This first case of a country that initiated a policy program supported by a SAF arrangement from the Fund is an economy that had once been wealthy.
THIS IS the first case of a country that initiated a policy program supported by a SAF arrangement from the Fund is an economy that had once been wealthy. Not only was it richly endowed with natural resources, fertile land, and well- timbered areas as well as large deposits of minerals, but it had also once had a thriving manufacturing and commercial sector.
In addition, with a long tradition of education, the country had one of the scarcest resources of all population with a high level of academic and business skills. A combination of political instability, bad domestic policies, and unfortunate developments outside the country's control, such as the fall in world commodity prices and two severe droughts, thoroughly eroded the productive capacity of the country. Real per capita incomes actually fell by about 30 percent between 1970 and 1982; savings and investment declined; and, unable to pay its debts, the country began to accumulate arrears. Between 1981 and 1985, earnings from its largest export fell, and industrial production and manufacturing also declined. Total export values dropped, not only because of lower world prices, but also because export volumes were lower, and this decline extended from agricultural commodities across the whole range of mineral exports.When it approached the Fund with a proposal for support from the SAF, this country had already begun to address its major problems, but it needed the assurance of financing over a longer period than that covered by a normal Fund stand-by arrangement. It needed time to fully liberalize its exchange and trade system?its currency had appreciated well beyond its competitive level, discriminating heavily against exports and in favor of imports, particularly energy.
The country also needed time to implement policies to stimulate output in the agricultural sector, where extensive replanting and rehabilitation was badly needed and urgent action was called for to put an end to large-scale smuggling to neighboring countries. Finally, time was needed to restore the basis for diversified economic activity, to streamline and reorient public investment to support higher and more varied production, and to improve in Infrastructure, particularly road maintenance, which had been a bottleneck on distribution and marketing for some time.This was a country with good potential for growth.
The challenge was to undo the harm that previous policies had done to productive capacity, to restore output in agriculture, mining, and commerce, and to raise the efficiency of transport and the use of energy. At the same the large sector had to become more efficient and the fiscal deficit less ol a burden on the economy. The SAF-supported program focused on four essential areas: raising price incentives for agricultural producers; increasing domestic savings; easing bottlenecks on supply; and improving fiscal management. Further, liberalization of the exchange and trade system was expected to stimulate the production of exports in general, in an effort to reduce the economy's vulnerability to external shocks from over-concentration on a few products.