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Helping the Poor: the IMF's New Facilities For Structural Adjustment
Vinod Anand | 14 Jan 2012

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 arc highly concessional. The SAF and the ESAF are part of a broader effort to cope with the unprecedented problems of the poorest countries. When the size of the ESAF was being determined, SDR 6 billion of additional resources was estimated to be essential for the medium-term financing needs of low-income countries, even when other exceptional sources of concessional finance were taken into account.

These included prospective re-scheduling of official debt by official and private creditors, growing bilateral flows for nonproject assistance, the World Bank's Special Program of Assistance for low-income, debt-distressed sub-Saharan African countries as well as its strengthened program for co-financing in the poorer countries, and the rapid implementation of IDA VIII, which was replenished with $114 billion in late 1987. The African Development Bank and the African Development Fund also received strong financial support from donors in the same year.

2. The SAF was created with about SDR 2.7 billion of resources to support adjustment in low-income countries with protracted balance of payments problems. The funds available under the SAF come mainly from repayments on loans from the Trust Fund, which will continue to be received through April 1991. However, it was evident from the outset that these resources were inadequate to enable the poorest countries to overcome their increasingly severe payments difficulties and to assist them in embarking upon the fundamental structural reforms that were required. The idea of a new facility backed by far larger funds emerged, and the Fund was able in a relatively short period of time to obtain, from a wide range of sources, a significant amount of loans as well as grant contributions to subsidize the interest payments on these loans.

Accordingly, in mid-December 1987 the Fund established the ESAF with some SDR 6 billion of additional loanable resources.Sixty-one of the Fund?s poorest members are eligible to use the SAF, but two of the largest, China and India, indicated at the outset that, as they did not anticipate acute or persistent balance of payments needs, they did not intend to make use of the resources. The Fund now commits up to 70.0 percent of a member's quota under the three-year arrangements supported by the SAF. Resources are made available for SAF-supported programs on highly concessional terms' /2 of 1 percent interest, with the principal repayable over 5?/2 to 10 years with a 5-year grace period. Disbursements under the SAF are made annually and are linked to the approval of annual arrangements, with members receiving the equivalent of 20 percent of quota under the first annual arrangement, 30 percent under the second, and 20.0 percent under the third.The same 61 countries that are eligible to use the SAF are eligible for the ESAF. China has indicated that, under present circumstances, it does not intend to use the facility although it remains fully eligible to do so, while India has stated that, in the absence of a fundamental deterioration in its balance of payments, it does not expect to borrow from the ESAF.

Eligible members can receive a great deal more assistance under the ESAF than under the SAF; up to 250 percent of quota over a three-year program period, with provision for up to 350 percent in exceptional circumstances. The broad objectives of programs supported by the ESAF are similar to those of SAF-supported programs, and these programs are also designed on the basis of a policy framework paper formulated by the national authorities with the assistance of the staffs of the Fund and the World Bank. Disbursements under the ESAF, however, are semiannual instead of annual; with more resources available to countries, it was felt that more frequent review of the member's performance under the program was both reasonable and appropriate. ESAF resources are available to members on the same highly concessional repayment and interest rate terms as SAF resources.By the end of February 1991, 32 countries had obtained support from the SAF, and 14 countries had obtained support from the ESAF, for their adjustment programs.