©1999 International Monetary Fund

Ordering Information

Economic Adjustment and Reform in
Low-Income Countries

Studies by the Staff of the International Monetary Fund


1   Overview
Hugh Bredenkamp and Susan Schadler
Summary of the Chapters
2   Methodological Issues
Hugh Bredenkamp
Approaches to Evaluation
Country Groupings
3   The Setting for Adjustment and Reform
Sharmini Coorey
Initial Conditions
Adjustment Strategy
Trends in the External and Domestic Environments
   The Global Setting
   Wars, Civil Strife, and Natural Disasters
4   The Policy Record
Louis Dicks-Mireaux, Jean Le Dem, Steven Phillips,
and Kalpana Kochhar
Fiscal Policy
   Fiscal Trends, 1981–95
   Medium-Term Program Objectives
   Fiscal Outcomes
   Was Fiscal Consolidation Adequate?
Exchange Rate and Monetary Policies
   Exchange Rate Policies
   Exchange Rate Developments
   Money, Credit, and Interest Rates
Structural Reforms
   Domestic Markets and Prices
   Exchange and Trade System
   Financial Sector Reform
   Public Enterprise Reform
   Civil Service Reform
   Property Rights
Appendix 4.1. Indices of Structural Distortions
   General Aspects of the Scoring Methodology
   Barometers of Structural Policies Used to Construct Scores
   Exchange and Trade System
   Pricing and Marketing Reforms
   Financial Sector Development
   Public Enterprise Reforms
5   Economic Growth: What Has Been Achieved and How?
Kalpana Kochhar and Sharmini Coorey
The Stylized Facts
Overview of the Methodology
Determinants of Growth
   Human Capital Accumulation
   Macroeconomic Policies
   Structural Distortions
   Other Factors
Specification of the Growth Equation and Estimation Results
Comparative Growth Perfomance
Structural Reforms and Growth
Concluding Remarks
Appendix 5.1. Details of the Analysis
6   Inflation: The Case for a More Resolute Approach
Steven Phillips
The Inflation Record: Inside and Outside of Programs
   A Chronological Perspective: Inflation Trends from the
      Early 1980s
   Inflation During Programs: Initial Conditions, Targets,
      and Outcomes
   Conclusions and Interpretations
Benefits of Low Inflation
   Assessing the Growth Benefits of Lower Inflation
   Implications of Low Inflation for the Distribution of Income
Potential Costs of Disinflation
   Is Disinflation Associated with Short-Run Output Losses?
   Targeting Low Inflation: A Loss to the Public Sector of Significant Seigniorage?
Determinants of Disinflation in Programs
   Disinflation Strategies
   Why Were Inflation Targets Missed?
Main Policy Conclusions
7   Progress Toward External Viability
Tsidi Tsikata
Conceptual and Methodological Issues
   External Viability, Sustainable External Position,
      and Debt Sustainability
   Gauging Progress Toward External Viability
What Progress Has Been Made?
   Broad Trends
   Debt-Service Burdens
   Exceptional Financing
   Progress During the Adjustment Phase
   Progress on Vulnerability Indicators
   Debt Sustainability
Why Have Some Countries Progressed Further Than Others?
   Degree of Concessionality in External Borrowing
   The Flows Underlying Changes in Debt-to-Export Ratios
   Shocks, Policies, and Growth
Targets Versus Outcomes: Explaining the Shortfalls
   Did Countries Borrow More Than Anticipated in Programs?
   Export Projections
   Evolution of Debt During and Outside Programs
Appendix 7.1. Statistical Tests of Differences Between
   Group Averages
Appendix 7.2. Decomposition of Changes in Debt-to-Export Ratios
8   Moving Ahead with Structural Reform
Jorg Decressin, Zia Ebrahim-zadeh, Louis Dicks-Mireaux,
and Ali Ibrahim
Back to Business: Reforming Public Enterprises
   The Setting
   The Reform Program
   Conditionality and Reform Priorities
   IMF–World Bank Collaboration
   The Need for Better Data
   The Role of Domestic Support
   Lessons for Program Design
The Need for Financial Order: Restructuring the Banking System
   The Scope and Causes of Bank Distress
   The Bank Restructuring Program: Strategy and Costs
   Reform Priorities and Monitoring: The Use of Conditionality
   Lessons for Program Design
Appendix 8.1. Summary History of Public Enterprise
      Reform Programs
Appendix 8.2. The Fiscal Program and the Treatment of
   Privatization Proceeds
9   The Causes of Program Interruptions
Mauro Mecagni
Defining a Program Interruption
Stylized Facts
A Closer Look at What Went Wrong: The Role of Program
      Design in Policy Slippages
   Overly Ambitious Targets
   Insufficient Prioritization
   Inadequacy of Technical Capacity
   Insufficient Monitoring
   Insufficient Contingency Planning
Conclusions and Lessons for Program Design
Appendix 9.1. Detail on Program Targets, Interruptions,
   and Monitoring
2.1.   The Countries Under Review
3.1.   Initial Conditions in Transition Economies
3.2.   Major Episodes of Domestic Conflict in ESAF Countries
4.1.   Program Objectives and Initial Conditions
4.2.   Fiscal Debt Dynamics
4.3.   Indices of Structural Reform
5.1.   Main Findings of Reinvigorating Growth in Developing Countries: Lessons from Adjustment Policies in Eight Economies
6.1.   The Inflation-Growth Association: Is It All Just High Inflation?
7.1.   Private Lending to ESAF Users
7.2.   ESAF Users: HIPCs and Non-HIPCs
7.3.   Macroeconomic Determinants of Private Capital Flows
8.1.   Operational Efficiency of Public Enterprises
8.2.   Highlights of Bank Restructuring
9.1.   Were Adjustment Measures a Factor Inducing Social Unrest?
9.2.   Elections and Program Performance
3.1.   Trends in National Income
3.2.   Key Macroeconomic Indicators: ESAF and Other Developing Countries
3.3.   Key Macroeconomic Indicators, by Region
3.4.   Social Indicators of Development
3.5.   ESAF Countries: Balance of Payments Indicators
3.6.   External Debt Indicators
3.7.   Inflation and Parallel Market Exchange Rates
3.8.   Selected Economic Indicators: Repeat ESAF Arrangements
3.9.   Partner-Country Real Imports of Goods and Services
3.10.   Net Resource Transfers and Concessional Inflows
3.11.   World Commodity Prices and Terms of Trade
4.1.   Fiscal Trends in ESAF Countries
4.2.   Fiscal Adjustment in SAF/ESAF-Supported Programs, by Initial Conditions
4.3.   Fiscal Primary Balance Targets: Changes from Preprogram Year
4.4.   Revenues, Expenditures, and the Primary Balance: Deviations from Targeted Changes
4.5.   Fiscal Targets and Outcomes
4.6.   Formal Classification of Exchange Rate Arrangements
4.7.   Real Effective Exchange Rate and Terms of Trade
4.8.   Broad Money Growth
4.9.   Distribution of Real Deposit Interest Rates
4.10.   Real Deposit Interest Rates, Before First SAF/ESAF- Supported Program and in 1993–95
4.11.   Status of Structural Reform in ESAF Countries
4.12.   Pace of Structural Reform
4.13.   Structural Reform in Pricing and Marketing
4.14.   Structural Reform in the Financial Sector
4.15.   Real Interest Rates
4.16.   Structural Reform in the Public Enterprise Sector
4.17.   Index of Economic Security
5.1.   Real Per Capita GDP Growth in ESAF Countries
5.2.   Real Per Capita GDP Growth in Adjustment Time
5.3.   Saving and Investment Ratios
6.1.   Consumer Price Inflation: Regional Median Values
6.2.   Progress on Inflation from the Pre-SAF/ESAF Period to 1993–95
6.3.   Distribution of Initial Inflation Levels Among 67 SAF/ ESAF-Supported Programs (Including CFA Cases)
6.4.   Inflation Targets in SAF/ESAF-Supported Programs, by Degree of Initial Inflation
6.5.   Distribution of Inflation Among 50 SAF/ESAF- Supported Programs (Excluding CFA Cases)
6.6.   Inflation: Program Targets and Outturns
6.7.   Association of Per Capita GDP Growth with Inflation and Logarithm of Inflation
6.8.   Real GDP Growth During SAF/ESAF-Supported Programs
6.9.   Increase in Growth Rate During Programs with Intermediate Initial Inflation, by Degree of Disinflation Achieved
6.10.   Distribution of Seigniorage Prior to SAF/ESAF-Supported Programs (Excluding CFA Cases)
6.11.   Deviations from Target: Inflation Against Money Growth
6.12.   Net Domestic Assets (NDA): Growth Targets and Outturns
6.13.   Broad Money Growth Projections and Outturns
6.14.   Deviations from Target: Net Foreign Assets (NFA) Against Net Domestic Assets (NDA)
6.15.   Disinflation from Intermediate Levels During Programs, by Degree of Fiscal Adjustment
7.1.   Scheduled Debt Service
7.2.   Scheduled Debt Service of ESAF Users
7.3.   Principal Indicators of Progress Toward External Viability
7.4.   Sectoral Financial Balances
7.5.   Growth of Real GDP, Export Volume, and Import Volume
7.6.   Official Borrowing: Deviations of Outturns from Projections
7.7.   Merchandise Exports: Deviations of Outturns from Projections
9.1.   Frequency Distribution of Changes in the Fiscal Balance
9.2.   Program Interruptions in SAF/ESAF Arrangements
9.3.   Distribution of the 51 Program Interruption Episodes by Main Factor
9.4.   Targeted Change in Fiscal Balance in Interruptions Affected by Policy Slippages
9.5.   Frequency of Missions in the Six Months Leading Up to Interruptions Affected by Policy Slippages
4.1.   Fiscal Developments in Nontransition Economies
4.2.   Fiscal Adjustment in SAF/ESAF-Supported Programs: Targets and Outcomes
4.3.   Composition of Noninterest Expenditures in SAF/ESAF-Supported Programs: Targets and Outcomes
4.4.   Budget Consolidation
4.5.   Fiscal Debt Dynamics
4.6.   Banking System Distress in Nontransition ESAF Countries
4.7.   Change in the Size of the Civil Service During SAF/ESAF Period
4.8.   Civil Service Wage Bill During SAF/ESAF Period
4.9.   Indicators and Scoring System for Structural Policies
4.10.   Overall Structural Reform Index
4.11.   Indices of Structural Reform: Pricing and Marketing
4.12.   Indices of Structural Reform: External Sector (Exchange and Trade Systems)
4.13.   Indices of Structural Reform: Exchange System
4.14.   Indices of Structural Reform: Trade System
4.15.   Indices of Structural Reform: Financial Sector
4.16.   Indices of Structural Reform: Public Enterprise Sector
5.1.   Growth in Real Per Capita GDP in ESAF Countries and Other Developing Countries
5.2.   Trends in Saving and Investment Rates
5.3.   Determinants of Growth
5.4.   Differences in Growth Between ESAF and Non-ESAF Countries
5.5.   Growth and Structural Reforms
5.6.   Growth Exercise: Sample Means
5.7.   Matrix of Simple Correlations: Whole Sample
5.8.   Determinants of Growth: Specification Search
5.9.   Growth Exercise: Five-Year Averages
5.10.   Growth Decompositions: Good Policies or Good Luck?
5.11.   Combined Effects of Structural Reforms on Growth
5.12.   Complementarities in the Effects of Structural Reforms on Growth
5.13.   List of Countries Included in the Panel Regressions
5.14.   Data Description and Sources
6.1.   Implied Reduction in Growth Rate when Inflation Exceeds 5 Percent
6.2.   Growth Performance in Countries Exiting High Inflation During SAF/ESAF Programs
6.3.   Seigniorage and Financial Depth Indicators Prior to SAF/ESAF Programs
6.4.   Deviations from SAF/ESAF Program Targets, by Performance of Net Domestic Assets (NDA)
6.5.   Inflation Performance, by Use or Nonuse of Nominal Exchange Rate Anchors
6.6.   Inflation Performance Without Nominal Anchors, by Type of Exchange Rate Policy
6.7.   Aspects of External Performance, by Use or Nonuse of Exchange Rate Anchors
7.1.   Amounts and Composition of Aggregate Net Resource Flows
7.2.   Concessional Element in External Debt
7.3.   Distribution of Public and Publicly Guaranteed External Debt by Creditor
7.4.   Annual Average Exceptional Financing by ESAF Users
7.5.   Principal Indicators of Progress Toward External Viability of ESAF Users
7.6.   Comparison with Results of 1993 ESAF Review
7.7.   External Debt Service: Fiscal Burden Ratios
7.8.   ESAF Users: Vulnerability Indicators
7.9.   ESAF Users: Progress on Vulnerability Indicators
7.10.   HIPC ESAF Users: Indicators of Debt Sustainability
7.11.   ESAF Users: Average Grant Element in New Borrowing and Net Present Value of Debt
7.12.   Summary Analysis of Change in Ratio of External Debt to Exports
7.13.   Summary Terms of Trade and Real Effective Exchange Rate Indices
7.14.   Indicators of External Sector Reform
7.15.   Sectoral Financial Balances
7.16.   Growth and Trade Indices
7.17.   Debt and Debt-Service Ratios: Projections Versus Outturns
7.18.   ESAF Users: Limits on Nonconcessional Public Borrowing or Guarantees
7.19.   Official Borrowing: Targets Versus Outturns
7.20.   Merchandise Exports: Targets Versus Outturns
7.21.   Debt Accumulation During and Outside Program Years
7.22.   Statistical Tests of Differences in Group Averages
7.23.   Systematic Errors in Projections of Official Borrowing
7.24.   Systematic Errors in Projections of Export Earnings
7.25.   Analysis of Change in Ratios of External Debt to Exports
7.26.   Terms of Trade and Real Effective Exchange Rate Indices
7.27.   Indicators of External Sector Reforms
7.28.   Sectoral Financial Balances
7.29.   Growth and Trade Indices
8.1.   Role of Public Enterprises in Economic Activity, 1978–91
8.2.   Strategies to Reform Public Enterprises
8.3.   Changing Scope of Public Enterprises in the Economy Before and After Reforms
8.4.   Direct Budgetary Flows to and from Public Enterprises
8.5.   Availability of Public Enterprise Financial Data
8.6.   Extent of Banking Sector Distress
8.7.   Main Elements of Banking Reform Strategy
8.8.   IMF Involvement in Bank Restructuring
8.9.   Partial Estimates of the Costs of Bank Restructuring
8.10.   Summary Indicators of Bank Restructuring
8.11.   Indicators of Financial Intermediation
8.12.   Monitoring Structural Public Enterprise Reforms
8.13.   Bank Lending Operations Supporting Cross-Sectoral Public Enterprise Reform, 1985–96
8.14.   Bank Sectoral and Technical Assistance Operations Affecting Public Enterprises, 1985–96
8.15.   Summary of Banking Reform Conditionality
9.1.   Investment and Growth in SAF/ESAF-Supported Arrangements
9.2.   Policy Deviations in Interruptions Affected by External Shocks and/or Natural Disasters
9.3.   Fiscal Targets and Initial Conditions in Annual Programs
9.4.   Relationship Between Fiscal Deficit Targets and Initial Conditions in All SAF/ESAF Annual Programs
9.5.   Targets and Outturns for the 12 Interruption Episodes in "More Ambitious" Programs
9.6.   Number of Structural Conditions in Programs Prior to Interruption Episodes
9.7.   Observance Rates in Structural Conditionality
9.8.   Program Monitoring Prior to Interruptions Affected by Past Policy Slippages
9.9.   Comparison of IMF Staff Resources in ESAF Countries and Baltics, Russia, and Other Former Soviet Union (BRO) Countries
9.10.   SAF/ESAF Review: List of Program Interruptions
9.11.   SAF/ESAF Review: Factors Underlying Program Interruptions
9.12.   Classification of Critical Factors in 51 Interruption Episodes
9.13.   Factors Underlying Program Interruptions Affected by Extensive Strikes and Social or Political Unrest
9.14.   External Shocks in 11 Program Interruptions Affected by Past Policy Slippages
9.15.   Annual Fiscal Targets Prior to Interruptions Affected by Past Policy Slippages
9.16.   Structural Conditionality in Programs Prior to Interruptions Affected by Past Policy Slippages
9.17.   Program Monitoring in Program Interruptions Affected by Past Policy Slippages
9.18.   Contingencies in Programs Prior to Interruptions


Hugh Bredenkamp and Susan Schadler

In the aftermath of the debt crisis of the early 1980s, many of the IMF's poorest member countries embarked on far-reaching programs of adjustment and economic reform. The severity and structural nature of the economic problems to be addressed suggested a need for longer-term financial support than that available under the IMF's conventional instrument for members' use of its resources, the Stand-By Arrangement. At the same time, given the low per capita incomes and typically large external debts of the countries concerned, there was a desire in the international community to ease the burden of new IMF loans by offering them to eligible borrowers on highly concessional terms. Those benefiting would be expected to combine strong macroeconomic policies with extensive reform of their economic systems, to remove distortions, enhance efficiency, and redirect the role of government in the economy. These circumstances led to the creation of the IMF's Structural Adjustment Facility (SAF) in 1986, followed a year later by its successor, the Enhanced Structural Adjustment Facility (ESAF). By the end of 1994, 36 countries had drawn on the ESAF, in support of 68 multiyear programs.1

This volume is a collection of studies prepared by IMF staff for an internal review of the experience of ESAF-using countries, and the programs they undertook, during 1986–95. Reviews of this kind are carried out periodically at the request of the IMF's Executive Board. They provide an opportunity to take stock of policies implemented and outcomes achieved, and to identify ways in which the design and execution of future programs can be strengthened. A summary report of the current review, drawing together the results of the staff studies and setting out policy recommendations, was recently published (IMF, 1997).2 In a new initiative, the IMF's Executive Board also commissioned an independent review of the ESAF, to be conducted by outside experts, with a particular focus on three aspects: developments in countries' external positions; social policies and the composition of government spending; and the determinants and influence of differing degrees of national "ownership" of ESAF-supported programs. The findings of the independent evaluation were also published in 1998 (IMF, 1998).

Summary of the Chapters

The approach to evaluating IMF-supported programs, and of structural adjustment more generally, has been the subject of considerable controversy over the years. Much of the debate arises from differing presumptions about what questions can reasonably be asked of the data. Some evaluations have sought to establish whether countries experienced faster economic growth, or had more favorable outcomes for other key variables, as a result of their choice to adopt an IMF-supported program. Such questions can be addressed only by postulating an alternative (counterfactual) set of policies--those that would have been pursued in the absence of the program. In Chapter 2, which gives a brief perspective on methodological issues, Hugh Bredenkamp notes some of the difficulties and limitations of an approach that relies on explicit identification of the counterfactual.

Instead, the present study assumes that the basic strategy for growth and adjustment underlying the ESAF--which is based on a large body of analytical and empirical literature that draws on the experience of all developing countries--is the right one. The aim, then, is to examine how well that strategy was reflected in the design and execution of programs, how much progress was made in strengthening economic performance, and in what respects the basic strategy can be refined and improved. As Bredenkamp explains, in using various tools--before-and-after, cross-country, and control group comparisons--to shed light on these questions, no assumption is being made that policies or outcomes were necessarily "caused" by ESAF support or conditions. Rather, the question is how strong were the policies and outcomes supported by the ESAF.

To provide a context for what follows, Sharmini Coorey lays out in Chapter 3 some of the background against which ESAF-supported programs were implemented. She describes, first, the range of economic problems that countries faced as they put together their first ESAF-supported programs. Unlike most countries that have sought IMF assistance through Stand-By Arrangements, ESAF users tended not to suffer from acute, but temporary, macroeconomic instability. Rather, they were weakened by entrenched structural defects in their economies--a legacy, by and large, of the inward-oriented and dirigiste development strategies of the 1960s and 1970s. Controls and distortions had stifled saving, investment, and growth, while the institutions essential for a market economy remained undeveloped or dysfunctional. The government and external accounts were in chronic imbalance, feeding severe debt burdens and often high inflation. Coorey goes on to outline the principal elements of the reform strategy supported by the ESAF, which aimed to reverse these trends by reducing macroeconomic imbalances, promoting saving, liberalizing and opening up markets, strengthening institutions, and mobilizing external financial assistance on appropriate terms. For much of the late 1980s and early 1990s, this challenging agenda had to be implemented within a difficult environment, as countries saw their terms of trade deteriorate and some experienced severe civil strife and natural disasters. After 1993, by contrast, global conditions were generally favorable and are likely to have contributed to the striking recovery of economic growth witnessed in ESAF countries during 1994–96.

The record of policy reforms and adjustment in ESAF countries from the mid-1980s through 1995 is the focus of Chapter 4. Louis Dicks-Mireaux, Jean Le Dem, Steven Phillips, and Kalpana Kochhar tell a story of qualified progress, with consistent but often hesitant advances in most areas of economic policy. There were disappointments, certainly, in some respects and in some countries, but all ESAF users ended the period under review with economies that were more flexible and market-oriented than a decade earlier. Moreover, there were signs of a general strengthening of the adjustment effort in the early 1990s, especially in Africa, increasing the likelihood that recent improvements in economic performance can be sustained. Overall, the clearest advances were in the dismantling of state control over exchange and trade systems, price setting, and marketing arrangements. The liberalization of exchange markets helped to correct widespread and often severe overvaluation in countries' real exchange rates, thereby promoting openness to trade. There was also some progress in reorienting government spending toward health, education, and infrastructure. The study finds much less encouraging evidence in the areas of public enterprise reform and bank restructuring, where slippages in implementation were commonplace and overall progress, in most countries, was limited. On the macroeconomic front, the worst instances of high inflation were tackled effectively, but many countries failed to reach single-digit inflation, despite successive programs in which that was a stated objective. Moreover, although three-year programs sought to cut budget deficits by almost half, on average, only about half of this adjustment was achieved. The continuing burden of public enterprises and meager progress in civil service reform were major factors impeding adjustment.3 Several of the later chapters are devoted to analyzing these various weak points and to developing proposals for stronger action in future programs.

The object of countries' policy efforts, and the ultimate goal of the ESAF, was to promote sustained economic growth with improved living standards, while securing progress toward external viability. The outcomes for growth are examined in Chapter 5. Kalpana Kochhar and Sharmini Coorey show that average real per capita growth in ESAF countries (excluding transition economies), which was negative and substantially below that of other developing countries in the early 1980s, rose to a modest positive rate by the early 1990s. After 1993, the "growth gap" relative to other developing economies was eliminated. To shed light on how this convergence was achieved, Kochhar and Coorey estimate a standard empirical model that relates growth to policy indicators (including budget deficits and inflation), social and demographic factors, and terms of trade and other shocks. They verify that the parameters of this relationship are similar in ESAF and non-ESAF developing countries and, on that basis, calculate that roughly half the improvement in ESAF countries' growth between the early 1980s and early 1990s was attributable to strengthened policies, both macroeconomic and structural. The relatively weak growth performance of ESAF users in Africa is traced to more rapid population growth and inadequate investment in human capital in these countries, a fact that reinforces the importance of making room for efficient social expenditures in ESAF-supported programs.

Given the finding of Kochhar and Coorey that growth is significantly and inversely related to the rate of inflation, Steven Phillips argues in Chapter 6 that the decidedly mixed record of ESAF countries in attaining low (that is, single-digit) inflation should be cause for concern. He demonstrates that, beyond the single-digit inflation range, the negative association between growth and inflation is robust, even after controlling for other factors. The analysis suggests that the causality goes from high inflation to lower growth, rather than vice versa. Moreover, it is not, as some other studies have claimed, determined only by a few observations of very high inflation. The size of the effect is sufficiently strong that the costs of failing to reduce inflation to low levels are economically as well as statistically significant. Phillips considers two possible concerns that may have led policymakers to postpone disinflation: expected short-run output costs, and the loss of seigniorage revenue for the government budget. He shows that growth typically rose immediately in ESAF-supported programs, even in those achieving substantial disinflation, and concludes that fears of a short-run weakening of output during a disinflation may be unwarranted when demand restraint is combined with supply-side reforms. The loss of seigniorage, he acknowledges, can be considerable when adjusting from the levels of inflation commonly found in ESAF countries. Disinflation therefore needs to be accompanied by durable tax and expenditure reform. Aside from these political economy considerations, it appears that most ESAF-supported programs also suffered from insufficiently ambitious fiscal tightening and the lack of an effective nominal anchor for inflation: ceilings on credit failed in this role, as monetary expansion tended to be sustained by balance of payments inflows. A case is made, therefore, for stronger fiscal programs backed up by the use of nominal anchors, in the form of money ceilings, exchange rate pegs, or formal inflation targets.

In Chapter 7, Tsidi Tsikata looks at progress toward the second core objective of the ESAF: external viability. Progress is defined as a decline in debt-service burdens and reduced reliance on exceptional financing--that is, arrears, debt rescheduling, and official balance of payments support. Roughly three-fourths of ESAF users moved closer to external viability according to this definition, a somewhat higher proportion than was so judged at the time of the last ESAF review in 1993. But the gains were generally modest, particularly when debt burdens are measured in relation to GDP rather than exports. Tsikata analyzes the possible reasons for differing performance across countries and finds that some obvious explanations, such as variation in the size of current account deficits or in the generosity of debt relief, are not supported by the evidence. Instead, he concludes that it is the pace of economic growth, particularly when export-led, that most clearly distinguishes those countries making strong progress toward external viability from the rest. This suggests that growth and external viability are complementary objectives, and that policies furthering one will tend to contribute to both. Less reassuring is a finding that access to external financing (if represented by the pace of debt accumulation) is not, as might have been expected, closely linked to a country's compliance with its IMF-supported program.

In Chapter 8, Jorg Decressin, Zia Ebrahim-zadeh, Louis Dicks-Mireaux, and Ali Ibrahim investigate the reasons for the persistent difficulties that many ESAF countries have had in moving ahead in two important areas of reform: improving the financial position and efficiency of public enterprises and addressing weaknesses in banks' portfolios and practices. Using a case-study approach, the authors highlight the failure to impose effective budget constraints and management accountability on public enterprises as a principal cause of the slow progress in rectifying the weakness of public enterprises. They conclude that more extensive privatization may be the only solution to these problems in many countries, and they note that programs have been moving in this direction in recent years. So long as firms remain under state ownership, however, it is argued that governments will need far better information about enterprise finances than most currently have if they are to exert the necessary financial discipline. The compilation of adequate financial data on public enterprises should therefore be given high priority in future programs. More can also be done to foster market discipline, by removing the monopoly rights of public enterprises and liberalizing investment codes.

The inefficiencies and mismanagement of public enterprises contributed to a substantial accumulation of bad loans in the banking systems of ESAF countries. The authors explain how this problem was related, in turn, to structural weaknesses in the banks' own management, stemming typically from government intervention in lending decisions and insufficient prudential regulation and supervision. They note that successful reform will require, among other things, that governments agree to cede political influence over banks' operations. Two suggestions are made for enhancing the design of ESAF-supported programs in this area. First, a full assessment of the (often very large) fiscal costs of bank restructuring should be made at the outset, so that the costs can be fully incorporated into programs and financing can be identified. This may lead to the selection of more efficient restructuring strategies, and it should reduce the likelihood of reforms running into financial roadblocks during implementation. Second, programs should include a comprehensive, medium-term reform strategy for the banking sector and set specific objectives for improving key aspects of bank regulation and supervision, such as licensing and closure policies, the application of capital standards, and loan provisioning rules. The aim would be to move away from an emphasis on approving plans and passing laws, and to focus instead on the effective functioning of the apparatus for regulating banking systems.

The final chapter, by Mauro Mecagni, adopts a quite different perspective on the experience with ESAF-supported programs. Rather than looking at specific policies and their consequences, he examines the overall continuity of the adjustment effort, as represented by the completion (or otherwise) of IMF-supported programs. Mecagni finds that only about one SAF or ESAF arrangement in four was completed without significant interruption, and that 28 of the 36 countries under review experienced at least one such interruption. Stop-go policies have been shown in other studies to be damaging for economic performance, and a brief review of the experience in the ESAF countries suggests that growth and investment were weaker in countries that experienced interruptions than in those that did not. Chapter 9 therefore asks whether there are changes in the design or monitoring of ESAF-supported programs that could enhance policy continuity. Some possibilities emerge: a more proactive approach by the IMF to the provision and coordination of technical assistance; greater use of contingency planning to deal with potential shocks; and more frequent monitoring of programs and assignment of resident representatives. Mecagni argues, however, that these measures, although worthwhile, would probably not have averted most of the interruptions witnessed in the past. In general, interruptions occurred when large and deep-seated deviations of actual from programmed policies had occurred, and the difficulties in formulating or adhering to sound policies could be traced to political upheavals or to flagging national commitment. To lessen risks of this kind--for instance, around the time of elections, when pressures on policymakers are often severe--the IMF would need to seek greater assurances than in the past with respect to a government's willingness and ability to carry out its policy commitments.


Abed, George T., and others, 1998, Fiscal Reforms in Low-Income Countries: Experience Under IMF-Supported Programs, Occasional Paper 160 (Washington: IMF).

International Monetary Fund, 1997, The ESAF at Ten Years: Economic Adjustment in Low-Income Countries, Occasional Paper 156 (Washington: IMF).

———, 1998, External Evaluation of the ESAF: Report by a Group of Independent Experts (Washington: IMF).

Schadler, Susan, Franek Rozwadowski, Siddharth Tiwari, and David Robinson, 1993, Economic Adjust-ment in Low-Income Countries: Experience Under the Enhanced Structural Adjustment Facility, Occasional Paper 106 (Washington: IMF).

Schadler, Susan, Adam Bennett, Maria Carkovic, Louis Dicks-Mireaux, Mauro Mecagni, James Morsink, and Miguel Savastano, 1995, IMF Conditionality: Experience Under Stand-By and Extended Arrange-ments, Part I: Key Issues and Findings, Occasional Paper 128 (Washington: IMF).

1Under the ESAF, resources are provided in phased disbursements over the course of a three-year adjustment program. They are repayable over 10 years with a 5!/2-year grace period, at an annual interest rate of 0.5 percent. The 36 countries that had drawn on the ESAF by the end of 1994 were Albania, Bangladesh, Benin, Bolivia, Burkina Faso, Burundi, Cambodia, Côte d'Ivoire, Equatorial Guinea, The Gambia, Ghana, Guinea, Guyana, Honduras, Kenya, Kyrgyz Republic, Lao People's Democratic Republic, Lesotho, Madagascar, Malawi, Mali, Mauritania, Mongolia, Mozambique, Nepal, Nicaragua, Niger, Pakistan, Senegal, Sierra Leone, Sri Lanka, Tanzania, Togo, Uganda, Vietnam, and Zimbabwe. See also Box 2.1 in Chapter 2.
2Two previous reviews are also available: one covering the experience under SAF and ESAF arrangements through 1992 (Schadler and others, 1993), and a comparable study on Stand-By and Extended Arrangements during 1988–92 (Schadler and others, 1995).
3See Abed and others (1998) for an extensive analysis of fiscal policies and developments in ESAF countries.