Chapter

VII Conclusion

Author(s):
Saleh Nsouli, and Justin Zulu
Published Date:
April 1985
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Even though some African countries implemented adjustment programs effectively during 1980–81, generally adjustment efforts of African countries remained fairly limited. During this period, the economic conditions in Africa did not show signs of improvement. After picking up somewhat in 1980, economic activity slowed down in 1981 to about 3 percent and stagnated in 1982. Inflation continued to rise during 1980–81 to an annual average of about 22 percent, but tapered off to 17 percent in 1982. The terms of trade declined sharply, by about 10 percent during the three-year period of 1980–82, reflecting in part the recession in the industrialized countries. The aggregate external current account deficit climbed from about US$10 billion in 1979 to an annual average of US$13.1 billion in 1980–82. These deficits continued to be financed primarily by foreign borrowing, with the result that total outstanding external debt rose from US$45 billion in 1979 to US$62 billion in 1982. As a ratio to GDP this represented an increase from 38 percent to 50 percent in three years. Rising international interest rates contributed to an even steeper rise in the debt service ratio, which increased from about 17 percent in 1979 to about 24 percent in 1982.

During 1983, economic conditions in Africa continued to be difficult. A sharp drop in the terms of trade, unfavorable weather conditions, and serious structural imbalances contributed to a fall in economic activity, reducing significantly per capita income. Inflation continued at about the same rate as in the previous year. While the aggregate external current account deficit declined from US$12.5 billion in 1982 to US$10.8 billion in 1983, it continued to require considerable external borrowing. This was compounded by the debt service ratio, which reached a record of 25 percent. Accordingly, by the end of 1983, the ratio of external debt of the African region rose sharply to 60 percent of GDP from 50 percent at the end of 1982. These developments show that the need for adjustment in Africa remains acute.

This study has examined the question of the design and implementation of adjustment programs supported by use of Fund resources in Africa during 1980–81. The programs under consideration were designed to promote economic growth, reduce inflation, and make progress toward a viable balance of payments position. The range of instruments and the intensity with which they were used varied considerably, according to the specific problems and macroeconomic relationships within the countries. Most programs emphasized both supply- and demand-oriented policies. Supply-oriented policies included measures regarding exchange rates, pricing policies, interest rates, investment policies, and the efficiency of public enterprises. These aimed at improving resource allocation, increasing capacity utilization, and expanding the productive capacity of the countries.

Demand-oriented policies included primarily fiscal and monetary measures aimed at keeping the growth of aggregate demand in line with supply constraints. Fiscal policies generally entailed reductions in the growth of expenditure, through restrained wage increases, limits on government employment, a containment or reduction of administrative expenditures, and an increase in the effectiveness of expenditure control. Tax measures were introduced with the aim of expanding the revenue base and enhancing the elasticity of the tax system. On the monetary front, the pursuit of an independent credit policy was constrained by the fact that budgetary policy dictated the credit expansion to the government sector. A number of programs aimed specifically at reducing the crowding out effect and thus provided for greater growth in credit to the private sector.

The programs under consideration did not generally attempt to bring about large changes in the objectives or the instruments in the scope of one year. The aim was to bring about orderly adjustment. In some programs it was recognized that, while measures were being implemented to bring about adjustment over the medium term, significant immediate improvements were not feasible. In fact, in some cases, a rise in inflation and a widened current account deficit were anticipated during the program period. In certain instances, policy instruments allowed for an increase in the budgetary deficit and an acceleration in the pace of credit expansion.

The implementation of programs showed mixed results. Where data are available, they show that only about one fifth of the countries reached the targeted level of economic growth. With regard to inflation, nearly half reached their targets. About a third attained targets relating to the current account of the balance of payments. This study has shown that such mixed performance was associated with slippages in implementation.

Two key indicators of financial performance were used. These indicators were the budgetary deficit (excluding grants) as a ratio to GDP and the rate of growth of net domestic credit. In over two thirds of the countries the budget deficit ratio exceeded the targets. Performance was somewhat better with regard to the expansion of net domestic credit. In over half the countries, this latter indicator’s rate of growth was kept within program targets. Where the quantitative target of either of these two financial instruments was observed, generally at least two of the three objectives were attained. Where the targets of either of these two instruments were not observed, at least two of the three objectives were not attained. Accordingly, a close correlation was established between policy implementation and attainment of objectives.

Slippages in implementation involved primarily the emergence of unforeseen developments, an inability to mobilize sufficient political support to implement the requisite adjustment measures, limitations in the administrative infrastructure, overly optimistic targets, and delays or shortfalls in net inflows of development assistance. However, unforeseen events were encountered both by countries that succeeded in implementing the programs and by countries that did not. This suggests that adjustment can be kept on track if policies are adapted to compensate for unexpected factors. However, this would generally imply a need to intensify adjustment efforts, for which a strong political commitment is necessary.

The case studies of Somalia and Mali provide concrete illustrations of adjustment programs supported by use of Fund resources. The roots and causes of the disequilibria differed somewhat between the two countries. Somalia faced a number of adverse exogenous factors, including a substantial drop in external aid and regional hostilities, which, together with expansionary financial policies, led to acute domestic and external financial imbalances. Mali, by contrast, had embarked on an ambitious public sector development program which, together with a large public enterprise sector, had led to expansionary financial policies. Both countries suffered from drops in their terms of trade and from extensive price controls. The programs in both countries aimed at resolving the resulting structural imbalances and reducing excess demand with a view to promoting a sustainable rate of economic growth, reducing inflation, and making progress toward a viable medium-term balance of payments position. The supply-oriented policies included readjustments of the exchange rate, liberalization of pricing and marketing policies, a reform of the public enterprise sector, and the pursuit of an appropriate investment strategy. Fiscal and monetary policies were designed to align aggregate demand with aggregate supply. The commonality of instruments is, thus, clear. However, these case studies show that differences in design of the programs, and the adaption of policies to changing and unforeseen circumstances, were critical to the progress made during the period of the adjustment programs. Both cases also illustrate that adjustment has to be viewed as a continuous process; no country can afford to implement an adjustment program and consider the task completed. The efforts have to be continued, taking into account the progress of previous years and the obstacles that still lie ahead.

While Fund programs can contribute to putting a country on a sustainable growth path, the real purpose of Fund financial assistance is to provide the necessary balance of payments support while the country takes steps to achieve a viable external sector position. The Fund’s assistance is different from development assistance, which aims at augmenting the resources of the country directly for capital formation. Nevertheless, restoring financial stability can generate confidence that will encourage foreign investors and lead to private sector capital inflows. As recent experience shows, foreign creditors and donors are prepared to provide additional resources to countries undertaking serious adjustment efforts. Resources the Fund can make available in support of adjustment efforts, together with whatever private financing is generated, will have to be accompanied by additional financial assistance on concessional terms if developing countries are to attain a satisfactory growth level under conditions of financial stability. The ensuing growing productive capacity of developing countries can generate greater trade and, over the medium term, contribute to improving their ability to service their external indebtedness.

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