- F. Rozwadowski, Siddharth Tiwari, David Robinson, and Susan Schadler
- Published Date:
- June 1993
Following broadly satisfactory growth, inflation, and external performance during the 1960s and 1970s, many low-income countries encountered serious economic difficulties in the early 1980s. These problems frequently stemmed from a clash between stark reversals of the terms of trade and expansionary financial policies. Long-standing structural weaknesses placed countries in a poor position to adjust to their setbacks while sustaining growth. Often, the first response to the adverse developments was to borrow more, and by the mid-1980s, many low-income countries found themselves facing not only massive stabilization problems but also excessive external debt burdens.
In these circumstances, adjustment programs focusing on financial policies alone would not address the roots of countries’ problems. Beyond changes in financial policies, major reforms in the structure and institutions of the economies—particularly in the role of the government and incentives for production—were needed. Moreover, the exceptionally heavy indebtedness of these countries required both debt-service relief and strict limits on new borrowing on nonconcessional terms—limits that precluded even borrowing from the IMF on conventional terms.
In 1986, the IMF responded to these needs by setting up the Structural Adjustment Facility (SAF), funded by proceeds from earlier sales of gold. This initiative was taken a step further with the establishment of the Enhanced Structural Adjustment Facility (ESAF) in 1987 (see Box 1), with financing derived in part from SAF resources and in part from contributions in the form of loans as well as grants administered by the ESAF Trust. The ESAF was designed to promote adjustment and reform in eligible countries by supporting particularly vigorous macro-economic and structural change with a larger scale of resources on the same concessional terms as the SAF. The explicit objectives of the ESAF are to promote external viability and higher output in a balanced manner by reducing domestic and external imbalances, mobilizing resources, and improving resource allocation. Policy programs supported by ESAF resources are to aim at a substantial move, during the three-year program period, toward an overall external position and structure of the balance of payments consistent with orderly relations with creditors (including the IMF) and a trade and payments system free of restrictions.
Box 1.The Structural Adjustment Facility (SAF) and the Enhanced Structural Adjustment Facility (ESAF)
The SAF was set up in March 1986 to provide highly concessional loans to support structural adjustment in low-income countries; the ESAF was set up in December 1987 to support especially vigorous adjustment programs with a higher level of access. Sixty-two low-income countries were eligible for access to the SAF and ESAF. In April 1992 eligibility was extended to a further 11 countries. As of end-July 1993, a total of 36 countries had had arrangements under the SAF and 29 countries under the ESAF.
Under both facilities adjustment is normally carried out in three successive annual programs (though the ESAF now provides for a fourth-year arrangement in exceptional circumstances). Each annual program forms the first year of a three-year policy framework elaborated in a policy framework paper (PFP). The PFPs are drawn up in a collaborative effort by the country authorities, the IMF, and the World Bank; they establish an agenda for mutually supporting macro-economic adjustment and structural reforms and may be used to attract financial support from donors.
In line with the needs of low-income countries, financial support under the SAF and ESAF is on concessional terms—an interest rate of 0.5 percent to be repaid beginning five and a half years and ending ten years after disbursement. Cumulative access under the SAF over the three years of the arrangement is now fixed at 50 percent of the country’s IMF quota: access under the ESAF is 110 percent of quota on average, although in exceptional circumstances a country may obtain up to 255 percent of quota over the three years of the arrangement.
The operational guidelines for ESAF-supported programs specified more detailed macroeconomic objectives in three areas.
- Economic growth. Programs were to create the conditions to achieve sustained economic growth at or near potential output and, indeed, to raise potential over time in a noninflationary manner. It was recognized, however, that in some countries, an increase in growth could not be expected during the program period.
- Balance of payments. Ideally, programs were to aim at attaining, by the end of the program period, an external current account deficit that could be financed by normal and sustainable capital inflows (including aid). When large initial debt burdens did not permit this, more limited goals were to be sought: any rescheduling after the program period would affect principal only: other forms of exceptional financing after the program period would be limited to grants and highly concessional loans: and new borrowing would be serviced on schedule. It was recognized that even these limited objectives might require debt reduction or high levels of exceptional financing on concessional terms during the program period.
- Structural policies. The staffs of the IMF and the World Bank were to cooperate with governments to identify and prioritize structural problems. ESAF programs were to focus on a few key problems that were within the expertise of the IMF and of greatest relevance to output and the balance of payments. The aim was to eliminate or substantially reduce these problems during the program period. Reforms were to be front-loaded whenever possible.
This paper examines the experience of 19 countries (see Chan 1) that had entered ESAF arrangements as of mid-1992 in order to determine the degree to which these three objectives were reached. This experience is examined by comparing recent developments with conditions prior to their SAF/ESAF period.1 All but two of these countries had had at least a one-year program under the SAF prior lo the ESAF arrangement: five countries had completed a full three-year ESAF period by mid-1992.2 Because ESAF programs typically entailed a continuation and intensification of efforts begun in SAF programs, the review covers the experiences of countries under both SAF and ESAF programs.
The emphasis in this review is on taking stock of accomplishments under SAF- and ESAF-supported programs and on identifying areas where successor arrangements will need stronger efforts. Clear-cut conclusions on the reasons for differences in countries’ performance have proved difficult to draw, except where those differences were stark. Thus, the experience of the few countries that undertook comprehensive and forceful adjustment suggests a strong correlation between improved economic performance and the strength of efforts to rein in financial policies and to shift processes for resource allocation from governments to markets. But when countries undertook adjustment in a more piecemeal and less vigorous fashion, explanations of differences in economic performance—such as the sequencing of policy changes—are not obvious. This opacity reflects two characteristics that muddy the assessment of even strong adjustment programs. First, countries faced diverse circumstances, so it was difficult to disentangle the effects of insufficiently comprehensive policy changes from those of adverse exogenous factors. Second, the strength of policy changes—particularly structural changes—was seldom quantifiable or comparable across countries.
The remainder of the review is organized in four sections. Section II describes the circumstances—both the initial conditions and the external environment—under which adjustment programs were formulated. Section III reviews the policy content of the SAF/ESAF programs. Section IV establishes criteria for gauging the success of SAF/ESAF arrangements both in terms of progress toward external viability and in terms of creating the conditions for sustained growth: it then uses them to measure progress under the SAF/ESAF arrangements. Concluding remarks are provided in Section V.
Chart 1.Annual Arrangements Under the SAF and ESAF1
1 Countries for which an ESAF arrangement was approved between 1988 and June 1992. Circles in the ESAF lines indicate dates when reviews were completed. The chart includes arrangements approved and reviews completed before end-July 1993.
2 New ESAF arrangement after the eligibility period of first three-year ESAF arrangement had expired.