Chapter

A View from the Fund

Editor(s):
Gerald Helleiner
Published Date:
March 1986
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Author(s)
Richard D. Erb

The International Monetary Fund has been playing and will continue to play a major role in supporting African members undertaking adjustment in a difficult external environment. While much attention is usually accorded to its provision of financial assistance, the Fund is, in a larger sense, a collaborative institution that provides all members with opportunities to interact within itself in a number of important ways. Through their full participation in discussions in the Executive Board, the Interim and Development Committees, and the Joint Annual Meetings of the Fund and the Bank, the representatives of African states are able to contribute to the formulation of policies of the Fund in such areas as Fund surveillance, the conditionality associated with the use of Fund resources, and international liquidity, as well as broader questions on the working of the international monetary system. The African countries are also major participants in the Fund’s technical assistance programs, both at headquarters and in the field. If the greater part of my remarks today addresses the Fund’s financial activities in Africa, this is simply a recognition of the extraordinary balance of payments problems that so many African states are encountering and which the Fund is seeking to help alleviate within the framework of its monetary role in the international monetary system. I shall revert to the broader issues of relations between the Fund and its members in the concluding part of my statement.

The Fund will maintain its financial assistance to its African members, and do so in cooperation with the World Bank, as long as these countries pursue their adjustment to the severe internal and external imbalances that have characterized so many of these countries since the start of the decade, if not earlier. Although the external environment has and will continue to have an important impact on the growth prospects in Africa, continued domestic policy reforms will be necessary to improve the domestic environment for economic growth and stronger external payments positions. There is no single economic formula for restoring growth and for strengthening the ability of countries to attract non-debt-creating capital flows and to mobilize domestic savings to finance expansion, but experience has pointed to the important roles that fiscal, monetary, exchange rate, and pricing policies play in providing conditions conducive to economic growth. These are the major themes of my remarks to you today and of the remarks that my colleagues will be making in the next few days. I hope these remarks will set the scene for a successful and stimulating symposium.

External Environment

The global economic environment of the late 1970s and early 1980s had a major impact on the economies of African countries. The rise in the price of oil, accompanied by a marked decline in the export prices of products typically exported by the African countries, led to a deterioration in the terms of trade for most of these countries. In addition, a slowdown in industrial country growth led to a decline in demand for exports from Africa, and a sharp rise in international interest rates increased the cost of commercial capital to those countries that were borrowing in private markets. Even countries for whom the bulk of capital flows was from official sources saw a leveling off in these flows as the economic situation of official lenders worsened with the global recession.

As to the future, the external environment for achieving orderly adjustment and restoring conditions for growth in Africa is likely to be somewhat better. In the short term, according to our latest staff assessment, gross domestic product (GDP) for all of Africa is expected to increase by 3.5 percent in 1985 and about the same level, or by 3.7 percent, in 1986. Growth in sub- Saharan Africa is projected to reach 2.9 percent per year in 1985 and 3.5 percent in 1986. Despite these improved prospects, however, the aggregate current account deficit for Africa will remain difficult to finance, narrowing to a projected $10.2 billion in 1985 and $9.3 billion in 1986. For sub-Saharan Africa this deficit is projected to be $8.3 billion in 1985 and $7.8 billion in 1986.

Projections beyond the near term are more difficult to make and subject to even greater uncertainties. The Fund’s World Economic Outlook provides a medium-term baseline scenario for the 1987–1990 period, based on assumptions regarding the policies “most likely” to be pursued by both developing and industrial countries. This baseline scenario anticipates an average rate of growth of slightly over 3 percent for the industrial countries over the period to 1990. For all indebted developing countries, gross national product (GNP) growth consistent with the underlying policy assumptions would average about 4.8 percent. For sub-Saharan Africa, the baseline scenario anticipates an average growth rate of 4.2 percent. Interest rates are expected to be somewhat lower in real terms than in early 1985. And non-oil commodity prices are expected to rise broadly in line with prices of manufactured goods exported by industrial countries.

The policies pursued by industrial countries will be especially important because their economic performance will determine the external environment within which developing countries’ efforts to resume sustainable growth will take place. The industrial countries will be seeking to consolidate the recovery and to ensure that its benefits are more broadly shared. This effort will involve a range of domestic policies, including a firm rejection of protectionism. Industrial countries—especially those in Europe—will have to work to reduce structural rigidities that have led to inefficiencies and reduced employment opportunities which, in turn, have nurtured protectionism. A tightening of trade restrictions could choke off the ability of indebted countries to earn the foreign exchange necessary to meet their external debt payments.

In addition, industrial countries should be prepared to support the adjustment efforts of debtor countries by providing adequate flows of capital on realistic terms and by a readiness to consider restructuring of existing debt. The Interim Committee has urged industrial countries to consider resuming export credit cover for debtor nations making satisfactory progress with adjustment policies. Industrial countries are urged to continue to provide concessional resources, either directly or through the multilateral development banks. While commercial capital, including debt rescheduling, is important, increased official development assistance will have to play the major role in the economic recovery and growth of many low-income African countries.

Domestic Policy Requirements

Although the adverse external environment has contributed to the difficulties of many African countries, these adversities have also served to highlight certain internal rigidities and structural imbalances that have been allowed to grow for too many years. While not gainsaying the importance of the external environment, it also has to be recognized that the growth and balance of payments prospects of African countries depend fundamentally on the domestic policy course in each country. In working with African countries in the context of Article IV consultations, in the context of requests for the use of Fund resources, and the furnishing of technical assistance, the Fund has gained considerable experience of the types of policies conducive to economic growth and external payments viability.

The key requirements for achieving enduring growth are domestic financial and price stability and the allocation of resources in an efficient and effective manner. Particularly where inflation has been endemic, action to reduce fiscal deficits and to control monetary expansion is essential. Special attention has to be accorded to keeping tight control over current public expenditures so that more resources can be directed to investment. A reduction in the claims of the general budget on the banking system releases resources for use by more productive sectors of the economy.

As for improving resource allocation, pricing policies are crucial. Many countries in Africa maintain extensive systems of price controls and subsidies that might temporarily mask inflationary pressures but that lead to misallocations of resources. Low agricultural producer prices, for example, result in declining domestic availability of food grains and to a growing dependency on imports.

In the external sector, the price of foreign exchange is another key element in the adjustment process. An inappropriate exchange rate generates cost and price distortions that encourage consumption and uneconomic investment and reduce the profitability of export and import competing sectors. If exchange rates and interest rates are not allowed to respond to market conditions, domestic savings tend to flow abroad and savings by nationals working in other countries tend to be retained abroad rather than repatriated. Similarly, restrictions on trade and competition create inefficiency and tax the community for the benefit of favored groups.

Economic growth depends critically on the level of domestic capital formation, provided, of course, that investment is allocated efficiently. Member countries can call on the expertise of the World Bank to help design measures to strengthen and enhance their development prospects. This is just one way in which the Fund and the World Bank reinforce one another in best serving their members. The Fund’s role is primarily to promote macroeconomic and broad pricing policies conducive to both growth and balance of payments viability. The Bank’s role is primarily to promote investment policies conducive to growth and to encourage better project design, evaluation, and implementation. Our experience has convinced us that a country’s productive resources cannot be properly developed if payments difficulties are overriding and if incentives—such as an appropriate exchange rate—are inadequate. At the same time, achievement of a sustainable balance of payments position depends, among other things, on the efficient deployment of resources over time.

These then are the policies that the Fund espouses, whether in the course of Article IV consultations or in the context of the use of its resources. Not only are these policies designed to mobilize larger savings in the domestic sector but they are also essential for attracting larger flows of resources from abroad on appropriate terms. Of course, these general policies must be carefully adapted to the situation of each country.

In advising countries on designing programs that can be supported by the Fund, the first step is to reach an understanding with country officials on the problems causing the balance of payments difficulties, the measures needed to correct them, and the total amount of financing that may be available from donors and creditors. There is no “optimal” adjustment path that is the same for every country seeking to restore conditions for growth. Within the constraints of available financing each country must answer for itself the critical question regarding the optimal speed and the pace of adjustment. Some countries may need, and in some cases may choose, to undertake very rapid and sharp adjustment, in which a number of corrective measures are implemented simultaneously. Others may be able to phase in their measures more gradually, assuming that such an approach does not make a call on larger external resources that are larger than can be mobilized, or even worse, discourage foreign sources of credit and development assistance from providing the required resources.

In addition, a more gradual approach to policy adjustment may, in some circumstances, directly result in a lower domestic growth rate. For example, if price incentives are inadequate, production may be discouraged. If inefficient enterprises are not strengthened or liquidated, resources will be diverted from more productive investments. Thus, it is not always appropriate to assume that more gradual adjustment will result in higher growth rates.

A number of countries of Africa have been successfully pursuing the types of policies that I have described. I would like to highlight some of the more noteworthy cases. For example, the Central Bank of Kenya, through a series of increases in domestic interest rates, has restored real interest rates to positive levels for the first time in recent years. Domestic saving as a percentage of GDP has exceeded the Government’s target for every year since 1980. In addition, a series of devaluations of the Kenyan shilling and a managed float of the currency since 1983 has helped increase Kenya’s exports as a percentage of GDP from 13.7 percent in 1983 to 17.9 percent in 1984. Other examples include the Côte d’Ivoire, where authorities have adopted an interest rate policy aimed at making domestic financial investments more competitive with similar investment abroad. And Mali, through adoption of important fiscal policy reforms, such as containment of public sector personnel expenditures through a wage freeze and increases in public enterprise prices and tariffs, succeeded in eliminating the deficit of the consolidated Government operations. Needless to say, while the Fund has supported these types of measures, it is the officials of the countries who chose and implemented them. Any improvements in economic conditions that resulted must be credited to the perseverance and tenacity of these officials.

The Fund’s Financial Activities in Africa

The Fund has played an active role in supporting the adjustment efforts of its African members in recent years. At the end of 1984, total obligations of African countries to the Fund subject to repurchase, including repayments to the Trust Fund, amounted to SDR 7.2 billion. Of this amount, SDR 1.5 billion was provided under the Fund’s compensatory financing facility in response to shortfalls in African countries’ export proceeds and also, in some cases, to increases in cereal import costs. At the end of April of this year, the Fund had 14 stand-by arrangements and one extended arrangement with its African members and two more stand-by arrangements pending—for Côte d’Ivoire and Togo.

In addition to providing its own financial resources, the Fund has been a catalyst for mobilizing support from other external sources such as Paris Club official debt reschedulings and provision of new external finance. In 1984 seven African countries negotiated debt reschedulings under the Paris Club for an estimated $1.9 billion in debt relief. In that year the Fund also attended consultative groups and donor conferences involving 12 African countries, where pledges were made for significant amounts of commodity and project assistance.

The Fund’s resources are a revolving pool that can be made available temporarily to members experiencing balance of payments difficulties. This assistance is designed to enable countries to restore a viable external payments position in the medium term, that is, an external current account deficit that can be covered by normal capital inflows consistent with the debt-servicing capacity of the economy. The resources of the Fund thus serve as a “second line” of reserve for its members, providing quick-disbursing financing, untied to projects or designated imports. Members draw on these second-line reserves to meet immediate financing needs while they implement corrective adjustment measures and work to attract other funds of a longer-term maturity designed to address their developmental needs. As these adjustment measures take effect, the need for exceptional financing from the Fund should recede and countries can start to rebuild their reserves as insurance against future, unforeseen crises. Part of this reserve rebuilding includes restoration of their second line of reserves through repayment to the Fund. Any failure to do so undermines the institution’s unique monetary role and makes it that much harder to obtain resources for the Fund itself. As central bankers you are well aware that claims on the Fund are treated as liquid reserves by creditors.

The role of the Fund in providing short-term, quick-disbursing financing can be seen by looking at the levels of Fund assistance during the difficult 1980–84 period, compared, for example, with multilateral development bank assistance, which is longer term, more project oriented, and thus not as quickly mobilized. Purchases from the Fund by African countries in 1981 and 1982—a period in which the external environment was particularly harsh because of high interest rates and a world recession—totaled SDR 1.9 billion and SDR 1.7 billion, respectively. This compares, for example, with World Bank disbursements of $1.0 billion in 1981 and $1.3 billion in 1982. By 1984, however, World Bank disbursements to Africa totaled $1.8 billion, while Fund purchases had declined to SDR 1.2 billion. This shift in the composition of flows to Africa reflects a transformation from immediate balance of payments requirements to longer-term, structural-adjustment and development financing.

In 1984 the Fund provided $13.4 million in technical assistance to Africa, a 44 percent increase over the $9.3 million provided in 1980. The Fund provided 62 man-years of expert assistance in 1984, compared with 47 man-years of assistance in 1980.

Policy Issues

Because its assistance is provided on a short-term basis, the Fund has been perceived as expecting its members to adjust overnight. Although Fund assistance is disbursed against short-term targets, these targets are established within a medium-term framework of policy commitments. The Fund does not expect that a balance of payments turnaround will occur in one year. That many stand-by programs have a one-year duration simply reflects the reality that it is not feasible in many cases to devise policy commitments beyond one year. Additionally, the longer the time over which adjustment is spread, the larger must be the commitment of resources from abroad. The Fund and the member country can make meaningful projections only for a certain period ahead. Few authorities are willing or able to make policy commitments beyond one year ahead for many reasons, given political calendars, that is, elections, the annual budget cycles of both the country and its donors, and the normal span of official debt reschedulings.

Some members are concerned that the policy conditions imposed by the Fund are unduly harsh and have the effect of undermining their growth. I would suggest that conditionality is no more severe than it has to be to meet the essential medium-term objective of restoring growth and a viable external payments position, given the external resources that members can obtain from the Fund and from other donors and creditors. In cases where a country has postponed adjustment too long, the adjustment measures may be implemented in circumstances that are socially and politically hard to bear, and may be disruptive to the economy. But the alternatives, in terms of further deterioration of economic conditions, are even more disruptive. For most countries implementing Fund-supported programs, the decline in growth rates occurred before they embarked on the program. The provision of financing by the Fund, both directly and indirectly through its catalytic effect, helps these countries to sustain much higher levels of imports and of activity than would be possible without the Fund’s support.

The Fund is prepared to use its best efforts to adapt to country preferences as long as it can carry conviction with other suppliers of finance, and is itself convinced, that a comprehensive program is being embarked upon to rectify the underlying imbalances in the economy. In every case, considerable attention will continue to be paid to supply-oriented policies consistent with the development aspirations of African countries. Any adjustment that requires a compression of net domestic absorption will appear restrictive in the short term but can enhance growth prospects in the medium run. Decontrol of interest rates may result in an increase in domestic interest rates that, in the short term, leads to liquidity pressures and problems and even bankruptcy for some domestic companies. But in the medium term these interest rates will attract higher levels of domestic savings and support increased domestic investment. In addition, these interest rates will provide better signals for a more efficient allocation of investment and, together with higher levels of domestic capital formation, contribute to increased domestic output.

Policies of the character supported by the Fund are not temporary measures to be abandoned once financial adjustment is achieved. Nor are they to be contrasted with policies aimed at development. On the contrary, they must be maintained and adapted to ever-changing conditions in the domestic and international environment if the momentum of growth is to be sustained.

Prospects

The Fund hopes to continue to assist its members through its various facilities, provided that appropriate adjustment policies are followed, and to serve the catalytic function of inducing additional finance from official and also private lenders. The Fund cannot project future use of its resources based on a specified country-by-country lending program in the same way a development financing institution can because it has no project pipeline and its funds disburse rapidly rather than being spread out over a project cycle.

The decision to approach the Fund for help is a sovereign decision of the member and cannot be taken for granted. The Fund might itself be precluded from providing additional finance by the emergence of arrears on payment of charges or on the discharge of repurchases on past transactions. However, on the basis of existing programs, and of those that are under active negotiation, it appears likely that net use of Fund credit by African countries—under the credit tranche facilities—will continue to expand in 1985, although the use of Fund financial assistance by the African countries might be expected to stabilize somewhat in the years ahead. African countries will be making repurchases under the Fund’s special facilities in the next few years, but the net outcome will depend on whether conditions develop that warrant fresh purchases under these facilities.

For the Fund to remain strong, credible, and able to help its African members, it must be assured of the adequacy of its resources. The Fund’s liquidity position was substantially strengthened in 1984 when quotas were increased to SDR 89.2 billion from SDR 61.1 billion and its permanent lines of credit were enlarged following the revision of the General Arrangements to Borrow. In addition, special borrowing arrangements with some Fund members have increased the Fund’s access to credit by SDR 7.5 billion. But the Fund’s resources are limited and, in order to be able to stand ready to meet the requirements of all its members, it must be assured of repurchases by member countries within the prescribed amount of time.

Collaboration with the Fund

There are a number of ways, in addition to the financial assistance that the Fund can provide, that the interests of African countries are served by their membership in the International Monetary Fund. One of these is consultation regarding economic and financial policies that every country undertakes in accordance with Article IV of the Fund’s Articles of Agreement. These regular consultations are central to the Fund’s surveillance and provide an opportunity for African members, in particular those members not currently drawing on Fund resources, to analyze and discuss their domestic policies and to benefit from the assessment of the international community on their consistency with the objectives of growth and external stability. Moreover, through the participation of their representatives in the Executive Board discussions, African members can express their views on the policies and actions of other Fund members, especially those that are important markets for African exports and suppliers of capital.

Through their participation in Board discussions, the African members also contribute to the evolution of Fund policies. Two issues keenly debated in the Board recently—Fund surveillance and the allocation of SDRs—exemplify the importance of these discussions. African members, in conjunction with a number of others from the developing world, have argued that there is a global need for liquidity that justifies an SDR allocation without delay. Other members have been unable to agree with this conclusion in part because they have difficulty in formulating the place of the SDR in a rapidly evolving structure of international liquidity. The debate therefore is broadening to take account of these more fundamental questions.

Fund surveillance has been subjected to similar reflection. African members have joined others in stressing the need for the Fund to carry out its responsibilities in an even-handed way. Given that developments in the largest industrial countries have a heavy impact on the rest of the world, they have argued the special importance of ensuring that surveillance be effective over those countries. In considering the modalities for making this process more effective, African states must be prepared to reflect on their own attitudes toward the views expressed by the Fund when they are not under the pressure of need to use Fund financial resources.

In recent years, emphasis has been given to the role that economic policies in member countries can play in improving the working of the monetary system. For example, efforts to encourage greater convergence of underlying economic and financial conditions and policies are being intensified by looking at ways to promote more effective surveillance. Increasing attention is being given to the structural characteristics of the financial and exchange markets to see if improvements in markets could result in smoother adjustments of exchange rates so as to contribute to maximizing trade and longterm investment opportunities. Improvements in the international monetary system are currently under study. The African countries, with their special concerns for the stabilization of markets, will undoubtedly have an important contribution to make to the intellectual process that will strengthen the Fund and enable it to function in the best interest of all its members.

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