Chapter

Fund Conditionality and the Socioeconomic Situation in Africa

Editor(s):
Gerald Helleiner
Published Date:
March 1986
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Author(s)
Samba Mawakani

Over the last few years, Fund conditionality for access to its resources has engendered abundant literature and controversial discussion. This paper serves as an introduction to an exchange of views on this widely discussed issue of great concern to Africa, with attention particularly on recent developments in Africa’s relations with the Fund.

Needless to say, Africa’s growing interest in Fund conditionality derives from the precarious economic and financial situation in which African countries have found themselves for several years. In response to their problems, many African countries have resorted to the Fund’s financial assistance, which is extended under certain conditions. Such conditionality has had an impact on both the economic and social environment of these African countries.

Section I of this paper gives a description of the economic situation in Africa so as to clarify the environment in which the Fund has operated over the last few years. Section II outlines the main characteristics of Fund conditionality. Section III describes the impact of conditionality on Africa’s economic and social position. Section IV identifies several issues to be examined by the Fund over the next few years in light of the requirements for economic adjustment in Africa.

The Economic Situation in Africa

Africa includes about 30 independent states with tremendous natural resources: 97 percent of world chromium resources, 85 percent of platinum, 64 percent of manganese, 25 percent of uranium, 13 percent of copper, 20 percent of hydroelectric potential, and vast bauxite, nickel, and lead resources. Africa also accounts for a large share of world production in other sectors: 70 percent of cocoa, 66 percent of coffee, 50 percent of palm oil, and 20 percent of petroleum traded in the world, excluding the United States and the Soviet Union.

There are certain general similarities in the economic structure of African countries: small domestic markets because of low per capita incomes and quite small populations, predominantly agricultural activities, high dependence on some basic export commodities, and concentration of foreign trade on a few partners. In addition, the education level is low, the reproduction rate is high, and the urban population is constantly increasing.

Over the last two decades, most African countries have recorded slow economic development, with annual per capita income only rising by 1.3 percent in 1969–70 and by 0.8 percent in 1970–79, while food production grew by only 1.5 percent a year during the 1970s, against 2 percent a year during the previous decade. In relation to size of population, food production fell by 0.9 percent in 1970–79, while cereal imports skyrocketed, thus increasing food dependency. Export production, which had grown by 20 percent in the 1960s, shrank by about 20 percent during the 1970s, while per capita exports declined by 3.5 percent from one decade to the next. During the present decade, production growth rates decelerated in African countries: from 3 percent in 1980 to 1.8 percent, 1.2 percent, and 0.1 percent in 1981, 1982, and 1983; while the inflation rate rose to 19.5 percent in 1983 from an average 7.5 percent in 1967–76.

The stagnation recorded in African economies since the early 1970s originated from both external and internal factors. The economic development of African countries depends on external resources in the form, of both export receipts, whose level depends on world market terms, and venture or borrowed capital. The external orientation of African economies, however, makes these countries sensitive to shocks and cycles in world markets. The crisis of the 1970s made it difficult for African countries to pull out of the economic stalemate against which they have been struggling.

Negative influences on Africa included the combined effects of inflation and slackening economic activity (stagflation) in the industrial countries. Indeed, the hike in oil prices led to a slowdown in the productive activity of industrial countries at a time when inflation was raging. As regards African countries, these conditions led to the collapse of their export commodity prices and to higher prices for their imports, resulting in the deterioration of their terms of trade and widening current account deficits.

The ambitious investment programs that some African countries initiated after becoming independent necessitated increased resort to external borrowing, thereby significantly increasing external indebtedness. African countries typically contracted most of their external loans as part of their investment program during the 1960s and 1970s, when the economic situation seemed to be favorable to the extent that lenders did not doubt the solvency of borrowing countries. Even the consequences of the first oil shock for the financial condition of developing countries in general, and African countries in particular, did not shake the confidence of lenders.

The current economic crisis, however, has led some African countries to experience payments difficulties so critical that these countries have been incapable of pursuing the development efforts initiated earlier, resulting in the thorny problem of mounting external debt service that these economies can no longer bear. This situation has jeopardized the access of most African countries to external capital markets, which, for some, are indispensable for financing their economic and social development.

In sum, the combined current account deficit of African countries worsened from some $6 billion in 1977 to over $10 billion in 1983. Foreign debt as a share of exports rose from about 140 percent (of exports) in 1977 to some 220 percent in 1983, while the debt-service ratio rose from 12 percent to 25 percent over the same period. To check the demand for foreign exchange, some countries adopted import restriction measures, thereby causing shortages of both consumer and investment goods. Scarcity of consumer goods aggravated domestic inflation, while scarcity of investment goods further contributed to the slowing down of domestic economic activity.

On the domestic front, it is necessary to underline the importance of structural obstacles and their aftereffects, which in turn derive from historical circumstances or from the physical environment, for example, human resource underdevelopment inherited from colonial training policies, economic confusion accompanying decolonization, the high cost of newly established institutions adapted to the new political realities and directed toward new requirements, harsh weather conditions, and internal economic dualism.

Some cyclical factors on the domestic front also need to be pointed out, since the high level of prices for basic commodities and minerals toward the end of the 1960s and the early 1970s moved many African countries into ambitious investment works. The shortfall in export revenue caused by declining prices of primary commodities and the rise of protectionism in industrial countries led to deficits not only in the balance of payments but also in the government budget, whose resources are drawn mainly from export and import duties. In most cases, budget and current account deficits have by now become structural. Indeed, with the evolution of institutions, population growth, and national security concerns, the burden borne by the government has become increasingly heavy.

In spite of the change in economic circumstances that reduced public revenues, the pace of public expenditure was not altered, hence significant new budget deficits financed through resort to domestic bank credit and foreign borrowings. Credit expansion engendered direct and unsustainable pressure on the balance of payments, while the often unrealistic repayment schedules caused serious foreign-debt servicing difficulties.

During the 1970s, several African countries resorted to the technical and financial assistance of the International Monetary Fund in an attempt to restore economic and financial equilibrium. Financial assistance to African countries by the Fund increased rapidly in three stages.

First, prior to the 1973 oil crisis, African countries had resorted to the Fund primarily under the compensatory financing facility created to finance temporary deficits in export earnings brought on by causes independent of the policies of the countries concerned. The second phase of intensive resort to the Fund related to the 1974–75 oil facilities, whose purpose was to finance deficits caused by the unexpected increase in oil bills, and to the Trust Fund, which used proceeds from gold sales to extend concessional credit to low-income countries for balance of payments adjustment.

The third phase of intensive resort to the Fund started at the end of the 1970s, in response to the second oil price shock and the subsequent world recession. At the end of 1979, a sharp increase in the Fund’s assistance to African countries could be noted under the stand-by and extended facilities. African countries’ share in Fund assistance under both these facilities reached 30 percent in 1979–80 against only 3 percent for 1970–78. The number of stand-by and extended arrangements signed by African countries rose to 53 percent of the total in 1979–80, against an annual average of 20 percent for 1970–78.

In accordance with its Articles of Agreement and subsequent convention, the use of some of the Fund resources provided under credit arrangements was subject to certain conditions.

Conditionality

The Fund’s conditions take into account the revolving nature of its resources and its basic objective to promote international payments and trade. Resources extended by the Fund may be provided unconditionally, with low conditionality, or with high conditionality.

As regards drawings from the reserve tranche and uses of SDR assets, no specific condition is imposed on the member, who has merely to claim a need for balance of payments support. Low conditionality drawings have been financed by the buffer stock financing facility, the 1974 and 1975 oil facilities, the Trust Fund, drawings from the first credit tranche, the emergency aid facility, the supplementary financing facility, the enlarged access policy, and the compensatory financing facility.

Drawings by African countries after 1979 have been overwhelmingly of the high-conditionality type. High-conditionality drawings are subject to compliance with performance criteria and other conditions stipulated in the arrangement. These criteria and conditions, put together in a program of action, are related notably to domestic credit, public-sector financing, external debt, some key elements of the price system (including the exchange rate), interest rates, and prices of primary products.

The main characteristic of the conditionality imposed under arrangements relating to high-conditionality drawings is therefore the adoption of an adjustment program in which the implementation period is defined and limited. The size of drawings is preset, and drawings are made quarterly, provided the country complies with the performance criteria relevant to the previous quarter and the agreed schedule of policy measures has been maintained. Under the extended Fund facility, the Fund may grant financial assistance to member countries over a longer period than that provided under other drawing provisions. Credits under this facility are extended to some countries facing serious payments difficulties owing to structural distortions in production, trade and prices, when these countries agree to adopt a series of correction measures during the life of the agreements (typically two or three years). Any country applying for assistance under the extended credit facility must support its request with a program defining the objectives and policies it expects to achieve during the entire period it will resort to the facility.

Impact of Conditionality

In their attempt to embark on the economic recovery described earlier, African countries resorted to international financial assistance (particularly from the Fund). Recourse to the Fund’s resources increased considerably following the first oil shock in the form of drawings under the special facilities, especially loans under the compensatory financing facility and the Trust Fund. In principle, these low-conditionality drawings have not given rise to any particular problems.

As regards high-conditionality credit based on an economic and financial adjustment program, the typical case from 1979 onward, many African countries have been unable to use all the resources put at their disposal because of the severe performance criteria.

Conditionality provides a means of ensuring that the international adjustment process operates properly and benefits all member countries of the Fund. By linking adjustment to the supply of financial resources, the Fund tries to help member countries achieve a viable payments position in the medium term, that is, a position of sustainable current transactions, with reasonable price and exchange rate stability, an acceptable and sustainable level and rate of growth of economic activity, and a liberal international payments regime. Nevertheless, the Fund’s policies in this area do not sufficiently take into consideration the peculiarities of African economies.

The unrealistic attitude that the Fund adopts at times has often led to the abandonment of programs implemented by African countries because of lack of compliance with the performance criteria set during negotiations. Indeed, out of the 20 African stand-by arrangements concluded with the Fund between 1982 and 1984, six were not totally used before the deadline or cancellation date, and two were canceled. Of the nine African agreements concluded under the extended Fund facility between 1975 and 1983, eight were not totally used at the deadline or cancellation date, and one was replaced by a stand-by agreement. Of the eight agreements not entirely used, five were canceled.

Consequently, the Fund has been criticized for its conditionality. In some cases, social tension has been created and economic growth has been checked because of the unrealistic measures taken with respect to major economic variables, particularly domestic credit, public sector financing, and external debt, as well as some elements of the price system, including exchange rates, interest rates, and, in some cases, commodity prices.

With undiversified economies based mainly on a few export commodities, most African countries often fall prey to external shocks. As a consequence of these structural realities, the type of adjustment often required by the Fund for the use of its resources entails loss of output and public revenues, with costs that, while possibly negligible in developed and more diversified economies, are considerable in Africa.

The limitation on aggregate credit expansion to achieve macroeconomic equilibrium often reduces considerably the share of credit devoted to financing productive activity. Limiting credit inhibits the expansion of supply and even reduces it when expanded supplies are required to improve the socioeconomic conditions of a country making the costly adjustment effort.

Devaluations, often part and parcel of the package of deflationary measures recommended by the Fund, have not always helped to achieve the desired objective, especially in terms of establishing a realistic and sustainable real exchange rate, transferring resources to specific sectors of the economy, particularly to the export sector, and restraining aggregate demand when other measures cannot be implemented simultaneously. In some cases, the economic situation of vulnerable countries, such as those of Africa, has worsened following devaluation.

Price liberalization that, in normal circumstances, is expected to lead to increased competitiveness and hence to lower prices through market forces has provoked social tension in cases in which the system of subsidizing some commodity prices and services was abolished before finding a valid substitute, notably a compensatory increase in salaries.

Liberalization of commercial transactions, expected to lead to harmonious world trade relations, does not seem to bring valid medium-term solutions for African economies. Their weak structure does not permit them quickly to measure up to the fierce competition of manufactured goods from industrial countries. Liberalization should be progressive, as a function of objectives to be achieved in the medium and long term.

As far as measures aimed at reducing the current account deficit are concerned, the Fund’s conditions put excessive emphasis on regular debt-service payments, which at present absorb an excessive share of the external means of payment of African countries. This emphasis has led, in some cases, to a substantial reduction in the import of goods required for recovery and adjustment and has created further overall economic decline.

Ismail Sabri Abdallah, Chairman of the Third World Forum, notes that a developing country necessarily runs a balance of payments deficit due to imports of capital goods so that it needs an international banking system to help it bridge it over the fifteen to twenty years that are necessary to achieve a real growth of its exports. The current degree of external dependence in Africa, because of the specialization of production and consumption associated with foreign markets and because of the financing of this specialization through foreign capital, can only perpetuate and worsen the medium-term disequilibrium in external payments. In any case, the rate of growth of exports depends a great deal on the absorption capacity of industrial countries, which also determine most world prices. Moreover, the African industrial nucleus receives very little encouragement since public revenues are so dependent on foreign trade. Restructuring requires far more time and more fundamental change than is implied in the Fund’s conditionality. There obviously remain conflicting points of view about ultimate structural objectives. Instead of granting financial assistance consistent with the magnitude of the required recovery and economic revival, the Fund offers a short-term regressive cure, followed sometimes by a few oxygen bottles. Herein lies the whole problem of striking a balance between adjustment and financing. The major basis of allocation, that is, quotas, limits the access of African members to Fund resources because it is biased from the start toward economically more important countries. The current policy of more restrictive access to Fund resources obviously does not favor an increase in financial flows to African countries either.

Conclusion

I have tried, in this short paper, to highlight the economic and financial problems of African countries during the last few years and to describe the approach generally adopted by the authorities who must deal with them. By the end of the 1970s, many African countries had asked for the Fund’s financial assistance and, because of their urgent need, accepted conditions of which they did not always approve.

Indeed, while the Fund’s assistance is certainly welcome—though its size and quality could be improved—recipient Africans deplore their subjection to socially costly reform of economic policies. We can cite the deflationary measures entailed by devaluations, the nonselective liberalization of producer prices, the tightening of domestic credit, and the readjustment of taxation that typically accompany the Fund’s financial assistance.

Moreover, although it derives from a concern for enhancing efficiency in the use of resources, the idea of putting the economy into private hands, which has been advocated by the Fund, seems to reflect a preconceived notion of economic organization. However dynamic a role is attributed to the private sector and however efficient this sector may be, the solution lies not in adopting straightaway a “market solution” in all African countries, but rather in achieving, in accordance with circumstances, a good combination of private initiative and government action in order to reduce social inequalities and the deficiencies of the market.

To conclude, I believe that the International Monetary Fund should consider the following:

  • In view of the shortage of available external resources for supporting economic adjustment programs necessary for a durable economic recovery, the Fund should rapidly approve a new allocation of SDRs, the main part of which should be reserved for developing countries to finance their balance of payments deficits and particularly to settle their external debts. Such a decision by the Fund, whose major member states are official creditors of deficit developing countries, would allow the international community to move toward a lasting solution to the thorny problem of external debt in the poor countries.

  • The role played by the Fund in the renegotiation of the external debt of some of its members has become so important that creditors systematically require that these countries conclude stand-by agreements with the Fund before starting any discussions. The Fund should seize this opportunity to request that creditors set conditions that would encourage economic recovery in African countries and, more particularly, to insist that they provide new financial facilities to those countries that successfully apply substantial adjustment programs. Such financial support is fundamental to ensuring the smooth functioning of the economy and would allow recipient countries to continue to meet their external obligations.

  • The structural nature of the balance of payments deficits of most African countries requires substantial financial resources over several years. The present limitation on the use of the Fund’s resources is not an answer to the needs and expectations of many, particularly African, member countries. The Fund should review its access policy. A lasting solution would be to enlarge the recurrent resources of this institution through increases in quotas and to reserve a substantial portion of this increase for countries with low quotas to allow them more access to resources needed to adjust their economies.

  • The international monetary system includes elements which need to be adapted to recent developments in the world economy. Since the reform initiated several years ago fell far short of meeting the needs of an important category of member countries, I emphasize that efforts at reform should be resumed and take into account the changes that have occurred since Bretton Woods. Doing so will enable the Fund fully to play the role expected by all its members, particularly in resource mobilization, economic adjustment, and supervision, with the objective of establishing an equitable sharing of the adjustment burden between the rich and the poor countries.

Comment

Kombo Moyana

Mr. Mawakani’s paper cannot be adequately dealt with without referring to the broader paper prepared by the Director of the Fund’s African Department, Mr. Ouattara. Since Mr. Ouattara set the broad parameters for the operations and actions of the Fund over the past few years, his paper assumes a certain importance as a reference point for our discussions. I should therefore like to consider the two papers together.

In the first place, I don’t think that the two papers differ very much on the definition of the problems which the African countries face. But it is probably important to note, however, the different way the two papers deal with the problems and particularly with the question of productive capacity in Africa. Productive capacity is broadly defined not only as underdevelopment of human and natural resources, but also of a lower level of technology and an absence of the indigenous technological dynamism crucial for insuring productive efficiency over time.

We are all agreed, I think, that adjustment is necessary, but the question remains of adjusting to what. Are we adjusting in a context in which there is little productive capacity that is itself being eroded, or are we adjusting in a context in which that capacity is being created?

It seems to me that many problems facing African countries today are akin to the problems that faced Europe after the war, at the time of the Bretton Woods Agreement. Africa is probably not even at Europe’s 1945 stage of development. We may be decades if not centuries younger in terms of historical development. It is important to note, with reference to Europe after the war, that the Fund was basically put on ice until the productive capacity of Western Europe was built up to a point where adjustment, in the Fund sense, became a sensible concept. It was not really until the 1960s that the Fund went into action there. By that time the European economies were performing in a way that they could have periodic adjustment problems. The Fund type of adjustment in Africa today is probably not a sensible form of adjustment. What is needed is another line of approach. The Fund will become relevant to the extent that it becomes a supporting institution for the type of effort in which the World Bank is the spearhead.

Mr. Ouattara and Mr. Mawakani agree that there are important external and internal causes for the problems of Africa and that the solutions have both an external and an internal dimension. They also agree that there is need for foreign adjustment as well as African adjustment.

Mr. Mawakani’s argument differs from Mr. Ouattara’s, however, in the degree and pace of adjustment that it maintains can be digested by a typical African economy facing the crises of drought, recession, and political and other constraints on policy action. Their arguments also differ in the extent to which they maintain adjustment should be shared between the countries at the center of the world system and the countries at the periphery of that system.

The developing countries themselves must decide on the appropriate modalities for finding solutions to their current problems. One approach has been to look inward at adjustment dynamics. That means compression of imports followed by reduced growth rates. Many other countries besides African countries are doing this. The other route, which is to go through the Fund (the two routes need not be mutually exclusive, and both routes are often combined), means that various conditions must be met. The conditions for Fund financing have ranged over a wide area, including limitation on public sector and fiscal deficits and on how they are financed. Other conditions involve limits on overall domestic credit creation for both the productive and the governmental (generally not directly productive) sector, limits on the size and nature of the external debt, and a wide range of pricing policies, on interest rates, agricultural products, and exchange rates.

On the question of the exchange rate, I would like to highlight several points. In many African countries, the data are generally unreliable, or incomplete. To measure inflation, many African countries use the consumer price index that, in many cases, unfairly reflects the cost of production. Often an exchange rate regime requires the maintenance of real effective exchange rates at a constant level during a program. If at the same time the Fund requires a reduction in subsidies, to the extent that price increases show up in consumer price index increases, that country must devalue even further. The Fund expects a full exchange-rate adjustment to correspond to the price differential between the country’s economy and that of its trading partners. The Fund staff tends to be less geared to examining the reality of local situations and tends to use indices and formulae that may actually be meaningless.

Second, the nature of some world markets is such that an exchange rate change may result in a country’s increasing the volume of exports without increasing export receipts and at times even experiencing reductions in foreign exchange earnings. Although the profitability of local enterprises may rise (a good thing in itself), this can be achieved through a different policy instrument if in other respects the exchange rate is appropriate. One needs to apply the right prescriptions to the right problems.

Liberalization of trading and monetary systems as part of conditionality also involves danger. Inadequate attention may be paid in Fund conditionality to the dynamic elements of comparative advantage and the infant industry argument for protection. It is sometimes suggested that dividends and profit remittances must be liberalized in order to attract direct investment. At a time when in the western economies themselves there is little investment because of world recession, however, investment may not come our way even after liberalizing. In this regard conditionality needs to be reexamined to take account of the real situation. Fund missions tend to be too worried about doing things only through market forces, almost to the exclusion of other forces, and this, at times, even in economies where the market does not exist or where market forces still have to be created. The balance between action in the public sector and action in the private sector has to be looked at.

If the developing countries face protectionism in the markets of the developed western economies, adjustment becomes difficult. Many countries in Africa, as well as in Latin America and Asia, besides reducing imports, took all sorts of measures to promote exports, only to find that the export markets in western industrial countries were in fact contracting.

Finally, there is the problem of access to Fund resources. The formula for access seems too rigidly based on the percentage of quota that a country can draw to finance a program. There is a problem, not only of adequacy of resources to achieve the so-called “adjustment,” but also of the way in which these resources are distributed. Regional distribution between Africa and Latin America is somewhat unfair, as is the way access is geared toward different kinds of economy. In certain African countries, before adjustment is possible, capacity must be expanded, and that is a medium- to long-term problem. In other economies the capacity already exists and, with relatively modest resources, the economy can be stimulated, external imbalance overcome, and the budget problem resolved. (As the economy recovers, people pay more taxes and, if expenditures are kept within limits, this assists in solving the budgetary problem.) The quantum of funding should always be geared toward the size of the problem and the difficulties of the required adjustment.

Finally, a certain amount of flexibility and discretion is needed in the use of policy instruments. There is danger at times of too much emphasis by the Fund on a single policy element as a solution for all ills. Normally, this element is devaluation or budget and credit compression. It might be more useful if programs are designed to encourage countries to choose from three or four scenarios encompassing different policy packages and different instruments to realize those policies.

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