This third example of a country requesting SAF resources to implement an adjustment program fell between the two extremes represented by the previous cases.
This third example of a country requesting SAF resources to implement an adjustment program fell between the two extremes represented by the previous cases. It neither had rich potential, nor were its prospects very limited. It neither had the opportunity to use all the tools of macroeconomic management, but nor did it face the constraints of Case 2. This was a country with limited natural endowments and, because of its location, extreme vulnerability to drought. The great majority of the population was employed in the subsistence agricultural sector and lived off domestically produced or imported cereals. The modern sector was small, with some manufacturing and tourism. Exports were highly concentrated and vulnerable to changes in the terms of trade and to the vagaries of the weather; in the year the country began the SAF-supported program, three agricultural exports and one mineral accounted for about 60 percent of total export earnings. Food and petroleum products made up 40 percent of import payments.
When droughts were severe, as they had been over recent years, exports plummeted and food imports rose massively. Weak international prices for the agricultural exports were also a problem. While the small industrial sector was reasonably diversified, its costs were high, and it operated in an environment of excessive regulations and distortions. Controls and tariffs on competing imports, export subsidies, and a variety of special agreements protected costly domestic operations in many different ways. The public sector was large and inefficient, with enterprises active in almost every sector of the economy. Both the budget deficit and the external deficit were unsustainably high and the country was in arrears. External debt was high and unsustainable. Although the authorities had already been implementing an adjustment program for three years, longer-term funds were needed so the country could reorient its activities to reduce its external vulnerability and establish new and sustainable activities.
The SAF-supported program contained a three-pronged strategy: to strengthen agricultural production and exports; to reform the industrial sector; and to achieve fiscal adjustment. It was hoped that good growth rates could be maintained throughout the program, that inflation could be reduced to less than half the rate that existed at the outset, and that fiscal and payments surpluses could be achieved by 1990. Arrears were also to be paid off, the current account deficit was to be financed mainly by official grants, and debt rescheduling was also envisaged.