Chapter

II The Role of the Fund

Author(s):
Saleh Nsouli, and Justin Zulu
Published Date:
April 1985
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In view of mounting economic and financial imbalances, a number of African countries worked closely with the Fund to design and carry out appropriate adjustment programs during 1980–81.2 At the beginning of 1980 there were 12 stand-by arrangements. The total amount approved under these arrangements was equivalent to SDR 455.2 million. Several arrangements expired and new arrangements were approved during 1980. At the beginning of 1981 there were 11 stand-by and 3 extended arrangements for a total of SDR 1.8 billion. With the increase in extended arrangements and the approval of new stand-by arrangements in 1981, the numbers of stand-by and extended arrangements in effect at the end of 1981 were 13 and 6, respectively, with the total amount committed reaching a record SDR 4.3 billion. Purchases nearly doubled in 1980 and more than doubled in 1981, reaching a record SDR 1.7 billion (Tables 2 and 3).

Table 2.Africa: Stand-By Arrangements and Arrangements Under Extended Fund Facility, 1979–83(In millions of SDRs)
Stand-By (SBA)

and Extended

Facility (EFF)
Date of

Approval
Expiration

Date
Amount

Approved
Amount

Purchased 1
Undrawn

Balance
1979
CongoSBAApril 25, 1979April 24, 19804.002.002.00
EgyptEFFJuly 28, 1978June 30, 1980425.0075.00350.00
Gambia, TheSBANov. 2, 1979Nov. 1, 19801.601.60
GhanaSBAJan. 10, 1979Jan. 9, 198053.0032.0021.00
KenyaSBAAug. 20, 1979Aug. 19, 1981122.48122.48
LiberiaSBAMarch 21, 1979March 20, 19809.259.25
MalawiSBAOct. 31, 1979Dec. 31, 198126.343.0623.28
MauritiusSBAOct. 31, 1979Oct. 30, 198173.0320.0053.03
RwandaSBAOct. 31, 1979Oct. 30, 19805.005.00
SenegalSBAMarch 30, 1979March 29, 198010.5010.50
Sierra LeoneSBANov. 2, 1979Nov. 1, 198017.007.509.50
SudanEFFMay 4, 1979June 30, 1980200.0030.00170.00
TogoSBAJune 11, 1979Dec. 31, 198015.0015.00
ZaïreSBAAug. 27, 1979Feb. 26, 1981118.0020.0098.00
Total1,080.20209.31870.89
Total (excluding
Egypt and Sudan)455.20104.31350.89
1980
Central African RepublicSBAFeb. 15, 1980Feb. 14, 19814.004.00
EgyptEFFJuly 28, 1978June 30, 1980425.0075.00350.00
Equatorial GuineaSBAJuly 1, 1980June 30, 19815.503.002.50
GabonEFFJuly 27, 1980Dec. 31, 198234.0034.00
KenyaSBAOct. 15, 1980Oct. 14, 1982241.5060.00181.50
LiberiaSBASept. 15, 1980Sept. 14, 198265.0018.4046.60
MadagascarSBAJune 27, 1980June 26, 198264.5010.0054.50
MalawiSBAMay 9, 1980March 31, 198249.9022.0027.90
MauritaniaSBAJuly 23, 1980March 31, 198229.708.9020.80
MauritiusSBASept. 5, 1980Sept. 4, 198135.0015.0020.00
MoroccoEFFOct. 8, 1980Oct. 7, 1983810.00147.00663.00
SenegalEFFAug. 8, 1980Aug. 7, 1981184.8041.10143.70
SomaliaSBAFeb. 27, 1980Feb. 26, 198111.506.005.50
SudanEFFMay 4, 1979May 3, 1982427.00151.00276.00
TanzaniaSBASept. 15, 1980June 30, 1982179.6025.00154.60
ZaïreSBAAug. 29, 1979Feb. 26, 1981118.0098.4019.60
Total2,685.00684.802,000.20
Total (excluding
Egypt and Sudan)1,833.00458.801,374.20
1981
EthiopiaSBAMay 8, 1981June 30, 198267.5044.0023.50
GabonEFFJune 27, 1980Dec. 31, 198234.0034.00
Ivory CoastEFFFeb. 27, 1981Feb. 22, 1984484.50176.70307.80
KenyaSBAOct. 15, 1980Oct. 14, 1982241.5090.00151.50
LiberiaSBAAug. 26, 1981Sept. 15, 198255.0033.0022.00
MadagascarSBAApril 13, 1981June 26, 1982109.0039.0070.00
MalawiSBAMay 9, 1980March 31, 198249.9040.009.90
MauritaniaSBAJune 1, 1981March 31, 198225.8010.3015.50
MauritiusSBADec. 21, 1981Dec. 20, 198230.007.5022.50
MoroccoEFFMarch 9, 1981Oct. 7, 1983817.10136.50680.60
SenegalSBASept. 11, 1981Sept. 10, 198263.0015.7047.30
Sierra LeoneEFFMarch 30, 1981Feb. 22, 1984186.0033.50152.50
SomaliaSBAJuly 15, 1981July 14, 198243.1025.9017.20
SudanEFFMay 4, 1979May 3, 1982427.00251.00176.00
TanzaniaSBASept. 15, 1980June 30, 1982179.6025.00154.60
TogoSBAFeb. 13, 1981Feb. 12, 198347.507.2540.25
UgandaSBAJune 5, 1981June 30, 1982112.5077.5035.00
ZaïreEFFJune 22, 1981June 21, 1984912.00175.00737.00
ZambiaEFFMay 8, 1981May 7, 1984800.00300.00500.00
ZimbabweSBAApril 8, 1981April 7, 198237.5037.50
Total4,722.501,525.353,197.15
Total (excluding
Sudan)4,295.501,274.353,021.15
1982
Gambia, TheSBAFeb. 22, 1982Feb. 21, 198316.9016.90
GuineaEFFFeb. 27, 1981Feb. 22, 1984484.50292.14192.36
Ivory CoastSBADec. 1, 1982Nov. 30, 198325.0011.5013.50
KenyaSBAJan. 8, 1982Jan. 7, 1983151.5090.0061.50
LiberiaSBASept. 29, 1982Sept. 28, 198355.005.0050.00
MadagascarSBAJuly 9, 1982July 8, 198351.0030.6020.40
MalawiSBAAug. 6, 1982Aug. 5, 198322.0010.0012.00
MaliSBAMay 21, 1982May 20, 198330.4025.405.00
MoroccoSBAApril 26, 1982April 25, 1983281.30196.9084.40
SenegalSBANov. 24, 1982Nov. 23, 198347.306.0041.30
SomaliaSBAJuly 15, 1982Jan. 14, 198460.0015.0045.00
SudanSBAFeb. 22, 1982Feb. 21, 1983198.0070.00128.00
TogoSBAFeb. 13, 1981Feb. 12, 198347.507.2540.25
UgandaSBAAug. 11, 1982Aug. 10, 1983112.5050.0062.50
Total1,582.90826.69756.21
Total (excluding
Sudan)1,384.90756.69628.21
1983
Central African RepublicSBAApril 22, 1983April 21, 198418.004.5013.50
GhanaSBAAug. 3, 1983Aug. 2, 1984238.50143.1095.40
Ivory CoastEFFFeb. 27, 1981Feb. 22, 1984484.50446.0038.50
KenyaSBAMarch 21, 1983Sept. 20, 1984175.95129.8046.15
LiberiaSBASept. 14, 1983Sept. 13, 198455.0028.0027.00
MalawiEFFSept. 19, 1983Sept. 18, 1986100.0010.0090.00
MaliSBADec. 9, 1983May 31, 198540.5010.0030.50
MauritiusSBAMay 18, 1983Aug. 17, 198449.5024.7524.75
MoroccoSBASept. 16, 1983March 15, 1985300.0030.00270.00
NigerSBAOct. 5, 1983Dec. 4, 198418.006.8011.20
SenegalSBASept. 19, 1983Sept. 18, 198463.0031.5031.50
SomaliaSBAJuly 15, 1982Jan. 14, 198460.0051.258.75
SudanSBAFeb. 23, 1983Feb. 22, 1984170.00144.5025.50
TogoSBAMarch 4, 1983April 3, 198421.4019.411.99
UgandaSBASept. 16, 1983Sept. 15, 198495.0044.0051.00
ZaïreSBADec. 27, 1983March 26, 1985228.00228.00
ZambiaSBAApril 18, 1983April 17, 1984211.5076.50135.00
ZimbabweSBAMarch 23, 1983Sept. 22, 1984300.0097.50202.50
Total2,628.851,297.611,331.24
Total (excluding
Sudan)2,458.851,153.111,305.74
Source: International Monetary Fund, Treasurer’s Department.

Cumulative purchases under the arrangement from date of approval.

Source: International Monetary Fund, Treasurer’s Department.

Cumulative purchases under the arrangement from date of approval.

Table 3.Africa: Purchases and Repurchases from the Fund, 1979–83(In millions of SDRs)
19791980198119821983
Pur

chases
Repur

chases 1
Pur

chases
Repur

chases 1
Pur

chases
Repur

chases 1
Pur

chases
Repur

chases 1
Pur

chases
Repur

chases 1
Benin1.941.80
Burkina Faso
Burundi9.504.80
Cameroon11.3912.858.482.953.000.50
Central African Republic2.385.854.3917.003.072.400.605.700.30
Chad1.242.187.105.433.30
Comoros0.480.480.30
Congo2.001.145.346.753.30
Djibouti
Egypt51.2278.9377.9247.0343.922.70
Equatorial Guinea0.249.537.200.851.261.271.40
Ethiopia36.0066.1023.502.2518.00
Gabon7.501.997.50
Gambia, The3.521.609.0016.902.240.902.60
Ghana44.6322.939.659.658.474.83275.0015.40
Guinea2.974.401.100.585.0115.914.574.70
Guinea-Bissau1.102.350.280.400.40
Ivory Coast12.22328.70115.43167.80
Kenya86.2530.5960.006.9830.007.17150.3816.89132.6043.00
Lesotho2.02
Liberia29.7518.402.4047.542.1664.4162.0010.30
Madagascar3.7339.201.5139.007.4357.735.3915.203.70
Malawi22.070.7624.380.9330.00.3614.6912.6234.2010.30
Mali1.755.102.252.2525.381.0617.601.80
Mauritania0.8919.406.7110.306.9418.763.692.104.40
Mauritius27.9735.0068.0011.0028.015.4931.6014.50
Morocco23.20184.5067.35192.7653.40433.2832.50134.8023.30
Niger30.80
Nigeria308.7177.40
Rwanda
São Tomé and Principe
Senegal14.758.7443.256.3657.746.3653.1713.3337.0010.50
Seychelles0.70
Sierra Leone7.507.279.509.2233.709.225.135.2823.602.00
Somalia6.0025.8837.004.7547.40
Sudan83.1533.70142.8034.70165.5519.0371.8530.15193.0041.60
Swaziland4.2810.00
Tanzania34.0013.0340.0025.0315.9026.341.7411.126.1025.10
Togo16.587.2521.90
Tunisia24.00
Uganda10.588.0037.5010.00122.5010.3185.001.51112.7011.90
Zaïre20.0031.4778.4065.45194.60103.78131.6122.07130.3010.40
Zambia100.0026.2950.0044.03359.3047.3241.5086.20188.40113.60
Zimbabwe32.4937.50153.60
Total539.72287.88874.12421.841,875.85436.231,765.55316.951,940.30378.60
Total (excluding Egypt and Sudan)456.57202.96731.30308.211,710.30339.281,646.67242.881,747.30334.30
Source: International Monetary Fund, International Financial Statistics.

Repurchases include only those relating to outstanding purchases.

Source: International Monetary Fund, International Financial Statistics.

Repurchases include only those relating to outstanding purchases.

The number of African countries that adopted adjustment programs supported by use of Fund resources during this period was relatively limited. Many, however, resorted to financing rather than adjustment. This was reflected in a sharp increase in debt servicing. It is, therefore, essential to review the difference between financing and adjustment, and, in this regard, the role of the Fund in the adjustment process.

Adjustment Versus Financing

When a country faces an external sector disequilibrium, this is manifested in a rise in its current account deficit, requiring it to resort to increased external borrowing to finance the disequilibrium. If the disequilibrium resulted from permanent factors and if a country were not to take the necessary measures to adjust, this financing would have to continue indefinitely. As the external debt rises, a country would eventually reach a point where its ability to service the debt would be impaired, undermining its creditworthiness. Under such conditions a country would lose its ability to continue to finance an external sector disequilibrium. Failure to adjust would force a country to impose strict controls on imports. The resulting import shortage would exacerbate underlying inflationary pressures. In developing countries that depend heavily on imported intermediate manufactured and capital goods, import controls would cause economic activity and investment to suffer and lead to a sharp fall in economic growth.

Thus, financing alone will not solve a disequilibrium. Financing only magnifies and postpones dealing with the problem and, in due course, leads to a greater disruption of the economy than if adjustment were undertaken promptly. Accordingly, the choice is not between adjustment and financing but between promptly initiating a gradual and orderly adjustment process, on the one hand, or being faced with abrupt and disorderly adjustment, on the other. The costs to the economy are too high in the latter case, in terms of the rising debt burden, the emergence of large distortions, and the abrupt shock to the economy when financing ceases. Yet many African countries followed the latter path. The role of the Fund is to avoid such disruptions and minimize the costs of adjustment by providing, preferably at an early stage, the necessary financing to ensure a smooth and gradual process of adjustment.

Duration of Adjustment

From the short survey of the economic problems facing African countries, it is clear that the extent of the imbalances has increased, requiring a more concerted adjustment effort. The Fund has recognized that the deep-seated structural problems and the magnitude of these imbalances require longer periods of adjustment. The question of the length of time over which adjustment should take place, other things being equal, is crucial. If a very short time period is set for attaining equilibrium, adjustment could prove costly to a country, because it would require a rapid deflation of the economy. At the other extreme, stretching out the adjustment period indefinitely would avoid dealing with the problem and result in a situation very close to that of pure financing. Between these two extremes, there is an optimal trajectory defining a time span that will minimize the economic costs of adjustment. Although in practice it is extremely difficult to determine such a trajectory with any significant degree of precision, every Fund-supported program attempts to place the economy concerned on such a trajectory, within the constraints of available information.3 Because in many developing countries the lack of foreign exchange may impede the country from following such an optimal adjustment path, the Fund can provide and help mobilize the necessary financing. It is these considerations that underlie the repeated emphasis by the Fund’s Managing Director that financing and adjustment must go hand-in-hand.

The guidelines on conditionality, which were reformulated in 1979, emphasize that there is a need to encourage members to adopt corrective measures at an early stage of their balance of payments difficulties; that, in many cases, periods of adjustment longer than those normally associated with one- or two-year stand-by arrangements are required; that a flexible approach to the treatment of external borrowing in adjustment programs needs to be adopted; and that due regard has to be given to the domestic social and political objectives, the economic priorities, and the circumstances of members, including the causes of their balance of payments problems. Within these general guidelines, considerable flexibility in applying conditionally has been maintained. Greater emphasis has also been given to providing increased financing to countries over sufficiently long time periods, while formulating programs that pay considerable attention to supply-oriented policies, which meet the development aspirations of developing countries and which reduce the burden of adjustment.4 These considerations are fully reflected in the programs adopted by the African countries during 1980–81.

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