INTERNATIONAL FINANCE AND TRADE

POLICY PAPER

On

“STRUCTURAL ADJUSTMENT FACILITY”

World Bank (left) and IMF(right)

Submitted By:
Submitted
To: Group 11
Prof. Deepak Dhall 07BS1184
Archana
Rohit Daftri 07BS3119
Pillai
Rupak Bansal 07BS3554
Shanki Bansal 07BS3948
Sri Krishna Tripathi 07BS4305
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 TABLE OF CONTENTS

S.No Particulars Page

. s
1 ABSTRACT 2
2 INTRODUCTION 3

3 THE IMPLEMENTATION OF STRUCTURAL ADJUSTMENT 5

PROGRAMMES
4 NEED FOR SAF 6

5 CRITICISM 6

6 POLICY ISSUE 8

7 CASE 1: The SOUTH AFRICAN Disaster 9

8 CASE 2: The Success Story of GHANA 11

8 POLICY IMPLICATIONS OF USING SAF AS AN ALTERNATIVE 14

8 POLICY RECOMMENDATIONS FOR IMF, WORLD BANK & 15

EMERGING NATIONS
9 CONCLUSION 17

REFERENCES 18

ABSTRACT

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Structural Adjustment Facility (SAFs) were designed in the 1980s as a response by the major
international creditor agencies, the World Bank (WB) and International Monetary Fund (IMF) to
the growing economic crisis and BALANCE OF PAYMENTS problems encountered by many
developing countries subsequent to the two major oil shocks in the 1970s. Both World Bank and
IMF concluded that short-term stabilization policies, which were traditionally prescribed to
address such crisis, had proved to be inadequate, ineffective and had lacked vision. There was a
growing realization at the Bank and the Fund that economic crisis of the type faced by majority
of the developing countries in the 1980s originated from deep-rooted structural weaknesses.
Consequently, this recognition influenced the Bank and Fund to design a new generation of
'stabilization facilities and policy based loans', which together came to be known as Structural
Adjustment Programme (SAF).

SAF (debt facility) provided by these institution has overtime attracted mixed views from the
economies with an inclination towards the negative side. It is argued that though this facility
helps the emerging nations to grow, but at the same time when we study the results of
implementation of this policy, the widespread outcome is subordination of these economies.

In this paper, we have studied two extreme cases (South African Economy & Ghana Case) to
analyze the elements of SAF and possible policy flaws. The primary objective of this paper is to
analyze the flaws in the policy on the basis of Policy implications and suggest some policy
recommendation for both the parties (Britton Woods Institutions & the benefiting economies) to
remove the existing flaws and efficiently achieve the actual objective of SAF i.e., development
of emerging economies.

INTRODUCTION

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"Structural Adjustment Facility (SAF)" is the name given to a set of "free market" economic
policy reforms imposed on developing countries by the Breton Woods institutions (the World
Bank and International Monetary Fund (IMF)) as a condition for receipt of loans and debt. To
ensure a continued inflow of funds, countries already devastated by debt obligations have little
choice but to adhere to conditions mandated by the IMF and World Bank.

SAF is designed to improve a country's foreign investment climate by eliminating trade and
investment regulations, to boost foreign exchange earnings by promoting exports, and to reduce
government deficits through cuts in spending. It also includes:

 a shift from growing diverse food crops for domestic consumption to specializing in the
production of cash crops or other commodities (like rubber, cotton, coffee, copper, tin
etc.) for export;
 abolishing food and agricultural subsidies to reduce government expenditures;
 deep cuts to social programmes usually in the areas of health, education and housing and
massive layoffs in the civil service;
 currency devaluation measures which increase import costs while reducing the value of
domestically produced goods;
 liberalization of trade and investment and high interest rates to attract foreign investment;
 Privatization of government-held enterprises.

Though SAF economically supports developing nations by granting them debt, but the policies
of IMF and World Bank have attracted international criticism on the grounds: SAF imposing
harsh economic measures which deepen poverty, undermine food security, and also lead to
unsustainable resource exploitation, environmental destruction, and population dislocation and
displacement. SAF also call for increased exports to generate foreign exchange to service debt.

SAF have paid little or no attention to their environmental impact. Deforestation, land
degradation, desertification, soil erosion and salinization, biodiversity loss, increased production
of greenhouse gases, and air and water pollution are but among the long-term environmental
impacts that can be traced to the imposition of Structural Adjustment Policies (SAPs).

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SAP had two major components: (a) macroeconomic stabilization as a short term measure that
was to be carried out in confluence with (b) structural reform measures which were of long-term
and fundamental nature. IMF was given the task of implementing the first component through its
Structural Adjustment Facility (SAF) and Enhanced Structural Adjustment Facility (ESAF)
whilst the structural reform programme was underwritten by Structural Adjustment Loans
(SALs) and Sectoral Adjustment Loans (SECALs) under the guidance of the Bank.

The stabilization experience of the early-1980s revealed that short-term economic management
through fiscal and monetary policies had serious limitations. Causes of macroeconomic
disequilibrium were deep rooted in the structure of the economy. Such a realization called for a
review of the policies favoring government interventions at macro and micro levels geared to
achieving the twin objectives of high growth and macroeconomic balance. Reforms underwritten
by the SAPs mainly concentrated on deregulation, decontrol and liberalization of the economy,
and they put major emphasis on market instruments as the main driving force behind the
economy. SAPs were primarily targeted at three areas of interventions: (a) demand management;
(b) structural policies; and (c) institutional policies.

Demand Management Policies were targeted at reducing aggregate expenditure by streamlining

the aggregate demand. This was to be carried out through contractionary monetary policies
implemented through credit control and fiscal policies with a view to restrict excess demand and
balance the fiscal deficit. Improvement of long run productive capacities in the economy was to
be achieved by stimulating savings and investment by means of allocative efficiency and
productivity enhancement. A number of measures were to be put in place towards this: (i)
financial liberalization through deregulation of both lending and deposit interest rates; (ii) trade
liberalization through elimination of non-tariff barriers, reduction of tariff rates and their
dispersion, and unification of tariffs aimed at reducing the effective rates of protection enjoyed
by domestic industries; (iii) gradual removal of anti-export bias in the economy; (iv)
rationalization of the pricing policies of the state owned enterprises to reflect actual costs; and
(v) elimination of price distortion to be effectuated through a policy of de-subsidization by
phasing out subsidies on food and inputs and by removing output price supports.

The Implementation of Structural Adjustment Programmes

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SAPs are built on the fundamental condition that debtor countries have to repay their debt in hard
currency. This leads to a policy of ‘exports at all costs’ because exports are the only way for
‘developing’ countries to obtain such currencies. A first feature of SAPs is therefore a switch in
production from what local people eat, wear or use towards goods that can be sold in the
industrialized countries. Since the 1980s dozens of countries have followed these policies
simultaneously.

SAPs have 4 fundamental objectives according to which they are shaped:

1. Liberalisation: promoting the free movement of capital; opening of national markets to

international competition.
2. Privatisation of public services and companies.
3. De-regulations of labour relations and cutting social safety nets.
4. Improving competitiveness

There are number of conditions that a country has to follow to avail loan under SAPs. These are:
 reduction of government deficit through cuts in public spending (cost recovery
programmes)
 higher interest rates
 liberalization of foreign exchange rules and trade (deregulation)
 privatization of public companies
 deregulation of the economy, for example:
- liberalization of foreign investment regulations
- deregulation of the labor market
- abolishing price controls and food subsidies
 shift from import substitution to export production
These measures forced countries on a path of deregulated free market economies. The IMF/World
Bank basically determine countries’ macro-economic policies; they take control over central bank
policies and over public expenditure through the so-called ‘Public Expenditure Review’. SAPs
promote the principal of cost-recovery for social services and the gradual withdrawal of the state
from basic health and educational services. Under its ‘Public Investment Programme’ the IMF even
decides what type of infrastructure should be built while an imposed system of international tender

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ensures that public-works projects are carried out by international construction and engineering
firms.

Need for SAFs

The World Bank and the IMF argue that SAF is necessary to bring a developing country from
crisis to economic recovery and growth. Economic growth driven by private sector foreign
investment is seen as the key to development. These agencies argue that the resulting national
wealth will eventually "trickle down" or spread throughout the economy and eventually to the
poor.
The achievement of social well-being is not an integral component of SAPs but a hoped-for
result of applying free market principles to the economy. The process of adjustment, as described
by many World Bank and IMF officials to developing countries, is one of "sacrifice" of "present
pain for future hope."
SAPs are intended to make structural changes which will hopefully provide long-term solutions
to some of the problems facing by developing countries by helping them to achieve economic
stability and sustained growth.

SAPs aim at:

 The reduction or elimination of a balance of payments deficit

 The resumption of higher rates of economic growth
 The achievement of structural changes that would prevent future payments and
stabilization problems
Criticisms

There are multiple criticisms that focus on different elements of SAPs.

 National Sovereignty: SAPs threaten the sovereignty of national economies because an

outside organization is dictating a nation's economic policy.
 Privatization: A common policy required in structural adjustment is the privatization of
state-owned industries and resources. Apparently, this policy aims to increase efficiency
and investment, and decrease state spending. State-owned resources are to be sold
whether they generate a fiscal profit or not.

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 But, when resources are transferred to foreign corporations and/or national elites, the goal
of public prosperity is replaced with the goal of private accumulation. Furthermore, state-
owned firms may show fiscal losses because they fulfil a wider social role, such as
providing low-cost utilities and jobs.
Structural adjustment policies call for the selloff of government-owned enterprises to
private owners, often foreign investors. Privatization is typically associated with layoffs
and pay cuts for workers in the privatized enterprises.
 Agriculture: A shift from growing diverse food crops for domestic consumption to
specializing in the production of cash crops or other commodities (like rubber, cotton,
coffee, copper, tin etc.) for export has to be adopted.

Moreover, SAPs impose harsh economic measures which deepen poverty, undermine food
security, and also lead to unsustainable resource exploitation, environmental destruction, and
population dislocation and displacement. SAPs also called for increased exports to generate
foreign exchange to service debt. Also, with the adoption of SAPs comes a withdrawal from
social spending, thus, less money going towards education, health, welfare, and local
infrastructures.

 Cuts in government spending -- Reductions in government spending frequently reduce

the services available to the poor, including health and education services (though the
IMF and World Bank now say they preserve health and education spending).
 Imposition of user fees -- Many IMF and World Bank loans call for the imposition of
"user fees" -- charges for the use of government-provided services like schools, health
clinics and clean drinking water. For very poor people, even modest charges may result in
the denial of access to services.
 Promotion of exports -- Under structural adjustment programs, countries undertake a
variety of measures to promote exports, at the expense of production for domestic needs.
In the rural sector, the export orientation is often associated with the displacement of poor
people who grow food for their own consumption, as their land is taken over by large
plantations growing crops for foreign markets.

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  Higher interest rates -- Higher interest rates exert a recessionary effect on national
economies, leading to higher rates of joblessness. Small businesses, often operated by
women, find it more difficult to gain access to affordable credit, and often are unable to
survive.
 Trade Liberalization -- The elimination of tariff protections for industries in developing
countries often leads to mass layoffs. In Mozambique, for example, the IMF and World
Bank ordered the removal of an export tax on cashew nuts. The result: 10,000 adults,
mostly women, lost their jobs in cashew nut-processing factories. Most of the processing
work shifted to India, where child laborers shell the nuts at home.

POLICY QUESTION??

Question: Critical Analysis of the SAF and recommendations for IMF, World Bank and
Developing nations for overcoming the existing flaws and harnessing the potential gains?

Detail: This policy paper would analyze the Structural Adjustment Facility provided by IMF and
World Bank in detail. It would include the assistance provided and different regulations and
norms required to be followed by the nations opting for these services. It would analyze the
different policy measures and their impact. Finally, after analyzing the flaws the policy paper
would try and suggest some measures for both the lending institutions (IMF and World Bank)
and the economies using these facilities in order to overcome the existing flaws and harness the
potential gains.

CASE 1: The SOUTH AFRICAN Disaster

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When we talk about the structured adjustment program or the structured adjustment policies, it
can come in any way to a country i.e. it could have both positive and negative effects on any
countries economic and social conditions. But the history says though these policies have
impacted many economies in a positive way, but the negative impact of these policies has been
more prominent in comparison to the positive ones. Here we explain the negative effects of the
structured adjustment program by taking a case of the African economy which suffered the
consequences of these policies.

At the time of decolonization in 1960’s, Africa was not just self-sufficient in food but was
actually a net food exporter. Today, the continent imports 25% of its food, with almost every
country in Africa being a net food importer. Agriculture in the continent is in deep crisis, and a
very important explanation to this can be attributed to the phasing out of the government controls
and support mechanisms under the structural adjustment programs to which most African
countries were subjected as the price for getting IMF and World Bank assistance to service their
external debt.

Lifting price controls on fertilizers while simultaneously cutting back on agricultural credit
systems simply led to reduced applications, lower yields, and lower investment. The departure of
the state, “crowded out” rather than “crowded in” private investment. In those instances where
private traders did come in to replace the state, they have sometimes done so on highly
unfavorable terms for poor farmers, leaving farmers more food insecure, and governments reliant
on unpredictable aid flow. The support which the government was allowed to muster was
channeled by the Bank to export agriculture – to generate the foreign exchange earnings that the
state needed to service its debt to the Bank and the Fund. But, as in Ethiopia during the famine of
the early 1980s, this led to the dedication of good land to export crops, with food crops forced
into more and more unsuitable soil, thus exacerbating food insecurity.

Agriculture was not the only area which suffered, compounding the negative impact of
adjustment were unfair trade practices on the part of the EU and the United States. Trade
liberalization allowed low-priced subsidized EU beef to enter and drive many West African and
South African cattle raisers to ruin. With their subsidies legitimized by the WTO’s Agreement on
Agriculture, U.S. cotton growers offloaded their cotton on world markets at 20-55% of the cost
of production, bankrupting West African and Central African cotton farmers in the process.
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The social consequences of structural adjustment cum agricultural dumping were predictable, the
number of Africans living on less than a dollar a day more than doubled to 313 million people
between 1981 and 2001 – or 46% of the whole continent. The role of structural adjustment in
creating poverty, as well as severely weakening the continent’s agricultural base and
consolidating import dependency, was quite evident from these detrimental figures of the dying
agriculture and the unprecedented lower levels of standard of living of African people.

To substantiate the above fact of the ill effects of the structured adjustment program or policies
on the African continent, case of Malawi can be a good example which illustrates the malicious
impacts of these policies.

It was a tragedy preceded by success. In 1998 and 1999, the government initiated a program to
give each smallholder family a “starter pack” of free fertilizers and seeds. This followed several
years of successful experimentation in which the packs were provided only to the poorest
families. The result was a national surplus of corn. The World Bank and other aid donors forced
the drastic scaling down and eventual scrapping of the program, arguing that the subsidy
distorted trade. Without the free packs, food output plummeted. In the meantime, the IMF
insisted that the government sell off a large portion of its strategic grain reserves to enable the
food reserve agency to settle its commercial debts. The government complied. When the crisis in
food production turned into a famine in 2001-2002, there were hardly any reserves left to rush to
the countryside. About 1,500 people perished. The IMF, however, was unrepentant; in fact, it
suspended its disbursements on an adjustment program with the government on the grounds that
the parastatal sector will continue to pose risks to the successful implementation of the 2002/03
budget.

So, in a nutshell for the African continent in can be said that owing to the absence of any clear
case of success, structural adjustment has been widely discredited throughout Africa. Even some
donor governments that once subscribed to it have distanced themselves from the Bank, the most
prominent case being the official British aid agency that co-funded the latest subsidized fertilizer
program in Malawi.

CASE 2: The Success Story of GHANA

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Structural Adjustment Programmes (SAPs) have reportedly been a success in Ghana. In SAP
various objectives and targets were defined in all areas like Fiscal policies, monetary policies,
external sector policies, various sectoral policies and social policies.

Following are the policies that Ghana had adopted in various areas that had really proved worth
of SAPs.

1) Fiscal policies:

A) Revenue: the objective was to improve domestic revenue mobilization and strengthen tax
administration for this they have Reviewed tax system and made adjustments to ensure
that the revenue-to-GDP ratio does not decline in the medium term.

B) Expenditure: the objective was to improve efficiency and effectiveness of public

expenditure through improved allocation and management of public resources. they have
reduced road sector arrears by 30 billion in the first half of 1999.

C) Budget and treasury system: Weekly cash flow projections of government treasury
operations for public debt and liquidity management was started. They have Implemented
Budget and Public Expenditure Management System (BPEMS) system in targeted
ministries and spending units.

2) Monetary policy and financial sector reform:

A) Objective was to enhance the effectiveness of the system of indirect monetary control
and develop the secondary market in domestic debt instruments. So they encouraged
the use of repurchase agreements.
B) Another important objective was to accelerate financial sector reforms and promote
greater competition through divestiture. For this bank of Ghana has ensured the
quarterly target of capital adequacy requirement and fully invest additions to deposits
in government securities.

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 Several other measures have been taken like removed the freeze on bank licensing to
withdraw licenses of banks that does not meet capital adequacy requirements.

3) External sector policy:

A) Exchange  system : With the objective of Deepen the foreign exchange market they
have Gradually reduce the share of export receipts that needs to be surrendered to the
Bank of Ghana.
B) External Debt Management: to reduce external debt service burden they strictly
limit new short-term borrowing and adhered to ceilings envisaged in the program
regarding new non-concessional public and publicly guaranteed borrowing. And
started Publish annually list of guaranteed loans in the budget documents.
C) Trade policy: To ensure that trade system enhances external competitiveness. They
Implemented Gateway Project aimed at removing constraints to trade and did a
Complete comprehensive review of tariff regime. Also reduce the tariff top rate to
20 percent in harmony with the sub region.

4) Sectoral policies:

A) Private sector development: Objective was to Improve Ghana’s economic

competitiveness through privatization. Announced a divestiture work program,
including annual targets for divestiture receipts for the period 1999-2000.
Decide on the treatment of the stock of outstanding liabilities of the State Housing
Corporation, Electricity Company of Ghana, Ghana Railways, and Ghana Airways.
B) Electricity: with the objective of Implementing power sector reform program they
Enacted legislation on "Electricity Regulations—Operation of National
Interconnected System" (Section 546 of Act 541) and complete separation of
electricity transmission utility (National Grid Company Ltd.) from Volta River
Authority (VRA).

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 C) Petroleum: Complete financial restructuring for the Tema Oil Refinery (TOR) Ltd
was done. They Enacted legislation on "Petroleum Regulations—Marketing of
Petroleum Products" (Section 56 of Act 541) and complete phase out of practice of
setting maximum retail margins for petroleum products.
D) Transportation: They targeted to Improve efficiency and lower costs of rail
transport also Increase competition in supply of port services so they Issued invitation
for bids to concession Ghana Railways and port operations.
E) Agriculture: tried to improve competitiveness of Ghana’s cocoa sector. Ensured
equal access to Cocoa Marketing Board (Cocobod) crop financing and warehousing
by licensed buying companies. And Allow qualified Licensed Buying Companies
(LBCs) to export at least 30 percent of their cocoa purchase.

5) Social policies:

A) Education: Formulated a revised policy framework for tertiary education with

sustainable financing and also formulated a phased implementation plan for basic
education. Implemented an education strategy to increase national girl’s net
enrollment in primary schools to 48.5 percent.
B) Health: they Increase health expenditure as a percent of domestic primary
expenditure and maintain a reasonable balance between capital and recurrent
expenditures. Increased the number of contracts between district hospitals, both with
nongovernmental organizations and with private providers of health services.

In case of Ghana overall impact of SAPs was positive only area where its impact was
not reflected was Education field. These policies led Ghana to restructure its economy
and paved for overall growth of country.

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 POLICY IMPLICATIONS OF USING SAF AS AN ALTERNATIVE

Though the primary objective of using SAF facility is to empower developing and under-
developed economies and facilitate the growth in these economies, but the effectiveness of SAF
in solving the problems of these nations still remain a topic of controversy and conflicting views.

On one hand, we have an example of successful transformation of Ghana but on the other
extreme, we are flooded by example in the likes of South Africa, East Asian Economies, Burkina
Faso (to name only a few), which shows the undesirable impact of using SAF on these nations. It
is widely argued that the SAF leads to subordination of economies opting for it.

Though SAF helps nation in accelerating the growth rate but it accompanies with itself a number
disadvantages. In this section, we would study the policy implications of using SAF on these
economies.

 SAF results in increased pressure on the domestic currency and thereby a reduced
Purchasing Power of the domestic currency and degraded Standard of Living. In 12 th Jan.
2004, CFA franc was devalued by 50% because of increased pressure due to SAF.
 It results in an increase in the Poverty Gap and wider disparities between the rich and the
poor. In the case of Burkina Faso, after the implementation of SAF it was found that 47%
of the population lived below poverty line and its score in HDI was only 0.33.
 It increases the Tax burden and reduces Subsidies on the citizens of an economy as the
pressure on the government to pay back the debt rises and at the same time the regulatory
norms in SAF agreement requires economies to phase out protection for domestic
players.
 Generally, there is a rise in the price level and inflation because of rising pressure due to
reduced subsidies, and increased taxes.
 It deteriorates the Employment relations and Social security among the employees.
 It deteriorates the Terms of Trade (TOT) of the economy as the economy loses the Price
advantage due to reduced protection and rising tax.

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POLICY RECOMMENDATIONS FOR IMF, WORLD BANK & EMERGING NATIONS

After studying the fallacy in SAF in detail in previous sections, in this section we would discuss
some possible policy measures to improve the existing SAF. The SAF facility provided by
Britton Woods Institution has huge capability of turning around the emerging economies.

 RECOMMENDATIONS FOR IMF & WORLD BANK

 Ease the norms and customize it according to the economy: The Britton Woods
Institutions should ease the norms and customize it accordingly for different nations.
All the nations do not stand equal in terms of natural resources, technology, trade, etc.
and they may not have a comparative advantage over some economies in any trade. In
this case, if they open up their economies, they are net losers. So, IMF and World
Bank should study the country in question first and customize the agreement and
norms accordingly because the motive of these institutions is not commercial but the
development of these nations.
 Stakeholders Participation: These institutions should allow for stakeholders
participation (the economies themselves) in formulating the norms. These
stakeholders know their economies in depth and they better understand the impact of
every policy on these economies.
 Regulate the Use of Funds: These institutions should regulate the use of the funds
granted through SAF so that the funds are used for developmental purpose (like
building infrastructure, improving education system, providing amenities, etc.) and
not towards non-productive ends (like repayment of earlier debts).

 RECOMMENDATIONS FOR BENEFICIARY EMERGING NATIONS

 Usage of Funds: The economies should properly regulate the usage of funds and
channelize it towards productive uses and in building productive resources for the
nations. This would help to generate returns in the long run. In contrast, if it is used to
repay the old debt, this would not contribute to the economies’ resources; instead it
would push the economies to a never ending spiral of debt repayment.

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 Stakeholders Participation: These nations should actively study the impact of
different regulatory norms on their nations and should actively participate in the
formulation of norms.
 New Initiatives: These emerging economies can take the initiative on their own and
come up with their own organization which would help them in the times of need.
One such example is Asian Development Bank (ADB) which is managed by Asian
countries and it provides assistance to the Asian economies.

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 CONCLUSION

In spite of having the huge potential to turnaround the fate of the emerging economies, in most of
the cases the SAF provided by the Britton Woods Institution (IMF and World Bank) have proved
to be a bane and not a boon for these economies. Due to the existence of some policy flaws,
SAF has gained widespread criticism and have been proved consistently unsuccessful in
achieving its objectives (helping emerging nations).

These policy flaws can be worked upon and a better system can be developed at both the ends
(Institutions & Economies) to achieve the unharnessed potential of the Structural Adjustment
Facility. Some of these recommendations have been discussed in this policy paper. The
effectiveness of these policy measures can be further studied on realistic ground based on the
impact on nations.

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 BIBLIOGRAPHY

Web-Sites

 www.imf.org
 www.worldbank.org
 www.ssrn.com

Databases

 EBSCO Database
 EMERALD Database

Case Studies

 Cases Studies from Delhi University Course Material

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