V Macroeconomic Results

Louis Dicks-Mireaux, Miguel Savastano, Adam Bennett, María Carkovic S., Mauro Mecagni, James John, and Susan Schadler
Published Date:
September 1995
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In most countries, macroeconomic developments improved considerably during the arrangements reviewed and, in many, continued to improve afterward. The improvements were most notable in the external sector, where immediate crises (primarily in the new users) were resolved, debt overhangs (primarily in the countries that had had several previous arrangements) were addressed, and the balance of payments moved toward a sustainable structure. Developments in other areas—inflation, growth, savings, and investment—were more mixed: many countries achieved steady improvements in some of these areas, but few experienced the remarkably strong turnarounds that several countries that had completed their adjustment in the mid-1980s had achieved.48 However, this pattern was similar to that in low-income countries with ESAF arrangements (Box 3). It is noteworthy that several countries were able to eliminate the need for IMF support and other exceptional finance during the period under review (1988-92), while growth and investment recovered (Box 4).

Box 3.Performance Under Stand-By, Extended, and ESAF Arrangements

The broad aims of the programs supported by standby, extended, and ESAF arrangements that have been reviewed were similar: to realize external viability, low inflation, and the potential growth rate of each economy.1 Programs supported by extended and ESAF arrangements, however, were concretely grounded in a medium-term perspective on financial and structural policy changes needed to reach these goals. Programs supported by stand-by arrangements were also expected to have a medium-term perspective, but it did not need to be as explicit. Terms of the arrangements, as noted earlier, also differed (see Box 1), Resources under the ESAF, available only to low-income countries, were provided on highly concessional terms. Under stand-by and extended arrangements resources were available on market-related terms, and under the former repurchases were due over a shorter time horizon. In the period under review, there was some overlap of countries with stand-by and ESAF arrangements.

The initial conditions in low-income countries with ESAF arrangements were quite different from those in countries with extended and stand-by arrangements. While average initial output growth rates were similar in the two groups of countries, most other indicators were considerably weaker in low-income countries: on average, saving and investment rates in the ESAF countries were below the already low levels in the countries with stand-by and extended arrangements, external current account deficits were twice as large, and growth potential was affected by narrower productive bases, inferior infrastructure, and less well-developed human capital.

Improvements in domestic economic performance under IMF arrangements in the two groups of countries were similar in several respects: output growth and saving rates rose modestly, but investment rates were stagnant except in a few countries. A comparison of external developments is more mixed. In both groups export volume increased, debt-service ratios fell, and reserves were rebuilt. However, on average, current account deficits (before official grants) narrowed relative to GDP in the countries with stand-by and extended arrangements but widened in the ESAF countries; an important contributory factor was the unusual weakness in the terms of trade in many of the ESAF countries. The countries with stand-by and extended arrangements were generally more successful than the countries with ESAF arrangements in reducing reliance on exceptional financing and attracting private capital. The ESAF countries, however, benefited from increases in official grants.

1 This discussion draws upon Schadler, Rozwadowski, Tiwari, and Robinson (1993), which reviews the experience under SAF and ESAF programs in the 19 countries that had entered ESAF arrangements as of mid-1992.

Box 4.Examples of Successful Adjustment

While most of the countries under review made significant progress in improving their external positions and structural policies, four—Czechoslovakia, Mexico, Papua New Guinea, and Tunisia—stand out for having completed their most recent arrangement with macro-economic policies on a sustainable footing that, continued, would eliminate the need to use IMF resources again in the near future.1

Despite widely different starting conditions, each of these countries demonstrated a decisive commitment to tight financial policies—in all but Tunisia supported by an exchange rate anchor—and maintaining stabilization and structural reform efforts even in the face of sizable adverse shocks: the collapse of Council for Mutual Economic Assistance (CMEA) trade in Czechoslovakia, unsettled domestic conditions in Papua New Guinea, and a prolonged drought in Tunisia. This commitment allowed each to regain or expand access to international capital markets, although progress in this area varied from dramatic (Mexico) to moderate (Tunisia). In each, inflation fell or was kept low and investment and output growth rose, albeit modestly in comparison with other developing countries that successfully adjusted in recent years.

With little external debt, only a modest monetary overhang, and moderate inflation, initial conditions in Czechoslovakia were favorable compared with those in other Central European countries. However, with virtually no market mechanisms, state domination of production, and heavy dependence on CMEA markets, structural distortions were at least as pervasive as in the other countries. The program involved a rapid liberalization of prices and external trade, freeing of access to foreign exchange for current account transactions, a far-reaching privatization program, financial sector reforms, and the promotion of foreign investment. To prevent price liberalization from inducing a wage-price spiral, restrictive fiscal, monetary, and wage policies were supported by an exchange rate anchor. The budget deficit was contained to 2 percent of GDP in 1991 and about percent in 1992 despite the fiscal strains common to all transition economies. Following an initial price jump, inflation fell below 10 percent in 1992. The balance of payments was strong, reflecting a rapid reorientation of exports to Western markets, increasing tourism, and steady growth of medium- and long-term capital inflows, including foreign direct investment. Access to international capital markets, at least in the Czech Republic, has been good. Investment and output declined sharply in 1991-92 but by 1993 showed signs of recovery, especially in the sectors where privatization had been completed. Helped by increasing employment in these sectors, the unemployment rate was about the lowest in the region.

Mexico’s extended arrangement was the culmination of the structural reform and fiscal consolidation initialed after the 1982 debt crisis. During 1982-87, supported by two IMF arrangements, Mexico sharply reduced public noninterest expenditures relative to GDP, reformed the tax system, divested over 600 small and midsize public enterprises, dismantled nontariff trade barriers, reduced import tariffs, and repeatedly rescheduled foreign debt. The primary fiscal balance and the external current account improved, but interest on the large domestic and foreign debt kept up pressure on the public sector borrowing requirement and balance of payments. Output growth slowed, and, reflecting still large overall fiscal deficits, wage indexation, and steady depreciation, inflation rose. In December 1987, a medium-term program was launched to redress these problems. The central features were eliminating the public sector deficit, principally by containing noninterest spending and lowering the interest burden through a frontal attack on inflation and securing external debt relief; coordinating the nominal paths for the exchange rate, wages, and official prices; and accelerating structural reform—reducing import tariffs, easing foreign investment regulations, negotiating free trade agreements, liberalizing the financial system, and undertaking large-scale privatizations. The program was supported by a multiyear rescheduling of Paris Club debt and a comprehensive agreement with commercial banks including debt and debt-service reduction. Helped by favorable terms of trade developments, results for the domestic economy were encouraging. Output growth rose from an average of one half of 1 percent a year in 1985-88 to 3½ percent in 1989-92 and, between 1987 and 1992, inflation fell from 160 percent to 12 percent, public sector interest payments relative to GDP dropped from 20 percent to 4 percent, and total external debt relative to GDP was halved. Access to international financial markets was regained, and massive inflows of private capital occurred. After April 1992 Mexico chose not to make use of IMF resources available under the extended arrangement.

After years of low accumulation of external debt and overall macroeconomic stability—albeit with low per capita growth—Papua New Guinea experienced a major setback in 1989 owing to the closure of an important mine after local political unrest and a decline in the terms of trade. The program—supported by precautionary stand-by arrangements in 1990 and 1991—was geared toward rapid adjustment to these setbacks through a devaluation of the currency and a tightening of financial policies. With a view to enhancing investor confidence and catalyzing official assistance for structural adjustment, several long-standing structural problems were also addressed by rationalizing the civil service and commodity stabilization funds, increasing the flexibility of wage setting, privatizing some government activities, and liberalizing trade and investment systems. Owing to a sharper-than-expected economic downturn and security-related expenditure overruns, the fiscal deficit widened more than programmed in 1990, but, with a drop in imports and improved terms of trade, the external current account strengthened. Notwithstanding continuing weakness in the fiscal position (owing to the decline in nonmining revenues and slippages in expenditure control prior to the 1992 elections), economic performance improved sharply after 1990: economic activity and imports rebounded, as the development of new mining projects spilled over to construction and other sectors; with the coming on stream of new mining capacity, exports and overall output rose and the current account improved; and inflation remained low, owing to stable imported prices and good harvests.

The fall in oil prices and dwindling of oil reserves in the early 1980s exposed weaknesses of the Tunisian economy stemming from an inward-looking strategy and a long history of government ownership and controls: the balance of payments deteriorated sharply, reserves plunged, and unemployment rose. In 1986, supported by a stand-by arrangement, Tunisia initiated a structural adjustment program by abolishing agricultural price controls, reducing import restrictions, freeing deposit interest rates, raising public enterprise tariffs, and depreciating the dinar. The 1988 extended arrangement sought to extend and consolidate these accomplishments while reducing the fiscal deficit. Output disruptions stemming from a prolonged drought in 1988-89 and from the Middle East crisis in 1990-91, together with the secular decline in petroleum revenues, hindered rapid progress in fiscal consolidation and kept the central government deficit above 5 percent of GDP in 1988-91 before it fell to 3 percent in 1992. Progress in other areas took place at a steady, but slower-than-expected, pace. Consumer subsidies, import barriers, and foreign exchange restrictions were lifted gradually and selectively, the privatization program was delayed, and complex investment incentives were not dismantled, deterring potential foreign investors. Despite the slow implementation of reforms, the adverse output shocks, and the unfavorable terms of trade, economic performance improved noticeably: nonenergy export volume grew at an annual rate of 9 percent; the current account deficit narrowed from almost 5½ percent of GDP in 1985-87 to 3½ percent in 1988-92; external debt was kept in check; inflation remained low; and, influenced by a recovery of agriculture, output growth rose from an average of 3½ percent a year in 1985-87 to 4½ percent in 1988-92. In 1992, access to the international capital market, denied since 1986, was regained.

1 At the time that this assessment was originally written, it was not meant to imply that these countries would never again require IMF financial support: such a need could arise at any time as a result of a major exogenous shock and/or divergence of policies from the established path (e.g., in the cases of Mexico and Papua New Guinea in 1995). Additionally, in the case of Czechoslovakia, when the January 1993 dissolution is taken into account, the assessment remains broadly valid for the Czech Republic but is less clearly applicable to the Slovak Republic.

It is almost impossible to distinguish between the roles of macroeconomic policies and other exogenous developments in the strengthening of economic performance. Reversion-to-mean influences—the tendency for unusually low (high) values of economic variables to be followed by positive (negative) changes—undoubtedly played a role, although, for many countries, economic performance had been chronically weak before the period under review. Also, for many countries, especially the oil producers, favorable terms of trade developments helped overall performance. In general, however, these were transitory developments, and the degree to which stronger economic performance persisted in 1992 suggests the underlying improvement. By contrast, the cyclical downturn in industrial countries in the early 1990s adversely affected terms of trade and export volumes in many non-oil exporters, although it also probably helped spur capital inflows to some countries as well. Developments in the Central European countries stand apart. The shocks to which these countries were adjusting were of a different order of magnitude from those in other countries, and the institutions for implementing policies were nascent at best. It is not surprising that short-term developments in these countries-—particularly growth—were significantly worse than those in other countries. Nevertheless, there was a wide range of outcomes, and, at least in the Czech Republic, remarkable progress toward a sustainable external position and controlling inflation.

External Sector Developments

The external position of most of the countries under review improved in at least four respects. First, official reserves rose; by the end of the period reviewed only a few countries had reserves below the equivalent of three months of imports. Second, of the 15 countries that had arrears at the start of their programs, about half substantially or completely cleared them. This process was usually part of a debt agreement with official or commercial creditors that also led to reductions in debt-service ratios. Next, about a third of the countries (particularly those that had initiated their adjustment efforts in the early 1980s) benefited from large increases in capital inflows—a reflection not only of changing circumstances abroad but also of investors’ confidence in domestic policies.49 Fourth, current account positions on average improved in countries where major adjustments were needed and had been planned—mainly countries that had embarked on their adjustment efforts in the recent past. In other countries, where on average the gap between current account deficits and sustainable levels of financing had been smaller, little current account adjustment had been planned, and many experienced stable or even slightly widening current account deficits relative to exports. These developments were, however, often sustainable in light of sizable increases in capital inflows.

There were also disappointments, even among countries that went beyond their initial purchases. Perhaps most important for medium-term developments was the failure of capital inflows to rise as projected in most of the sub-Saharan African countries, the Central European countries, and several others (Algeria, Jamaica, Trinidad and Tobago, and Venezuela).50 Second, several countries did not fully resolve their debt overhangs and a number failed to clear—or even accumulated—arrears. Most arrears accumulated were to commercial creditors during discussions on financing agreements, but some were to official creditors while programs were off track. Several countries (Argentina, Bulgaria, Ecuador, Guyana, Jordan, and Poland) have concluded agreements for debt reduction since the period under review. Third, export volume growth, which on average rose sharply in the first year of arrangements, fell in subsequent years, and for many countries in 1992 was no higher than before the arrangements. The rest of this subsection reviews the details of these developments.

There was considerable success in bringing current account deficits in line with sustainable external financing. In about two thirds of the countries where programs stayed on track after approval, this involved a major adjustment of the current account position—at least as large as initially targeted—over a three-year horizon. This group was composed almost entirely of new users of IMF resources and countries that had had one previous arrangement (Chart 10),51 By contrast, most of the countries that had had several previous arrangements (many of which experienced increasing capital inflows) saw noticeable deteriorations in their current account deficits. What accounted for this difference?

Chart 10.External Adjustment

(Ratios to the value of merchandise exports, in percent; period t refers to first year of program(s) under review)

1 Argentina, Cosca Rica, Côte d’Ivoire, Ecuador, Haiti, Jamaica, Malt, Mexico, Morocco, and the Philrppines.

2 Algeria, Gabon, Nigeria, and Tunisia, Egypt is excluded because the very large debt rescheduling and cancellation, receipts of official transfers, and accumulation of reserves in the year prior to the arrangement distorted the representation of the rest of the group.

3 Bulgaria, Czechoslovakia, Hungary, Poland, and Romania.

4 Cameroon, El Salvador, Handuras, Jordan, Pakistan, Papua New Guinea, Trinidad and Tobago, and Venezuela.

5 The difference between the increase in net international reserves and the current account balance (before official transfers) excluding the net accumulation of arrears.

Two types of developments were common to both groups. First, strong improvements in the services account—considerably larger than envisaged in initial programs—occurred generally. The strongest influences behind these improvements were lower foreign interest rates and, in a few countries, debt reductions. Also at play were stronger tourism receipts, private remittances and transfers, and other inflows.

Second, outside Central Europe, trade accounts were supported by a rather general strengthening of export volume growth in the first year of the arrangements (Chart 11). However, export growth on average moderated during the next two years and by 1992 had fallen slightly below rates immediately before arrangements. In many countries, exports benefited initially from large real depreciations immediately before the arrangement. The general stability of real exchange rates—and, in the countries that adopted exchange rate anchors, real appreciations—during the arrangements meant that this source of stimulus largely disappeared as the arrangement progressed. In addition, exports were affected by the slowdown in world trade during the early 1990s. By 1992, the gap between the export volume growth of these countries and that of other developing countries had returned to its 1988 level (Table 5). In Central Europe, limited data indicate strong increases in export volumes from the Czech Republic, Hungary, and Poland to the West but massive reductions in the bulk of their prereform trade, which was to the Council for Mutual Economic Assistance (CMEA) area.

Chart 11.Developments in Trade Accounts

(Period t refers to first year of program(s) under review)

1 Argentina, Costa Rica, Cote d’lvoire, Ecuador, Haiti, Jamaica, Mali, Mexico, Morocco, and the Philippines.

2 Algeria, Egypt, Gabon, Nigeria, and Tunisia.

3 Bulgaria, Czechoslovakia, Hungary, Poland, and Romania.

4 Cameroon, El Salvador, Honduras, Jordan, Pakistan, Papua New Guinea, Trinidad and Tobago, and Venezuela.

5 Ratio to merchandise exports.

Table 5.Export Volume Growth(Annual Percent Change)
Countries with arrangements16.38.84.6
Other developing countries7.36.35.7
Sources: IMF, World Economic Outlook, various issues; and staff estimates.

Excluding Central Europe, Haiti, Zaire, and the six countries where programs went off track immediately after approval.

Sources: IMF, World Economic Outlook, various issues; and staff estimates.

Excluding Central Europe, Haiti, Zaire, and the six countries where programs went off track immediately after approval.

What most differentiated developments in the trade accounts was the pattern of imports. Whereas import volumes fell in the first year of the arrangements in most of the countries that had just begun to adjust, they rose sharply in most of the countries further along in their adjustment efforts. These differences reflected both the divergence among countries’ growth rates and differences in capital inflows. There was a sizable recovery of, or further increase in, import volumes in the second year of the arrangements for most countries, even in Central Europe.

Differences in terms of trade developments were also important. Improvements in the terms of trade, principally in the oil exporters with arrangements during the disturbances in the Middle East in 1990-91, were an important source of strength in those countries, most heavily represented in the group of countries with one previous program. Several countries (Cameroon, Egypt, El Salvador, Hungary, Mali, and Poland) suffered drops in their terms of trade of more than 10 percent during their arrangements.

Increases in reserves were significant in virtually every country, but were particularly large in the repeat users, about half of which benefited from large capital inflows (Chart 12). Similarly, almost every country succeeded in significantly reducing its debtservice ratio—by the most, in the countries that had had previous arrangements and had been carrying the heaviest initial debt-servicing burdens, A critical factor in moving to a manageable debt-servicing burden for most countries was the conclusion of operations to reduce and/or reschedule debt and debt service: Paris Club reschedulings were implemented for 21 countries (including Egypt and Poland, where some debt was canceled); commercial bank debt was restructured in seven countries; and debt and debtservice reduction agreements with commercial banks were signed by five countries (Table 6).52

Chart 12.Indicators of Debt, Debt Service, and Reserves

(In percent unless otherwise noted; period t refers to first year of program(s) under review)

1 Argentina, Costa Rica, Côte d’Ivoire, Ecuador, Haiti, Jamaica, Mali, Mexico, Morocco, and the Philippines.

2 Algeria, Gabon, Nigeria, and Tunisia.

3 Bulgaria, Czechoslovakia, Hungary, Poland, and Romania.

4 Cameroon, El Salvador, Honduras, Jordan, Pakistan, Papua New Guinea, Trinidad and Tobago, and Venezuela.

5 Ratio to exports of goods and services.

Table 6.Summary of Rescheduling and Debt and Debt-Service Reduction Operations(All data for arrangement period unless otherwise noted)
ArrearsParis Club ReschedulingCommercial BanksDebt-Service Ratio1
ClearedRoseGraduateOngoingDebt reductionRestructuringAgreement pendingPreprogram year2End of arrangement
1. Countries that substantially solved debt problems during arrangements
Costa Ricaxxx46.920.9
El Salvadorxxx24.426.3
Trinidad and TobagoNonex20.915.5
2. Countries that made major progress in addressing debt burdens
3. Countries where substantial action in addressing debt burdens still needed
Côte d’lvoirexxxx19.218.1
Source: IMF staff estimates.

In percent of exports of goods and nonfactor services, after rescheduling.

Year preceding first arrangement.

Rescheduling agreements not currently in effect. The latest Paris Club agreement with the Philippines expired in 1993.

Debt-reduction agreement reached in 1992.

Debt-reduction agreement reached in 1992.

Rescheduling agreement with Paris Club creditors lapsed before end of arrangement.

Debt-reduction agreement reached in 1993.

Source: IMF staff estimates.

In percent of exports of goods and nonfactor services, after rescheduling.

Year preceding first arrangement.

Rescheduling agreements not currently in effect. The latest Paris Club agreement with the Philippines expired in 1993.

Debt-reduction agreement reached in 1992.

Debt-reduction agreement reached in 1992.

Rescheduling agreement with Paris Club creditors lapsed before end of arrangement.

Debt-reduction agreement reached in 1993.

The degree to which these operations, together with countries’ own adjustment efforts, addressed debt problems varied over a wide range. Most successful were six countries (Costa Rica, El Salvador, Mexico, Morocco, Trinidad and Tobago, and Venezuela) that by the end of the arrangements under review had cleared all existing arrears, eliminated the need for further Paris Club reschedulings, and reduced their debt servicing to sustainable levels. Six other countries (Egypt, Honduras, Jamaica, Mali, Nigeria, and the Philippines) made major progress toward normalizing relations with creditors. Benefiting from a variety of agreements affecting debt and debt service, these countries were able to fully clear any arrears, although they needed further Paris Club reschedulings and, in a few cases, significant further reductions in their debt-service ratios after the arrangements under review.53 In half of these 12 countries (Costa Rica, Egypt, Honduras, Mexico, Morocco, and the Philippines), reaching a solution to accumulated debt problems helped attract large increases in capital inflows, which further cased the external financing constraint.

In the remaining ten countries where some debt relief was needed, the progress in addressing debt problems, while significant, fell considerably short of that needed to eliminate arrears and attain manageable debt burdens. Most were countries that had begun their adjustment programs in the recent past, although a few (Argentina, Côte d’Ivoire, Gabon, and Ecuador) had begun their adjustment efforts well before the period under review.54 Almost all of these countries not only failed to clear arrears as planned but also accumulated arrears during the arrangements as restructuring agreements with commercial creditors were delayed, adverse shocks and policy slippages weakened the balance of payments relative to projections, and planned capital inflows failed to materialize. Notwithstanding these setbacks, rescheduling, lower interest rates on debt, and, in some countries, other improvements in the balance of payments—even if less than planned—resulted in sizable reductions in the debt-service ratios, although not enough to render them sustainable.


The record of achieving and sustaining low inflation was at best mixed (Table 7). On the positive side, about half the countries that entered their arrangements with inflation above 10 percent—mainly those with very high initial inflation rates-saw significant reductions that persisted through 1992. The four countries (Argentina, Guyana, Mexico, and Poland) that began with triple-digit inflation reduced it significantly by 1992 (although not always within the arrangement period). On the negative side, the other half of the countries with initial inflation above 10 percent saw little change or increases—Romania and Zaïre to triple-digit levels. Also, inflation rose in about half of the countries with low initial inflation.

Table 7.Summary Indicators of Inflation(In Percent)
Pre-Program Year1Targe for First YearLast Program Year1992
All countries215611351686132615
Countries with initial inflation above
50 percent3492867650261825731
10–50 percent42322302717192621
Below 10 percent555777875
Source: IMF staff estimates.

Year preceding first program. As estimated at the time the programs were approved.

Excludes the six countries ineligible for any purchases after approval.

Argentina, Bulgaria, Czechoslovakia, Ecuador, Guyana, Mexico, Poland, Romania, and Zaire. Includes transition economies with major price liberalizations.

Algeria, Costa Rica, Egypt, El Salvador, Honduras, Hungary, Nigeria, and Venezuela.

Cameroon, Côte d’lvoire, Gabon, Haiti, Jamaica, Jordan, Mali, Morocco, Pakistan, Papua New Guinea, the Philippines, Trinidad and Tobago, and Tunisia.

Source: IMF staff estimates.

Year preceding first program. As estimated at the time the programs were approved.

Excludes the six countries ineligible for any purchases after approval.

Argentina, Bulgaria, Czechoslovakia, Ecuador, Guyana, Mexico, Poland, Romania, and Zaire. Includes transition economies with major price liberalizations.

Algeria, Costa Rica, Egypt, El Salvador, Honduras, Hungary, Nigeria, and Venezuela.

Cameroon, Côte d’lvoire, Gabon, Haiti, Jamaica, Jordan, Mali, Morocco, Pakistan, Papua New Guinea, the Philippines, Trinidad and Tobago, and Tunisia.

There were a few common threads, none of them surprising. The most noticeable regularity was the importance of a nominal anchor. Of the 15 countries that held inflation below 10 percent or reduced it from high levels, only three (Guyana, Jordan, and Tunisia) did not have a nominal anchor in the form of an exchange rate or money supply rule. By contrast, only Honduras among the countries where inflation rose or was sustained at a high level had a primary nominal anchor.55 In most of these countries, it was hoped that credit ceilings (supplemented by wage controls in Central Europe) would provide a nominal anchor. However, the stabilizing effect of credit ceilings proved inadequate when exchange rate adjustments were used aggressively to sustain or improve competitiveness, financial discipline on enterprises was weak, or large capital inflows occurred. This is not to say a nominal anchor alone was sufficient to lower or stabilize inflation; most countries that adopted an explicit nominal anchor also undertook a sizable fiscal adjustment. But a nominal anchor clearly enhanced the disinflationary effect of fiscal adjustment.

Linkages between developments in inflation and in other policies were far less clear—bearing out the well-known complexity of the inflationary process, particularly with respect to the formation and role of expectations. There was a reasonably close correspondence on average between progress in reducing fiscal imbalances and containing inflation. Nevertheless, inflation rose or remained at high levels in several countries (most noticeably, Ecuador, Jamaica, and Venezuela) where fiscal deficits were reduced significantly.56 It was less common for inflation to fall or remain low when deficits rose, although this did occur in several of the CFA franc zone countries and Papua New Guinea.

There was remarkably little correspondence, on average or for individual countries, between the degree of credit restraint—as reflected in the growth of real net domestic assets—and success in reducing inflation.57 This reflects the tendency for increases in net foreign assets—stemming from stronger-than-expected current account positions and larger-than-expected capital inflows—to offset the effects of restrained domestic credit policies on the growth of broad money.

Although few countries changed arrangements for wage indexation, removal of indexation, when it occurred, proved important for reducing inflation. Only Mexico among the five countries that had a high degree of formal or informal wage indexation undertook appreciable modification, and this contributed to its success in reducing inflation. Among the other four (Algeria, Argentina, Costa Rica, and Venezuela) formal or informal indexation arrangements were not significantly changed. On the other hand, following sweeping financial policy changes supported by a subsequent arrangement, inflation fell significantly in Argentina: an improvement in the fiscal position, supported by an exchange rate anchor and the removal of indexation, was clearly enough to overcome incrtial elements of inflation. In the other countries where indexation was not modified (Algeria, Costa Rica, and Venezuela) the fiscal adjustment was far less and the depreciation of the domestic currency was significant.

Growth, Investment, and Savings

The record reveals few, if any, countries shifting to a distinctly rapid pace of development backed by higher investment and saving ratios (Chart 13). In this sense, the experiences under review might be seen as disappointing in reaching the ultimate goals of adjustment and reform. Nevertheless, for the bulk of the countries outside Central Europe, there was a steady strengthening of growth and on average an increase in saving rates. Developments in investment were less encouraging: few countries experienced any increase, although those that did were frequently the beneficiaries of large capital inflows that were clearly related to the adjustment and reform policies, as well as the securing of debt relief.

Chart 13.Growth, Savings, and Investment

(In percent; period t refers to first year of progrom(s) under review)

1 Argentina, Costa Rica, Côte d’ivoire, Ecuador, Haiti, Jamaica, Mali, Mexico, Morocco, and the Philippines.

2 Algeria, Egypt, Gabon, Nigeria, and Tunisia.

3 Buigaria, Czechoslovakia Hungary, Potand, and Romania, Data for Bulgaria are not included in the panela for savings and investment.

4 Cameroon, El Salvador, Honduras, Jordan, Pakistan, Papua New Guinea, Trinidad and Tobago, and Venezuela.

In Central Europe, developments in output were dire: output fell in each country by about 13 percent in the first year under review and by another 5-15 percent in the second year; early indications are that output began to recover in the third year and, in Poland, rose strongly in the fourth year. The causes of these setbacks have been hotly debated, but three influences stand out: (i) structural upheavals that aggravated the effects of already obsolete capital stocks; (ii) for the arrangements after 1990, the collapse of CMEA markets; and (iii) a massive deterioration in the terms of trade. The role of demand restraint has been controversial.58 In Poland, where the initial stabilization and reform predated the collapse of the CMEA and terms of trade loss, the reduction in real credit growth and the fiscal deficit could have worsened the drop in output. For the other countries, the coincidence of the CMEA shock and the initial adjustment effort, as well as the complications in judging the fiscal stance, make it hard to assess the role of policies.59 Even more difficult to determine is whether the pace of reforms—the big bang—worsened the cumulative drop in output relative to what would have occurred had reform been more gradual. One light that the short experience can shed on this issue is that the drop in output has been about the sharpest in Romania, where the scope and force of reforms, particularly for enterprises, was weakest.

The repeat users of IMF resources entered the arrangements under review with a record of rather steady, but weak, growth—on average about 2 percent—during the previous three years. Taken together, they saw a slight improvement during the years of their arrangements, notwithstanding a modest deterioration in the terms of trade. The strongest growth—-averaging over 3 percent a year during the arrangement—occurred in Costa Rica, Jamaica. Mali, Mexico, and Morocco, several of which made progress in addressing their external debt problem and successfully attracted capital inflows.

On average, in the countries newer to the adjustment process, output picked up strongly. In several of the countries that had had one previous arrangement, growth had rebounded in the year preceding the beginning of the arrangements under review and rose somewhat further during the arrangements. Algeria and Egypt were exceptions: falling oil prices after 1991 affected both countries, but the outturn was particularly disappointing in Egypt, where there had been marked success with debt relief, large fiscal adjustment, and sizable capital inflows, but more limited structural reform. The countries just beginning their adjustment, on average, entered their arrangements following three years of weakening growth, although in a few (Honduras, Pakistan, and Venezuela) growth had remained steady at moderate rates. In many of these countries, growth fell in the first year of the arrangement, but, helped by favorable terms of trade and a slowdown in the pace of fiscal adjustment, began to recover by the second year and rose further in the third year.

Developments in investment were perhaps the most disappointing aspect of the programs (Chart 14). Where data are available for Central Europe (Hungary. Poland, and Romania), ratios of investment to GDP fell sharply. Outside Central Europe, investment ratios rose relative to recent levels in only eight countries—some of these (Honduras, Mexico, and the Philippines) the beneficiaries of large capital inflows. There does appear, however, to have been some shift in the composition of investment—private investment ratios rose slightly as public investment ratios fell. Such a shift occurred in about a third of the countries—principally among the repeat users of IMF resources—but was typically small and usually did not show up until 1992. This pattern is similar to that seen in other adjusting countries, where there is evidence that private investment responds reasonably strongly to macroeconomic stabilization but usually with a substantial lag.60

Chart 14.Investment Ratios

(In percent; period t refers to first year of program(s) under review)

1 Countries for which a classification of investment by public and private sector is available.

2 Argentina, Costa Rica, Côte d’Ivoire, Ecuador, Haiti, Jamaica, Mali, Mexico, Morocco, and the Philippines.

3 Algeria, Egypt, Gabon, Nigeria, and Tunisia.

4 Bulgaria, Chechoslovakia, Hungary, Poland, and Romania. Data for Bulgaria are not included in the panels for savings and investment.

5 Cameroon, El Salvador, Honduras, Jordan, Pakistan, Papua New Guinea, Trinidad and Tobago, and Venezuela.

6 Argentina, Costa Rica, Côte d’ivoire, Ecuador Haiti, Mali, Mexico, Morocco, and the Philippines.

7 Algeria, Gabon, Nigeria, and Tunisia.

8 Hungary, Poland, and Romania.

9 Cameroon, El Salvador, Honduras, Jordan, Pakistan, Trinidad and Tobago, and Venezuela.

It is hard to know whether the confluence of higher output growth and stagnant investment ratios should be interpreted as a negative or positive development. On the one hand, the increase in output could have resulted from the absorption of unused capacity, suggesting that higher growth rates are not sustainable. On the other hand, it could have reflected improved efficiency of investment owing to better structural and financial conditions. In either case, the stagnancy of investment ratios underscores the difficulty of restoring investors’ confidence: while reserves, current account deficits, and short-term output developments tend to be responsive to changes in financial policies, generating the confidence needed to raise investment requires the establishment of a track record of stable financial policies and often profound structural changes.

Available data suggest that there was some increase on average in national savings. Indications are that increases were large in several oil exporting countries, where windfalls in oil revenues during 1990-91 were probably channeled mainly into savings. Other countries tended to experience stable or slightly declining saving ratios. These observations, however, are based on perhaps the least reliable data reported in this review.61 In fact, however, narrowing the focus to the 20 countries that explicitly reported public and private savings tends to confirm the broad observation that savings rose during the period of IMF involvement. For these countries, total savings relative to GDP rose by about 1 percentage point over the period of IMF involvement, reflecting an increase in the public saving ratio of 2½ percentage points but a drop in the private saving ratio of 1½ percentage points.

These results, while close to program projections, are disappointing in view of the role many of the countries would have liked higher domestic savings to play in generating investment and growth. In fact, however, the policy channels for influencing savings proved quite limited.62 The strongest and most systematic influences on savings were the rate of growth of the economy and changes in public savings. Studies of other countries have also found a significant role for the terms of trade, although for the countries reviewed here that effect was weak. Of these, only changes in public savings, which tended to elicit partially offsetting changes in private savings, are directly under policy control. Other influences more directly influenced by policy—real interest rates, the real exchange rate, the stance of credit policy, and financial sector reform—tended to have weak and unpredictable effects on savings. Moreover, some countries that undertook sweeping adjustment and reform programs, particularly from positions of chronically weak growth, even experienced declines in private savings as expectations of permanent income rose and external capital inflows were large.

For example, Chile, Korea, and Thailand realized extraordinary success in improving the external position, attracting capital inflows, and sharply increasing growth, savings, and investment with relatively low inflation.

See Schadler, Carkovic, Bennett, and Kahn (1993) for a discussion of the causes and effects of large capital inflows.

Recent but still preliminary data for 1993, however, indicate remarkable increases in capital inflows to the Czech Republic and Poland.

The outcomes portrayed in Chart 10 are directly comparable to the projections presented in Chart 4, except Chart 10 excludes Zaire and the six countries that went off track immediately after approval.

Eight olher countries (Algeria, Czechoslovakia, Haiti, Hungary, Pakistan, Papua New Guinea, Romania, and Tunisia) did not engage in any debt-rescheduling or debt-reduction agreements. Most of these countries did, however, reduce debt-service burdens somewhat through increases in exports and restraint in the accumulation of new debt. See Collvns (1993) and Kuhn (1994) for a full discussion of developments in the debt strategy affecting developing countries.

During the second of the two arrangements under review for Nigeria arrears were again accumulated and its latest Paris Club agreement is not currently in effect.

Argentina, Bulgaria, Ecuador, Jordan, and Poland, however, have made substantial progress, including the conclusion of debt-reduction agreements with commercial creditors, in arrangements since those under review.

In Honduras, inflation increased early in the arrangement, when price reforms occurred and the lempira was depreciated. Subsequently, the exchange rate against the dollar was held stable and inflation fell.

For Ecuador and Venezuela this may have been affected by increases in revenues from oil that were partially spent on domestic goods.

Real (rather than nominal) credit growth and inflation are compared here because during disinflation nominal credit growth tends to fall as inflation drops, with the causality running more from prices to credit than vice versa.

Causes of the drop in output are discussed in Borensztein (1993), Bruno (1992), and Calvo and Kumar (1994).

For example, fiscal positions weakened in each of the countries except Poland during 1990-92. In light of the sharp contraction of output, however, the fiscal stance is likely to have been restrictive.

In 17 out of 30 countries, the gross national saving ratio was calculated as the difference between the external current account and gross domestic investment relative to GDP in at least one year. The savings data are therefore affected by any deficiencies or discontinuities in the investment or current account data.

See Savastano (1995) in Background Papers.

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