Paul Streeten
Published Date:
September 1988
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The continuing debate on the costs and benefits of Fund conditionality has generated a substantial empirical literature on Fund-supported stabilization programs. The paper by Aghevli, Kim, and Neiss constitutes an important contribution to that literature, especially because it addresses extended Fund facility programs. It is not only timely1 but also insightful and informative, providing a wealth of analysis and data that had hitherto not been available.

Of the four countries examined by the paper, only Bangladesh’s program was suspended and cancelled prematurely, because of a breach in credit ceilings. The latter was by no means an isolated case. More than half of the 30 extended arrangements initiated up to June 1983 were suspended and/or cancelled due to noncompliance with demand-based performance criteria, notwithstanding the proclaimed emphasis on structural adjustment. This raises questions about the Fund’s ability to protect growth, even in medium-term adjustment programs. The use of a pinpointed quarterly credit ceiling as the chief performance criterion can, and has, led to suspension of extended Fund facility programs, even when the mode of expenditure management and implementation of structural measures are quite satisfactory. This was the case in Bangladesh. Using the paper’s framework for evaluation, my comments will attempt to establish that contention.

To assess the success of extended arrangements in the four countries, Aghevli, Kim, and Neiss look at the degree of policy implementation and the actual performance of key macrovariables over the program period, relative to that expected in the program. If policies are implemented and targets met, the program is judged successful, notwithstanding the possibility that an alternative set of policies might have achieved the same objectives at lower cost.2

On that basis, my comments will endeavor to

  • (1) point out the difficulties of assessing the extent of policy implementation;

  • (2) indicate the problems with the Fund’s response to those difficulties, when that response was to continue using a credit ceiling as the main performance criterion; and

  • (3) show that the paper’s conclusions about Bangladesh’s experience are certainly misleading, if not incorrect, and that Bangladesh’s process of adjustment was adversely affected because of the use of inappropriate performance criteria.

I. Assessing Policy Implementation

Problems of monitoring or assessing the extent of policy implementation in a program that combines stabilization and structural adjustment are inherent in the present state of knowledge. These problems exist because there is no unified, well-articulated analytical framework for designing consistent demand- and supply-oriented policies. 3 Performance on the supply side can no doubt be gauged by looking at changes in the share of domestic investment and savings in gross domestic product (GDP), in the growth of export volume (or share of exports in output), in the share of revenue in GDP, and so on, as the paper has done. However, the link between multiple structural policy instruments and the total effect on the quantity and composition of aggregate supply is much less direct. Some measures (e.g., privatization vs. liberalization of interest rates) have conflicting effects, and the trade-offs are seldom articulated in a coherent model. It is conceivable, therefore, that, even if all policies are implemented as envisaged, performance, in terms of structural change, may not be as expected. Thus, the degree of implementation of structural measures must be assessed by examining movements in the policy variables themselves. Conclusions about the degree of overall policy implementation become problematic only if some structural measures are better implemented than others, or if some are implemented and others are not. In Bangladesh’s case, all supply-side policies were implemented, even though all indicators of structural change did not move favorably or equally favorably. The Aghevli, Kim, and Neiss paper substantiates the latter conclusion.

II. Fund’s Implementation of Extended Fund Facility

In the implementation of extended facility programs, the Fund has tended to rely mainly on the traditional criterion of policy implementation—that is, the degree to which the country has met domestic credit targets. The use of credit ceilings as the chief performance criterion in extended programs means that a breach in a ceiling automatically triggers suspension of the program, irrespective of the degree of implementation of structural measures. More importantly, even when the breach is caused by a government’s efforts to protect public investment in the face of an unanticipated adverse shock—efforts that are conducive to structural adjustment— the program can be suspended. Bangladesh’s experience bears testimony to this fact.

III. Experience of Bangladesh

Of the four countries examined, Bangladesh’s experience with the extended Fund facility is distinctive in many ways. Foremost of these is that the extended Fund facility was suspended in the first year (June 1981) because of a breach of a single quarter’s credit ceiling, and was canceled in the second year without further disbursements. The paper lumps together 1980/81 and 1981/82 as the program period. This obscures more than it clarifies. For example, overexpansionary financial policy is said to have wrecked the program (page 51), yet, as shown in Table 2 of the Aghevli, Kim, and Neiss paper, Bangladesh appears to have broadly achieved the credit expansion targets. Also, the program specified targets for credit, inflation, growth, and the balance of payments for the first year only. In addition, since suspension occurred in July 1981, and cancellation in July 1982, actual performance in 1980/81 and expectations for 1981/82 and 1982/83 must have played an important role in the Fund’s decision to withhold reactivation. Moreover, the drastic credit squeeze that followed suspension and the subsequent absence of expected facility disbursements over 1981/82 altered performance in that year relative to an uninterrupted program. It is, therefore, more appropriate and less confusing to look at 1980/81 and 1981/82 separately, with the first being the effective program period.

Aghevli, Kim, and Neiss conclude that “progress toward price stability and external viability was thwarted by expansionary financial policies …” (page 51) because of “stagnation in revenues” (page 44) and rising current expenditure resulting from “still-large subsidies on food and fertilizer” (page 44) and continued financial weakness of public enterprises. The implementation of structural adjustment is claimed to be inadequate, except for successful import substitution in foodgrains and moderate depreciation of the real exchange rate. Inadequacies described by the paper relate to tightening of import controls (page 42), insufficient public sector price adjustments (page 40), poor incentives for exports, reduced availability of credit to the private sector, and reduced public investment.

Table 1.Bangladesh: Macroeconomic Performance1
ProgramProgram Period
Real GDP1.
Real agricultural GDP0.
Real non-agricultural
Industrial production0.48.30.5-4.0
Million U.S. dollar
CPI (middle class)18.511.512.516.29.9
CPI (industrial)16.08.917.42.6
GDP deflator13.110.312.74.8
Basic balance-253-300-291-394164
Source: Computed from International Bank for Reconstruction and Development, Bangladesh: Economic and Social Development Prospects (Washington, April 1985).

Yet a more detailed scrutiny of facts fails to support those contentions. Instead, it suggests the following:

  • (i) financial policies were expansionary in 1980/81, but they resulted from an unanticipated shortfall in foreign aid, 4 not from unplanned budget deficits;

  • (ii) implementation of structural measures were significantly greater than is suggested by Aghevli, Kim, and Neiss and could easily be deemed as satisfactory, if low investment were attributed to the aid shortfall, as it should be;

  • (iii) performance in 1981/82 would, in any case, have been adversely affected by drought and the collapse of jute export prices, but the drastic retrenchment of credit to meet the original September 1981 ceilings and the lack of extended Fund facility arrangements made it worse;

  • (iv) conclusions (i), (ii), and (iii) suggest that the probability of achieving the objectives of the program might have been increased if there had been no suspension; if it had been quickly reactivated; or, better still, if quarterly credit ceilings had not been used as the main performance criterion.

1. Credit and Fiscal Policy

Bangladesh breached the credit ceiling for only the quarter ended June 1981 (Table 2). Table 3 below shows that government borrowing from the banking system to finance its fiscal deficit was the main cause of this breach, which occurred notwithstanding good fiscal performance. Revenues did not stagnate; instead, they rose by 25.7 percent in 1980/81 (exceeding the program target of 25 percent). Current expenditure (inclusive of the food subsidy) did rise by more than was envisaged in the budget (8.5 percent instead of 1.5 percent)5 even though the subsidy was lower, and public enterprises as a whole made a net profit for the first time in 1980/816 The reason for government recourse to the banking system is to be found partly in the financing of larger-than-usual food stocks necessitated by a bumper harvest. Price supports and higher procurement prices constituted an integral element of the program, and the excess outlay was not avoidable. The most significant factor was still the unanticipated fall in total foreign assistance of 12.7 percent instead of the rise of 21 percent that had been projected in the program.7 In short, credit ceilings for June 1981 were breached because foreign assistance was 5.9 billion taka lower than had been expected in the program (Table 4).

Table 2.Bangladesh: Extended Fund Facility Performance Criteria and Outturn(In millions of taka)
Total Domestic

Credit Expansion
Gross Credit to Government

and Public Sector
September 1980
December 198047,00045,01929,10028,744
March 198148,90047,50630,30030,127
June 198149,48054,88830,45035,862
September 198154,00054,04333,20035,016
Source: Table XXI in K. M. Matin, Bangladesh and the IMF: An Exploratory Study (Dhaka: Bangladesh Institute of Development Studies, January 1986), p. 100.
Table 3.Bangladesh: Sources of Quarterly Changes in Total Domestic Credit(In millions of taka)
Total quarterly change4,320.62,487.17,382.7-845.2
Sources of change1
Fiscal operations21,054.6891.03,354.3- 149.0
Public sector1,575.5492.62,380.4-846.3
Private sector1,690.51,103.51,684.01.1
Source: Same as Table 2.

2. Implementation of Structural Measures

Table 5 shows the supply-side measures and policy objectives that were part of the program. Table 6 shows the behavior of several supply-side indicators, not only for the program period (1980/81) but also beyond, since a year is in any case too short a period in which to expect noteworthy structural changes to occur. Except for domestic savings, a sustained positive performance is evident. The actual extent of implementation of structural measures in the four major areas is examined below.

a. Export Promotion

Nominal devaluations were undertaken frequently in 1980/81 and after, such that the price-deflated real exchange rate for Bangladesh’s exports experienced real depreciation over the entire three-year period (Table 7, Row I.3). This constituted a departure from earlier trends. Commercial policies were used in line with those envisaged by the program. Export duties on traditional items were reduced (Row II. 1), and some subsidies were provided to leather exports. However, the major attempt at increasing export subsidies was directed at nontraditional exports. The coverage of export performance licensing (XPL) was expanded, and the entitlement rates were enhanced. This increased the level of subsidy, but by not as much as had been expected. The market premium on XPL certificates fell sharply in the second year as a result of the credit squeeze-induced recession in demand and the larger supply of remittances.8 Nevertheless the effective subsidy rate increased over 1980/81 and 1981/82. The policies, despite the setback, helped exporters to receive a greater taka return per dollar of export earnings than before. This is evident from the real effective exchange rates for nontraditional exports, shown in Row III.4 of Table 7. Real effective rates for traditional exports depreciated continuously, even though not as much as those for the nontraditional ones. Export volume grew, with growth of nontraditional exports exceeding that of traditional items. The share of nontraditional exports in total exports rose significantly, as a result (Table 6).

Table 4.Bangladesh: Government Budgetary Operations(In millions oftaka)
Total revenue17,40021,93021,880
Current expenditure (excluding food subsidy)10,82011,91013,000
Loss on food trading2,9102,0201,900
Current surplus3,6708,0006,980
Food stocks2,4101,4702,750
Other capital expenditure770320400
Development expenditure21,72028,19024,960
ADP (Annual Development Program)20,82027,00023,690
FFW (Food-for-work)9001,1901.050
Financed by:
Domestic resources
Banking system2,9205,000
Foreign resources (net)17,45021,19015,230
Of which: project aid plus commodity aid11,83017,60013,640
Source: Table 1.10 in International Bank For Reconstruction and Development. ‘‘Bangladesh Recent Economic Developments and Selected Development Issues” (unpublished, Washington March 1982), p. 30.
Table 5.Bangladesh: Program’s Supply-Side Policies and Objectives
AreaObject ivesPolicy Measures
Export promotionRaise exports—in particular the shares of exports in manufacturing output, nontraditional items in total exports, and free foreign exchange market.Change exchange rate to offset inflation differentials.

Raise export subsidies to offset bias.

Reduce restrictions on wage earners’ scheme imports;

improve export performance licensing and merge it

with the wage earners’ scheme to raise subsidy.
Import substitutionIncrease foodgrain production. Raise share of domestic gas in consumption of total energy.Raise procurement prices for rice. Raise share of agriculture in Annual Development


Raise price of imported oil to reflect foreign prices

(weighted average rise of 46 percent).

Raise investment in gas production and distribution.
Resource mobilizationIncrease revenue and elasticity of tax system.

Increase domestic and national savings.
Implement new tax measures.

Raise prices of public enterprises to improve their

financial situation.

Raise nominal interest rates to ensure positive real interest rates.

Reduce restrictions in wage earners’ scheme to

increase demand and thus rates for remittances.

Reduce subsidies on food and fertilizer.
InvestmentRaise share of total domestic investment in gross

domestic product.

Promote faster growth of private investment relative to public investment.
Reorient and step up public investment.

Liberalize industrial regulations and provide easier

credit and imports for private investors.

Provide foreign investors with increased incentives.
Table 6.Bangladesh: Selected Supply-Side Indicators, 1979/80-1982/831(In percent)
Aggregate domestic savings/GDP2.02.3- 3.51.7
Aggregate national savings/GDP4.05.3-0.75.9
Aggregate domestic investment/GDP16.717.213.916.4
Fiscal deficit/GDP9.
Share of agriculture in Annual

Development Program
Foodgrain production (million tons)13.314.714.315.1
Share of nontraditional exports in total exports212.31 5.818.226,9
Share of manufactured exports in total manufactured output2_12.212.314.9
Share of wage earners’ scheme in total imports37.612.512.720.7
Change in real non-foodgrain imports5.026.52.3- 11.9
Source: Same as Table 1.

b. Import Substitution

Policies aimed at raising farmers’ profitability and at encouraging shifts in domestic energy demand toward domestic gas were put in place exactly as expected. Foodgrain production rose from 13.3 million tons in 1979/80 to 15.1 million tons in 1982/83, notwithstanding the severe drought of 1981/82. Increased domestic-currency prices of imported energy and higher public expenditures on production and distribution of indigenous gas led to a 58 percent rise in production over the three-year period.9

Table 7.Bangladesh: Real Effective Exchange Rates for Exports, 1975/76-1982/83(Taka pet U.S.dollar)
I. Exchange rate
1. Official exchange rate114.5015.5015.0015.0015.0016.0019.5023.76
2. Export-weighted nominal exchange rate13.9214.4214.4014.8514.8515.2216.5617.94
3. Price-deflated, export-weighted real rate213.9216.6615.2614.9914.8515 0716.2317.58
II. Effective exchange rate: traditional3Million taka
1. Export duties471.1162.6213.9302.4424.0418.9220.9108.7
2. Export subsidy5101.582.687.912.9
3. Net duty (II.1 minus II.2)71.1162.6213-9302.4322.5336.3133 095 8
4. Traditional exports5,0226,0066,4948,4459,6499,89710,13013,162
5. Effective net duty (percent)1.422.703.293.533.343.401.310.73
6. Real effective exchange rate (Taka per U.S. dollar)13.7216.2014.7614.4514.3514.5616.0217.45
III. Effective exchange race: nontraditional6
1. Export subsidy63.852.697939.2
2. Nontraditionai exports5306646841,1871,3481,5872,2574,854
3. Effective subsidy rate (percent)4.733.314.340.81
4. Real effective exchange rate (Taka per U.S. dollar)13.9216.6615.2614.9915.5515.5716.9317.72

C. Domestic Investment

Growth in gross domestic investment in the actual program period, though considerable, was lower than planned because of an unanticipated shortfall in aid inflows. A fall in revenue owing to a low level of dutiable imports led to an absolute decline in investment in 1981/82. It recovered sufficiently in the following year to regain the high share in GDP it had commanded in 1980/ 81. Private investment fluctuated, too, but the dip in 1981/82 was largely caused by a fall in private industrial investment induced by the severe credit squeeze early that year.

d. Resource Mobilization

Though all policies envisaged for the purpose of raising national savings were implemented, overall results were disappointing. This was due mostly to stagnant gross domestic savings. Public savings rose in the program period, but could not be sustained; data on private savings are poor, but indications are that they fared no better. Liberalization of the wage earner’s scheme (WES) market did, however, lead to a substantial increase of remittance inflows; this contributed to national savings.

3. Performance of Key Macrovariables

Over the actual program period, targets for growth, inflation, and the basic balance of payments were broadly achieved (Table 1), notwithstanding the breach of credit ceilings in June 1981. This is perhaps not surprising. (In a country with institutional and structural characteristics like those of Bangladesh and, more importantly, one with frequent changes in its exchange rate, it is difficult to ascertain the precise level of domestic credit that would be consistent with a target balance of payments position10 in a given year. In fact, for most developing countries, the information necessary to fine-tune domestic credit every quarter is not usually available.)11 Macroeconomic performance did, however, deteriorate in 1981/82. The monetary overhang no doubt contributed to inflation; the drought-induced crop failure was, however, a bigger factor in raising the inflation rate. Agricultural growth was lower because of weather, but the fall in industrial output (Table 1) was policy-induced.

At the insistence of the Fund, Bangladesh instituted draconian credit control measures in order to meet the original September 1981 ceilings. This necessitated a fall in the absolute level of domestic credit, instead of only in its rate of expansion. Table 3 shows the magnitude of the absolute fall required to stay within the ceiling. The fall affected the output of public enterprises adversely. While there was no absolute reduction in private sector credit, there was no growth either.12 Nevertheless, the credit squeeze led to expectations of poor credit conditions, reducing both private sector production and industrial investment.

In addition, withholding of extended Fund facility disbursements worsened an already difficult economic situation. In anticipation of balance of payments pressures arising from drought-induced imports of foodgrains and from reduced export volume and prices, the Bangladesh Government raised import deposits and increased import controls in early 1981/82. When actual domestic demand for imports turned out to be lower than expected, largely owing to recessionary conditions, restrictions on imports were gradually reduced. No tightening of import controls occurred, however, in the actual program period.

It is obvious that 1981/82 performance was affected adversely by exogenous factors. Bangladesh’s ability to deal with the situation was significantly handicapped by the suspension of expected disbursements and by the Fund’s insistence on drastic credit controls. Failure to reactivate the extended Fund facility further weakened ongoing efforts to achieve structural change.

IV. Conclusion

There can be no doubt that sustained expansionary financial policies do thwart price stability and external viability. Thus, monitoring domestic credit expansion remains important in supply-oriented programs, such as those under the extended Fund facility. However, the use of quarterly credit ceilings as the chief performance criterion is clearly inappropriate for such programs. This is so because such use implies that a breach in any quarter, whatever the cause, must trigger automatic suspension, even if fiscal performance is good and the implementation of structural measures is as envisaged. The resulting interruption can (and has in the case of Bangladesh) undermine the process of structural adjustment initiated under the program.

It is therefore most unfortunate that the Fund has continued to rely overwhelmingly on credit ceilings, despite their obvious inadequacies in a supply-oriented program. After more than a decade, the Fund has made only limited progress in developing and using supplementary indicators to monitor overall implementation of extended arrangements. Still, in order to permit a better and more balanced review of overall program performance, which is what should happen after a breach, such indicators should be used. The new structural adjustment facility makes such use imperative. Many low-income countries that depend heavily on concessional foreign assistance could face a situation like the one that Bangladesh faced if the present Fund practice of using credit ceilings as the main performance criterion continues.

In view of the new structural adjustment facility for low-income countries.

Comparing program performance with what could have happened under alternative sets of policies would be more apt. However, to simulate the effects of alternative packages, an econometric model with estimated parameters would be needed for each country.

On the demand side, relationships between policy instruments (e.g., fiscal deficit deduction ot lowering rate or domestic credit), aggregate demand, and policy objectives are fully articulated in the Fund’s monetary model of the balance of payments. The effects of changes in domestic credit on prices, output, and external balance may be distributed differently, based on differences in the structural characteristics of countries.

Receipt of a lower-than-expected level of aid than had been projected in the Fund program was surprising, considering the claim that Fund-supported adjustment efforts “encourage donor countries to provide funds for members that have limited resource bases and are at low levels of development,” which is made in Manuel Guitian, Fund Conditionality: Evolution of Principles and Practices, IMF Pamphlet Seties, No. 38 (Washington: International Monetary Fund, 19811, p. 4T.

The current surplus was lower than the projected level by only one billion taka.

Public enterprises as a whole made losses of Tk 709 million in 1979/80 and Tk 840 million in 1981/82. Only in 1980/81 did they make a profit (Tk 209 million). See International Bank for Reconstruction and Development, “Bangladesh: Recent Economic Developments and Selected Development Issues” (unpublished, Washington, March 1982).

If special food assistance of Tk 2 billion is subtracted from the 1979/80 figures, aid can be shown to have risen by 4 percent instead of the projected 2 percent.

The XPL certificates and remittances are sold to potential importers at market-determined rates.

International Bank for Reconstruction and Development, Bangladesh: Economic and Social Development Prospects (Washington, April 1985).

I have tried to compute the annual level of credit expansion consistent with payments equilibrium, on the basis of an estimated model for Bangladesh—along the lines of Polak and Argy (J.J. Polak and Victor Argy, “Credit Policy and the Balance of Payments,” Staff Papers, International Monetary Fund (Washington), Vol. 18 (March 1971), pp. 1-24)to see it actual payments disequilibrium was consistent with the direction of deviations of actual domestic credit from their computed levels. In nearly 7 out of 10 years, it was not. See details in K. M. Matin, “IMF’s Stabilization Programmes in Bangladesh,” Bangladesh Development Studies (Dhaka) (forthcoming).

This has been demonstrated by the use of a dynamic balance of payments model in Mohsin S. Khan and Malcolm D. Knight, “Stabilization Programs in Developing Countries: A Formal Framework,” Staff Papers, International Monetary Fund (Washington), Vol. 28 (March 1981), pp. 1-53.

The actual level of credit to the public sector was higher than had been envisaged in the program in all quarters up to June 1981.

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