Rattan J. Bhatia
The economic and financial situation of many African countries began to deteriorate sharply after the mid-1970s. The weighted average annual rate of economic growth of the non-oil countries in sub-Saharan Africa (excluding South Africa) fell from 4 percent in 1974–76 to only 1 percent in 1981–83. Simultaneously, their combined current account deficit almost tripled from $4.5 billion in 1973 to $12.2 billion in 1981 before declining to $8.9 billion in 1983, with a further decline estimated for 1984. To finance their large and growing deficits, a number of these African countries resorted to foreign borrowing which, until the late 1970s, was facilitated by relatively easy access to international financial markets. As a result, the combined external debt of sub-Saharan African countries grew from less than $10 billion in 1973 to about $56 billion in 1984, and the debt-service ratio almost tripled to about 20 percent of exports of goods and services.
The causes underlying these unfavorable developments have been discussed extensively in recent years (see, for example, “Adjustment programs in Africa” by Justin B. Zulu and Saleh M. Nsouli, Finance & Development, March 1984). In brief, the first general shock emanated from the 1973–74 oil price increases that were followed by further sharp increases in 1979–80. The 1973–74 oil price increases were accompanied by a sharp but short-lived increase in the international prices of African export products. This followed an improvement in mineral and primary product prices during the late 1960s and early 1970s, prompting many African countries to embark on expansionary fiscal policies after 1973 and, in many cases, to protect domestic consumers from the increases in the prices of oil and other essential commodities through an extensive system of consumer subsidies. Unfortunately, these domestic policies were continued even when the countries experienced a collapse in the export prices of their products (coffee, cocoa, phosphates, iron ore, etc.) and had to finance the resulting external deficits through foreign borrowing. Most of this borrowing was denominated in dollars, and the substantial depreciation of the dollar in the mid-1970s prevented the adverse impact of their international borrowing from becoming immediately evident to the African countries. This encouraged the authorities to postpone adjustment and to continue financing their growing deficits with additional external borrowing.
Beginning in late 1979, when the effects of the world-wide recession began to emerge, the prospects for African countries took a turn for the worse. Their difficulties became further entrenched after the second oil price shock of 1979–80. An immediate result was a fall in export prices of commodities that further aggravated the problems of African exporters. Higher interest rates and the subsequent appreciation of the dollar added to the financial burden of servicing the external debt of African countries, thus compounding their difficulties.
It was after 1979 that the Fund’s involvement in Africa became both financially important and geographically widespread. The role of Fund-supported stabilization programs in the adjustment efforts of African countries can be examined broadly in two phases: 1980 to about mid-1983, and the period after mid-1983, the first phase beginning with the world recession, and the second including the full impact of the second oil price shock, and the emergence of the debt crisis.
Fund-supported programs: Phase I
As mentioned earlier, initially the sub-Saharan African countries had relied on external borrowing while postponing adjustment. However, as their debt reached important proportions ($36 billion at end-1979 compared with $10 billion at end-1973), external financing from commercial sources became increasingly more difficult to obtain and more expensive, and the increase in official aid was insufficient to fill the gap in the balance of payments. African countries, therefore, began to perceive the need to undertake adjustment efforts with technical and financial assistance from the Fund.
During 1980–81, 21 countries in sub-Saharan Africa established financial programs with the Fund. Of these 21, 6 were in the form of extended (three-year) arrangements and 15 were stand-by arrangements. The amounts agreed under these arrangements were $1.5 billion in 1980 and $3.9 billion in 1981, of which $463 million and $1.4 billion were disbursed respectively in the two years. Such large amounts of financial assistance were made possible by enlarging countries’ potential access to the Fund beyond the traditional maxima permitted under the standby or extended arrangement. The general presumption of these programs (a third of which were under the extended Fund facility) was that the balance of payments problems of the African countries were of a short-term nature and could be reversed by implementing suitable adjustment policies. Of course, in some cases, the problems were also seen as emerging from structural weaknesses that had hampered growth and hence prevented the attainment of a viable balance of payments. In these cases, the Fund was prepared to use its extended facility, which had been established earlier to address such problems.
The design of the programs in the earlier part of this first phase emphasized demand-management policies, though in the extended arrangements specific supply measures were also introduced. This was because the emerging payments problems were at least partly attributable to expansionary policies that had encouraged consumption and imports. The basic emphasis was on reducing budgetary deficits, identified as the main contributing expansionary factor. As the authorities had allowed imports to rise, the inflation rates were generally moderate and cost-distortions limited. Accordingly, in the initial phase, exchange rate adjustments did not appear to be required on comparative cost grounds. Of the 14 arrangements in force in 1980, 6 involved an exchange rate adjustment, while in 1981, exchange rate adjustment was included in 8 out of 19 cases. In the area of interest rates, time deposit rates were raised and made positive in real terms in only a few arrangements in 1980 and 1981. On the other hand, in all cases the programs aimed at reducing the budgetary deficit and established separate subceilings on bank credit to government.
Change in analysis, programs
In 1982, a major change took place in the approach to the nature of difficulties confronting sub-Saharan African countries. It was realized increasingly (especially after the impact of the 1980 oil price increase was fully felt) that the balance of payments problems of these-countries had become intractable, and were likely to be of longer duration than initially thought. Different solutions had to be examined. Strengthening this realization was the fact that the 1980–81 programs had been disappointing as regards their balance of payments results; in 1980, about 20 percent of the programs attained their external current account targets, while in 1981 40 percent reached the target. In 1980, of the 9 country programs with specific growth targets, only 3 attained or surpassed the growth target, while in 1981 only 4 out of 14 reached the target. The attainment of the inflation targets was somewhat better: 3 out of 10 countries in 1980 and 10 out of 15 in 1981.
Despite the improvement, this result was disappointing and was only partly attributable to exogenous circumstances. It was largely due to the inability (or unwillingness) of the national authorities to carry out the intended policies. For instance, the budgetary deficit target was respected in only 30 percent of the programs in 1980 and in 27 percent of the programs in 1981. The performance for overall credit expansion was better, conforming with the ceilings in 70 percent of the programs in 1980 and 60 percent in 1981; but this also implied that excessive credit to the government crowded out the often fledgling private sector, with an adverse impact on growth. Finally, the authorities found it difficult to implement structural policies, such as reform of state enterprises, tax reform, etc., agreed under extended Fund arrangements.
For all these reasons, the Fund’s approach to the design and implementation of adjustment programs changed in several important directions. Given the longer-term uncertainties and the difficulties that national governments had experienced in committing themselves to longer-term policies, one-year standby arrangements, rather than three-year extended arrangements, became the Fund’s preferred approach to the adjustment programs. These arrangements gave countries the flexibility to adjust policies to changing circumstances from year to year, as they progressed from one stand-by arrangement to another. Also, in light of the disappointing results of the initial years, the programs placed greater emphasis on prior implementation of policies that were regarded as crucial for the success of the program, before the Fund would approve a stand-by arrangement.
Further, demand management policies alone could not be regarded as sufficient to overcome the widening payments deficits resulting from the adverse shift in the terms of trade, and greater emphasis than before had to be placed on other measures. In general, while demand-management measures continued to be used to help reduce budgetary deficits, the new Fund-supported programs in Africa encompassed a wider set of policies to increase supply and exports. To improve monitoring during the course of the program, the new arrangements also included one or more reviews during each year. Finally, because the external deficits of individual countries had become large and the resources of the Fund had been depleted by the increased lending undertaken in the previous years, the Fund had to supplement its resources through borrowing. These resources were borrowed at market-related rates, increasing the average cost of the use of Fund resources by member countries.
The policies within Fund-supported programs became more comprehensive, and the adjustment period was extended to the medium term to allow countries to achieve viable balance of payments positions gradually. Despite the apparent contradiction, there was no clash between the emphasis on the medium-term approach and the shift away from extended arrangements to one-year stand-by arrangements. The medium-term approach fixed targets to be achieved over the agreed period, leaving policies to be decided and adjusted annually. Extended arrangements, however, tended to fix policies for the duration, making them more difficult to implement in a changing environment and requiring modifications to be negotiated.
On the demand-management side, the continuing emphasis on reducing budgetary deficits was reinforced by appropriate actions in individual areas of revenue and expenditures. Fund-supported programs paid special attention to policies on public employment and subsidies (both consumer and producer subsidies) not only because they constituted a large proportion of budgetary outlays and thus contributed to budget deficits, but also because they had a detrimental effect on domestic savings. On the supply side, a greater number of programs included specific actions and understandings on the exchange rate, price liberalization and adequate producer incentives, interest rates, and reform of public enterprises. But the approach continued to be tailored to the situation of each country. For example, contrary to popular belief that all Fund-supported programs include a change in the exchange rate, of the 20 stand-by arrangements in sub-Saharan Africa during 1982 and the first half of 1983, only 12 included exchange rate action. Greater emphasis on exchange rate policies, in countries that needed to adjust their currencies, was based on the realization that these rates had become seriously overvalued, making it difficult to put in place an appropriate incentive structure for production. Overvalued exchange rates prevented the needed improvement in the balance of payments by making exports uncompetitive and encouraging imports. Accelerating inflation had made real interest rates negative in many countries, thus discouraging savings and promoting a misallocation of resources. As a result higher interest rates were sought in many arrangements to achieve positive returns in real terms.
Experience with the new programs in 1983, although not satisfactory, was better than in the previous year. Growth targets were actually attained in about half of the programs, as were the targets relating to the current account deficit in the balance of payments. The budgetary situation showed an improvement over the previous year in a greater number of cases than in the earlier period, and credit targets were adhered to in over two thirds of the programs for overall credit, and about half for credit to government. However, as the content and requirements of the arrangements with the Fund became more comprehensive, the number of countries with which stand-by arrangements were concluded initially declined, from 15 countries in 1981 to 12 in 1982. Only three new countries concluded arrangements with the Fund in 1982, compared with seven in 1981.
Phase II: debt and capital flows
A second phase of stand-by arrangements followed the onset of the Mexican debt crisis in September 1982, which later spread to Argentina, Brazil, and many other Latin American countries, drawing world-wide attention. The debt problem of the African countries was no less acute. By 1982, the external debt of non-oil sub-Saharan African countries (excluding South Africa) reached nearly $50 billion, and their average debt service ratio was 25 percent. Within this average, there were several countries whose debt-service ratio to exports of goods and services reached 50 percent or higher.
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Extended Fund facility
Extended Fund facility
The emergence of the debt problem in Latin America, and the assumption of a coordinating role by the Fund to contain and resolve the problem, meant that the demand on the Fund’s resources became more widespread and the amounts required, larger, at a time when the Fund’s own liquidity was becoming constrained. This meant either that adjustment programs had to be made even more restrictive, limiting the acceptable external deficit to the amount a member country could borrow from the Fund, or that Fund resources had to be supplemented with financial support from other external sources. Given the large external debt problem facing African countries, and the higher cost to them of using Fund resources (which included borrowed resources), it was not considered desirable that the entire balance of payments gap should be filled by the Fund. In many cases, the size of the payments imbalance was such that it could not have been fully financed during the course of a suitable adjustment program by Fund resources alone. Accordingly, over this period evolved the concept of “gap filling.” This meant that the financing of the gap under a Fund-supported program had to be guaranteed ex ante, for the Fund’s stand-by arrangement to become effective and for a member country to use Fund resources. Since such financing involved many parties (the member country, the commercial banks, the official creditor and donor institutions and governments), the Fund programs became a broad cooperative effort.
The debt problem also focused attention, more sharply than in the earlier period, on the medium-term viability of the balance of payments of member countries. It was recognized that Fund resources were available for only a short period (normally 3–5 years, in keeping with the revolving nature of the Fund’s resources), and that, in view of the mix of regular and borrowed resources, they were being made available to member countries on costlier terms. This inevitably meant that even greater emphasis had to be placed on structural policies to go hand in hand with the short-term stabilization efforts. In this exercise, the Fund relied heavily on the World Bank to provide its assessment on a country’s public investment program and on microeconomic policies in certain sectors.
By 1983 (and more so in 1984), many African countries had become prolonged users of Fund resources (having continuously used these resources for over 3–5 years) or were likely to become such. Further, while some prolonged users were expected to achieve viability in the balance of payments within a foreseeable, albeit longer, period, others were not. In principle, at least, this latter set of countries should not have been using Fund resources as they would inevitably encounter difficulties when repurchases (i.e. repayment to the Fund) began to fall due three years after use of Fund resources.
In 1984, the total amount of the 14 agreed stand-by arrangements with sub-Saharan African countries was SDR 1.1 billion, of which SDR 488 million was drawn, compared to SDR 2.3 billion and SDR 1.3 billion respectively in 1983. As the African countries also made repurchases, net purchases totaled some SDR 400 million only.
During 1985 and subsequent years, African countries will need to make substantial repurchases from the Fund in respect of purchases made since 1980. This raises the prospect that, at a time when the world is becoming more aware of the problems of sub-Saharan Africa and is trying to allocate more resources for African development, the Fund may be withdrawing resources on a net basis—a contrast to the reasoning that prompted the Fund’s active involvement in Africa, beginning in 1980. Is the Fund right in taking this posture? First, the Fund is not a development agency and its resources have a revolving character that needs to be maintained if the Fund is to discharge its assigned responsibilities. Second, the Fund should be regarded as one of the many sources of international finance, and the international community, as a whole, should endeavor to attain positive net inflow into sub-Saharan Africa. As the experience of the past two years shows, the Fund, along with the World Bank, has been very active in mobilizing those efforts at international assistance. In these endeavors, the Fund continues to help its member countries in their adjustment efforts and to encourage an environment for a smoother and increased flow of international resources to those countries. Finally, while African countries that have made large use of Fund resources in the past may be making net repurchases, it is by no means certain that other African countries will not use the Fund’s facilities and, thereby, reduce if not reverse the net repurchase possibility for sub-Saharan Africa as a group.
The Fund has remained conscious of the need to encourage adjustment efforts and to act as a catalyst in attracting international financial support for such efforts. In this role, the Fund negotiates a stand-by arrangement with a country in support of an adjustment program that foresees an external deficit larger than the Fund could, or is prepared to, finance. It makes the activation of such an arrangement dependent on the assurance that the gap would be filled by donors and creditors. On the basis of such a program, the country concerned obtains debt rescheduling from its official and commercial creditors, and donor assistance within the framework of a multinational donors’ conference, usually chaired by the World Bank but in which the Fund staff participates actively. Over the short period of experience with such efforts, a tradition has grown that such exceptional financing is received only after the country has negotiated a stand-by arrangement with the Fund.
The bringing together of such a varied number of donors and creditors makes it imperative that the Fund negotiate a program that is credible enough to attract the needed support, and its strength is no longer a function of the amount the Fund is able to provide. Thus, the more recent programs have placed greater emphasis on the medium-term link between the annual programs, usually through the requirement that during the last review of a program, understandings be also reached on the main policy stance for the following year.
Perhaps a major contribution of the Fund over the past five years is not the resources it has provided to African countries in support of their adjustment programs, but the fact that those countries have recently come to accept the need for implementing adjustment policies. This is in marked contrast to an earlier resistance to adjustment altogether. This change in attitude should make even a smaller level of international assistance that much more efficient and effective.
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