The IMF Policy

In the mid 1970s, African economies across the continent started to experience deep, pervasive and continuing economic crises, especially Sub-Saharan Africa (excluding South Africa). Zero or insignificant economic growth rates, together with high inflation, led to rising foreign and domestic debts, an increase in unemployment, a dire shortage of consumer goods as well as deteriorating social infrastructures. For example, economic output for sub-Saharan Africa as a whole stagnated between 1980 and 1986, with real GDP increasing at only 0.

2 percent per anum on average. GDP per capital was falling at 3 percent per year with a average population growth per annom of 3. 2 percent, the end result of which was a cumulative decline of over 20 percent over the 1980-1986 period. Export volumes, import volumes, domestic investment and savings as a share of GDP all fell drastically as well. (Gladwin, 1991, p. 33) The first responses to these crises were to implement price controls and introduce subsidies for many popular consumer goods and inputs for productions, such as fertilizers and seeds.

These measures were largely ineffective, and as the situation deteriorated further, the IMF intervened with a policy of structural adjustment. (Osei-Hwedie, Bar-on, 1999) Osei-Hwedie and Bar-on further writes: “The essence of the IMF's approach to structural adjustment is the neo-liberal notion that the state must divest itself of direct participation in the economy and the provision of social services to make way for free-market exchange. ” This paper will explore what the IMF policy of structural adjustment really is about, how it was implemented, and it’s short and long term effects over the period of 1982 to 1986.

1. The IMF Policy of Structural Adjustment and ESAF Structural adjustment program (SAP) is the name given to a standard policy package imposed by the World Bank and the IMF, which was tied to loans granted to developing country (Colgan, 2002). This policy package usually specifies certain policy changes and reforms to be carried out, and was generally viewed as “austerity policies” as they usually involved a reduction in government expenditure.

These policies were designed to reorient production of the country towards exports, and to implement a general program of state withdrawal from active involvement in the social and economic sectors, as well as emphasizing the role of the private sectors and a free market. The strategies of SAPs were typified by macroeconomic stabilization measures (elimination of macroeconomic price distortions) and structural reforms involving market liberalization, privatization of public enterprise and significant reductions in the developmental role of the state (Belshaw & Livingstone, 2002, p.215) .

Briefly, the SAPs involved a comprehensive set of economic and policy measures, which were designed to achieve certain macro-economic goals as discussed previously, such as improvement in the balance of payments, a more efficient use of the productive potential, an increase in the long-term rate of economic growth, and low inflation. By the late 1980s, SAPs were in place in more than 30 countries in sub-Saharan Africa.

SAP measures were generally geared towards price mechanism designed to induce substitutions in consumption and production (Osei-Hwedie, Bar-on, 1999) since it was largely based on the assumption that efficiency in resource allocation and economic equilibrium were the main determinants of long-term growth. Hence the primary aim of the SAP was to facilitate the increased intervention of market forces in the economy. As such, according to Naiman and Watkins in a study by CEPR (1999), SAP generally require countries to adopt policies such as Reductions in government expenditure;

Monetary tightening through increased domestic interest rates to promote savings (and investment ) and reduced access to credit; Elimination of government subsidies for food and other items of popular consumption as well as other price distortions; Privatization of enterprises previously owned or operated by the government; Market (capital and goods) liberalization and the removal of barriers to trade, foreign investment and ownership; ESAF stands for the Enhanced Structural Adjustment Facility, and it is the IMF’s concessional lending facility designed for the least developed countries in the world.

The ESAF offers loans with low interest rates and generous repayment terms of five and a half up to ten years, and is an evolved version of the Structural Adjustment Facility (SAF). It was established in 1987, one year after SAF came into operation in 1986. According to the IMF Factsheet (2004), a coutnry’s eligibility for ESAF funding was principally based on the per capita income and its associated eligbility under the International Development Association (IDA), the World Bank’s concessional window.

Under the ESAF, an eligible country could borrow up to 140 percent of its IMF quota under a three year agreement, with this limit being possibly extended to a maximum of 185 percent of quota under exceptional circumstances. In 1999, the Poverty Reduction and Growth Facility replaced the ESAF as the key instrument for the Fund to support member countries in implementing a more participatory and country led mechanism to reduce poverty in developing countries.