March 11, 1998
While Directors did not endorse all of the views expressed by the external evaluators, they found that the report provided an opportunity to broaden the debate by offering a fresh and different perspective, and to promote a better understanding of the Fund's work.
Regarding social developments under ESAF-supported programs, Directors agreed with the evaluators' view that economic reforms, while "generally having positive effects on growth and income distribution", do entail temporary costs for certain segments of the population: this calls for appropriate compensatory measures to be built into program design. Everything possible should be done in program design to protect such groups, including the provision of well targeted assistance to the more vulnerable groups and the allocation of adequate resources for social sectors. Also, the sequencing of fiscal and other structural reforms should be further analyzed to minimize any adverse social impact. As the evaluators point out, these actions would help policy makers to build a domestic consensus in favor of important but difficult reform measures.
Directors did consider that important efforts were already being made by the Fund to advise countries to protect poor groups from the impact of adjustment measures and to safeguard social expenditures during fiscal consolidation. They welcomed the proposals by the evaluators to draw more extensively on the expertise and data of the World Bank for a more refined ex ante assessment of the likely impact of adjustment measures on poor groups. They also agreed that it would be desirable to review the effects of the adjustment measures on poor groups as part of the regular ESAF program reviews. Directors asked management and staff to explore the feasibility of these suggestions, including the availability of the necessary data, with the World Bank, to assess also the ability of the World Bank to provide the envisaged services, and to come back to the Board with operational proposals.
Directors agreed that an assessment of progress towards external viability required a broad range of indicators, and they continued to see considerable merit in the traditional export-based indicators of external viability.
On other external aspects, Directors did not share the view of the evaluators that the ESAF constituted an inadvertent tax on exports by virtue of most ESAF funds being disbursed to central banks. They endorsed the staff view that the macroeconomic effects of ESAF disbursements do not depend on the initial recipient of ESAF resources, and noted that the evaluators were not suggesting that the currencies of ESAF-supported countries were generally overvalued.
On fiscal issues, Directors agreed that short-term revenue objectives should be pursued with sensitivity to the important longer term implications of the tax system for economic efficiency. Directors were not persuaded by the evaluators' view that the Fund systematically exaggerates the size of fiscal deficits. They noted that where the line was drawn in presenting the fiscal balance does not materially affect the setting of fiscal targets, which always is based on considerations of the availability of non-inflationary financing and the evolution of the debt and debt-servicing burden. What was essential was transparency and clarity of the breakdown, and Directors were generally satisfied with staff presentations on fiscal positions.
On national ownership of Fund-supported programs, Directors noted with concern the evaluators' assessment--which they saw as a key contribution of the evaluators' report--that a common perception at the country level was "a feeling of loss of control over the policy content and the pace of implementation of reform programs". Directors therefore welcomed the proposals by the evaluators as to the steps that should be taken by national authorities to build a greater policy consensus within society. They agreed that it was, first and foremost, the obligation of national governments to ensure transparency in policy making and to promote wide public debate of policy issues. They therefore recommended for serious consideration by governments the suggestions of the evaluators concerning national conferences and regular meetings with academics, business, and labor groups. It was important that policy alternatives and trade-offs be openly debated, and that economic management teams made up of the economic and social sector ministries and political leaders--already a practice in some countries--be established in all countries to oversee the reform process.
Directors agreed with the evaluators that the Fund staff should take into consideration the political constraints faced by the authorities when making recommendations on the policy mix--although this should not lead to an overall weakening of the programs. Indeed, Fund staff should not be put in a position of having to judge what is and is not politically feasible. Directors supported the recent trend toward a greater variety of contacts between staff and representatives of civil society and noted that the Fund could thereby play a role in easing political constraints.
Directors noted that some of the recommended measures to ensure ownership may prolong the initial stages of negotiations, but considered that that investment would be compensated for over the period of implementation. Some Directors emphasized that ownership is a dynamic concept: even when ownership is not as strong as the ideal initially, early success with reforms can feed stronger commitment. Directors also recognized the importance of striking the right balance between ownership and securing a strong program. Directors observed that, unless a government is committed to pursuing the program objectives, the program would have little chance of success, and therefore would not merit ESAF support. Directors agreed with the evaluators' recommendation that the Fund should be more cautious in providing ESAF support where the authorities' commitment was in question. They believed that this view may call for greater selectivity in the use of Fund resources.
On the point of the perceived inflexibility by Fund staff, many Directors felt that the evaluators may have inadvertently conveyed an inconsistent message. While criticizing perceived inflexibility, the evaluators were also very clear that "the failure to frontload structural reforms with long gestational lags may well be the most serious defect of structural adjustment as currently designed". Often this failure reflected the willingness of the Fund to accommodate government resistance to specific reforms. Some Directors embraced the suggestion that, wherever feasible, the Fund staff should seek to identify, with the national economic authorities, alternative options for economic programs, each capable of achieving the needed economic results. These alternative options could be presented to national decision makers for their consideration.
Directors also considered that finding the proper balance between negotiating flexibility and supporting only programs that adequately address economic problems is indeed a delicate matter. These trade-offs and the sequencing of reform issues will continue to be at the center of future discussions of ESAF programs by the Executive Board. On the sequencing of reform measures, Directors agreed with the staff that member countries often needed to take advantage of windows of opportunity, without being overly constrained by strict sequencing considerations. Directors also felt that, in several cases, what appear to be sequencing problems were in reality problems of lack of implementation of agreed policy measures.
Directors agreed that further efforts were needed to improve public
understanding of the Fund in countries receiving ESAF support, including
through public explanations of the purpose and benefits of economic
reform programs by the governments. As one Director observed, it was
important that having a program with the Fund should be seen by members
not as a stigma, but as an enviable badge of excellence. Directors agreed
with the observations of evaluators concerning the very helpful role of
Fund resident representatives in ESAF countries in this regard. They felt
that the steps now being taken, to strengthen the role of resident
representatives in external relations and to enhance collaboration with
national authorities and civil society, were very much in line with the
evaluators' views.
Directors agreed that there were many cases in which the Fund must
stay engaged in ESAF-eligible countries after the initial macroeconomic
stabilization has been achieved. They stressed that this was indeed the
essence of the intent of the ESAF, which was to address, in a medium
term context, the structural weaknesses that may threaten the
maintenance of financial stability and the achievement of sustained
growth and external viability. As the evaluators had suggested, Directors
saw a window of opportunity in several African economies that had
stabilized and were now approaching high rates of growth as a result of
policy reform. However, investment rates in these economies remained far
too low for these growth rates to continue over the longer term and
significant external capital needed to be attracted to supplement only
slowly rising domestic savings rates. To attract external savings from
public and private sources in an environment perceived by markets to be
risky, a Fund signal of policy adequacy was often essential to help reduce
uncertainty.
Commenting on the scope for ESAF financing in the post stabilization phase, several Directors emphasized that the ESAF provides exceptional--and temporary--balance of payments support on concessional terms to low-income members, but that the ESAF is not a long-term aid transfer mechanism, as the evaluators seemed to imply. Therefore, disbursements of ESAF support could not be provided over the long-term through a "tapering-in" mechanism coupled with ex post ESAF support for programs that aimed at little, if any, further reform. Directors expressed interest in more extensive use of precautionary arrangements with the Fund. This could have the advantage of conferring the Fund's stamp of approval for a country's reform efforts, in order to catalyze financial support from other sources. For this purpose, the Fund should also take a close look at the effectiveness of its Article IV consultation process. Directors also saw the need for a greater role for the World Bank and other donors in supporting the reform efforts of ESAF countries in the post-stabilization period.
Directors noted the evaluators' recommendation that the Fund develop more systematic mechanisms for providing ex post support in situations in which stabilization has been achieved but in which agreement between the government and the Fund is delayed, or the government feels unable to agree on a conventional Fund arrangement for mainly political reasons. The evaluators sought a move from negotiation to certification. While a few Directors considered that this suggestion deserves attentive consideration, many other Directors were concerned that Fund support for such programs might not be workable. In particular, the absence of ex ante agreement on a framework for policies might mean that any ex post judgement and disbursement of ESAF resources would pose difficulties, as the Fund must avoid arbitrary judgements and unequal treatment of member countries.
Directors noted the indications by the evaluators that Bank and Fund cooperation could be improved in some country cases and noted the importance of seeking ways to strengthen this collaboration. These issues had also surfaced in the internal evaluation of the ESAF and on other recent occasions. A few Directors called for early Board review of specific proposals by management to address these issues. Some other Directors, however, considered that it may not be useful to establish further formal rules on coordination. They recommended that priority be given to promoting an open and free flow of information between the Fund and the Bank. For this reason, it has been particularly valuable to have the participation of a World Bank representative in this discussion.
This has been a rich and useful discussion, bringing out worthwhile suggestions for follow-up. We have here started a constructive process and dialogue, and Directors invited the external evaluators and the staff to make themselves available to discuss the findings of the internal and external evaluations with interested parties. This, together with the earlier Board consideration of the internal review of the ESAF, will lead to the formulation of specific proposals for the Executive Board to consider, on operational lessons from these evaluations for the future work of the Fund in assisting low-income countries.