital. Second, how to boost domestic savings and help the financial sector to contribute to the mobilization and efficient use of resources. Third, how to facilitate foreign aid and make it more effective. And finally, what are the essential elements of sound debt management practices.

    Before turning to the Fund’s basic approach to these important issues, I would stress two overarching considerations: we have always sought to address these issues with due attention to the specific social and economic situation of each country; and we have encouraged policymakers to aim at macroeconomic consistency within a coherent medium-term policy framework.

    As regards the first issue of fostering the development of the private sector, I see three elements relating to macroeconomic policies that are critical.

    First, macroeconomic stability, underpinned by strong noninflationary monetary policies, is essential, and sustained (as distinct from “stop-go”) adjustment efforts are critically important. This helps to establish the credibility of policies in the eyes of the private sector.

    Second, the magnitude as well as the quality of public sector adjustment is important. The public sector deficit should not crowd out the private sector—which is so often impeded by distortionary and burdensome tax systems, inadequate access to bank credit, and the accumulation of public sector arrears. What is often needed is a restructuring of public expenditure—away from unproductive to developmental uses that support and reduce the costs of private sector activity—and the establishment of a tax system that is efficient, equitable, and least burdensome.

    Third, it is essential to ensure that the exchange rate is consistent with fundamentals and does not need to be supported by unsustainable external borrowing or exchange and trade restrictions. The establishment of market-determined exchange rates in many countries—as in Kenya, Tanzania, and Uganda for example—and the devaluation of the CFA franc in early 1994 highlight the importance that African countries attach to realistic exchange rates. This recognition has often been accompanied by outward-looking exchange, trade, and investment policies that encourage competition, the absorption of technology, and efficient resource allocation.

    In our approach to strengthening savings mobilization and the financial sector, we have focused on two areas:

    First, we have underscored the need to restructure financially distressed banking institutions, while establishing strengthened prudential practices and central bank supervision, and avoiding centrally directed lending policies that carry the risk of insolvency for financial institutions.

    Second, we have urged a shift from direct to indirect methods of monetary control, moving from administered to market-determined interest rates, and phasing out the discriminatory or distortionary elements of monetary and credit policies. The aim has been to improve access of the private sector to the services of the financial sector, and to make such access as equitable and transparent as possible. I am sure valuable insights will be gained when you share your thoughts on the reforms implemented, for example, in Ghana, Kenya, Malawi, Uganda, Zimbabwe, and in the countries of the West African Economic and Monetary Union.

    Our efforts to enhance aid effectiveness have aimed at promoting transparency and accountability in the use of aid resources in essentially three ways:

    First, emphasis has been put on enhancing the transparency and monitoring of public expenditure, and on adjusting public wage, subsidy, and pricing policies to improve resource allocation and reorient expenditure toward basic economic and social infrastructure. The process of public expenditure review and restructuring is becoming progressively internalized in African countries; the experiences of Ghana, Uganda, and Zambia might shed light on how this is being achieved.

    Second, we have stressed the need to strengthen public accounting of the financial operations of parastatals, reduce their reliance on budgetary and bank financing, and accelerate privatization efforts. Progress in this area has not been as rapid as one would have hoped, so we need to assess the problems and the approaches tried, and learn from the experiences, for example, of Mali, Côte d’Ivoire, Malawi, Senegal, and Tanzania.

    Third, we have encouraged countries to develop integrated medium-term scenarios for the government budget, the balance of payments and the public debt, in order to give a coherent view of domestic resource mobilization efforts, external financing needs, and the expected outcome in terms of resource use and progress toward domestic and external viability.

    Finally, we have been stressing sound debt management practices. Many low-income countries have high debt and debt service ratios. For many countries, the need to reduce large external borrowing requirements as well as meet obligations on a large debt stock implies a significant reduction in the share of income that could be channeled into domestic absorption. We now have in place mechanisms that, if implemented with sufficient flexibility, should bring the burden associated with the stock of debt to manageable levels. As these mechanisms are implemented, attention must shift from the “debt crisis” to the need for governments to adopt sound debt management and macroeconomic policies so as to maximize the development value of external borrowing and prevent the re-emergence of debt servicing problems. Policies that can attract non-debt creating flows are also important complements to prudent debt management. In addition, there is a need for official financial support—on as concessional terms as possible—in order to finance the enormous development requirements of these countries.

    In conclusion, I wish to emphasize that good governance is crucial if sound economic policies are to be successfully implemented and sustained. In this regard, strong institutions with “checks and balances,” coupled with transparency and accountability in public sector activities, can play an important contributory role. Political stability is also essential for the continuity of economic reforms, and domestic ownership of economic policies is indispensable for the broad national commitment to reforms. Finally, an equitable sharing of the benefits of reform and adequate social protection schemes, or what I would call growth with equity, can influence the course of growth, and in particular, the political sustainability of economic reforms.

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