Helping the Poor: the IMF's New Facilities for Structural Adjustment (PART 6)
Vinod Anand | 30 Nov 2011

Sensible fiscal and monetary policies had to ensure that financial imbalances were addressed while these structural reforms were being implemented.

SENSIBLE FISCAL and monetary policies had to ensure that financial imbalances were addressed while these structural reforms were being implemented. Good policies were needed so that inflation could be controlled, domestic savings encouraged, and resources released for productive investment. Given the country's already high level of debt, the SAF-supported program had to be implemented within strict budget constraints and limited prospects for external assistance.

To ease these constraints, domestic savings were to be encouraged by a reform of the financial sector. Domestic interest rates were liberalized to offer savers better returns on their deposits, while an active domestic money market was to be stimulated by establishing a discount house and introducing an auction market for treasury bills. A reform of the tax system was to complement these efforts.The SAF-supported program envisaged an average annual growth rate of real gloss domestic product (GDP) of about 5 percent over the period of the program, which would maintain the level achieved over the previous two years.

It was planned to bring inflation down substantially between 1986 and l990, and to generate large export surpluses to meet the expanded import needs of new investments. Barring the unforeseen, it was hoped that by the end of the program's period, the country would have a viable external payments position and the basis for more diversified and sounder growth in the future.Case 2As a striking contrast to the first case, this second example of a country that implemented a SAF-supported program was a small economy that was heavily dependent on two agricultural products as its main source of income and exports. This economy did not have the broad potential for growth of the first case. Because the country was small and mountainous, moreover, its production costs for even its limited exports were high compared with those of its competitors. It had previously had access to preferential markets; these were now closed.

This country needed a basic reorientation in its objectives and policies - first, to ensure that its scarce resources were used as efficiently as possible and that the demands on these resources were not excessive, and second, without being overly ambitious about what could be achieved, to lay the basis for new sources of income. Before the country approached the Fund with a request for SAF support, bad weather had battered the agricultural sector, slowing exports, and actually reducing the production of one basic export. Although these had begun to recover, the vulnerability of the economy to outside forces was clear.

Meanwhile, unemployment was high and investment prospects limited; the government had difficulty in generating public sector savings, and public investment was financed mainly with foreign money. Although most of this was still on concessional terms, the outlook for continued concessional finance was limited and the country simply could not afford market terms. Adjustment had to be achieved by skillful fiscal management; as the main source of domestic investment, the public sector had to reallocate resources to potentially productive activities while reducing non-priority expenditures.