STRUCTURAL
ADJUSTMENT AND THE ROLE OF THE CENTRAL BANK
BY
N.E. MASHOLOGU RESEARCH DEPARTMENT (CBL)
I. INTRODUCTION
1.
Structural Adjustment is a phrase that is now increasingly identified
with an economic development option or strategy, advanced
with varying degrees of conviction and persuasion by the International Monetary
Fund and the World Bank, in response to the immense problems domestic and
external that created barriers for most developing countries, in meeting
their objectives and realizing the aspirations, both social and economic of
their peoples.
1.1
As a preface to an examination or what structural as a strategy, purports
to achieve and what it emerges to be in practice, it is essential to put its
geneses in some perspective and in particular to review those, problems with
singular relevance to Sub-Saharan Africa (SSA), that it was and still is
intended to redress. And in this context, it cannot be overstated that the
underlying premise of any analysis of the perceptions or the authors of
structural adjustment must always be the assumption that the measures that they
have advocated to relieve the plight of the developing countries have largely
been due to a desire to improve the quality of life of the people in the
developing countries.
1.2
Low income Sub Saharan African countries, like many developing countries,
are in the grip of an economic and social crisis. The crisis developed gradually
over a period of time and it is accumulation of adverse developments, which
became evident in the early 1980s
1.3
Since the start of the decade, Sub Saharan Africa has been characterized
by severe economic problems. These problems included fiscal and external
deficits; excess public Indebtedness, overall economic contraction and inflation
sated into a sharp decline in the standards of living, especially of the poor,
vulnerable groups.
1.4 The external debt problem has for most of Sub Saharan Africa, dominated the agenda of the region’s major economic pre-occupations. So serious has the problem become that prospects of full debt servicing in the foreseeable future are at best bleak and at worst nonexistent According to the World Bank reports, in 1906 the ratio of all external debts to GDP in low-income African countries was 88 percent compared to 61 per cent in the 17 highly indebted middle income countries. The aggregate medium and long term external debt of SSA is reported to have risen according to some analysts, from around US$ 6 billion in 1970 to a staggering US$126 billion by the end of 1987. It is ironic that governments of the region first incurred external debts to finance development projects to boost the economies of their countries, only to be caught, due to a combination of circumstances, in a vicious grip of having to resort to more external borrowing, sometimes even to service interest on original loans. Actual realities have too infrequently matched expectations of the countries of Sub—Saharan Africa.
1.6 The opposing view is that adverse developments in the international economy are solely responsible for the critical situation prevailing in developing countries. But, in effect, it is a combination of these two sets of factors, that is, policy and structural weaknesses in developing countries coupled with negative external economic trends that crippled the economies in these countries including Sub—Saharan Africa.
II.
STRUCTURAL ADJUSTMENT: Analytical
Framework
2.1
One of the primary functions of the International Monetary Fund is to
foster conditions conducive to sustained economic growth. The Fund provides
financial support on very confessional terms
and advice to governments of its member countries, in formulating and
implementing their economic policies the financial assistance is generally given
on a conditional basis that the countries concerned adopt Sound economic
policies. The major emphasis of adjustment programmers supported by the IMF and
the Sank is achievement of balance of payments stability with sustainable
economic growth. This entails a mix of policies designed to achieve adjustment
and growth. The appropriate roles of commercial banks and official creditors in
providing finance to developing countries are an important ingredient to the
adjustment programmed.
2.2
At its inception, SAP consisted of a package comprising two sets of
policy measures. Some measures. Some measures focused on short term
stabilization whilst other were designed for and aimed at structural reforms and
growth. The Funds emphasis in particular appeared to be on short term
stabilization, whilst the Bank’s inclination was bent towards support of
medium term adjustment programmers. Lately, and with the hindsight of experience
gained since the early 1980s, there are indications that the Fund is becoming
somewhat more receptive and amendable to arguments in support of a medium—
term perspective of structural adjustment programmers.
1.7
While external forces will continue to influence the region’s economic
performance, it has been necessary for many of the African countries to design
and implement policy reforms and structural adjustment programmers for the
recovery of their economies with the support of bilateral and international
agencies.
1.8
Thin paper attempts to describe the nature of structural adjustment and
the role of the central bank in the Sub—Saharan Africa context. Section II: of
this paper discusses the concept of structural adjustment in broad terms.
2.3
The World Bank introduced structural adjustment loans (SAL) in 1980. The
main policy objectives include:
a) Reduction in the size of the public sector and improvements in its management;
b) Elimination of price distortions in various sectors of the economy;
c) Increasing trade liberalization and
d)
Promotion of domestic savings in the public sectors.
For
stabilization and adjustment programmers, the Fund and the Bank recommend the
following public instruments
a) Exchange rate adjustment, mainly through devaluation;
b) Interest rate policy designed to promote domestic savings and appropriate allocation resources;
c) Control of money supply and credit;
d) Fiscal policy aimed at reducing government expenditure and deficit financing;
e) Trade and payments liberalization; and
f) Deregulation of prices of goods, services and factor inputs.
1)
AAF-SAP UNICA
2.4
The Fund’s Approach: The Fund seeks to help alleviate severe balance of
payments problems and high inflation rate, which characterize most developing
countries, in recognition that it is extremely difficult to achieve adjustment
with growth in countries with large external deficits and high rate of inflation.
External and internal imbalances are the major macroeconomic factors that hamper
economic growth. Therefore, the Fund puts priority in the reduction of budget
deficit and achievement of viable external balance.
5.
The external deficit can be caused by either the domestic investment gap
(that is the difference between domestic savings and investment) or the
government deficit. According to the IMF, government deficits are more to blame.
Besides, if the target is to reduce the deficit within a short time, working
through increased savings may be inadequate since that requires a longer time
perspective. Thus, the burden falls on the budget and in most cases, the
emphasis is on reducing government expenditure, or disabsorption.
Disabsorption
policies or the so called demand management can be fiscal or monetary.
Fiscal policies often include a combination of government expenditure
reducing and revenue boosting measures, tax and pricing policies etc. Monetary
policies aim at influencing the monetary aggregates underlying both domestic
demand and the balance of payments e.g. changing the volume of credit.
Remand management policies directly affect absorption and therefore, the internal balance. To achieve external balance simultaneously requires a set of policies aimed at changing the composition of foreign and domestic goods i.e. expenditure switching policies. These aim at correcting distortions that favor foreign over domestic goods and services in order to boost the production of goods for Exports or those that compete with imports. These policies include devaluation, liberalization of price controls and quantitative restrictions.
3.1
The central bank plays a significant role in the implementation of
monetary policy, in particular. The objective of viable balance of payments and
stability in prices can be achieved through demand constraint within short to
medium term. Restrictive monetary policy and domestic credit controls are the
basic instruments to cut inflation and improve balance of payments. The central
bank in conjunction with the IMF sets credit ceilings for private and public
sectors to be maintained by the financial institutions. This ensures that the
level of money supply is compatible with the desired target of balance of
payments. Furthermore, the central bank can set interest rate structure at a
level that will stimulate domestic savings and discourage excessive
borrowing. One of the weaknesses that have been identified in the economic
management of most Sub-Saharan African countries is the maintenance of negative
real interest rates. This acts as a disincentive to savings while it encourages
consumption borrowing and deterioration in BOP. In some cases, it promotes
severe capital flight.
3.1.1
The central bank is also responsible for the stabilization of the
exchange rates. In most countries of the Sub—Saharan Africa, the currencies
are over—valued. This policy tends to compress exports and promote imports —
another source of balance of payments deficits. It is clear, therefore, that the
central bank has a direct role to play in the adjustment process. Indirectly,
the central bank can play an important role of being advisor to government in
the pursuit of other macroeconomic objectives relating to the adjustment
programmers as well as monitoring the economic performance of the country that
is adopting the policy reforms
3.3
Finally, private savings are stimulated by stable and predictable
macroeconomic policies particularly as they pertain to interest rate policies
and inflation. Macroeconomic policies alone are not always sufficient, however.
Raising private savings also requires stren9thening of domestic
financial systems. Is the role of the central bank to ensure that the financial
system within which the adjustment process is taking place is sound? This will
also attract foreign investment through confidence of the investor in that
country’s financial system.
IV. REVIEW OF STRUCTURAL ADJUSTMENT
4.1
1980 ushered in the age of structural adjustment with the introduction by
the World Bank of Structural Adjustment Loans (SAL). At the time it was the
expectation that structural adjustment lending would be a temporary expedient
and that after a short period, then calculated at no more than five years, aid
policy would revert to mainstream project lending. It says much for the
conceptual framework of structural adjustment that this IMF/World Bank
development strategy is not only the hallmark of substantial donor policy at the
beginning of the l990s but that structural adjustment lending constituted 40 per
cent of total lending by the International Development Agency in the fiscal
years 1985 – 88.
4.2
This departure from the expectations of the 1980s of SAL as a temporary
measure to its current elevation to what appears to he, at least amongst
advocates of special adjustment programmers, a fixture of aid policy, is
attributed to two factors. First that it had to be recognized that reform of
macro—structural policies could not be dealt with piecemeal but in a
comprehensive way and that, as one donor report state, “economic distortions
nearly everywhere by the end of the 1970a reduced the effectiveness of
traditional project aid”. Second, that against the background of economic
retrenchment experienced by the countries of Sub—Saharan Africa,
rehabilitation, maintenance and increasing capacity utilization commanded
greater importance on aid in tame of resource allocations.
4.3 By the latter part of the 1980s, adjustment programmers had become conventional wisdom in IMF/World Bank relation with aid recipient countries of the Sub—Saharan African countries with more than 60 per cent of those countries following such programmers albeit with varying degrees of enthusiasm. Throughout this same period questions have begun to arise that pose a serious challenge to the effectiveness of adjustment programmers and some level of disillusionment has begun to surface. A number of studies have been conducted on the actual impact of adjustment programmers on the economies of the SSA and even more pointedly on the economic and social well—being and welfare of the peoples of the region.
4.4
Two conclusions reached separately, are instructive about the form that
the structural adjustment strategy has now assumed and the claims that have been
made for it. The first, reached by a major donor, the UK — and one which,
notwithstanding the fact that it is having second thoughts about the tight rigid
IMF/World 3ank penchant for tying aid support to practitioners of adjustment
programmers. Still insists on implementation of structural adjustment as a
condition for disbursement of aid — recognizes that structural adjustment must
meet the following goals to be seen to have succeeded. That it should result in faster
economic growth; stabilized public finances and low levels of inflation; a
stronger external position including faster growth of export volumes and
non—traditional experts; higher savings and investment rates; greater private
investment reflected in new domestic and export oriented production; and higher returns on capital; and
adjustment with
improvement in social indicators. Against this criterion, the conclusion
states “there is no evidence of a systematic improvement in a broad range of
economic indicators associated with the implementation of adjustment programmers
of the Fund and/or Bark in Sub—Saharan Africa”. The conclusion goes on to
say that at most there appears to be some association between adjustment and,
say, a reduction in inflation for certain periods but little more.
4.5
The second conclusion by African countries and contained in the Khartoun,
Declaration which judges the structural adjustment strategy against, and indicts
it, on credit policy, interest rates, exchange rate
policy, trade liberalization, privatization policy, price mechanism, and
across—the—board reductions in budget deficits characterizes the
adjustment programmers as incomplete because they are often implemented as if
fiscal, trade and price balances are aside in themselves, and are virtually
complete sets of moans to production increases. Human condition imbalances, as
related to employment, incomes, nutrition, health and education, do not receive equal
priority in attention to macroeconomic imbalance, the conclusion further
states “They are too mechanistic, being inadequately grounded in or sensitive
to specific national economic, human and cultural
4.6
A salient feature of any examination of the structural adjustment process
is that it is fraught with difficulties, St addressed is, a generalist Context
Since differences in individual Sub—Saharan African countries tend to be
glossed over and divergent responses of the economies of SSA become blurred. It
is obvious that despite the World Bank’s claim that “the evidence points to
better overall economic performance in countries that pursue strong reform
programmers than those that do not, an objective judgment can only be based on a
country by country scrutiny of performance. After all, the SSA countries are at
varying degrees of economic development, some with weak resource bases and
others ranking as middle—income economy countries. Statements by spokesmen of
some countries have actually claimed success with Structural adjustment and such
claims cannot be dismissed on the basis of generalization of the performance of
SSA region as a whole.
4.7 Equally, it must be recognized that some flexibility in implementation of SAP would not be remiss particularly in striking some balance between SAP and project aid and refocusing on the quality of lire of the peoples of the SSA region. In the final analysis though, it is the people rather than advocacy of one strategy against another that should occupy the plateau of concern of both donors and recipients and it is above all their well—being and welfare.
4.9
In short, it is the quality of life in the SSA region that should command
the urgent emphasis of economic policy. The word of the President of the World
Sank Croup, Mr. Barber B. Conable at the recent IMZ/World Bank Annual Meetings
should hopefully set the momentum of the process back on the rails where he
stated Our business — working for the future welfare of all people — could
hardly be more pressing. As we enter a new decade, the World Bank — your World
Bank —wants to snake the future brighter, more productive and more fulfilling
for the people of the developing countries. Of Course, the first task must
always be to deal practically and efficiently with the problems of today. But we
must never lose sight of that great vision.
V.
CONCLUSION
5.1
Prom available empirical data, it is quite obvious that in a global
context, claims of overall success of structural adjustment programmers are
based on extremely tenuous grounds. What can be said for the IMF/world Sank
strategy is that it has quite clearly focused the spotlight on the need for
re—evaluation and reform of policy by Sub—Saharan African Countries, and
further, that credit can be claimed, with some credence, for success in certain
sect oral areas such as reduction of inflation and uncalled for and disruptive
budgetary deficits, it has additionally to be recognized that SAP strategy
focuses on rather short—term targets and given that these targets are embedded
in medium term framework of policy commitments, judgments on Success or lack of
it, cannot but be hasty. There has thus emerged a moot invidious
situation-confronting Sub—Saharan African countries, a situation that has left
most countries in a dilemma of conflicting policy options. On the one hand
delays in correcting structural imbalances in their economies, can only be
compounded by ever—changing Conditions in the domestic and international
environment Reforms cannot be postponed indefinitely whilst the debate continues
about the viability of structural adjustment programmers.
5.2
On the other hand embarking on the programmers without any clear evidence
of at least some measure of guaranteed success, amounts to undertaking
open—ended commitments that can in fact lead to the most awesome disruptions
for the structures of production and consumption and for the main actors of
development, the peoples of the Sub—Saharan Africa.
5.3 Indeed, spectators in the theatre of the operations of SAP must often be dismayed by the lengthening catalogue of extremely harsh measures that some countries practicing SAP strategies often have to implement. The recent measures announced by a West African country that not so long ago was cited as a success story for SAP is an example in point. Ghana, a few days ago imposed a 500 per cent sales tax on what are described as luxury goods, accompanied by a further 10 per cent reduction in the government budget and a rise in price of fuel. Where and when will the era of sacrifice aver end is a question that must indeed pre-occupy those about to embark on SAP strategies.