4 Structural Adjustment Policies and Private Sector Development: Experience of Six Central African States

Claire Liuksila
Published Date:
December 1995
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Roger Rigobert Andely

Adjustment policies are very important for the private sector. In fact, internal and external liberalization measures, which constitute the traditional elements of structural adjustment, have as an ultimate objective higher private savings and investment; in other words, the development of the private sector. The experience of the six members of the Bank of Central African States (BCAS)—Cameroon, Central African Republic, Chad, the Congo, Equatorial Guinea, and Gabon—shows the important link between structural adjustment policies and the private sector.

The experience of these countries covers three subperiods between 1980 and 1994.

The 1980-85 subperiod. Expansionary policies and rapid private sector development—absence of adjustment. During this subperiod, economies of the Zone enjoyed a “golden age.” The overall average growth rate in real terms for the six countries was 7.1 percent, well in excess of the population growth rate of 3 percent. Employment was high. The export boom brought in vast resources, and capital inflow grew significantly, at an annual amount of CFA 750 billion. Foreign assets increased to approximately CFA 209 billion, or the equivalent of two months of imports. Fiscal policies were expansionary with a high level of government expenditure. Monetary policy was also expansionary, with easy access to banking credits. The preferential interest rate was particularly low, between 4.5 percent and 5.25 percent.

Naturally, the private sector gained from and contributed to that strong expansion. The rate of private investment was at its peak (approximately 20 percent of GDP). The revenue of a sample of firms followed by the Central Bank grew at an annual rate of 12 percent. Moreover, the business world also experienced big changes, especially in Cameroon, where economic operators switched from traditional trade activities (import-export) to manufacturing industries.

Because of the great economic expansion, the authorities ignored the need for adjustment, even though the crisis had already begun.

The 1986-93 subperiod. Internal or partial adjustment and disaster for the private sector. From 1986 onward, commodity prices started to decline. By the end of 1992, the downward trend of prices reached an annual rate of more than 50 percent for oil, cocoa, and coffee; 30 percent for cotton; and 4 percent for wood. The slump in prices, together with internal economic mismanagement and decreasing interest of industrial countries in Africa, had a negative impact on central African economies. That impact was even more severe in Cameroon and the Congo, where the authorities postponed adjustment.

By the end of 1993, the economic and financial situation of the six central African states had worsened. Growth rates became negative (2.7 percent); the budgetary deficit represented an average of 9.5 percent of GDP against 3.6 percent in 1980-85; foreign assets declined sharply and imports were financed by loans from the French Treasury; external financing fell by one-half and many banks went bankrupt, except in Gabon.

To overcome that situation, adjustment measures were implemented in collaboration with the IMF and the World Bank. Unfortunately, the measures were applied at a late stage and in a lax manner, thus creating disaster for the private sector.

Poor implementation led to important government arrears to the private sector. Moreover, public services were badly provided and that significantly disturbed private sector activity. To restore fiscal revenue, taxes were increased, and this shook economic operators badly once more. Finally, irregular salary payments (or simply the lack of payment) reduced the purchasing power of civil servants and had a negative effect on domestic demand.

The monetary policy adopted during this period—centered on fighting capital flight and restoring foreign assets—was restrictive. Interest rates were high—20.0 percent in nominal terms and 17.5 percent in real terms. In an environment where investment was already notably weak, such high borrowing rates worsened the already precarious situation of the private sector. Bankruptcy caused many small enterprises to collapse.

The overvaluation of the CFA franc significantly reduced the competitiveness of local industries, and many firms went out of business. Imported products from Asia, Nigeria, and Zaïre invaded markets in the six states.

Labor and trade regulations, which are complex and inadequate, constituted another problem for the private sector.

In short, the inefficiency or the lack of implementation of adjustment policies seriously affected the private sector

The 1994 subperiod and the 1995 outlook. Integral adjustment with the devaluation of the CFA franc and hope for the private sector. After the failure of partial adjustment, the six states of the BCAS together with their partners of the West Africa Monetary Union (WAMU) chose integral adjustment (incorporating the exchange rate). The CFA franc was devalued by 50 percent in January 1994, and set at F 1 = CFA francs 100.

The new adjustment, coupled with subregional integration, is improving the long-term economic outlook of central Africa. Because of the competitiveness gains created by the exchange rate adjustment, the six states look forward to launching a South-East Asia type of industrial development program.

The first results of the new adjustment are beginning to improve private sector activity.

Owing to currency realignment and effective public finance policies, non-oil fiscal revenue, which declined during the first semester of 1994, increased slightly during the second semester to 36.8 percent. The negative results during the first half of the year were due to the disturbance caused by the devaluation (this also resulted in a drop in imports and customs duties), while the positive outcome during the second semester is related partly to the increase in imports (when economic operators had adjusted to the devaluation) and efforts in tax collection. This improvement in revenue, together with the mobilization of external resources, opened the way to internal arrears repayment, a source of private sector recovery.

Monetary policy, which was restrictive during the first semester of 1994 to restrain inflation created by the exchange rate adjustment, has since been eased. The Central Bank’s discount rate dropped to 7.75 percent from 14 percent. Bank credits to the private sector, after having decreased by 6.5 percent during the first semester of 1994, increased by 7.5 percent during the second semester. Economic operators thus took advantage of the additional resources for their transactions. Despite this progressive increase in credits, commercial bank excess liquidity remained significant, reaching CFA 82.2 billion by the end of 1994.

The gains in competitiveness brought about by the devaluation allowed exporters to obtain important resources. The following sectors benefited from the devaluation: cash crop exporters; foodstuff producers in Cameroon; the livestock sector in Chad, whose meat became as competitive as that of Argentina and southern Africa; and the forestry sector, which was supported by environmental policies of Asian competitors. Gains in competitiveness also allowed the trade balance to improve with Nigeria, which is now importing significantly from Cameroon (sugar, rice, cooking oil, and petroleum products) and from Chad (meat).

If the structural adjustment programs continue to be well executed, an improvement in growth of 3.6 percent (in real terms) is expected in 1995, against a drop of 1.8 percent in 1994.

Based on the experience of the six central African countries during 1980-94, it can be said that adjustment policies, on the one hand, if badly implemented or not implemented at all, can harm the private sector; on the other hand, if strictly executed, they can benefit the private sector.

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