News Brief No. 97/14

News Brief: IMF's Executive Board Completes Internal Review of ESAF.

July 28, 1997

Most low-income developing countries that have undertaken reform and adjustment programs with the support of the IMF's enhanced structural adjustment facility (ESAF) now have economies that are materially stronger and more market-oriented than a decade ago, the IMF's Executive Board concluded on July 21, on the basis of an internal staff report. Fiscal imbalances have been reduced, helping to eliminate almost all instances of high inflation. Liberalization and structural reforms have taken hold and, in some respects, have gathered momentum in recent years. On average, the decline in per capita growth rates has been arrested, and social indicators have improved.

At the same time, Executive Directors noted that progress has been uneven and in a number of areas has fallen short of what was required for countries to reach their potential. Stronger macroeconomic and structural policies are needed to enhance outward-oriented growth and--in combination with debt relief and appropriate financing--to accelerate countries' progress towards external viability. Executive Directors called on IMF staff to ensure that future ESAF-supported programs embody renewed efforts to tackle persistent weaknesses in these crucial areas. Specifically, they urged greater attention to:

• more decisive fiscal adjustment to boost national saving rates and release resources for investment;

• stronger efforts to bring inflation to single digits on a sustainable basis within the period of three-year ESAF arrangements; and

• structural measures to stimulate private investment and entrepreneurship, including further liberalization of foreign trade and investment, public enterprise reform, the creation of sound banking systems, and measures to improve governance and strengthen property rights.

Executive Directors were optimistic that low-income countries drawing on ESAF support could build on the progress made in past years--and on the recent improvements in economic performance, particularly in Africa--to develop stronger medium-term programs that would put their economies on a sustainably higher growth path. They noted that the lessons from this review would help countries in this endeavor.

Background

The IMF's ESAF and its precursor, the structural adjustment facility (SAF), have been supporting adjustment and reform programs in many of the IMF's low-income developing countries for over ten years. In March 1993, on the basis of a review prepared by the staff, the Executive Board discussed the experience of 19 countries through mid-1992 and concluded that the experience under SAF/ESAF-supported programs had been generally favorable. The current study, which was completed in June of this year, reviews the experience of 36 countries that had availed themselves of SAF and ESAF financing in support of 68 multi-year programs approved prior to December 31, 1994. The staff's summary report, and accompanying studies, formed the basis for the Executive Board discussions on July 18 and 21. The summary staff report will be released in early September, to be followed by publication of the entire study.

The internal review will be complemented by an external evaluation of the ESAF now underway, and scheduled to be completed later this year. The external evaluators will use a case-study approach to examine three topics in detail: (i) developments in countries' external positions; (ii) social policies and the composition of government spending; and (iii) the determinants and influence of differing degrees of national ownership of ESAF-supported programs. The Executive Board is expected to draw additional lessons for future ESAF-supported programs on the basis of that study.

Summary Report

The conclusions of the IMF staff's recently completed review are organized around possible ways in which ESAF supported programs might be re-oriented to achieve more consistently the two key and mutually reinforcing objectives of the ESAF--sustained higher growth, with improved living standards, and progress toward external viability. Several aspects of ESAF-supported programs are considered: the need for further and more growth-enhancing fiscal adjustment that would also improve prospects for external viability; the case for more decisive disinflation as a spur to growth, and measures to achieve it; steps to advance structural reforms in two areas where performance has continued to lag--the public enterprises and banking systems; and, finally, modifications to promote more continuity in policy implementation.

The analysis steps back from program-by-program detail and looks instead at how far countries progressed between the beginning of their SAF/ESAF-supported adjustment and 1995, the most recent year for which comprehensive data were available. This approach reflects the view that adjustment and reform are continuing processes that do not begin or end with specific programs; that the full effects of policies may emerge only gradually, and with an uncertain lag; and that there is now a sufficient span of experience with adjustment in the countries under review to allow a more extended perspective than was possible at the time of the last ESAF review in 1993. The current study uses a variety of before and-after, cross-country, and control-group comparisons to examine the links between policies implemented and outcomes achieved.

The IMF staff study does not question 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--but focuses instead on assessing how well that strategy was reflected in the design and execution of programs. The study also seeks evidence on how much progress was made in strengthening economic performance in ESAF countries and how the basic strategy can be refined and improved.

What Has Been Achieved

The attached table provides summary economic and social indicators for the 36 low-income developing countries that have undertaken reform and adjustment programs with the support of ESAF financing. It compares their experience in the five-year period immediately prior to the inception of the SAF in 1986 with the most recent five year period for which comprehensive data are available. It also compares the experience of the 36 ESAF users with that of non-ESAF developing countries (other than those classified by the World Bank as "high income") during the same periods. This latter comparison not only is a useful benchmark for assessing the magnitude of the improvement in the ESAF countries but also provides a reminder that ESAF countries, by definition, started out with much worse economic indicators than other developing countries. Thus, the data for the most recent period, while showing some improvement, also clearly highlight areas where much progress remains to be made if these countries are to reach their potential.

As the table shows, ESAF users achieved some progress in reducing inflation, cutting budget deficits, and increasing export volumes. The figures on external debt reveal that the stock of ESAF users' external debt almost doubled between the two time periods. However, in the latter period a much larger portion of this debt was provided on concessional terms, implying a smaller increase in the net present value of the debt. With respect to social indicators, infant mortality and illiteracy have declined, and life expectancy has increased.