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Structural Adjustment in Sub-Saharan Africa

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1993
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IN 1986 the IMF’s Executive Board established the structural adjustment facility (SAF)—augmented in 1987 by the enhanced structural adjustment facility (ESAF)—to provide balance of payments assistance on concessional terms to low-income developing countries. Since 1986, 30 African countries have made use of the SAF and ESAF. It is now time to review the experience of these countries with macroeconomic and structural adjustment and to seek the lessons that might be drawn from that experience.

Buffeted by an adverse international economic environment, a heavy debt burden, droughts, a weak administrative and physical infrastructure, and political and civil strife, the African continent faces formidable challenges to achieving satisfactory and sustainable growth. While a number of African countries have made substantial progress in recent years in addressing the structural bottlenecks and financial imbalances that constrained their growth capacity, other sub-Saharan African countries are still confronting serious economic and financial crises, either because of a reluctance to embark fully on the road to reform or due to a difficult political situation.

This article briefly outlines economic and financial developments in sub-Saharan Africa over the last two decades. It explains the design of structural adjustment programs supported by the SAF and ESAF and reviews the experience of sub-Saharan African countries implementing them. It concludes with some of the lessons emerging from that experience.

Three phases

During the past two decades, economic and financial developments in sub-Saharan Africa exhibited three basic phases. During the first, from 1973–79, African countries generally witnessed a major improvement in their terms of trade, prompting many of them to sharply expand both current and capital government expenditure and resort to heavy domestic bank and external borrowing. The emerging financial constraints, nonetheless, began manifesting themselves in an accumulation of public sector domestic and external debt and payments arrears. Concurrently, monetary policy accommodated an expansion of private sector credit, while the regulated low interest rate levels discouraged financial savings and contributed to a misallocation of resources. The impact of the expansionary financial policies was aggravated by inappropriate structural policies. Most African countries established large but inefficient public enterprise sectors; expanded the scope of price controls and subsidies; and, with increasingly overvalued exchange rates, intensified exchange and trade restrictions that led to the emergence of widespread parallel markets for goods and foreign exchange. By the end of the 1970s, the sub-Saharan African countries were facing a major economic and financial crisis.

During the second phase, from 1980–84, many African countries tried to cope with the crisis in the face of a deteriorating external environment. A second round of oil price increases in 1979–80 and a recession in the industrial countries contributed to a 12 percent decline in the terms of trade of sub-Saharan Africa in the three years from 1980–82 before recovering somewhat in 1983–84. In addition, the rise in international interest rates in the early 1980s exacerbated their debt service burden. Furthermore, the worst drought in 15 years hit large parts of sub-Saharan Africa during 1982–84. The adjustment efforts of the African countries during this second phase were sporadic, although some progress was achieved. Economic activity picked up somewhat, inflation moderated, and the average external current account deficit, excluding grants, narrowed.

The third phase, from 1985–92, was characterized by a deepening of the structural adjustment efforts on the part of a number of African countries in the context of a severely depressed international economic environment. During this period, sub-Saharan Africa witnessed one of the most severe shocks to its terms of trade, which fell by some 40 percent; industrial country growth slowed considerably in 1990–92; civil unrest created serious economic disruptions in a number of countries; and a drought in southern Africa that began in 1990 took an immense toll on agricultural output and exports. Thus, notwithstanding the adjustment efforts of a number of countries, economic growth—which had risen to an average annual rate of over 3 percent during 1986–89—dropped to an annual average rate of about 1 percent during 1990–92 (for sub-Saharan Africa, excluding South Africa, Nigeria, Sudan, and Zaire, as the latter three countries bias the averages substantially during this period); the average external current account deficit, excluding official transfers, widened from about 7 percent of GDP in 1984 to about 12 percent in 1992; and the average rate of inflation continued to hover around 15 percent annually. These averages, however, conceal wide variations in performance of different groups of African countries, and, in particular, the progress made by several countries that tenaciously implemented structural adjustment programs.

Program design

The increased momentum for structural adjustment in sub-Saharan Africa in the second part of the 1980s was driven by a recognition of the need to tackle deep-rooted structural problems and financial imbalances and to counter the adverse effects of a difficult external environment. Between 1986 and 1992, 30 sub-Saharan African countries adopted adjustment programs under the SAF and ESAF arrangements.

In the context of these new facilities, the design of comprehensive programs benefited from the enhanced collaboration between the IMF and the World Bank, with the staffs of the two institutions providing advice in their respective areas of expertise. The discussions surrounding the formulation of policy framework papers, which set out the medium-term objectives, policies, and financing needs for each country, also helped foster a political consensus within many of the countries. In addition, the concessionality of the resources provided under the SAF and ESAF was important for the low-income sub-Saharan African countries, which were already facing heavy debt service burdens. The programs also helped catalyze additional bilateral and multilateral financial assistance, including debt relief on increasingly concessional terms, with the result that virtually all sub-Saharan African countries implementing programs supported by the SAF and ESAF witnessed an increase in net resource transfers.

The key objectives of structural adjustment programs were to achieve a satisfactory and sustainable rate of economic growth, reduce inflation, and attain a viable balance of payments position over the medium term. Even though the broad objectives and policy instruments were generally similar, each program was tailored to the particular circumstances of the country, taking into account the government’s specific quantitative objectives, the intensity with which each policy instrument was to be used, the institutional and administrative setting, and potential financing.

In the design of these programs, achieving domestic and external financial stability was seen as an important ingredient for a sustainable rate of economic growth. If a country had high levels of inflation, reflecting excess demand pressures, savings and investment would be discouraged, leading to a drop in economic growth. Similarly, if a country faced continuous external imbalances, the ensuing shortage of foreign exchange could result in a curtailment of essential imported inputs, undermining the domestic industries.

“In the design of these programs, achieving domestic and external financial stability was seen as an important ingredient for a sustainable rate of economic growth.”

Although the programs were designed within a medium-term framework, most were geared toward enhancing economic growth, even over the short run. In certain countries, however, where the economy had overheated because of unsustainable expansionary policies, the programs envisaged a temporary slowdown. Similarly, while most programs were designed to reduce inflation during the adjustment period, some foresaw an initial rise in inflation to allow for the impact of exchange rate adjustments and price decontrols. Most programs also aimed at reducing the external current account deficit during the program period, but some did envisage an increase in the deficit—to be covered by additional external financing—to accommodate the added investment and the liberalization of the exchange and trade system.

The programs designed during 1986–92 were characterized by a comprehensive range of policies involving (a) structural measures to increase productivity and promote capital formation by reducing distortions and physical bottlenecks; (b) macroeconomic policies to align aggregate demand with available resources, mobilize savings, and release resources to the private sector; and (c) social safety nets to protect the most vulnerable groups of the population and mitigate the transitional costs of adjustment.

The experience

The most significant aspect of the adjustment efforts of sub-Saharan African countries during 1986–92 was the progress they made toward liberalizing their economies, with a view to enhancing incentives and the efficient utilization of scarce resources. Virtually all the African countries that implemented structural adjustment programs supported by SAF and ESAF arrangements gave high priority to liberalizing pricing and marketing policies. In this regard, given that the highest potential for growth in sub-Saharan Africa is in the agricultural sector—which employs most of the population, generates the bulk of value added, and, in a number of cases, accounts for an important part of exports—producer prices were reviewed or liberalized to send the right signals to producers and consumers, while marketing arrangements were reassessed to avoid trade monopolies.

These actions were reinforced with appropriate external sector policies. Given the importance of the exchange rate in allocating resources and regulating absorption, many African countries, excluding those pegging their currencies under monetary arrangements, adjusted their exchange rates to reflect market conditions;, some adopted various forms of floating exchange rate regimes. In this context, governments paid particular attention to the sequencing of policies. The adjustment in exchange rates to equilibrate the demand for and supply of foreign exchange was supported by appropriate demand management policies, thus providing the basis for many African countries to reduce exchange and trade restrictions and streamline their customs tariffs.

The overextended public enterprise sectors had become a major drain on the economy of a number of African countries, putting pressures on both the government budget and bank credit. The programs, therefore, generally included actions to rehabilitate, privatize, or liquidate public enterprises. While a limited number of countries made progress in this area, most countries lagged seriously behind, as inadequate preparatory work, limited financial intermediation, and political pressures hindered the process.

Virtually all programs included measures to strengthen development planning, with a view to ensuring that the investment strategy was consistent with the overall macroeconomic objectives, the rate of return on projects was carefully evaluated, and the recurrent cost and debt servicing implications were taken into account. However, while reviews of investment programs succeeded in weeding out the most unsuitable projects, they were generally not sufficiently comprehensive to allow for a full evaluation of all the projects.

All programs involved structural measures to increase government revenues and rationalize expenditures. The programs included wide-ranging reforms of the tax system designed to enhance its elasticity, broaden its coverage, and improve the distribution of the tax burden. Many programs also aimed at reducing the share of the government wage bill through a restrained incomes policy, strict limits on employment, and, in some cases, a retrenchment in the civil service under voluntary departures schemes. The programs also attempted to curtail lower priority expenditure, improve the efficiency of maintenance and investment outlays, reduce subsidies, and increase the share of expenditure for social services. Even though slippages occurred, most countries made progress in fiscal reform. Under the programs supported by the SAF and ESAF, there was an improvement in the fiscal balance relative to the three-year period preceding the programs in nearly two-thirds of the African countries.

The reduction in fiscal deficits and the improvement in the financial situation of public enterprises allowed the monetary authorities to redirect credit to the private sector, while restraining monetary growth. Major reforms of financial markets, institutions, and the regulatory framework undertaken also strengthened the allocation of financial resources. Those reforms enhanced the role of the market in allocating credit, notably by abolishing interest rate ceilings or floors or removing bank-specific or sector-specific quantitative ceilings on credit; they also strengthened the banking systems by restructuring banks, improving prudential regulations, and reinforcing bank supervision.

SAF- and ESAF-supported programs paid increasing attention to poverty and the social aspects of structural adjustment programs. In general, the programs provided targeted assistance for the most vulnerable groups of society. Some structural measures taken in the context of programs, such as an increase in agricultural producer prices that redistributed income to the poorer rural areas, improved the economic situation of the poor directly. In addition, many programs provided for increases in outlays for health and education. To ease the short-term impact of certain adjustment measures, programs often included specific compensating measures. For example, when policies involved a reduction in public employment, severance pay was provided and retraining programs were offered. Over the medium term, the reform programs, by promoting growth and increasing employment opportunities, were seen as the best insurance for improving living standards.

Sub-Saharan Africa: before and after1
Pre-program three-year annual averageProgram annual average
GDP growth(percent)
A2.34.1
B2.23.5
Inflation(percent)
A27.517.5
B26.926.3
Overall fiscal balance2(percent of GDP)
A-13.9-11.4
B-13.5-13.5
Current account balance2(percent of GDP)
A-15.6-16.1
B-15.0-17.5
Gross international reserves(months of imports)
A2.52.8
B1.82.6
Source: Data provided by countries and IMF staff estimates.A: Countries with sustained program Implementation.B: Including those with Interruptions.

Covers sub-Saharan African countries that had completed annual programs or reviews under SAF and ESAF arrangements by May 31, 1992.

Excluding grants. Includes effects of trade liberalization, in the case of the external current account, and of structural reform expenditures, in the case of the budget, made possible inter alia by increased external financial assistance in support of the programs.

Source: Data provided by countries and IMF staff estimates.A: Countries with sustained program Implementation.B: Including those with Interruptions.

Covers sub-Saharan African countries that had completed annual programs or reviews under SAF and ESAF arrangements by May 31, 1992.

Excluding grants. Includes effects of trade liberalization, in the case of the external current account, and of structural reform expenditures, in the case of the budget, made possible inter alia by increased external financial assistance in support of the programs.

The results

Although the experience with policy implementation has varied across countries, a recent evaluation of the progress made under SAF/ESAF arrangements for 30 sub-Saharan African countries during the program period (relative to the three-year pre-program period) shows that there was an improvement in growth performance in nearly two-thirds of the cases, a reduction in inflation in about the same proportion, an improvement in the external current account in nearly two-fifths of the countries, and an increase in international reserves in over two-thirds of the countries. In addition, many sub-Saharan African countries implementing programs managed to reduce or stabilize their ratio of gross external debt to merchandise exports through a combination of improved export performance, prudent debt policies, and debt cancellation. The Gambia, Malawi, Mozambique, Senegal, and Togo, in particular, succeeded in reducing their debt ratios, while Ghana, Guinea, Kenya, and Mauritania stabilized theirs.

These results are all the more remarkable if the factors that adversely affected performance are taken into account. Of the African countries with SAF/ESAF arrangements, about half had arrangements that were interrupted for a cumulative period of more than one year. In general, countries that sustained policy implementation, promptly adapted their policies to a changing environment, and sequenced their policies appropriately made greater progress than those that did not (see table). The interruptions also suggested that the political consensus may have waned during the course of the program, possibly as the initial crisis atmosphere subsided.

In addition, a number of countries suffered from adverse climatic conditions. Burundi, the Central African Republic, The Gambia, Ghana, Kenya, Lesotho, Mozambique, Rwanda, Sao Tome and Principe, Senegal, and Uganda suffered particularly in this respect. Furthermore, many of the African countries were hit by a sharp deterioration in their terms of trade, with the most substantial drops occurring in Burundi, Equatorial Guinea, Ghana, Guinea-Bissau, Kenya, Madagascar, Mauritania, Mozambique, and Uganda.

In many cases, program implementation was constrained by a limited administrative and institutional infrastructure, while program monitoring was hindered by data deficiencies. Program implementation was also hampered frequently by delays or shortfalls in the receipt of external financial assistance, resulting mostly from the administrative procedures in certain creditor countries or from the recipient country’s lack of performance under certain sectoral or program loans. In some cases, concerns regarding governance also led to shortfalls in financial assistance.

Finally, a number of countries suffered to different degrees from political instability, internal conflicts, and border problems that contributed to program slippages. Program implementation in 5 countries was somewhat adversely affected by political instability or border conflicts, while in 14 countries it was affected consider ably more.

The lessons

The benefits of the adjustment policies pursued in recent years in a number of African countries will take time to materialize fully, given the inherently long gestation period of structural reforms. In the period ahead, however, there is a need to deepen those reforms, even in the countries that have already made significant progress. These countries are discovering the layering effect—that is, as some of the more obvious and urgent problems are tackled, a second layer of problems that were not as evident initially become more binding. For instance, as public sector imbalances were reduced and external sector policies liberalized, the problems of financial intermediation assumed greater importance in many African countries in holding back the expansion of private sector activity. Other African countries that have so far been reticent in their efforts to reform can draw inspiration from the successful experience of the adjusting countries. Furthermore, it is to be hoped that, once the situation stabilizes in those countries going through political crises or civil strife, they will embark on the road to reform. It is clear from the recent experience that headway has been made in tackling some of the major challenges of sub-Saharan Africa that were foreseen for this decade. Yet the major long-term issues that constrain development in the African countries—the high rates of population growth, the degradation of the environment, and the limited human capital and institutional capacity—still remain to be tackled.

It is not easy to generalize from the experience of African countries pursuing structural adjustment, as the progress made has varied considerably from country to country and as the challenges facing the countries differed significantly. Furthermore, it is not feasible to isolate the impact of policies from that of other factors. Nonetheless, there are some lessons that can be drawn from this experience.

First, comprehensive policy packages are essential. The countries that made the most headway were those where structural reforms and macroeconomic policies reinforced each other, contributing to increasing efficiency, promoting investment, mobilizing domestic savings, and aligning aggregate demand with available resources. The combination of structural reforms and appropriate macroeconomic policies can foster private sector investment through a reduction in distortions, an improvement in production incentives, and the enhancement of confidence through a stable economic environment.

Second, the appropriate sequencing of policies can enhance the effectiveness of the adjustment effort, as it takes into account the complementarity of instruments and the need to support certain actions with others. For instance, the liberalization of exchange and trade restrictions had to be preceded or accompanied by macroeconomic and exchange rate policies to align aggregate demand with available resources, if such a liberalization was to be sustained.

Third, the preparation of reforms should be thorough. The experience of the African countries in particular with regard to the restructuring of the public enterprise sector suggests that the preparatory work—in terms of auditing the enterprises and developing a strategy for their restructuring—was often inadequate and that the time frame envisaged for privatization did not fully take into account the time needed for completing the process and the feasibility of generating the requisite domestic financial resources or attracting the necessary foreign financing.

Fourth, the continuity of policymaking is critical to the success of the adjustment efforts. The experience of the sub-Saharan African countries shows that those countries that followed off-again, on-again adjustment policies eroded, during the relaxation phase, much of the progress achieved during the adjustment period.

Fifth, the prompt adaptation of policies to a changing economic environment is a key ingredient of successful adjustment. While many of the countries in Africa were confronted with adverse shocks, it is those that reinforced their policies rapidly that were able to keep their adjustment efforts on track.

Sixth, the building and maintenance of a consensus and the implementation of safety nets can help strengthen the support for and the commitment to adjustment. With the institution of the SAF and the ESAF, the internal dialogue generated by the need to elaborate policy framework papers contributed to the formation of a shared vision of the future among policymakers. Unfortunately, the political commitment generated by this initial consensus was not always sustained over the adjustment period. At the same time, delays in implementing actions to protect the most vulnerable groups from the transitional costs led in certain cases to increased resistance to adjustment.

Seventh, the reinforcement of the administration and of institutions is essential for effective program implementation. Quite often the progress made in putting in place reforms was hindered by a weak administrative and institutional base. Adjustment programs need to include explicitly technical assistance to help in the buildup of the administration and institutions that, over the long run, will be able to conduct economic policy effectively.

Eighth, an improvement in the data base can help strengthen the design of programs and the monitoring of progress. The lack of timeliness and the spotty coverage of the data base have resulted, in some instances, in an incomplete identification of problems at the time of policy formulation and in delays in reacting to policy slippages or changing economic conditions.

Ninth, there is a need to further improve the coordination of foreign financial assistance to support reforms. While the policy framework paper has provided a convenient vehicle for identifying the financing needs of a country in the context of a comprehensive reform program, a number of African countries, even after securing the requisite commitments, have experienced shortfalls that complicated their internal economic management.

Tenth, good governance is an important element for the success of the adjustment effort. The implementation of policies and the fostering of an environment conducive to enhancing resource mobilization and investment require the sustained political stability that only good governance can ensure. Interestingly, experience in Africa shows an interaction between political and economic conditions—with political stability fostering good economic conditions and vice versa.

The sub-Saharan African countries deepening their reforms or embarking on new ones can draw on the accumulated experience of those countries that have made progress. IMF Managing Director Michel Camdessus has noted that there is a broad consensus among the members of the IMF that the ESAF has proved to be an effective mechanism for Fund support of the reform efforts in low-income countries and that a successor facility needs to be established. In this regard, all efforts are being made to make this instrument even more effective in light of the lessons of experience.

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