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Helping the Poor: the IMF's New Facilities for Structural Adjustment (PART 1)
Vinod Anand | 30 Nov 2011

The international community has responded to the crisis in the poorer developing countries by equipping the International Monetary Fund with two special new facilities.

THE INTERNATIONAL community has responded to the crisis in the poorer developing countries by equipping the International Monetary Fund with two special new facilities?the structural adjustment facility (SAF) in March 1986 and the enhanced structural adjustment facility (ESAF) in December 1987. Under these facilities, up to SDR 8.7 (about US$12) billion of concessional resources is expected to be made available to help low-income countries with protracted payments problems take measures to improve their balance of payments and foster growth over the medium term.The concept embodied in the two facilities is innovative. They establish a procedure to build consensus on an adjustment program within the borrowing country and among the international lending and donor communities and they provide a rallying point for the mobilization of additional funds.

Policy framework papers, the basic documents that describe in broad terms the measures the country proposes to take during the program period, are prepared by the national authorities with the joint assistance of the staffs of the Fund and the World Bank. These papers identify the sources of a country?s problems as well as the remedies and external financing that are needed, providing a framework for other donors planning additional assistance to the country in question. The need for special facilities to support adjustment in the low-income countries arose out of their unprecedented problems. These countries have very low per capita incomes. Many have faced falling prices for their exports and deteriorating external positions.

At the same time, the external sources of finance for most have been declining just when their debt burden represented an increasing claim on future earnings.This combination of circumstances seriously undermined the capacity of these countries to grow out of their poverty without exceptional assistance. Sustainable growth requires a steady rise in the level of investment as well as improvements in its efficiency. But after a decade of poor growth, the domestic resources available for investment in these countries were too low to compensate for the slowing inflow of foreign funds. If growth was to recover, fundamental reforms were called for to strengthen and expand productive capacity.

More resources had to be released for new investment. To increase the efficiency of existing investment, institutions had to be reformed and new ones created; above all, people had to be persuaded to follow new approaches. These reforms frequently meant basic shifts in the structure of economic activities.Traditional sources of concessional lending were insufficient to support countries' efforts to meet these challenges. This conclusion was behind the decision of the international community to support the creation in the Fund of the SAF and, less than two years later, the ESAF. The idea behind these facilities was that adjustment and growth must be mutually reinforcing. If structural impediments delay and undermine countries? adjustment efforts, these must be directly addressed. The broad objectives of the SAF and the ESAF are to help countries restore and maintain payments viability, while changing the structure of economic activity to achieve high and sustainable rates of economic growth.

The terms of the facilities recognize that low- income countries implementing strong adjustment programs are apt to be less successful if they have access to financing only on market terms. Concessional resources allow borrowing countries to pursue the bolder and longer-term reforms that are needed, and the resources available under both of the Fund?s new facilities are highly concessional.