Over the last decade, 4. In , the ESAF was replenished with 8. On average, from , the IMF disbursed funds worth 0. To achieve this the IMF will need to secure up to 3. However, in terms of the volume ofresources it will have available to lend to the poorest countries, it is not clear why it should wish to do so. Thus future loans from ESAF are going to be smaller than they already are. This problem will be compounded by the fact that more countries are becoming eligible for ESAF financing, reducing the share of ESAF resources available to each country and reinforcing the problem that ESAF resources must be recycled quickly.
See below. The Fund is pushing hard to ensure that ESAF is made permanent, but it appears to be less concerned with finding adequate resources so that it can provide ESAF loans on more appropriate terms. To date, million of this money has been used, with 20 million used in the last financial year. The IMF is not an aid organisation, it is not a development organisation, it is not into projects or anything of that kind, it is there as a purveyor of macroeconomic advice, balance of payments support with conditionality attached to its aid to try and encourage good macroeconomic government.
The poorest countries desperately need low cost funds for balance of payments support from the IMF , because, unlike developed countries and many richer developing countries, they are unable to borrow from private capital markets and they have insufficient foreign currency to hold large reserves.
However, the Fund is no longer able to fulfil its vital role as a source of liquidity for the poorest countries to ease balance of payments crises. Although the IMF s resources are useful because they are not tied to particular uses or the purchase of products from a donor country, the extensive conditions and benchmarks attached to ESAF loans means that these resources are relatively slow to materialise.
Unlike resources from the Standby facility which are released quickly on the basis or pre-agreed conditions, it takes a relatively long time to develop an ESAF programme and for funds to be committed to it, and, once agreed, funds may be disbursed slowly and subject to delay or stopped completely if performance targets are not satisfied. While the IMF no longer fulfils its intended role, it has neither the financial resources nor the expertise to take on the role of a development institution. The strongest case against Fund lending does indeed seem to be that the nature of international financial gaps has changed in a way that reduces the relevance of conventional forms of Fund lending.
The high cost of ESAF loans, in terms of their relatively short repayment periods, has been compounded by the fact that they are not used to directly fund productive investments but are used largely to fund balance of payments deficits, i. This means that the loans do not directly generate funds from which they can be repaid.
In theory, countries should be able to adjust their economies rapidly enough so that they can earn sufficient foreign exchange to cover their import needs and to repay their ESAF loans. However, adjustment has been more difficult to achieve than the theory would anticipate, and external circumstances, such as falling terms of trade, have exacerbated the need for adjustment. Countries have not been able to turn around their economies sufficiently to earn the money to repay the Fund and consequently debts to the Fund are growing.
Repayments on ESAF loans are expected to amount to. On balance then, it can be seen that the IMF does not provide a significant source of funds to adjusting countries as a whole although for individual countries on specific occasions it has been more significant. ESAF was created to ease repayment problems to the Fund by allowing the Fund to continue to provide finance to the poorest countries, but on a concessional basis, thereby implicitly refinancing its loans.
However the burden of ESAF loans is still too much for the poorest countries. Unfortunately the IMF has no plans to lengthen the repayment period of its loans.
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Moreover, if the ESAF became self-sustaining it would not be possible to do so without seriously reducing the volume of funds that the Fund could lend on a regular basis because of the need to recycle ESAF resources. It appears, therefore, that the ESAF will continue to be an inappropriate source of funds for the poorest countries. While it is clear that adjusting countries require more in the way of concessional finance to support their adjustment efforts, the ESAF is not an appropriate mechanism through which to do so.
The HIPC Initiative has been developed to address the problem of multilateral debt within a framework which includes all debtors and aims to achieve overall debt sustainability.
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While the Initiative is welcome, because it is attempting to address the problem of multilateral debt, the Fund has used it as a means of ensuring that it maintains its influence in developing countries, by linking its funding for the Initiative to ESAF. If, collective donor action through the Initiative can lead to a reduction in debt burdens to a manageable level, i.
The distinguishing feature of a financial program is that it seeks to achieve an orderly adjustment, preferably through the early adoption of corrective policy measures and the provision of appropriate amounts of external finance? In principle, stabilisation can be achieved either by cutting demand in the economy or by increasing the supply of tradeable products, particularly exports, by loosening supply side constraints to production and changing incentives.
Both approaches will create hardship as the economy adjusts, but the supply side approach is more gradual and requires less contraction of the economy, and is therefore less harsh than a purely demand reducing approach.
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The poorest countries tend to be less able to adjust quickly because of the inflexible nature of their economies and so a demand reducing approach is less appropriate for them and consequently they have a much greater need for liquidity to allow them to adjust more slowly. Typically a programme will combine these approaches.
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The availability of external finance including debt relief is important because it determines the pace and therefore the nature of adjustment. The less finance is available, the more likely it is that countries will be forced to adjust by contracting their economies, and the more politically and economically difficult adjustment will be to achieve.
While the preference is for slower adjustment and more finance, the IMF s own financial considerations compel it to force countries to adjust quickly and so they are required to reduce their economic activity by far more than if adjustment took place over a longer period. The ESAF is a revolving pool of credit, i. Because the Fund has only a very limited amount of concessional resources available through ESAF , it lends them for short periods of time so that it can recycle them quickly to refinance its previous loans.
Consequently, the Fund is preoccupied with the short term repayment capacity and export capacity of the countries it lends to. This reinforces the short term, deflationary nature of its programme, and encourages an export led growth strategy at the expense of considering alternative growth paths, and in some cases to the neglect of domestic needs. For example, some countries are facing food security problems because their prime agricultural land is now used to produce cash crops for export markets.
In short, the Fund forces countries to adjust too quickly, at speeds that are technically and politically unfeasible and unsustainable, and without due consideration of perhaps more appropriate growth strategies. The Fund argues that faster adjustment produces better results. Faster adjustment is seen as allowing less scope for adjustment to be derailed by political opposition, and shortening the duration of the transitional negative effects of adjustment by accelerating improvements in economic efficiency and growth.
This argument is based on the short, sharp shock philosophy. However this view rests on several questionable assumptions which neglect to consider the political, economic and social constraints to adjustment. That the transitional costs of the adjustment process are independent of the pace of adjustment; As mentioned above, if stabilisation must occur rapidly due to financial constraints or ideology , then it is more likely that a country will be forced to take a demand reducing approach and cut consumption over the short term through monetary and fiscal policy, rather than being able to increase production through investment and supply side initiatives, which takes longer and requires more resources.
Similarly, a country that adjusts rapidly due to financial constraints and which adopts predominantly demand reducing policies, will have to contract by a larger extent than if adjustment was at a slower pace, by for example devaluing the currency by more than if adjustment proceeded over a longer period of time.
Because deflationary policies have a negative impact on society, the short term costs on society are likely to be larger. Stabilisation and structural adjustment are not so much complementary as mutually dependent. Successful structural adjustment requires a stable macroeconomic environment ; and stabilisation is easier when economic structures are sound. However, some potentially serious conflicts may arise in trying to achieve both objectives at the same time.
For example, cuts in the volume of imports and removal of import taxes to reduce trade barriers have in some cases seriously reduced government revenues making fiscal balance harder to achieve and potentially leading to expansion of the government deficit. Restraints on government spending and falling revenues have been associated with a halt in government investment which has led to a deterioration in the countrys infrastructure and diminishing private sector investment.
That adjustment programmes are independent so that faster adjustment in one country does not affect adjustment elsewhere; An inherent problem with the IMF s current approach to adjustment is that it deals with countries in isolation and does not take into account the problems of collective adjustment. Nor does it consider that there is a limited amount of development finance and foreign direct investment. IMF programmes are based on the assumption that economic problems arise from shortcomings in the economic policies of individual countries.
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Consequently the Fund focuses its programmes on reformulating policy at the country level, disregarding the effects on other countries. However, many of the problems faced by the developing countries are related to changes in the global economy which have affected many countries at once. In an increasingly globalised economy it is not appropriate to assume that policy changes in one country will affect the efforts of other countries to adjust.
For example, some developing countries conduct a substantial amount of trade with each other, so that, if one country reduces its imports it may impact on the export opportunities of other adjusting countries. If rapid adjustment leads to excessive exchange rate devaluation the likely outcome is to encourage greater export production of primary products which require little investment and few imported inputs. However, if several countries increase their production of these products, and therefore supply to the global market, this is likely to reduce their price considerably for a given level of demand, as happened in the cocoa and coffee markets in the s and early s.
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This is known as the fallacy of composition. If adjustment could take place more slowly, there would be more opportunity to invest in a more diverse range of processed primary and manufactured exports which would help limit the effect on export prices. The limited availability of finance means that countries are also competing against each other to attract investment and aid resources. Therefore, the more countries that need to adjust the fewer resources are available for each country.
In the case of private sector investment this can be particularly damaging as countries compete against each other to attract it, by for example, cutting wage levels, offering tax incentives, and removing regulatory controls and tariff restrictions, all of which can also depress government revenues.