Chapter

III What Has Been Achieved?

Author(s):
International Monetary Fund
Published Date:
February 1998
Share
  • ShareShare
Show Summary Details

Progress with regard to the strategy for adjustment and reform can be assessed both on the basis of policies implemented and outcomes achieved. The experience of SAF/ESAF-supported programs—and the countries that undertook them—is reviewed below from both perspectives. Fiscal policies, inflation, structural reforms, and the degree of openness are examined first, before turning to the outcomes for economic growth and countries’ external positions. Because adjustment in the six transition economies under review began comparatively late (see Box 3 for a synopsis) and historical data are generally lacking for these countries, most of the analysis that follows relates to the nontransition countries.

Box 3.Adjustment in ESAF-Supported Transition Economies

The demise of central planning and the transition to a market-based economy began at different times for the six transition countries under review: in 1986 for the Lao People’s Democratic Republic, 1989 for Vietnam, 1990 for Mongolia, and 1992 for Albania and the Kyrgyz Republic; Cambodia—still struggling with armed internal conflict—did not undertake comprehensive adjustment until 1993. ESAF-supported programs began in 1993 and 1994 in all but one of the six countries. The Lao People’s Democratic Republic, the exception, began adjustment under a SAF arrangement in 1989, followed by an ESAF arrangement in 1993. ESAF-supported programs in these countries were, in many respects, a continuation and a deepening of adjustment efforts initiated at the beginning of transition. Although their strategies included the same core elements as in other ESAF countries (see section on “The Adjustment Strategy” above), adjustment programs in the transition economies tended to place greater emphasis on certain areas, consistent with their different circumstances.

  • Rapid stabilization was a central objective, to be achieved mainly through strong fiscal adjustment and tight control of credit, particularly to public enterprises. Stabilization efforts were most successful in Albania and the Indochinese economies, all of which reduced inflation to low levels, initially through a credit-based approach backed in Indochina by wage controls. During 1992–95, following initial stabilization, Cambodia, the Lao People’s Democratic Republic, and Vietnam maintained stable nominal exchange rates (with official rates generally within 1 percent of the parallel market rate) through tight fiscal and monetary policy. Although Mongolia and the Kyrgyz Republic also made notable progress in reducing inflation in 1994—95, their inflation rates remained relatively high (53 percent and 32 percent, respectively, at the end of 1995), mainly because of difficulties in curbing fiscal deficits and controlling credit growth to public enterprises.

  • Strong fiscal adjustment, particularly through tax and public enterprise reform, was crucial. Budget deficits were reduced sharply in Albania, the Lao People’s Democratic Republic, and Vietnam. In Albania, measures to improve tax and customs administration were delayed, and fiscal adjustment relied mainly on programmed reductions in current spending, facilitated by the decline in unemployment (reflecting greater private sector activity) and reforms in the budget process. Government employment was reduced by close to a third from mid-1992 to February 1995, spending was shifted toward investment, direct subsidies were virtually eliminated by 1995, and other current expenditures were scaled back considerably. Tax reforms were introduced early (1988—89) in the Lao People’s Democratic Republic and Vietnam, and later in Cambodia. By 1994–95, revenues had strengthened considerably in all three countries, aided in Vietnam by the improved financial performance of state enterprises. Fiscal deficits were kept to moderate levels, initially by lowering the real wage bill (partly through retrenchment, with labor later being absorbed by the growing private sector), lowering subsidies and transfers to public enterprises, and reducing capital outlays and social services. The compression of capital and social spending was subsequently reversed as revenues were raised. Reform efforts failed to increase revenues in the Kyrgyz Republic and Mongolia, partly due to tax arrears and poor tax administration, and overall fiscal deficits were markedly higher.

  • Wide-ranging structural reforms, particularly public enterprise reform and privatization, received strong emphasis. In Vietnam, state enterprises were given substantial management autonomy in 1988–89, while policies were adopted to increase competition (by liberalizing imports and encouraging foreign direct investment), harden budget constraints (by eliminating most direct subsidies and directed credit), and subject enterprises to uniform rules of taxation. As a result, the net budgetary contribution of enterprises rose to over 10 percent of GDP by 1994–95, partly through increased profits from the oil sector. Similar efforts were undertaken in the Lao People’s Democratic Republic and Cambodia. Although a majority of small and medium-sized enterprises were privatized in Albania, the Kyrgyz Republic, and Mongolia by the end of 1995, ESAF-supported programs called for further restructuring and privatization of strategic enterprises. In all six countries, weak banking systems remain a concern. In addition, a need for further reforms in the legal and institutional framework was identified in programs, especially those governing land in Albania and the Kyrgyz Republic. By the end of 1995, all six countries had undertaken extensive liberalization of prices, trade, and foreign investment and had relatively few exchange restrictions on current transactions.

Macroeconomic Stabilization

Fiscal Consolidation

In the broadest terms, fiscal adjustment in the ESAF countries appears to have proceeded in three phases since the beginning of the 1980s. The first phase, prior to the inception of the SAF in 1986, was marked by early attempts to tackle the most egregious fiscal imbalances—typically to be found in non-CFA Africa and the Western Hemisphere. These efforts, often made in the context of programs supported by standby arrangements with the IMF, met with some success (Figure 2). Progress slowed markedly, however, during much of the late 1980s and early 1990s. Asian and Western Hemisphere countries continued to trim budget deficits over this period, but African countries saw their budget positions hold steady at best, with deteriorations in most CFA franc zone countries. Progress resumed only after 1994, as countries took advantage of an upturn in export demand, growth, and the terms of trade to trim budget deficits, mainly by containing expenditure as output increased.8

Figure 2.Fiscal Trends in ESAF Countries

(Averages, in percent of GDP)

Source: IMF staff estimates.

1Excluding grants.

2Excluding Equatorial Guinea.

3Excluding Guyana.

The average SAF/ESAF-supported program aimed, over a three-year horizon, to cut primary budget deficits (in relation to GDP, excluding grants and privatization receipts) by a little under half—or 3 percentage points of GDP.9 African countries sought greater-than-average adjustment, including in programs supporting the major devaluation of the CFA franc in 1994 (Figure 3). On average, the greatest adjustment was targeted in cases where initial imbalances were the most severe (Figure 4).

Figure 3.Fiscal Adjustment in SAF/ESAF-Supported Programs: Averages by Region1

(In percent of GDP)

Source: IMF staff estimates.

1Restricted sample of 28 countries and 47 SAF/ESAF-supported programs reflecting data availability. Figures in parentheses above the bars refer to the number of programs.

2Excluding grants.

Figure 4.Fiscal Adjustment in SAF/ESAF-Supported Programs: By Initial Conditions1

(In percent of GDP)

Source: IMF staff estimates.

1Based on the same restricted sample as in Figure 3.

The relative reliance on targeted expenditure restraint and revenue increases to bring about this adjustment varied widely, depending to some degree on initial conditions. Thus, although programs envisaged cuts in noninterest expenditure relative to GDP of about 2 percentage points on average over three years, almost half targeted increased or unchanged spending from preprogram levels. The deepest cuts—averaging more than 2½ percentage points over three years—were sought in Africa, where initial spending levels were highest (the transition economies excepted). In all other regions, the principal source of fiscal adjustment was to be increased revenues. Across the regions (again, other than the transition economies) the aim was to raise revenue-GDP ratios by about 1 percentage point over three years. The constellation of revenue targets (see Figure 4) implied some degree of convergence in revenue-GDP ratios over time: programs aimed to maintain (or, in some cases, reduce) these ratios where the initial tax burden was relatively high, and boost them in countries where initial revenues were below average.

Looking more closely at the modalities of adjustment within spending and revenue totals, the diversity across countries increases still further, but a few important patterns can be discerned:10

  • First, most programs targeted a significant shift from current to capital spending: two-thirds of programs envisaged increased capital expenditure, while almost 60 percent planned cuts in current spending relative to GDP.

  • Second, of the saving sought in current spending, roughly half was to come from the government wage bill and half from subsidies and transfers (through, for instance, reduced support for public enterprises and better targeting of consumer subsidies).

  • Third, most programs in recent years included pledges to strengthen health and education spending, although this objective was seldom quantified; they also commonly incorporated specific safety net measures for vulnerable groups to mitigate the short-term impact of price increases or reduced employment opportunities.

  • Fourth, on the revenue side, programs typically aimed to shift the burden from nontax to tax revenues, from direct to indirect taxation (often through the introduction or expansion of a VAT), and to boost tax receipts from international trade; the latter was sought in some cases as a matter of expediency, but in others it was simply a product of expected increases in imports, improved customs administration, or the planned tariffication of quantitative trade restrictions.

On average, only about half of the targeted reduction in primary budget deficits was achieved (see Figure 3). Performance varied widely, however, with almost half of all programs achieving no improvement in the primary balance over three years. The largest shortfalls, relative to target, appeared in the Western Hemisphere countries, where deficits actually increased as a percentage of GDP (though this partly reflects upward revisions to recorded deficits in the preprogram year). African countries also tended to miss program targets by wide margins, but nevertheless succeeded in reducing their budget deficits from preprogram levels. Revenues fell short of target in roughly two-thirds of all programs, and on average (in relation to GDP) were barely changed from preprogram levels. Somewhat surprisingly, however, deficit overruns were not significantly correlated with revenue shortfalls, reflecting a common tendency for expenditures to be curtailed in programs where revenues failed to meet expectations. The brunt of this expenditure restraint was typically borne by capital spending, which came in below target in three-quarters of the programs experiencing revenue shortfalls (whereas current spending was cut in only one-third).11 By contrast, overshooting of deficit targets was more typically associated with expenditure overruns, the latter dominating in two-thirds of such cases.12

Where program objectives were not met, the reasons were often complex. On the revenue side, targets for direct and indirect taxes were, on average, achieved. The ambition to raise tax receipts from foreign trade, however, was only partially realized in most cases. It appears that early tariff rate reductions were often not accompanied by the planned elimination of import duty exemptions, or by effective measures to tackle evasion. In some cases (notably in Africa), there were also delays in converting quantitative restrictions to tariffs. In an attempt to compensate for tax shortfalls, countries often resorted to one-off measures to boost nontax revenues, increased profit transfers from central banks being a common device.

Expenditure overruns were most prevalent in African and Western Hemisphere countries. Governments frequently failed to scale back civil service headcounts as intended, trying instead to trim wage rates (in conflict with another oft-stated objective: retaining and motivating good quality civil servants). Subsidy costs also tended to exceed targets in these countries, in all likelihood reflecting their limited progress in reforming public enterprises. More generally, ESAF countries’ expenditure management suffered from weak budgetary institutions—owing in part to a scarcity of trained personnel—with poor systems for budgeting and monitoring of expenditures, and widespread use of extra budgetary funds.

As regards the evolving composition of government spending in ESAF countries, the record is, on the whole, reasonably positive (Figure 5). Relative to the pre-SAF/ESAF period, the desired shift from current to capital expenditure did occur, albeit to a lesser extent than had been hoped. The tendency to sacrifice capital spending as revenues fell short meant that, rather than rising as intended, capital spending did no more than hold steady as a share of GDP in the nontransition economies as a whole, and declined slightly among ESAF users in Africa.13 More encouragingly, the limited data that are available suggest that roughly three-quarters of countries succeeded in raising expenditure on health and education since their SAF/ESAF-supported adjustment began, including (on average) in Africa. Similarly, in the area of military spending there was a broad-based shift in the desired direction, with declines observed since the pre-SAF/ESAF period in 12 of the 15 countries for which data are available, from an average of almost 3 percent to about 2½ percent of GDP.

Figure 5.Composition of Government Spending

(Averages, in percent of GDP)

Source: Abed and others (forthcoming).

1Excluding Guinea and Guyana,

2Including net lending.

3Limited sample, subject to data availability.

4Excluding Guinea.

Inflation Control

The diversity of experiences among ESAF countries in reducing inflation is so marked as to preclude generalizations about the sample as a whole. Among regional groupings, however, some clear patterns emerge (Figure 6).14

Figure 6.Inflation Trends by Region

(CPI, end-of-pehod basis where available, group medians)1

Source: IMF staff estimates.

1Where end-of-period CPI data are not available, period average figures are used. In a few cases, the GDP deflator is used.

First, countries in the CFA franc zone stand apart, having succeeded in maintaining inflation consistently in the low single-digit range since the mid-1980s, reflecting their use of the exchange rate peg to the French franc as an anchor. The 50 percent devaluation of the CFA franc in January 1994 triggered a price level adjustment in that year, but by 1995 inflation was already back to about 7 percent on average, and it fell further in 1996. ESAF countries in Asia have also had generally stable inflation over the past decade, fluctuating within a fairly narrow range around 10 percent.

The three ESAF users in the Western Hemisphere other than Honduras had witnessed very high inflation (above 100 percent) at some point in the past decade, but all extinguished it successfully (Bolivia in 1986 and Nicaragua and Guyana in 1992) and had reached rates in the neighborhood of 10 percent by 1995.15 Dramatic disinflation was also achieved in the six transition economies. Following the price surges commonly associated with liberalization, all but Mongolia quickly brought inflation down into the intermediate range, and by 1995 Albania, Cambodia, and Vietnam had rates close to or below 10 percent.

Inflation performance has been most mixed, however, in non-CFA Africa. In a handful of cases—The Gambia, Guinea, Lesotho, Mauritania, and Uganda—a good deal has been accomplished in recent years. These countries each had average inflation rates of below 10 percent during 1993–95—compared with rates during the late 1980s that averaged 37 percent, and exceeded 100 percent in Uganda. The region as a whole, however, saw no downward trend in inflation during the 10–15 years to 1995. Indeed, the average rate rose during the first half of the 1990s, to over 20 percent by 1995. Several countries witnessed sharp declines in inflation in 1996, although it is too early to say how much of this drop reflects the generally favorable supply conditions and how much a durable strengthening of macroeconomic policies.

How does this experience compare with what was envisaged in SAF/ESAF-supported programs? Programs typically aimed to bring inflation down to the single-digit range over the three-year arrangement period, with the pace determined to a large extent by the initial level of inflation (Figure 7). In the event, programs had greatest success in tackling high and very high inflations (Figure 8). For the most part, however, the intended transition to low inflation was not achieved. Setting aside the CFA franc zone cases, fewer than two programs in five had single-digit inflation by the third program year. This is not much more than the proportion (30 percent of programs) that already had single-digit inflation in the year before the program started. Thus, almost as many countries moved up from the low to the intermediate range during programs as achieved the reverse.

Figure 7.Inflation Targets, by Degree of Initial Inflation1

(Group medians, excluding CFA countries)

Source: IMF staff estimates.

1Targets set at the beginning of three-year SAF/ESAF-supported programs. Year t is the first program year.

Figure 8.Inflation Target and Outturns1

(Group medians, in percent; excluding CFA countries)

Source: IMF staff estimates.

1Figures in parentheses above bars refer to the number of programs. Year t is the first program year.

In the majority of those starting with initial inflation in the intermediate range (26 programs, or half of all non-CFA cases), less than one-half of the decline in inflation targeted for the first year was achieved. The picture by the third year was only somewhat better, and there is no systematic evidence of further gains made beyond the program period. Moreover, although inflation rates did tend to decline during programs, it was typically from a peak following several years of rising inflation (see Figure 8): hence the earlier observation that many countries made no perceptible progress in reducing inflation over the longer term. Section IV, considers why many ESAF users have remained stuck in the intermediate inflation range (Table 2), and what this implies for program design.

Table 2.Progress on Inflation Since the Pre-SAF/ESAF Period1(In percent)
 Average Inflation During Three Years Prior to First SAF/ESAF ProgramAverage Inflation, 1993–95
CFA franc zone Africa, median1.416.52
Other ESAF users  
    “Stronger performers”3  
        Albania170.417.6
        Bangladesh10.24.7
        Bolivia3,471.210.1
        Gambia, The34.61.4
        Guinea71.84.2
        Guyana63.610.6
        Lesotho14.48.0
        Mauritania8.84.4
        Nepal11.08.2
        Sierra Leone70.324.0
        Sri Lanka6.98.7
        Uganda155.38.3
    “Weaker performers”  
        Burundi8.814.3
        Ghana19.644.2
        Honduras23.022.9
        Kenya7.422.7
        Lao People’s Democratic Republic18.213.8
        Madagascar11.635.6
        Malawi19.453.1
        Mongolia177.0100.8
        Mozambique32.756.0
        Pakistan5.411.4
        Tanzania33.926.9
        Zimbabwe20.221.9

Source: IMF staff estimates.

Excluding countries that did not begin their first SAF/ESAF-supported program until 1994 (Cambodia, Cote d’lvoire, the Kyrgyz Republic, Nicaragua, and Vietnam).

This figure reflects the CFA franc devaluation in early 1994; the 1995 median was 6.4 percent.

Countries that achieved average single-digit inflation during 1993–95, or (in the case of Albania, Bolivia, Guyana, and Sierra Leone) that had brought inflation down very sharply from high preprogram levels.

Source: IMF staff estimates.

Excluding countries that did not begin their first SAF/ESAF-supported program until 1994 (Cambodia, Cote d’lvoire, the Kyrgyz Republic, Nicaragua, and Vietnam).

This figure reflects the CFA franc devaluation in early 1994; the 1995 median was 6.4 percent.

Countries that achieved average single-digit inflation during 1993–95, or (in the case of Albania, Bolivia, Guyana, and Sierra Leone) that had brought inflation down very sharply from high preprogram levels.

Structural Reform

At the time of the last review, looking back over the first six years of experience with SAF/ESAF-supported programs, it was concluded that progress in structural economic reform among the countries involved had been profound but uneven. Important gains had been achieved in the areas of exchange and trade liberalization, price-setting and marketing, and the freeing of interest rates. But little had been accomplished in other areas, notably in the restructuring and reform of public enterprises and banking systems.

Four years on, the assessment must be similarly qualified. On the positive side, reforms continued to move ahead on all fronts and in all countries, to varying degrees. Equally important, there are few instances of substantial policy reversals. Thus, although the process has been long and drawn out in many cases, the countries concerned now have economies that are significantly more market driven and flexible than they were 10 years ago. There are also signs that the pace of structural reform has picked up in recent years, especially in Africa (Figures 9 and 10). It remains the case, however, that reforms affecting bank soundness and public enterprises lagged far behind other areas and fell short of program ambitions: these are also among the areas in which African economies compare least favorably with other ESAF countries. (The judgments in this section regarding the extent and pace of structural reform are based primarily on “policy indices,” the construction of which is summarized in Box 4.)

Figure 9.Status of Structural Reform in ESAF Countries

(Indices of structural reform)

Source: Dicks-Mireaux and others (forthcoming).

1Higher values of the indices denote lower distortions (“better” policies).

Figure 10.The Pace of Structural Reform

(Change in indices of structural reform)1

Source: Dicks Mireaux and others (forthcoming).

1Higher values of the indices denote greater improvement in structural policies or decline in distortions.

Box 4.Indices of Structural Reform

The five indices of structural reform shown in Figures 9 and 10 are each based on a number of criteria:

  • Pricing and marketing. The extent of price controls and state intervention in marketing of fertilizers, petroleum products, major foodstuffs, and export products.

  • Exchange system. The level of the premium in the parallel exchange market and the extent of surrender requirements and nonmarket foreign exchange allocation.

  • Trade system. The coverage of quantitative restrictions and the level and dispersion of tariffs.

  • Financial sector. The presence or otherwise of controls on credit or interest rates; real interest rates and interest rate spreads that are above or below certain thresholds; quantitative measures of financial intermediation, private sector access to credit, and financial deepening; and the existence or otherwise of a diversified banking system and markets for interbank funds, government or central bank securities, and stocks.

  • Public enterprise sector. Measures of public enterprises’ share in total output and total credit, of their overall financial balance, and of net financial flows from government.

The detailed methodology for scoring against and weighting these criteria is explained in Dicks-Mireaux and others (forthcoming).

The deregulation of pricing and marketing was among the earliest of structural reforms to be implemented in SAF/ESAF-supported programs (and some countries had made significant advances in prior adjustment programs). Major successes were achieved early on, particularly in the important markets for agricultural products. Progress since then has continued; by 1995 instances of the most extensive intervention had been eliminated, although one-third of ESAF countries still had controls on a few staple foodstuffs, transportation, utilities, petroleum products, and some construction materials. There has also been a widespread shift to more rational mechanisms for setting prices that remain subject to controls, with petroleum prices now commonly linked to world prices, and utility rates typically set on a cost recovery or long-run marginal cost basis. One important area where the pace of reform accelerated in recent years is in the pricing and marketing of export products, which were heavily controlled in almost half of all nontransition ESAF countries in the early 1980s and which are now universally subject, at most, to light or moderate intervention. In general, with a few exceptions, price reform is an area where Africa has outpaced other ESAF countries since the early 1980s.

Rapid progress has also been commonplace in the reform of ESAF countries’ exchange systems. Already by 1990, extensive use of surrender requirements and controls on the allocation of foreign exchange was confined to only four of the nontransition ESAF countries (Bangladesh, Mauritania, Tanzania, and Zimbabwe).16 By 1995 such distortions had been eliminated in all nontransition countries except Madagascar, and currently all except Burundi, Lesotho, Mauritania, and Mozambique have accepted the obligations of Article VIII of the Fund’s Articles of Agreement.17 Foreign exchange markets in many countries remain subject to restrictions on capital transactions, however, as indicated by the persistence of parallel market premiums exceeding 10 percent in two-thirds of Asian and non-CFA African ESAF countries in 1995.

The easing of trade barriers was somewhat slower in coming, beginning typically in the late 1980s, but accelerating in the early 1990s. Non-CFA African countries had the most severe initial distortions in this area, but subsequently made faster progress than any other region, and by 1995 almost all had put in place regimes that were in many respects less protective than the average Asian ESAF user.18 In the CFA countries, the pace of trade reform benefited from the impetus provided by the 1994 devaluation of the CFA franc and by new regional initiatives aimed at expanding trade links in that part of the world. Overall, significant progress was achieved in curtailing quantitative restrictions: the number of countries making extensive use of such highly distorting instruments declined from 14 in the early 1980s to 7 by 1990 and zero by 1995. The rationalization and reduction of tariff rates typically proceeded more slowly. The pace picked up in the early 1990s with important reforms in a number of countries (Benin, Ghana, Guinea, Honduras, Kenya, and Togo), although many countries supplemented tariffs with other taxes, customs fees, and duties targeted at imports. Notwithstanding the generally encouraging trends, there is great scope for further gains in trade reform through tariff reductions: as of 1995, trade regimes remained “moderately restrictive” in half of all nontransition ESAF countries.19

A more sobering impression emerges from the experience with public enterprise reform. This has been an important element in SAF/ESAF-supported programs, since the losses imposed by public enterprises on the state budget and the banking system have been of macroeconomic proportions. Although in some countries the planned measures were piecemeal—aimed at selected problem enterprises—as many as two-thirds of the countries under review developed comprehensive public enterprise reform plans, typically in collaboration with the World Bank. The key elements of the strategy were as follows:

  • Hardening budget constraints on public enterprises, by limiting their recourse to capital transfers, direct subsidies, and net lending from government and to credit from the banking system.

  • Creating the conditions for more management accountability in public enterprises, either by entering into “performance contracts” with existing managers or by contracting out management responsibilities to the private sector.

  • Enhancing competition to encourage efficiency gains in public enterprises and to pave the way for privatization, through the lifting of restrictive regulations on pricing and investment, and removal of de jure barriers to entry.

  • Privatization of selected (usually small and medium-sized) enterprises; divestment plans typically excluded “strategic” enterprises—those in utilities, telecommunications, transportation, heavy industry, and agricultural processing and marketing—which were usually targeted instead for restructuring under state control.

  • Building social and political consensus for the reforms, including through the process of negotiating policy framework papers with World Bank and IMF staff (and dialogue during staff visits more generally) and by provision of social safety nets.20

Overall, the implementation of public enterprise reform has been slow, uneven, and subject to extensive slippages. The size and financial burden of public enterprises (according to the limited available data) have been reduced in roughly half of the nontransition ESAF countries since the early 1980s, and the number of countries with a severe burden in this respect has fallen sharply. However, despite the finding of the last review that this is an area where greater efforts were needed, only in non-CFA Africa is there any evidence of an accelerated pace of reform in the 1990s. Even in non-CFA Africa, progress has been variable: based on available indicators, half of the countries appear to have made little or no progress during the past 10 years.

Poor results can be traced to the fact that the biggest problems—both from a financial and a resource allocation perspective—typically reside in the strategic sectors, where the standard approach has had least effect. Many countries (especially the transition economies) have made significant progress in privatizing small and medium-sized enterprises, but few (Bolivia and Ghana are exceptions) have divested large enterprises in the strategic sectors. Meanwhile, attempts at restructuring the large enterprises have not delivered the desired results. Managers do not appear to have changed their ways in response to the introduction of performance contracts, which have often been poorly designed. And governments have tended to replace direct budgetary support with quasi-fiscal assistance such as tax concessions and loan guarantees, thereby reducing pressure on the enterprises to reform. It is encouraging that recognition of these weaknesses appears to be growing, and recent programs have tended to put greater emphasis on privatization of strategic enterprises, including through leasing arrangements.

Reforms of the financial system in SAF/ESAF-supported programs have had three broad and complementary aims: to move from state to market allocation of credit; to substitute indirect for direct instruments of monetary control; and to strengthen banks’ financial positions on a durable basis. In the event, achievements have been mixed, with least progress in what is perhaps ultimately the most important aspect: bank soundness. Reforms to liberalize interest rates were enacted early and are now widespread, encompassing two-thirds of nontransition countries in 1995 (with remaining controls confined largely to Africa). As a result, the prevalence of negative real interest rates has diminished sharply outside non-CFA Africa. The development of financial markets—for interbank funds, government securities, and stocks—and the transition to indirect instruments of monetary control have also proceeded well, beginning in the late 1980s (Asian countries made particularly strong and rapid progress here). The number of countries with formal quantitative controls on credit dropped from almost half of all nontransition countries in 1990, and all but five countries in the early 1980s, to only seven by 1995.

Weaknesses in the banking systems in ESAF countries, however, remain pervasive. Though data are extremely scarce, the extent of balance sheet problems has become increasingly apparent over the past decade as banks’ principal clients, the public enterprises, suffered from the terms of trade declines of the late 1980s and the squeezing of financial aid from state budgets. Banking (liquidity) crises have been avoided in most countries, probably owing to the perception of implicit government guarantees, but banks’ ability to mobilize and allocate resources efficiently has been severely impaired in cases where loan portfolios are fundamentally unsound. At the root of these difficulties has been—in addition to the continuing financial problems of borrowers in the public enterprise sector—a combination of governmental interference in bank operations, weak managers and management systems, and poor regulatory and supervisory frameworks.

Most countries have adopted multiyear bank restructuring plans, in the context of ESAF-supported programs, aimed at addressing inadequacies in each of these areas. The dominant approach has involved government assumption of problem loans and recapitalization, some cost-cutting and downsizing of operations, the introduction in state banks of performance or management contracts to improve decision making, and the strengthening of supervision. Privatization has been limited, as has resort to bank liquidations (except in some CFA countries). Although many of these programs are ongoing, or are too recent to allow an assessment, the results of those in the vanguard have not been encouraging. The fiscal costs, where they are known at all, have been large—on the order of 15–25 percent of GDP in some cases. Yet progress has been slow and fitful, and it has rarely been possible to point to significant improvements in the functioning of banks. Reforms appear to have been held back by a dearth of local banking skills, a failure to expand competition in the banking sector, and an unwillingness of governments to stop pressuring banks to lend to uncredit-worthy public enterprises.

There has been increasing recognition that an important element in the move to market-based economies is the strengthening of property rights and other aspects of good governance. Legal systems and practices are needed to define clearly and enforce property rights, to ensure respect for contracts, and to deter corruption and abuse of authority. ESAF-supported programs have made a positive contribution in this regard, both directly (promoting reform of land tenure systems and more liberal and transparent foreign investment codes, for instance) and indirectly (by reducing the extent of the distortions and regulations that feed corruption). Assessing overall progress in this area is particularly difficult, however. Dicks-Mireaux and others (forthcoming) report some evidence, based on ratings by commercial agencies according to various “economic security” criteria.21 These suggest a mixed picture among ESAF countries: property rights appear to have improved in recent years (comparing the early 1990s with the late 1980s) in two-thirds of countries, but deteriorated in one-third. The improvements seem to have been concentrated in Asian and Western Hemisphere countries, although some countries in Africa (Ghana, Tanzania, and Uganda) have also made considerable progress in this area.

Openness

This survey of evolving policies tells a story of qualified progress over the past decade among countries pursuing SAF/ESAF-supported programs. There were consistent but often hesitant advances in most policy areas, disappointments in some respects and in some countries, but signs of a general strengthening of the adjustment effort in the early 1990s. Progress in increasing the outward orientation of ESAF countries’ economies—an important strategic objective—was similarly modest, but with signs of an improving trend in recent years.

Liberalization of exchange and trade regimes, nominal depreciation, and fiscal adjustment were reflected in a steady and sizable depreciation of the real exchange rate across all regions from 1985 onward (Figure 11). Real depreciation was particularly sharp in the Western Hemisphere and least pronounced in CFA Africa until the devaluation of the CFA franc at the beginning of 1994. Notwithstanding substantial cross-country variation, parallel market premiums on the whole also declined markedly over this period as exchange regimes were liberalized. Regional differences also narrowed significantly, reflecting marked progress in those regions—non-CFA Africa and Western Hemisphere—that had the most distorted exchange regimes in the early 1980s, and comparatively little progress in Asia.22

Figure 11.Share of Trade in GDP and Exchange Rates

(Sample medians)

Sources: International Monetary Fund, World Economic Outlook; and IMF staff estimates.

1Calculated as the sum of exports and imports in percent of GDP.

2Excluding Guyana.

These developments contributed to a sizable expansion from the mid-1980s onward in the degree of openness—as measured by the level of foreign trade in relation to GDP—in non-CFA Africa and the Western Hemisphere. In Asia, where the trade ratio is smaller owing to the much larger size of these countries, the increase has been less pronounced, as overall output grew in line with relatively rapid growth in trade.23 In CFA Africa, foreign trade flows picked up following the devaluation in 1994.

A somewhat different regional picture, however, emerges from an analysis of trade volumes. In all regions, with the striking exception of Asia, export volumes had been stagnant or declining during the early 1980s and picked up only modestly in the second half of the 1980s (Figure 12). On average, countries in Africa and the Western Hemisphere incurred major losses in export market share throughout the 1980s. These losses were stemmed in the early 1990s, however, as export volume growth in the two regions accelerated to over 7 percent, and significant gains in market share were recorded by a number of countries (including Ghana, Kenya, and Tanzania). By contrast, export market share rose steadily and markedly in Asia from 1985 to 1995.

Figure 12.Trends in External Trade

(Sample medians)

Sources: International Monetary Fund, World Economic Outlook; and IMF staff estimates.

1Difference between export volume growth and growth in partner countries’ real import volumes (as defined in World Economic Outlook), compounded from 1980.

Stronger export growth and increased resource transfers allowed import volumes to rebound in Africa in the mid- to late 1980s, following a period of severe compression. In Asia and the Western Hemisphere, import growth was subdued or declining until the early 1990s, when it rose sharply as a counterpart to booming exports in these regions.

Economic Growth

This broad picture is closely mirrored in ESAF countries’ growth performance over time. From the trough of the early 1980s, when real per capita GDP declined at an average of almost 1½ percent a year in nontransition ESAF countries, growth rose to a modest positive rate of around 0.3 percent a year in the early 1990s (Figure 13).24 During 1994–95—aided by a sharp rise in world demand, improved terms of trade, and the realignment of the CFA franc—average per capita growth exceeded 1 percent, and it remained strong in 1996.

Figure 13.Real Per Capita GDP Growth

(In percent a year)

Source: IMF staff estimates.

1As defined in International Monetary Fund, World Economic Outlook, excluding countries classified as “high income” by the World Bank.

The improving trend also helped to narrow the gap between growth in ESAF users and other developing countries. In the early 1980s, annual average per capita growth in non-ESAF developing countries exceeded that in nontransition ESAF countries by around 2.2 percentage points: this differential had been more than halved, to 0.9 point, by 1991–95. The turnaround in growth typically began remarkably quickly as countries embarked on their first SAF/ESAF-supported programs (see Figure 13, bottom panel). Saving and investment rates in ESAF countries showed some measure of convergence too with respect to other developing countries, although ESAF users continue to have much lower saving rates than other countries (Figure 14).

Figure 14.Growth, Saving, and Investment

(Period averages)

Sources: International Monetary Fund, World Economic Outlook; and IMF staff estimates.

1As defined in Wbr/d Economic Outlook, excluding countries classified as “high income” by the World Bank.

2Excluding Guyana.

Important as these gains are, there are other perspectives that suggest a less sanguine assessment. First, and most obviously, since ESAF countries’ output expanded less rapidly than in the rest of the developing world over the past decade, their average level of per capita income (which was only about one-quarter the average in other developing countries in the early 1980s) fell further behind. Other development indicators depict an improvement in living standards in ESAF countries since the early 1980s but, again, without narrowing the gap vis-avis the other countries (Figure 15).

Figure 15.Social Indicators of Development

(Period averages)

Source: World Bank Social Indicators Database.

1As defined in International Monetary Fund, World Economic Outlook, excluding ESAF countries and countries classified as “high income” by the World Bank

Second, not all countries or regions within the ESAF group shared in the recovery to the same extent. The turnaround in economic growth was most pronounced among the four Western Hemisphere countries, especially Bolivia and Guyana. By contrast, ESAF users in Africa—the poorest in the sample—saw, on average, a smaller degree of convergence toward the developing country mean (see Figure 14). The averages, however, even within Africa, mask a large dispersion—one that widened significantly between the early 1980s and early 1990s. Of the 22 African ESAF countries, as many as 7—Equatorial Guinea, Ghana, Guinea, Lesotho, Mozambique, Tanzania, and Uganda—had real per capita GDP growth that exceeded the average of all developing countries over the 10 years ending in 1995. In some, the excess was by a wide margin.25

This prompts the question of what motivated the recovery in growth among ESAF users over the past 10 years. How much was due to good fortune, and how much to good policies? In Coorey and Kochhar (forthcoming), the comparative growth experience of ESAF and other low- and middle-income developing countries is examined using a standard empirical model based on the now extensive literature on this subject. This study reveals, importantly, that the behavior of growth in ESAF countries—its responsiveness to policies, terms of trade shocks, differences in social and demographic factors, and so on—does not differ fundamentally from that in other developing economies: ESAF countries are not “special” in this respect.26

The estimated relationships are subject to sizable margins of error and, as is common with this kind of analysis, they leave a large portion of the variation in growth over time and across countries unexplained.

Nevertheless, they suggest that about half of the rise in per capita GDP growth in the nontransition ESAF countries between the early 1980s and the early 1990s may be attributed to strengthened policies. Structural reform and financial consolidation—reduced fiscal deficits and, in a few countries, lower inflation—both contributed to this result (Figure 16). When compared with other developing countries over the same period, ESAF countries’ generally more successful efforts at macroeconomic stabilization were an important element behind the convergence in per capita growth rates between the two groups. Human capital accumulation (proxied by increases in life expectancy) and reduced population growth also figured prominently in the gains in growth among developing countries since the early 1980s, in ESAF and non-ESAF countries alike.

Figure 16.Explaining Increases in Growth Since the Early 1980s

(Change in annual average real capita GDP growth between 1981–85 and 1991–95)

Source: Coorey and Kochhar (forthcoming).

1Estimated contributions to changes in growth rates are derived from an econometric equation relating per capita GDP growth to a range of determinants estimated on pooled annual data from 1981 to 1995 for 84 low- and middle-income developing countries. In this figure, “macroeconomic policies” combine the effects of changes in inflation and the budget balance; “structural policies” combine openness to foreign trade, size of government, and economic security; “shocks” include changes in the terms of trade and dummies for weather and war or civil unrest. The unshaded portion in each bar is the portion of the change in growth that the estimated equation does not explain. The total change in growth between 1981–85 and 1991–95 is equal to the difference between the height of the bar above and below the zero axis.

2The 84 low- and middle-income developing countries, excluding ESAF countries.

The empirical model sheds some light on why average growth among ESAF users in Africa in particular has continued to lag behind that in other countries, notwithstanding some narrowing of the gap over time. Continuing weaknesses in structural policies are part of the story, as is apparent from Figure 16. However, using non-ESAF developing countries as a benchmark for comparison, it appears that by the early 1990s, the dominant factors holding back relative growth performance in Africa were more rapid population growth and inadequate investment in human capital (Table 3).27 These impediments more than offset the growth advantage that African ESAF countries are estimated to have solely by virtue of their lower initial level of development (labeled “catch-up” in Table 3). These findings, which are consistent with those of other studies, highlight the importance of policies aimed at raising health and education standards in these countries. At the same time, given that the impact of such policies will be felt only gradually, this analysis brings into stark relief the challenge facing African countries if they are to narrow the gap in per capita income levels vis-a-vis the rest of the world.

Table 3.Per Capita GDP Growth in 1991–95: Differentials Relative to NonESAF Developing Countries1(Percentage points, annual averages)
 African ESAF CountriesOther ESAF Countries
Differential in real per  
       capita GDP growth–0.61.8
    Of which, due to:2  
       Macroeconomic policies0.2–0.2
       Structural policies–0.40.0
       Population growth–0.8–0.2
       Human capital–1.2–0.1
       “Catch–up”1.50.7
       Shocks0.10.2
       Unexplained0.01.3

Source: Coorey and Kochhar (forthcoming).

The sample of 84 low- and middle-income developing countries used in the growth regression, excluding ESAF countries.

See Figure 16, footnote I, for an explanation of these estimates. The “catch-up” term represents the estimated amount by which growth in the countries concerned would exceed that in non-ESAF developing countries due solely to lower initial income levels, if all other factors were equal.

Source: Coorey and Kochhar (forthcoming).

The sample of 84 low- and middle-income developing countries used in the growth regression, excluding ESAF countries.

See Figure 16, footnote I, for an explanation of these estimates. The “catch-up” term represents the estimated amount by which growth in the countries concerned would exceed that in non-ESAF developing countries due solely to lower initial income levels, if all other factors were equal.

External Viability

The relatively poor response of saving rates to rising growth and improved policies in ESAF countries has meant that current account deficits were barely reduced, on average, over the past decade (Figure 17). Consequently, the stock of ESAF users’ external debt—about 80 percent of which is public or publicly guaranteed—almost doubled between 1985 and 1995.28 By comparison with prior history, a much larger portion of this debt was provided on concessional terms by multilateral creditors, while private creditors substantially reduced their exposure to ESAF countries (Table 4).

Figure 17.Balance of Payments Developments

(Sample medians)

Source: IMF staff estimates.

1Excluding Guyana.

Table 4.External Debt: Some Long-Run Comparisons(In percent unless otherwise indicated)
 ESAF Users1Low-Income CountriesAll Developing Countries2
 198519951985199519851995
Total external debt      
    In billions of U.S. dollars81.6161.0198.3534.81,028.32,065.7
    In percent of GNP71.187.824.738.734.039.6
Share of public and publicly guaranteed debt77.182.274.781.971.070.1
    Of which, shares held by:      
       Bilateral creditors48.843.644.042.928.839.1
       Multilateral (excluding IMF)20.244.117.327.89.016.1
       IMF10.15.89.93.35.34.2
       Private creditors20.96.528.826.056.940.6
Concessional debt as share of total347.265.939.442.016.621.1
Average grant element in new borrowing450.061.729.929.615.120.2

Sources: World Bank, Debtor Reporting System; and IMF staff calculations.

Excluding transition economies.

World Bank definition, including ESAF countries.

Loans with an original grant element of at least 25 percent.

Grant element equals commitment value minus discounted present value of contractual debt service; expressed in percent of amount committed.

Sources: World Bank, Debtor Reporting System; and IMF staff calculations.

Excluding transition economies.

World Bank definition, including ESAF countries.

Loans with an original grant element of at least 25 percent.

Grant element equals commitment value minus discounted present value of contractual debt service; expressed in percent of amount committed.

Data on overall external financing flows, although sketchy, suggest that ESAF countries in non-CFA Africa and the Western Hemisphere were the principal beneficiaries of official flows—both transfers and loans—over the past 10 years (Table 5). Relative to the size of their economies, total financing flows to countries in these regions increased markedly between the early 1980s and early 1990s, with a rising proportion in the form of official transfers. By contrast, Asian and CFA countries obtained stable or declining amounts of external financing (relative to their GDP) and relied much less heavily than the other regions on debt relief and arrears as a source of funds. Except in Asia and the transition economies, private capital flows, although rising in recent years, remained small in relation to total financing needs. ESAF users in all regions achieved a substantial increase in official reserve coverage, particularly during the early 1990s (Figure 17).

Table 5.Net External Flows to ESAF Countries(Annual averages; in percent of GDP)
 1981–851986–901991–95
Non-CFA Africa   
    Official transfers5.07.710.2
    Net flows on long-term debt14.75.95.0
    Debt relief and arrears22.74.05.5
    Net foreign investment32.02.711.2
    Net credit from IMF0.40.10.2
CFA Africa4   
    Official transfers7.06.96.3
    Net flows on long-term debt16.54.32.8
    Debt relief and arrears22.94.24.4
    Net foreign investment33.22.61.5
    Net credit from IMF0.9-0.20.3
Asia (nontransition)   
    Official transfers3.12.31.7
    Net flows on long-term debt13.73.62.5
    Debt relief and arrears20.10.00.0
    Net foreign investment32.72.67.4
    Net credit from IMF0.20.00.1
Western Hemisphere5   
    Official transfers2.06.08.1
    Net flows on long-term debt16.914.15.0
    Debt relief and arrears27.59.819.2
    Net foreign investment31.93.913.0
    Net credit from IMF0.20.10.5
Transition economies   
    Official transfers  8.6
    Net flows on long-term debt1  3.6
    Debt relief and arrears2  1.3
    Net foreign investment3  19.4
    Net credit from IMF  0.9

Sources: IMF staff estimates; and World Bank, Debtor Reporting System.

Excluding borrowing from the IMF.

Rescheduling, change in arrears and debt cancellation.

Net foreign direct investment and portfolio equity flows.

Excluding Equatorial Guinea.

Excluding Guyana.

Sources: IMF staff estimates; and World Bank, Debtor Reporting System.

Excluding borrowing from the IMF.

Rescheduling, change in arrears and debt cancellation.

Net foreign direct investment and portfolio equity flows.

Excluding Equatorial Guinea.

Excluding Guyana.

These tendencies were to a large extent already apparent at the time of the previous ESAF review. That review concluded that only about half of the then 19 ESAF users had succeeded in making progress toward external viability (see Box 5 on definitional issues), although almost all had halted the trend deterioration in their external debt situations. In Tsikata (forthcoming), this analysis is brought up to date and extended to the now larger sample of countries. Possible factors underlying relative progress across countries are also considered, albeit in rather broad terms, given that this will be the subject of a detailed study in the external evaluation of the ESAF (see above).

As in the last review, the present study gauges progress toward external viability primarily on the basis of indicators of the debt burden and the degree of reliance on exceptional financing, with some reference also to indicators of “external vulnerability.” However, the emphasis here is shifted away from measures based on debt stocks. Nominal debt stock ratios give a misleading picture when average repayment terms become increasingly concessional, as they have done for ESAF countries since the mid-1980s (see Table 4); and historic time series for debt in present value terms are not available. Instead, two measures of the debt-service burden are considered—specifically, the ratio to exports (an indicator of the “foreign exchange” burden of debt) and the ratio to GDP (an indicator of the “internal transfer” burden).29

In relation to exports of goods and services, scheduled debt service has been on a fairly consistent downward trend for the average nontransition ESAF country since the mid-1980s, from a median of 40–45 percent then, to about 28 percent in 1995 (Figure 18). For the ESAF users classified as heavily indebted poor countries (HIPCs), the decline has been similar but at a level about 5 points higher.30 There is, however, no discernible trend over the long run in measures of the “internal” burden of foreign debt: average scheduled debt service stayed within ranges of 4–5 percent of GDP (8–9 percent for HIPCs) for most of the last 10 years. This disparity between the external and internal perspectives on the debt burden is a reflection of the marked rise in the share of exports in ESAF countries’ GDP.

Figure 18.Alternative Measures of the Debt-Servide Burden

(Sample medians)

Source: IMF staff estimates.

1Excluding transition economies, The Gambia, Tanzania, and Guyana (bottom panels only).

Focusing on individual country experiences since the pre-SAF/ESAF period, out of 27 countries where data permit an assessment, 12 can be said to have made “clear” progress toward external viability—defined as an improvement (or maintenance at low levels) in all three of the principal indicators: the ratios of debt service to exports and GDP and the ratio of exceptional financing to exports (see Table 6 for country coverage and exclusions). In another 10 countries, “limited” progress was achieved, meaning that no more than one of the indicators showed a deterioration since the pre-SAF/ESAF period. In all but 2 of these 10 cases, the ratios of debt service to exports and GDP both improved, and only reliance on exceptional financing failed to move in the desired direction (see Table 6).

Table 6.Indicators of Progress Toward External Viability1(In percent unless otherwise indicated)
 Scheduled Debt Service in Relation toExceptional  
 Exports2GDPFinancing Ratio4Export Concentration5Reserve Coverage6
 Pre-SAF/ESAF31993–95Pre-SAF/ESAF31993–95Pre-SAF/ESAF31993–95FellUnchangedRoseRoseUnchangedFell
Clear progress7           
    Bangladesh30.312.82.11.30.00.0    
    Benin48.630.16.04.640.713.0    
    Bolivia80.039.412.27.646.414.9    
    Burkina Faso29.021.93.22.811.22.3    
    Gambia, The44.925.77.24.538.0–0.3    
    Lesotho41.014.93.52.80.00.0    
    Malawi47.527.813.610.85.5–2.4    
    Mauritania34.532.717.515.113.37.6    
    Nepal6.710.70.71.60.00.0    
    Pakistan35.827.64.54.50.40.0    
    Sri Lanka21.312.55.54.30.00.0    
    Uganda67.838.54.84.25.20.9    
    Mean40.624.56.75.413.43.0      
Limited progress7            
    Burundi49.934.34.94.00.02.3     
    Equatorial Guinea59.635.218.816.3–34.128.4    
    Ghana45.327.15.06.4–14.3–0.7   
    Guinea32.929.69.76.23.614.7    
    Guyana96.827.7  4.58.0    
    Mali42.037.47.57.420.320.7    
    Mozambique291.7136.413.333.1278.2197.1    
    Niger44.732.79.64.914.923.0    
    Senegal24.722.97.26.111.016.4    
    Togo44.539.614.89.013.334.3    
    Mean73.242.310.110.429.734.4      
No progress7            
    Honduras37.638.111.013.113.57.3    
    Kenya25.729.25.68.80.01.0    
    Madagascar79.363.711.112.747.551.3    
    Sierra Leone51.659.05.59.321.339.8    
    Zimbabwe20.724.66.39.50.00.0    
    Mean43.042.97.310.220.017.8      

Source: IMF staff estimates.

Excluding transition economies. Cote d’lvoire and Nicaragua are excluded because their ESAF programs had been in place for less than three years at end-1995, and Tanzania because of severe deficiencies in official export data.

Exports of goods and nonfactor services. For Lesotho, the denominator includes workers’ remittances because of the dominance of this item in the country’s foreign exchange earnings.

Annual average for three years preceding first SAF/ESAF program.

The sum of net change in arrears, rescheduling, and debt cancellation, as a ratio to exports of goods and nonfactor services.

Change between 1985 and 1995 in share of total exports accounted for by the largest three export products.

Change between 1985 and 1995 in official reserves, in months of imports. The indications for individual CFA countries (Benin, Burkina Faso, Cote d’lvoire, Equatorial Guinea, Mali, Niger, Senegal, and Togo) are not as meaningful as for the other countries because of the pooling arrangements in the CFA.

Countries that made “clear progress” are those that showed improvement in all three indicators, or (in the case of Nepal) that maintained indicators at low levels. Countries that made “no progress” are those where at least two indicators worsened. Countries with a mixed record are designated “limited progress.”

Source: IMF staff estimates.

Excluding transition economies. Cote d’lvoire and Nicaragua are excluded because their ESAF programs had been in place for less than three years at end-1995, and Tanzania because of severe deficiencies in official export data.

Exports of goods and nonfactor services. For Lesotho, the denominator includes workers’ remittances because of the dominance of this item in the country’s foreign exchange earnings.

Annual average for three years preceding first SAF/ESAF program.

The sum of net change in arrears, rescheduling, and debt cancellation, as a ratio to exports of goods and nonfactor services.

Change between 1985 and 1995 in share of total exports accounted for by the largest three export products.

Change between 1985 and 1995 in official reserves, in months of imports. The indications for individual CFA countries (Benin, Burkina Faso, Cote d’lvoire, Equatorial Guinea, Mali, Niger, Senegal, and Togo) are not as meaningful as for the other countries because of the pooling arrangements in the CFA.

Countries that made “clear progress” are those that showed improvement in all three indicators, or (in the case of Nepal) that maintained indicators at low levels. Countries that made “no progress” are those where at least two indicators worsened. Countries with a mixed record are designated “limited progress.”

Thus, 22 out of 27 countries appeared to have made some measure of progress toward external viability. Bearing in mind that changes in methodology make comparisons difficult, this suggests some improvement on the findings of the last ESAF review, where only half of the countries were considered to have advanced in relation to the external objective. It remains true, however, that many of the countries that progressed continue to have heavy debt burdens: 13 out of the 22 had scheduled debt service in excess of 25 percent of exports in 1995. Looking at two measures of external vulnerability—export diversification and reserve coverage—13 of the 22 countries appear to have strengthened their position over the last 10 years, with neither indicator worsening and at least one improving (see Table 6).31

At the other end of the spectrum are five countries (Honduras, Kenya, Madagascar, Sierra Leone, and Zimbabwe) where no apparent progress was made toward external viability during the period under review.32 What explains the disappointing results in these cases, by comparison with the more successful ones? Several hypotheses were examined.

Box 5.Defining Progress Toward External Viability

At the time the ESAF was established, it was stipulated that members undertaking ESAF-supported programs should attain—or at least approach—a situation by the end of a three-year arrangement in which the external current account deficit can be financed by “normal” and “sustainable” capital inflows. Abnormal or exceptional financing for these purposes includes arrears accumulation, debt rescheduling or cancellation, and official balance of payments support. Sustainable inflows were defined as those that would not jeopardize the country’s external debt or debt-service position. Thus, declining reliance on exceptional financing and improving debt burden indicators would be taken as evidence of progress toward external viability. (One limitation of the exceptional financing indicator is that it treats all forms of such financing as equivalent: it fails in particular to distinguish between agreed debt relief and disorderly accumulation of arrears.)

Underlying the recent Initiative for heavily indebted poor countries (HIPCs) is the related concept of “debt sustainability.” This too requires a move toward orderly relations with creditors, in the sense of graduation from arrears and debt rescheduling as sources of finance. It also focuses on debt burden indicators, requiring that they be brought within or below specified manageable ranges. Unlike the notion of external viability, however, debt sustainability does not necessarily require that official balance of payments support be eliminated in the medium term, although program projections would be expected to show a reduced reliance on such support and an eventual exit from the need for ESAF arrangements.

Thus, progress toward external viability also in effect represents progress toward debt sustainability.

  • First, that those making more progress might have obtained more favorable borrowing terms. This is not supported by the data. The average grant element in new borrowing incurred since a country’s first SAF/ESAF-supported program was 63 percent for those that made “clear” progress toward external viability, 67 percent for countries achieving “limited” progress, and 54 percent for the “no” progress group. These differences are not statistically significant.

  • Second, that the most successful might have received higher official transfers. While the scale of official transfers has varied widely across countries, it appears that the groups making progress toward viability did receive more transfers on average than those that did not: in relation to the initial (pre-SAF/ESAF) debt stock, such transfers averaged 12 percent a year in the “clear” and “limited” progress groups, and 4½ percent a year in the “no” progress group. These differences may be linked to comparative policy performance.33

  • Third, that maintaining smaller current account deficits might have been a determining factor. In fact, the reverse appears to be true: measuring current account deficits in relation to initial-period debt stocks, the averages are 20 percent for the “clear” progress group, 16 percent for the “limited” progress cases, and 7 percent for the countries making “no” progress.

  • Fourth, that countries making most progress may be those achieving higher rates of economic growth, particularly in favor of exports, and hence more rapid expansion in the resource base available to support external debt. This appears to be the critical factor. Since the pre-SAF/ESAF period, real GDP and export volumes have grown at annual rates 3–6 percentage points faster, on average, among countries making “clear” progress toward viability than among “no” progress countries (Figure 19).

Figure 19.Growth of Export Volume and of Real GDP, and Change in Fiscal Balance During the SAF/ESAF Period1

Source: Tsikata(forthcoming).

1From the year preceding the first SAF/ESAF arrangement to 1995; numbers in parentheses in the bottom panel indicate the average number of years for each group.

2Excluding grants.

Thus, far from being conflicting objectives, it appears that strong (export-led) growth and greater progress toward external viability are complementary.34 This raises the question, however, of why debt management policies did not succeed in all countries in keeping debt accumulation in close correspondence with the evolving path of exports and output. If they had, even the slower-growing economies could have avoided a deterioration in their external debt situation. Did countries borrow more than anticipated in SAF/ESAF-supported programs? Were borrowing plans based on overoptimistic assumptions—for instance, regarding export growth? Or was it that large amounts of debt were accumulated outside the context of programs (that is, either between programs or when programs had broken down)?

The evidence suggests that the problem does not appear to be one of widespread overshooting of borrowing plans. Among a sample of those that had made “limited” or “no” progress toward external viability, formal program limits on external borrowing (which apply only to nonconcessional borrowing) were found to have been almost universally respected.35 Likewise, projections of overall official borrowing were met or undershot in more than three-quarters of the cases examined. Nor is there evidence of systematic overprediction of exports, if one controls for broad policy implementation: there is a slight (but statistically significant) pattern of overprediction on a full sample, but within the set of programs completed without interruption, exports were as likely to exceed as to fall short of target.36

What is less clear is that borrowing is curtailed significantly when policy implementation falters. The proportion of programs where official borrowing projections were undershot was no higher among interrupted programs than among programs that were completed without interruption. In a similar vein, the average rate of increase in the debt stock during program interruptions (at 7.7 percent a year) was slightly higher than in years when programs were on track (7.4 percent a year). Half of the 14 countries examined were borrowing at a faster pace during interruptions than during “on track” years.37 Thus, one likely explanation for lack of progress toward external viability, in cases where it occurred, is that export growth (and perhaps economic activity more generally) suffered more than the country’s access to external financing when policies weakened.

    Other Resources Citing This Publication