Journal Issue

IMF Survey: Vol.25, No.1 1996

International Monetary Fund. External Relations Dept.
Published Date:
January 1996
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Goal of European Union Is Focus For European Policymakers

Massimo Russo, Director of the IMF’s European I Department—responsible for western Europe and central and eastern European countries in transition—joined the IMF in 1964, and has headed the European I Department since 1987. He has also served as senior economist at the Organization for Economic Cooperation and Development and as Director General of Economic and Financial Affairs at the European Commission. On December 14, he spoke with the Editor of the IMF Survey about recent developments in Europe, the European Union, and Bosnia and Herzegovina. Subsequent to this interview, on December 20, Bosnia and Herzegovina became a member of the IMF (see page 10):

IMF Survey: Despite the progress in some of the European countries such as Germany, Italy, and the United Kingdom, the latest World Economic Outlook notes that much remains to be done to restore fiscal balance and put ratios of public debt to GDP on a declining trend in Europe. What are the overall and key country prospects for further substantial fiscal consolidation in the countries in your department?

Russo: Every EU member has prepared programs of fiscal consolidation that would enable them to meet the Maastricht criteria by 1997 or 1998 [see box, page 2]. The question now is whether they will be able to take all the measures required to fulfill those plans. The 1996 budgets have already been decided, and if they are not in line with those plans, countries will have to make a much larger adjustment effort in just one year—1997. There are clearly a few crucial countries, particularly France and Italy. The French government intends to meet the Maastricht criteria by 1997. France already meets the inflation and the debt-to-GDP criteria. The measures included in the 1996 budget and those concerning social security, recently announced, should permit France to achieve the fiscal deficit target, provided an additional effort is made in the 1997 budget. However, the public sector strikes in France are a reaction to the proposed adjustment measures in the social security area, which are essential if the government is to achieve the target; and, as of today, the jury is still out. We wish the French government success in this area, and hope the French public will realize that what the government is proposing is necessary for France itself, and not just for meeting the Maastricht criteria. The social security finances for all European countries, not just France, are in a difficult position, and measures to review entitlements and contributions are needed everywhere.

In Italy, the current program provides for reaching the 3 percent deficit target in 1998. So, unless this program is changed and the target advanced, Italy will fall one year short of meeting the Maastricht requirement. I understand the government is likely to reconsider this program, but not until 1996 and if it is given a new mandate. Italy’s chances of meeting the Maastricht target of a debt-to-GDP ratio of no more than 60 percent are clearly nil, but the Maastricht Treaty calls for a clear declining trend to the 60 percent level, so this is still an open issue. Several countries are likely to meet the fiscal deficit criterion but not the overall debt criterion; these include the Netherlands and Belgium, which are already basically in a monetary union with Germany. Therefore, the issue of the interpretation of the debt criteria is also open for them.

The Maastricht criteria also include exchange rate stability and the differential on interest rates and inflation, which only partly reflect the fiscal condition. In the area of convergence of inflation, progress is much more advanced and the inflation and interest rate criteria are likely to be met by many countries. Exchange rate stability will be measured ex post, but the requirement of being in the exchange rate mechanism of the European Monetary System seems to remain.

IMF Survey: As the date for economic and monetary union (EMU) approaches, there is likely to be an inner core of countries that meet all the convergence criteria and another group of countries that do not. What implications does this have for EMU?

Russo: The Maastricht Treaty provides for an inner and outer core of EMU countries. The treaty indicates that the first examinations will be made in 1996, and if the majority of countries meet the criteria, EMU would begin with that group; the second examination would take place in 1998 and provide for starting the EMU with the countries that meet the criteria on January 1, 1999. This arrangement has several implications. The first is that for a small, restricted group—Austria and the Netherlands, which are essentially in a monetary union with Germany—the system is already in place. Thus, a small group will form this monetary union; it is important that this monetary union include at least another large country besides Germany—notably, France—with arrangements made for other countries to be able to enter the union if and when they meet the Maastricht criteria.

The Maastricht Treaty Criteria

Following are the main criteria for monetary and fiscal convergence as set out in the Maastricht Treaty in December 1991:

  • cumulative public debt not to exceed 60 percent of GDP;

  • the annual fiscal deficit not to exceed 3 percent of GDP;

  • inflation not to exceed that in three EC [EU] states with the lowest rate by more than 1.5 percentage points;

  • the interest rate on long-term government securities not to exceed that in three EC [EU] countries with the lowest inflation rates by more than 2 percentage points; and

  • a country must have maintained its membership in the European Monetary System for two years without having initiated a devaluation.

There will also have to be arrangements for the kind of exchange rate regime that will prevail between the countries that share the common currency and those that retain their own currency. This issue is at an early stage of discussion. Various solutions are possible. One is a system similar to the European Monetary System, with an exchange rate mechanism established with the European currency [the “euro”] at the center; this system would clearly be asymmetric in the sense that the anchor role will be played by the European currency. The more difficult issues concern the kind of support the European Central Bank would give the exchange rate of the other currencies and under what conditions. The discussion is completely open, with proposals ranging from no support—with the responsibility for defending a currency resting with the country issuing the currency—to automatic support, moving eventually to a process of conditionality.

IMF Survey: What implications does the prospective enlargement of the EU have for the future of the Union itself?

Russo: The prospective new members—mainly some central European countries and some Mediterranean countries—could in my view be in a position to join the EU with an adequate adjustment period. However, I don’t think they will be in a position to join the monetary union soon. While the question of deepening versus widening of the Union will continue to be discussed, beyond a certain number of countries it becomes difficult to manage a union. On the other hand, it is important for the Union not to be exclusive. So, a compromise will have to be found between these tensions.

IMF Survey: The latest World Economic Outlook states that the recovery in continental Europe is likely to bring only relatively slow progress in reducing high unemployment rates. How can European governments improve on this forecast and do you think they will?

Russo: We have maintained for a long time now that Europe suffers from a high level of structural unemployment, which has increased over time. This means that the measures to deal with the problem need to emphasize the structural side—in particular, improvements in the working of labor markets. There are various related measures, ranging from incentives to work, to rules for hiring and dismissal, to wage differentiation among regions. These are difficult issues. Every country in Europe has attempted to address them, and some have been more successful than others. The most visible results have been in the United Kingdom—but Germany, Italy, and France have also made progress. The “critical mass” of progress in this area, however, has yet to be achieved, and prospects for improving the unemployment situation in Europe remain difficult.

This issue is also heavily colored by social preferences. The European paradigm is to avoid creating a class of working poor and therefore to assist those with low incomes, but not necessarily by providing low wages to employ them. I believe that the price mechanism of the wage should be separated from the social aspects; therefore, the issues of social protection should be addressed by government transfers, while the price of labor should be set by the market in a way that permits the labor market to be cleared and unemployment reduced. The other aspect of unemployment relates to mismatches of educational skills. This can be addressed only by improving the education provided to workers by offering the skills that are in demand. This will require major efforts in Europe, but certainly not only in Europe.

The prospects for dealing with these problems are, in my view, not as good as we would like; progress will continue to be slow, given the difficult political implications surrounding measures in this area.

IMF Survey:The transition economies of central and eastern Europe have made considerable progress toward market-oriented economic systems. In which areas has there been success, and what are the remaining challenges?

Russo: Almost all countries have made great strides in stabilization, price liberalization, establishment of financial markets, and fiscal reform. Progress with privatization is more uneven, with some countries—such as the Czech Republic—having moved very far, and other countries—such as Romania—still saddled with a very large government-owned sector.

The remaining challenges are numerous. On the stabilization front, inflation needs to be reduced to single digits—despite the entrenched inflation expectations in many countries, which have generated de facto indexation mechanisms. In the structural area, privatization needs to completed; a banking system needs to be established that is privately owned, efficient, and not burdened by a portfolio of doubtful loans; and a truly free and competitive market needs to be achieved. Social security presents another major challenge. The benefits inherited from the previous system are still largely in place and are too high compared with the resources available to finance them and too widespread in the sense that they are not targeted. Since this issue is difficult to deal with in the EU and western Europe, you can imagine how difficult it is to deal with it in eastern Europe, where income levels are much lower. But it remains a major problem that must be resolved if the public finance position of these countries is to be strengthened. Interestingly, in only a few countries is domestic and external debt still a problem. The situation could become a major concern, however, if the fiscal position and social security finances in these countries are not improved.

IMF Survey:How have the successful transitional economies managed to deal with capital inflows, especially since the crisis in Mexico?

Russo: Some of them—the Czech Republic and more recently Poland—have experienced the phenomenon of capital inflows, which stems from success and should be viewed from that perspective. Nevertheless, capital flows do complicate the conduct of monetary policy and the achievement of lower inflation. We are not, however, at the point of the Mexican crisis. None of the countries in question has a current account deficit similar to that registered by Mexico; in fact, Poland has a surplus. So it is more an issue of domestic inflation, or inflation regression.

All of these countries will also need an exchange rate appreciation. The reform process implies major increases in productivity, and the exchange rates were set at relatively low levels to make the economies competitive and limit the loss of output and then foster output growth. The experience of eastern Europe has been different in this respect from that of eastern Germany, where the exchange rate was set at a high level and industries had either to be closed or maintained with large subsidies from west Germany. Real exchange rate appreciation can occur in two ways: through a nominal appreciation of the exchange rate or through higher inflation. What is occurring now is higher inflation, and we would prefer that it took place through some nominal appreciation of the exchange rate. The countries, however, are concerned that any nominal appreciation of the exchange rate would damage prospects for export growth.

IMF Survey:How is the IMF approaching surveillance of the EU region, in addition to its individual country surveillance?

Russo: This department has carried on the most intensive “regional surveillance” in the IMF. We have discussed on several occasions issues related to the EU and to EMU. We are preparing a paper based on a mission I led to the European Commission and the European Monetary Institute in November 1995. Clearly, we have to look at the area as a whole and at the interaction among countries within the area. Therefore, whenever we conduct the World Economic Outlook exercise we want to be sure that the discussion of, for example, monetary policy and the interest rate and exchange rate is consistent among countries. We have good relations with both the EC and the European Monetary Institute; we exchange information and keep them informed of the views of IMF staff and the Executive Board, and they keep us informed. We also have staff in the IMF Paris office who deal with the European Union, and we have an advisor in our department who works only on this issue. We have also conducted regional surveillance for other groups of countries, in particular eastern European countries, where we have looked at the common experiences of stabilization and reform and other issues to identify common trends and possible common policy advice and also to review our work critically. We have also studied the possible creation of a payments union for the region, which was undertaken by Peter Kenen of Princeton University, who was attached to our department for a few months. To the extent our budgetary resources allow, we are conducting regional surveillance on a permanent basis.

IMF Survey:What is the IMF doing, or prepared to do, for the Republic of Bosnia as well as for the Republic of Yugoslavia?

Russo: In the case of Bosnia, we are extremely active. We have had a team in Sarajevo on a permanent basis since the end of October to help the authorities in the process of securing IMF membership. We have begun to advise the Bosnian authorities on policies and helped them draw up a memorandum of economic policies, which was signed today, and which will support emergency financing from the IMF under its new policy for assisting post-conflict countries. We are again in the forefront of international institutions, and this has to be so because membership in the IMF opens the way to membership in all the other international institutions.

On December 20–21, at the international donors’ conference in Brussels, we expect to announce Bosnia’s membership in the IMF. [This announcement was made.] By providing post-conflict assistance, we will enable Bosnia to repay bridge loans it will receive to clear its arrears to the IMF; we have also started the process leading to Bosnia’s use of IMF resources [see story on page 10]. We plan to send an IMF resident representative to Bosnia as soon as conditions permit. The various groups or entities that form Bosnia, however, have to build their own internal relationships, and we will continue to do what we can to help them. We are also providing technical assistance; missions have already been sent by the Fiscal Affairs and the Monetary and Exchange Affairs Departments.

As for the Republic of Yugoslavia, we have not yet been contacted by them but will deal with them as objectively as we do with any other country.

Official Financing Fell in 1994 Multilateral Aid for Poor Countries Rose in 1994

Net official development financing to developing countries continued its decline in 1994. Such financing—including disbursements from both multilateral institutions and bilateral sources but excluding official export credits—amounted to $66 billion in 1994. This represented a drop of 5 percent in nominal terms from 1993, and, after adjusting for inflation and exchange rate changes, a drop of 16 percent from its peak level in 1990, according to a forthcoming IMF study, Official Financing for Developing Countries. Official development assistance (ODA), which accounts for the bulk of official financing, rose slightly in 1994, to $58 billion. In real terms, however, net ODA declined by 2 percent in 1994, falling to 0.29 percent of Development Assistance Committee (DAC) country GNP in 1994—its lowest level since 1973. In light of budgetary constraints in major donor countries, this decline in net ODA can be expected to continue.

Net Official Development Finance For Developing Countries

(billion U.S. dollars)


Data: Official Financing For Developing Countries

Official Flows

Since 1990, net official disbursements from multilateral institutions to developing countries fell by $3 billion, to less than $21 billion in 1994. This falloff reflects the larger role now being played by private flows in replacing nonconcessional borrowing from official sources in those countries with access to capital markets.

Development Assistance

The fall in net ODA to developing countries can be traced to both budgetary constraints in donor countries and increased demand for aid from countries in transition to market-oriented economic systems, according to the IMF report.

Multilateral Assistance. Gross and net multilateral lending to all developing countries in 1994—$37 billion and $14 billion, respectively—was broadly unchanged in U.S. dollar terms from the previous four years. Following declines in 1993, both gross and net disbursements to heavily indebted poor countries rose by about $1 billion in 1994. Virtually all heavily indebted poor countries continued to receive positive net disbursements from multilateral institutions in 1994. The regional pattern of disbursements has varied considerably, however, according to the IMF study. Gross and net disbursements to sub-Saharan Africa, North Africa, and the Middle East in 1994 increased by about $1 billion, while gross disbursements to Western Hemisphere countries fell by $3 billion.

Bilateral Assistance. Nominal ODA flows increased to $58 billion in 1994, from $56.5 billion in 1993, but remained below the historical peak of $61 billion in 1992. Changes in the regional pattern of gross disbursements have been dominated by large declines in the share of official bilateral assistance to North Africa and the Middle East. In turn, bilateral aid flows to Asia, Europe, and sub-Saharan Africa recorded significant increases between 1991 and 1993. The distribution of bilateral assistance by income group of recipients since the beginning of this decade shows a 5 percent increase in the share of assistance going to middle-income recipients, at the expense of low-income countries.

Two major trends are shaping bilateral aid policies, according to the IMF study: the end of the Cold War and new budgetary stringencies. Donor countries are making greater efforts to devise more cost-effective and responsive foreign aid policies; hence, the heightened emphasis on poverty reduction and good governance in a growing number of bilateral assistance programs.

Poverty Reduction. Donors’ increased emphasis on poverty reduction has led them to focus increasingly on supporting low-income countries that are pursuing sound policies to encourage growth—especially employment growth—and on supporting projects and programs aimed at reducing poverty. Several donors have narrowed the list of beneficiaries by graduating countries that achieve a higher income level and are benefiting from trade and private capital inflows. Other donors are electing to jettison such traditional development projects as infrastructure in favor of initiatives bolstering support for human capital development.

Good Governance. With the end of the Cold War, many donors are likewise undertaking efforts to build support for legal and political institutions that are conducive to growth and widespread participation in economic and political life. Donors have worked with countries to strengthen governance, and some donors provide technical assistance to help governments establish more responsive legal systems and build democratic institutions.

Export Credits

Total export credit exposure to developing countries and economies in transition rose to $420 billion in 1994 from $380 billion in 1993. Between 1988 and 1994, annual net export credit commitments to these countries grew 275 percent—to $90 billion, from $24 billion. The IMF study attributes the higher exposure to new export credit commitments to aggressive export promotion efforts by exporting countries and a resurgence in import demand in many developing countries.

Measured by net cash flow, the financial performance of most export credit agencies has begun to improve, according to the IMF study. The combined cash flow deficit of export credit agencies in 1994 narrowed to $5.5 billion, from $6.2 billion in 1993. To reduce these deficits further, most agencies have taken steps to improve their risk assessment procedures.

Debt Policy

External Debt and Debt Service. Official bilateral debt remains the fastest-growing component of developing countries’ debt, according to the IMF study, despite increasingly concessional reschedulings. The share of official bilateral credit reached 55 percent of developing country debt by the end of 1994, while the share of credit extended by multilateral institutions was 30 percent. Alternatively, multilateral debt service has remained broadly unchanged over the last decade—at about 4 percent of exports of goods and services for all developing countries. The share of concessional debt in total multilateral debt of the heavily indebted poor countries reached 70 percent by the end of 1994.

Paris Club Rescheduling. During the first seven months of 1995, 11 reschedulings were agreed under the new Naples terms, adopted by Paris Club creditors at the end of 1994 for low-income countries, including a stock-of-debt operation for Uganda. (In the rest of 1995—since the study was completed—two further reschedulings have been agreed, including another stock-of-debt operation for Bolivia.) Under Naples terms, most recipient countries may obtain reductions in eligible non-ODA debt of 67 percent in net present value terms. Most middle-income countries have graduated from the rescheduling process. Most of the remaining middle-income countries with rescheduling agreements still in force are expected to graduate at the end of their current consolidation periods.

In contrast, the debt situation for most low-income rescheduling countries remains difficult, notwithstanding repeated Paris Club reschedulings over the past several years. Since 1989, only 3 such countries (Bolivia, Uganda, and Vietnam) have graduated from rescheduling, bringing the total number that have done so to 5 out of the 35 since 1980. The conditions facing low-income countries need to be viewed in perspective, according to the IMF study. Notwithstanding formidable debt burdens, these recipients continued to receive large aid inflows from donors: in 1994, for example, such flows equaled three times the actual debt service paid out. Even if all the debt now being shouldered by low-income countries were canceled, they would still be heavily dependent on external assistance.

Current mechanisms for handling the debt situation of heavily indebted poor countries further insure that debt relief is given in support of adjustment on a case-by-case basis. The preliminary conclusion of the IMF study is that these mechanisms are likely to work for the majority of countries currently eligible for Naples terms, because they offer the likelihood of a durable exit from the rescheduling process, consistent with the achievement of external debt sustainability.

Official Bilateral Creditors. Relatively less progress has been made by debtors in negotiations with non-Paris Club official bilateral creditors. The largest single creditor in this group, particularly among heavily indebted poor countries, is the Russian Federation. According to its valuations, Russian claims inherited from the former Soviet Union exceeded $170 billion at the end of 1993. Many of these claims are under dispute.

Official Financing for Developing Countries, in the IMF’s World Economic and Financial Surveys series, was prepared by a staff team in the Policy Development and Review Department, led by Anthony R. Boote. Copies will be available in mid-January for $20.00 (academic rate: $12.00) from Publications Services, Box XS600, International Monetary Fund, Washington, DC 20431 U.S.A. (Telephone: (202) 623-7430; fax (202) 623-7201; Internet:

Panama: Stand-By

The IMF today approved a stand-by credit authorizing drawings up to the equivalent of SDR 69.8 million (about $104 million), over the next 16 months, in support of the government’s economic and financial program. Of this amount, 25 percent of each drawing will be set aside to finance debt and debt-service-reduction operations. In addition, the IMF will be prepared to consider an augmentation in the amount of the stand-by credit in the event that financing arrangements are concluded with commercial bank creditors and upon determination by the IMF that such arrangements are consistent with the objectives of the program.

Following a period of political turmoil and a sharp economic contraction in 1988–89, Panama implemented an economic recovery program that sought to restore financial stability and liberalize the economy. Over the past five years, public finances have shifted to a surplus of 0.4 percent of GDP in 1994 from an overall deficit (accrual basis) of 11.3 percent in 1989. Economic sanctions were lifted and large aid flows enabled Panama to normalize relations with a number of external creditors and initiate negotiations on debt restructuring with others. Large capital inflows helped sustain rapidly expanding levels of private investment and consumption, and the economy experienced a strong recovery in the first half of the 1990s. However, progress in deregulation, privatization, and public sector reform was limited, and severe underlying distortions continued to erode the basis for sustained growth. In response to this, the administration that took office in September 1994 began to implement a program that emphasizes reduction of the size of the public sector, deregulation of the economy, and debt relief as means to accelerate growth and to reduce unemployment and poverty.

The 1995–96 Program

The government’s medium-term program seeks to achieve, in the context of medium-term viability, a recovery in the rate of real GDP growth to 4 percent in 1996 and higher rates thereafter, while maintaining inflation below 2 percent. To these ends, the authorities will be reinforcing expenditure controls and efforts in revenue collection so as to accommodate rising investment: public sector operations, which went into a deficit of 0.6 percent of GDP in 1995 will return to a surplus of 0.4 percent of GDP in 1996. At the same time, the authorities are proceeding with reforms that would strengthen the public finances in the medium term. In this context, in June 1995 the Legislative Assembly approved the Tax Incentives Harmonization Law that, among other things, phases out and reduces subsidies and tax breaks. This will improve resource allocation and broaden the tax base. Also, the authorities have been formulating a new public wage and employment policy for implementation in 1997. In the rest of the public sector, the government is preparing various proposals to improve the finances of the social security system.

More Muscle for IMF Surveillance?

Surveillance touches on everything the IMF does and is perhaps its most important activity,” said Sam Y. Cross, former IMF Executive Director for the United States, during a recent IMF Economic Forum. The Forum, moderated by Jacques Polak, President of the Per Jacobsson Foundation and former IMF Economic Counsellor, addressed the question: How can IMF surveillance be strengthened? In addition to Cross, participants included Jack Boorman, Director of the IMF’s Policy Development and Review Department; Barry Eichengreen, Professor of Economics and Political Science at the University of California at Berkeley; and Harold James, Professor of History at Princeton University and author of the recent International Monetary Cooperation Since Bretton Woods.

How Surveillance Developed

According to Cross, the concept of surveillance—introduced in the 1978 amendment to the IMF’s Articles of Agreement—was based on the idea that “good international behavior depended not on whether a country maintained a par value or a float or a peg to another currency, but rather on the policies that the country actually followed.” Although the 1978 amendment marked the first explicit instruction to the IMF to exercise surveillance over the exchange rate policies of its members, the concept dates back to the origins of the IMF. Indeed, as Harold James noted, it is implied in the Bretton Woods Articles, which created a mechanism for consultation and collaboration on international problems.

“Implicit” surveillance under the Bretton Woods system, however, relied on a rule—the requirement to maintain parity. As Cross noted, the only obligation a member country had to the IMF was to maintain its par value. With the move to a system of flexible exchange rates, the IMF needed a new obligation—“and that obligation,” Cross said, “was surveillance.”

Why Strengthen Surveillance?

IMF surveillance has served a useful purpose, according to James. IMF data and estimates provide a basis for discussions among finance ministers of the major industrial countries. And the views of the IMF—sometimes conveyed privately, or published in the World Economic Outlook or by other means—have helped to shape the discussions among policymakers about likely developments and appropriate policy responses. Yet, IMF surveillance has many limitations. From its introduction, according to Jacques Polak, there was a “nagging doubt whether the institution would, in fact, be able to exercise effective surveillance over exchange rates, as well as over the underlying economic and financial policies of all its member countries without the leverage provided by the par value system.”

IMF surveillance, according to Cross, required both negative and positive obligations from member countries. The negative obligations, which have been fulfilled reasonably well, are to “avoid manipulating exchange rates in order to prevent balance of payments adjustment or to gain unfair competitive advantage.” The positive obligations—to collaborate with the IMF and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates—are seen as “weak and ineffective,” however.

One of the limitations of IMF surveillance, said James, is that exchange rates, whose control and management were, historically, the raison d’être of the IMF, cannot be easily discussed in a world of active capital markets without the fear of setting off market panics. Only in the late 1940s when capital movements were subject to controls did the IMF intervene publicly in exchange rate discussions and tell countries what they should do. Since then, he said, the discussion of exchange rate levels has generally become a taboo. James cited two recent and telling examples: the IMF played almost no role in giving exchange rate advice before the 1992 and 1993 crises of the European Monetary System’s exchange rate mechanism; and—at least, not publicly—before the Mexican peso crisis of late 1994. In both cases, said James, fixed exchange rates had become too politicized to be the subject of public discussion between an international institution and central bank or treasury officials.

In James’s opinion, the greatly increased availability of private market financing will further reduce the IMF’s traditional role as a “priest in the policy confessional.” The market should be the judge of the appropriateness of a country’s policies, but it was important that informed policy judgments be made based on as broad a base of information as possible. The IMF had an important role to play as a facilitator and publicist, providing an open forum and making it possible for others to make sound assessments by promoting the timely publication of accurate information.

Post-Crisis Damage Control

Although the Mexican financial crisis may have taught the financial community that more information and closer surveillance were indisputably good things, Barry Eichengreen said that these expedients were not enough to stave off all crises. Indeed, periodic financial crises were not only inevitable but actually a sign that the international capital market was functioning as it should. Still lacking in the case of financial crises in developing countries, he said, were “orderly procedures to pick up the pieces when things go wrong.”

Eichengreen proposed some “modest reforms” for handling financial crises in developing countries. These reforms, he said, would enhance the efficacy of the debt restructuring process and complement, rather than substitute for, strengthened IMF surveillance:

• IMF approval or disapproval of unilateral suspension of debt-service payments by debtor countries. A government receiving IMF approval for a payments standstill would suffer relatively little damage to its reputation, while the possibility that the IMF might not approve would discourage unlicensed use of the option.

• Creation of a bondholders committee responsible for restructuring bonded debts. The London and Paris Clubs would retain their responsibility for commercial bank loans and official credits, respectively, thereby eliminating uncertainty about the locus of authority in negotiations.

• Change in bond covenants. Currently, bond covenants require unanimous consent by creditors before terms of payment can be modified. Permitting a majority of creditors to alter settlement terms would prevent dissident investors from holding up the process of settlement.

• Strengthened IMF conditionality. Any new money injected in conjunction with the debt restructuring—as well as the potential for the IMF’s sanction of a country’s unilateral payment suspension in the event that further financial difficulties arise—would depend on the government’s first agreeing to fulfill strong IMF policy conditions. Knowledge of this precondition would reduce the likelihood that such difficulties would arise in the first place.

Crisis Avoidance

Surveillance could be strengthened, Cross suggested, if the IMF concentrated on crisis avoidance rather than crisis management. Pursuit of this objective would include strengthening in certain areas—some of which are already under way. These include:

The IMF should concentrate on crisis avoidance rather than crisis management.


• better data and prompter reporting;

• making surveillance more transparent and public; and

• more precisely defined obligations on each member country beyond the “rather general admonitions” about surveillance in the Articles of Agreement.

Because the financial environment is changing so rapidly, concluded Cross, whatever is done to improve the surveillance process may need to be changed again very soon.

What the IMF Is Doing Now

IMF surveillance has several dimensions, according to Jack Boorman. Efforts within the IMF to strengthen surveillance have concentrated on three areas: framework, application, and public identity.

Framework. The annual World Economic Outlook exercise has been reinforced by more intensive surveillance of capital markets. In addition, the IMF’s Economic Counsellor keeps the Executive Board up to date on developments in the world economy and the financial markets.

Application. The basis of individual country operations remains the IMF’s annual (Article IV) consultation with country authorities. Unresolved questions from the discussions with country authorities, however, are now followed up immediately. Also, consultation discussions in the Board—which follow intensive IMF staff discussions with the authorities—have become more frank and candid, particularly discussions about the sustainability of the exchange rate.

Public Identity. IMF surveillance defines the institution’s relationship with and responsibility to member countries. Since the breakdown of the Bretton Woods system, however, private market financing has assumed an ever-increasing weight in the international financial equation. Because a country’s ability to pay its debts determines the willingness of markets to provide financing, economic health and appropriate policy initiatives can mean the difference between adjustment and growth or default and crisis.

The IMF is meeting this new challenge on two fronts, according to Boorman: improved data provision by member countries and an opening up to the public of the IMF’s views on member countries. Neither issue, said Boorman, has been completely resolved.

Timely provision of accurate data to the IMF is necessary to ensure that the institution has the information it needs to conduct firm surveillance over its members’ policies. Provision of data to the public by members will allow the market to make sounder assessments.

Although the IMF is not getting into the business of publishing these data, it is formulating a set of standards for data publication. These standards include coverage and choice and definition of variables, as well as timeliness, periodicity, quality, and integrity of data. The intent is to create a data-reporting system that will allow countries to present to the public data of high quality that meet commonly accepted standards.

There is an active debate going on in the IMF, Boorman said, about the extent to which the institution should make its views known to the public. Although Boorman agreed with James that the IMF was moving in the direction of more openness, it was not yet clear, he said, how far this new openness will be taken. Much information is already available through the Internet and through the release of basic background documents to the Article IV consultation process with member countries. But other important documents—such as assessments of individual country policies and the summaries of the Board discussions of the consultations—remain confidential.

The issue of public dissemination of candid economic appraisals, said Boorman, has created a dilemma: what will be the effect of greater IMF openness on the relationship between country authorities and IMF staff, management, and the Board? Can the IMF be more public and, at the same time, preserve the candid and open relationship that exists between country authorities and the IMF within the confidential confines of Article IV consultations? These issues remain unresolved.

From the Executive Board …

Panama: Selected Economic Indicators
(percent change)
Real GDP8.
Consumer prices (end of period)
(percent of GDP)
Public sector balance (accrual basis)1.8-1.50.4-0.60.4
External current account balance-4.2-4.1-6.4-5.8-5.0
Data Panamanian authorities and IMF staff estimates

Structural Reforms

Under the program, with World Bank and Inter-American Development Bank assistance, the authorities are continuing to strengthen the management of public enterprises, and the regulatory framework is being reformed to allow full or partial privatization of enterprises or the contracting out of services to the private sector. By mid-1996, 49 percent of the shares of the telecommunications company will have been brought to the point of sale, and a substantial part of the operations of the ports of Cristobal and Balboa will have been contracted out to the private sector.

To reduce the cost of production, the authorities also are undertaking reform outside the realm of the public sector. The National Assembly recently approved the reform of the Labor Code, which will significantly reduce labor market rigidities. Through the Law for the Defense of Competition (currently being drafted), penalties would be introduced for practices that restrict free competition, price controls would be eliminated, and antidumping clauses compatible with World Trade Organization (WTO) standards would be introduced. In addition, negotiations for Panama’s accession to the WTO are close to completion, and preparations for the reversion of the Canal Zone have been intensified.

Addressing Social Costs

The government’s reform agenda seeks to reverse the trend of the past several decades, when income distribution and the real incomes of the poor deteriorated sharply as a result of pervasive policy distortions. Efforts are under way to improve the efficiency and equity of social spending in the education and health sectors, and to target subsidies to the most vulnerable groups. The activities of the Social Emergency Fund are being expanded so that more community-generated projects can offer employment and basic services to the underprivileged.

Debt-Reduction Operations

In May 1995, Panama reached agreement-in-principle with its creditor banks on a debt and debt-service-reduction operation for $3.5 billion. This agreement, which contains a menu of financing options, is to be concluded in the spring of 1996. Based on a preliminary selection of financing options by creditors, the up-front cost of this package would be about $190 million, about half of which would be financed by international financial institutions (including the IMF), and the remainder by Panama with its own resources.

The Challenge Ahead

Panama faces important challenges related to the need to combat unemployment and poverty. The Panamanian authorities’ economic program represents a serious adjustment effort that, through raising savings and investment, lays the basis for stronger and sustainable growth rates over the medium term. Its full implementation would significantly contribute to meeting these challenges.

Panama joined the IMF on March 14, 1946; its quota is SDR 149.6 million (about $224 million), and its outstanding use of IMF credit currently totals SDR 67 million (about $100 million).

Press Release No. 95/60, November 29, 1995

Uganda: ESAF

The IMF approved the second annual loan for Uganda under the enhanced structural adjustment facility (ESAF) equivalent to SDR 40.17 million (about $60 million), in support of the government’s 1995/96 macroeconomic and structural adjustment program. The loan will be disbursed in two equal semiannual installments, the first of which is available on December 15. The three-year ESAF credit, for the equivalent of SDR 120.5 million ($180 million) was approved on September 6, 1994 (see Press Release No. 94/60, IMF Survey, September 26, 1994).

With broadly based real economic growth of 10 percent and an inflation rate of 3.4 percent, Uganda had a strong economic performance in 1994/95 (July-June), and observed all the quantitative and structural benchmarks under the economic program supported by the first annual ESAF loan. The authorities contained the upward pressure on the real effective exchange rate, which arose from a doubling of coffee prices compared with 1993/94, through sterilizing capital inflows, higher imports, and fiscal and monetary measures. Although good progress was made in structural reforms, the weak state of the financial sector continued to constrain the effectiveness of monetary policy. In February 1995, Uganda became the first country to receive a stock-of-debt operation on Naples terms from Paris Club creditors.

Bosnia and Herzegovina: A New Beginning

On December 20, the Republic of Bosnia and Herzegovina became a member of the IMF and the fourth state to succeed to the membership of the former Socialist Federal Republic of Yugoslavia [SFRY](see accompanying press release). At the same time, the IMF Executive Board approved an emergency credit of $45 million for Bosnia under the IMF’s recently adopted policy for providing assistance to countries emerging from economic and political disruptions. At a press briefing held on December 18, Massimo Russo, Director of the IMF’s European I Department, described the events leading up to Bosnia’s integration into the international financial community.

The process of succession to the former Yugoslav Republic was made extremely difficult by the war in Bosnia and the existence of sanctions in the Republic of Serbia, Russo explained. As soon as prospects for peace appeared promising, the IMF and the World Bank began setting the stage for Bosnia’s accession to membership. Accordingly, in early October 1995, the IMF and the World Bank met with representatives from the donor community to discuss the situation in Bosnia and the conditions for IMF membership, including the clearance of arrears. At that meeting, said Russo, he pledged, on behalf of the IMF, that “we would not be the wagon that would slow down the whole convoy.”

An IMF staff mission has been stationed in Sarajevo since late October. In addition to helping the authorities prepare for membership, the staff team also discussed with the authorities the economic policies that would need to be in place to support their request for emergency assistance from the IMF.

The $45 million extended by the IMF marks the first use of its new emergency credit window for countries in post-conflict situations, Russo said. Financing from this window enables countries devastated by war to take the first steps toward rebuilding their economies and establishing macroeconomic stability, thereby laying the foundation necessary to make them eligible to apply for further IMF assistance, which entails higher policy conditionally.

Russo said it was not yet clear what form the additional IMF assistance to Bosnia will take. “Clearly,” he said, “we will be working toward a medium-term arrangement that provides assistance on concessional terms, because the country is in need of reconstruction and transformation.”

The Dayton Agreement, signed in Paris on December 14, which ended the hostilities in Bosnia, provides for a new central bank that will be created after elections are held and a new parliament is created, said Russo. As agreed by all parties, the head of the new central bank will be a non-national and will be nominated by the IMF sometime in the next six months.

Policy discussions with the authorities have been complicated, said Russo, by the devastation and division of the country and the difficulty of arriving at common decisions. On the monetary side, institutional constraints built into the financial system make it difficult for the authorities to pursue destabilizing policies. The authorities themselves support the decision to operate the central bank as a de facto currency board, which would leave them virtually no discretion for monetary policy. On the fiscal side, however, the situation is more difficult, because resources are meager and fragmented, and under the Dayton Agreement, the central government will have relatively limited power over spending.

Reconstruction of the Bosnian economy, according to a World Bank estimate, could run as high as $5 billion. Russo acknowledged that although a number of international financial institutions have expressed an interest in providing assistance, additional contributions will have to come from governments, Paris Club debt reschedulings, and the private sector.

Bosnia and Herzegovina: IMF Membership, Emergency Credit

The Executive Board of the IMF determined that Bosnia and Herzegovina has fulfilled the necessary conditions to succeed to the membership of the former Socialist Federal Republic of Yugoslavia (SFRY) in the IMF. The IMF also approved a drawing equivalent to SDR 30.3 million (about $45 million) under the IMF’s policy on involvement in post-conflict countries that was endorsed by the Interim Committee at its October 8, 1995 meeting. Bosnia and Herzegovina’s quota in the IMF is SDR 121.2 million (about $180.1 million), and with the succession of Bosnia and Herzegovina, IMF membership now totals 181 countries.

Bosnia and Herzegovina’s membership in the IMF was made possible partly by the clearance of its outstanding arrears, arising from its share of liabilities and assets of the former SFRY in the IMF (see Press Release No, 92/92, IMF Survey. January 11, 1993), totaling SDR 25.1 million (about $37 million), The clearance of arrears was effected through a short-term bridge loan provided by the Netherlands Central Bank, which has been repaid from the credit being provided by the IMF under the policy on involvement in post-conflict countries.

The government of Bosnia and Herzegovina is faced with the very difficult and urgent task of rebuilding the country after the devastations of war without losing control over financial policies. This task is complicated by physical bottlenecks, a weak and fragmented administration, severe foreign exchange shortages, and deep-rooted structural problems in the enterprise and banking sectors that mate the economy highly inflation-prone. While it is too early to develop a quantified framework for macroeconomic policies, two key decisions lend considerable assurance as to the authorities’ capacity to maintain control over financial policies.

First, it has been decided that the new central bank, to be established under the constitution, will operate for at least six years as a de facto currency board, issuing currency only when there is full foreign exchange backing. Second, the central government and public sector entities have decided to refrain from domestic bank financing of fiscal expenditures.

The authorities intend soon to initiate discussions on a more comprehensive economic program that could be supported by the IMF under the upper credit tranches or the enhanced structural adjustment facility (ESAF), once effective procedures for policy development and implementation are in place and an adequate administrative infrastructure has been established.

There is clearly a need for the international community to assist the reconstruction process with large-scale financial and technical support. Financial support must be on highly concessional terms considering the limited debt-servicing capacity of the country, and it must be received urgently in order to overcome acute bottlenecks in key sectors. To unlock broad-based foreign assistance, the authorities will need to seek an early normalization of relations with external creditors, starting with the problem of arrears to multilateral institutions other than the IMF.

Press Release No. 95/70, December 20, 1995

The Program for 1995/96

The government’s medium-term policy framework seeks high and sustained economic growth and poverty reduction within a sound macroeconomic environment. Consistent with these medium-term goals, the objectives for the 1995/96 program, supported by the second annual ESAF loan, are to achieve real growth of 6.5 percent; to keep inflation below 5 percent on an end-year basis; and to increase gross reserves. The external current account deficit, excluding grants, will decline slightly to 7.9 percent of GDP in 1995/96 from 8.4 percent in 1994/95, as the coffee boom subsides, while the overall balance of payments is projected to remain in surplus, with gross reserves rising to 4.3 months of imports in 1995/96 from 3.6 months in 1994/95.

To these ends, the authorities will continue to pursue tight financial policies while leaving adequate room for private sector investment activity. The overall fiscal deficit, excluding grants, is to be reduced by 2 percentage points of GDP through a combination of revenue-enhancing measures and expenditure restraint. The monetary program allows for broad money growth only slightly above nominal GDP growth, with a provision for contingency mechanisms to sterilize additional inflows.

Structural Reforms

To enhance the effectiveness of monetary policy, financial sector reforms are being addressed. These include the development of a secondary market in treasury bills and steps to deal expeditiously with the weak state of the banking system. The development of a securities industry is being given added impetus by legislation creating a Capital Markets Authority, and it is expected that a stock exchange will be established and functioning by end-June 1996. Other structural reforms in the public sector will focus on the tax system, public expenditure management and the civil service, and public enterprises.

Uganda: Selected Economic Indicators
(percent change)
Real GDP growth10.
Consumer prices (end of period)
(percent of GDP)
Government budget, excluding grants-7.8-6.1-5.5-4.4
External current account balance, excluding grants-8.4-7.9-7.7-7.1
(months of Imports)
Foreign exchange reserves3.
Data: Ugandan authorities and IMF staff estimates and projections

Social Issues

The government has made a major effort to improve the economic well-being of all Ugandans. One of the major ways in which the less well-to-do have benefited is through the decline in inflation. In view of the competitive and liberalized export sector, the recent coffee boom has resulted in significant benefits accruing directly to the large number of smallholders in the coffee sector. The government is also increasing the budgetary allocation for basic social services in respect of primary health care, education, and water supply and is targeting these expenditures toward the less well-off segments of the population.

The Challenge Ahead

Notwithstanding the progress achieved so far, a number of risks remain in the period ahead. In addition to the fragile external situation, it will be essential to ensure that monetary growth remains within program projections so as to maintain a low rate of inflation. On the structural side, further progress in the financial sector and privatization will contribute importantly to better resource mobilization and allocation, thereby enhancing growth prospects. Uganda’s adjustment efforts will also continue to be critically dependent on both multilateral and bilateral donor support.

Uganda joined the IMF on September 27, 1963. Its quota is SDR 133.9 million (about $200 million), and its outstanding use of IMF credit currently totals SDR 263 million (about $393 million).

Press Release No. 95/61, November 29, 1995

Zambia: ESAF and SAF

The IMF lifted Zambia’s ineligibility to use IMF financial resources and approved loans for Zambia totaling SDR 883.4 million (about $1.3 billion). Approval of the credit follows the clearance of Zambia’s arrears to the IMF of SDR 830.2 million (about $1.2 billion), which was facilitated by bridge financing provided by several countries. Of the total loan, SDR 701.7 million (about $1 billion) is provided under a three-year enhanced structural adjustment facility (ESAF) arrangement, and a further SDR 181.7 million (about $270 million) under a one-year structural adjustment facility (SAF) arrangement, in support of the government’s economic and financial reform program for the period 1995/96-1997/98. These loans correspond essentially to an encashment of rights, accumulated under Zambia’s rights accumulation program, which was successfully completed on December 4, 1995.

Under the rights approach, which represents an element in the IMF’s collaborative strategy for countries with protracted overdue financial obligations to the IMF, certain members with protracted overdue financial obligations to the IMF can earn rights based on the member’s performance under an economic program endorsed by the IMF. Following satisfactory performance under its program, clearance of its arrears to the IMF, and approval by the IMF of a successor arrangement or arrangements, the member can then encash the accumulated rights as the first disbursement under the successor arrangement from the IMF.

Clearance of its arrears to the IMF has allowed Zambia to consent to, and pay for, its quota increase under the Ninth General Review of Quotas. As a result, Zambia’s quota in the IMF has increased from SDR 270.3 million (about $402 million) to SDR 363.5 million (about $540 million).

Zambia was declared ineligible to use IMF financial resources on September 30, 1987, following the accumulation of overdue financial obligations to the IMF. When the rights accumulation program was established on July 17, 1992, Zambia’s arrears to the IMF totaled SDR 920.7 million (about $1.4 billion). In November 1991 when the current government took office, the Zambian economy had long been in decline, with per capita income down by one third since the early 1970s. The new government introduced an economic recovery program that aimed to reverse the economic decline through far-reaching market-oriented reforms. The pace of economic reform gained momentum with the endorsement by the IMF of a rights accumulation program on July 17, 1992 (see Press Release No. 92/57, IMF Survey, August 3, 1992). Zambia has made great strides in some areas of structural reform under the rights accumulation program, notably in freeing markets and by eliminating government intervention and control. In the area of macroeconomic policy, however, inflationary fiscal and quasi-fiscal operations have at times hindered effective policy implementation. The authorities have responded to such problems with a variety of corrective fiscal measures, as well as reforms to deal with the fundamental sources of the problems. Since embarking on economic reforms at the end of 1991, Zambia has had to face problems caused by drought and falling production of copper, its main export. Despite recurrent episodes of macroeconomic instability, positive effects are now beginning to emerge and the reforms have laid the groundwork for economic growth.

Medium-Term Strategy And Program for 1995/96

Zambia’s program for 1995/96-1997/98 aims at strengthening the macroeconomic stabilization effort, while consolidating and advancing the structural reforms begun under the rights accumulation program. The objectives of the program include real economic growth of 6 percent in 1996-98; a single-digit inflation rate; a significant accumulation of foreign exchange reserves; and completion of the process of liberalizing the economy. To these ends, the government will seek to achieve a surplus on its domestic budget through a tax reform that will reduce reliance on trade taxation; through a containment of the civil service wage bill in real terms; and through significant receipts from privatization. In its conduct of monetary policy during the program period, the Bank of Zambia will endeavor to keep inflation on a downward path. The exchange rate will continue to float.

Within this medium-term framework, the objectives of the 1995/96 (July-June) program are to achieve real economic growth of 6 percent in 1996, after stagnation in 1995; to reduce the rate of inflation to 10 percent in the same period; and to narrow the external current account deficit to 6.4 percent of GDP in 1996, from 7.9 percent of GDP in 1995. To these ends, fiscal policies will target a domestic budget surplus of 1 percent of GDP, while monetary policy will be tightened to reduce broad money growth to about 13 percent (annualized) in the first half of 1996, from 32 percent in 1995.

Structural Reforms

The program envisages a number of structural reforms. In the financial sector, the Bank of Zambia will strengthen its supervisory capacity and improve the quality of bank inspections. It will also develop a system of prudential indicators for early warning of banking problems and will establish objective criteria for determining bank solvency. In the parastatal area, the authorities are carrying out a privatization program, which is to include privatizing the copper company ZCCM. As part of their program of civil service reform, they are downsizing the civil service through a partial hiring freeze that is expected to reduce the size of the civil service by about 2 percent in 1995/96.

Addressing Social Problems

The best hope for a reduction in poverty, which is pervasive in Zambia, lies in a resumption of economic growth that is expected to result from sound structural adjustment policies. The authorities are also seeking to alleviate poverty by reorienting public expenditure toward the social sectors, and by providing training and limited financial support to workers laid off in the privatization process. In addition, drought-relief programs are currently being run with donor-provided maize.

The Challenge Ahead

Steadfast implementation of the program’s policies in the period ahead will do much to bolster confidence in macroeconomic management, thereby reducing the uncertainty that deters potential domestic and foreign investors from commitment to the Zambian economy. Zambia will continue to need external support on highly concessional terms for some years if it is to achieve external viability.

Zambia joined the IMF on September 23, 1965. Zambia’s outstanding use of IMF credit currently totals SDR 833.4 million (about $1.2 billion).

Press Release No. 95/62, December 6, 1995

Zambia: Selected Economic Indicators
(percent change)
Real economic growth-
Consumer prices (end of period)
(percent of GDP)
External current account balance-1.9-7.9-6.4-5.3-7.9
Overall domestic budget balance-
(In months of nonmaize imports)
Gross official foreign reserves2.
Data: Zambian authorities and IMF estimates

Botswana: Article VIII Status

The government of Botswana has notified the IMF that it has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement, with effect from November 17, 1995. IMF members accepting the obligations of Article VIII undertake to refrain from imposing restrictions on the making of payments and transfers for current international transactions or from engaging in discriminatory currency practices or multiple currency practices without IMF approval. A total of 109 countries have now assumed Article VIII status.

Two of the purposes of the IMF, as stated in its Articles of Agreement, are to facilitate the expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of high levels of employment and real income; and to assist in the establishment of a multilateral system of payments in respect of current transactions between IMF members. In seeking to achieve these objectives, the IMF exercises firm surveillance over the exchange rate policies of its members and oversees the elimination of exchange restrictions which hamper the growth of world trade.

By accepting the obligations of Article VIII, Botswana gives confidence to the international community that it will pursue sound economic policies that will obviate the need to use restrictions on the making of payments and transfers for current international transactions, and thereby contribute to a multilateral payments system free of restrictions.

Botswana joined the IMF on July 24, 1968; its quota in the IMF is SDR 36.6 million (about $54 million).

Press Release No. 95/63, December 7, 1995

Kyrgyz Republic: Augmented ESAF

The IMF approved an augmented second annual loan equivalent to SDR 32.3 million (about $48 million) for the Kyrgyz Republic under the enhanced structural adjustment facility (ESAF) in support of the government’s economic and structural reform program through September 1996. The decision, based on the strength of the program, raises access under the second annual loan by SDR 8.6 million (about $13 million). The total three-year ESAF loan has also been increased to SDR 88.15 million (about $131 million) from the original SDR 70.95 million (about $105 million) approved on July 20, 1994 (see Press Release No. 94/53, IMF Survey, September 12, 1994).

Kyrgyz Republic: Selected Economic Indicators
199419951996 11997 1
(percent change)
Real GDP growth-
Consumer prices (end of period)87.230.315.18.0
(percent of GDP)
Government budget, excluding grants-8.0-11.3-5.5-3.7
External current account balance, excluding grants-18.6-13.5-14.0-11.4
(months of Imports)
Foreign exchange reserves2.
Data: Kyrgyz authorities and IMF staff estimates and projections

The Kyrgyz Republic has achieved significant progress in its reform and stabilization efforts under the first annual ESAF loan. The monthly inflation rate has averaged less than 1 percent since March 1995, while monetary and credit targets were largely on track. The exchange rate for the som remained stable against the U.S. dollar, and was accompanied by an accumulation of reserves. External trade expanded rapidly, as it shifted away from former Soviet Union trading partners, and the government made significant progress on structural reforms, particularly in privatization and enterprise restructuring. The Kyrgyz Republic has accepted the obligations of Article VIII of the IMF Articles of Agreement in March 1995 (see Press Release No. 95/18, IMF Survey, April, 17 1995) and maintains a fully convertible currency.

The Program Through September 1996

The program covering the period through September 1996 that is supported by the second annual ESAF loan aims at achieving real GDP growth of 2 ½ percent in 1996, halving the rate of annual inflation to 15 percent by end-1996, and at further strengthening international reserves. To these ends, the program envisages a reduction in the budget deficit to 5.5 percent of GDP in 1996 from 11.3 percent in 1995 through a combination of revenue and expenditure measures. On the revenue side, the focus will be on improved tax collection and administration; on the expenditure side, a rationalization of outlays will allow for a reduction of government expenditure relative to GDP without impairing the social safety net. The authorities will maintain a tight monetary and credit stance, as well as a fully liberalized exchange and trade system.

Structural Reforms

Under the program, the Kyrgyz government intends to deepen structural reforms in several areas—including privatization and state enterprise restructuring and financial sector reform—as well as to implement legal, regulatory, and institutional reforms. Full privatization has been completed for 500 enterprises, and in January 1996, the government will adopt the 1996–97 privatization program with the intention of offering for sale all remaining enterprises by no later than end-1997. The government further intends to make the energy sector increasingly self-financing rather than dependent on public or external assistance.

Social Issues

The government’s social strategy focuses on improving the targeting of social assistance and ensuring the provision of basic services, while remaining within the program’s fiscal objectives. Priorities include strengthening the financial position of the Social Fund and the rationalization of social expenditures.

The Challenge Ahead

The program is underpinned by major fiscal adjustment, with the budget deficit projected to stabilize at 2-3 percent of GDP by 1997 from 11.3 percent in 1995. The authorities are planning to withstand pressures for additional expenditures that could jeopardize the impressive stabilization gains already achieved. The program goes a long way toward putting the Kyrgyz economy on the path of sustained output and export growth and overcoming the difficulties stemming from the steeper-than-expected decline in output in 1994.

The Kyrgyz Republic joined the IMF on May 8, 1992. Its quota is SDR 64.5 million (about $96 million), and its outstanding use of IMF credit currently totals SDR 67.5 million (about $104 million).

Press Release No. 95/64, December 11, 1995

Senegal: Second Annual ESAF Loan

The IMF has approved the second annual loan for Senegal under the enhanced structural adjustment facility (ESAF) equivalent to SDR 47.6 million (about $71 million), to support the government’s 1995–96 economic reform program. The loan will be disbursed in two equal semiannual installments, the first of which is available immediately.

Following the devaluation of the CFA franc in January 1994, Senegal adopted a comprehensive adjustment strategy aimed at achieving sustained economic growth and financial viability over the medium term, in the context of increased regional cooperation and economic integration. Senegal made important strides under its first annual ESAF-supported program. Overall, the macroeconomic objectives of the program were largely achieved, and the authorities implemented a wide range of structural measures.

Medium-Term Strategy and Program for 1995-96

Building on the progress achieved so far, Senegal’s adjustment efforts for 1995–98 aim at achieving its medium-term goals of economic growth and financial viability through continued sound management policies and the deepening and acceleration of structural reforms. The basic macroeconomic objectives are to achieve an average annual economic growth rate of some 4½ percent; to lower the average inflation rate to less than 3 percent by 1996; and reduce the external current account deficit, excluding official transfers, to about 6 percent of GDP by 1998, a level seen as broadly consistent with external viability.

Senegal: Selected Economic Indicators
(percent change)
Real GDP-
Consumer prices (annual average)0.632.
(percent of GDP)
Overall fiscal balance, excluding grants-4.0-5.7-3.3-2.0-0.7
External current account balance, excluding official transfers-10.2-9.38.0-7.3-6.6-6.1
Data: Senegalese authorities and IMF staff estimates and protections

Within this medium-term strategy, the program for 1995-96 to be supported by the second annual ESAF loan has as its main objectives to achieve an annual increase in real GDP of 4½ percent; to limit the rate of inflation to about 8 percent in 1995 and to less than 3 percent in 1996; and to contain the external current account deficit, excluding official transfers, to 8 percent of GDP in 1995 and 7.3 percent of GDP in 1996.

To achieve these objectives, the authorities will reduce the overall fiscal deficit (excluding grants) to 2 percent of GDP in 1996, from 5.7 percent in 1994 and 3.3 percent in 1995 through specific measures designed to increase government revenue by 1.5 percent of GDP, and to cut total expenditure by 2.2 percent of GDP over the period 1995-96. Monetary policy will continue to be based on the use of indirect instruments put in place by the BCEAO (central bank) in October 1993—notably, a flexible interest rate policy consistent with the exchange rate peg, reliance on reserve requirement ratios, and a strengthened role for the money and interbank markets.

Structural Reforms

The structural measures that constitute the other pillar of the program are designed to promote the development of a dynamic private sector and to support rapid and sustained economic and per capita income growth. The structural reforms focus on three main areas: further price and trade liberalization, and modernization of the regulatory framework; strengthening reforms in the agricultural sector; and accelerating public enterprise reform.

Addressing Social Costs

The government’s strategy in the social and environmental areas aims at increasing the standard of living, reducing poverty, and improving the management of natural resources and the urban environment. To further enhance human resource development, the authorities intend to raise the enrollment ratio in primary education from the current level of 56 percent to 65 percent by 1998, and to improve the efficiency of expenditures in the education sector. In the health sector, the government aims to expand the coverage of primary health care and family planning, reduce maternal mortality by half, and promote the procurement and distribution of generic drugs by the private sector.

The Challenge Ahead

Senegal made important strides under its first annual ESAF-supported program, but the economic situation remains fragile. The authorities must, therefore, persevere with their adjustment efforts, consolidate the progress made, and improve performance in those areas where weaknesses have emerged, by improving revenue performance and pursuing spending restraint, while providing adequately for health and education; following a prudent credit policy and deepening financial intermediation; and accelerating the next phase of structural reforms.

Senegal joined the IMF on August 31, 1962, and its quota is SDR 118.9 million (about $176 million). Its outstanding use of IMF credit currently totals SDR 215 million (about $319 million).

Press Release No.95/65, December 11, 1995

Pakistan: Stand-By

The IMF approved a 15-month stand-by credit for Pakistan equivalent to SDR 401.9 million (about $596 million) to support the government’s 1995/96 economic program.

Since 1988, Pakistan has been implementing economic programs designed to achieve a comprehensive economic reform. After several years in which impressive gains were made, the effort faltered due in part to unfavorable weather conditions and political uncertainties. The authorities intensified their efforts in 1993 with IMF support, but by the first half of 1995 the situation deteriorated again, marked by growing macroeconomic imbalances due to a worsening fiscal position, accompanied by a loose monetary policy. There were also continued poor weather conditions and crop disease. As a result, the trade deficit widened, international reserves declined, and the rate of inflation remained stubbornly high.

Program for 1995/96 (July-June)

The authorities responded to these developments by initiating a broad-based economic program. The objectives of the program supported by the stand-by credit are to restore international reserves to the equivalent of 9.4 weeks of imports; to reduce inflation to 9 percent; and to accelerate real GDP growth to 5.5 percent.

Pakistan: Selected Economic indicators
1994/951995/96 1
(percent change)
Real economic growth4.75.5
Consumer price index (end of period)12.19.0
(percent of GDP)
Budgetary balance-5.6-4.6
External current account, excluding official transfers-4.0-4.6
(weeks of Imports)
Gross reserves, excluding gold12.99.4
Data: Pakistan authorities and IMF staff estimates and projections

To achieve these objectives, the program is designed to cut the budget deficit in relation to GDP through a combination of revenue and expenditure measures. The program also has a strong structural component to ensure a sustainable improvement in the budgetary situation. Monetary policy aims to slow the growth of domestic liquidity by tightening credit policy and interest rate measures. The authorities will continue to manage the exchange rate flexibly, seeking a balance between preserving competitiveness and containing inflationary expectations.

Structural Reforms

One of the main policy objectives in the period ahead will be to reinvigorate the structural reform process, particularly in the areas of budget reform and trade liberalization. The government also intends to achieve further significant gains in the area of privatization.

Social Issues and the Challenge Ahead

The government intends to fully protect outlays under the Social Action Program, and will maintain expenditure under the Core Investment Program.

If rigorously implemented, the program should revive market confidence and lay the groundwork for a comprehensive medium-term program, beginning in 1996/97, that could be the basis for a return to an ESAF credit.

Uzbekistan: Selected Economic Indicators
(percent change)
Real economic growth-3.5-2.0-1.5
Consumer prices (end of period)1,281110-11521-25
(percent of GDP)
Consolidated external current account balance2.1-2.5-5.0
Consolidated fiscal balance-7.1-4.0-4.0
(months of imports)
Gross reserves5.96.05.5
Data: Uzbek authorities and IMF staff estimates

Pakistan became a member of the IMF on July 7, 1950; its quota is SDR 758.2 million (about $1.1 billion), and its outstanding use of IMF credit currently totals SDR 983 million (about $1.5 billion).

Press Release No. 95/66, December 13, 1995

Uzbekistan: Second Stand-By, STF Drawing

The IMF approved credits for the Republic of Uzbekistan totaling SDR 174.6 million (about $259 million) to support the government’s 1995/96 economic reform program. Of the total, the equivalent of SDR 124.7 million (about $185 million) is being made available under a 15-month stand-by credit, and SDR 49.9 million (about $74 million) is being disbursed as Uzbekistan’s second drawing under the systemic transformation facility (STF). The first drawing under the STF, also of SDR 49.9 million, was approved on January 25, 1995 (see Press Release No. 95/7, IMF Survey, February 20, 1995).

Uzbekistan has made significant progress in achieving the objectives of its program of macroeconomic stabilization and reform that was begun in late 1994 and was supported by the first STF drawing. The goals of the program were to limit the decline in real GDP and to reduce inflation, while carrying out structural and institutional reforms to speed up the market orientation of the economy. Inflation proved to be initially higher than programmed, however, due to a faster-than-envisaged liberalization of prices and a sharper-than-intended growth in monetary aggregates. The authorities responded by tightening financial policies in early 1995. These policies also brought stability to the foreign exchange market, a development that enabled Uzbekistan to carry out a major liberalization of the foreign exchange system, including the ending of restrictions on the purchase by individuals of foreign exchange.

On the structural front, performance was more mixed. In some areas, such as the liberalization of prices and the exchange system, the authorities went further than envisaged under the program. In other areas, such as the adoption of central bank legislation and the auditing of commercial banks, there were delays, although these were due in part to technical reasons.

Program for 1995/96

The main objectives of the economic program for October 1995—December 1996 supported by the second drawing under the STF and the stand-by credit are to consolidate the gains made so far in macroeconomic stabilization and to lay the foundation for economic recovery and improved living standards. These objectives will be achieved by accelerating market-oriented reforms and reducing administrative interventions in the economy. The main macroeconomic objectives of the program are to reduce the decline in real economic activity to 1½ percent in 1996, from about 2 percent in 1995; and to cut the rate of inflation to 21-25 percent in 1996, from more than 100 percent this year. The external current account deficit is expected to double to 5 percent of GDP in 1996, as a result of the liberalization of the foreign exchange and trade system, as well as higher capital imports associated with investments in infrastructure. Gross official reserves are projected to remain at a relatively high level of 5½ months of imports next year.

To achieve the program objectives, the authorities will maintain tight monetary and credit policies to reduce inflation and to ensure a strong currency, and will continue their restrained fiscal policy. As a first step toward reducing the role of government in the economy, both revenues and expenditures are expected to decline in relation to GDP by 4½A percentage points in 1996, compared with 1995, while the overall deficit is expected to be unchanged at about 4 percent of GDP. These financial policies will be supported by a tax-based incomes policy.

Structural Reforms

Uzbekistan intends to add momentum to its structural reform efforts, with particular emphasis on the privatization of medium- and large-scale enterprises, enterprise reform, continued liberalization of foreign trade, and further disengagement of the government in economic activity. In the monetary area, structural reforms will include steps to improve policy formation; introduction of new central bank and commercial bank laws; improved bank supervision and measures to deal with nonperforming assets of banks; and measures to improve the functioning of the payments system. In the fiscal area, reforms will include eliminating the foreign exchange budget; reducing state orders and increasing procurement prices for cotton and grain; reducing the government’s demand for credit from the central bank and, over the medium term, from the banking system; and working toward establishing a treasury. The authorities also plan to introduce a number of measures to liberalize the trade system, including reducing the number of goods subject to export licensing; rationalizing the import duty system; and reducing the number of items subject to export duty, as well as cutting the maximum export duty rate.

Addressing Social Costs and The Challenge Ahead

The program provides for social safety net measures to protect the most vulnerable segments of the population through a better targeting of social benefits, and the authorities plan to continue reform of the pension system.

The Uzbek authorities are fully aware that a consolidation of the stabilization gains achieved during 1995 and the creation of conditions for a resumption of economic growth will require perseverance in carrying out macroeconomic policies under the program and a speeding up of structural reforms.

Uzbekistan joined the IMF on September 21, 1992, and its quota is SDR 199.5 million (about $296 million); its outstanding use of IMF credit currently totals SDR 50 million (about $74 million).

Press Release No. 95/67, December 18, 1995

Sierra Leone: ESAF

The IMF approved an augmented second annual loan for Sierra Leone under the enhanced structural adjustment facility (ESAF) equivalent to SDR 23.2 million (about $34 million), to support the government’s 1996 economic reform program. The decision, based on Sierra Leone’s financing needs, raises access under the second annual loan by SDR 13.1 million (about $19 million). The loan will be disbursed in two semiannual installments, the first of which is available on December 29, 1995. The total three-year ESAF loan has been increased to SDR 101.9 million (about $151 million) from the original SDR 88.8 million (about $132 million). A one-year arrangement under the structural adjustment facility (SAF) equivalent to SDR 27 million (about $40 million) was approved in March 1994 (see Press Release No. 94/20, IMF Survey, April 18, 1994).

Sierra Leone: Selected Economic Indicators
(percent change)
Real GDP0.63.5-
Consumer prices (end of period)15.122.335.
(percent of GDP)
Overall fiscal balance-6.76.3-7.3-6.3-4.3-3.6
External current account balance, excluding official transfers-16.218.1-20.0-17.8-15.7-15.1
Data: Sierra Leonean authorities and IMF staff estimates and projections

After Sierra Leone successfully concluded its rights accumulation program and cleared its arrears to the IMF in 1994, the authorities continued to press on with their economic stabilization program and have made considerable progress in stabilizing and restructuring the economy despite adverse external and domestic circumstances. However, rebel attacks on key economic installations at the end of 1994 and in 1995 posed a particularly damaging setback to economic reform. Production of rutile and bauxite was halted, and foreign exchange receipts and fiscal revenues fell drastically. Business and consumer confidence was badly shaken, and, as a result, real GDP is likely to contract by at least 10 percent in 1995. The Bank of Sierra Leone also experienced a serious drain of its foreign exchange reserves, primarily as a result of the interruption of mineral exports, and the resulting currency depreciation, together with large increases in imported rice prices, intensified inflationary pressures.

Medium-Term Strategy and Program for 1996–97

The government’s economic strategy for 1996–98 has been formulated on the expectation of a continued improvement in the security situation. It incorporates stabilization policies aimed at establishing a low-inflation environment that will set the stage for a recovery in private sector activity and contribute to a more viable external position. The key objectives of the medium-term program are to raise real GDP growth to 7 percent in 1997 and to stabilize growth at 5 percent thereafter; reduce inflation to 5 percent by 1998; and reduce the external current account deficit, excluding official transfers, to about 15 percent of GDP by 1998.

Within this medium-term strategy, the program for 1996 to be supported by the second annual ESAF loan is designed to achieve an annual increase in real GDP of 5 percent, limit the rate of inflation to 10 percent, and contain the external current account deficit, excluding official transfers, to 17.8 percent of GDP.

To achieve these objectives, the authorities intend to reduce the overall fiscal deficit (on a commitment basis) to 6.3 percent of GDP in 1995/96 from 7.3 percent in 1994/95. Owing to the fragility of the economy, virtually no revenue is expected from the mining sector, and no new major revenue-enhancing measures are contemplated for the time being. Hence, the bulk of the fiscal adjustment will have to be borne by expenditures, particularly in the area of defense, through economies in the purchase of military hardware and downsizing the army. Other fiscal measures include an increase in the rate of duty on premium gasoline, which was effected in November, and implementation of a civil service retrenchment program. Monetary policy will be geared toward achieving the inflation target, and open market operations will continue to be used as the primary instrument of monetary control.

Structural Reforms

The authorities’ structural reform program for 1996 involves improving the implementation capacity of the civil service by increasing pay for managerial and supervisory staff; removing from the public enterprise sector a number of enterprises whose functions can be managed more efficiently by the private sector; and improving the judicial system by reviving the Law Reform Commission and liberalizing laws governing the establishment, operation, and closing of business enterprises.

Addressing Social Costs

Poverty alleviation is at the center of the development program. The government has initiated the preparation of a national strategy for poverty reduction to be reviewed with donors in a multilateral forum. In addition to promoting broadly based, labor-intensive economic growth coupled with low inflation, the strategy focuses on improving social services—in particular, primary health care and education—and on implementing special programs to protect the more vulnerable groups. In support of this strategy, the government’s outlays in the social sectors will be raised by 5 percent a year in real terms.

The Challenge Ahead

For several years now, economic reform in Sierra Leone has taken place against the background of serious rebel hostilities, which have dislocated economic activity and imposed severe strains on the country’s social fabric. In spite of this, however, the government has pressed on with its adjustment program and has made considerable progress in stabilizing and restructuring the economy. The government will have to seek debt relief and additional concessional resources from donors to ensure the success of its program.

Sierra Leone joined the IMF on September 10, 1962, and its quota is SDR 77.2 million (about $115 million). Its outstanding use of IMF credit currently totals SDR 98 million (about $145 million).

Press Release No. 95/68, December 18, 1995

Guinea: Selected Economic Indicators
(percent change)
Real GDP growth4.
Consumer prices (end of period)
(percent of GDP)
Government budget, excluding grants-7.2-6.0-5.5-5.2
External current account balance, excluding grants-9.3-8.6-7.6-7.5
(months of imports)
Foreign exchange reserves2.
Data: Guinean authorities and IMF staff estimates and projections

Guinea: Article VIII

The Government of Guinea has notified the IMF that it has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement, with effect from November 17, 1995. IMF members accepting the obligations of Article VIII undertake to refrain from imposing restrictions on the making of payments and transfers for current international transactions or from engaging in discriminatory currency arrangements or multiple currency practices without IMF approval. A total of 111 countries have now assumed Article VIII status.

Two of the purposes of the IMF, as stated in its Articles of Agreement, are to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income, and to assist in the establishment of a multilateral system of payments in respect of current transactions between IMF members. In seeking to achieve these objectives, the IMF exercises firm surveillance over the exchange rate policies of its members, and oversees the elimination of exchange restrictions that hamper the growth of world trade.

By accepting the obligations of Article VIII, Guinea gives confidence to the international community that it will pursue sound economic policies that will obviate the need to use restrictions on the making of payments and transfers for current international transactions, and thereby contribute to a multilateral payments system free of restrictions.

Guinea joined the IMF on September 28, 1963, and its quota is SDR 78.7 million (about $117 million).

Press Release No. 95/69, December 19, 1995

Guinea: ESAF

The IMF approved the third annual loan for Guinea under the enhanced structural adjustment facility (ESAF), equivalent to SDR 23.2 million (about $34 million), in support of the government’s 1995/96 macroeconomic and structural adjustment program. The loan will be disbursed in two equal semiannual installments, the first of which is available immediately. The three-year ESAF credit for the equivalent of SDR 57.9 million ($86 million) was approved on November 6, 1991, and SDR 34.7 million (about $52 million) has already been disbursed thereunder.

Over the past decade, Guinea made major strides in dismantling state controls over the economy by freeing business activity, restructuring or privatizing key public enterprises, and overhauling the tools of monetary policy. Policy implementation was weak in the early 1990s, but performance improved under the program supported by the second annual ESAF arrangement, and most targets for 1994 were met. Developments in the first half of 1995 were generally in line with the program, but in the second half of the year, fiscal and monetary policies were more expansionary than programmed, resulting in some pressures on the price level and on the exchange rate.

Program for 1995/96

The objectives of the 1995/96 program are to raise real GDP growth to 4.6 percent in 1995 and to 4.7 percent in 1996; to stabilize the annual rate of inflation at 4 percent (one of the lowest in sub-Saharan Africa); to reduce the external current account deficit, excluding official transfers, to 8.6 percent of GDP in 1995, and 7.6 percent in 1996, from 9.3 percent of GDP in 1994; and to raise official reserves to the equivalent of 3.6 months of imports by 1996. Implementation of the program should also lead to a normalization of relations with creditors.

To achieve these objectives, fiscal policy will seek to lower the overall deficit from 7.2 percent of GDP in 1994 to 6 percent in 1995 and to 5.5 percent in 1996. This reduction is predicated on an increase in government nonmining revenue through reduced duty exemptions, strengthened tax administration, and a broadened tax base. The level of government expenditure will increase by one percentage point of GDP in 1996 and its composition will be altered to favor the social sectors and investments in infrastructure. Guinea also intends to pursue a tight monetary policy to keep inflation low.

Structural Reforms

Structural policies under the program aim at further broadening the scope for private sector growth. Accordingly, they focus on privatizing and reforming the parastatals, strengthening the judiciary, revising the development strategy for the mining sector, and reforming the civil service. In particular, a complete inventory of the remaining government enterprises and an action plan for their restructuring, privatization, or liquidation is to be completed by the end of 1995.

Social Issues

Under the program, the 1996 budget is slated to raise expenditure on primary education and preventive health and sanitation by 10 percent in real terms. The primary school enrollment rate, which has increased from 29 percent in 1990 to about 43 percent at present, is targeted to rise further to 53 percent by the end of the decade. To meet this objective, some 2,400 teachers are to be recruited over the next five years. The 1996 budget will also include provisions for social safety net outlays for poverty alleviation, as well as for redundancy payments for the newly retrenched public sector employees. Over the medium term, the authorities will focus their poverty alleviation efforts on sustaining agricultural sector growth and improving the integration of the rural areas into the formal market economy.

The continued availability of technical assistance will be crucial to the success of Guinea’s adjustment program. Substantial assistance needs remain in the areas of tax administration, monetary management, data collection, legal and judicial reform, and capacity building; those needs are being addressed as a matter of priority.

Guinea joined the IMF on September 28, 1963. Its quota is SDR 78.7 million (about $117 million), and its outstanding use of IMF credit currently totals SDR 52 million (about $77 million).

Press Release No. 95/71, December 20, 1995

Togo: Second Annual ESAF loan

The IMF has approved the second annual loan for Togo under the enhanced structural adjustment facility (ESAF), equivalent to SDR 21.7 million (about $32 million), to support the government’s 1995-96 economic reform program. The loan will be disbursed in two equal semiannual installments.

Following a period of severe social disruptions and a sharp downturn in economic activity, Togo adopted a comprehensive adjustment strategy in mid-1994 aimed at restoring sustained economic growth and achieving financial viability over the medium term. The strategy, which centered on the devaluation of the CFA franc and relied on the pursuit of supporting fiscal and credit policies, led to a resurgence of economic activity. Real GDP growth was nearly 14 percent in 1994, following a contraction of 22 percent over the previous three years, and is projected to grow by 8.3 percent this year, due largely to the buoyant performance of the mining and manufacturing sectors. After an initial surge in prices caused by the devaluation, inflationary pressures subsided in late 1994, and inflation has been running at an annual rate of 6.5 percent during the first nine months of 1995. The authorities made significant progress in implementing the structural reforms envisaged under the program, notably in the fiscal area, preparing for the privatization of public enterprises and mixed companies, and economic liberalization. The authorities also instituted a number of social safety net measures to protect the most vulnerable groups in society.

Togo: Selected Economic Indicators
(percent change)
Real GDP-15.513.
Consumer prices (annual average)-3.635.
(percent of GDP)
Primary fiscal balance-10.0-5.9-
External current account balance, excluding grants-8.8-8.2-7.47.8-7.9-6.8
Data: Togolese authorities and IMF staff estimates and projections

Medium-Term Strategy and Program for 1995-96

Building on the progress achieved so far, Togo’s adjustment efforts for 1995–98 aim at achieving an annual real GDP growth rate of 6.5 percent, while reducing inflation and further strengthening public finances and the balance of payments. To these ends, government revenue has to be raised in an enduring way, and wage policy will have to be prudent. The fiscal effort will be supported by a cautious credit stance and a flexible interest rate policy at the regional level. Ongoing structural reforms will be reinforced to sustain high GDP growth through efficiency gains and a greater involvement of the private sector.

Within this medium-term strategy, the program for 1995–96, supported by the second annual ESAF loan, has as its main objectives to achieve real economic growth of about 6.5 percent and to reduce the annual average rate of inflation to 5 percent. To attain these objectives, the authorities will seek to increase the ratio of revenue to GDP by about 4 percentage points in 1996, to above 16½ percent, while restraining the level of expenditure and improving its structure, thereby permitting a reduction in external and domestic arrears. Monetary and credit targets under the program have been set within a regional framework, consistent with the objective of containing inflation and maintaining adequate external reserves to ensure the stability of the CFA franc.

Stand-By, EFF, and ESAF Arrangements As of November 30
MemberDate of ArrangementExpiration DateAmount ApprovedUndrawn Balance
(million SDRs)
Stand-by arrangements19,815.817,526.71
ArmeniaJune 28, 1995June 27, 199643.8830.38
AzerbaijanNovember 17, 1995November 16, 199658.5049.14
BelarusSeptember 12, 1995September 11, 1996196.28146.28
CameroonSeptember 27, 1995September 26, 199667.6059.10
Costa RicaNovember 29, 1995February 28, 199752.0052.00
CroatiaOctober 14, 1994April 13, 199665.4052.32
EcuadorMay 11, 1994March 31, 1996173.9075.00
El SalvadorJuly 21, 1995September 20, 199637.6837.68
EstoniaApril 11, 1995July 10, 199613.9513.95
GeorgiaJune 28, 1995June 27, 199672.1549.95
HaitiMarch 8, 1995March 7, 199620.003.60
KazakstanJune 5, 1995June 4, 1996185.6092.78
LatviaApril 21, 1995May 20, 199627.4527.45
LesothoJuly 31, 1995July 30, 19967.177.17
Macedonia, FYRMay 5, 1995June 4, 199622.3014.80
MexicoFebruary 1, 1995August 15, 199612,070.204,416.24
MoldovaMarch 22, 1995March 21, 199658.5026.10
PanamaNovember 29, 1995March 31, 199769.8069.80
Papua New GuineaJuly 14, 1995January 13, 199771.4847.56
PolandAugust 5, 1994March 4, 1996333.3050.00
RomaniaMay 11, 1994December 10, 1995131.9775.41
RussiaApril 11, 1995April 10, 19964,313.101,437.70
Slovak RepublicJuly 22, 1994March 21, 1996115.8083.65
TurkeyJuly 8, 1994March 7, 1996610.50150.00
UkraineApril 7, 1995April 6, 1996997.30458.65
EFF arrangements8,004.513,184.62
AlgeriaMay 22, 1995May 21, 19981,169.28928.48
ArgentinaMarch 31, 1992March 30, 19964,020.25512.37
EgyptSeptember 20, 1993September 19, 1996400.00400.00
GabonNovember 1, 1995October 31, 1996110.30110.30
JamaicaDecember 11, 1992December 10, 1995109.1322.38
JordanMay 25, 1994May 24, 1997189.3058.98
LithuaniaOctober 24, 1994October 23, 1997134.5582.80
PakistanFebruary 22, 1994February 21, 1997379.10255.90
PeruMarch 18, 1993March 17, 19961,018.10375.41
PhilippinesJune 24, 1994June 23, 1997474.50438.00
ESAF arrangements3,000.301,739.19
AlbaniaJuly 14, 1993July 13, 199642.3611.30
BeninJanuary 25, 1993January 24, 199651.899.06
BoliviaDecember 19, 1994December 18, 1997100.9684.14
Burkina FasoMarch 31, 1993March 30, 199653.0417.68
CambodiaMay 6, 1994May 5, 199784.0042.00
ChadSeptember 1, 1995August 31, 199S49.5641.30
Côte d’lvoireMarch 11, 1994March 10, 1997333.48154.83
Equatorial GuineaFebruary 3, 1993February 2, 199612.888.28
GhanaJune 30, 1995June 29, 1996164.40137.00
GuineaNovember 6, 1991November 5, 199657.9023.16
Guinea-BissauJanuary 18, 1995January 17, 19989.457.88
GuyanaJuly 20, 1994July 19, 199753.7635.84
HondurasJuly 24, 1992July 24, 199747.4623.73
Kyrgyz RepublicJuly 20, 1994July 19, 199770.9547.30
Lao P.D.R.June 4, 1993June 3, 199635.1917.60
MalawiOctober 18, 1995October 17, 199845.8138.18
MaliAugust 28, 1992March 31, 199679.24
MauritaniaJanuary 25, 1995January 24, 199842.7528.50
MongoliaJune 25, 1993June 24, 199640.8116.70
MozambiqueJune 1, 1990December 31, 1995130.0514.70
NicaraguaJune 24, 1994June 23, 1997120.12100.10
PakistanFebruary 22, 1994February 21, 1997606.60404.40
SenegalAugust 29, 1994August 28, 1997130.7983.23
Sierra LeoneMarch 28, 1994March 27, 199768.7820.22
TogoSeptember 16, 1994September 15, 199765.1643.44
UgandaSeptember 6, 1994September 5, 1997120.5187.04
VietnamNovember 11, 1994November 10, 1997362.40241.60
EFF = extended Fund facility.ESAF = enhanced structural adjustment facility.Figures may net add to totals owing to rounding.Data: IMF Treasurer’s Department

Structural Reforms

The program includes comprehensive structural measures that aim at accelerating the restructuring of public enterprises and furthering private sector involvement. These include the sale of the government’s participation in nine companies in which it has a majority or substantial participation; the restructuring of the export crop marketing company, OPAT; and the sale of 40 percent of the government’s share in the phosphate mining company, OTP. In the regulatory area, the authorities plan to eliminate a number of price controls.

Addressing Social Costs

The government’s strategy in the social and environmental areas aims at reducing poverty and improving the management of natural resources and the urban environment. To these ends, the program contains measures that are targeted at protecting the most vulnerable groups of the population, with a view to promoting job creation, and strengthening health and education services.

The Challenge Ahead

Despite welcome gains, Togo’s economic and financial situation remains fragile, and further significant improvements are required in order to attain a sustainable position and fully utilize the potential of the economy. The rate of disbursement of external financing remains subject to some uncertainty, and the government should, therefore, stand ready to take such additional measures as required to ensure rigorous implementation of the economic program.

Togo joined the IMF on August 1, 1962, and its quota is SDR 54.3 million (about $81 million). Its outstanding use of IMF credit currently totals SDR 61 million (about $90 million).

Press Release No. 95/72, December 20, 1995

Romania: Stand-By Extension

The IMF approved a request by the Romanian government to extend the current standby arrangement through April 1997 and to augment the amount available under it by SDR 188.5 million (about $280 million), in support of Romania’s adjustment and structural reform policies. The IMF’s Executive Board took the decision in conjunction with the completion of the first program review under the stand-by arrangement for SDR 133 million (about $196 million) approved on May 11, 1994 (see Press Release No. 94/34, IMF Survey, May 30, 1994).

Economic performance in Romania during 1994 was marked by a sharp improvement in confidence. Developments in the first nine months of 1995 presented a more contrasted picture, as the further acceleration in growth was accompanied by the re-emergence of balance of payments pressures. GDP growth accelerated to some 5 percent, unemployment began to decline, and recorded consumer price inflation slowed to an annual rate of less than 30 percent from 62 percent a year earlier. However, the current account deficit is estimated to have widened to 4.7 percent of GDP in 1995 from 1.8 percent of GDP in 1994. The economic program for 1996 is designed to achieve a growth rate of 4 percent, a reduction in consumer price inflation to less than 20 percent, a narrowing of the current account deficit to 3.4 percent of GDP, and a significant increase in the foreign exchange reserves of the National Bank of Romania by year end.

Romania joined the IMF on December 15, 1972, and its quota is SDR 754.1 million (about $1.1 billion). Its outstanding use of IMF credit currently totals SDR 644 million (about $958 million).

Press Release No. 95/73, December 21, 1995

Africa: Adjustment Through Cross-Fertilization

Following are edited excerpts of an address by IMF Managing Director Michel Camdessus at the Society for International Development in Washington on December 14, 1995:

Today, I would like to talk to you about one of the most important development issues of our time: the challenges facing Africa and, by extension, the challenges facing the IMF and, indeed, the rest of the international community in our efforts to assist these countries in becoming full participants in the international economy. The challenges facing Africa are no doubt many, but I would like to focus on three that capture the essence of its adjustment task.

Globalization. We talk a lot about it, and we in the IMF have some firsthand experience with it. Our experience in the Mexican crisis, for example, offered a stark reminder that we are already operating in the global economy of the twenty-first century. Our experience also indicates that thanks to larger capital inflows and higher investment, improved technology, and expanding export markets, globalization offers considerable opportunities to accelerate economic progress throughout the world; at the same time, countries unable to adjust enough to integrate themselves into the mainstream of the global economy risk marginalization. In this respect, the challenge for African countries is the same as for every other country in the world: to pursue an adjustment strategy that enhances the prospects of benefiting from globalization while avoiding the risks.

Growth. Even if Africa is now doing better, economic progress is still much too slow to have a significant impact on poverty and to make credible headway toward sustainable growth. Indeed, since the early 1980s, sub-Saharan Africa as a whole has slipped further behind the rest of the developing world in terms of average real GDP growth and per capita income, and in terms of its share of total capital inflows and world exports. Part of the explanation for this poor record is that, regrettably, there are a number of countries where civil strife, the breakdown of the rule of law, and other adverse political developments have had catastrophic economic effects.

How to Do Better. The IMF has firsthand knowledge that some African countries have markedly improved their performance, allowing the region as a whole to achieve a recovery in real GDP that could reach 4–5 percent a year in 1995–96. It has always been a central concern in the IMF to do a better job of assisting our member countries through a process of cross-fertilization of ideas and sharing of experiences on the requirements of sustainable growth and development, and of catalyzing international support for African countries’ own efforts.

When I meet with African leaders whom I see as successful, I say: Tell me why are you successful where the others are not. And you, investors, why are you taking risks and investing in country X and not in country Y?

Many African leaders, including President Masire of Botswana, President Compaoré of Burkina Faso, President Konaré of Mali, President Museveni of Uganda, President Soglo of Benin, and several others whom I met recently at the Global Coalition for Africa meeting in Maastricht, could tell you about our conversations. It is with the lessons we draw from them that we continuously seek to strengthen and refine adjustment and reform programs. Let me share what I have learned and why I believe that Africa can succeed in taking advantage of the opportunities in the global economy and overcome the risk of marginalization.

The Social Dimensions of Structural Adjustment in Africa

The IMF and the World Bank organized a workshop on December 4–7, in Washington, for high-level trade union leaders from francophone Africa, affiliated with the International Confederation of Free Trade Unions (ICFTU). The purpose of the workshop was to continue the dialogue with the national trade unions through the offices of the ICFTU, and to discuss the reasons and strategies behind the results of the devaluation of the CFA franc. Christian François, of the IMF’s African Department, described the work the IMF had done in assisting the authorities of the CFA franc group of countries. Pierre Dhonte, also of the African Department, discussed the prospects and requirements for sustained high-quality growth in francophone Africa after the devaluation. IMF and Bank staff welcomed, on behalf of the two institutions, ICFTU’s initiative to promote a dialogue and acknowledged the importance of the leadership role played by labor unions. For their part, the labor leaders encouraged the Bretton Woods institutions to undertake a continuing and more systematic dialogue with labor.

Structural Adjustment Programs. While the labor representatives accepted economic growth as a key goal of economic policy—in the context of social solidarity and equitable sharing of the benefits of growth—they emphasized the importance of labor unions being consulted and involved in domestic policies. They considered devaluation, price liberalization, and civil service reform responsible for much of the economic and social crises in their countries and felt that burden sharing should cut across all socioeconomic levels.

Privatization. According to the labor representatives, the social dimension was key in the privatization process, and all options—up to and including privatization—should be negotiated between affected workers, entrepreneurs, governments, and trade union organizations prior to any action. Transparency and equity were essential for making the privatization process acceptable to workers and society at large.

Governance. A major theme of the workshop was the frustration labor unions felt at the lack of dialogue with their governments, as well as their lack of participation in economic policymaking that affected their constituents. They said that IMF-supported adjustment programs should not be presented as a fait accompli, and that trade unions should be asked to sign on to the letter of intent, together with the authorities, after proper consultation and negotiation.

While recognizing that adjustment programs were inevitable for African countries, the labor representatives emphasized that the benefits of reforms must be shared equally by all socioeconomic levels. They added that good governance should be an important component of structural adjustment programs. They expressed regret that many governments still disapproved of any dialogue between labor unions and the Bretton Woods institutions and suggested that the IMF and the Bank should organize more seminars—both at the national and global levels—to improve mutual understanding.

Role of the IMF. The workshop, according to François. had been particularly useful in clarifying the extent and limits of the IMF’s mandate and had also opened up a number of common areas of agreement between the unions and the international financial institutions. He acknowledged the importance labor union leaders attached to intensified consultation between the international financial institutions and the International Labour Organisation and with social partners in the countries. At the same time, he indicated that because they were public institutions, the IMF and the World Bank had to work with the government authorities, and that a deepening of the dialogue needed to take place pragmatically and within existing constraints.

So what do we take from one country to another, like bees in this process of African cross-fertilization? What we have learned is simply that the process of development can get under way, provided a few basic conditions are met. To compete internationally, economies must first function well domestically; and to do this they must overcome the sense of economic uncertainty—about domestic security, the direction of future macroeconomic policy, the permanency and predictability of the regulatory system, property rights and the enforceability of contracts, and the reliability of public services, among other risks—that pervades many countries. When this uncertainty is reduced, economic decision-making can proceed, especially the investment decisions that are critical to getting economies moving on a sustainable basis.

The first requirement for establishing an environment of domestic economic security is getting the economic fundamentals right, beginning with restoring and maintaining financial stability, including relatively stable prices. Do you know what President Museveni answered when I asked him about the secret of Uganda’s remarkable success? First, eliminate inflation! Second, eliminate inflation! Accordingly, fiscal deficits have to be reduced to the point that they can be financed in a noninflationary way, do not crowd out private sector activity, and remain consistent with a sustainable debt situation. This requires, of course, a major effort to mobilize increased domestic resources—and they exist—so that adequate provisions can be made for health and education, agriculture, appropriate social safety nets, and basic infrastructure.

To this end, a strengthening of tax administration and enforcement, a broadening of the tax base, and the elimination of exemptions are often necessary and preferable to inexorably raising taxes. Reducing unproductive expenditure and tackling the problems of loss-making public enterprises are also inescapable tasks for increasing public savings and making room in the budget for well-targeted public investment and essential services. This brings me to a further must: strengthening financial intermediation to provide a means of channeling domestic savings back into productive investment. In the absence of such intermediation, savings in many African countries are largely kept in nonfinancial form. If such a channel existed, a larger share of required investment could be financed domestically. “Getting the fundamentals right” entails all of the above. The second requirement is to establish an institutional framework in which both domestic and foreign entrepreneurs have confidence to invest. A key step is to ensure a positive perception of the government’s role in the economy. This can be created and sustained if governments concentrate on doing a few things well, notably: ensuring law and order; providing reliable public services; establishing a simple, transparent regulatory system that is equitably enforced; and providing an independent and professional judiciary. Governments must also give their full attention to preventing corruption. In several countries in Africa, but also in countries in transition, I have been told that the most important minister for development is not the Minister of Planning, but the Minister of Justice!

Experience also shows that to make a decisive difference in the domestic economic climate, policies must be reasonably consistent and achieve a critical mass of reform, thereby convincing economic agents that reform is irreversible and that the country is truly integrating into the world economy. Partial reform may not elicit much response if substantial impediments to economic activity remain in place. In some countries, the domestic consensus does not yet permit the pace of reform required to attain this critical mass. In these cases, it is the responsibility of African leaders to take the initiative to deepen the national dialogue and bring about the needed consensus. Let me be very frank: we have every reason to be concerned about the real chances for development when our interlocutors are distinctly more concerned about the amounts of assistance to be obtained from abroad rather than about building the consensus to support the inescapably tough internal adjustment measures that reform and development entail.

With these preconditions for a well-functioning domestic economy in place—sound economic policies and good governance—other economic initiatives are more likely to bear fruit. In particular, sub-Saharan African countries could spur regional economic activity and attract more foreign capital by increasing the linkages among their economies. In addition, for many small African countries, regional solutions to the provision of public services—such as regional power grids, transportation networks, and universities—may be more cost-effective and provide better service than national programs. Likewise, the harmonization of domestic policies—such as common tax and tariff systems, as well as common business codes and regulatory frameworks—would facilitate cross-border transactions, create larger areas of stable economic conditions, and gradually establish a framework within which regional free trade could develop—consistent with comparative advantage and without increased outward protection.

I would like to add a word of caution, however. From my conversations with African presidents, I am convinced that they are committed to regional economic integration and development. But many at lower levels of government are less committed to this process. All must be fully on board if the positive impact is not to be offset by costly bureaucratic regional development.

Of course, a constructive partnership with the rest of the world is also indispensable for the achievement of sustainable development. The international community must do what it can to assist African countries in preventing national conflicts, which are so destructive of national and regional prosperity and such a setback to economic development. And where such conflicts unfortunately take place, there is a need for early reconciliation and reconstruction with international assistance. I am pleased that the Executive Board has recently expanded the scope of IMF emergency assistance to include post-conflict situations so that we can act more quickly and efficiently in these circumstances.

The rest of the world also needs to open its markets more fully to the products in which developing countries, including sub-Saharan African countries, have or are likely to develop a comparative advantage: in agriculture, mineral products, and basic manufactured goods.

Furthermore, the international community must continue to give strong support, including adequate concessional assistance, to countries that undertake serious reform. The IMF’s instrument for doing this is ESAF—the enhanced structural adjustment facility—which will be put on a permanent footing beginning early in the next century.

Use of IMF Credit and Loans in November(million SDRs)
General Resources Account416.7913,923.694,520.40
Stand-by arrangements1368.7911,676.351,499.04
EFF arrangements9.831,676.57828.34
SAF and ESAF arrangements0.00401.30873.97
Note: EFF = extended Fund facilityCCFF = compensatory and contingency financing facilitySTF = systemic transformation facilitySAF = structural adjustment facilityESAF = enhanced structural adjustment facilityFigures may not add to totals shown owing to roundingData: IMF Treasurer’s Department

But ESAF is only a little—albeit an essential—part of the needed support. The replenishment of IDA [International Development Association], the World Bank’s concessional window, is essential, as is the replenishment of the African Development Fund, and the continuation of concessional bilateral aid. While it is laudable that many industrial countries are trying to reduce their fiscal deficits, this should not become a pretext for cutting the already limited amounts of budgetary resources devoted to official development assistance. I was pleased that President Clinton conveyed this message most clearly to our Annual Meetings in October.

Finally, I would like to add a word about Africa’s external debt, especially the multilateral debt of heavily indebted poor countries. The staffs of the IMF and the World Bank are working together to analyze the nature and extent of this problem on a country-by-country basis. For the majority of these countries, our analysis suggests that debt-service burdens should be manageable. Some countries will have difficulty, however, in bringing their debt burdens down to a sustainable level, and in a few cases, more relief may be needed than is currently available under existing mechanisms. We are committed to putting our conclusions to the Interim and Development Committees next April.

But even if all debt to all creditors were written off, most African countries would continue to have serious external financing problems. For example, while actual debt-service payments consume about 20 percent of the export earnings of low-income rescheduling countries, their current account deficits represent about 70 percent of export earnings. Even in the absence of debt-service problems, these countries would still need external aid flows equivalent to some 50 percent of export earnings to pay for current import bills. Whatever solutions are found to ease these countries’ debt-service problems, we should not lose sight of the larger problem of how to get domestic economies moving on a sustainable basis, so that countries can finance an increasing share of their needs themselves and progress toward fully sustainable growth.

In conclusion, I would like to emphasize that the stakes for Africa in today’s global economy are high. For countries able to take advantage of globalization’s opportunities, the potential rewards are great in terms of more investment, higher exports, and stronger growth. But so, too, is the risk of marginalization for countries that cannot meet the challenge of globalization. Fortunately, we have discovered a great deal about the requirements for successful structural adjustment from the experience of African countries themselves. Our job now is to help support African countries as they put these requirements in place.

David M. Cheney, Editor

Sara Kane • John Starrels

Senior Editors

Sheila Meehan

Assistant Editor

Sharon Metzger • David Juhren

Editorial Assistant Staff Assistant

Philip Torsani • In-Ok Yoon

Art Editor Graphic Artist

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