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Thursday, August 29, 2013

ALTERNATIVES TO THE PRESENT FRAMEWORK OF FUND CONDITIONALITIES



Alternatives to the Present Framework of Fund Conditionality

Katele Kalumba
Minister of Finance
Zambia
July 5, 2001

I would like to begin my contribution to this very important subject by congratulating the organizers of this meeting: the Development Policy Forum of the German Foundation for International Development (DSE) and the International Monetary Fund (IMF) for having decided to convene a meeting to discuss, share experiences and review the Ownership and Conditionality of economic reforms supported by the International Monetary Fund with a view to offering an alternative framework or approach.
In many of the poorer developing countries such as Zambia, structural adjustment programmes with the support or endorsement of the Bretton Woods financial institutions have been implemented since 1970s with little success to talk about. In the case of Zambia, we have been implementing structural adjustment programmes now renamed the Poverty Reduction and Growth Facility (PRGF) since early 1970s, with no notable improvement in the viability or sustainability of the balance of payments position or external debt situation. Before the 1990s, this was mainly blamed on lack of total commitment on the part of the politicians and bureaucrats. However, since 1990 to date, the politicians and bureaucrats have been implementing the structural adjustment programmes almost religiously. There has been Government commitment to the implementation of the economic and structural adjustment programme, as agreed upon with the IMF and other donor agencies. In the first few years of its coming into power, the Movement for Multiparty Democracy (MMD) led government, to which I belong, moved swiftly to implement all the recommended economic and structural reforms. This was out of our conviction that in order for the country to move forward, we had no other alternative, except to implement the adjustment programme in its totality.
These reforms in many other countries have encompassed all the four main elements usually associated with IMF supported structural reform programmes, namely, (a) privatisation and parastatal reform programme, (b) market liberalisation in all sectors of the economy without any exception, (c) adoption of market-based pricing for food, services and public utilities, and (d) opening up of trade: no foreign exchange controls, reducing substantially customs duty, removal of non-tariff barriers to trade and adoption of a market-determined exchange rate regime.
In Zambia´s case, since 1991 when the Government embarked on fundamental economic structural reforms, notable policy developments have included (i) the decontrol of prices, (ii) removal of subsidies, (iii) the decontrol of interest rates, (iv) the removal of exchange controls and floating of the Kwacha, (v) the liberalisation the of banking sector, (vi) the removal of quantitative restrictions on imports and exports, (vii) the compression and simplification of tariff structure, (viii) implementation of appropriate monetary and fiscal policies, ix) the privatisation of over 255 companies, (x) the downsizing of the number of workers in the public sector, and (xi) the establishment of a capital market. From the list I have given, structural reforms in Zambia have included all the essential ingredients or prescriptions deemed necessary for the proper functioning of a market-based economy by the international financial institutions.
These reforms have been implemented with the full support, and at times, with threats that if certain specific decisions or actions are not implemented by the national authorities, then the co-operating partners, usually led by the IMF, were not going to provide the much needed financial support that is essential to the successful implementation of the economic and structural reform programme. This simply means that if the IMF does not like the package of policies in the homegrown economic programme, then the IMF Staff would not present the programme to the Executive Board for endorsement, and therefore in all likelihood, all the other co-operating partners would not financially support the reform programme. A programme, which is not financially supported by co-operating partners, has little chance of succeeding. Usually, as a Government, we are reluctantly made to review our original policies, programmes and planned actions in order to accommodate recommendations made by officials from the Bretton Woods institutions.
At this stage, one might strongly argue that domestic ownership of a structural adjustment programme becomes questionable. By implication, it also means that, in certain cases, commitment to the full implementation of the programme may not be in total anymore, as certain policies are being imposed from outside. And this may be evident from programme slippages or inability to implement certain actions as per the agreed timetable or performance criteria on, for example, total domestic credit expansion or net credit to the Government. Sometimes, certain policy measures or conditionalities are never implemented at all. One may attribute failure to implement certain supposedly agreed upon policy actions to the imposition or insistence by the Bretton Woods financial institutions on the conditionalities” that the politicians and bureaucrats may view as not being in the best national interest of the local economy and ordinary people. For example, the insistence on market liberalisation in the agricultural sector in Zambia without ensuring that the removal of Government intervention is immediately taken over by a vibrant and financially strong private sector in the provision of agricultural inputs and extension services, and the purchase of agricultural produce has brought about misery in the rural areas of Zambia in the past few years. Under such circumstances, local support for such policies would best be described as being absent.
Not only did the Government pull out of the provision of agricultural inputs and other requisites, but also the Government withdrew from the purchase of agricultural produce. However, the private sector companies involved in the purchase of produce do not have the financial muscle to procure and supply needed inputs throughout the country, and later on to buy the produce and store it for resale at a later date. The result, as expected, has been the near collapse of rural type of life in the countryside. Rural incomes both in nominal and real terms have sharply dropped. Ultimately, in spite of the uninterrupted implementation of structural reforms over the past ten years, we have noted also a sharp increase in the incidence of poverty among the people of Zambia, a situation that is not politically and socially sustainable. The increase in poverty levels is evident from the 1998 Living Conditions Monitoring Survey conducted between November and December 1998 in Zambia, which shows that: 

among the rural strata, small scale farming households have the highest proportions (84 percent) of persons who are poor. Non-agricultural households come second with 80 percent of all persons being poor. Large-scale farming households have the lowest proportion of 16 percent poor. In general, the proportion of persons who are poor in rural areas is much higher at 83 percent than urban areas where 56 percent are poor”.
These developments may partly be attributed to the imperfections in the market of agricultural inputs and produce, whereby the withdrawal of the Government was not replaced by an equally capable private sector in terms of coverage and financial resources. In spite of this observed market failure, which has been acknowledged by both the Government and the international financial institutions, financial support from co-operating partners to the agricultural sectors is still tied to non-Government intervention in agricultural activities. It is a conditionality that is not beneficial to the large proportion of the people of Zambia. Its national ownership and support therefore becomes questionable.
Moreover, one may even point to the fact that the programme design on market liberalisation that called for total Government pull out from input supply and purchase of produce, and hand over this role to the private sector that was ill-equipped for the task was inappropriately and hurriedly done. This was a conditionality for accessing financial support, and the strong argument for non-Government involvement was that it would reduce Government expenditures and net Government credit from the domestic banking system. However, due to programme failure and the resultant impact of shortage of staple food crops, the Government has actually been forced to fund programmes targeted at the provision of food relief to a large proportion of the population year after year.
The same could be said about other conditionalities and programmes such as the privatisation programme and the public sector reform programme. The prime objective of the public sector reform programme was to have a lean public sector capable of delivering a more efficient service and to pay the remaining civil servants a better and living wage after reducing the number of workers on the payroll of the Government. Over the years, implementation has been problematic and has proved more complex than was earlier thought. First while the number of workers on the Government´s payroll was reduced, there has been no corresponding increase in workers pay and other conditions of service. Second, these workers who were retrenched added on to number of the unemployed and, in most cases, have contributed to the increase in poverty levels in the country. Furthermore, those who were retrenched under an aggressive privatisation and parastatal reform programme of state-owned enterprises have also added to the number of the unemployed, and to the incidence of poverty among the people in the country. The identified problem or weakness here is that probably the pace of implementing structural reforms has been rather too fast. Had the reforms been implemented at a modest pace and allowed for gradual changes, perhaps the reforms would have resulted in improved living conditions for the majority of the people.
The foregoing argument is reinforced by the fact that while employees were retrenched at a very fast pace, the private sector economy was not expanding at an equally rapid pace in order to create enough jobs to employ all those who were being retrenched in the Government and state-owned companies. The point here is, while Government is fully committed to both privatisation and public sector reform programme with a view to ensuring prudent fiscal management, in particular to reduce Government expenditures, what has really not been beneficial is to attach, prescribe or to use the number of employees to be retrenched as a yardstick to assess the success or the failure of the public sector reform programme. In addition, the weakness in the IMF approach to economic reforms has of late been the insistence to micro-manage the programme, with issues such as that a particular company must be privatised using a specific mode of privatisation by a particular deadline, which becomes problematic, and in a way takes away the national authorities autonomy. Such insistence does not care to analyze or identify beforehand which segments or groups in society will be better off or worse off as a result of requesting the Government to implement such a recommended action. Moreover, such specificity and detail in economic reform programmes often tend to create wrong signals among the national leadership and people that perhaps the Bretton Woods financial institutions do not care much about what happens to the living conditions of the people, as long as their objectives of constraining domestic demand, total domestic credit, net credit to the government, building international reserves and meeting all external debt service obligations were being observed.
Time has come to focus on basic principles if the IMF has to successfully play its global financial role. They must acknowledge that structural adjustment programmes generate `transitional poverty` in the process of correcting distortions in the macro-economy and hence must focus on how to mitigate this poverty. They must help countries focus on economic development and growth measured by improvements in the real economy. They must design in a broadly consultative way, technically sound economic policy advice to countries and pay adequate attention to the contingencies of political implementation of any policy.
 

Alternative Framework for IMF Programmes

From the forgoing analysis, it is clear that the modes operandi of the IMF programmes needs to be revisited or modified. While the IMF should remain fully committed to ensuring the viability or sustainability of all countries´ external sectors, it should equally become concerned with the achievement of the domestic economy’s internal core objectives of ensuring full employment of labour and improving the living conditions of the people. In the case of Zambia, the ultimate objective is to improve the living conditions of all the citizens. In order to ensure that the concerns of the IMF and the country are given equal importance, it becomes necessary that only general performance criteria should be agreed upon between the host Government and the IMF. The details on the projected performance of the economy or microeconomics of the domestic budget, monetary aggregates, real sector and external sector should be left to the governments to determine what is the best way to attain the broad performance criteria. For example, on fiscal management, the IMF should be satisfied with agreeing on domestic fiscal balance, revenue effort and expenditure as a ratio of GDP. The details on each one of these broad aggregates should be left to the national authorities. However, the Government should still be held fully accountable to observe the agreed upon broad aggregates for assessing whether implementation of an economic reform programme is on track or not. Such programmes should come out from an exhaustive consultative process among all the national stakeholders.
A programme delivered in such a way would really ensure that the Government is committed and accountable for both programme successes as well as programme failures. Equally, the Bretton Woods institutions would be spared of the blame that they are the ones bringing about misery and significant increases in the incidence of poverty in the countries in which they have been imposing reform programmes. In this regard, my suggestion is that IMF assistance to needy countries be tied to the country implementing successfully the broad programme objectives and macroeconomic aggregates, as opposed to observing very specific and detailed monetary, fiscal and external targets, which when sometimes combined, do not translate into the development of an economy.
 

Streamlining Conditionalities and Enhancing Policy Dialogue

This then brings me to the next issue of streamlining the IMF conditionalities and enhancing policy dialogue. We have noted, that a multiplicity of conditionalities is not helpful to the achievement of the main objectives of any programme. This is especially important when you have the IMF, the World Bank and bilateral donors, all imposing or working out their own conditions, which in many instances, tend to contradict each other or are crosscutting. A multiplicity of conditions tends to reduce the concentration of the implementing agency or ministry, as it has to attend at the same time to too many conditions from too many donor organisations. This is especially the case with structural reform conditionalities. The number of quantitative and structural conditionalities should be kept to the barest minimum, must be measurable, able to stand the test of time and not subject to change at the whim of the donor institution, as is usually the case with most structural conditionalities by the bilateral countries.
On the question of promoting policy dialogue, it is very cardinal to the successful formulation of policies that both partners would agree upon and work to achieve. Imposing policies on a weak partner requiring financial assistance does not lead to achievement of projected results most of the time. Therefore, in the interest of accountability, transparency and ownership the co-operating partners must take time to exhaustively explore all the alternatives available to them before agreeing on what option should be implemented. Again here, only general policy framework should be agreed upon, while detailed programmes should be left to national governments to work out. I am sure that a programme developed along the above suggestions has much better chance of succeeding than a programme imposed by the financing institution. Policy dialogue must be promoted. In this regard, to a certain extent, the preparation of the Poverty Reduction Strategy Papers (PRSP), through a consultative process of all the stakeholders will go some way in promoting national ownership of economic and structural reform programmes. We are very hopeful, that multilateral and bilateral co-operating partners will whole-heartedly support the policy recommendations that will come out of the consultative process among all the stakeholders.


Copyright © 2001, DSE: July 5, 2001