Status Report on Follow-Up to the Reviews of the Enhanced Structural Adjustment Facility, August 30, 1999

Distilling the Lessons from the ESAF Reviews

External Evaluation of the ESAF

ESAF Factsheet

Publications on ESAF

Summing Up
by the Chairman of the Executive Board
Distilling the Lessons from the ESAF Reviews
Executive Board Meeting 98/73

July 8, 1998

Executive Directors welcomed this opportunity to draw lessons from the internal and external evaluations of the Enhanced Structural Adjustment Facility (ESAF). They endorsed a number of important proposals for changing ESAF operations in ways that will improve the design and implementation of future ESAF-supported programs, and thereby contribute to stronger economic performance in the Fund’s poorest member countries. Directors restated their confidence in the ESAF as an effective and valuable instrument in supporting macroeconomic adjustment and structural reform in low-income countries. The policies that the ESAF has helped to promote have stimulated growth, improved living standards, and moved countries toward external viability. The reforms to the ESAF discussed today are, therefore, evolutionary, rather than revolutionary. Directors emphasized the need to take account of the individual circumstances of each country case--especially its administrative capacities and needs--and to apply flexibly the recommendations of the ESAF reviews. Directors noted that these reforms are part of a continuing effort to adapt the Fund's strategy for growth and adjustment. Noting that dialogue with interested parties outside the Fund will be important to this process and so as to invite their views and comments, Directors agreed that the staff report, together with this summary of the discussion, will be published, taking into account Directors’ suggestions.

The internal review of the ESAF had focused on the determinants of growth and the degree to which ESAF-supported programs had addressed weaknesses in the areas shown to be important for growth. Recalling their discussion of the internal review a year ago, Directors agreed on a number of aspects of program design on which progress had not been as strong as would be desired and should receive increased emphasis in future ESAF- supported programs. Several key points emerged:

  • First, stronger efforts must be made to boost the availability of investable resources. To this end, programs should generally target substantial increases in national saving over the three-year period of an ESAF arrangement. Higher public saving rates must take the lead in this process, given the often slow responsiveness of private saving to policy in the short run. The required fiscal discipline would, at the same time, help to provide a low-inflation environment conducive to growth and to strengthening countries’ external positions.

  • Second, the quality of fiscal adjustment is as important as the quantity of that adjustment. The balance of adjustment between revenue increases and expenditure savings should continue to take account of the potential for raising revenues efficiently and the adequacy and efficiency of government spending. These factors will vary substantially from country to country. Programs should aim to shift the composition of government revenues over time toward sources that are more robust and less distortionary, while paying due attention to the distributive aspects. This would typically mean reduced reliance on trade taxes in favor of broad- based consumption taxes, such as the value-added tax, simple taxes on income and profits, and strong tax and customs administration.

  • Third, there was considerable scope, and a pressing need, to improve the quality and composition of public spending. Programs should be designed to protect--and in most cases, increase--productive spending on health, education, and basic infrastructure. Better data are needed on the "outputs" from social spending to ensure that resources are adequate and well-used. In addition, as the external evaluators observed, social safety nets should feature more prominently in the design of future ESAF-supported programs. To make these objectives feasible, savings would need to be generated in other areas over the medium term, notably through far-reaching reforms of the civil service and public enterprises.

  • Fourth, the achievement and maintenance of single-digit inflation should be a key element in countries’ growth strategies, and hence a central objective of ESAF-supported programs. An appropriate policy mix is important, and fiscal restraint is a prerequisite in this context, but there is also a case for adopting more effective nominal anchors in a number of programs to ensure that monetary policy plays its part. Such anchors could take the form of exchange rate pegs, money ceilings, or more explicit commitment to adjust policies to achieve specified inflation targets. Several Directors noted that caution was needed in accepting exchange rate anchors when a country was highly vulnerable to external shocks, and they underscored the importance of identifying appropriate exit strategies as warranted.

  • Fifth, the extent of structural change already achieved under ESAF supported-programs has been profound. Nevertheless, structural weaknesses remain to be addressed across a broad front. Greater attention to the sequencing of such efforts is needed, with early implementation of those reforms that are most crucial to the success of the overall program. The priorities for reform and the appropriate sequencing should continue to be determined on a country-by-country basis, but with a clear emphasis on measures that would stimulate private investment and entrepreneurship. Thus, further trade liberalization should be targeted, including through attention to the regional dimension of such efforts. The regulatory and legal framework for private sector activity should be streamlined and rigorously enforced; and programs should work toward the establishment of a sound banking system and the reform and privatization of public enterprises--two areas in which progress in the past has been comparatively slow. To that end, the quality of data on the banking sector and public enterprises needs to be improved, and the fiscal costs of restructuring in both sectors should be incorporated into program design at an early stage as far as possible.

    Experience had shown that reforms to stimulate growth would also move countries further toward the other ultimate objective of the ESAF, that is, external viability. Growth and external viability are, in practice, complementary objectives. Directors considered that the staff’s analysis of external viability in ESAF countries should continue to use export-, GDP-, and revenue-based indicators, all of which conveyed relevant information; the indicators proposed by the external evaluators could also be presented when they are found to provide a differing perspective on a country’s external debt situation. Especially in light of the recent Asian experience, it was important to use the broadest possible coverage of external obligations in making these assessments, which, in turn, would require improvements in the monitoring of private external debt.

    Both reviews brought home the important fact that programs need not only to be well-designed, but also resolutely and consistently implemented, if they are to have their intended effect on economic performance. The external evaluation, in particular, provided a number of valuable suggestions on what the Fund could do to help ESAF users prepare and implement programs more effectively. Directors endorsed, above all, the notion that national ownership of the program greatly improved the prospect for sustained implementation. They observed that the responsibility for developing national consensus behind a program resided first and foremost with the country authorities. The Fund should not seek to prescribe the nature of the participatory process. However, Fund staff can and should continue to assist the authorities in explaining to society at large the content and rationale for their program. Staff, and resident representatives in particular, 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. Directors agreed that publication of Policy Framework Papers, or a similar document, and letters of intent was particularly helpful in this regard, and should become standard procedure.

    A prior condition for national consensus is that the authorities themselves, including at the highest levels, have ownership of their program, and here, Directors considered that the Fund could make the most direct contribution, in two main ways. First, greater flexibility should be afforded to missions to agree with the authorities on alternative policy mixes that would be consistent with an appropriate set of program objectives. Directors cautioned, however, that the scope for such flexibility would need to be defined reasonably clearly ex ante, so that program objectives would not be undermined and to ensure uniformity of treatment. Second, although Fund missions will continue to negotiate with the heads of the authorities’ economic team, they should encourage the authorities to include other 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. How this would be done should be a matter for the authorities to determine, but Directors noted that the creation of economic management teams, drawn from a wide range of ministries and with senior political leadership, had often proven useful in fostering wider commitment to a program and the consensus for supporting it.

    Consensus-building and the development of a program that was truly "owned" took time, and Directors acknowledged that some delay in initiating reforms may even be desirable if the result were stronger ownership of the program. As noted above, the Fund staff has a role to play in these efforts to strengthen ownership. At the same time, Directors considered it important to strike the right balance between fostering ownership and securing a strong arrangement. Most Directors expressed support for the suggestion that had emerged from both the internal and external reviews that the Fund should be more willing to withhold ESAF support when the authorities’ commitment to reform or ability to implement the program was in question. They agreed, therefore, that staff reports for requests of ESAF support should include sections that describe and assess the environment for program implementation. These discussions should cover the technical capacity to implement the program; the country’s technical assistance needs and how they will be met; potential roadblocks to the reform measures; and the authorities’ effort to foster consensus for, or anticipate opposition to, reforms. Directors also agreed that the authorities’ willingness to take prior actions was a strong and tangible indication of commitment. Prior actions--as part of the overall sequencing of the reform program--should be sought more frequently where progress has not been made in the past on certain structural reforms that are fundamental to the success of the program. Among programs that receive ESAF support, Directors are willing to see greater differentiation in access levels than in the past, depending not only on the balance of payments need and the strength of the program, but also on the evidence of commitment and implementation capacity. In this context, some Directors suggested that staff reports identify the areas in which flexibility had been exercised in the program, especially as this related to the recommended level of access. Some other Directors also underscored the importance of keeping the Board notified on a timely basis of differences of views between the staff and the authorities during program negotiations.

    One reason reform programs had lost public support--leading to problems in implementation--was a failure to identify and address unintended effects of policies on vulnerable social groups. Directors noted the conclusion of the external evaluators that structural adjustment generally has positive effects on income growth and poverty reduction, and that the cost of the reforms often falls more heavily on the better off than on the poor. Nevertheless, it was important to ensure that the poor are protected during the process of adjustment and reform. To achieve this, Directors agreed that: social impact assessments should be conducted during the design of an ESAF-supported program; based on these assessments, measures to protect the poor should be incorporated into the program; and the social impact of the program should then be monitored during implementation. In addition, closer attention should be paid to developments in the real level of social spending, through an assessment of changes not only in nominal spending but also in the relative price of social services, and, more generally, to poverty alleviation. Directors reiterated that the Fund would need to rely on the expertise of the World Bank to carry out this work, and they welcomed the Bank’s intention to collaborate more actively in this process, including in the context of five or six pilot cases. The problem of inadequate data availability was recognized, but Directors hoped that it would ease gradually as the work proceeded.

    Directors also welcomed the proposal to intensify and enhance the existing channels of Bank-Fund collaboration on other aspects of program design. In particular, there was a need for more effective joint work with country authorities on the formulation of reforms in the public enterprise and banking sectors, where the internal review had traced slow progress in part to weaknesses in Bank-Fund collaboration. Better collaboration--which will be a special focus in the pilot cases, but should also be attempted more widely--should aim, for instance, to: ensure that programs target early reform of those public enterprises that pose a significant threat to the public finances; identify up front the likely costs of bank restructuring, including their dependence on the pace of reform, so that these can be incorporated into the program’s macroeconomic framework from the outset; and help countries plan and execute the strategies to build political support for reforms. The Bank and the Fund should also work to ensure that their technical assistance, and that of other agencies, is well coordinated, made available on a timetable that meets the country’s needs, and contributes to the development of the authorities’ own institutional capacity to make and implement policy.

    In addition, Directors endorsed the collaborative efforts between Bank and Fund staff and the national authorities to assess--in countries that have a track record of macroeconomic stability and are implementing policies that promote domestic saving--the potential to absorb higher inflows of aid for investment spending without jeopardizing fiscal or external sustainability. If this analysis demonstrates significant absorptive capacity with limited prospect for private external financing, efforts could be made to increase access to official financing from the ESAF, the World Bank, and bilateral donors, in support of a strong medium-term program that targets early progress in critical areas of reform. Equally important for these and other countries was to create the conditions for inflows of private capital, especially direct foreign investment. To this end, countries must ensure open markets and transparent and effective regulatory and legal systems.

    Directors supported the proposed modalities for the pilot cases, recognizing the importance of allowing flexibility and innovation. Most Directors emphasized that the established delineation of responsibilities between the Bank and Fund staffs should be maintained, as should the Fund staff’s ultimate responsibility for the content of ESAF-supported programs brought to the Fund’s Executive Board. Directors looked forward to early progress reports on the pilot cases, and they agreed that the experience should be assessed in 12 to 18 months’ time. They would seek, then, to agree on lessons for the ESAF operations in other countries, not only with regard to the particular issues of program design and implementation (including the effective coordination and provision of technical assistance) in the context of the ESAF arrangements, but also to Bank-Fund collaboration per se.

    As indicated in their prior discussion of the internal ESAF review, Directors generally supported the use of more intensive program monitoring in selected cases in which it is expected to aid consistent policy implementation. They broadly endorsed the staff’s proposal to amend the ESAF Trust Instrument to permit monitoring and disbursements along the lines provided for under extended arrangements. Decisions as to which ESAF-supported programs would benefit from monitoring through quarterly performance criteria and disbursement would be made case by case, depending on the vulnerability of the program to shocks and policy slippages, and on the frequency of slippages or interruption under past Fund arrangements or staff-monitored programs. Some Directors argued that quarterly monitoring should be exceptional, and several Directors noted that technical assistance should be provided to help improve the implementation capacity of the authorities.

    The external evaluators had raised the question of how the Fund should continue to support the programs of former ESAF users that ceased to need further Fund resources. Directors considered that precautionary arrangements would serve this purpose. A precautionary arrangement would signal the Fund’s approval of the country’s adjustment program, thereby catalyzing financial support from other sources, while providing assurances that Fund resources would be available should the country’s circumstance change. Directors were persuaded, however, by the arguments against granting precautionary ESAF arrangements. They broadly agreed that ESAF-eligible countries without a current or prospective balance of payments need could instead request a precautionary extended arrangement, which could be replaced or supplemented by an ESAF arrangement in the event that a balance of payments need emerged; a few Directors, however, were concerned about the practical implications of such a conversion. To facilitate such conversions, Directors agreed that Policy Framework Papers should be prepared for ESAF-eligible countries requesting precautionary extended arrangements.

    Finally, while some Directors agreed with the likely implications of these proposals for staff resources, several other Directors considered that the envisaged strengthening of program monitoring and selectivity, as well as of Bank-Fund collaboration, should afford greater gains in resource efficiency than envisaged.