The IMF's Enhanced Structural Adjustment Facility (ESAF): Is It Working?

Distilling the Lessons from the ESAF Reviews

Summing Up by the Chairman of the Executive Board on Distilling the Lessons from the ESAF Reviews, Executive Board Meeting 98/73, July 8, 1998

External Evaluation of the ESAF

ESAF Factsheet

Publications on ESAF



Status Report on Follow-Up to the Reviews of the Enhanced Structural Adjustment Facility

Prepared by the Policy Development and Review Department In consultation with the Fiscal Affairs Department
August 30, 1999


Contents
I. Introduction
II. Update on Economic Developments Under ESAF-Supported Programs
III. Enhancing Ownership and Assessing Program Implementation Capacity
IV. Strengthening Bank-Fund Collaboration
V. Social Expenditures and Social Safety Nets
VI. Scope for Increased Absorption of External Assistance
VII. Closer Program Monitoring
VIII. Conclusion

Figures
1. Growth, Inflation and the Terms of Trade in ESAF Countries, 1990-98
2. Health and Education Spending Increase in ESAF and other IMF-Supported Programs

Tables
1. Economic and Social Indicators in ESAF and Other Developing Countries
2. Fund Contacts with Civil Society in ESAF Countries
3. Fund Contracts with Line Ministries in ESAF Countries
4. Publication of ESAF Program Documents
5. Adjustments to Fiscal Targets in ESAF-Supported Programs to Accommodate Priority Expenditures

Appendix
1. ESAF Program Countries and Non-ESAF Developing Countries




Status Report on Follow-Up to the Reviews of the Enhanced Structural Adjustment Facility

I. Introduction

1.    On July 8, 1998, the Executive Board concluded a series of discussions on the internal staff review and external evaluation of the Enhanced Structural Adjustment Facility (ESAF), and agreed on a number of proposals for strengthening the design and implementation of future ESAF-supported programs. This paper recalls the main conclusions from the reviews—summarized in italics in each section—and reports on progress over the past year in implementing them.1

Table of Contents

II. Update on Economic Developments Under ESAF-Supported Programs

ESAF-supported programs should aim to accelerate growth by boosting national savings, achieving and maintaining single-digit inflation, accelerating structural reforms, and shifting the composition of fiscal expenditure in favor of health, education, and other priority sectors.

2.    It is too early to assess the effects of new programs put in place over the past 12 months. However, looking more broadly at recent performance under ESAF-supported programs, further evidence has accumulated indicating that the economies concerned are moving in a positive direction. Whereas the internal ESAF review was based largely on data through 1995, macroeconomic outcomes are now available through 1998. The more recent information shows:
  • A pick-up in real per capita GDP growth in ESAF program countries, from an average of -2.3 percent a year (or approximately zero, excluding transition countries) in 1991-95 to 2 percent in 1996-98 (Table 1). The sharp turnaround is the result not only of a recovery among transition economies, but also of a substantial improvement in other ESAF countries’ growth rates, including in most African countries. While it no doubt reflects in part a rebound in the terms of trade from the 1992-93 trough (Figure 1), the findings of the empirical analysis of economic growth in the internal ESAF review suggest that the progressive strengthening in macroeconomic and structural policies throughout the 1990s is likely to have been the dominant influence. For the last four years, ESAF users have also experienced markedly higher per capita GDP growth than other developing countries (Figure 1).2 This is consistent with the need highlighted in the internal ESAF review for faster output growth rates, so as to begin closing the gap in living standards between ESAF users and higher income developing countries, though it should be emphasized that still higher growth will be required to make effective inroads into poverty in ESAF countries.

  • Higher growth rates have been supported by rising national saving rates, which improved from an average 8.4 percent of GDP in 1991-95 to 9.9 percent during the past three years. The driving factor has been further progress in fiscal consolidation (Table 1). Saving rates in ESAF countries remain, on average, well below those in other developing countries—as should be expected, given relative income levels—but the gap is narrowing.

  • Growth is also likely to have benefited from further progress in lowering inflation, which has fallen to a median of 7.9 percent in the last three years. Most significantly, perhaps, the number of non–transition ESAF countries with double–digit inflation rates has fallen to 10 in 1998 (Figure 1), down by more than half relative to the early 1990s.

  • Social spending has been on a rising trend for many years in ESAF countries, a fact confirmed by data updated since the ESAF review: health and education spending has increased by an average 4 percent a year in real per capita terms during ESAF–supported programs (Figure 2).3 In the eleven non-transition countries starting ESAF arrangements since end–1997, the programs have targeted increases in health and education spending sufficient to increase their share of GDP by nearly percent on average in the first year alone, and many have embodied measures aimed at improving the efficiency of social spending. Based on the World Bank’s 1999 World Development Indicators, social "output" indicators are also continuing to improve steadily, albeit gradually: life expectancy and literacy are rising on average, and infant mortality is falling, though in some African countries the HIV/AIDS epidemic has halted or even reversed progress with respect to life expectancy and some other social indicators.


Table 1. Economic and Social Indicators in ESAF and Other Developing Countries
(In percent per year, unless otherwise indicated)


51 ESAF Program Countries

96 Non-ESAF Developing Countries1

1991-95

1996-98

1991-95

1996-98


Real per capita GDP growth 2

-2.3

2.5

-0.2

1.3

     Excluding transition economies 2

-0.4

2.5

     African ESAF countries 2

-1.4

2.3

     Original 36 countries 2

-0.4

2.6

 

Inflation 3

     Mean

221.3

15.5

208.1

38.7

     Median

17.5

7.9

13.1

7.6

 

Gross national saving 2 (in percent of GDP)

8.4

9.9

19.2

19.1

 

Budget balance 2, 4 (in percent of GDP)

-6.8

-3.9

-3.9

-3.9

 

Export volume growth

10.9

9.0

7.4

6.6

 

Debt-service ratio (actual) (in percent of
   Exports of goods and nonfactor services)

30.0

21.3

20.8

18.2

 

External debt 2 (face value, in percent of GNP)

129.2

119.5

54.7

54.2

 

Gross reserves (in months of imports)

3.2

3.8

3.6

4.1

 

Population growth 5

2.3

2.4

1.6

1.5

 

Life expectancy (years at birth) 6

54.5

55.1

65.8

67.1

 

Infant mortality (per thousand live births) 6

87.3

80.1

42.7

36.3

 

Illiteracy (in percent of population age 15 or above) 7

44.3

42.5

18.6

17.6


Sources: Bredenkamp and Schadler (1999); International Monetary Fund, World Economic Outlook and International Financial Statistics; and World Bank, World Debt Tables, Social Indicators of Development, and 1999 World Development Indicators.

1 Developing countries as defined in World Economic Outlook, excluding countries classified as "high income" by the World Bank.

2 Excludes Equatorial Guinea, as its per capita GDP growth after 1996 has been dominated by new oil production.

3 Annual averages.

4 Overall balance, including grants as revenue.

5 Latest data available is for 1997.

6 Averages are based on comprehensive data for 1992 and 1997.

7 Averages are based on comprehensive data for 1995 and 1997.



Figure 1. Growth, Inflation and the Terms of Trade in ESAF Countries, 1990-98






Figure 2. Health and Education Spending Increase in ESAF and
IMF-Supported Programs

(Annual average percentage change in real per capita spending since year preceding program)


Source: "Review of Social Issues and Policies in IMF-Supported Programs," forthcoming.

Table of Contents

III. Enhancing Ownership and Assessing Program Implementation Capacity

Missions should assist the authorities in explaining to society-at-large the content and rationale for their program; staff should be ready to engage in more frequent contacts with representatives from civil society and to participate, for instance, in national conferences on policy issues.

3.    Fund missions have in recent years been steadily broadening their contacts and dialogue with groups outside of government. Using results from a survey of Fund mission teams working on ESAF countries, Table 2 illustrates those contacts that have taken place between the Fund and civil society representatives since the start of 1998. An increase in the frequency of Fund contacts, compared to earlier years, was reported in more than 85 percent of countries covered and this was widely viewed by Fund staff as having improved the quality of public debate on program-related issues. As the table also illustrates, a broad spectrum of civil society has been consulted by Fund missions during this period. Contacts with business representatives were most prevalent—having taken place in almost 90 percent of countries—followed by meetings with labor representatives and NGOs, which were recorded in about half of the countries covered. In addition to staff missions, Fund resident representatives play a significant role in the dialogue with local civic groups.

4.    An increase in the authorities’ own efforts to foster wider program ownership has also been reported, through this same survey, in more than 95 percent of countries. For example, mission teams consider that governments are now generally more actively engaged in dialogue with civil society than in the past, and the dissemination of program-related information through the media and conferences has also improved. Fund staff is increasingly involved in helping governments in these areas. Finally, there has been a marked increase in the frequency with which countries publish their program documents—an important means of fostering wider program ownership (see paragraph 6).

Fund missions should encourage the authorities to include relevant ministries in the discussion of structural or sectoral policies, and to discuss with all affected ministries the impact of measures taken in other areas.

5.    Fund mission teams report participation of a broader range of line ministries in program negotiations. Table 3 illustrates the wide array of line ministry meetings that have taken place over the past 18 months and the range of topics covered. While Fund staff have consulted frequently with line ministries in the past, an increase in such contacts was reported over the past year and a half in more than three-quarters of countries reviewed; in most cases relevant line ministries are now consulted during every mission. Of the line ministries, meetings with the agriculture ministry were most prevalent—having been reported in two-thirds of countries. Meetings with the health and education ministries, and privatization agencies—with whom consultations have also been common—were recorded in about half of the countries reviewed.

Table 2.  Fund Contacts with Civil Society in ESAF Countries
(January 1998 to July 1999)
1

Country
Organized Meetings--Counterpart groups
Albania Business, Investors, Religious
Armenia Business, NGOs
Azerbaijan Academics, Business, Donors, Investors, Officials, Politicians
Benin Business, Labor, Media, NGOs
Bolivia Academics, Business, Exporters, Farmers
Burkina Faso Business, Media
Cameroon BEAC, Business, Councils, Donors, NGOs
C.A.R. Business, Councils, Labor, Media
Chad Business, Donors, Labor
Cote d'Ivoire Academics, Business, Judiciary, Labor, NGOs, Officials, Politicians, Women's Groups
Ethiopia Business, Councils, Donors
The Gambia Business, Labor, Media
Georgia Business, NGOs
Ghana Business, Donors, Labor, NGOs, Politicians, Religious
Guinea Academics, Business, Donors, Investors, Labor, NGOs, Religious
Guinea-Bissau Business, Farmers, Women's Groups
Guyana Business, Media, NGOs
Honduras Business, Councils, NGOs
Kyrgyz Republic Academics, Business, Labor, NGOs, Politicians
Macedonia Business, Councils, Investors, Officials, Politicians
Malawi Business, Labor, Media, NGOs, Religious
Mali Business, Donors, Labor, Media
Mauritania Business, Employers
Mongolia Academics, Business, Labor, NGOs, Officials, Politicians
Mozambique Business, Donors, Labor, Media, NGOs, Politicians
Nicaragua Business, Donors, Labor, Media, NGOs, Politicians, Religious
Niger Business, Donors, Labor, NGOs
Pakistan Business, Donors, Farmers, NGOs, Labor
Rwanda Academics, Business, Media, NGOs, Politicians
Senegal Business, Councils, Labor
Tajikistan Councils, Labor, Officials
Tanzania Business, Donors, Media, NGOs, Politicians
Uganda Business, Donors, Labor, Media, NGOs, Politicians
Yemen Academics, Business, Labor, Politicians
Zambia Business, Labor, NGOs, Religious

Source: Internal Fund staff survey, August 1999.
1Covers countries for which an ESAF arrangement was agreed or review completed in the period January 1, 1998 to June 30, 1999.


Table 3: Fund Contacts with Line Ministries in ESAF Countries
January 1998 - July 1999
1


Country

Government Unit 2

Topic


Albania

Agriculture

Land market

Privatization

Privatization

Trade

Trade Reform

Armenia

Agriculture

Agricultural issues

Energy

Energy Sector financial rehabilitation

Industry

Financial monitoring of public enterprises

Privatization

Privatization

Regional

Local government budgets, irrigation and drinking water, district heating

Welfare

Pensions, targeted transfers

Azerbaijan

Energy

Oil export policy and performance; tax and payment arrears

Parliament

Loan guarantees; projects under negotiation

Privatization

Privatization

Tax

Tax reforms; tax code

Trade

Trade policy

Welfare

Pension reforms and social insurance contributions

Benin

Agriculture

Cotton sector reform and production estimates and forecasts

Civil Service

Objectives and progress on civil service reform

Commerce

Private sector development

Culture

Objectives and progress on telecommunications reform

Education

Objectives and execution of education budget

Health

Objectives and execution of health budget

Industry

Objectives and progress on public enterprise sector reform

Mining

Private sector development and industrial production

Planning

Objectives and execution of investment budget

Regional

Objectives and progress on cotton sector reform

Transport

Reforms in the transportation sector

Bolivia

Agriculture

Structural reforms and budget allocations

Education

Structural reforms and budget allocations

Employment

Structural reforms and budget allocations

Health

Structural reforms and budget allocations

President

Structural reforms and budget allocations

Burkina Faso

Civil Service

Civil service reform

Commerce

Privatization

Education

Education reform

Energy

Mining code

Health

Health sector reform

Mining

Mining code

Regional

Agricultural reform

Transport

Transport sector reform

Cameroon

Education

Education sector reform

Forestry

Forestry and environmental issues

Health

Strategy and action plan in the health sector

Industry

Oil industry developments; contribution of oil revenue to the budget

C.A.R.

Agriculture

Sectoral structural reform program

Commerce

Sectoral structural reform program

Education

Sectoral structural reform program

Energy

Sectoral structural reform program

Environment

Sectoral structural reform program

Forestry

Sectoral structural reform program

Health

Sectoral structural reform program

Mining

Sectoral structural reform program

Transport

Sectoral structural reform program

Water

Sectoral structural reform program

Chad

Civil Service

Road maintenance and financing

Education

Sectoral reforms and financial needs

Employment

Sectoral reforms and financial needs

Health

Sectoral reforms and financial needs

Industry

Petroleum pricing; cotton producer prices

Transport

Road maintenance and financing

Cote d'Ivoire

Agriculture

Liberalization of the coffee and cocoa sectors, sectoral developments

Civil Service

Wage bill, reform of the public service policy

Development

Structural reforms, infrastructure investment, statistical issues

Education

Education sector issues

Employment

Wage bill, reform of the employment policy

Health

Health sector issues

Justice

Judicial reform/governance

Mining

Liberalization of oil sector, privatization

Planning

Privatization, infrastructure, social sectors

Privatization

Privatization

Regional

Rural development, housing, social sector issues

Trade

Trade liberalization, in particular coffee and cocoa exports

Welfare

Public sector liabilities

Ethiopia

Agriculture

Agricultural output, rural land lease system

Civil Service

Current operations, foreign participation

Employment

Civil service reform

Energy

Current operations, foreign participation

Industry

Current operations, foreign participation

Privatization

Privatization program

Statistics

National income accounts, CPI

Telecom

Current operations, foreign participation

Trade

Trade licensing

The Gambia

Agriculture

Groundnut sector reforms

Education

Education expenditure

Health

Health expenditure

Industry

Performance/Privatization

Justice

Legal reforms

Georgia

Agriculture

Land reform program

Environment

Environmental reform

Forestry

Environmental reform

Justice

Judicial reform, legislative issues

Privatization

Privatization program

Statistics

Real, balance of payments and fiscal data issues

Trade

Export duties, trade liberalization

Ghana

Civil Service

Public service reform

Cocoa

Cocoa sector reform policies

Education

Policy Framework Paper

Employment

Employment policies

Energy

Tariff policies and privatization for public utilities. Petroleum pricing policies, energy policy, and privatization of energy sector.

Environment

Policy Framework Paper

Industry

State enterprise reform, public service reform, and privatization

Statistics

Statistical reporting and national accounts

Transport

Road sector policies and expenditure arrears

Welfare

Social security policy and public service policies

Guinea

Defense

Budgetary issues

Energy

Privatization

Health

Expenditure efficiency

Justice

Reform of the judicial system (equal justice; diligence); fight against corruption

Mining

Mining tax regime and privatization; governance

PM

General program issues

Planning

General program issues

President

General program issues

Supply

Privatization

Welfare

Social expenditures

Guinea-Bissau

Civil Service

Civil service reform

Commerce

Privatization

Education

Education reform

Health

Health reform

Regional

Agriculture reform

Transport

Infrastructure sector reforms

Guyana

Health

Health sector policy reform, institution strengthening

Honduras

Agriculture

Land reform issues

Banking

Modernization of the banking system

Mining

Impact of new concessions regulations

Privatization

Privatization process

Kyrgyz Republic

Agriculture

Land reform, other agricultural reforms

Industry

Trade policies

President

Broad spectrum of economic reforms

Privatization

Privatization

Trade

Trade policies

Welfare

Pension reform, unemployment issues

Macedonia

Agriculture

Agriculture developments, purchase of tobacco crop

Culture

Expenditure reform

Employment

Pension and labor sector reform

Foreign

Trade and international agreements

Justice

Bankruptcy reform and public sector reform

Privatization

Capital markets and privatization process

Telecom

Sectoral reforms, privatization

Trade

Foreign trade regime and customs

Malawi

Agriculture

Relevant sections of the PFP

Education

Relevant sections of the PFP

Health

Relevant sections of the PFP

Privatization

Relevant sections of the PFP

Transport

Relevant sections of the PFP

Mali

Agriculture

Sector's reforms, particularly in the cotton sub-sector

Civil Service

Administrative reforms

Education

Sector's reform program

Employment

Administrative reforms

Energy

Restructuring of EDM and institutional reforms

Family

Sector's reform program

Health

Sector's reform program

Industry

Reforms of the regulatory framework

Justice

Reforms of the judicial system

Telecom

Sector's reform program

Water

Cotton sub-sector reforms

Mauritania

Agriculture

Agriculture reform program, fisheries strategy

Energy

Petroleum price reform

Welfare

Food security, health and poverty reduction strategy

Mongolia

Parliament

Budget, structural reforms

Privatization

Privatization and banking sector reform

Mozambique

Agriculture

Agricultural policies

Civil Service

Public sector reform

Commerce

Industrial and trade policies

Education

Education sector policies

Employment

Sector's reform program

Health

Health sector policies

Industry

Industrial policies

Justice

Reforms of the judicial system and commercial arbitration

Tourism

Tourism policies

Welfare

Poverty issues

Nicaragua

Agriculture

Rural development, land titling, cadastres

Education

Education reform, indicators of progress, quantitative targets

Environment

Environmental protection policies and capacity of enforcement

Health

Health reform, indicators of progress, quantitative targets

Justice

Measures to strengthen the Judiciary

Niger

Agriculture

Sector's reform program

Civil Service

Sector's reform program

Education

Sector's reform program

Health

Sector's reform program

Justice

Sector's reform program

Mining

Sector's reform program

Pakistan

Agriculture

Production targets and plans to achieve targets

Commerce

Trade liberalization

Energy

Petroleum development surcharge

Privatization

Status of privatization program

Rwanda

Agriculture

Agriculture production

Civil Service

Civil service reform, payroll issues

Education

Budget implementation; social indicators monitoring; social reforms

Health

Budget implementation; social indicators monitoring; social reforms

Welfare

Social policies; assistance to victims of genocide; social security system

Senegal

Agriculture

Fisheries policy and reform; agricultural policy and agricultural data

Energy

Power generation and petroleum sector reforms

Planning

Civil service reform

Tajikistan

Agriculture

Land reform

Energy

Cost recovery

Health

Health reform

Welfare

Social safety net

Tanzania

Agriculture

Agricultural sector developments and policies

Civil Service

Civil service reform policies

Energy

Energy policies

Industry

Petroleum sector reform

Mining

Reform petroleum sector and mining sector policy

Privatization

Privatization

Statistics

Improvements in statistics

Tax

Development - tax revenues; tax reform

Uganda

Civil Service

Civil service reform, payroll issues, pension

Capital

Securities market, central depositary system

Coffee

Coffee production and exports

Education

Universal primary education

Justice

Anti-corruption efforts

Privatization

Privatization program

Yemen

Civil Service

Civil service reform

Customs

Customs reform

Energy

Energy sector reform

Industry

Investment regime reform

Planning

General economy

Privatization

Privatization

Statistics

Production of statistics

Supply

Subsidy and trade reform

Tax

Tax reform

Tourism

Tourism developments

Transport

Transportation reform

Welfare

Social safety net reform; pension reform

Zambia

Agriculture

Agricultural policies

Commerce

Trade reform

Justice

Tax exception and arrears

Cabinet Office

Civil service reform

Privatization

Privatization

Welfare

Pension system


Source: Internal Fund staff survey, August 1999.

1 Covers countries for which an ESAF arrangement was agreed or review completed in the period January 1, 1998 to June 30, 1999.

2 Either the relevant ministry or other government body in the areas indicated.



Publication of Policy Framework Papers and letters of intent should become "standard procedure."

6.    Table 4 summarizes the recent publication record of countries with ESAF arrangements. The publication of PFPs (which has long been encouraged) became more frequent during 1998, and by end-July 1999, more than 85 percent of countries had published their latest PFP. The proportion of countries publishing their LOIs and/or MEFPs also rose markedly in 1999, supported by the Spring 1999 decision by the Executive Board establishing a presumption that such papers would be made public. By end-July 1999, 60 percent of countries with ESAF-supported programs had decided to make their most recent LOI/MEFP public.

Staff reports for requests for new three-year ESAF arrangements should include sections that describe and assess the environment for program implementation.


7.    The intent behind this proposal was to provide a clearer picture of the extent to which governments had prepared the ground—both politically and technically—for implementation of their program. Staff reports for five new ESAF arrangements have since included a section of the kind envisaged, the countries concerned being Ghana, Honduras, Mauritania, Mozambique, and Zambia.4 , 5

8.    Four of these reports noted efforts the authorities had made to foster consensus around the program, for instance by maintaining a close policy dialogue with the private sector and with donors (Mozambique) and with stakeholders in key productive sectors (Ghana). Following the devastation brought about by Hurricane Mitch, the government of Honduras established a forum (with representatives from civil society) to help set the agenda for the government’s reconstruction plans. Regarding possible risks to program implementation, spending pressures from both within and outside the government and the need for vigilance ahead of approaching elections were noted in the report for Mozambique, while in the case of Ghana, the staff warned that the divestiture program could be derailed if the government did not show sufficient resolve in striking a reasonable balance between the need to have a strategic shareholder to lead the new privatized company and the interests of small local investors. The Mauritania report noted possible opposition from vested interests to reforms (on market deregulation and the removal of tax exemptions) that reduced the scope for rent-seeking activities.

Table 4. Publication of ESAF Program Documents


 

Policy Framework Paper (PFP)


Letter of Intent (LOI) and/or Memorandum of Economic and Financial Policies (MEFP)


Published


Not published


Published


Not published


 

ESAF arrangements in place on April 30, 1998

Armenia, Azerbaijan, Chad, Cote d'Ivoire, Georgia, Ghana, Guinea, Kenya, Madagascar, Senegal, Uganda, Yemen (n=12)

Benin, Bolivia, Burkina Faso, Cameroon, Rep. of Congo, Ethiopia, Guinea-Bissau, Haiti, FYR Macedonia, Malawi, Mali, Mauritania, Mongolia, Mozambique, Nicaragua, Niger, Pakistan, Sierra Leone, Tanzania, Togo, Zambia (n=21)

Armenia, Bolivia, Guinea, Nicaragua (n=4)

Azerbaijan, Benin, Burkina Faso, Cameroon, Chad, Rep. Of Congo, Cote d'Ivoire, Ethiopia, Georgia, Ghana, Guinea-Bissau, Haiti, Kenya, FYR Macedonia, Madagascar, Malawi, Mali, Mauritania, Mongolia, Mozambique, Niger, Pakistan, Senegal, Sierra Leone, Tanzania, Togo, Uganda, Yemen, Zambia (n=29)

         

ESAF arrangements in place on December 31, 1998

Armenia, Azerbaijan, Benin, Bolivia, Burkina Faso, Cameroon, Central African Republic, Chad, Cote d'Ivoire, Ethiopia, Gambia, Georgia, Ghana, Guinea, Kenya, Kyrgyz Republic, FYR Macedonia, Madagascar, Malawi, Mali, Mozambique, Niger, Pakistan, Rwanda, Senegal, Tajikistan, Uganda (n=27)

Albania, Rep. Of Congo, Guyana, Haiti, Mongolia, Nicaragua, Tanzania, Yemen (n=8)

Albania, Armenia, Benin, Bolivia, Georgia, Ghana, Guinea, Nicaragua, Rwanda, Uganda (n=10)

Azerbaijan, Burkina Faso, Cameroon, Central African Republic, Chad, Republic of Congo, Cote d'Ivoire, Ethiopia, Gambia, Guyana, Haiti, Kenya, Kyrgyz Republic, FYR Macedonia, Madagascar, Malawi, Mali, Mongolia, Mozambique, Niger, Pakistan, Senegal, Tajikistan, Tanzania, Yemen (n=25)

         

ESAF arrangements in place on July 31,
1999 1

Albania, Armenia, Azerbaijan, Benin, Bolivia, Burkina Faso, Cameroon, Central African Republic, Cote d'Ivoire, Ethiopia, Gambia, Georgia, Ghana, Guinea, Kyrgyz Republic, FYR Macedonia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Pakistan, Rwanda, Senegal, Tajikistan, Tanzania, Uganda, Yemen, Zambia (n=30)

Guyana, Haiti, Honduras, Mongolia, Nicaragua (n=5)

Albania, Armenia, Benin, Bolivia, Burkina Faso, Central African Republic, Georgia, Ghana, Guinea, Honduras, Kyrgyz Republic, Madagascar, Mali, Mozambique, Nicaragua, Rwanda, Senegal, Tajikistan, Tanzania, Uganda, Zambia (n=21)

Azerbaijan, Cameroon, Cote d'Ivoire, Ethiopia, Gambia, Guyana,
Haiti2, FYR Macedonia, Malawi, Mauritania, Mongolia, Niger, Pakistan, Yemen (n=14)


Sources: IMF external website.
1 Countries classified according to whether they have published most recently discussed program papers.
2 Published LOI for emergency assistance request, November 19, 1998.


9.    Assessments of the technical capacity to implement the program were included in all five reports. The judgments were that technical capacity was generally adequate in relation to the planned policies, but all the reports noted areas where further capacity-building should be sought, with relevant technical assistance. In Ghana and Honduras, the main focus of technical assistance was on public sector reform, banking supervision, and privatization. In the Zambian program, public sector reform also figured prominently, with additional technical assistance being directed at strengthening expenditure control and improving the quality of the statistical base. Reflecting the government’s limited implementation capacity, the Mozambique program included a broad range of technical assistance aimed at strengthening fiscal control; other areas included legal and financial sector reform and statistics. The report on Mauritania set out a wide-ranging technical assistance agenda, and noted the authorities’ commitment to provide the counterpart resources necessary to carry it out.

Table of Contents

IV. Strengthening Bank-Fund Collaboration

Bank and Fund staffs should intensify their collaboration, working with the authorities in areas such as the design of structural reform measures, assessing the social impact of policies, and examining the scope for higher externally-financed public expenditures in programs. Staffs should experiment with new forms of collaboration in a few pilot cases.

10.    The IDA/ESAF pilot program was initiated in the fall of 1998 in six countries: Cameroon, Ethiopia, Nicaragua, Tajikistan, Vietnam, and Zimbabwe.6 This is one of a broader range of efforts under way to further enhance Bank-Fund collaboration more generally, including in ESAF countries.

11.    The precise work program in each of the pilot countries was determined in consultation with the national authorities. The areas identified for special attention—consistent with the broad recommendations from the ESAF reviews—included privatization and civil service reform (Cameroon), social expenditure, poverty reduction, and an assessment of the social impact of reforms (Cameroon, Tajikistan, and Vietnam), public enterprise reform, private sector development, and public expenditure management (Tajikistan), and financial sector reform (Tajikistan and Ethiopia). In Nicaragua, the agenda was heavily influenced by the impact of Hurricane Mitch, and the Bank and Fund teams worked closely on issues related to damage and reconstruction efforts, including the absorption of a major influx of aid. But coordination was also strengthened in the areas of financial sector reform (together with the Inter-American Development Bank), social security reform, and privatization. The urgent need to address problems of macroeconomic instability in Zimbabwe delayed discussions on a possible ESAF arrangement; nevertheless, the country teams have begun to work with the authorities on structural measures aimed at more effective poverty alleviation in the medium-term and the integration of social safety net mechanisms in the current stand-by arrangement to mitigate the impact of rising food prices on the poor.

12.    Although the pilot countries were selected partly on the basis of the availability of social data, gaps in this area have in some cases delayed detailed ex ante and ex post analyses of the social impact of adjustment measures (notably in Ethiopia and Tajikistan); forthcoming household surveys and poverty assessments prepared by the Bank are expected to provide a better basis for such analyses. In Cameroon, however, work is underway, based on recently started annual household surveys, to assess the social impact of the government’s ambitious privatization effort, which involves some 35,000 employees. This will help better inform how the design of the ESAF-supported program can be adapted, including through new safety net measures, to mitigate any adverse social consequences of the privatization.

13.    The country teams have begun to change their work practices to strengthen collaboration through a variety of ways: more joint missions (e.g., Vietnam and Tajikistan), the inclusion of Bank (Fund) counterparts in the Fund (Bank) country team internal communication networks (e.g., Cameroon and Tajikistan), and more intensive efforts to develop unified and integrated policy approaches, especially in the context of parallel Fund and Bank missions. New approaches in Vietnam include joint written communications on policies to the authorities, joint aide-memoires by Bank-Fund technical assistance missions, and joint letters from mission heads highlighting issues where further progress is needed: these initiatives have been well-received by the country authorities. In Tajikistan, the updated PFP now incorporates important elements of the Bank's Comprehensive Development Framework, and reforms and associated conditionalities in the SAC and ESAF-supported programs are being sequenced to ensure that they are mutually reinforcing.

14.    The Bank and Fund country teams in the pilot project are expected to report periodically to their respective Executive Boards on progress made. At the Fund, this has been in the form of annexes to staff reports. In addition, the Managing Director of the IMF and the President of the World Bank have held two joint meetings with the teams to discuss their experience with the pilot program and underline the importance of their efforts; further meetings are envisaged.

15.    The time elapsed since setting up the pilots has been short, and it is too early to make concrete evaluations at this stage. However, it is clear that all the country teams have made some progress in refocusing and intensifying their collaborative efforts, and changing their work practices in ways that contribute to a more integrated joint approach. It is also apparent that the greater coordination needed has not been a free good: it has absorbed additional staff time and resources. The experience in the pilot cases is expected to be reviewed in early 2000, with a view to drawing lessons for enhancing Bank-Fund collaboration in ESAF/IDA operations as well as more generally.

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V. Social Expenditures and Social Safety Nets

Programs should be designed to protect—and in most cases increase—productive spending on health, education, and basic infrastructure. Social safety nets should feature more prominently in ESAF-supported programs.

16.    Since the early 1990s, ESAF-supported programs have progressively strengthened the integration of social spending needs into program design. A review of PFPs and memoranda of economic and financial policies (MEFPs) for 44 countries that had ESAF-supported programs during 1994-98 indicates that about 80 percent of the programs sought increases in public spending on education and health care.7 Over the same period, the use in MEFPs of quantitative targets for social spending increased by 40 percent. In transition countries, where levels of social spending were already high at the outset of reform, programs have emphasized improvements in the quality and efficiency of spending rather than expanding social budgets further. Many PFPs now also include "output" indicators, to try to capture the extent to which social spending has translated into improved delivery of social services. This is an area where ongoing work, notably in the Bank, could lead to further improvements in program design.

17.    During 1994-98, three-quarters of ESAF countries included commitments in their MEFPs to allocate budgetary resources for social safety nets, aimed at countering possible adverse short-term effects of some reform measures on the poor and vulnerable. The use of structural benchmarks and performance criteria related to social protection objectives increased over this period, while measures to strengthen the design and coverage of social safety nets were also commonly specified.8

18.    These trends are consistent with the message from the ESAF reviews. Nevertheless, there is an increasing recognition that much more can and should be done in both Bank- and Fund-supported programs to ensure a better integration of economic policies and social objectives. A series of papers by Bank and Fund staff—including a joint paper in the context of the enhanced HIPC Initiative—examine ways in which such a strengthening could be achieved in ESAF and IDA countries.9 The proposals contained in these papers would lead to a more direct focus on poverty reduction as an ultimate objective, and would integrate the design of future ESAF-supported programs with countries’ comprehensive poverty reduction strategies.

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VI. Scope for Increased Absorption of External Assistance

In countries that have achieved stable macroeconomic conditions and are well-advanced in structural reforms, the potential to absorb and spend productively larger amounts of foreign assistance should be examined, and where appropriate reflected in the design of programs.

19.    This approach has been applied during the past year in a number of "post-stabilization" countries (e.g., Bolivia, Burkina Faso, Mali, Mauritania, Mozambique, Rwanda, Senegal, Tanzania, and Uganda), where modified fiscal targets have been agreed with the authorities to allow more room for development and social expenditure, or to accelerate structural reform (Table 5). An easing of fiscal targets was also agreed with the authorities in Nicaragua and Honduras in the wake of Hurricane Mitch, to accommodate the emergency relief and reconstruction needs of these countries. In another recent case (Azerbaijan), the staff agreed to adjust the fiscal targets in the event of higher-than-programmed project loans associated with infrastructure investments. Finally, there are now a number of programs in place (Mozambique, Guinea, and Senegal) where the choice of a fiscal target excluding foreign-financed capital expenditures implicitly accommodates additional spending when higher-than-programmed external finance is available.10

20.    This increased flexibility in the fiscal stance has in all cases been closely linked to the availability or prospect of higher external budget financing, except in Senegal, where the additional capital expenditure programmed for the medium-term is to be financed by exceptional privatization revenues. In several cases (e.g., Honduras, Nicaragua, Mauritania, Rwanda, Senegal, Tanzania, and Uganda), Board country papers have addressed explicitly the link between the proposed relaxation of fiscal targets and the objective to accommodate additional capital or social expenditure in light of higher-than-programmed external budgetary support. In Rwanda and Uganda, the fiscal program specifies adjusters that make room automatically for additional social or development spending, and hence higher deficits, to the extent that more external budgetary support becomes available.

Table 5. Adjustments to Fiscal Targets in ESAF-Support Programs to Accommodate Priority Expenditures


Country

Program Adjustment

Basis for Adjustment

Azerbaijan

Possible upward revision of fiscal deficit in the budget for 2000.

In case of higher-than-programmed project loans associated with infrastructure investments.

Bolivia

Adoption of a less ambitious target for the fiscal deficit and higher target for public investment in 1999.

To safeguard key social programs/infrastructure projects in view of expected high amounts of external grants/concessional loans.

Honduras

The program contemplates a marked widening of the combined public sector deficit in 1999 (from 1.4 percent of GDP in 1998 to 8.7 percent in 1999).

Motivated by the large size of the emergency relief and reconstruction needs (total NFPS capital expenditure is programmed to increase from 7 percent of GDP in 1998 to almost 12 percent in 1999). Larger fiscal deficit to be financed almost entirely by concessional loans and debt relief.

Mali

The medium-term expenditure targets (for 2000-2001) were revised upwards at the briefing stage.

To allow more room for productive/social expenditures, given the expected availability of project assistance and assistance under the HIPC Initiative.

Mauritania

The medium-term program envisages a gradual reduction in the overall budget surplus, from 2.2 percent of GDP in 1999 to 0.4 percent in 2002.

Surplus target reduced to allow for more expenditure on basic infrastructure and social outlays. Reduction expected to be consistent with monetary stability and low inflation given the significant amounts of external financial assistance expected over the medium term.

Mozambique

Primary deficit programmed to rise temporarily in 1999 to allow implementation of structural reforms. In addition, since domestic primary deficit excludes foreign-financed capital expenditure, these can be fully accommodated within the program.

To increase the scope for greater aid absorption, in view of the expected unusually large amounts of foreign assistance in 1999 and the progress made on macroeconomic front during the last few years.

Nicaragua

Significant increase in fiscal deficit targets for 1999-2001 compared to pre-hurricane scenario. Estimates for total amount of reconstruction outlays recently increased by US$30 million, totaling about 8 percent of GDP in both 1999 and 2000.

To accommodate increased reconstruction and social expenditures in the wake of Hurricane Mitch, financed with external grants and concessional borrowing.

Rwanda

The fiscal program includes a contingency mechanism for additional social spending above the program targets and for a higher primary deficit, up to a limit.

Primary balance to be adjusted by the amount of social expenditure, provided the additional spending is fully financed by donors on highly concessional terms; the adjustment is subject to consultation with Fund and IBRD staffs and donors.

Senegal

Adoption of less ambitious targets for the basic budget in 1999-2000. For 1999, the supplementary budget reduced the basic surplus target to 1.7 percent of GDP instead of 2.6 percent in original budget.

To accommodate additional capital expenditure financed by exceptional resources from privatization operations.

Tanzania

The overall budget balance is projected to move from an estimated surplus of 0.3 percent of GDP in 1998/99 to a deficit of 0.8 percent in 1999/2000 and a deficit of 1.3 percent in 2000/2001 (compared to a surplus of 0.4 percent and zero balance, respectively, in the brief).

The deficits are more than offset by higher-than-expected net foreign financing; reflect increasing donor emphasis on the use of program grants to support social sector expenditures; an increase of 80 percent in health and education spending is envisaged in 1999/2000 budget.

Uganda

The target for fiscal deficit in 1999/2000 was increased by 0.9 percent of GDP, in line with government’s commitment to increase expenditures on social and priority areas—up to a limit— if donor financing proved more favorable than expected.

To make room for higher development/social spending given higher-than-expected net external budget financing and positive assessment of domestic economic situation.


Source: Staff reports and briefing papers.


21.    In proposing increased fiscal flexibility, staff reports have commonly stressed the need to ensure additional spending is effectively targeted—often indicating that the World Bank will make an assessment in this respect. Other factors that have been taken into account include the implications of higher borrowing for debt sustainability (the programs invariably require that additional financing be on concessional terms), and the risks associated with building in higher expenditure allocations in the face of uncertain funding prospects.

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VII. Closer Program Monitoring

In order to promote more consistent policy implementation, the framework for program monitoring should be enhanced, and in selected cases more intensive monitoring should be considered.

22.    The ESAF Trust Instrument was amended on November 20, 1998, to allow greater flexibility in the setting of test dates in ESAF arrangements, and hence closer program monitoring. As well as simplifying the structure of arrangements—new three-year ESAF arrangements no longer include three separate annual arrangements—the modifications provide for either regular six-monthly performance criteria and reviews (annual arrangements previously had only one test date and review, mid-year) or for quarterly test dates and disbursements. The Executive Board indicated that quarterly performance criteria should be used only in exceptional cases, where the country’s record on policy implementation was weak, or where the program was considered particularly vulnerable to shocks and policy slippages.11

23.    Although visits by Fund staff and discussions on program developments commonly take place on a quarterly or even more frequent basis, quarterly performance criteria and disbursements have so far been used in only two ESAF arrangements, for Zambia and Tajikistan (both in 1999). In both cases, the poor track record in implementing previous Fund-supported programs was a factor. In addition, Tajikistan’s vulnerability to external shocks (related to contagion from the Russian crisis and lower cotton prices) was considered sufficiently severe to warrant quarterly program reviews by the Board. It is too early to assess whether these provisions have contributed to better policy implementation in the two countries.

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VIII. Conclusion

24.    This report constitutes, of necessity, a very preliminary assessment of progress to date in following through on the lessons from the ESAF evaluations. Nevertheless, it is clear that ESAF operations have begun to evolve in the directions sought by the Executive Board at the conclusion of the reviews:
  • The dialogue between Fund staff and member countries appears to be steadily becoming more open and broad-based, involving a wider range of contacts both within and outside government, helped in no small measure by the increasing readiness of governments to make their program documents publicly available.


  • Issues of implementation capacity and ownership-building are receiving more attention in staff reports on requests for ESAF arrangements, though the advances in this area are fairly modest.


  • The pilot projects to enhance Bank-Fund collaboration have, for various reasons, gotten off to a slower start than had been hoped, but are all now underway and beginning to report tangible improvements in both program design and work practices.


  • The focus on social spending and safety net issues is continuing to strengthen in ESAF-supported programs, with an increasing proportion of programs adopting specific benchmarks in both these areas of social policy.


  • In circumstances where macroeconomic conditions are reasonably stable and structural reforms well advanced, there are now numerous instances (affecting 14 ESAF countries in all) where programs have been designed with flexibility in the fiscal targets to accommodate additional aid for productive expenditures.


  • Changes to the ESAF Instrument now allow for closer formal program monitoring, including on a quarterly basis where this is considered likely to improve program implementation, and two ESAF-supported programs with quarterly monitoring are now in effect.

25.    It would be premature to attempt an assessment of how the macroeconomic and structural policy content of programs has changed in light of the ESAF reviews. The sought-after changes in these areas did not, however, call into question the basic strategy for adjustment and reform that ESAF had been supporting, which the evidence corroborated. It is therefore encouraging that new data accumulated since the internal review was carried out supports that study’s contention that the marked strengthening of ESAF countries’ policies in the early 1990s was beginning to show through in their economic growth rates: per capita GDP growth in these countries has since accelerated further, and has surpassed that of other developing countries in each of the last four years. Saving rates have risen, inflation rates have come down, and fiscal positions have been further consolidated, notwithstanding substantial real per capita increases in social expenditures.

26.    In the coming months, the experience gathered in implementing the ESAF evaluation conclusions—particularly in the context of the Bank-Fund collaboration pilots—will be useful input to the new proposals that are being developed for a reform of the ESAF, founded on comprehensive poverty reduction strategies. These proposals will, if adopted, give additional impetus to many of the initiatives of the past year, especially in strengthening the social content of programs and enhancing national ownership by opening up the process through which those programs are formulated.

Appendix 1. ESAF Program Countries and Non–ESAF Developing Countries


51 ESAF Program Countries


96 Non-ESAF Developing Countries


ALBANIA

AFGHANISTAN

MAURITIUS

ARMENIA

ALGERIA

MEXICO

AZERBAIJAN

ANGOLA

MICRONESIA, FED.STS.

BANGLADESH

ANTIGUA AND BARBUDA

MOLDOVA

BENIN

ARGENTINA

MOROCCO

BOLIVIA

BAHRAIN, KINGDOM OF

MYANMAR

BURKINA FASO

BARBADOS

NAMIBIA

BURUNDI

BELARUS

NIGERIA

CAMBODIA

BELIZE

OMAN

CAMEROON

BHUTAN

PANAMA

CENTRAL AFRICAN REP.

BOTSWANA

PAPUA NEW GUINEA

CHAD

BRAZIL

PARAGUAY

CONGO, REPUBLIC OF

BULGARIA

PERU

COTE D IVOIRE

CAPE VERDE

PHILIPPINES

EQUATORIAL GUINEA

CHILE

POLAND

ETHIOPIA

CHINA,P.R.: MAINLAND

ROMANIA

GAMBIA, THE

COLOMBIA

RUSSIA

GEORGIA

COMOROS

SAMOA

GHANA

CONGO, DEM. REP. OF

SAO TOME & PRINCIPE

GUINEA

COSTA RICA

SAUDI ARABIA

GUINEA-BISSAU

CROATIA

SEYCHELLES

GUYANA

CZECH REPUBLIC

SLOVAK REPUBLIC

HAITI

DJIBOUTI

SLOVENIA

HONDURAS

DOMINICA

SOLOMON ISLANDS

KENYA

DOMINICAN REPUBLIC

SOMALIA

KYRGYZ REPUBLIC

ECUADOR

SOUTH AFRICA

LAO PEOPLE'S DEM.REP

EGYPT

ST. KITTS AND NEVIS

LESOTHO

EL SALVADOR

ST. LUCIA

MACEDONIA, FYR

ERITREA

ST. VINCENT & GRENS.

MADAGASCAR

ESTONIA

SUDAN

MALAWI

FIJI

SURINAME

MALI

GABON

SWAZILAND

MAURITANIA

GRENADA

SYRIAN ARAB REPUBLIC

MONGOLIA

GUATEMALA

THAILAND

MOZAMBIQUE

HUNGARY

TONGA

NEPAL

INDIA

TRINIDAD AND TOBAGO

NICARAGUA

INDONESIA

TUNISIA

NIGER

IRAN, I.R. OF

TURKEY

PAKISTAN

JAMAICA

TURKMENISTAN

RWANDA

JORDAN

UKRAINE

SENEGAL

KAZAKHSTAN

URUGUAY

SIERRA LEONE

KIRIBATI

UZBEKISTAN

SRI LANKA

LATVIA

VANUATU

TAJIKISTAN

LEBANON

VENEZUELA

TANZANIA

LIBERIA

YUGOSLAVIA, SFR

TOGO

LIBYA

UGANDA

LITHUANIA

VIETNAM

MALAYSIA

YEMEN, REPUBLIC OF

MALDIVES

ZAMBIA

MALTA

ZIMBABWE

MARSHALL ISLANDS





1The list of policy conclusions is drawn from the Summing Up by the Chairman—Distilling the Lessons from the ESAF Reviews. See also the staff paper, Distilling the Lessons from the ESAF Reviews, for a fuller description of the proposals and references to the reports on the internal review and external evaluation. Both documents are available on the IMF's website (www.imf.org).

2See Appendix I for a list of ESAF program countries and non-ESAF developing countries.

3See Review of Social Issues and Policies in IMF-Supported Programs (forthcoming).

4In the case of the three other new ESAF arrangements approved since July 8, 1998—for Bolivia, Guyana, and the Central African Republic—the missions had taken place (and, in two cases, the reports were already issued) before the new policy took effect.

5The staff report for Ghana combined the section on the environment for program implementation with that on access, capacity to repay, and risks to the program. The report for Mauritania had a section on "program monitoring, performance criteria, and implementation capacity."

6The selection was based on a number of considerations, including: the geographical distribution of ESAF arrangements; the stage of the reform process and whether a new thrust of reform to accelerate progress could be envisaged; the receptiveness of the authorities to intensified dialogue; and the adequacy of information, such as household surveys, for assessing the social impact of program design.

7See Box 3 in Review of Social Issues and Policies in IMF-Supported Programs (forthcoming).

8Box 1, ibid. The use of formal benchmarks or performance criteria on social safety net measures is still comparatively rare, however, rising from one case (within the sample) in 1994 to five cases in 1998.

9Review of Social Issues and Policies in IMF-Supported Programs (forthcoming); HIPC Initiative—Strengthening the Link between Debt Relief and Poverty Reduction (forthcoming); and Building Poverty Reduction Strategies in Developing Countries (World Bank, forthcoming).

10In Mozambique, the domestic primary balance is the only quantitative fiscal target, so additional foreign-financed capital expenditures can be fully accommodated in the program. This is also the case in Guinea and Senegal: the fiscal targets in these countries include a ceiling on net bank credit to the government, and do not (unlike most programs) require that government bank borrowing be adjusted downward in the event that external budgetary assistance is greater than programmed.

11Summing Up by the Chairman—Distilling the Lessons from the ESAF Reviews.