ESAF - No Solution to Multilateral Debt

The International Monetary Fund and the World Bank have proposed a framework of action to assist in resolving the debt problems of heavily indebted poor countries. In the current formulation of this framework, replenishment of the Enhanced Structural Adjustment Facility (ESAF) has been presented as the centrepiece of the IMF contribution.

The IMF role was described in the brief prepared by IMF and World Bank staff for the April 23, 1996 meeting of the Development Committee:

"The IMF would also be expected to take action that would reduce the present value of its claims on a country, consistent with broad and equitable participation in the framework of this initiative. Various possibilities involving support under the ESAF which might achieve this objective are currently under examination."

Support for this approach is shared by IMF Governors and Executive Directors. As Canadian Finance Minister Paul Martin made clear in his speach at the Interim Committee meeting on April 22, 1996:

" At a minimum, the Fund must be in a position to continue to finance an adequately-funded Enhanced Structural Adjustment Facility. Clearly, as the IMF's only concessional arrangement, ESAF remains essential in addressing the special problems of the poorest countries. The lack of agreement on the role of the IMF centres on the financing of such an initiative."

But is ESAF an appropriate means of responding to the needs of countries stressed by debt? A look at the experience of ESAF indicates that it is not an effective method of addressing debt problems, either directly in terms of reducing debt obligations, or indirectly in terms of stimulating positive economic development in general so as to help provide capacity to deal with debt obligations.

The perception of ESAF as a response to debt problems arises from an understanding that refinancing previous loans on softer terms, with a grace period, should have a positive effect on debt service obligations over the short term. This, in turn, should provide room for an economy to stabilize and direct its energies to growth, especially through increases in export earnings. But the reality of ESAF in practice is not that encouraging.

ESAF programmes have been available to highly indebted poor countries for several years, and there is enough evidence to indicate that their effectiveness is unsatisfactory, both in terms of what they were ostensibly designed to do and, more importantly in the context of how much the IMF is pointing to ESAF as a contribution to the debt crisis, in terms of any impact they might have on reducing the overall debt burden of these countries to manageable levels.

ESAF is not an appropriate means of addressing debt problems, and it is not adequate as development finance. Several countries have had a series of SAF and/or ESAF programmes, and there is no reason to assume that a replenishment of ESAF funds, through the sale of IMF gold or otherwise, would provide for better programme results.

This paper provides a broad overview of the ESAF experience, with an aim to evaluate ESAF effectiveness in helping alleviate the debt burden of poor countries either directly or incidentally. Included are brief case studies of two countries with different experiences with ESAF programmes, Uganda and Nicaragua, in order to provide examples of some of the circumstances within which ESAF programmes operate.

The Purpose of ESAF:
ESAF objectives, eligibility and basic procedures are virtually the same as for SAF. Basic objectives are:

  • to enable low-income countries to restore and maintain balance of payments viability, while undertaking the necessary structural reforms that would enable them to achieve a high and sustainable rate of growth, with the support of concessional, medium-term assistance
  • to maintain a low inflation rate, and
  • to facilitate orderly relations with creditors and a reduction in trade and payments restrictions.

In recent years, the IMF has expanded its activities to include medium- and long-term financing for promoting economic reforms and structural adjustment programmes, beyond the provision of short-term balance of payments finance for stabilization purposes. These additional lending facilities significantly change the role of the Fund, which now plays a more active role in the formulation and implementation of member countries' domestic policy reforms.

The IMF sets the economic and financial objectives and targets for the countries in ESAF programmes, as well as the priorities for reform and recovery, and then assesses the performance and progress. While the terms are agreed to, the increased involvement of the IMF in the determination and management of domestic affairs has led to a deterioration in its relationship with many members.

Under some conditions, the refinancing of loans on softer terms is considered a relevant approach to long-term structural debts. The refinancing available through ESAF does not include any grant element, however, and can only be regarded as a contribution to debt reduction to the extent to which softer terms are obtained on the refinanced debt.

The Enhanced Structural Adjustment Facility: Overview
Eleven ESAF programmes were started in Africa the first year it became operational, joining 230 other stabilization and structural adjustment programmes begun by the World Bank and IMF in the 1980s.

By 1993, 29 countries had ESAF agreements, with just over US$6 billion of the available $15 billion being disbursed. Several countries had undergone a series of ESAF (or prior SAF) programmes by that time:

Bangladesh (3 ESAFs, plus 3 SAFs),

Bolivia (4 ESAFs, plus 1 SAF),

Burundi (2 ESAFs, plus 3 SAFs),

The Gambia (3 ESAFs, plus 2 SAFs),

Ghana (3 ESAFs, plus 1 SAF),

Guyana (3 ESAFs),

Kenya (3 ESAFs, plus 1 SAF),

Lesotho (2 ESAFs, plus 3 SAFs),

Madagascar (2 ESAFs, plus 1 SAF),

Malawi (4 ESAFs),

Mauritania (1 ESAF [extended], plus 2 SAFs),

Mozambique (3 ESAFs, plus 3 SAFs),

Niger (2 ESAFs, plus 2 SAFs),

Senegal (3 ESAFs, plus 2 SAFs),

Sri Lanka (2 ESAFs, plus 3 SAFs),

Tanzania (2 ESAFs, plus 3 SAFs),

Togo (3 ESAFs, plus 1 SAF),

Uganda (4 ESAFs, plus 2 SAFs)

ESAF countries generally entered their programmes with low rates of saving and investment, external current account deficits, and weak productive capabilities. As a group, these countries experienced some growth in productivity and savings rates, but investment was stagnant. Although there were continued weaknesses in the terms of trade, exports increased and reserves were built up, and the debt-service ratios declined; however, current account deficits widened relative to the GDP. ESAF countries continued to be reliant on exceptional financing, and unable to attract private investment. (Schadler 1995)

ESAF and debt:
Past experience indicates that ESAF programmes do not generally contribute to the alleviation of debt.

In the IMF Occasional Paper, Economic Adjustment in Low-Income Countries: Experience Under the Enhanced Structural Adjustment Facility, it was admitted that while some countries with the ESAF experience "can be considered to have made progress in the sense of cutting or holding constant their debt and debt-service burdens", about half of the countries studied "experienced little change or even increases in debt and debt-service ratios and had increased recourse to exceptional financing".

The report goes on to say that "for many countries, debt and debt service remain so high that even the strongest domestic policy efforts would be insufficient to restore external viability in the foreseeable future". (Schadler 1993, p.40)

Presently, almost all of the debt of highly indebted poor countries to the IMF is on ESAF terms. Therefore, refinancing this debt under new ESAF loans would have no effective impact on the debt overhang of these countries.

ESAF is Structural Adjustment
It is important to note that ESAF is not purely a financing mechanism. The financing that is provided through ESAF is advanced as support to structural adjustment programmes.

A country must be prepared to commit to an IMF-approved programme of reforms or stabilization measures in order to obtain additional funding from donors, or gain and maintain access to international capital markets. Similarly, the concessional funds of an ESAF agreement are available only with IMF conditionalities, in other words the acceptance of fiscal, monetary and structural policies (such as privatization or the removal of price controls) that the IMF wants followed.

Thus ESAF is exposed to the same criticism that has pursued structural adjustment generally. Although adjustment of some kind is necessary for economies with internal or external imbalances that cannot be sustained, structural adjustment programmes designed and imposed by the IMF have received substantial criticism.

In particular, there are questions about the distribution of costs and benefits within the societies, and the long-term performance of countries in adjustment programmes, within the context of the dominant position of the IMF in directing the adjustment process.

"The distinction between adjusting and non-adjusting countries is largely artificial and cannot be justified by either needs or the superior performance of the recipient countries. All sub-Sahara Africa countries, for example, need a substantial injection of external assistance to meet the immediate economic crisis facing them as well as to finance their recovery and long-term growth. However, only the adjusters, or those who accept conditionality, qualify for and receive external funding for structural adjustment, although the evidence on their superior economic performance is, at best, patchy and open to question." (Abbott, p.123)

In order to gain funding, a country could over-commit, or find things going wrong once in adjustment. It could under-perform, fail to comply with policy requirements, or abandon a programme. False starts, abandoned programmes, low compliance rates, wasted resources and poor performance can result either from the lack of good faith or from bad luck.

The harsh social impact of structural adjustment has been one of the major criticisms of the IMF approach. The United Nations Economic Commission for Africa argued in 1989 that structural adjustment programmes "not only ignore the human dimension, but also tend to worsen the well-being of large categories of the population, especially the poor and vulnerable". (quoted in Sonko, p.105)

In most countries with programmes introduced after 1982, real wages declined while unemployment climbed. With continued weakness in terms of trade, low levels of investment, and substantial debt burdens, any increases in productivity have not translated into an improvement in living standards for most people in these countries. And, in general, any benefits to be found have accrued to the urban minority.

Case studies

per capita debt: US$ 2,800 (highest in the world)
per capita GNP: US$ 330
annual increase in debt: US$ 500 million
Total foreign debt: US$ 12 billion debt (World Bank, 1996)

Structure of Nicaragua's debt:
Bilateral 72%
Commercial 16%
Multilateral 12% (largely $800 million owed to the Central American Economic Investment Bank and the Interamerican Investment Bank [1994], on hard terms)

Programmed for 1995:
Donations 18.7 ($ million)
Loans 152.0
Foreign debt service payment: 264.9
International reserves
(Net reserves less foreign currency reserves, net BOMEX placements, and back debt obligations)

Dec. 1994 - 1.5

March 1995 - 53.0

May 1995 - 64.8

(Central Bank of Nicaragua, quoted in envio, Sept. 1995)

From 1990 to 1993, Nicaragua received US$ 3.24 billion, of which $660 million was for reprogramming of the debt, $920 went to debt service, and $1.66 billion used to finance the trade deficit. (envio Aug. 1994)

Structural adjustment in Nicaragua before ESAF:

The Nicaragua government entered into a structural adjustment programme with the IMF in 1988. With the replacement of the Sandinista government with that of Violeta Barrios de Chamorro and the National Opposition Union (UNO) coalition, a new programme began in March 1991, with immediate social impacts.

The currency was devalued by 400 percent, with a resulting overall price increase of 358 percent. The impact on women was particularly hard. At the end of 1991, almost 16,000 working women had lost their jobs, over half of them in the agricultural sector. Women represent 60 percent of the informal sector of the economy, mainly as traders and domestics, which has expanded.

The infant mortality rate increased to 91 per 1,000 live births in 1992, compared with 64 per 1,000 the decade previous. Most Nicaraguans have seen their standard of living decline, with reductions in spending on food and other basic necessities.

Children are leaving school early both because education is no longer free and because for low income families more members are needed to work.

In Managua, there has been an increase in violence since the early 1980s, when the city registered low indices of crime, alcoholism and prostitution.

ESAF in Nicaragua:

The ESAF agreement with Nicaragua was signed in June 1994. At the time, ESAF provided access to concessionary foreign resources at a time when the country had almost no reserves. Over the 1994-96 period of the ESAF, the programmed debt service to the multilateral agencies was set at $415 million, equal to 94 percent of the volume of liquid loans Nicaragua will receive through the programme.

The agreement set quarterly macroeconomic goals, so that adjustments could be made in order to reach the year-end (December) target, in terms of: Central Bank credit to the public sector and to the economy, net international reserves, and back payments on prioritized foreign debt.

Structural changes were to include: reduced state employment, elimination of Central Bank credit to the state banks, limits on the kind of credits handled by the Nicaraguan Investment Fund, reduction of state banks' losses, privatization, increased private investment in electric and hydrocarbon sectors, the lifting of non-tariff import and export barriers, and the elimination of restrictions on charging for education and health services.

The agreement thus aims for the reduction of the state's capacity to intervene in the economy, and the opening of finance, communications, and energy sectors to private competition.

The first evaluation of Nicaragua's ESAF was in March 1995, but the government had not met the main goals of the agreement and so these were reprogrammed. The aim at the time was to give more weight to the savings goals of the non-financial public sector, and restrict the Central Bank's credit to private commercial banks and the Nicaragua Investment Fund. The government agreed to reach even higher international reserves level required by the IMF, but considering that in the first phase of the programme the adjusted balance of international reserves had actually declined to -$53 million, the outcome was predictable.

The second evaluation was in September 1995. Goals had again not been met (reserves had again declined, to -$107.7 million) and the March reprogramming not been observed, and so the ESAF agreement was superseded by a "bridge programme". The IMF and the government reached an agreement to try to keep inflation down by withdrawing money equal to $US 18.2 million from circulation, and placing it into reserves or savings deposits. The non-financial government sector was continued to be financed, however, while there were strong restrictions to commercial banks and the private sector.

New conditionalities were added, including the transfer of $15.3 million from the state development bank (BANADES) to the Central Bank, and the collection by the Central Bank of $7 million in back payments from the National Investment Fund and of the ENAL (the state energy company) debt of $53.3 million. In all, almost 50 percent of the money circulating in the country would have to be recovered.

Even with a great effort on the government's part, these were not reachable goals. BANADES, for example, would have to try to collect on loans to farmers before the harvest, which was poor, was in and the crops sold.

The bridge programme targets were not reached.

As a result of this process, pressure was put on the government to stay with an unrealistic ESAF programme. There was a reworking of the programme, but not so as to make it attainable and avoid the continued non-compliance.

With the goals of the bridge programme dominant, other obligations were not fulfilled. Nicaragua incurred an arrears charge on the debt itself. Failure to pay the Central American Integration Bank cost $35 million, and while nonpayment to bilateral creditors cost $11.9 million.

Going into 1996, the government was required to provide $77.2 million in prioritized foreign debt payments, and $82 million for its international reserves. This meant more credit restrictions. For example, financing for the agricultural sector will be reduced again, after having been reduced by 33.5 percent for the 1995/96 cycle from the year before.

As another response to IMF restrictions, there were increases in electrical rates for small and medium industry (+15%) and for farm irrigation (+30%). Rates for drinking water pumps went up 29 percent, resulting in household water rates going up 8 percent, prompting a general protest and calls for refusal to pay the higher bills.

The adjustment process was criticised as being "very unequal and insufficient, incapable of increasing the productivity and institutional conditions required to move toward a modernization that supports a sustained growth rate... The problem with ESAF is not that it exists... the problem is that it is incapable of dealing with the country's main challenges. ESAF needs to be an integral part of an economic recovery packet". (envio April 1996, p.26)

In a volatile social situation, there has been a reduction in the regulatory capacity of the state, and its ability to act in social reconciliation. The sovereignty of the state is threatened by the strength of other powers, including the Church and the United States, while economic policy is directed by the IMF, World Bank, and the IDB. This is within the context of political instability and social stress associated with the high levels of poverty and unemployment, health and education problems, and deteriorated infrastructure - transport, energy and communications, while stabilization benefits accrue to members of the old oligarchy.

Seventy-four point eight percent of all Nicaraguan families live below the poverty line, 43.6 percent in extreme poverty. Unemployment is around 60 percent, mainly women and young people. (UNDP poverty study, June 1994, as quoted in envio, Nov. 1995) The growth in the economy is not enough to absorb the currently unemployed and new workers, and the response under ESAF is to provide temporary job-creation programmes like the Emergency Social Investment Fund (FISE). Funded at $75 million in 1995, it will create 20,000 new temporary jobs.

Growth in 1994 and 1995 is based on primary resources (seafood, forestry, cattle, grain) and cannot be relied on for sustainability. Extractive industries like these do not have a strong positive impact for the rest of the economy. Economic instability is aggravated by a low level of domestic savings, a depressed credit supply, pressure to raise taxes (in a regressive tax structure) and, of course, an unpayable foreign debt.

The World Bank has pointed to the rise in exports in goods and services in 1994, an increase of 25 percent (World Bank News, Jan.4 1996), as an indicator of success, but the increase was mainly due to the rise in coffee prices and unrelated to domestic economic policy (and of benefit only to that sector).

Long term export growth will not be possible without adequate investment levels, which the country is too indebted to attract. Trying to achieve a positive trade balance by reducing imports provides another dilemma, given the level of poverty that already exists in the country, and the need to increase the import of intermediate goods and capital (nearly half of the country's imports were final consumer goods; $915 million from 1990-1993).

The flight of capital was reversed for the first time in 1993, but the creation of a positive environment for domestic investment is necessary if Nicaraguan capital is to stay within the country. Continuing high levels of debt service frustrate that process by limiting public investment and contributing to a negative psychological impact.

This is the fourth poorest country on earth, with a per capita income of US$170. Life expectancy is estimated to be about 44 years. More than one in ten infants does not survive to his or her first birthday. One in five do not survive their first five years, dying mostly from preventable diseases; half the children are stunted from malnutrition.

$114 million will be sent to multilateral institutions in 1996. For 1996/97, Uganda is expected to pay $5.8 per capita to multilateral creditors ($3.2 of which is to the IMF) while spending about $3 per capita on health care.

Uganda has had a long relationship with the multilateral institutions, agreeing to its fourth ESAF programme in 1993 (which followed two SAF programmes in 1987 through 1989). The ESAF agreements are of particular interest here, because more recently they are occurring within the context of a broad development strategy. The extent to which the experience here allows for some optimism about the future is due in large measure to the circumstances that surround the structural adjustment process. However, there continue to be serious concerns both about the injurious social impact of the process, and about the long-term prospects for stable economic growth.

The Debt Sustainability Analysis provided by the staffs of the IMF and World Bank in January, 1996, showed that debt indicators would remain high, even with all applicable bilateral and multilateral actions and with sharply rising private sector contributions:

"Debt indicators are expected to improve only gradually, leaving the country vulnerable to adverse shocks for an extended period. It is particularly exposed to a weakening in world coffee prices."

The level of multilateral debt stock is expected to increase steadily, from under $4 billion in 1995/96 to over $7 billion by 2010/11. Reduction in the debt-service ratio is dependent on growth in exports, of which one crop, coffee, makes up two-thirds.

In the early 1980s, the Obote regime accepted all IMF conditionality terms, and literally signed the economy over to the FUND. The currency underwent devaluation, price controls were abandoned, and ceilings placed on net government credit and total domestic credit. In many respects, the programme was considered a success: the GDP grew at 5.4 percent between 1981 and 1983, inflation reduced from over 100 percent to 30 percent, and the government budget deficit was reduced. The programme had other effects, however: IMF dollars intended for Uganda was diverted to Kenya's parallel market, and found its way into the foreign bank accounts of Kenyan businessmen; industrial production, which was dependent on imports, began to decline; the quality of education went down (although the number of schools went up); medical services ceased; and roads went unrepaired.

During this time, IMF and World Bank lending climbed to over half of the external sources of funds, and contributed substantially to the emerging debt burden problem. Service ratio rose from 18.9 percent of export earnings in 1981 to 55 percent in 1985. In all, the Obote regime received about $865.5 million in assistance from the IMF and World Bank, with much of the debt contracted on non-concessional terms.

After several years of civil war, the National Resistance Movement (NRM) of Uganda formed the government in 1986, in an environment economic chaos and with hundreds of thousands of internal refugees. It began its first serious attempt at a structural adjustment programme in May 1987, within the framework of its Economic Recovery Programme. This programme was supported by an IMF Structural Adjustment Facility and by an IDA Economic Recovery Credit, approved in September, and by Paris Club rescheduling of bilateral debt. In April 1989 the SAF was replaced by an Enhanced Structural Adjustment Facility, as the government decided to accelerate the pace of reforms.

The aim of the Economic Recovery Programme was to reduce inflation (over 200 percent in 1986/87) to under 10 percent by 1991/92, to strengthen the balance of payments to allow an increase in international reserves and reduce external arrears, and to provide for economic growth, with a target of a 5 percent annual increase in GDP.

To accomplish these, the currency, the Ugandan shilling, was devalued from UShs14 to UShs440 to the US dollar between 1987 and 1990, a real effective depreciation of over 40 percent. Price and distribution controls were dismantled, and marketing and agricultural parastatals were either abolished or reduced.

The results of these efforts were mixed. The gross domestic product increased in 1987 by 4.5 percent, with industrial sector growth at 15 percent. Good weather and higher prices helped agricultural production to go up 8.5 percent, but exports fell by 18 percent because of external factors. The economy failed to adjust to a number of external shocks, and inflation rose in September to an annual average of 24 percent. By the end of the 1987/88 programme, the economy was once again severely destabilized, and relying heavily on external financial assistance.

To a certain extent, the economic programme in the early 1990s was effective. Inflation had been successfully controlled, and stood at 16 percent in 1993 (compared with a record high of 270 percent), with growth in the GNP evident after 1992, following years of decline.

Gross National Product:
1987 6,204
1988 6,430
1989 5,192
1990 4,213
1991 3,250
1992 2,758
1993 3,162
1994 3,941 (World Bank, 1996)

In 1986, the tax on coffee production provided 60 percent of government revenues. By 1994 this tax was eliminated as the government tried to encourage production in the face of falling world prices (coffee sales dropped from $394 million in 1986 to $98 million in 1992/93). The government has been unable to maintain a sufficient level of social spending, caught as it is between the demands of debt repayment and the budget restrictions because of the narrow tax base and lean revenues.

Between 1987 and 1990, there was a net transfer of resources to the IMF of over US$90 million. By 1994, Uganda's debt was 2.6 billion dollars, with annual payments of 100 million dollars. Two-thirds of this debt was to multilateral institutions. Prior to the first SAF or ESAF, Uganda's debt to export ratio was 273; five years later (1991) it had increased to 1,092, the largest increase for African countries with rising debt ratios. The debt-service ratio for this period rose from 54 percent to 128 percent, before going back to 56.5 percent in 1993/94. (Sharer)

During the first five years of SAF/ESAF, the country's external debt increased by 101.2 percent, with its debt to export ratio increasing by 300.8 percent. (Schadler, 1993) Between 1987 and 1994 the total debt stocks grew from $1.6 billion to $3.5 billion, and the country had difficulties servicing its debt, incurring external payments arrears.

In 1994 the IMF and Uganda agreed to another three year ESAF programme, with a US$175 million loan. This ESAF agreement called for the further reduction of the civil service and a restructuring of the Uganda Commercial Bank with an aim to privatization.

The next year, the government of Uganda initiated a unique approach to its debt problem, through the Uganda Multilateral Debt Fund. It will be managed by the government in consultation with the multilateral institutions and donors, and gets no financial contribution from the IMF or World Bank. There may be difficulties because negotiations through this fund are not supported globally, but there may be lessons to be learned in the process for other countries.

Uganda was the first country to receive debt reduction under the 1994 "Naples Terms", under which Paris Club creditors agreed to reductions of 67 percent of debt stock. Because of the large amount of multilateral debt, however (almost 70 percent of payments), and the bilateral debt that was not considered eligible for Naples Terms treatment, the total debt stock was reduced by only about 2 percent

Social considerations:
Uganda's High Commissioner to London, George Kirya, has said that "Because of these debts, we can't do anything to alleviate the problems in the country. We want free primary education, free health care and to build economic infrastructures and to pay decent salaries to workers.. But we cannot do these things because of the very heavy debt burden." (quoted in Samboma)

Adult literacy declined from 57 percent in 1986 to 46 percent in 1992. Infant mortality increased to 122 per 1,000 in 1992, up from 115.56 in 1987. Life expectancy dropped from 48 years in 1985 to 42, in large part because of the AIDS epidemic, but that does not account for a maternal mortality rate which has grown from 300 per 100,000 live births to 550 since the mid-1980s. (World Bank, 1996)

Debt repayments have caused major cutbacks in healthcare services and education. Fees are charged for medical services, putting them out of the reach of many, and parents are asked to contribute to their teachers' salaries while there is inadequate public investment in the school system. More children, especially young girls, are being withdrawn from school, and primary school attendance is about half what it should be. In the poorest areas, less than one in ten children attend school.

"Structural adjustment programmes (SAPs) have pushed down spending on Uganda's social sector and set wage restraints that impinge on health. This has led to a brain drain of doctors, absenteeism, inefficiency and corruption in the health service," said Dr. Angela Wakhweya of Makere University's Institute of Public Health in Kampala in 1994.

"SAPs have limited public sector physicians to earning a monthly wage of 50 dollars. Between 1986 and 1990, 249 doctors graduated in Uganda. By the end of their first year of employment, 25 percent had left for richer pastures. If they don't leave, they take secondary jobs, run a side business, or take bribes from the families of patients to secure increasingly scarce medicines." (quoted in Chatterjee)

A 1995 report from the Uganda Women's Network (UWONET) declared that although in many ways the economic programmes undertaken by the NRM have been successful at reduced inflation and restoring economic growth, "SAP has also widened the rift between rich and poor, as the lives of the latter have been severely eroded". (quoted in Borzello)

In particular, women agricultural workers are not benefitting from the structural adjustment process. With little or no access to cash, health care is no longer available except through missionary hospitals or traditional healers.

As to the efforts by the World Bank to alleviating the social effects of the structural adjustment programme, the UWONET report charged that programmes were not implemented, that projects were behind schedule, and that donors had not delivered promised levels of funding.

There is also an environmental concern about the SAP in Uganda. The country has traditionally grown high quality cotton without the use of chemical pesticide or fertilizer, because of the fertile soil and favourable climate. Cotton exports provide for 5.6 percent of export earnings, and there is an increasing desire for a higher yield, especially since the subsidies that farmers had previously received as compensation for low world market prices were abolished. Farmers have been turning away from cotton production, however, and growing other crops that provide more cash. This is a concern to the government, because the domestic cotton industry is only using about 25 percent of its capacity, while the country imports 85 percent of its needs. And so the pressure to use chemicals and technology to increase production grows.

The IMF regards the Uganda sequence of economic adjustments to be a success: "A strong commitment of the Government to adjustment and consistency in its actions led to a remarkable recovery in economic activity", a process in which "the support of the IMF has been critical". (Sharer, p.1-2) In a recent paper evaluating economic changes in Uganda, IMF analysts declared that "Uganda's performance provides lessons for African countries involved in adjustment efforts: success is critically dependent on commitment, the courage to take the first steps, and consistency of policy implementation along the road to growth and development". (Sharer, p.42)

Thus the IMF apparently believes, contrary to all indications that African countries have on the whole not adopted an adversarial attitude with the IMF and World Bank but rather entered into adjustment programmes in a spirit of cooperation, that a failure to produce positive results is a result of a lack of commitment, courage, and consistency on the part of these countries.

Concluding comments
ESAF was designed to provide liquidity over the short term, but it should not be regarded as development finance, and not as a substitute for a comprehensive strategy. IMF policies in particular are best limited to short term stabilization measures rather the design and imposition of obligatory long-term development programmes.

The Uganda experience provides an example of the integration of ESAF arrangements into a comprehensive development strategy. Although there are some indications that the economy is improving, there are serious concerns about the vulnerability of the economy to external shocks, the dependence on concessional assistance in the absence of private investment, and the continuing high level of debt. Such improvements as there have been in the economy are not sufficient to provide for improvements in social conditions.

The Nicaragua ESAF arrangement was not done in the context of a comprehensive development strategy, the absence of which leaves a host of problems unaddressed. The program goals are not be realistic in terms of either the government's intent or capacity to pursue them. It remains to be seen if the country can continue to experience export growth, which was due less to domestic policy than it was to changes in the world market. Like Uganda, Nicaragua is heavily dependent on concessional assistance, and has a continuing high level of debt.

Seeking a solution to the debt crisis through the encouragement of export growth would require both an efficient tradables sector and a realistic exchange rate, but also access to markets in industrial countries. The establishment of steady export growth in highly indebted poor countries will not come easily or quickly, and for the short and medium term it can be expected that they will be vulnerable to setbacks outside their control.

The implementation of programmes of economic adjustment requires both will and capacity . If targets are not met, it hardly matters if later it is argued that the failure of a programme was the fault of the government for not pursuing the goals with enough vigour. Economic programmes that are designed without adequate consideration for social, political, cultural and environmental conditions, and are not realistic in terms of what can actually be achieved, will not realize effective accomplishment of the goals.

In 1989, Jeffrey Sachs argued that the IMF should "recognize the limited efficacy of conditionality", and proposed several ways by which it might do so, including:

  • approve fewer programs
  • encourage governments to enlist the necessary range of political support behind the terms of a high-conditionality program before the program is made final
  • encourage the use of debt relief schemes as a way to enhance the likely adherence to conditionality terms
  • narrow the goals of conditionality: Make macroeconomic stabilization the preeminent aim, with structural reform to be implemented only as macroeconomic stability is restored. (Sachs, 1989)

The inclusion of this list should not be understood as an endorsement of these particular recommendations, but rather as another example of the recognition that any economic program must include aspects of popular support, and that the conditionality should not be contrived to be more than what it is. Debt relief is a separate and necessary component in any development program that is to be effective for highly indebted poor countries.

ESAF does not provide an appropriate response on the part of the IMF to the ongoing debt crisis. As this paper indicates, ESAF would provide no effective reduction of the debt overhang for the highly indebted poor countries. And this approach also remains open to criticism, as with other structural adjustment programmes, particularly because of damaging impacts on the weakest sectors of society.

Prepared by Derek MacCuish
Social Justice Committee of Montreal
for the Halifax Initiative. June 1996.


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