Chapter

Design, Implementation, and Adequacy of Fund Programs in Africa

Editor(s):
Gerald Helleiner
Published Date:
March 1986
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Author(s)
Alassane D. Ouattara

In the second half of the 1970s and early 1980s the African countries, in common with other developing countries, were seriously affected by the adverse developments in the international economic environment, notably the oil price shocks, the economic recession in industrial countries, the steep rise in international interest rates, and the decline in prices of raw materials. The impact of these external shocks was compounded by inadequate domestic economic and financial policies pursued in many countries. The convergence of these factors thus resulted in large and growing domestic and external financial imbalances, high rates of inflation, and slackening economic growth in most African countries. Furthermore, the situation was exacerbated by structural weaknesses and the damaging impact of protracted droughts, particularly in the Sahelian region.

Faced with mounting economic and financial difficulties, a number of African countries embarked, especially since 1980, on adjustment programs supported by the International Monetary Fund. This paper examines the design, implementation, and adequacy of these programs. The discussion of these elements will be preceded by a brief overview of the causes of economic and financial difficulties in African countries and the role the Fund is playing in assisting these countries in their adjustment efforts. The paper will conclude with some remarks on the lessons that can be drawn from the recent experience with Fund-supported programs and on future prospects in Africa.

Causes and Magnitude of the Economic Problems

The economic and financial situation of most African countries deteriorated markedly in the second half of the 1970s and early 1980s.1 The annual rate of economic growth in the non-oil African countries, which reached 6.3 percent in 1974 and 5.8 percent in 1976, fell to less than 2.5 percent in 1977–80 and to only 1.3 percent in 1981–83 (Table 1), a rate significantly lower than the 3 percent annual increase in population, resulting in a significant decline in real per capita income. Over this period, their combined external current account deficit grew sharply, rising from $4.5 billion in 1973 to $14.1 billion in 1981, or from an average of about 10 percent of exports of goods and services to almost 43 percent, respectively.2 To finance these large and growing deficits, a number of countries resorted to foreign borrowing which was facilitated, in the mid-1970s, by relatively easy access to external sources of financing. However, the heavy borrowing, combined with the steep rise in interest rates at the turn of the decade, led to a debt crisis in some countries.3 The weakening in economic growth and the large external payments imbalances were accompanied by an intensification of inflationary pressures. The average annual rate of inflation in the non-oil African countries rose almost continuously, from 10 percent in 1973 to over 20 percent during 1977–83.

Table 1.Africa:1 Selected Economic Indicators, 1973–84
Estimate
1973197519771979198119831984
(percent)
Economic growth2.392.752.302.001.700.803.20
Inflation9.8615.8424.3022.9028.0026.5017.00
Terms of trade8.30–12.1918.102.70–3.00–0.103.50
Ratio of external debt to GDP24.9027.5036.0037.9043.4054.6057.70
Debt service ratio9.5011.9015.5018.7022.6024.90
(billions of dollars)
Current account–4.50–7.20–6.60–9.60–14.10–10.20–9.40
Net official transfers1.101.702.303.003.403.303.40
Net capital inflows3.804.905.006.408.405.405.10
of payments0.50–0.600.70–0.20–2.30–1.50–0.90
Total outstanding debt11.6018.4031.0045.1056.3062.2069.30
Source: International Monetary Fund, Current Studies Division, Research Department, and World Economic Outlook (Occasional Paper No. 27, 1984).

This follows the International Monetary Fund’s International Financial Statistics classification of the African countries. These include all the African member countries, with exception of Algeria, Egypt, Nigeria, and Libya, which are classified under different headings. In this table, South Africa is also excluded.

Source: International Monetary Fund, Current Studies Division, Research Department, and World Economic Outlook (Occasional Paper No. 27, 1984).

This follows the International Monetary Fund’s International Financial Statistics classification of the African countries. These include all the African member countries, with exception of Algeria, Egypt, Nigeria, and Libya, which are classified under different headings. In this table, South Africa is also excluded.

This deterioration in the economic and financial situation of most African countries was due in part to adverse external factors. The sharp increase in oil prices in 1973–74 and again in 1979–80 resulted in a marked rise in the import bill of the oil-importing countries, thereby affecting significantly their external position. Although the cost of oil imports has been reduced by the recent decline in oil prices, such imports still constitute a heavy burden on the balance of payments. The African countries that are net exporters of oil of course benefited from the increases in oil prices, but have been adversely affected by the recent decline in these prices. The severe recession in industrial countries in the early 1980s affected both the oil and non-oil African countries. The recession resulted in a marked weakening in demand for exports of many countries, which was exacerbated by a sizable decline in prices of primary commodities and a significant deterioration in the terms of trade, estimated at about 15 percent over the period 1978–83. Meanwhile, the unprecedented rise in international interest rates aggravated the already heavy burden of debt servicing. High interest rates affected especially those countries with large indebtedness, but was also a factor for small borrowers. During 1974–83 the debt service payments of the non-oil African countries rose elevenfold; as the growth of their export earnings slowed, the average debt service ratio increased from 8 percent in 1974 to 23 percent in 1983 and further to 25 percent in 1984.

The adverse impact of external factors was compounded by inadequate domestic demand management and structural policies, which contributed to the worsening in the balance of payments position, the weakening of the real sector, and the rise in inflationary pressures. Many African countries continued to pursue expansionary financial policies, even though the changing world economic environment increased the urgency for restraint. These policies were reflected in large and growing fiscal deficits and in rapid expansion of domestic credit and liquidity. The widening fiscal deficits were the result of increases in both current and capital expenditures which were out of line with the growth of revenue. In many cases, large spending was initially caused by ambitious development programs which had been initiated when, in the early 1970s, world prices of certain primary and mineral products were highly favorable, thereby raising export receipts and budgetary revenues (e.g., Gabon, Liberia, Madagascar, Mauritania, Morocco, and Zaïre). However, as exports weakened and revenues tapered off as a result of subsequent declines in world prices and a weakening of world demand, many countries continued with their expansionary expenditure policy, resulting in the widening of their fiscal deficits. In other cases, high expenditures reflected social and political pressures, as well as security needs. In several countries, rapidly rising wage outlays, large recruitment in the public sector, consumer subsidies, and transfers to public enterprises represented a growing budgetary burden and were frequently major causes of the widening fiscal deficits. These deficits were financed by external borrowing, large recourse to domestic credit, and, in certain cases, by an accumulation of domestic and external arrears. In a number of countries, the expansion of credit to the government was made at the expense of the nongovernment and productive sectors. This misallocation of credit was compounded by credit and interest rate controls which resulted in an inefficient sectoral allocation of resources. Negative real interest rates in many countries hampered the mobilization of savings and also contributed to the misallocation of resources.

In addition to inappropriate demand management policies, inadequate structural policies played a significant role in the deterioration of the economic and financial situation in many African countries. There was a tendency to allow exchange rates to appreciate in real terms and become increasingly overvalued, resulting in a reduction in the profitability of the export- and import-substitution sectors, an erosion of the competitiveness of domestic production, and widespread distortions in the economy. In many instances, overvalued exchange rates were accompanied by a wide range of restrictions, as well as administrative and price controls, leading to parallel markets for goods and foreign exchange. In particular, the rigidity in consumer prices led to increases in budgetary subsidies, encouraged consumption, and thereby raised imports of consumer goods. Moreover, low consumer prices were reflected in low agricultural producer prices which did not keep up with higher costs of production, thus eroding the profitability and productivity of the agricultural sector, which was also hampered by recurring droughts, especially in the Sahelian region. Frequently, controls on prices and utility tariffs added to the problems the public enterprise sector was facing as a result of poor management and overstaffing. As the development strategy in many African countries relied heavily on the public sector, the growing difficulties of public enterprises increased the magnitude of the economic and financial problems of these countries. In addition, during the last decade, there were large public investments in infrastructure and in nonviable projects, instead of quick-yielding projects; as such, these investments contributed little to export promotion or import substitution and to generating the foreign exchange needed to service the debts contracted to finance the projects.

Faced with large and mounting domestic and external imbalances, in the 1970s most countries resorted to external borrowing to finance their financial deficits while running down their foreign reserves; few countries took corrective measures to contain the deterioration of their financial situation. As financing was used as a substitute for adjustment, in many countries the debt service burden rose sharply, creditworthiness was eroded, and additional borrowing became much more costly and less available. At the turn of the decade, it became evident to these countries that financing was only a temporary solution and that there was a need for appropriate adjustment to tackle the existing problems. Since many of these problems were deep-seated and structural, however, adjustment could not be realized in a short period of time, and additional financing was needed to support an orderly adjustment process. Accordingly, a proper combination of adjustment and financing was required to achieve over the medium term a viable balance of payments position that would be consonant with sustainable economic growth and relative price stability.

The Role of the Fund in the Adjustment Process4

In recent years the International Monetary Fund has been playing an important role in assisting a number of African countries in the design and financing of their adjustment programs. The Fund’s role in Africa, as else-where, is governed by its Articles of Agreement, which state at the outset (Article I) that its purposes are:

(ii) 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 the development of the productive resources of all members as primary objectives of economic policy; (iii)… to maintain orderly exchange arrangements…; (v) to give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity; and (vi) …to shorten the duration and lessen the degree of disequilibrium in the international balance of payments of members.

In accordance with these objectives, the Fund has developed a pragmatic and flexible approach in assisting member countries in their adjustment efforts and in providing them with technical and financial assistance. In particular, the Fund has continuously adapted its policies and procedures in response to the changing international economic environment and the needs of member countries. To deal with balance of payments disturbances that are temporary and beyond the control of the authorities, the Fund introduced certain special facilities with low conditionality. These included the oil facilities, the Trust Fund, the subsidy accounts, the compensatory financing facility, and, more recently, the so-called cereal facility. The oil facilities were introduced in 1974–75 to help members cushion their economies against the adverse impact of the sharp increases in oil prices in 1973–74. The Trust Fund was created in 1976 to extend low-interest loans to low-income members out of profits derived from sales of a portion of the Fund’s gold holdings. The subsidy accounts were set up in 1975 and 1980 to help the same group of members meet the higher charges on amounts lent to them from resources borrowed by the Fund at market-related interest rates. In addition, in 1979 the maximum entitlement under the compensatory financing facility, which was established in 1963 to help countries finance deficits due to temporary export shortfalls, was enlarged to 100 percent of quota. More recently, in 1981 the Fund introduced the cereal facility, as an integral part of the compensatory financing facility, to provide assistance to members experiencing temporary increases in the cost of cereal imports. Many members benefited from these special facilities. Purchases under the oil facilities by African countries amounted to SDR 465 million in 1974–76, and Trust Fund loans disbursed to them totaled SDR 962 million over the period 1977–81. The drawings under the compensatory financing facility increased from SDR 968 million during 1974–79 to SDR 1,620 million during 1980–84 (Table 2).

Table 2.Compensatory Financing Facility Purchases by African Countries, 1980–84(millions of SDRs)
19801981198219831984
Export

short-

falls
Cereal

import

excesses
Export

short-

falls
Cereal

import

excesses
Export

short-

falls
Cereal

import

excesses
Export

short-

falls
Cereal

import

excesses
Export

short-

falls
Cereal

import

excesses
Central African Republic9.0
Chad7.1
Côte d‘lvoire114.0
Egypt
Equatorial Guinea6.44.7
Ethiopia18.0
Gambia, The9.0
Ghana120.558.29.0
Guinea-Bissau1.9
Kenya28.831.6
Liberia34.714.4
Madagascar29.221.813.8
Malawi12.012.2
Mali5.1
Mauritania10.5
Mauritius40.5
Morocco113.0123.4
Niger24.0
Senegal42.0
Sierra Leone20.7
Sudan21.845.739.1
Swaziland9.0
Tanzania15.015.9
Uganda25.045.0
Zaïre106.9114.5
Zambia59.334.097.2
Zimbabwe56.1
Total (both facilities)113.0424.1494.2493.395.4
Total (excluding Egypt and Sudan)91.2378.4494.2454.295.4
Source: International Monetary Fund, Bureau of Statistics.
Source: International Monetary Fund, Bureau of Statistics.

While these facilities were helpful to African countries, it was evident that most countries were facing fundamental disequilibria that can only be corrected over a number of years through the adoption of appropriate corrective policies, formulated in the context of comprehensive adjustment programs. The number of African countries that implemented such adjustment programs and were supported by stand-by and extended arrangements from the Fund increased from 8 during the period 1974–79 to 27 in 1980–84. The amount of Fund assistance drawn under these arrangements rose from SDR 600 million to over SDR 5 billion, respectively. As shown in Table 3, at the end of 1980, there were 11 stand-by arrangements and 5 extended arrangements in effect; the total amount committed was SDR 2,685 million, of which SDR 685 million was drawn. By the end of 1981, the number of arrangements rose to 13 stand-by arrangements and 7 extended arrangements; consequently, the amount committed reached a record level of SDR 4,722 million, of which SDR 1,525 million was drawn. Subsequently, with the cancellations of some arrangements, the number of extended arrangements declined in 1982 to only 1 while the number of stand-by arrangements remained at 13, with a total amount of SDR 1,583 million committed and SDR 827 million drawn. By the end of 1983, the number of stand-by arrangements rose again to 16 while that of extended arrangements increased to 2; the total amount committed was SDR 2,629 million, and the amount drawn increased to SDR 1,298 million. At the end of 1984, there were 14 stand-by arrangements and 1 extended arrangement, with a total amount of SDR 1,435 million committed and SDR 719 million drawn under these arrangements.

Table 3.Stand-By Arrangements and Arrangements Under Extended Fund Facility at End of Year, 1980–84(millions of SDRs)
Stand-By

or

Extended

Fund

Facility
Date

of

Agreement
Expiration

Date
Amount

Agreed
Amount

Purchased
Undrawn

Balance
1980
Central African RepublicSBAFeb. 15, 1980Feb. 14, 19814.004.00
EgyptEFFJuly 28, 1978June 30, 1980425.0075.00350.00
Equatorial GuineaSBAJuly 1, 1980June 30, 19815.503.002.50
GabonEFFJuly 27, 1980Dec. 31, 198234.0034.00
KenyaSBAOct. 15, 1980Oct. 14, 1982241.5060.00181.50
LiberiaSBASept. 15, 1980Sept. 14, 198265.0018.4046.60
MadagascarSBAJune 27, 1980June 26, 198264.5010.0054.50
MalawiSBAMay 9, 1980March 31, 198249.9022.0027.90
MauritaniaSBAJuly 23, 1980March 31, 198229.708.9020.80
MauritiusSBASept. 5, 1980Sept. 4, 198135.0015.0020.00
MoroccoEFFOct. 8, 1980Oct. 7, 1983810.00147.00663.00
SenegalEFFAug. 8, 1980Aug. 7, 1983184.8041.10143.70
SomaliaSBAFeb. 27, 1980Feb. 26, 198111.506.005.50
SudanEFFMay 4, 1979May 3, 1982427.00150.00276.00
TanzaniaSBASept. 15, 1980June 30, 1982179.6025.00154.60
ZaïreSBAAug. 27, 1979Feb. 26, 1981118.0098.4019.60
Total2,685.00684.802,000.00
Total (excluding

Egypt and

Sudan)
1,833.00458.801,374.20
Table 3.(continued). Stand-By Arrangements and Arrangements Under Extended Fund Facility at End of Year, 1980–84(millions of SDRs)
Stand-By

or

Extended

Fund

Facility
Date

of

Agreement
Expiration

Date
Amount

Agreed
Amount

Purchased
Undrawn

Balance
1981
Côte d’lvoireEFFFeb. 27, 1981Feb. 22, 1984484.50176.70307.80
EthiopiaSBAMay 8, 1981June 30, 198267.5044.0023.50
GabonEFFJune 27, 1980Dec. 31, 198234.0034.00
KenyaSBAOct. 15, 1980Oct. 14, 1982241.5090.00151.50
LiberiaSBAAug. 16, 1981Sept. 15, 198055.0033.0022.00
MadagascarSBAApril 13, 1981June 26, 1982109.0039.0070.00
MalawiSBAMay 9, 1980March 31, 198249.9040.009.90
MauritaniaSBAJune 1, 1981March 31, 198225.8010.3015.50
MauritiusSBADec. 21, 1981Dec. 20, 198230.007.5022.50
MoroccoEFFMarch 9, 1981Oct. 7, 1983817.10136.50680.60
SenegalSBASept. 11, 1981Sept. 10, 198263.0015.7047.30
Sierra LeoneEFFMarch 30, 1981Feb. 22, 1984186.0033.50152.50
SomaliaSBAJuly 15, 1981July 14, 198243.1025.9017.20
SudanEFFMay 4, 1979May 3, 1982427.00251.00176.00
TanzaniaSBASept. 15, 1980June 30, 1982179.6025.00154.60
TogoSBAFeb. 13, 1981Feb. 12, 198347.507.2540.25
UgandaSBAJune 5, 1981June 30, 1982112.5077.5035.00
ZaïreEFFJune 22, 1981June 21, 1984912.00175.00737.00
ZambiaEFFMay 8, 1981May 7, 1984800.00300.00500.00
ZimbabweSBAApril 8, 1981April 7, 198237.5037.50
Total4,722.501,525.353,197.15
Total (excluding

Sudan)
4,295.501,274.353,021.15
Table 3.(continued). Stand-By Arrangements and Arrangements Under Extended Fund Facility at End of Year, 1980–84(millions of SDRs)
Stand-By

or

Extended

Fund

Facility
Date

of

Agreement
Expiration

Date
Amount

Agreed
Amount

Purchased
Undrawn

Balance
1982
Côte d’lvoireEFFFeb. 27, 1981Feb. 22, 1984484.50292.14192.36
Gambia, TheSBAFeb. 22, 1982Feb. 21, 198316.9016.90
GuineaSBADec. 1, 1982Nov. 30, 198325.0011.5013.50
KenyaSBAJan. 8, 1982Jan. 7, 1983151.5090.0061.50
LiberiaSBASept. 29, 1982Sept. 28, 198355.005.0050.00
MadagascarSBAJuly 9, 1982July 8, 198351.0030.6020.40
MalawiSBAAug. 6, 1982Aug. 5, 198322.0010.0012.00
MaliSBAMay 21, 1982May 20, 198330.4025.405.00
MoroccoSBAApril 26, 1982April 25, 1983281.30196.9084.40
SenegalSBANov. 24, 1982Nov. 23, 198347.306.0041.30
SomaliaSBAJuly 15, 1982Jan. 14, 198460.0015.0045.00
SudanSBAFeb. 22, 1982Feb. 21, 1983198.0070.00128.00
TogoSBAFeb. 13, 1981Feb. 12, 198347.507.2540.25
UgandaSBAAug. 11, 1982Aug. 10, 1983112.5050.0062.50
Total1,582.90826.69756.21
Total (excluding

Sudan)
1,384.90756.69628.21
Table 3.(continued). Stand-By Arrangements and Arrangements Under Extended Fund Facility at End of Year, 1980–84(millions of SDRs)
Stand-By

or

Extended

Fund

Facility
Date

of

Agreement
Expiration

Date
Amount

Agreed
Amount

Purchased
Undrawn

Balance
1983
Central African
RepublicSBAApril 22, 1983April 21, 198418.004.5013.50
Côte d’lvoireEFFFeb. 27, 1981Feb. 22, 1984484.50446.0038.50
GhanaSBAAug. 3, 1983Aug. 2, 1984238.50143.1095.40
KenyaSBAMarch 21, 1983Sept. 20, 1984175.95129.8046.15
LiberiaSBASept. 14, 1983Sept. 13, 198455.0028.0027.00
MalawiEFFSept. 19, 1983Sept. 18, 1986100.0010.0090.00
MaliSBADec. 9, 1983May 31, 198540.5010.0030.50
MauritiusSBAMay 18, 1983Aug. 17, 198449.5024.7524.75
MoroccoSBASept. 16, 1983March 15, 1985300.0030.00270.00
NigerSBAOct. 5, 1983Dec. 4, 198418.006.8011.20
SenegalSBASept. 19, 1983Sept. 18, 198463.0031.5031.50
SomaliaSBAJuly 15, 1982Jan. 14, 198460.0051.258.75
SudanSBAFeb. 23, 1983Feb. 22, 1984170.00144.5025.50
TogoSBAMarch 4, 1983April 3, 198421.4019.411.99
UgandaSBASept. 16, 1983Sept. 15, 198495.0044.0051.00
ZaïreSBADec. 27, 1985March 26, 1985228.00228.00
ZambiaSBAApril 18, 1983April 17, 1984211.5076.50135.00
ZimbabweSBAMarch 23, 1983Sept. 22, 1984300.0097.50202.50
Total2,628.851,297.611,331.24
Total (excluding

Sudan)
2,458.851,153.111,305.74
Table 3.(continued). Stand-By Arrangements and Arrangements Under Extended Fund Facility at End of Year, 1980–84(millions of SDRs)
Stand-By

or

Extended

Fund

Facility
Date

of

Agreement
Expiration

Date
Amount

Agreed
Amount

Purchased
Undrawn

Balance
1984
Central African
RepublicSBAJuly 6, 1984July 5, 198515.005.0010.00
Côte d’lvoireSBAAug. 3, 1984Aug. 2, 198582.7541.3841.37
Gambia, TheSBAApril 23, 1984July 22, 198512.832.6310.20
GhanaSBAAug. 27, 1984Dec. 31, 1985180.0066.00120.00
LiberiaSBADec. 7, 1984June 6, 198642.788.5034.28
MadagascarSBAApril 10, 1984March 31, 198533.0027.006.00
MalawiEFFSept. 19, 1983Sept. 18, 1986100.0034.0066.00
MaliSBADec. 9, 1983May 31, 198540.5034.006.50
MoroccoSBASept. 16, 1983March 15, 1985300.00210.0090.00
NigerSBAOct. 5, 1983Dec. 4, 198418.0035.2012.80
Sierra LeoneSBAFeb. 3, 1984Feb. 2, 198550.2019.0031.20
SudanSBAJune 25, 1984June 24, 198590.0020.0070.00
TogoSBAMay 7, 1984May 6, 198519.0016.003.00
ZaïreSBADec. 27, 1983March 26, 1985228.00158.0070.00
ZambiaSBAJuly 26, 1984April 30, 1986225.0080.00145.00
Total1,435.06718.71716.35
Total (excluding

Sudan)
1,345.06698.71646.35
Source: International Monetary Fund, Treasurer7s Department.
Source: International Monetary Fund, Treasurer7s Department.

Design of Fund-Supported Programs

The formulation of an adjustment program supported by the Fund usually involves four steps: (i) a diagnosis of the problems and the adjustment needed; (ii) a definition of the program’s objectives; (iii) setting the policies and time frame required to achieve these objectives; and (iv) specifying the performance criteria to monitor the program.5

The first step in the design of an adjustment program is an assessment of the problems causing the balance of payments difficulties and the adjustment needed to correct them. This diagnosis, which is undertaken by the authorities and the Fund staff, aims at identifying the causes of the disequilibrium, the adjustment needed to achieve a viable or sustainable situation, and the time span required to achieve it. A viable external position means that the external current account deficit can be covered by normal capital inflows which are consistent with the debt servicing capacity of the economy, and that such a viable situation is consonant with a sustainable economic growth and relative price stability. The estimate of normal capital inflows is an important factor in the formulation of an adjustment program and is arrived at by assessing the economic assistance that is likely to be available to the country over the medium term. Accordingly, the recently adopted adjustment programs in Africa were formulated in the context of medium-term frameworks that foresee the achievement of viable external positions and sustainable economic growth, usually over a five-year period.

Once broad agreement is reached with the authorities on the diagnosis of the problems and the adjustment period needed for achieving a viable position, specific objectives are established for the program period (usually one year). The three main objectives generally included in most programs are a reduction in the external current account deficit, the stimulation of economic growth, and the containment of inflation.

The ability to finance the overall balance of payments deficit is also a crucial element in the formulation of the program. Before a program is approved by the Executive Board, assurances are needed that the financing gaps will be covered to ensure the successful implementation of the program. In addition to purchases made available by the Fund, the Fund plays an important role in the gap-fill exercise by sensitizing creditors and donors to the importance of closing the gap through debt relief, refinancing, or additional balance of payments assistance. The Fund is invited to the rescheduling meetings of official creditors under the auspices of the Paris Club and remains in close contact with commercial banks in the rescheduling exercises of the London Club. Furthermore, in a few cases, the Fund, in close cooperation with the World Bank, has taken the lead in organizing donor country meetings for balance of payments assistance. The Bank also plays an important role in organizing consultative group meetings to ensure the availability of development financing from these countries over the medium term.

After agreeing on the specific objectives for the program period, the Fund staff works out with the authorities the measures to be implemented in order to achieve them. The measures included in recent Fund programs in Africa have involved both demand management and supply-oriented measures, taking into account the specific circumstances of each country. The package of measures adopted, as well as the emphasis on specific elements, depend on the peculiarities and options available in each case. On the demand side, the measures called for in the programs have included a reduction in the fiscal deficit, the pursuit of a cautious credit policy accompanied in certain cases by increases in interest rates and reforms of the financial sector, and prudent external debt management. On the supply side, the main measures have comprised the adoption of appropriate exchange and tariff policies, liberalization of marketing and pricing policies, including in particular adjustments in producer prices, rehabilitation of public enterprises, and appropriate public investment programs. Of course, some of these measures have an impact on both demand and supply conditions.

As discussed above, growing fiscal deficits have played an important role in the deterioration of the balance of payments position of many African countries. Accordingly, a restrained fiscal policy has been a crucial element in most adjustment programs undertaken by these countries. The reduction in the fiscal deficit was to be achieved through both expenditure-containing and revenue-raising measures. On the expenditure side, adjustment programs usually aimed at containing and in some cases reducing both current and capital outlays. The emphasis on specific measures varied from case to case. In certain cases, to limit current expenditures, the emphasis was placed on wages and recruitment policies, including at times the institution of wage and hiring freezes (e.g., Kenya, Liberia, Madagascar, Mauritania, and Morocco). In cases where budgetary subsidies and transfers to public enterprises represented a heavy burden on the budget, scaling down of these subsidies and transfers was an important element in the adjustment (e.g., Kenya, Senegal, and Morocco). In most programs, efforts were made to improve expenditure control and administrative efficiency. For those countries that have accumulated domestic arrears, their gradual elimination was also an important element in the programs. Restraining, and in certain cases reducing, capital outlays in line with resource availability and the absorptive capacity of the economy was also essential in certain cases (e.g., Liberia, Madagascar, Morocco, and Niger). On the revenue side, programs generally contained specific measures to strengthen revenue performance through the introduction of new tax measures and improvements in tax administration and collections (e.g., Gabon, Liberia, Madagascar, Malawi, Mauritania, Morocco, and Niger). In this context, the Fund has been providing technical assistance to member countries to reform their tax systems.

With regard to monetary policy, programs generally emphasized the pursuit of a cautious policy, consistent with the balance of payments and fiscal objectives, while accommodating the credit needs of the productive sectors and crop financing requirements. In addition, many programs included structural reforms of the financial sector aimed at strengthening financial intermediation and enhancing central bank management (e.g., Morocco and Somalia). Furthermore, to improve resource allocation and the mobilization of savings, many programs included upward revisions in interest rates.

Appropriate external debt management was also a crucial element in all the programs. The aim was to contain the debt to levels consistent with debt servicing capacity. The Fund also provided technical assistance to help countries improve their debt management. For those countries that accumulated external arrears, the program provided for their gradual elimination.

For the countries in which the exchange rate was overvalued or the exchange rate system was inappropriate (e.g., multiple-currency practices), exchange rate actions were a key element in the programs. The aim of adopting an appropriate exchange rate policy was to alleviate the distortions in the economy, to enhance the profitability and competitiveness of domestic products, particularly export and import substitutes, and to reduce the excess demand for imports. A wide variety of actions have been included in recent programs. In some cases, exchange rates were depreciated in order to restore and sometimes enhance the competitiveness of the domestic economy. In other instances, the depreciation of the exchange rate was accompanied by a modification of exchange arrangements, such as the move from a multiple currency peg to an SDR or a basket peg, or the change in the currencies included in a basket or their weights in line with the weights of the country’s major trading partners in its trade and payments transactions. The adoption of a flexible exchange rate policy during the program period was also called for in some cases. More recently, some countries introduced a freely floating or managed floating exchange rate system (e.g., Somalia and Zaïre).

Other changes in exchange systems included, where appropriate, the elimination of dual or multiple markets (e.g., Malawi, Mauritania, and Uganda). In certain cases, this was effected gradually and the unification of rates was allowed to be completed over a period of time (e.g., Somalia and Uganda). The exchange rate actions were accompanied, in a number of cases, by an easing of import restrictions and tariff adjustments, aimed at reducing the rate of effective protection (e.g., Kenya and Morocco).

To improve resource allocation and promote domestic production, in particular in the agricultural sector, the adoption of appropriate pricing and marketing policies was a key element in a number of programs. Adjustments in prices and utility tariffs were also necessary to improve the operations of public enterprises and reduce the budgetary burden of subsidies and transfers. Accordingly, many programs called for increases in retail and producer prices, easing of price controls, and gradual liberalization of marketing.

In cases where the public enterprise sector was a major source of difficulties, the programs contained specific measures to improve the financial performance of public enterprises (e.g., Central African Republic, Malawi, Morocco, Niger, Senegal, and Togo). The measures included adjustments in prices and tariffs of the goods and services provided by these enterprises, and steps to improve their management, as well as to reduce overstaffing. Several countries also embarked on comprehensive reform programs of the public enterprise sector aimed at improving the public enterprise policy environment and institutional framework and at determining which enterprise can be privatized or liquidated. These reforms were often undertaken with technical and financial assistance from the World Bank and bilateral donor countries.

The adoption of appropriate investment programs supported by the World Bank was also a key element in recently approved programs. In many cases, this involved setting the level of public investment in line with resource availability and absorptive capacity of the country and the reallocation of investment in favor of the directly productive sectors. This reorientation often aimed at providing more resources to the agricultural and small- and medium-scale industrial enterprises, and less to infrastructure and projects with low productivity. In addition, this reorientation was accompanied, in certain cases, by the adoption of incentives to promote investment by the private sector and to attract foreign capital.

To ensure successful implementation of the programs and provide the Fund with assurances that its resources are being used to support needed adjustment, all Fund-supported programs in the upper credit tranches included “performance criteria.” These criteria are relatively few in number and easily quantifiable. They typically included quarterly ceilings on total domestic bank credit and net credit to the government, as well as limitations on contracting or guaranteeing by the government of nonconcessional external loans. For countries that accumulated external or domestic arrears, their gradual elimination also constituted performance criteria. In a few cases where the monitoring of fiscal developments was crucial to the successful implementation of programs, a ceiling was placed on the fiscal deficit. In addition to the above quantitative ceilings, there were a number of qualitative performance criteria dealing with a member’s intention not to introduce or intensify restrictions on payments and transfers for current international transactions, or conclude bilateral payment arrangements with other members.

During the program period, if any performance criterion was not met, the member’s right to make subsequent drawings under the arrangement was interrupted. Consultation was held between the authorities and the staff to examine the reasons. In cases where the excess over the ceilings was not substantial and did not jeopardize the realization of the objectives of the program, and additional adjustment measures could be taken to ensure the attainability of subsequent ceilings, a “waiver” was recommended to the Executive Board. If approved, this restored the member’s drawing rights. However, if the excess was substantial and it was determined that the program’s objectives were not attainable, or that no agreement could be reached on additional measures, the program was canceled and efforts were made to formulate a new program taking into account the new circumstances.

In addition to the above mentioned performance criteria, the programs were monitored through periodic reviews to assess the progress made in the implementation of the programs, and to agree on any additional measures that may be needed to ensure the realization of the program objectives. These review clauses also constituted performance criteria.

Implementation of the Programs

Although there is a wide variety of standards that can be used to assess the performance under the programs adopted in recent years in Africa, the following two standards have been used in this paper: (i) a comparison between actual results and targets; and (ii) a comparison between actual results and previous year’s performance.

The comparison against program targets shows that the performance under the programs adopted in 1980–84 was mixed. The targeted rates of economic growth were attained in only about one third of the cases. The results with regard to the external current account deficit as a proportion of GDP and to the rate of inflation were somewhat better; the external current account deficit targets were achieved in 43 percent of the cases, while the targeted rates of inflation were realized in more than half of the cases. In most of the countries involved, there was a shortfall in policy implementation as evidenced by higher fiscal deficits and larger domestic credit expansion than envisaged under the programs. The fiscal deficits in terms of GDP were exceeded in almost two thirds of the cases, reflecting higher spending than programmed, and also, in some cases, shortfalls in budgetary revenue. The higher deficits generally resulted in larger expansion of credit to the government than programmed. As credit to the private sector also exceeded the programs’ targets in numerous cases, the expansion of total domestic credit exceeded the targets in as many cases and resulted in higher than targeted growth of domestic liquidity.

Compared with the results achieved in the year prior to the program’s inception, the outcome was generally better, indicating that, while in a number of cases the program targets were not achieved, a larger number of countries were able to improve their situation. The growth performance during the program year compared with the previous year was better in about half of the cases. There was also a decline in the rate of inflation in almost 60 percent of the cases, and the current account deficit of the balance of payments improved in approximately two thirds of the countries. With regard to policy instruments, the fiscal position as measured by the ratio of the deficit to GDP declined in about two thirds of the cases. The rate of growth of net credit to the government and the expansion of total domestic credit, as well as the rate of growth of the money supply, were nearly equal or lower than in the previous year in a large number of countries.

There are several reasons for the problems that African countries faced in carrying out their adjustment programs in 1980–84. The main reasons are unexpected adverse developments, weaknesses in the implementation of policies, and ambitious program targets or insufficient policy measures to achieve them.

First, several countries faced unforeseen and adverse exogenous developments. These included sharp declines in world prices and weakening in world demand for main export commodities, shortfalls in capital inflows, increases in international interest rates, unfavorable weather conditions, and, in a few cases, social and political disturbances. For example, performance in Côte d’Ivoire was adversely affected by external shocks, as well as drought, which necessitated revisions in the annual targets of the 1981–83 program supported by an extended arrangement, and the authorities had to intensify their adjustment efforts to partly offset the impact of these adverse developments. Kenya, Mali, Mauritania, Niger, and several other countries were seriously affected by severe droughts that decimated livestock and necessitated large imports of cereals. In Liberia, the implementation of the program in 1982 was made more difficult by the onset of economic recession in the principal markets for Liberia’s exports of iron ore. Ghana’s performance in 1983–84 was adversely affected by unfavorable weather conditions and slower-than-expected disbursement of external resources. In Madagascar, the weakening in world demand and prices for coffee resulted in a shortfall in export receipts. In 1980 Mauritius was severely affected by the cyclones that led to a sharp fall in sugar output and exports. Morocco suffered during the implementation of its programs from a slackened world demand for its main export commodity, phosphates, and from drought. The program with Senegal in 1982–83 ran into difficulties partly because of the sharp downturn in world market prices for groundnut oil. Sierra Leone also suffered from a weakening of export prices and unexpectedly high levels of rice imports to compensate for domestic shortfalls in production due to drought. In Somalia, the external ban imposed on its exports of livestock placed severe pressure on the balance of payments. Zambia’s performance was seriously affected by a sharp decline in copper prices.

Second, many countries encountered difficulties in implementing the intended policies. In some cases, there were problems in mobilizing sufficient political support for the implementation of the programs. In others, after some initial success, the authorities had to yield to political and social pressure and relaxed their austerity measures, particularly in the fiscal field. Limited administrative capabilities were also a factor in certain cases, and the government was not able to improve expenditure control and revenue collection, or effect requisite measures to rehabilitate public enterprises as envisaged under the programs.

A third factor related to the design of the programs. In retrospect, in some cases, the targets were too ambitious, and the package of policy instruments was not sufficient to achieve fully the desired results. Data limitations in some countries may also have affected economic forecasting and financial programming.

Adequacy of the Programs

Were the Fund-supported adjustment programs adequate for African countries? To address this important question, let me first refer to the criticisms which have been made, in both official and academic circles, regarding Fund-supported programs, particularly in the African context. The main criticisms are the following:

  • Fund-supported programs are generally “standard” and do not take into account the specific situation of African countries;

  • Fund-supported programs aim at restoring economic and financial viability in a relatively short period of time, while most African countries are faced with structural problems that can be resolved only over the long term;

  • the policies envisaged in these programs are not appropriate in the context of African countries and are harmful to economic growth; and

  • the financial support provided by the Fund is small and is subject to very harsh conditionality.

With regard to the first point, it should be noted that while technically certain macroeconomic variables, policy instruments, and performance criteria are common to most programs, the specific objectives and appropriate combination of policies, as well as the emphasis on key measures, have clearly depended on the circumstances of each country. Invariably, the different nature and severity of the problems were fully taken into account in the design of the programs. In fact, each program was formulated after detailed and lengthy discussions with the authorities on the problems each country was facing, the root causes of the problems, and the measures needed to tackle them.

Regarding the time span required to restore viable economic and financial positions, while most of the stand-by arrangements covered one to two years, the annual programs supported by these arrangements were formulated in a medium-term framework which usually foresaw that a viable situation would be achieved over three to five years, provided, in particular, that the country pursued its adjustment efforts with determination. Furthermore, in many cases, successive one-year stand-by arrangements were approved. Thus, the programs clearly recognized that a reasonable time horizon for adjustment is needed.

Turning to the appropriateness of the policy measures envisaged in the adjustment programs for African countries, as mentioned earlier, the design of the programs takes into account the specific situation of each country. As to whether particular measures such as exchange rate actions or increases in interest rates are effective instruments, experience has shown that these measures play an important role in correcting the disequilibrium. In addition, in recent programs increasing emphasis has been placed on supply-oriented measures such as appropriate pricing policies, reform of public enterprises, and adequate investment programs. The programs have not ignored economic growth; on the contrary, the policies undertaken in the context of Fund-supported programs in Africa, as elsewhere, have been designed to restore domestic and external balance in the economy and thus establish a sound basis for sustainable growth over the medium term.

With respect to the amount and conditions attached to Fund financial assistance, it should be borne in mind that the Fund is a monetary institution with limited resources. Hence, it is essential that there are adequate safeguards to ensure that Fund resources are effectively utilized in support of appropriate adjustment programs. It should also be recalled that, in view of the revolving nature of the Fund’s resources, the use of Fund credit must not remain outstanding for more than a temporary period, during which the required adjustment is undertaken by a member to restore its balance of payments viability.

As indicated earlier, Fund financial assistance to African countries has been substantial, especially since 1980. In addition, by making its own resources available in accordance with its access policies, the Fund has been playing a catalytic role in helping these countries to obtain additional balance of payments assistance from other sources to support their adjustment efforts. In this way, the Fund has been instrumental in easing the hardships that are inevitably involved in the adjustment process. In the absence of such financing, African countries would evidently need to place stricter limits on domestic demand and imports to achieve internal and external balance.

The discussion on the implementation of Fund-supported adjustment programs in Africa has made it clear that performance relative to the targets has been mixed for a variety of reasons. However, there is no doubt that those countries that have undertaken such programs promptly and pursued them with determination have made significant progress, especially in relation to the conditions that prevailed in the preadjustment period. By contrast, those countries that have retarded the adoption of adjustment measures now face much more difficult circumstances. To conclude this brief section on the adequacy of Fund-supported adjustment programs in the African context, the following points should be emphasized. First, the analysis has shown that Fund-supported programs have generally succeeded in narrowing the external current account deficit, reducing inflationary pressures, and improving the growth prospects of the economy over the medium term. Second, those countries that fully implemented the requisite adjustment policies and measures registered much better results than those where policy slippages occurred, suggesting that the policy mix has been adequate in the circumstances and that policy implementation is critically important. Finally, it should be recognized that it is very difficult in a number of cases to assess the full impact of adjustment policies and measures within a short period of time. For example, the effects of a reduction in economic distortions may not be easily quantifiable and may not be felt until after a considerable gestation period. However, if the adjustment effort is pursued with determination, its full benefits become more evident over the medium term.

Concluding Remarks

The recent experience with Fund-supported adjustment programs in Africa has shown that, for a program to be successful, the design of the program has to be adequate and its policy content has to be effectively implemented. Because of the structural difficulties facing most African countries, a comprehensive policy package has to aim at addressing not only demand management issues but also the structural problems. While adverse exogenous factors may have been a major cause for unsuccessful implementation of programs, this only highlights the need for countries to continuously review, readapt, and reinforce their policies to achieve the desired objectives. Delays or interrupted adjustment efforts can only compound the problems and make the necessary adjustment more severe and more difficult.

Although in a number of cases there were slippages from program targets, a large number of African countries, in implementing Fund-supported programs, were able to make significant progress toward reducing domestic and external imbalances. However, as these imbalances remain large, African countries should persevere in their adjustment efforts. Clearly, adjustment cannot be achieved in a short period of time, and hence continuous and effective implementation of adjustment policies is necessary. Strong and sustained adjustment efforts that will contain demand pressures and promote supply are required to restore a viable financial situation and a satisfactory path of economic growth. These efforts will, undoubtedly, be helped by the current economic revival in the major industrial countries and the consequent improvement in the international economic environment. However, in the final analysis, there can be no lasting solution to the problems of African countries in the absence of appropriate domestic economic and financial policies.

The Fund stands ready to assist African countries in their adjustment efforts. As in the past, the Fund will continue to work closely with other international organizations, particularly the World Bank, and all members of the international community, in order to assure an integrated and coordinated effort to assist African countries.

References

    BergE.“The IMF in Africa,”unpublishedpaper prepared for Conference on Africa and the IMF, U.S. Department of StateNovember11984.

    BhatiaJ.B. and AmorTahari“External Debt Management and Macroeconomic Variables: Problems of African Countries in the 1980s” (unpublishedInternational Monetary Fund,1984); presented at a seminar on external debt problems of African countries organized by the African Center for Monetary Studies, Tunis, Tunisia, September 1983.

    CalamitsisEvangelos A.“Les problèmes et les programmes d’ajustement en Afrique et le rôle du Fonds Monetaire International” in Croissance et Ajustemented. by P.Guillaumont (Paris: Economica1985) pp. 16794.

    CrockettAndrew D.“Issues in the Use of Fund Resources,”Finance and Development (Washington) Vol. 19No. 2 (June1982) pp. 1015.

    de LarosièreJ.“The IMF and the Developing Countries,”IMF Survey (Washington) March 71983p. 73.

    GuitianManuel“Economic Management and International Monetary Fund Conditionality” in Adjustment and Financing in the Developing Worlded. by T.Killick (Washington: International Monetary Fund1982) pp. 1618.

    HelleinerGerald K.The IMF and Africa in the 1980sEssays in International Finance, No. 152(Princeton, New Jersey: Princeton University1983).

    International Monetary FundWorld Economic Outlook Occasional Paper No. 27 (Washington: International Monetary Fund1984).

    Kanesa-ThasanS.“The Fund and Adjustment Policies in Africa,” Finance and Development (Washington) Vol. 18No. 3 (September1981) pp. 2024.

    NowzadBahramThe IMF and its Critics Essays in International Finance No. 146 (Princeton, New Jersey: Princeton University1981).

    WaiU Tun and Paul A.Acquah“Experience with Exchange Rate Adjustment in African Countries” (unpublishedInternational Monetary Fund1984).

    WilliamsonJohn“The Lending Policies of the International Monetary Fund”Institute for International Economics Policy Analyses in International Economics, No. 1 (Washington: Institute for International Economics1982).

    World BankToward Sustained Development in Sub-Saharan Africa: A Joint Program of Action (Washington: World Bank1984).

    ZuluJustin and Saleh M.NsouliAdjustment Programs in Africa: The Recent Experience Occasional Paper No. 34 (Washington: International Monetary Fund1985).

Comments

David Phiri

I begin by congratulating Mr. Ouattara for a comprehensive and interesting paper. The paper gives a factual account of how Fund programs in Africa are designed and implemented. One striking feature of the paper is its variety of coverage. It might have been better, however, if the author had taken a specific case and gone through the various stages of designing, implementing, and assessing the adequacy of the recovery program. In addition to this general comment, a number of observations can be made on the paper.

The author correctly points out that both external and internal factors have played their role in the current difficult external payments position of African countries. It seems to me, however, that great emphasis has been placed on the inadequacy of internal policies as the main factor for the plight of the majority of our economies. Prominence has been given to the deficiencies of both demand management and structural policies reflected in expansionary financial policies, rising wage outlays, consumer subsidies, on the one hand, and inappropriate exchange rates, supported by a wide range of restrictions and price controls, on the other. This emphasis seems misleading. The hostile world economic environment has been the dominant factor in the problems now confronting developing countries. The steep increase in oil prices in the 1970s, followed by recession, protectionism, and high interest rates in industrial countries, set in motion forces that are still straining the economies of developing countries today. The subsequent decline in prices of their export commodities and the higher import prices have led to sharp falls in the terms of trade; hence the current economic crisis. Take, for example, my own country, Zambia. The price of copper, which is the country’s sole product, is probably at its lowest level in the last 15 years in real terms, and Zambia is not being adequately compensated for its copper exports. Moreover, the drought that has ravaged our economies, though out of our control, has made our position more difficult. Even the debt burden of almost all African countries rose in the first place from external developments that have led to reduced export proceeds, necessitating heavy foreign borrowings. In my view, therefore, external and exogenous factors are the root causes of the current intolerable economic conditions in African countries, and it is these factors that any recovery program must address. These factors are reflected both in balance of payments difficulties and in lower economic growth, high unemployment levels, deteriorating living standards, and indeed dire poverty in our countries.

Although, in designing stabilization programs, the Fund should take all these factors into account, the main feature of the programs in our countries has been the overriding importance given to the balance of payments. In a way, this is not surprising, given the emphasis that the Fund puts on internal developments and policies as causes of the deterioration in the external positions of our countries. To restore payments equilibrium, the goal of Fund programs, countries are urged to pursue painful demand management policies, which in many ways tend to negate the very objectives of the Fund—higher levels of employment and income, economic growth and price stability—through their deflationary impact. In any case, demand management policies, usually in the form of budgetary stringency, credit restrictions, wage restraint, interest rate reform, devaluation, all undertaken in deficit countries, fall short of the objectives of global balance of payments management.

The emphasis on the balance of payments objective also means that Fund programs are designed to achieve results in the short term, whereas the problem, being structural, requires medium-term solutions. Economic growth as an objective requires not only demand management policies, but more importantly supply-side policies. Since structural adjustment is a lengthy process, it is questionable whether conventional stand-by arrangements of oneyear duration are well designed to assist with this task, even if they are set within some kind of medium-term framework. Supply-side measures have merit in our situation, particularly given the excess capacity in our economies. The strategy of adjustment with growth is therefore more beneficial to our countries. With this strategy, a viable balance of payments situation will be achieved with minimum conflict with current objectives. The supply-side measures will ensure an improvement in the balance of payments through increased volume and value of exports, while imports would be reduced through higher domestic output to meet domestic demand.

A further criticism of balance of payments equilibrium as a major objective of Fund programs is that imports may have to be suppressed in a way that denies essential intermediate and capital goods to those sectors needing to expand if the structural problem is to be overcome. The nature of the beneficiaries of Fund assistance has changed tremendously over time, and yet this change seems not to be taken into account in designing programs. The majority of stand-by credits have recently gone to the poorer developing countries, and yet in these countries the Fund’s traditional policies are least suitable. Tightening conditionality in the 1980s has contracted the economies of these poor countries. The current design of Fund programs reduces the Fund’s ability to achieve its objectives, especially because of the nature of the economies of the recipients of this credit.

The emphasis on internal factors as chiefly responsible for the current economic situation of developing countries seems to have resulted in making adjustment into a prescription reserved for low-income deficit countries, when in fact it should apply to all countries. It is imperative and just that surplus countries reduce their surpluses, thus helping the deficit low-income countries reduce their deficits. Unfortunately, the kind of adjustment process now pursued places the heaviest burdens upon those least able to bear them.

Some Fund programs are treated like mere intellectual exercises. The human element is not given the prominence it deserves. Political and social unrest have been constraints on the successful implementation of stabilization programs in most developing countries and, as such, cannot be overlooked in our efforts to correct imbalances of our economies. Some programs have had to be abandoned in the past because of inbuilt inflexibility on the part of the Fund regarding such unforeseen developments as deviations of official commodity prices from price assumptions. The Fund has normally been reluctant to change program targets in light of new developments, preferring to render the program inoperative. Canceling a program is costly to a country that finds itself in such a situation not of its own making.

There is no question that the Fund has been of assistance to the ailing economies in Africa. This assistance should have been even greater, however, and it could have been, if the current approach to stabilization and adjustment had been changed in light of changing circumstances. Nobody advocates that the Fund turn into a development agency, but the structural nature of the problems in developing countries in general, and African countries in particular, dictates that changes of approach take place if the Fund is to meet the primary objectives of economic policy. In this context, the question of conditionality is crucial if African countries are to benefit from the Fund. The Fund should particularly try to avoid “overkill” in the application of severe demand-management policies. It should use a richer mixture of policies, oriented to both demand and supply, in designing a stabilization program, taking into account the practical capabilities of each country.

I have been dealing with the Fund since 1976 (except for about two years when I was not in Zambia), and want it said that conditionality is becoming more difficult and politically more unacceptable. With population in Africa increasing annually at over 3 percent, unemployment has reached a dangerous point. We are now producing graduates who may never find employment, and yet we are given conditions by the Fund that may actually increase unemployment. The consequences are grave. There should be a human element in whatever conditionality we have to bear from the Fund. There is no point in accepting a program that, following mass demonstrations, has to be scrapped. Whatever we do, we must be sure of the support of the entire country and that people understand what conditionality implies.

Substantial public relations effort is needed to make the Fund acceptable to most countries. Some countries blame their own shortcomings and problems on the Fund. We should rather accept our responsibilities and develop and implement our own programs. Any program we enter into with the Fund must be a joint program, not one imposed by the Fund. The Fund must understand these problems better and show itself less rigid. Unfortunately, to be acceptable to the international community—the Paris Club and the London Club, for example—a country has to have a program with the Fund, whatever the consequences. Consequently, there are times when we reluctantly enter into programs with the Fund even though we know only too well that they will not work, and we do so only so that the Paris Club and the London Club can reschedule our debts. This is unhealthy, and I feel strongly that whatever program we accept must be a joint program, well understood and agreed to by both sides.

E.I.M. Mtei

To my mind, the success of a program very much depends on its design. An inappropriately designed program can hardly achieve the desired objectives no matter how determined the authorities are in its implementation. Mr. Ouattara has described the steps and the various elements involved in the formulation of a Fund-supported program. By and large, there has been a convergence of views in this symposium on the nature and severity of the problems to be addressed as well as on specific program objectives—reduction in the external current account deficit, containment of inflation, and economic growth. Whether these objectives are achievable within a timeframe ranging from one to two years, or at best three years, and with the recommended mix of policy measures is another matter. This point is crucial in the context of the structure of African economies. That structure is known to all of us, and needs no further elaboration.

The success rate of African countries in implementing Fund-supported adjustment programs is, to say the least, far from satisfactory. Mr. Ouattara has provided some insight on this in his paper, as have the tables at the end of the paper showing, on a yearly basis, the amounts drawn under Fund arrangements. The magnitude of the problem with Fund programs could, however, have been more vividly brought into focus if he had provided us with information on the number of programs agreed, the number that were effectively implemented in the sense that all the quantitative and qualitative performance criteria were met and the full amounts agreed drawn, and the number that went off the rails. Further information is also required on what happened with the set objectives of those programs in which the policies were fully implemented, in particular, whether or not they resulted in higher growth rates, a reduction in inflation, and a sustainable payments position. Did any such fully implemented programs fail to achieve their set objectives? If so, why? Unless analysis is organized along this line, it will be difficult to apportion blame between inadequate program design and the inability of countries to carry out agreed measures.

As is evident in Mr. Ouattara’s paper, a Fund-designed stabilization program, whether for an African, Asian, Latin American, or European country, involves a package of measures oriented essentially toward demand management, including variations in exchange and interest rates, and reduction in both the fiscal deficit and the rate of expansion of domestic credit. Exchangerate devaluations and interest-rate changes in the African context are more of a demand-management than a supply-oriented measure. So are the various recommended pricing measures, including the elimination of subsidies. Let me stress that no one will seriously question the use of these tools to ensure prudent fiscal and monetary policies and realistic exchange rates. One is inclined to wonder, however, whether they are adequate to meet the particular African situation. These are tools best suited to correct short-term departures from equilibrium caused by imbalances like temporary loss of budgetary control. There is no gainsaying the fact that the payments problems confronting African countries are due not only to temporary disequilibria but also to the problems rooted in the very nature of African economies. Adjustment measures that take no cognizance of these structural weaknesses stand little chance of success. Unfortunately, measures that could ease these problems, including improvements in the quality of manpower through education and of agricultural and other infrastructures, are issues which the Fund has not been able to address. In most cases, institution building is a paramount need. In the absence of a properly functioning financial system, interest rates, for example, no matter how positive in real terms, will not produce the desired results. I know of an African country where the interest rate was raised in the context of a Fund program to a level higher than that prevailing in the major financial centers. Yet, during the mid-term review, it had generated extra resources of not more than $5,000 (in six months). A poor result indeed. What is needed is institution building and, in many cases, confidence that goes beyond financial considerations.

Furthermore, Fund programs do not sufficiently reflect the extent to which African countries can adjust to a harsh external economic and financial environment. Many of these countries rely on one or two export commodities, either agricultural or mineral, whose prices have been declining. The often recommended use of exchange rate adjustment, though relevant, may not do the trick in all cases. Obviously devaluation has its limitations. First, many of these countries produce more or less the same commodities for export. With the sort of competitive devaluation which the Fund seems to encourage among them, we have witnessed continuous increases in output and export volumes, but reduced foreign exchange earnings. The net beneficiaries are the developed countries importing these commodities. The situation becomes ridiculous when the Fund tends to link the extent of exchange rate depreciation with the fall in the price of a particular export commodity, say, copper. Far from encouraging diversification, such a stance tends to impede it. Also, it is not often acknowledged that the best designed program could be rendered inoperative by other countries’ policies, particularly trade and financial policies of major trading partners, and that trade liberalization measures in an increasingly protectionist world could prove self-defeating. Neither do programs anticipate natural disasters, such as the drought that has taken its toll on African economies.

The fact that growth has proved elusive in Fund programs may suggest that something is fundamentally wrong with program designs. The expectation under a Fund program is that the main elements of a policy package will be complementary. Any recessionary impact of reduced fiscal deficits should be offset by the stimulative effect of devaluation. This expectation fails to take into account the possibility that devaluation may itself have recessionary implications, thereby compounding the recessionary effects of cuts in government spending and money supply.

Of particular importance is the period during which adjustment should be effected. In this regard, the responsiveness of African economies to adjustment measures cannot be expected to be as rapid as in the economies of the advanced countries. It is unfortunate to note the small number of extended arrangements that could have taken more into account the needs of Africa. I cannot see how the formulation of one-year programs in a so-called “medium-term framework” that the Fund claims to use can surmount this problem. One should call a spade a spade, and a one-year program precisely what it is.

Finally, the crucial matter of financing deserves mention. In many programs there are financing gaps. The Fund has been extraordinarily stringent when it comes to determining access to its resources by African countries. Although the Fund has tried to bring creditors together to pledge the filling of such gaps, in some cases the pledges are either not honored or honored too late to save the program. Even though adjustment and financing go together, if success is to be assured, financing gaps to be filled by donors’ pledges introduce a new element of uncertainty into programs and tend to result in traditional aid donors shifting emphasis from long-term development aid to short-term balance of payments support. Without the former, the economies of many African countries cannot take off. At best, Fund programs can provide the basis for sustained growth in African countries. Longterm development is needed to guarantee that growth.

H.B.B. Oliver

Mr. Ouattara mentioned that strong and sustained adjustment efforts are required to restore a solid financial structure and that these efforts will undoubtedly be helped by the current economic revival in the major industrial countries and the consequent improvement in the international economic environment. I am glad that members of the staff of the Fund take an optimistic view of the prices for raw materials, because if they did not, it might be difficult for them to get programs through the Executive Board. Nevertheless, I suggest that the word “undoubtedly” was put in by the author because he felt some doubts. The great triumph and the great pride of European governments lately has been that they have succeeded in stopping the inexorable rise of prices. They have succeeded in stopping the prices, that is, of those things they do not produce themselves. This is the problem that we have to face. It is the prices of primary products that must go down and, indeed, perhaps permanently. It is fortunate for a sugar producer that the Fund staff has consistently, for some time, been able to foresee increases in sugar prices. On that basis, we have been able to get the compensatory financing facility, which would not be available to us if that estimate had not been made. Now that the price for sugar is down to 3 cents a pound, a pretty useless figure in the world market, we wonder whether indeed an adjustment effort based upon the same crop is indeed the best advice that could have been given. Should we not have used the funds from this facility to develop a substitute for a product that is obviously now in world surplus and likely to so remain as long as the Europeans decide to continue to grow beet sugar and to protect their beet sugar producers. Here we have a really drastic problem. If any sugar producer defaults, it will not be, of course, because of failure to follow his own part of the agreed program, but because the price forecasts incorporating the program proved erroneous. In such circumstances, there is need—and I believe this applies to many other products besides our own—for a facility for developing substitutes for products that are no longer economical. It is hardly likely that the Fund can adapt itself within its charter to solve the sort of problem that has arisen in many cases in which countries have gone on depending upon a product that is no longer going to be the means of gaining their livelihood. Perhaps we should persuade the Bank in its structural adjustment program to include bailing out those countries that have borrowed from the Fund on a short-term basis and find it impossible to fulfill their obligations because of changes unforeseen, even by those whose job it is to foresee the future price trends.

Reply

Alassane Ouattara

As some of you know, I took on my job as Director of the African Department only last year. Before that, I was for 12 years a central banker. I know the realities and the problems of the African countries. The West African Monetary Union, with which I was associated, comprises seven countries, five of which have programs with the Fund, and these programs are all on track. This is why I said that the determination of the authorities to apply some of the policies and measures agreed to is essential. I agree with the Executive Director of the Fund, Mr. Mtei, that the design of programs is important. I did not deal in my paper with the details of how we develop our views on what type of program or policies might be appropriate for a country. Let me do so now.

As you know, the Fund holds Article IV consultations with every country once a year. This is the occasion to look at recent developments, to hear from the authorities about their policies, their intentions, their problems, the solutions, and the way in which they want to address the possibly difficult economic situation of their country. Consultation takes quite some time because, after the Fund consultative mission has returned from the country, a report is written. This report is examined by the Board. The conclusions of the Board discussions are sent to the country within about three months. Afterwards, some countries request another staff visit, and we respond. We provide technical assistance so that designing a program is not a magic process. In some countries, negotiations go on for two years and occasionally longer. Mr. Mtei asked me how many programs are on track—in effect, asking whether the way we have looked at the problem is the accurate way of doing it. Of course, one could have chosen a different approach, but, of the 15 programs in force at the end of 1984 (14 stand-bys and a single extended Fund facility program), 10 are on track. These countries have made drawings without any problem. Five have had difficulties. The Fund is not, however, inflexible. Of the countries I have mentioned, one has had no fewer than three waivers over the past 12 months because of the type of unfavorable development Governor Oliver was addressing.

A program is designed on the basis of a whole series of assumptions, both on the domestic economic situation, the policy intentions of the authorities, and the projections about the external environment. If there is a major external development, we look at it, and if this development warrants a waiver, we propose this to the Board, which, under most circumstances, grants this waiver.

Governor Phiri proposed that one should not generalize. I welcome this suggestion, and I propose that for the next seminar, we use Zambia as a case study, going through the negotiation step by step, arriving at a program, implementing the program, and analyzing the difficulties in the follow-up of the program, the use of Fund resources, and so on.

Another general topic of interest is the speed of adjustment. It was said here that maybe the Fund should have a slower adjustment process for African countries, that our countries have peculiarities, that they are special, that they have specific structural problems, drought, and other circumstances that make it difficult for these countries to adjust quickly. A stand-by for one year is therefore not a good way of dealing with problems of African countries. It is true that the framework of a stand-by is one year or 18 months, but for 12 of the 15 countries I referred to, this is the fourth consecutive year of stand-by arrangements. There are good indications that we will still be involved with these countries in the framework of stand-by arrangements for the next two to three years. So, suggesting that the turnaround of the balance of payments has to be in one year or two is not correct. It is true that the statutes of the Fund require adjustment to be made within a specified period, and this is linked to the monetary character of the Fund. It is also true that the management has to take into account the basic law that guides this institution. But in applying these guidelines, we do take into account the special circumstances of countries. If a country, after five years of stand-by arrangements, has the same imbalances that it had in the first year, however, I think most of you will agree that having a program with that country is not useful and that seeking other solutions would have been better.

With reference to the basic design of a program, a slow pace of adjustment is not necessarily the best course of action. Depending on circumstances, a country may prefer a slower pace of adjustment, but the slower it is, the larger, probably, will be the external debt. The larger the external debt, the more difficulty there will be to fill that gap, and if you cannot fill the gap, then you have slower growth. If the pace is so slow that you do not give the right signal to the countries with which you have specific relationships and whose assistance is necessary to help bridge the gap, the concessionary inflows may not be forthcoming in optimum amounts. There may be cases in which a slow pace of adjustment is required because there is fairly strong and constant external support; the adjustment measures can then be spread over a longer period. But there are cases in which the authorities may prefer to have a stronger adjustment effort to give the right signal and to get back to a faster pace of economic growth. This has happened in several cases in Africa, and it has been successful. There have been cases in which the trade balance was in deficit, with imports twice as large as exports three or four years ago, but in which the trade balance has now turned into surplus.

These cases lead to the question of exchange rate action and current account financing. We had some discussions here about whether exchange rate adjustment is good for growth and for export diversification, and whether the exchange rate impact is positive if there is a large foreign sector. Africa has a large agricultural sector, and there are countries in which these supply responses are real and significant. Like all of you here, I am from a village in Africa. I know that farmers are responsive to price increases. If you double the price, they will produce more. Of course, if it does not rain, they cannot produce. But if conditions are normal and you double prices, you have a good chance of increasing production.

It is obviously not true to say that domestic conditions are the sole factors that play a role in an adjustment process. Of course, there must also be external adjustment, but what I have tried to say is that once we have an adjustment program, it is important that the authorities implement this program with determination. The degree to which a country can influence external conditions is strictly limited. If conditions are deteriorating, if, for example, the terms of trade are getting worse, there will be additional difficulties for the country in balancing its current accounts. But domestic efforts give the international community the assurance that the country needs help and that it is worthy of help, and, therefore, there will be a greater input of capital. Consequently, I can only support the view that African countries should have remunerative prices for their basic products, though a mechanism for this purpose does not yet exist. We have a compensatory financing facility, but this is a short-term measure that does not really solve the problem of investment. There is already an improvement in the external environment, and our projections indicate that it will improve further in terms of trade, in international interest rates, and a greater stability of exchange rates. With a better international environment, and with appropriate policies in our own countries, African countries can strengthen their adjustment and therefore their economic growth.

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