Part II Country Case Studies - IEO Home II...Country Case Studies 1. Pakistan is one of the most prolonged users of IMF resources and has been under IMF-supported programs almost continuously

Part II

Country Case Studies

1. Pakistan is one of the most prolonged users ofIMF resources and has been under IMF-supportedprograms almost continuously since the late 1980s.

2. This report aims to cast light on what succes-sive IMF-supported programs achieved and failed todeliver and on the factors underlying their limitedsuccess.1 In particular, two such factors, which ap-pear to have been critical in the Pakistan case, areanalyzed in depth, namely (i) program design andimplementation problems; and (ii) internal IMF gov-ernance issues affecting the rationale for IMF in-volvement, the effectiveness of surveillance, and theprogram design itself. The report concludes by high-lighting a few key lessons from this experience andoutlining suggested remedies.2

3. This evaluation was conducted based on (i) re-views of IMF staff reports and internal documents(including mission briefs, internal review comments,and selected technical assistance reports); (ii) inter-views with IMF staff, a broad range of Pakistanistakeholders, and staff of the World Bank;3 (iii) asurvey of relevant academic literature; and (iv) inde-pendent work commissioned by the IEO from theCenter for Development Research at the Universityof Bonn (Appendix 1).

Pakistan’s Prolonged UFR ExperiencePoints to a Limited Effectiveness of ItsIMF-Supported Programs

4. Pakistan’s economic history over the last 30years can be subdivided in two periods. From 1970to the late 1980s, Pakistan enjoyed an impressivegrowth performance (6–7 percent a year on average).Fiscal and external imbalances were large during

most of that period, but unlike in many other devel-oping countries, they did not lead to hyperinflationor to a debt crisis, which led Pakistan to be some-times referred to as a “development puzzle.”4 How-ever, the picture deteriorated markedly from the late1980s onward, as growth faltered and the continuedfailure to rein in the fiscal and current accountdeficits led the debt—which had been accumulatingfor over two decades—to become unsustainable.Pakistan made an intensive use of IMF resourcesduring both periods, but became continuously de-pendent upon IMF-supported programs only in thesecond one.

Overview of Pakistan’s history of use of IMFresources since 19705

1970/71–1987/88: repeated but discontinuous useof IMF resources

5. Pakistan had four one-year Stand-By Arrange-ments6 (SBAs) with the IMF between 1972 and1977. They were followed by a three-year extendedarrangement in 1980, which was to provide close toSDR 1.3 billion (445 percent of quota) over threeyears. The programs supported by these arrange-ments were classic macroeconomic stabilizationprograms, which put little emphasis on structural re-forms (although the program supported by the 1980EFF did consider reforms in the areas of taxation,tariff reform, and price liberalization).

6. All SBAs except the first one were entirely dis-bursed. However, they did not succeed in correctingdurably the underlying imbalances. As the dollar (towhich the Pakistani rupee was pegged) began appre-ciating in 1979, pressures on competitiveness in-creased, and a new recourse to IMF resources proved

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CHAPTER

9 Pakistan

1In keeping with the IEO’s terms of reference, which prevent it from commenting on ongoing operations, the PRGF arrange-ment approved in December 2001 is not within the scope of thisreview.

2Lessons and recommendations are elaborated in greater detailin Part I.

3A full list of people outside the IMF interviewed by the IEO isprovided in Appendix 2.

4In fact, as the subsequent discussions will show, the achieve-ments of that period hinged upon the buildup of partially dis-guised debt vulnerabilities.

5Figure 9.1 provides an overview of this history.6These arrangements were supplemented by rather large draw-

ings under special facilities (the Oil Facility and the Compen-satory Financing Facility for export shortfalls).

PART II • CHAPTER 9

necessary. In spite of strong policy implementationin the first year of the EFF-supported program, in1981 devaluation could not be avoided. Thereafter,slippages in the fiscal and monetary area grew largerand the pace of reform slowed, so that after severaldelays in the completion of reviews, the programwas eventually declared off-track.

1988–2000: almost continuous IMF arrangements

7. Pakistan had seven different arrangements withthe IMF over the 1988–2001 period,7 of which fourwere short term and three were multiyear arrange-ments. All put a strong emphasis on restrictive de-mand management policies and a variety of struc-tural reforms to correct financial imbalances. Thetotal amount of funds committed under these pro-grams amounted to over SDR 4 billion.8 All but the

last arrangement (the 2000 SBA) suffered from sub-stantial policy slippages and soon went off-track,usually after the first or second review. As a result, alarge share of the committed financing was not dis-bursed: undrawn balances averaged a little over halfthe committed amounts, compared to one-third forall users of IMF resources and a quarter for pro-longed users.9 This suggests a rather poor implemen-tation record overall.

Economic performance over 1988–2000 wasunimpressive compared with previous decades

Macroeconomic performance deteriorated and financial imbalances largely persisted

8. GDP growth fell to a little under 4 percent ayear over 1988–2000, compared to almost 6 percentin the two previous decades, with a sharp slowdown

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Figure 9.1. Pakistan: History of Lending Arrangements

1971 74 77 80 83 86 89 92 95 98

Sources: IMF Treasurer's Department and IEO calculations.

7This count does not include the PRGF arrangement approvedin late 2001, which, as an “on-going operation,” must be consid-ered outside the scope of this evaluation.

8In addition, over that period, Pakistan had access to sizable re-sources under special facilities.

9Not taking into account precautionary arrangements, that is,those where the authorities indicate at the outset that they do notintend to avail themselves of the resources committed under theprogram.

Part II • Chapter 9

in capital formation. Export growth slowed to under3 percent a year, against over 10 percent in the 1970sand 1980s. Poverty rose steadily, according to mostmeasures, after two decades of decline, and by theend of the 1990s close to 30 percent of the popula-tion lived below the poverty line, against less than 20percent a decade earlier.

9. Only a modest correction of financial imbal-ances was achieved over the period. Inflation washalved to 4 percent by 2000, but the fiscal deficit de-clined only from 7.7 percent of GDP in 1989 to 5.2percent in 2000. The current account deficit fluctu-ated around 4 percent of GDP. Gross internationalreserves fell as a share of imports over the period tounder one month in June 2000, the symbolic thresh-old of three-month import coverage was reachedonly once, and the coverage of effective short-termdebt by official reserves averaged just over 15 per-cent over 1991–2000.

Structural reforms progressed in some areas but significant challenges remain

10. Significant progress was achieved relativelyearly on in the areas of interest rate liberalizationand public debt management; liberalization of exter-nal transactions, both on the current and the capitalaccount; and trade liberalization: tariffs werebrought down sharply,10 their structure was simpli-fied, and quantitative restrictions on both importsand exports were substantially reduced. Neverthe-less, Pakistan’s trade regime remains relatively re-strictive in comparison with most Asian economies.

11. In other areas, such as the implementation ofa broad-based general sales tax (GST), taxation ofthe agricultural sector, liberalization of administeredprices, and the setting of utilities tariffs, the reformprocess was very protracted. Progress was achievedmany years later than initially intended, and most ofthese reforms have yet to be fully effective. By con-trast, very little was achieved in the areas of tax administration or income tax reform, and public en-terprises were still a considerable drain on the gov-ernment’s finances in 2000.

12. One indicator of limited progress in bringingabout core structural changes needed for longer-termsustainability is the evolution of the tax revenue toGDP ratio: in spite of all attempts to increase it underrepeated IMF-supported programs, the ratio waslower in 2000 than in 1988 (12.1 percent against 13.5percent). This decrease in the overall tax ratio reflects

a shift in the structure of taxation away from interna-tional trade taxes, which ceteris paribus should haveincreased tax efficiency. But these possible gainsmust be weighed against the efficiency losses in-duced by the de facto very narrow base of domestictaxes, which fall on a very small number of taxpay-ers11 despite significant steps taken to broaden thelegal definition of the tax base.

Economic institutions do not seem to have benefited from prolonged UFR

13. In Pakistan, the 1990s has been characterizedas an era of “institutional decay.”12 This was mani-fested through increased political interferences inthe management of public enterprises and in the op-erations of the predominantly public banking sector,more widespread corruption in tax administration,and increased clout of vested interests in all areas ofpublic policymaking. Meanwhile, statistics and pub-lic accounts remained of very poor quality, as didtechnical skills at all but the highest level of publicadministration. The greater independence graduallygranted to the central bank (State Bank of Pakistan)is one exception to that general trend.13

14. These problems obviously had other, deepercauses that were not directly associated with IMF-supported programs, but they proliferated in spite ofthese programs, which has prompted many in Pak-istan to blame the IMF for failing to tackle gover-nance issues directly. Addressing governance issuesdid not explicitly become part of the agenda of IMF-supported programs until 1997, and those negotiatedwith Pakistan were no exception in that respect.Within that context, however, the issue of institutionaleffectiveness could have received more emphasis thanit did, both in the design of programs and in the policydialogue with the authorities in the context of surveil-lance and technical assistance.

15. Moreover, many officials in Pakistan were ofthe view that protracted UFR has weakened the inde-

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10The weighted average rate went down from 65 percent in1988 to 19 percent in 2000. Pakistan is rated 7 on the IMF’s 10-point index of trade restrictiveness (where 10 is the most restric-tive), that is, below India (10), but well above China and SriLanka (5) or Indonesia, Malaysia, and the Philippines (4).

11In theory, broad consumption- or income-based taxes shouldbe more efficient than trade taxes, but the problem in Pakistan isthat these taxes have relatively high rates to compensate for the lackof broad base: in 2000, there were less than 100,000 registeredGST taxpayers and under 2 million income taxpayers (compared to1 million in 1990), in a population of roughly 140 million.

12See, for instance, “Economic Reforms and MacroeconomicManagement in Pakistan (1999–2001)” by Ishrat Husain, Gover-nor of the State Bank of Pakistan.

13Admittedly, changes in the legal framework of the centralbank’s operations do not necessarily imply that its de facto inde-pendence increased. Indeed, one former Governor of the SBP toldthe IEO that he had been able to perform his functions in great in-dependence at a time when no institutional safeguards guaranteedit. However, there was broad agreement among both IMF staffand Pakistan stakeholders that the SBP was significantly strength-ened during the 1990s.


pendent policy formulation capacity, in part becausethe policy closure process revolved around negotia-tions with the IMF, with little room for domestic ini-tiative and open discussion of policy alternatives.14

Most officials also viewed as limited the capacitybuilding effect on economic management skillssometimes assumed to be associated with IMF-sup-ported programs, because this “skills transfer” waslargely concentrated in narrow areas geared to thetechnical implementation and monitoring of IMF-supported programs. Likewise, the unusually largeamount of resources invested by the IMF in techni-cal assistance to Pakistan produced a considerableamount of blueprints for reform.15 But, according tothe authorities, they failed to have a significant im-pact because the knowledge transfer involved intheir conception was limited, and they were not suf-ficiently focused on implementation.16

The Lack of Effectiveness of Pakistan’s IMF-Supported ProgramsStems from Both Design andImplementation Issues

16. At first glance, it is tempting to blame the lackof effectiveness of IMF-supported programs in Pak-istan on their poor implementation by the authori-ties.17 The prolonged political instability and re-gional disruptions undoubtedly weakened policiesand the ability of the economy to respond to adjust-ment initiatives. To the extent that policy slippages

prevented the full disbursement of all but one of Pak-istan’s arrangements since 1980, poor implementa-tion is also undeniable. However, there is a strongperception in Pakistan that the programs had a lowprobability of success from the outset, owing to vari-ous design flaws and weak ownership at the highestpolitical level. These problems were compounded byshortcomings in conditionality and program “en-forcement” by the IMF that resulted in some coreunderlying problems remaining unresolved. Many ofthese difficulties reflected “systemic” issues associ-ated with the IMF’s approach in Pakistan rather thanjust technical issues associated with the IMF staff’sanalysis (see the section “Some Program DesignProblems Were Rooted in Deeper IMF GovernanceIssues” below).

Most IMF-supported programs had several design flaws

Overoptimistic assumptions and unrealisticobjectives

17. Most programs, particularly from 1993 onward,were based on overly optimistic projections as regardssuch key elements as GDP and export growth, as wellas regarding the growth of domestic savings and in-vestment (Figure 9.2).18 Any such comparison needsto take account of the fact that macroeconomic pro-jections made in IMF-supported programs are not un-conditional forecasts: they implicitly assume that theprogram will be implemented as planned, which wasclearly not the case in Pakistan. However, the discrep-ancies between projections and outturns are so largeas to make it difficult to assess whether poor imple-mentation was the cause or, at least in part, the conse-quence of these discrepancies.

18. The growth rate was overestimated on aver-age by 1!/2 percentage points (over 2 percentagepoints from 1993 on). Whether this gap resultedfrom an excess of optimism ex ante or from unfore-seen exogenous shocks, the IMF generally provedreluctant to adjust the program framework and keyobjectives, especially the fiscal deficit target. Re-views of internal documents suggest that this reluc-tance reflected concerns to avoid accommodatingpolicy slippages that would undermine the incen-tives to persevere with the core fiscal reformsneeded for long-term sustainability.19 However,

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14However, former IMF mission chiefs for Pakistan pointed outthat there were few cases where the authorities had approachedthem with viable policy alternatives. When they did, particularlyfrom late 1998 onward, their proposals were often incorporatedinto the program framework (e.g., as concerns the exit strategyfrom the foreign currency deposit freeze or as regards the ex-change rate regime).

15From 1990 to 2000, Pakistan received 40 IMF technical as-sistance missions, with over half of them concerning fiscal issuesand about a quarter on monetary and banking issues. During thatperiod, it also benefited from the presence of resident advisors fora cumulative total of five years. Furthermore, since FY1996, IMFTA to Pakistan has represented the equivalent of 13 staff years.

16Examples of such problems include the 1992 and 1997 TA re-ports on tax administration reform or the 1999 TA report on mod-ernizing the income tax system. Numerous reports were also pre-pared on the reform of indirect taxation, with limited concreteresults until the last couple of years.

17This dimension was frequently emphasized in performanceassessments done by the IMF. For instance, the 2000 Article IVstaff report notes that “Pakistan has had a series of adjustmentand reform programs supported by Fund arrangements during thepast decade. Policy implementation and economic performancehave been disappointing. . . . This weak performance stems inlarge part from the failure of successive governments to carrythrough sustained reforms. . . .”

18The starting point of projections is occasionally off the “actu-als” line because of subsequent revisions to the data on which theprojections were based.

19A justification for this reluctance is provided by the debt sus-tainability concerns that surfaced at the end of the 1990s. But,more than the level of the target itself, what appears to have hin-dered fiscal adjustment most is the stop-go process stemming


since most programs did not incorporate specificcontingency plans to deal with the effects of lower-than-projected growth, and in the absence of ade-quate methodology to distinguish the impact of pol-icy slippages from that of exogenous shocks, theresult was often lengthy negotiations on the scopeand nature of the corrective actions needed. In mostcases, this process resulted in fiscal targets gener-ally being met at least up to the first review, at thecost of ad hoc efforts that were neither sustainablenor economically efficient, while negotiations onadaptations to the program framework and neces-sary policy changes dragged on thereafter, with lackof agreement on a suitable course of action de factosending the program off-track.

19. Export growth projections also proved far toooptimistic: instead of rising by roughly 15 percent a

year, which was the average program projection andwould have represented an acceleration from the 11percent growth rate observed in the 1970s/80s,20 ex-ports rose by barely 5 percent annually during the1990s. As a result, current account projections typi-cally projected a too rapid improvement, while capitalaccount projections were, on the whole, too conserva-tive. The outcome was a substantial underestimationof the buildup of external debt servicing charges fromthe early 1990s onward (Figure 9.3).

20. Similarly, some program targets proved unre-alistically ambitious given the time frame and theimplementation capacity available. This was espe-cially the case for tax revenues (Figure 9.4). Thesetargets were also very ambitious compared to IMF-

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from the inadequate macroeconomic framework, with the slip-pages that occurred during off-track periods more than undoingany progress previously made.

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Figure 9.2. Pakistan: Growth of GDP, Exports, Gross Domestic Saving, and Gross Domestic Investment

Actual data Data as projected under the arrangement

Real GDP growth(In percent)

Exports(In millions of U.S. dollars)

Gross domestic saving(In percent of GDP)

Gross domestic investment(In percent of GDP)

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Source: IMF staff reports.

20These projections were also more optimistic than contempo-raneous WEO forecasts for developing countries as a whole (9 percent) and for Pakistan’s WEO country group (i.e., Asia: 10percent).


wide averages.21 Indeed, these targets were nevermet over the 1988–2000 period in spite of frequentin-program downward revisions.

21. While stakeholders, including IMF staff, nowgenerally agree that tax revenue targets were gener-ally unrealistic ex ante, the reasons for it are not entirely clear. The authorities argue that the overop-timism of revenue projections reflected an overesti-mation of their implementation capacity. IMF staff,on the other hand, contend that the lack of realism of

revenue projections reflected the authorities’ pres-sures and was fueled by the political economy ofPakistan’s budgetary process.22 Staff memoranda ex-changed during the internal review process indicatethat they resisted what they viewed as overoptimisticprojections as much as possible, but in the end had todefer to the authorities’ knowledge of their own abil-ities on that issue. In any event, the overoptimism ofrevenue projections undoubtedly helped paper over

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Figure 9.3. Pakistan: Current and Capital Account Projections and External Debt

Actual data

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Data as projected under the arrangement

Capital Account(In millions of U.S. dollars)

Current Account Balance: Before Transfers(In millions of U.S. dollars)

External Debt(In percent of GDP)

Debt-Service Ratio(In percent)


21In multiyear arrangements approved since 1993, the averagetargeted revenue increase over the three-year program period was2.2 percentage points of GDP in Pakistan, compared to 0.7 pointsfor prolonged users as a whole and 1.3 points for “temporary”users. Overall and primary fiscal balance targets were also moreambitious in Pakistan than in both “temporary” and prolongedusers’ programs on average. (Source: MONA.)

22The logic of the argument is the following: building the bud-get on the basis of overly optimistic revenue projections avoidsmaking tough decisions on expenditure at the time of the budgetdebate, while the deficit that inevitably arises when revenue ex-pectations fail to materialize makes it easier for the Finance Min-istry to impose a degree of expenditure restraint that would havebeen unacceptable before. (Nonetheless, the cuts adopted in thatcontext may not be—and in fact often were not—optimal in termsof economic efficiency.)


difficult policy choices in a context of strong pres-sures to agree on a program.

22. As regards structural reforms, the overopti-mism was reflected in the length and diversity of thereform agenda embedded in IMF-supported pro-grams from 1988 onward and from the overambi-tious timetable envisaged for reforms that take timeto implement even in countries with far more admin-istrative resources than Pakistan.23 The number ofareas of economic policy covered by explicit condi-tions increased from four in the 1988 SBA/SAF toeleven in the 1997 EFF/ESAF. The result was insuf-ficient prioritization and an overburdening of the

policy formulation and implementation capacity ofthe authorities—a capacity that was limited in partby technical constraints, but mostly by the lack ofpolitical will to take measures with significant short-term costs (for instance, as concerning the removalof tax exemptions).

Some of the policy prescriptions had adverse side effects

23. Some of the policy prescriptions embeddedin IMF-supported programs turned out, owing toimplementation difficulties, to have unintended sideeffects.

24. In the fiscal area, two mutually reinforcingproblems occurred. First, the strategic orientation ofshifting taxation from international trade to domesticactivities, an important feature of all IMF-supportedprograms since 1980, proceeded at an uneven pacethat caused de facto sequencing problems. While thereduction of tariffs and other taxes on internationaltrade was relatively fast, it took much longer for thegeneral sales tax (GST) instituted in 1990 to yield acomparable revenue, owing to numerous exemptionsthat took no less than ten years to eliminate, and tothe shortcomings of tax administration.24 Likewise,income tax was prevented by poor tax administrationand too narrow a base from making a sufficient con-tribution to the revenue collection effort. These fac-tors explain the bulk of the revenue shortfalls thatwere a common characteristic of all IMF-supportedprograms since 1988 (see Figure 9.5).

25. The second problem was that attempts to meetthe fiscal deficit targets led to the frequent adoptionof ad hoc tax increases and expenditure cuts in thecourse of the program. These measures were fre-quently inconsistent with the medium-term strategypursued under the program. In particular, hikes intax rates and surcharges, which in the short term ap-peared to be the most effective way to fill the rev-enue gap, might have contributed to reducing the taxbase further by encouraging taxed activities to shiftto the informal sector. They also led to an increasedcomplexity of the tax system.25 Many observers inPakistan commented that such ad hoc measures havehad a detrimental effect on business sentiment bymaking tax legislation unpredictable (owing to fre-

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Figure 9.4. Pakistan: General Government Balance and Tax Revenues(In percent of GDP)

Actual dataData as projected under the arrangement

2000 SBA

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General government balance

General government tax revenue

23For instance, effective taxation of the agricultural sector wasexpected to be put in place within one year and the implementa-tion of a broad-based GST within two years. In both cases, afterten years full effectiveness had yet to be achieved.

24In theory, a shift from trade taxes to broad-based domestictaxes, such as the VAT, should be revenue enhancing since the lat-ter taxes would typically also include traded goods in their base.However, in Pakistan, this effect largely failed to materialize be-cause of severe weaknesses in tax administration and of generousand widespread tax exemptions, which persisted in spite of spe-cific conditionality to that effect in each of the programs.

25In particular, in the form of multiple tax rates, cascading salestaxes, multiple withholding taxes, and complex excises.


quent legal changes but also to the increased scopefor taxpayer harassment by the employees of theCentral Board of Revenue, who traditionally havelarge discretionary powers in the implementation oftax policy). As regards expenditure cuts, given theinflexible structure of expenditure (due to the largeshare of military spending and the weight of interestexpenditure) cuts inevitably fell on development andsocial spending, which resulted in a marked declinein public investment (from about 10 percent of GDPin 1992 to 4!/2 percent in 2000).

26. As regards financial sector reforms, the sameprocess of uneven implementation of a package ofreforms resulted in ex post sequencing problems.The 1988 SAF envisaged the simultaneous imple-mentation of a liberalization of interest rates andlending practices, a major regulatory reform of thebanking sector, and a significant reduction in theborrowing requirement of the public sector. In theevent, only the first leg of this tripod was delivered.As a result, the financing costs of fiscal deficits bal-looned, making it ever more difficult to balance thebudget, and the soundness of the banking sector de-teriorated as governance weakened. This led to theaccumulation of large volumes of nonperformingloans. The very deteriorated state of public banks’loan portfolios also accounts for the high level of in-terest rate spreads that has had a depressing impacton economic activity in recent years.

27. However, it is worth emphasizing that the twotypes of side effects discussed above do not implythat the fundamental policy prescriptions werewrong. In particular, it is unlikely that economic per-formance would have been better had tariffs notbeen lowered until sufficient revenue could be ob-

tained from domestic taxes (i.e., in the late 1990s),or had interest rates not been liberalized until the fis-cal deficit had been sharply reduced (i.e., not yet).Rather, these side effects demonstrate that a criticalmass of reforms is needed for adjustment to takehold, and that the adjustment path chosen cannot ig-nore the longer time frame needed to implement themost complex of these reforms. Nonetheless, thetrade-offs and risks involved (of which internal doc-uments suggest that IMF staff was keenly aware)would certainly have warranted a more open debatein policy discussions with the authorities and in re-ports to the Executive Board.26

Insufficient emphasis was placed on institutional reforms

28. In retrospect, there is ample recognition—both in the IMF (more in the views expressed in staffinterviews than in reports) and in Pakistan—thatIMF-supported programs should have put muchstronger emphasis on institutional reforms, particu-larly in tax administration, the banking sector, andpublic enterprises, all of which have only begun tobe addressed in recent years.27 In addition to direct-ing attention to implementation capacity issues,thereby making program objectives less unrealistic,an explicit emphasis on institutional reforms wouldhave mitigated the program design problems dis-cussed above.

29. As far as tax administration is concerned, in-terviews with Pakistani officials and a review of in-ternal documents suggest that there was an implicitunderstanding on both sides that the revenue targetscould only be met if far-reaching tax administrationreforms were undertaken in addition to the changesin tax policy explicitly monitored under IMF-sup-ported programs. However, none of the programshad an explicit focus on tax administration reform,

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Figure 9.5. Pakistan: Evolution of Tax Revenue StructureRevenue to GDP ratio (in percent)

Sources: IMF staff reports and IEO calculations.

26For instance, an internal country strategy paper prepared inearly 1993 noted, in drawing the lessons from past experience ofIMF-supported programs in Pakistan, that “in sequencing the pro-gram measures, primary emphasis needs to be placed on fiscalconsolidation and reform, taking full account of the budgetarycosts associated with trade and financial sector reforms”(empha-sis added).

27To some extent, this criticism reflects the application of cur-rent standards to past programs. Program documents typically didsay that these aspects were important, but they put little emphasison the detailed monitoring and implementation of deeper institu-tional reforms, in keeping with the IMF’s own institutional cul-ture at the time. Moreover, a number of these issues were rightlyidentified as being the primary responsibility of the World Bankbut, as will be discussed in the section “Some Program DesignProblems Were Rooted in Deeper IMF Governance Issues”below, this identification of the division of labor between the twoinstitutions did not lead to an effective operational approach toensure that the issues were addressed.


and even though Pakistan received several technicalassistance missions from the IMF in relation to taxadministration problems, the actual implementationof reforms was never pursued through specific con-ditionality until the 1997/98 EFF/ESAF.28 As a re-sult, no significant progress in revenue collection oc-curred during that period, in spite of protracted buteventually significant improvements in tax policy.

30. Likewise, stakeholders on both sides nowgenerally agree that much of the deterioration in thequality of banks’ portfolios that occurred in the1990s might have been avoided had the financialsector reforms of the beginning of the decade beendesigned differently. In particular, giving the sameweight to regulatory improvements as to interest rateliberalization and paying due attention to banks’management flaws (in particular, political interfer-ences in lending decisions) would probably have ledto a better outcome.

31. Finally, the effectiveness of IMF-supportedprograms would have been enhanced had public en-terprises been handled from an institutional reformperspective from the start: IMF-supported programs’focus on preventing too large misalignments be-tween public enterprises tariffs and world marketprices was warranted, but it ignored the broader re-structuring needs of these enterprises. The draw-backs of this approach are particularly visible in thecase of the largest public enterprises (discussed fur-ther below), whose impact on the economy expandway beyond that of potentially distortionary pricesand eventually took the form of a drain on fiscal re-sources, expensive and unreliable supply of basicutilities, accumulation of nonperforming loans in thebanking system, and massive cross-arrears withinthe broader government sector.

Lack of ownership and inconsistent monitoring resulted in poor implementation

Ownership was generally weak

32. Pakistan suffered from a very unstable politi-cal environment throughout most of 1988–2000. Nosingle government managed to stay more than three

years in power, with an average tenure of 18months.29 The effects of this instability on succes-sive governments’ ability (and willingness) to imple-ment comprehensive reforms and carry through anambitious adjustment effort seem to have beenlargely underestimated—at least in reports submittedto the Executive Board. Most UFR staff reports dur-ing that period acknowledged the fluidity of the po-litical situation, but usually stated that governmentshad strong ownership of the programs and werestrongly committed to their implementation, evenwhen programs were negotiated with caretaker gov-ernments and endorsed at the last minute by the in-coming cabinet, as occurred for the 1988 SAF andthe 1994 EFF/ESAF. While the claim made by suc-cessive IMF reports that there was a broad consensusacross major political parties on economic policymatters was correct, this consensus gave no assur-ances as to the political ability of elected govern-ments to carry through unpopular adjustment poli-cies (Box 9.1).

33. In the event, as political difficulties arose, itoften appeared that the reform agenda of the eco-nomic team had little backing at the highest politicallevel,30 at least in the sense that top decision makerswere not sufficiently convinced that the reformswere necessary and that the economic price of post-ponement outweighed the political costs of early im-plementation. As a result, implementation effortsoften limited themselves to the minimum needed toensure the continued disbursement of IMF re-sources. In many instances, what was observed wasmore the letter of the conditions than their spirit, andeven though the tightening of conditionality overtime gradually reduced the room for such practices,it was insufficient to compensate for the lack of own-ership. For instance, in the fiscal area, performancecriteria initially targeted bank financing of thedeficit, while the overall deficit was only a bench-mark. Since bank financing was not a predominantsource of financing of the deficit, Pakistan was ableto comply with the fiscal performance criteria until1994 in spite of substantial fiscal overruns.

34. As regards structural reforms, conditionalitywas initially set in the form of general commitmentsin the letter of intent or structural benchmarks,which were at best partially observed (e.g., the re-moval of exemptions from excises, custom duties,and other taxes targeted by the 1980 EFF and the

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28The fact that the achievement of revenue projections hingedcritically on improvements in tax administration was repeatedlyunderscored in internal memoranda by the Fiscal Affairs Depart-ment, which also supplied abundant technical assistance in thatarea and frequently expressed concern that their recommenda-tions did not appear to receive consistent follow-up. At the sametime, they emphasized in their comments that improvements intax administration should not be strongly relied upon to deliverlarge and quick increases in tax revenue. This might explain whyimprovements in tax administration were not aggressively pur-sued through conditionality until the most recent programs.

29By contrast, at the administrative level, there was a consider-able degree of stability at the top of the two main institutions in-volved, namely the central bank and the Ministry of Finance.

30This problem was recognized in the 1993 country strategypaper, which highlighted as the first lesson to be learned frompast experience that “it is important that the policy dialogue in-volve, at an early stage, full commitment at the highest politicallevels in Pakistan.”


1988 SAF). When conditionality was “hardened,” inthe mid-1990s, conditions were often met in waysthat minimized their impact. A few examples can il-lustrate the general problem:

• by enacting a law but not implementing it (e.g.,extension of GST to the services sector and tax-ation of agricultural income);

• by adopting a new tax but with so many exemp-tions as to make its additional yield negligible(e.g., the GST act in 1990);

• by abolishing existing tax exemptions while si-multaneously creating new ones;

• in other cases, measures adopted were subse-quently reversed or suspended (e.g., the petro-leum price adjustment mechanism from 1995 to1998).

35. Furthermore, during much of that period, thegovernment’s practice was to use the IMF as ascapegoat for unpopular decisions, a strong indica-tion of the limited degree of actual ownership. Overtime, the result was that the surest way to underminepopular support for any measure was to give it an“IMF” label.31

The mitigating devices available to the IMF were not used fully

36. The extent of political instability and ensuinglow ownership during the period of prolonged UFRwas such that even using the whole arsenal of safe-guards at the disposal of the IMF would have beenunlikely to produce the results promised in succes-sive programs. However, many of the safeguards—which the Board had established as part of a strategyfor minimizing prolonged use (see Chapter 3 of Part I)—were not used fully until late 2000. At thatstage, practice shifted to the strictest standards oftrack record probing.32 However, ownership too washigher, which was probably more determining in thesuccess of the program than any parameter under theIMF’s control.

Track record requirements

37. When there are significant doubts about theauthorities’ commitment or ability to pursue adjust-ment policies over a sustained period of time—per-haps as a result of previous policy slippages—it iscustomary practice for the IMF to ask a governmentto build a track record before engaging in a multi-year arrangement. In Pakistan, however, track recordrequirements were often squeezed out by protractednegotiations. For example, the 1994 EFF/ESAF, for

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Box 9.1. Ownership Assessment in the Context of Pakistan Arrangements with the IMF

A brief analysis of the politico-administrative con-text of Pakistan at the onset of the multiyear arrange-ments approved in 1993/94 and 1996/97, undertakenby a political scientist at the IEO’s request, shows thatthere were conflicting factors at play, making the as-sessment of strength of ownership and political feasi-bility particularly difficult:

• On the positive side, governments in power at thetime of program approval enjoyed a comfortablemajority in Parliament and in key provincial gov-ernments and the reforms they put in motion beforethe program’s approval were consistent with itsspirit, they could rely on well-structured and, at thetop echelons, skillful and stable bureaucracy.Moreover, there appeared to be a broad consensusacross major political parties about the main thrustof economic reforms.

• On the negative side, vested interests weighedheavily in the political power base of every govern-ment and were in a position to block the approvalof reforms (i.e., they had a “veto power”), many ofwhich directly or indirectly threatened their privi-leges, implementation capacity was weak due toserve deficiencies in the rule of law and law en-forcement; decision-making style (restricted to anarrow circle), and a policy dialogue that presentedreforms as IMF-imposed, were not conducive to abroad ownership of reforms. Taking all these fac-tors into consideration, serious doubts should havebeen raised about the prospects for consistent im-plementation of the programs.

See Appendix 1 for a more comprehensive presentation ofthe analysis conducted.

31One telling anecdote heard during the evaluation team’s mis-sion to Pakistan illustrates how a long series of weakly ownedprograms can lead to perverse results: when the IMF suggestedincluding in the program supported by the current PRGF arrange-ment key elements of the tax administration reform prepared bythe authorities, some government officials initially resisted on thegrounds that these reforms were ones they truly wished to imple-ment, whereas including them in the LOI would give the impres-sion they were IMF-imposed and hence would reduce theirchances of implementation.

32The 2000 SBA was adopted only upon completion of an un-usually long list of prior actions, going beyond the unfulfilledcommitments of the preceding interrupted program, and its dis-bursements were slightly back-loaded. The current PRGFarrangement was approved only after one year of satisfactory per-formance under a Stand-By Arrangement.


which negotiations lasted 18 months, was precededby a Stand-By Arrangement, but the SBA was not al-lowed to run its course: it was cancelled after sixmonths to be replaced by the multiyear arrangement,even though the first review had not been completeddue to slippages.33 Negotiations for the 1997EFF/ESAF started in mid-1996, at a time when Pak-istan was under a Stand-By Arrangement followingthe collapse of the previous EFF/ESAF. TheEFF/ESAF was eventually presented to the Boardafter a six-month track record—not under the SBA,which had been irremediably interrupted owing tovery large policy slippages, but under a staff-moni-tored program (SMP) whose targets had been re-vised several times to accommodate various slip-pages and shocks.

38. Other tools available to the IMF are prior ac-tions and the phasing of disbursements, with a back-loaded schedule providing a greater incentive to sus-tain the policy effort over the medium term.

• Prior actions were used in most UFR requestssince 1988. However, these prior actions did notalways include the key conditions whose nonob-servance had sent the previous program off-track(e.g., GST base extensions in the 1994 program,or the petroleum price adjustment mechanism in1997). In addition, prior actions, like any otherconditionality, are subject to superficial or tem-porary observance only. Two examples drawnfrom agricultural taxation illustrate this point:the 1993 SBA included a prior action related tothe extension of taxation to the agricultural sec-tor. The prior action was considered to be met,but legal impediments that subsequently sur-faced made it necessary to impose a new prioraction in the 1994 ESAF, this time related to theparliamentary approval of the ordinance on fed-eral agricultural taxation. Neither prior action re-sulted in meaningful taxation of agricultural in-comes (Box 9.2).34 Thus, the issue in Pakistan’sprograms appears to have been the prioritizationof prior actions and their integration into pro-gram design, rather than their quantity.

• The tranching of disbursements was generallymildly front-loaded,35 even in cases where facil-

ity specific rules allowed flexibility. This favor-able tranching contrasts with the generally back-loaded design of the policy agenda: even in the1997 ESAF/EFF, which came after a series ofinterrupted programs, half of the structural con-ditions specified from the outset were related tothe second program year, and several pivotalmeasures, such as income tax reform, civil ser-vice reform, extension of the GST to the retaillevel, and tariff cuts were only planned for thethird program year.

Conditionality

39. The conditionality response to the practicesinduced by the low ownership of programs by theauthorities was to gradually close as many loopholesas possible, through an increase in the overall num-ber of both macroeconomic and structural condi-tions, through a larger recourse to performance crite-ria and prior actions as opposed to generalcommitments in the letter of intent, and through theuse of continuous performance criteria and other no-reversal clauses (Figure 9.6).

40. It is doubtful that any form or volume of con-ditionality would have been sufficient to compensatefor the authorities’ fundamental unwillingness or in-ability to implement many of the policies promotedby successive programs. However, two lessons canbe derived from this experience. First, strict imple-mentation and enforcement would have been easierhad conditionality been more focused on truly criti-cal areas. Second, the approach—eventually adoptedwith success in the areas of tax exemptions and utili-ties price adjustment—consisting in setting condi-tionality on policy rules rather than discretionary ac-tions by the authorities might have speeded up thereform process if adopted and generalized earlier.

41. More minor problems that hindered the effec-tiveness of conditionality in Pakistan are the follow-ing. First, the tightening of conditionality always oc-curred with a lag following repeated failures todeliver on policy undertakings, a lag that in somecases was very long (e.g., conditionality on the fi-nancing of the fiscal deficit or utilities price adjust-ments). Second, in some areas, such as tax adminis-tration, utilities pricing, or public enterprise reform,the effectiveness of conditionality was reduced bythe lack of a sustained, consistent approach. Theseareas, which were presented as key to the success ofthe programs of the 1980s, subsequently ceased tobe covered by conditionality for several years, de-spite very limited progress and occasional backslid-ing. In other cases (e.g., agricultural taxation), theinconsistency stemmed from the lack of follow-upon undelivered commitments from one review orprogram to the next.

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33End-1993 targets, however, were reportedly met, which al-lowed the request for an EFF/ESAF to be presented to the Boardand approved in February 1994.

34For a more comprehensive review of attempts to tax agricul-ture in Pakistan and impediments thereto, see Khan and Khan(1998).

35In Stand-By Arrangements during the 1990s, the amount dis-bursed upon approval by the Board was on average 12 percenthigher than what would have resulted from a division of the totalamount committed under the arrangement into tranches of equalsize.


42. In the few cases where conditionality re-sponded proactively and consistently, better resultswere eventually obtained, e.g., in the area of tax ex-emptions: conditionality evolved from a simple LOIcommitment to phase out existing tax exemptions (in1988), to a continuous performance criterion on thenonintroduction of new exemptions (in 1995), to aprior action on the passage of an act prohibiting thegovernment from creating new exemptions (in 1998).

43. Finally, the relative generosity of the IMF ingranting waivers to the authorities, or in consentingto renew its support soon after a program interrup-tion typically caused by large fiscal slippages, led—according to many Pakistan officials—to a form ofmoral hazard: the expectation that the IMF wouldeventually provide financing weakened incentivesto tackle the fiscal deficit forcefully. Indeed, of theseven program reviews completed in the 1990s, five

involved at least one and generally several waivers,mostly concerning fiscal performance criteria.36

Furthermore, in spite of the many interruptions suf-fered by IMF-supported programs, the interval be-tween two disbursements of IMF resources wasgenerally short—never exceeding 12 months over1991–99.37

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Box 9.2. A Chronology of IMF Conditionality on Agricultural Taxation in Pakistan1

Agricultural taxation was pursued through IMF-sup-ported programs since 1981 through the following con-ditionality (implementation status as reported in staffreports noted in parentheses). None of this conditional-ity—much of which was actually observed, in a narrowsense—had substantially increased the contribution ofthe agricultural sector to tax revenues by the end of thedecade.

• 1981 (EFF): commitment in the authorities’ Mem-orandum of Economic Policies (MEP) to tax agri-cultural output within one year (formally imple-mented, but with a very low yield).

• 1991 (SAF): commitment in the MEP to extend thescope of agricultural taxation in the 1992/93 bud-get (not implemented).

• 1993 (SBA): prior action on extension of taxationto the agricultural sector (met).

• 1994 (EFF/ESAF): prior action on parliamentaryapproval of ordinance relating to federal agricul-ture taxation (met) and performance criteria on ex-pansion in agricultural tax base including through

Produce Index Units (PIU) adjustment, within sixmonths (met).

• 1995 (SBA): performance criteria on inclusion ofprovisions in 1996/97 budget to broaden agricul-tural taxation through an increase in PIU to PRs400 and extension of its base (met).

• 1996 (SBA, revised): performance criteria onadoption by all provinces (by end-December 1996)of ordinances on agricultural taxation (not met); establishment of a task force on the potential rev-enue from provincial agricultural taxes (met); andtask force to present recommendations for 1997/98budget and the medium term.

• 1997 (EFF/ESAF): performance criteria on harmo-nizing provincial taxation of agricultural incomewith that prevailing in Punjab, by end-June 1998(not met; waived and rescheduled).

• 1998 (EFF/ESAF): performance criteria on harmo-nizing provincial taxation of agricultural incomewith that prevailing in Punjab, by end-June 1999and structural benchmark on finalization by thesame date of the rate and threshold structure for theprovincial tax on agricultural income capable ofyielding PRs 3.5 to PRs 4 billion in 1999/00 (bothconditions partially implemented, with delay).

• 2000 (SBA): performance criteria on GST exten-sion to urea fertilizers and pesticides by March2001, and to all other agricultural inputs by Sep-tember 2001 (both performance criteria met);structural benchmarks on full implementation ofagricultural income taxes on the basis of provincialimplementing regulations to become effective ineach province by end-June 2001 (met with delay intwo provinces, unmet in other two).

1Agriculture accounts for roughly 25 percent of GDP, em-ploys half of the labor force, and is one of the largest earnersof foreign exchange. Under the Constitution of Pakistan,farmers have been exempt from taxes on their incomes fromagriculture, and only the provincial governments are permit-ted to levy a land tax. The political power of large landownershas long prevented the federal government from seeking thelegal changes needed to give it authority to tax agricultural in-come or land and Provincial governments from using the au-thority they have to pursue the same goal. This situation hasled the agricultural sector to become a legal, and sometimesillegal, shelter for other forms of income.

36Over that period, Pakistan was granted 18 waivers of compli-ance, of which 8 concerned quantitative PC, another 8 concernedstructural PC, and 2 continuous PC. In all three categories, half ofthe waivers concerned fiscal PC (two-thirds if PC on utilitiesprices are treated as “fiscal” conditionality). All the waivers onquantitative PC were requested for reasons other than “minortechnical deviation” or “exogenous shocks.”

37Somewhat longer intervals occurred at the beginning and endof the decade, and coincided with episodes of major political dis-order: from December 1989 to December 1991 and from June1999 to November 2000.


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Some Program Design Problems Were Rooted in Deeper IMF Governance IssuesInstitutional considerations weighed heavily in decisions regarding IMF involvement inPakistan

Geopolitical considerations

44. “Most IMF-supported programs primarilyserved political purposes. Thus, it should come as nosurprise that they did not achieve much in terms ofeconomic results.” That view, expressed by a seniorPakistan official interviewed by the IEO, appears tobe very widely shared in Pakistan, both within andoutside official circles. A large proportion of IMFstaff involved in Pakistan programs were also of theopinion that political considerations had, at times,prevailed over technical judgments, not necessarily onthe details of program design but in terms of the over-all threshold required for a program to be supported.

45. While there is no hard evidence or “smokinggun,” either in internal memoranda or in the record ofBoard discussions, that noneconomic considerationsplayed a predominant role in IMF decisions to sup-port a request for use of Fund resources or to com-plete a program review, there is no shortage of anec-dotal evidence—coming from both former authoritiesand the IMF staff—that such considerations did mat-ter importantly on some occasions. Moreover, a fewsignificant “program events” closely followed majorgeopolitical developments, for instance the 1980 EFFfollowing the Soviet invasion of Afghanistan; and themid-1998 program interruption following Pakistan’snuclear tests.

46. More generally, until 1998, the prevailing per-ception within IMF staff was that the principal IMFshareholders, no matter how demanding they claimedto be on the substance of programs, were not willingto take the risk of major turmoil in Pakistan that an in-terruption of IMF support might have caused. This re-sulted in a general sense, shared by staff and the au-thorities, that the IMF would remain involvedirrespective of performance under a specific program.The succession of adverse events of 1998–99 (nucleartests, a military coup, and the unveiling of past misre-porting of fiscal data to the IMF) caused a dramaticreversal in shareholders’ views, after which IMF sup-port was perceived by IMF staff and the authorities asunlikely—short of a very strong performance underan extremely ambitious program.

47. Assessing with accuracy to what extentgeopolitical considerations did supersede economicones in program or program-design decisions is vir-tually impossible, given the element of judgment ap-propriately present in any UFR decision. But thesimple fact that IMF-supported programs are widelyperceived as heavily influenced by political fac-tors—both by the authorities who sign onto themand by the economic agents whose behavior they aremeant to influence—probably weakened the efficacyof these programs.38

0 5 10 15 20 25 30 35

Performance criteria

Prior actions

Benchmarks

2000 SBA

1997 EFF/ESAF

1995 SBA

1994 EFF/ESAF

1993 SBA

1988 SAF

Figure 9.6. Pakistan: Evolution of Structural Conditionality(Average number of conditions per program year)


38In this connection, it has been suggested to the IEO by someIMF staff members that the program design weaknesses discussedin the section “The Lack of Effectiveness of Pakistan’s IMF-Sup-ported Programs Stems from Both Design and Implementation Is-sues,” such as unrealistic macroeconomic projections, the pretenceof toughness, and so on were symptomatic of attempts to find aface-saving way to justify continued lending to Pakistan.


“Systemic” considerations related to the IMF mandate

48. There are four dimensions of the IMF man-date that might account for some of the design prob-lems discussed above. First, as a monetary institu-tion, the IMF is traditionally viewed as primarilymandated to provide temporary balance of paymentsupport to its members, not long-term financing.This means that its interventions are expected toallow a restoration of balance of payments viabilityover a relatively short period. While the creation ofthe EFF and, later on of the SAF, ESAF, and PRGF,has lengthened the time frame for the restoration ofviability, until recently it would have been difficultto present for the consideration of the ExecutiveBoard a program that did not lead to a restoration ofbalance of payments viability within a short- tomedium-term time frame. This constraint is likely tohave contributed to two related problems: (i) a ten-dency toward overoptimism both in the speed withwhich the real economy would respond to the policymeasures and in the pace at which difficult structuralreforms could be implemented; and (ii) a focus ontypes of structural “conditions” that can be clearlydelivered within programs’ time frame—or even inthe few weeks separating the finalization of the pro-gram from its presentation to the Executive Board, inthe case of prior actions. Complex institutional re-forms, which are key to longer-term sustainability,are much harder to fit within such a framework.39 Asfar as Pakistan is concerned, program assumptionsdid not become markedly overoptimistic until theearly 1990s (see the figures in the section “The Lackof Effectiveness of Pakistan’s IMF-Supported Pro-grams Stems from Both Design and ImplementationIssues”). From then on, internal memoranda do sug-gest that several review departments had seriousreservations about the optimism of program assump-

tions, particularly regarding GDP and export growth,as well as revenue targets. The “systemic constraint”discussed above is a plausible explanation for whyprograms went ahead despite these reservations.

49. Second, until the late 1980s, the IMF inter-preted its mandate as narrowly focused on macroeco-nomic policies and a few structural areas. That con-ception changed dramatically when concessionalfacilities were created, which led the IMF to embracea broad agenda of structural reforms, without neces-sarily having the expertise needed for an optimal se-lection, sequencing, and design of these reforms, atleast initially. While in theory these shortcomingscould have been mitigated by a close collaborationwith the World Bank (and the AsDB), in practice col-laboration was imperfect. As a result, key areas, suchas governance and institutional reforms in tax admin-istration, civil service, and public enterprises, endedup being handled inadequately by both IFIs for lackof emphasis and coordination of their efforts. Bothinstitutions implicitly or explicitly recognized thatthese issues were central to long-term macroeco-nomic sustainability. But they do not appear to havereached an effective agreement, among themselvesand with the government, on what the prioritiesshould be and on coordinated action plans to addressthem, until the EFF/ESAF approved in late 1997.

50. The problems of the power sector provide agood illustration. Initially (i.e., in the 1988 SAF), theIMF focused on power tariff adjustments, on an “asrequired” basis, with the primary purpose of contain-ing the fiscal impact of the operational losses and in-vestment needs of the power sector. However, thatcondition was omitted in subsequent arrangements,40

while at the same time, the World Bank was shiftingits focus toward human development, limiting its in-terventions in the energy sector to technical aspects.Meanwhile, severe institutional problems intensi-fied.41 As a result, by 1996–97, the overall borrowingrequirement of the seven major public enterprises hadreached 2!/2 percent of GDP (the bulk of which camefrom WAPDA and KESC, the two main public powerproducers). Their nonperforming loans had piled upin public banks to the point of threatening their stabil-

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39Examples of such difficulties include tax reform, where set-ting conditions on the enactment or parliamentary approval ofgiven measures failed to ensure their actual implementation (e.g.,for agricultural taxation, where the first legal changes were ap-proved in 1994, but full implementation was an unmet structuralbenchmark (SB) as of mid-2001, or for the extension of the GSTto traders/retailers, where the timetable was similar); improve-ments in tax administration, where conditionality on the creationof a given administrative structure failed to ensure that it per-formed effectively the tasks it had been set up for (e.g., tax auditunit, an SB for 1997); or yet again privatization, where condition-ality on “bringing to the point of sale” specified public enter-prises, does not guarantee that they will ever be privatized (as wasdone in 1996/97 for companies in the oil and gas sector, which forthe largest part had yet to be sold by end-2000). In such a context,an alternative is to specify the condition in terms broad enough to give staff room for judgment in appraising the extent ofprogress made at the time of the program review. However, evi-dence from other case studies (especially the Philippines) sug-gests that so-called “review” conditionality is no panacea.

40Presumably because of a change of strategy, which, from1993 onward, focused on privatizing these enterprises.

41The World Bank diagnosed them in 1998 in the followingterms: “Public enterprises suffer from operational inefficiencies,overstaffing, inappropriate incentives, misdirected investments,inadequate O&M [operation and maintenance], political interven-tion in their decision making, and other problems which ad-versely affect their performance . . . [they] have become a vehiclefor employment creation, political patronage and corruption. . . .Their inefficiency has resulted in high costs to the private sectoras a result of high prices of utilities . . . [and] in many cases poorquality of supply. . . . Problems are most acute in the power sec-tor.” (“Pakistan Public Expenditure Review,” 1998, pp. 15–16.)


ity and substantial cross-arrears had accumulatedamong public enterprises and vis-à-vis the govern-ment. At that point, the seriousness of the problembrought a greater focus on it by both IFIs. The WorldBank helped the authorities draw up operational andfinancial restructuring plans, whose implementationwas subsequently monitored through IMF-supportedprograms’ conditionality.42 By end 2000, both the fi-nancial and the operational restructuring were underway but are likely to take considerable time to yieldsubstantial efficiency gains and cost reductions.

51. Third, the “seal of approval” function effec-tively given to IMF-supported programs by donorsand creditors might account for the tendency to over-promise in programs and subsequently undersanc-tion when the authorities did not deliver. The factthat the IMF acted as gatekeeper for access to manyother sources of financing in one sense gave it greatleverage, but also meant that the consequences of aprolonged interruption in programs would be verysevere. Ultimately the IMF—presumably reflectingthe views of its shareholders—proved extremely re-luctant to risk the costs of such major disruption,which meant that there was an inbuilt tendency notto insist too hard on the core issues.

52. Fourth, the IMF’s mandate gives it an obliga-tion to support member countries making the neces-sary efforts to address their economic difficulties.Thus, any government committing itself to makingsuch efforts has to be given the benefit of the doubt,at least initially. In Pakistan, since 1988, political in-stability was such that each new IMF arrangementpractically coincided with a new government and itwould have been extremely difficult not to give sucha government the initial benefit of the doubt on itsdeclared policy intentions.

Defensive lending considerations

53. It has been argued43 that a factor contributingto the prolonged use of IMF resources when adjust-ment fails to take place is the need to ensure thatobligations falling due are met. The IMF did have asignificant exposure to Pakistan throughout the pe-riod,44 although Pakistan’s record of repayment of

its obligations to the IMF was impeccable even attimes of severe stress on its international reservesposition. The only times when there is evidence that“defensive lending” considerations could have beena significant factor, as reflected in explicit concernsabout a possible default expressed in internal memo-randa, were when Pakistan came closest to the brinkof a foreign exchange crisis: (i) in late 1996, just be-fore the revival and augmentation of the SBA; (ii) inthe months preceding the completion, in January1999, of the second review of the 1997 EFF/ESAFfollowing its de facto interruption in May 1998; and(iii) in mid/late 2000, prior to the approval of theSBA.

Crowded out by UFR, surveillance played onlya limited independent role

54. In Pakistan, all but two of the Article IV con-sultations of the 1988–2000 period were conductedjointly with UFR activities. A comparison of thedepth and quality of surveillance in stand-alone Arti-cle IV reports with joint Article IV/UFR reports andwith surveillance guidelines over 1982–2000 indi-cates that joint consultations tended to make a morecursory treatment of such key issues as medium-term perspectives, sensitivity to shocks, and vulnera-bilities.45 They also tended to be less concernedabout exploring trade-offs between policy optionsand less candid about divergences of views betweenthe staff and the authorities.

55. Once again, this “crowding out” of aspects ofsurveillance appears to reflect systemic factors,rather than a particular shortcoming of the IMFstaff’s work on Pakistan. For example, since there isan inbuilt incentive not to undermine the catalyticrole of an IMF-supported program in mobilizingother financing, surveillance activities that areclosely associated with programs tend not to raise

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42Specific conditions included: introducing performance im-provement arrangements between the government and WAPDA(by 12/97); developing action plans for restructuring seven majorpublic enterprises (by 6/98); strengthening the National ElectricPower Regulatory Authority (by 6/98); reconciling and settlingelectricity bills of federal and provincial governments (prior ac-tion, 1999); and implementing power sector restructuring pro-gram (by 3/99).

43See, for instance, Birdsall and others (2001).44Pakistan’s average outstanding obligations over 1988–2000

were SDR 904 million; annual repayments and repurchases aver-aged SDR 148 million over the same period.

45The quality of surveillance over that period was assessed bysystematically rating the performance of each surveillance reportfor nine functions viewed by the IEO as “key elements” of sur-veillance in a program context (see Chapter 6 of Part I for a dis-cussion of how these elements were identified). These nine func-tions are (i) provision of realistic medium-term and alternativescenarios; (ii) provision of meaningful sensitivity analyses; (iii)discussion of risks to the assumptions and projections; (iv) discus-sion of the risks and impact of policy slippages and of vulnerabil-ities; (v) balanced reporting of the authorities’ views, includingany significant differences with staff; (vi) cogent presentation ofproposed policy course; (vii) discussion of policy alternatives andtrade-offs; (viii) critical and frank review of previous UFR perfor-mance; and (ix) presentation of collaboration/interaction with theWorld Bank. The diagnosis is consistent with the findings of the2002 “Biennial Review of Surveillance.” In other words, the Pak-istan exception lies not so much in this absence of strong, inde-pendent role for surveillance as in the length of time it lasted.


too many questions about alternative policy designor downside risks.

Implications of short-term stabilization measures for longer-term growth andsustainability of adjustment were not analyzed sufficiently

56. There are three aspects where, with the bene-fit of hindsight, it appears that surveillance couldhave played a larger role in analyzing some of thelonger-term implications for sustainability. First, theconsequences for long-term growth and hence sus-tainability of the structure of fiscal adjustment couldhave been given greater attention—although moreanalysis was undertaken in internal reports than wasreflected in Board papers.46 Specifically, the adverselong-term effects of ad hoc revenue measures takenby the authorities to compensate for revenue short-falls, or ad hoc expenditure cuts instead of funda-mental improvements in the structure and quality ofexpenditure were not emphasized in surveillance re-ports, even when strong reservations were expressedabout them in the internal review process.

57. Second, as most programs failed to deliver therequired adjustment but nevertheless unlocked sub-stantial financing flows, over time financing largelysubstituted itself for adjustment. To a large extent,this merely reproduced the pattern of the 1970s and1980s, but this time in a low-growth environmentwith a much higher cost of financing (workers’ re-mittances and ODA flows, relative to GNP, both fellby over 40 percent in the 1990s compared with theaverage of the two previous decades, and the averagegrant element also fell from 46 percent to 32 per-cent). As a result, Pakistan got trapped into a debtsustainability problem, which was not fully analyzedin IMF reports until 1997, apparently in part becauseof concerns about undermining the credibility-enhancing effects of programs.47

58. Third, surveillance failed to sound the alarmloudly enough at a sufficiently early stage about thegradual buildup of an eventually very large uncov-ered exposure of the central bank to foreign currencydeposits (FCDs)—a central avenue through whichthe debt buildup occurred.48 By the time the 1997ESAF/EFF was approved, FCDs had reached over$11 billion, that is, the equivalent of 17 percent ofGDP and 9!/2 times the level of gross internationalreserves. This vulnerability turned into a foreign ex-change liquidity crisis when capital outflows intensi-fied in mid-1998 after Pakistan’s nuclear tests andensuing international sanctions, leading the authori-ties to impose a deposit freeze.

59. Surveillance reports, while factually accurate,never gave much prominence to the issue, even whenthe downsides of the heavy reliance on FCDs werementioned, and mission briefs suggest that thebuildup of large uncovered foreign exchange expo-sure through FCDs was never a pivotal issue of ei-ther policy or program discussions with the authori-ties until late 1996 (Box 9.3). However, weunderstand from interviews with staff and others thatthe potential vulnerabilities involved were raisedwith the authorities beginning in the early 1990s,even though the issue was not given prominence inIMF reports until much later.

Factors that might have undermined confidencein the programs were downplayed

60. Discussions of risks to the program outlook andsensitivity analyses of medium-term projections were

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46In particular, several research papers of the early 1990s (see,for instance, Haque and Montiel, 1992) emphasized that in thePakistan context, a deficit reduction strategy emphasizing cuts inpublic investment would have large output costs, because oflower public and private capital stocks, “since the smaller publiccapital stock would have depressed private investment as well.Crowding-in through lower interest rates does not materialize inthis case because the lower public capital stock actually repre-sents a substantial negative supply shock.” (pp. 9–10.) Interest-ingly, the 1993 country strategy paper for Pakistan explicitly ac-knowledged the findings of that paper. To be sure, it could also beargued that in a corrupt environment, the supply impact of publiccapital expenditure is limited and, therefore, reducing capital ex-penditure makes sense in the short term, provided public expendi-ture management reforms are undertaken at the same time.

47As noted earlier, more analysis was undertaken internally—for example, in the late 1980s by economists from the IMF Re-

search Department. However, their work was not approved forpublication as an IMF Working Paper until late 1992, apparentlybecause of concerns about country sensitivity. This paper (Haqueand Montiel, 1992) made it clear that “although the average costof servicing this debt may have been low in the past, the marginalcost of debt service can be expected to rise in the coming years,since, as a result of the opening up of the economy, internationalinterest parity is likely to prevail. . . . The high level of govern-ment indebtedness implies that debt servicing has the potential tofrustrate future deficit reduction plans.” Under assumptions ofconstant revenue to GNP and primary expenditure to GNP ratiosand with a growth rate constant at 5.8 percent (i.e., much higherthan it turned out to be), they found that the deficit to GNP ratiowould rise to 8 percent over five years just through increaseddebt-servicing costs. Under similar GNP growth assumptions,they also found that an average deficit of 4 percent of GDP overthe next five years would be consistent with lower macroeco-nomic imbalances (in fact, the fiscal deficit averaged 7 percent ofGDP during the 1990s).

48The deposits, after being surrendered to the SBP, were effec-tively on-lent to the government and therefore did not result in acorresponding buildup in reserves. Hence the uncovered foreignexchange exposure. FCDs increased at a rapid pace starting in1991, when they were first allowed for residents, partly reflectingvarious price incentives for both banks and depositors, partlyowing to the advantages of their “no questions asked” status.


generally limited, in the sense that sensitivity analysesnever involved sufficiently large adverse shocks thatthey would push the medium-term outlook off its“sustainable” path, even though the Pakistan economywas subject to a variety of shocks of much broadermagnitude.49 Likewise, only exceptionally were sub-stantive ex ante analyses of the implications of policyslippages offered (the 1993 SBA request report andthe 1991 and 1995 Article IV consultations are theonly, but welcome, counter-examples). When suchanalyses were provided, they did not spell out the sideeffects that might result from an uneven implementa-tion of reforms intended as a package.

61. For the same reasons, most joint surveillance-UFR reports provided little analysis of trade-offs be-

tween alternative policy strategies and the divergencesof views between IMF staff and the authorities as tothe best option. For instance, when programs wentalong with the authorities’ preference for imposing aturnover tax on traders instead of putting them underthe GST net, as favored by staff, or for a tax registra-tion drive instead of focused improvements in tax col-lection, only the retained options were presented, withno detailed discussion of their merits and downsidesrelative to the alternative. Likewise, disagreementsbetween staff and the authorities (as well as withinstaff) on the appropriate exit strategy from the FCDsfreeze were not discussed in the reports.

Only limited ex post evaluation of UFR was undertaken

62. Another function of surveillance that was re-grettably toned down in most Article IV reports—

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Box 9.3.The Coverage of the Issue of Foreign Currency Deposits in IMF Staff Reports

From 1992 to late 1995, surveillance reports gavefactual accounts of the evolution of FCDs,1 and a fewnoted that they compounded the weakness of gross in-ternational reserves, but they did not flag them as a se-rious vulnerability,2 nor did they offer any specific pol-icy advice to address the problem. The IMF’s approachchanged dramatically in 1996: there was no Article IVconsultation, but the staff report on the second reviewof the SBA, which was completed as Pakistan was onthe verge of a foreign exchange crisis partly owing to

withdrawals from FCDs, clearly emphasized the risksof Pakistan’s heavy reliance on short-term liabilities tofinance its current account deficits and, for the firsttime, set specific conditionality on the preparation, at afuture date, of an exit strategy from the forward ex-change cover provided to banks by the SBP. In theevent, the definition of a strategy took somewhatlonger than initially expected, by which time the im-mediate crisis had passed, and the 1997 Article IV re-turned to a relatively relaxed stance: while the presenceof a large uncovered foreign exchange exposure wasstill identified as a “major concern,” the emphasis wasmore on the constraint this exposure represented forthe conduct of exchange rate policy and the distortionsto incentives induced by the too low price of the SBPforward cover fee, than on the looming risks of foreignexchange crisis.3 The EFF/ESAF arrangement ap-proved at the same time did outline a detailed exit strat-egy, based on the recommendations of an IMF TA mis-sion, which was partially supported by explicitconditionality. However, to the extent that financingneeds had not diminished, it is doubtful that the author-ities would have pressed ahead with its implementationeven if the mid-1998 crisis had not struck.4

1However, from 1993 onward, those factual accounts wereonly partial, since—at the authorities’ request—FCDs ownedby residents were reported in the balance of payments “abovethe line,” as part of private transfers, and even FCDs held bynonresidents were not included in the stock of external debt intables presenting key indicators. Furthermore, FCDs held byresidents, even though they represented a liquid claim on thecentral bank’s reserves, were not netted out from internationalreserves for the purpose of IMF monitoring of net interna-tional reserves.

2The first staff report that put some emphasis on the vulnera-bility aspect was the background paper to the 1995 Article IVreport. Internal documents attest that the vulnerability aspecthad been fully understood as early as 1993: a memorandumfrom the Research Department noted that “attempts by domes-tic residents to reduce their holdings of foreign currency de-posits in the domestic banking system could precipitate notonly balance of payment difficulties, but also a major bankingcrisis. Indeed, given the degree of mismatch between Pakistan’slow gross international reserves and the uncovered foreign cur-rency accounts . . . , even modest capital outflows could triggera loss of confidence in the authorities’ ability to sustain the con-vertibility of the foreign currency deposits. Avoidance of a for-eign exchange crisis and reversal of the liberalization measureswould be a major success at the current juncture.”

3However, the paper did note, in a separate section, that“Pakistan’s fragile external reserve position is compoundedby the accumulation of short-term foreign currency liabilitiesby the banking system, mostly . . . FCDs.”

4Indeed, the staff report on the first review of theESAF/EFF, completed in March 1998, noted that the authori-ties viewed with concern the decline in FCDs registered inprevious months.

49For instance, the only shock analyzed in the sensitivity analy-sis attached to the 1997 ESAF/EFF was a 1 percent lower thanprojected cotton exports.


and in other Board documents—since 1988 is the expost evaluation of UFR experiences. Among earlierreports, only the report on the 1991 Article IV con-sultation provides a detailed review of performanceunder previous programs. Subsequent surveillancereports gave only limited factual accounts of themost recent UFR performance, and were generallysilent about the recurrent implementation difficultiesthat were encountered, in contrast with the more crit-ical tone of internal documents.50 The 2000 ArticleIV report represented a marked improvement in thatrespect, by taking a long-term look at past economicperformance, but it did not examine the reasons forthe failures of the previous, or earlier, programs.

Internal governance issues occasionallycontributed to program design imperfections

Excessive attention is paid to fine-tuning thefinancial programming framework

63. While a sound and internally consistentmacroeconomic framework is essential to the suc-cess of any adjustment program, the IMF’s “finan-cial programming” framework, as implemented inpractice in Pakistan, suffered from several imperfec-tions that took extra significance owing to one majorweakness: the soundness of the framework itself isheavily dependent upon the realism of growth tar-gets. In Pakistan, for reasons discussed above, strongincentives to be overoptimistic were at play.

64. First, the precision with which quantitativetargets are set (and monitored) is at odds with the se-vere imperfections of the data they are based on.Second, the weight attached to these targets in set-ting appropriate macroeconomic policies (and laterappraising them) often does not recognize suffi-ciently the considerable uncertainties attached to theunderlying behavioral relationships. In light of theseconsiderations, the authorities and most staff were ofthe view that too much time had been spent on “fine-tuning” the financial programming variables, at boththe negotiation and subsequent monitoring stages,

when the time could have been better spent on morefundamental issues.

65. Issues that, according to IMF staff membersthemselves, did not receive sufficient attention as aresult of this process in Pakistan are real economydynamics (in particular the links between the policyvariables monitored under programs and economicoutcomes), analysis of the sources of growth, andimpact on economic performance of a variety of ex-ogenous shocks.

Some of the incentives to which IMF staff issubject may have perverse effects

66. There is a rather widespread perception, sharedby Pakistan officials and many IMF staff, that the de-cision-making process of the IMF was biased towardprograms that look “tough” on paper, even if therewere substantial doubts about their realism. A numberof IMF staff who have worked on one or more pro-grams with Pakistan noted that the internal incentivesystem rewarded toughness more than realism, andthat negotiating a program with ambitious objectivesand few departures from the mission brief smoothedthe internal review process considerably, whereas at-tempts to be realistic and accommodative of the au-thorities’ concerns—legitimate or not—did not.

67. Furthermore, a majority of staff interviewedexpressed the view that the excessive attention paidto the fine-tuning of the financial programming re-flected the focus of the internal review process onthat aspect of programs,51 at the expense of muchgreater attention to judgments on ownership and thecapacity of the authorities to implement the policyundertakings couched in the program. While themove from the ESAF to the PRGF/PRSP approachwas intended to bring about improvements in that re-spect, it is too early too judge whether this shift inemphasis will succeed.52

68. While there is no such intentional bias in in-ternal guidelines, the fact remains that most of theconcerns expressed on Pakistan’s UFR requests byinternal reviewers and in the record of ExecutiveBoard meetings were related to the lack of ambi-tiousness of the programs, in relation to both macro-economic and structural aspects, not to their lack ofrealism or difficulty to implement.

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50Even internal documents, however, did not go beyond thestage of taking note of past implementation difficulties. The onlyeffort to take stock of past experience and draw strategic orienta-tions for future IMF involvement was done in a 1993 countrystrategy paper (CSP), but its close links with the briefing paperfor the negotiation of what became the 1994 EFF/ESAF limitedits “strategic” value, and the lessons it drew from past experiencedid not appear to be consistently reflected in the design of subse-quent programs. No other CSP was prepared since then, evenafter CSPs were given new impetus in 1997 through guidelinesaimed at making them a prime vehicle for staff to step back fromthe contingencies of program negotiations, learn lessons frompast country experience, and design an optimal strategy for theIMF’s involvement in the country.

51This focus itself is in large part a reflection of the legal frame-work of programs, which involves cumbersome and—from theauthorities’ standpoint—embarrassing procedures in case of devi-ations from targets, no matter how small.

52The first PRGF for Pakistan was approved in late 2001, and theinterim PRSP was finalized not long before the IEO mission to thatcountry. As such, both are beyond the scope of this evaluation.


69. A related problem is staff turnover, which ac-celerated dramatically in the 1990s.53 While Pak-istan’s experience is broadly in line with recentFund-wide practice (see Chapter 4 of Part I), it hasled the authorities to feel that significant amounts oftime are wasted, in the conduct of negotiations, asnew mission members gain familiarity with the is-sues at stake.

70. Finally, Pakistan officials noted that IMF Res-ident Representatives played a very useful role, andthey were generally very complimentary about theirinputs. However, they felt that the Resident Repre-sentatives’ better understanding of “ground realities”was not sufficiently taken into account in policy for-mulation at IMF headquarters.

Several internal guidelines were not fully implemented

71. Over time, the IMF has developed a series ofinternal guidelines aimed at ensuring an efficientuse of its resources, either specific to prolongedusers or applicable to all UFR cases (see Chapter 3of Part I for a detailed discussion). While it is un-likely that a full implementation of these guidelineswould have avoided Pakistan’s prolonged UFR, orwould have had a dramatic impact on program ef-

fectiveness, two procedural slippages are neverthe-less worth mentioning.

72. First, general guidelines on the justification ofthe level of access and the capacity to repay the IMFcall for particularly strong motivation in cases in-volving prolonged use and/or a poor track record. Inpractice, such discussions have been largely superfi-cial in successive UFR reports on Pakistan, eventhough approved access was always on the generousside of the range until the end of the period and in-creased moderately over time instead of decreasing(see Figure 9.7).

73. Second, the guidelines specific to prolongedusers, as endorsed by the Executive Board in 1984and 1991, do not appear to have been fully adheredto. These guidelines require a proactive use of pro-gram design to ensure strong implementation (trackrecord requirements, prior actions, back-loading ofdisbursements, diminishing access, etc.), along witha critical appraisal in staff reports of performanceunder previous programs and an analysis of the rea-sons why their objectives were not achieved. Asnoted earlier, candid ex post assessments were un-dertaken only rarely.

Conclusions and Suggested Remedies

74. The various factors discussed in this report arepresent to some extent in many IMF-supported pro-grams, and it is clearly their combination, more thanthe isolated influence of any single one of them, thatresulted in a limited effectiveness of programs and aconsequent prolonged use of IMF resources. More-

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53Pakistan had six different mission chiefs and nine differentdesk economists over 1990–2000. Only two of the desk econo-mists subsequently became mission chief. However, some greatercontinuity was provided by the fact that the Department Director,or another senior staff member, typically participated in key as-pects of the discussions.

0 10 20 30 40 50 60 70 80 90

SAF/ESAF

SBA/EFF

2000 SBA1997 EFF/ESAF (3)1997 EFF/ESAF (2)

1997 EFF/ESAF1995 SBA

1994 EFF/ESAF (2)1993/94 EFF/ESAF

1993 SBA1988 SAF (3)

1988 SAF (2)1988 SBA/SAF

Figure 9.7. Pakistan: Evolution of Access in IMF Arrangements(Average annualized access in percent of quota)

Source: IMF Policy Development and Review Department.


over, the IMF was clearly faced with an extremelydifficult situation in Pakistan, and one where theability of any external agency to achieve a better out-come would be limited. In the absence of any way oftesting a counterfactual, it is impossible to state withcertainty that any alternative course of action by theIMF would have led to a better outcome. However,the following lessons are worth pointing out. Theseissues are discussed in greater depth in Part I.

Program design was affected by pressures tooverpromise and downplay risks

75. A number of factors led IMF staff and thePakistan authorities to agree to programs that wereoveroptimistic in their assumptions and that favoredquick fixes over more difficult but essential reforms.At the stage of program implementation, these pres-sures led to actions that sometimes met the letter butnot spirit of the agreements. In other cases, theagreed policies were only partially implemented, ina way that turned out to have adverse side effects(e.g., reducing tariffs with no replacement tax inplace), while other critical steps (e.g., the strength-ening of domestic tax collection) were not insistedupon. A more consistent and proactive use of condi-tionality, track record requirements, and other moni-toring devices might have improved the outcome ofsuccessive programs. But beyond that, to addressthese problems in future IMF programs, each of thefollowing factors deserves some attention:

• The pressures for an IMF-supported program toproduce “success” in a very short time frame: it iscounterproductive to try to cram long-term re-forms into an unrealistically short time frame, es-pecially with regard to the implementation ofcomplex reforms that may be central to longer-term sustainability. In some cases, this might callfor more realistic assessments of the possiblespeed of adjustment. In this context, morethought needs to be given to the question of howto deal with the implementation of long-term in-stitutional reforms, such as reform of the tax sys-tem/administration, that stretch beyond the timeperiod of programs and where, by their nature, itis often not possible to condense the needed ac-tion into only a few concrete measures. This istrue whether these reforms are critical to macro-economic stability (i.e., clearly related to a coreIMF responsibility) or critical to futuregrowth/poverty reduction in some other way thatis less clearly an IMF core responsibility (e.g.,public enterprise reform and other forms of insti-tutional reform). The Pakistan case illustrates thatjust requiring a law to be passed, for example, isnot sufficient. On the latter aspects, an important

lesson is the importance of the IMF engagingwith partners such as the World Bank and othersto ensure that all such reforms are given appropri-ate external support (as a better option than tryingto expand the IMF’s own mandate).

• Pressures to agree a “seal of approval” for otherfinancing. This raises questions about whetherthe seal of approval could be given in anotherway, and the risks of devaluing the seal of ap-proval if these pressures lead to poor qualityIMF-supported programs.

• The perception, at least, that political influenceson the IMF determined the outcome: eliminatingpolitical considerations altogether would not berealistic, since the IMF as an institution shouldrespond to its shareholders, whose views shouldbe taken into account in difficult cases wherejudgments as whether or not to proceed are finelybalanced. But such political judgments should bemade in as transparent a manner as possible, thatis, at the level of the Executive Board, which isaccountable for them, and should be distinct fromtechnical assessments by the staff. Candid staffreports, with a clear discussion of implementa-tion risks and their consequences, is one way ofensuring such transparency.

Programs did not always focus on the right issues

• Tailoring programs as closely as possible to coun-try-specific circumstances would be instrumentalin “getting the program design right,” that is, (i)building as much as possible on domestic policyformulation, based on local expertise, to deter-mine what reforms need to be made, in what se-quence, what is feasible in a given time frame,and what milestones would constitute meaningfulbenchmarks to measure progress (in the spirit ofthe strategy followed for tax administration re-form in the recent PRGF); (ii) showing flexibilityin the face of unexpected developments: eitherexogenous shocks, or when the policies agreedupon do not produce the intended/expected re-sults. That implies being prepared to question thevalidity of initial assumptions and to communi-cate about revisions made necessary by initial de-sign flaws in a way that clearly distinguishesthem from policy slippages. Meaningful sensitiv-ity analyses ex ante could help prepare adequatecontingency plans.

• More attention should be devoted to debt sus-tainability issues. The debt crisis faced by Pak-istan in late 1999/2000 rightly, but belatedly, ledIMF staff to focus on that issue. Recent initia-

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139

tives to bring more discipline and consistency tosustainability assessments are a further step inthe right direction.

Ownership matters enormously, and should be linked to greater selectivity

76. This issue goes beyond ownership of the pro-gram by the immediate economic team. Had the IMFinsisted more on the presence of strong ownershipand devoted greater efforts to promoting it, ex antedesign flaws might have been reduced by a moresubstantive negotiation process, as the authoritieswould have refused to commit themselves to under-takings viewed as unrealistic or ill-suited to theneeds of the country. Similarly, ex post side effectscould have been mitigated by stronger and moreconsistent implementation. Political and institutionalfactors would have still existed, but they would havebecome less critical.

77. This approach also implies greater selectivity:the IMF should refrain from providing resources insupport of a program that is not genuinely owned bythe authorities and when there is not a strong com-mitment to a core set of necessary adjustment andreform measures. This can imply either fewer IMF-supported programs or more focused programs. Italso implies dedicating more resources and attentionto assessing implementation capacity (of whichownership is a strong component) and political feasi-bility, and being more candid about uncertainties anddownside risks in documents submitted to IMF man-agement and to the Executive Board. In retrospect,

some of the programs with Pakistan would probablynot have been entered into had these precautionsbeen taken (especially considering that, in the ab-sence of candid assessments of the implementationrisks, the Board generally regretted that those pro-grams were not more demanding). Clearly, greaterselectivity in those circumstances might have im-plied a worsening of economic conditions in theshort run, perhaps to the point of a full-blown crisis,and such implications are not to be taken lightly.However, such an evolution might have been moreconducive to the strengthening of ownership neededfor adjustment to take root than the provision of new financing in a context where it was de facto lit-tle more than a device to postpone hard decisions.Clearly, such a judgment is easier to make in hind-sight, but this does not mean that the trade-off should not have been faced in those terms at thetime.

IMF surveillance did not act as a secondopinion on program design and performance

78. This raises the issue of whether the surveillancefunction can or should be separated from program de-sign and monitoring. At the very least, care must betaken in the relationship with the member country toavoid being trapped in a narrow program perspective.To that end, surveillance should be used as a tool forstepping back from time to time, to take a broaderstrategic look and to reexamine vulnerabilities, assessalternative strategies, and foster a debate on key re-forms that can help build the necessary consensus.

The developments below are drawn from a paperprepared at the IEO’s request on “Political ScienceTools for Assessing Feasibility and Sustainabilityof Reforms.”54 They are meant to illustrate the typeof analyses that might have been undertaken by

IMF missions to make a methodical assessment ofthe authorities’ ownership of the programs sup-ported by the IMF and of their ability to implementthem. There are essentially three different tools: (i)stakeholder analysis, which focuses on the balanceof power, policy preferences, and modes of interac-tion of key individuals and interest groups having astake in the decision-making process; (ii) institu-tional analysis, which looks at the institutional dy-namics of this process, including the identificationof institutions in a position to veto certain reforms,along with an analysis of capacity constraints; and

54“Political Science Tools for Assessing Feasibility and Sus-tainability of Reforms” by Professor Andreas Wimmer, Directorof the Department of Political and Cultural Change at the Centerfor Development Research, University of Bonn, with Indra deSoysa and Christian Wagner. This paper is available on the IEO’swebsite at www.imf.org/ieo.

APPENDIX 1

An Illustration of Ownership and Political Feasibility Assessment in the Context of the 1993/94 Programs Through the Use of

Basic Political Science Tools


(iii) “Delphi” study, which involves seeking theviews of an expert panel in a systematic manner oneach of the relevant dimensions of the politicaleconomy setting. Each of these tools can be used inthree different modes, namely (i) trend extrapola-tion; (ii) impact analysis; and (iii) scenario build-ing. Scenario building and “Delphi studies” are notmeaningful when applied retrospectively. There-fore, they are not discussed in the following presen-tation.55 The overall analysis summarized belowand the characterizations of the Pakistan politico-administrative system contained therein are thoseof Wimmer and others (2002) and do not necessar-ily reflect the views of the IEO.

Stakeholder Analysis

Trend extrapolation

• Reforms under way. Since coming to power in1990, the government of Nawaz Sharif favored eco-nomic liberalization and had already launched aderegulation program strengthening the private sector.The budget deficit had been brought down (by cuttingexpenditure in health and education and by reducingpublic works programs). However, there were noplans to introduce an agricultural tax or increase taxrevenues in general. Looking at the measures alreadyundertaken, the government thus seemed to have thepolitical will to continue the process of reforms, and itseemed to enjoy a large enough political basis both atthe national and provincial levels to do so. But the ex-isting reform trend was clearly selective and avoidedimportant areas that would have touched the en-trenched interests of groups on whose political sup-port the government depended (such as the JamooriIttahad coalition—IJI) in Punjab, with its importantlandowners.

• Decision-making style. Political decision makingwas mostly concentrated in the higher echelons of thegovernment, with major reform steps being decidedupon by the inner circle of a relatively isolated groupof decision makers and then left to the respectiveministers to implement. Despite political rivalries,there was agreement between the main political par-ties about the necessity to continue reforms. Indeed,Benazir Bhutto, the leader of the opposition in 1993,had declared she would not reverse the process of pri-vatization if she came back to power, and she did not,but under her government decision making followedthe same pattern and was likewise restricted to a very

small group of advisers. Given this structure of deci-sion making, a broad ownership of the reforms hadcertainly not yet developed.

• Attribution of agency. IMF-sponsored reformswere generally presented as a bitter pill that thecountry was forced to swallow by a powerful out-sider. Implicitly and sometimes explicitly, however,the message was that the pill would not be con-sumed as bitter as it looked at the time of the nego-tiations, given the apparently widespread assump-tion in the informed public that lending waspolitically motivated (i.e., the reward of the politi-cal alliance with the United States). The style ofcommunication on the reforms thus does not showsigns of genuine ownership by the major politicalforces.

Impact analysis

The implementation of the program would nothave affected the power balance between the army,the prime minister, and the president, given thegenerous treatment of military expenditures in theproposed agreement. However, the other parts ofthe political equation would have changed quite abit. Taxation of agricultural incomes, one of thecornerstones of the agreement, would have seri-ously reduced the support of the government by theIJI coalition. The increase in indirect taxes mayhave heightened public discontent and may havestrengthened opposition parties. Thanks to thebroad agreement between the main parties on thegeneral direction of reforms, this would perhapsnot have stopped them, but it would certainly havebrought about increased pressures for softening theconsequences for the public and taking tax reformsback. The reform of credit-awarding mechanismswould have seriously limited the capacity of gov-ernment employees to distribute credit along thelines of political patronage, which may have weak-ened the support of the bureaucracy, traditionallyregarded as another important power center in Pak-istan. In sum, it seems that effective implementa-tion of the reform program would have shaken atleast part of the political basis of the regime and itis doubtful whether it would have survived a com-prehensive enforcement of reforms in the tax andfinancial sectors.

Institutional Analysis

• Veto point analysis. The institutional position ofthe government was restricted by two factors inher-ited from military rule: (i) the constitution allowedthe indirectly elected president to dismiss the di-

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55A schematic presentation of these tools and modes is pro-vided in Figure 9.8.


141

rectly elected prime minister and his government;(ii) the army was still the most important veto actorthat could influence all government decisions (as il-lustrated by the exclusion of the defense budget fromany expenditure cuts undertaken under most IMF-supported programs). Besides these two institutionalactors, the bureaucracy and the national assembly(MNA) would have been two other important vetoplayers. Given the strong representation of landedinterests within these groups, it was highly unlikelythat any law would have been enforced that wouldseriously introduce taxation on agricultural income.Large parts of the bureaucracy would also not havebeen in favor of privatization programs that wouldhave implied serious cuts in their domains of politi-cal influence.

• Implementation capacity. Despite the long tra-dition of military rule, Pakistan showed a seriousweakness of its law and policy enforcing authori-ties. Widespread corruption, clientelistic practices,and recruitment procedures based on patronage ex-plain at least in part the difficulties in enforcingbasic rights and duties in different areas. Most min-istries use the large discretionary powers that thesedeficits imply in order to build up their own net-

work of patronage relationships and therefore en-hance their standing in the all-embracing web ofpolitical alliances. A good example of this is theway that the Central Board of Revenues interpretsthe myriads of exemptions in tax law on a case-by-case basis. The situation in public enterprises andin the banking sector was comparable. Every gov-ernment would face the problem of such deficientimplementation capacities, a weakness that wouldalso have an impact on the design of the reformprograms. The rise of indirect taxes, for instance,would be favored in order to circumvent the en-forcement problems of direct taxation.

Overall AssessmentSerious doubts about the prospects of future im-

plementation of the program would have had to beraised. The decision-making coalition endorsingthe reform was not broadly built. It did not includelarge sections of the public in order to counterbal-ance the possible loss of support that effective im-plementation would have brought about from thepower base of the current regime and from withinthe administration.

Tools

Mod

es

Institutional analysisStakeholder analysis

Scenarios of politicalevents and trends

• Reforms under way• Decision-making style• Attribution of agency

Impact on power balance

Scenarios of institutionalreforms

• Institutional mapping• Veto point analysis• Capacity assessment

Impact on institutionalsetup

Delphi study

General trends

Generalimpact

Generalscenarios

Trend extrapolation

Impact analysis

Scenario building

Figure 9.8. Political Economy Analysis Toolbox

Note: Tools in italics are those whose conclusions are reported above.


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Senior Officials

Mr. Mueen Afzal, Secretary General FinanceMr. Shaukat Aziz, Ministry of FinanceMr. A.R. Chugtai, Deputy Governor, State Bank of

PakistanMr. Ishrat Husain, Governor, State Bank of PakistanMr. Ashfaque H. Khan, Economic Adviser, Ministry

of FinanceMr. Yunis Khan, Finance SecretaryMr. Mushtaq Malik, Joint Secretary (External

Finance), Ministry of FinanceMr. Riaz Ahmad Malik, Chairman, Central Board

of RevenueMr. Altaf M. Saleem, Minister for PrivatisationMr. Murtaza Ahmad Shaikh, Special Assistant to

Deputy Chairman, Ministry of Planning & Development

Dr. Abdul Naseer, Economic Adviser, State Bank of Pakistan

Former Senior Officials

Mr. Aitzaz Ahsan, former Minister of Law and Interior

Mr. Qazi M. Alimullah, former Finance SecretaryMr. Sartaj Aziz, former Minister of FinanceMr. H.U. Beg, Chairman, Ad-hoc Public Accounts

Committee, and former Finance SecretaryMr. Mushahid Hussain, former Minister for

InformationMr. Fakhar Imam, former MinisterMr. Vaseem A. Jafarey, former Governor of State

Bank of Pakistan and Adviser to the Prime Minister

Mr. A.G.N. Kazi, former Governor, State Bank of Pakistan

Mr. M. Farooq Leghari, former PresidentMr. Saeed Qureshi, former Secretary General

Finance

Academics

Mr. Akhtar A. Hai, Senior Research Economist/Associate Professor, Applied Economics Research Centre, University of Karachi

Dr. Akmal Hussain, Economist, Syeed EngineeringDr. A.R. Kamal, Director, Pakistan Institute of De-

velopment Economics

Banking Sector

Mr. S. Ali Raza, President & Chief Executive Officer, National Bank of Pakistan

Mr. Masood Karim Shaikh, Chief Financial Officer,National Bank of Pakistan

Mr. Zubyr Soomro, Chief Executive & CountryCorporate Officer, Citibank

Business Community

Dr. Anwarul Haque, Secretary General, The Federation of Pakistan Chambers of Commerce & Industry

Mr. Sheikh Javaid, Chairman, The Federation of Pakistan Chambers of Commerce & Industry

Mr. Tahir Khaliq, Chief Executive, Chamber of Commerce & Industry, Karachi-Pakistan

Dr. Mohammad Zubair Khan, Managing Director,Financial Techniques Internationals (and formerMinister of Commerce)

Mr. Haroon Rashid, Vice President, The Federationof Pakistan Chambers of Commerce & Industry

Journalists

Mr. Farhan Bokhari, Pakistan Correspondent,Financial Times

Mr. Nadeem Malik, The NewsMr. M. Ziauddin, Resident Editor, DawnMr. Arshad A. Zuberi, Deputy Chief Executive,

Business RecorderMr. M.A. Zuberi, Editor, Business Recorder

Nongovernmental Organizations

Mr. Khadim Hussain, Senior Programme Officer,Action Aid Pakistan

Dr. Asad Sayeed, Social Policy and Development Centre

Trade Union Representatives

Mr. M. Zahoor Awan, Secretary General, All Pak-istan Federation of Labour

Mr. Raja Khalique A. Khan, Vice President,Pakistan National Federation of Trade Unions

The mission also met with a large number of cur-rent and former IMF and World Bank staff involvedwith these institutions’ work on Pakistan.

APPENDIX 2

Pakistan: List of People Interviewed in Connection with the Evaluation of Prolonged Use of IMF Resources


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APPENDIX 3

Pakistan: History of Lending Arrangements

Amount Amount

Date of Initial date of Actual date agreed drawn Percent____________________________Facility arrangement expiration of expiration1 (In thousands of SDRs) undrawn

1 SBA Dec. 8, 1958 Dec. 7, 1959 Sep. 22, 1959 25,000 0 1002 SBA Mar. 16, 1965 Mar. 15, 1966 37,500 37,500 03 SBA May 18, 1972 May 17, 1973 100,000 84,000 164 SBA Aug. 11, 1973 Aug. 10, 1974 75,000 75,000 05 SBA Nov. 11, 1974 Nov. 10, 1975 75,000 75,000 06 SBA Mar. 9, 1977 Mar. 8, 1978 80,000 80,000 07 EFF Nov. 24, 1980 Nov. 23, 1983 1,268,000 1,079,000 158 SAF Dec. 28, 1988 Dec. 27, 1991 Dec. 15, 1992 382,410 382,410 08 SBA Dec. 28, 1988 Mar. 7, 1990 Nov. 30, 1990 273,150 194,480 299 SBA Sep. 16, 1993 Sep. 15, 1994 Feb. 22, 1994 265,400 88,000 67

10 ESAF Feb. 22, 1994 Feb. 21, 1997 Dec. 13, 1995 606,600 172,200 7210 EFF Feb. 22, 1994 Feb. 21, 1997 Dec. 13, 1995 379,100 123,200 6811 SBA Dec. 13, 1995 Mar. 31, 1997 Sep. 30, 1997 562,590 294,690 4812 PRGF Oct. 20, 1997 Oct. 19, 2000 682,380 265,370 6112 EFF Oct. 20, 1997 Oct. 19, 2000 454,920 113,740 7513 SBA Nov. 29, 2000 Sep. 30, 2001 465,000 465,000 0_________ _________Total 4,071,550 2,099,090

1If different from initial date of expiration.

Philippines

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CHAPTER

10

Introduction

1. The Philippines is probably the most extremecase of prolonged use of IMF resources, with 23 pro-grams between 1962 and 2000. Over the 30-year pe-riod 1971–2000, the Philippines had programs foralmost 25 years (Table 10.1) with credit outstandingfrom the IMF continuously since 1967.1 The Philip-pines’ status as a “prolonged user” was recognizedby the Executive Board as early as 1984.2

2. This study presents an assessment of the natureof the IMF’s prolonged involvement with the Philip-pines and attempts to draw lessons for the future. Theevaluation is based on an extensive review of pub-lished and unpublished IMF documents and inter-views with (i) current and former Philippine officialsand a range of other stakeholders, including acade-mics, NGOs, and representatives of the private sector,undertaken during an IEO mission to Manila inMarch 2002; (ii) current and former IMF staff; and(iii) staff of the Asian Development Bank, the WorldBank, and some bilateral donors. The study is orga-nized as follows: the second section presents a briefoverview of the experience over three decades; thethird section examines the factors that led to pro-longed use; the fourth section focuses on implica-tions for program design and implementation; thefifth section considers the implications of prolongeduse for IMF surveillance; and the final section pre-sents conclusions and recommendations.

Overview of the Philippines’Experience with IMF-SupportedPrograms

3. The extent of continuous involvement by theIMF in supporting programs in the Philippines is re-

flected in Table 10.1, which lists the various stand-by arrangements (SBAs) and Extended Fund Facility(EFF) programs since 1967.3 Rather than provide adetailed evaluation of each program, we attempt asummary assessment of the experience in four dis-tinct periods.

The Marcos period prior to the 1982–83 debtcrisis: almost continuous programs thatachieved no lasting adjustment

4. In this period there were a total of 10 SBAs andone EFF in 15 years but this near continuous in-volvement with the IMF did not prevent a wideningof external imbalances and a sustained debt buildupthat eventually resulted in a crisis.

5. The deterioration in economic performanceand vulnerability is evident from Table 10.2. Eco-nomic growth was relatively strong during the1970s, averaging 6 percent a year, but it fell to about2!/2 percent in 1981–83. After approximate balancein the first half of the 1970s, a large current accountdeficit emerged from 1975—averaging 5!/2 percentof GNP in the second half and rising to 8 percent in1981–83. The higher deficit was financed by risingexternal debt, most of which was directed to financ-ing large-scale investment projects that subsequentlyproved to be of low efficiency. Programs struggled todeal with the aftermath of the liquidity expansion as-sociated with the 1973 increase in commodity pricesand a subsequent deterioration in the terms of tradelater in the decade. The two oil price shocks of 1973and 1980 also added to these challenges. A majorstructural weakness that developed over the period,and was to plague the Philippines for a long time,was a fall in gross national saving. This deteriorationpartly reflected a worsening fiscal balance thatchanged from a surplus of 0.6 percent of GNP4 on

1Amounts outstanding were initially small as a percentage ofquota, in line with general IMF policies at the time, but then rosequickly to the 250–300 percent range by the time of the 1982 debtcrisis. They declined by the mid-1990s, but picked up again in theaftermath of the Asian and Russian crises.

2See “Prolonged Use of Fund Resources,” SM/84/91, April 27,1984.

3There were also several precautionary SBAs prior to this start-ing in 1962. The background paper to the 1984 review of pro-longed use of IMF resources contains a detailed review of theIMF’s involvement in the Philippines since the 1960s. See alsoBoughton (2001).

4National government balance.


average in the first half of the decade to a deficit of3!/2 percent in 1981–83.

6. Several sources of structural inefficiency alsoprevailed in this period. A system of monopolisticpractices allowed political favorites to extract eco-

nomic rents especially in key agricultural marketingareas (sugar, coconuts, bananas, etc.) that weakenedincentives and harmed small producers, who wereamong the poorest groups. Inadequate governanceand supervisory controls allowed widespread lending

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Table 10.1. Philippines: Chronology of IMF Arrangements Since 19671

(In millions of SDRs)

Original ActualType of Date of expiration expiration Size of Percent Paris Club debt Commercial bankarrangement arrangement date2 date or cancellation arrangement drawn restructuring restructuring

SBA Jan. 1967 Jan. 1968 55.0 100.0SBA March 1968 Mar. 1969 27.5 100.0SBA Feb. 1970 Feb. 1971 27.5 100.0SBA Mar. 1971 Mar. 1972 45.0 77.8SBA May 1972 May 1973 45.0 77.8SBA May 1973 May 1974 29.0 0.0SBA July 1974 July 1975 May 1975 38.8 100.0SBA May 1975 May 1976 Apr. 1976 29.1 99.9EFF Apr. 1976 Apr. 1979 217.0 100.0SBA June 1979 Dec. 1979 105.0 86.9SBA Feb. 1980 Dec. 1981 410.0 100.0SBA Feb. 1983 Feb. 1984 315.0 31.7SBA Dec. 1984 Dec. 1986 June 1986 615.0 65.5 Dec. 1984 Jan. 1986SBA Oct. 1986 Apr. 1988 Aug. 1988 198.0 100.0 Jan. 1987 Dec. 1987EFF May 1989 May 1992 Feb. 1991 660.6 35.7 May 1989 Jan. 1990SBA Feb, 1991 Aug. 1992 Mar. 1993 334.2 100.0 June 1991 Dec. 1992EFF June 1994 June 1997 Mar. 1998 791.2 100.0 July 1994SBA Apr. 1998 Mar. 2000 Dec. 2000 1020.8 76.7

1The period 1967–2000 spans four administrations: Marcos, 1967–86; Aquino, 1986–92; Ramos, 1992–98; and Estrada, 1998–2001. The following programs spilledover into succeeding administrations: 1984 SBA, 1991 SBA, and 1998 SBA.

2Only if different from the actual expiration date.

Table 10.2. Philippines: Selected Economic Indicators(Period average, in percent of GNP, unless otherwise noted)

1998–1971–75 1976–80 1981–83 1984–85 1986–88 1989–92 1993–97 2000

Real GNP growth (in percent) 6.1 6.1 2.6 –8.0 5.3 3.5 4.9 2.9Export growth (in billions of U.S.

dollars, in percent) 15.9 20.7 2.8 –3.8 15.2 8.6 20.8 14.7Inflation (CPI, annual average, in percent) 17.0 12.3 10.9 34.4 5.3 13.0 7.9 6.9External current account –0.4 –5.4 –8.1 –2.1 0.2 –3.4 –4.9 7.91

External debt (in billions of U.S. dollars) 2.5 10.8 23.0 26.0 28.3 29.3 40.3 50.5

Debt-service ratio (in percent, after rescheduling) 23.4 33.5 33.0 39.7 34.7 22.9 16.8 14.8

National government fiscal balance 0.6 –1.3 –3.4 –1.9 –3.5 –2.2 –0.3 –3.7Consolidated public sector balance . . . . . . –4.5 –7.2 –3.8 –3.3 –0.6 –3.7Tax revenue 10.3 12.1 10.3 9.9 11.3 14.2 16.1 13.9

Gross national saving n.a. 27.7 23.4 17.5 19.5 19.8 18.2 24.51

Gross investment . . . . . . . . . 16.6 15.6 19.8 23.4 17.9

Sources: IMF staff reports and WEO database.1National saving may well be overstated in 1998–2000, because of statistical weaknesses, particularly suspected underrecording of imports, which led the current

account also to be overstated.


to insiders by financial institutions, including pub-licly owned banks. Several Article IV staff reportsdid discuss the distortions caused by the monopolis-tic practices, but—reflecting the general approach ofIMF-supported programs at this time—there was lit-tle effort to address these issues in any of the pro-grams prior to 1984. Some structural measures tomake the economy more export oriented were imple-mented in 1970–72, including liberalization of ex-change controls and tariff reforms. However, themain structural component of the 1976 EFF—an ef-fort to improve the tax effort—failed.5

7. The rapid buildup in external indebtedness in thesecond half of the 1970s (Figure 10.1), which in partreflected excess liquidity in the industrial countries,eventually resulted in a serious economic and finan-cial crisis culminating in a standstill on external debtservice in October 1983. The standstill was accompa-nied by widespread failure of domestic banks and cor-porations, and a subsequent recession. The discoverythat the authorities had misstated the international re-serves position exacerbated the crisis and contributedto a program agreed in early 1983 going quickly off-track. Although staff reports show an awareness of thedangers of the debt buildup, programs were not ableto address in a systematic way the factors that wereleading to it.6, 7 Moreover, the risks to the quasi-fiscaldeficit implied by a series of exchange rate guaranteesand forward cover arrangements were not fully recog-

nized and eventually contributed to significant centralbank losses when the exchange rate depreciatedsharply following the crisis.

8. It is interesting to note that economic perfor-mance deteriorated and vulnerabilities increased de-spite the fact that most of the specific performancecriteria in the various programs were satisfied and 94percent of the amount committed in arrangements be-tween 1968 and 1981 were disbursed. This suggeststhat the problem was not just one of program imple-mentation.

9. Staff and former staff interviewed who were in-volved with the Philippines during this period, or inits immediate aftermath, were generally of the viewthat the extensive IMF involvement for much of theMarcos era had been a mistake, sending the wrongsignals to markets and effectively helping to post-pone adjustment. This was also the view of most ofthose with whom the evaluation team discussed theissue in the Philippines. A number of officials aswell as some staff and former staff also expressedthe view that, until 1983, political factors—that is,the close relationship between the Philippines underthe Marcos regime and the United States as well as,to a lesser extent, some other major IMF sharehold-ers—were important in explaining the lengthy IMFinvolvement during this period. We have not foundany documentary evidence to support such a judg-ment, but the fact that such a view is held by a num-ber of those who were close to the negotiations is, initself, significant.

10. However, it has to be recognized that the IMFwas dealing with a very difficult situation—epito-mized by deep-seated governance problems and alack of commitment to fundamental reform at the

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5The EFF initially targeted an increase in the ratio of tax toGNP from 13!/2 percent in 1975 to 16 percent in 1978; the actualoutturn in the latter year was under 14 percent. This largely re-flected shortfalls in indirect taxes but does not appear to havebeen related to adverse exogenous shocks since real growth wasbroadly on target and the terms of trade were better than expectedunder the program.

6Moreover, at the time there were significant IMF-wide short-comings in the design of limits on the external debt contracted bythe public sector, in particular the exclusion of short-term debtfrom these performance criteria and insufficient attention paid tothe impact of public guarantees on external debt contracted by theprivate sector. These problems are now well recognized, and ex-ternal debt ceilings generally now have a more comprehensivecoverage.

7The internal 1984 review of prolonged use was quite candid inits assessment of the reasons why the long series of programswith the Philippines had failed to achieve their targets. For exam-ple, it noted that, while growth had been quite high for much ofthe period, “these developments reflected, in part, an unsustain-able accumulation of foreign debt as the external position and do-mestic saving performance remained unsatisfactory. . . . Subse-quently, unfavorable external developments, inadequate structuralpolicies, and inadequate demand-management policies, in partic-ular in 1981–83, resulted in a sharp worsening of the balance ofpayments position.” It also noted the problems with wasteful pub-lic expenditure but shied away from an explicit discussion of gov-ernance-related factors: “A significant part of the public invest-ment program, which was largely financed abroad, consisted ofprojects with doubtful economic justification.” See “ProlongedUse of Fund Resources,” SM/84/91, April 27, 1984.

0

10

20

30

40

50

60

0

20

40

60

80

100

120

1970 73 76 79 82 85 88 91 94 97 2000

In billions of U.S. dollars(left scale)

In percent of gross national income(right scale)

Figure 10.1. Philippines: External Debt

Sources: IMF staff reports.


highest political level—at a time when it did nothave adequate instruments, or even an explicit pol-icy, for addressing such issues.8 While greater atten-tion at an early stage to the structural and institu-tional problems discussed above might have helped,it is quite likely that program design was not the coreissue. In these circumstances, it would have beenbetter for the IMF to have refrained from lending.

The debt crisis and subsequent prolonged debt workout, 1983–93

11. In the 10-year period following the onset of thedebt crisis, the Philippines had to undergo a protractedadjustment to correct the initially large external im-balances and to deal with the accumulated debt prob-lem. There were five programs in this period, span-ning the last year of the Marcos administration, thewhole of the successor Aquino administration, and theearly days of the Ramos administration.

12. As noted above, the 1983 SBA quickly wentoff-track and, after an interval of nearly a year, wasfollowed by the 1984–86 SBA, the last of the Mar-cos administration, which prescribed tight macro-economic policies combined with floating of the ex-change rate. The program also made a significanteffort to address some of the major structural prob-lems, most notably to dismantle the sugar and co-conut monopolies, to establish a more elastic domes-tic tax system to replace taxes on trade, and torehabilitate public financial institutions andstrengthen control over public sector investment de-cisions. The program went off-track because of pol-icy slippages in the run-up to the February 1986election. Fiscal policy turned sharply expansionaryand implementation of reforms to the tax system andthe sugar and coconut sectors and import liberaliza-tion were delayed, with several measures reversed.The program did achieve a sharp reduction in infla-tion, while there was an even greater current accountadjustment than envisaged under the program. Thissharp adjustment was driven by the cutoff in privateexternal financing and involved a large contractionin imports and in economic activity. Real GNP fellby a cumulative 17 percent during 1984–85, com-pared with the projected 7 percent fall.

13. The Aquino administration negotiated threearrangements with the IMF: an initial SBA in 1986,which was successfully completed; an ambitious,growth-oriented EFF covering 1989–91 that quicklywent off-track as a result of major policy slippages

amid considerable political instability and severe ex-ogenous shocks (Box 10.1); and finally, in 1991, aless ambitious SBA—successfully completed—thatfocused on stabilizing the economy in the run-up tothe May 1992 election, which was won by PresidentRamos.

14. The programs negotiated with the Aquino ad-ministration increased the focus on structural re-forms with greater emphasis on dismantling the ad-ministrative and other restrictions that had hinderedprivate sector activity and exports, distorted prices,and favored inefficient industries and vested inter-ests. While continuing to aim at improving publicsector revenue and the elasticity of the tax system,the tax reforms envisaged were more far-reachingthan earlier reforms, paying greater attention to thestructure of incentives and equity. There was initialsuccess on reforms covering trade, taxes, and theagricultural sector, especially in those areas that rep-resented a dismantling of the “crony capitalism”privileges of the Marcos era and the creation of amore level playing field. However, progress thenslowed, as the administration tackled more politi-cally sensitive structural issues.

15. The realignment of incentives for exports,arising from the exchange rate depreciation andtrade liberalization in the 1980s, led to a sharp im-provement in export performance as reflected in thegrowth rate of over 15 percent a year in the period1986–88. Rapid export growth, combined with theseries of reschedulings of commercial bank and offi-cial debt, contributed to a significant reduction in thePhilippines’ external debt problems. Indicators ofthe debt and debt-service burden started to improvemarkedly in the late 1980s with the debt-serviceratio (after rescheduling) falling to below 20 percentin the early 1990s and to 14 percent by the mid-1990s. The debt/GNP ratio fell from a peak of 100percent in 1985 to less than 60 percent in 1992.9

The 1994 EFF: restoration of access to private financial markets and the planned“exit” from IMF programs

16. From the time of the accession of the Ramosadministration in 1992, staff and managementplanned a final EFF explicitly intended to be an “exitprogram” from prolonged use. In the view of staff, arecurrence of external financing problems could notbe ruled out if the economy were to resume sus-tained growth of 5 percent a year or more and furtherstructural changes were needed to ensure medium-

147

8A guidance note on governance calling for a more comprehen-sive treatment of governance issues and a more proactive ap-proach in advocating policies that promote good governance wereonly approved by the Executive Board in 1997. See IMF (1997and 2001b).

9Public debt service also fell—from an average of 48 percent ofcentral government revenue in 1986–88 to 26 percent in1994–97.


term viability. A new three-year EFF was agreed inJune 1994 after lengthy negotiations with the Ramosadministration. In the interim, the Philippines hadregained access to international capital marketswhen it floated a $150 million Eurobond issue in1993. It also resumed servicing Paris Club debt, al-though it would soon seek further rescheduling.

17. The 1994 EFF aimed at fiscal consolidation;tax reform; financial sector reform; and continuedeconomic liberalization, particularly in the fields ofthe deregulation of oil pricing and the abolition ofremaining quantitative import restrictions (Box10.2). In order to meet program objectives, it wasjudged necessary to improve the saving/investment

148

Box 10.1. Why Did the 1989 EFF Fail?1

One important development that prolonged thelength of the Philippines’ adjustment was the failure ofthe 1989 EFF to achieve its objectives. The three-yearprogram was intended to be growth oriented: (i) thetargets for investment and saving were ambitious,while the current account deficit was projected to in-crease modestly rather than decline; (ii) the fiscal pro-gram allowed for a substantial increase in public infra-structure investment, to be financed by higher publicsaving but also by a modest increase in the fiscal deficitin the first year; and (iii) a wide range of structural re-forms, including financial sector strengthening, tradereform, privatization, power tariff reform, foreign in-vestment and exchange market reform, elimination ofthe Central Bank deficits, and land reform. Unfortu-nately, actual performance fell well short of these ob-jectives. Rather than going through a consolidationphase with rapid growth, the economy slipped backinto significant vulnerability: growth declined; infla-tion accelerated; and both the fiscal and current ac-count deficits widened sharply.

Three sets of factors accounted for the disappointingperformance:

• Adverse exogenous shocks, in the form of consid-erable political instability with several coup at-tempts; natural disasters (including a drought,typhoon, and severe earthquake); and an unantici-pated 10 percent weakening in the terms of trade.While these adverse shocks put the short-term bal-ance of payments and growth objectives out ofreach, they were temporary in nature and, by them-selves, should not have caused the program to failin its longer-term objectives.2 But the degree of po-litical instability that occurred would have beenhard to predict.

• Program design issues, including: (i) A structuralreform agenda that proved to be overambitious andinsufficiently prioritized, especially in the contextof a newly restored Congress that wanted a sub-

stantial say in economic policy matters. In retro-spect, it would have been better to have concen-trated on a shorter and more specific agenda.3(ii) An overoptimistic projection of the speed of re-covery in private investment, reflecting an apparentunderestimation of the adverse impact of the debtoverhang on investment.4 (iii) The program rightlyplaced more emphasis on measures to improve taxadministration and compliance rather than on dis-cretionary measures. However, this posed chal-lenges for program design since the revenue impactwas uncertain in terms of both magnitude and tim-ing—and progress proved slower than expected.(iv) The move to six-monthly performance criteriaappears to have been a mistake. It permitted thebuildup of large policy slippages that proved toolarge to correct by the time of the next test dates.Quarterly performance criteria were reinstated inJune 1990.

• Weaknesses in program implementation wereprobably most important of all, although thetimetable of reforms would have been difficult to de-liver even without the disruptions caused by the coupattempts. The Government’s ability to implement theprogram was hampered by its inability to pursue itseconomic policy agenda—particularly revenue andstructural reform measures—in Congress, a con-straint that had been insufficiently recognized whenthe program was prepared. Some actions by Con-gress that were opposed by the Government—no-tably approval of a large wage increase and a cut inoil taxes—seriously aggravated the fiscal situation.5

1This box draws in part on internal ex post staff assess-ments, which were quite candid, but tended to put even moreemphasis on implementation failures.

2IMF staff estimates suggest that the natural disasters accounted for about half of the deterioration in the externalcurrent account, mostly financed through foreign emergencyassistance.

3For example, internal assessments by the staff suggest thatthe lack of specificity in the program on action to deal withthe central bank deficit contributed to the lack of progress inthis area.

4Overoptimistic projection of investment appears to be acommon problem in program design. See Goldsbrough andothers (1996).

5Implementation problems began at the outset of the pro-gram when the authorities indicated that the oil price increaseagreed upon as a prior action would have to be delayed. Com-bined with an unanticipated increase in world oil prices, thedelay had a significant fiscal impact. Oil price issues re-mained highly sensitive, since the December 1989 coup at-tempt was timed to coincide with the date of the postponedprice increase, in order to exploit expected social unrest.


balance significantly, and this was to be achievedthrough a substantial fiscal adjustment. The programaimed at increasing tax revenue by nearly 4 percent-age points, to 19 percent of GNP, over the three-yearperiod by broadening the tax base, reducing exemp-tions, and improving tax administration.

18. An interesting feature of the EFF-supportedprogram is that the fiscal targets of the program weremet—mainly because of lower interest paymentsand lower public investment than targeted—al-though the aim of increasing tax revenue was notachieved. Tax revenues rose by only 1 percent ofGNP over the period. Thus it was possible to meetthe fiscal targets even though the structural strength-ening on the tax side had only partially occurred,leaving the economy vulnerable on this front wheneconomic circumstances changed.

19. Considerable progress was made on some ofthe structural measures included in the program.Under the Ramos administration, banking, telecom-munications, domestic shipping, and the oil sectorwere opened to new competition, and limits on for-eign participation were eased in a number of sectors.Import tariffs were reduced markedly, and quantita-tive import restrictions largely eliminated. The priva-tization program was accelerated, and the centralbank recapitalized under a new statute. However—as discussed in the section “Implications for Pro-gram Design and Implementation”—progress in im-plementing tax reform proposals was slower and lesscomplete than envisaged. The 1994 EFF was associ-ated with improved export performance and a mod-est improvement in growth, but it did not bring aboutthe sustained current account adjustment originally

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Box 10.2. Original Aims and Outcomes of the EFF, 1994–96

Aims

Macroeconomic targetsIncrease investment by 3 percentage points of GNP.

Reduce the current account deficit to about 3 percent ofGNP from 6 percent of GNP.

Increase national saving by 6 percentage points ofGNP by 1996, almost all through fiscal adjustment.

Reduce consolidated public sector deficit (CPSD) from2.7 percent of GNP in 1993 to 0.5 percent of GNP by1996.

Reduce underlying CPSD1 from 4.2 percent of GNP in1994 to 0.7 percent of GNP by 1996.

Raise government tax revenue by 4 percentage pointsof GNP between 1993 and 1996.

Increase real GNP growth from 2.3 percent in 1993 to5 percent by 1996.

Key structural measuresTax reform, including adoption of a minimum businesstax, phased abolition of tax exemptions, and improvedVAT administration.

Deregulation of oil pricing and importation.

Tariff reduction and elimination of nearly all quantita-tive import restrictions.

Public expenditure reform.

Local government devolution.

Outcomes

In 1996, investment was 23.1 percent of GNP, slightlylower than in 1994.

The current account deficit was 4.6 percent of GNP in1996.

By 1996, the saving rate had risen just 0.8 percentagepoints.

Outturn in 1996 was a surplus of 0.2 percent of GNP.

Outturn was 0.2 percent of GNP.

Tax revenue rose just 1 percentage point.

Real GNP growth exceeded the target, rising to 7!/4percent in 1996.

Comprehensive tax reform was eventually passed inDecember 1997 but major tax exemptions and incen-tives remained. Minimum business tax based on sales,not assets. Tax administration weaknesses remained.

Deregulation of oil prices was completed in early 1998and the Oil Price Stabilization Fund abolished.

Quantitative import restrictions were removed (exceptfor rice). Average tariff was reduced to 15 percent.

Legislative action on rationalizing civil servicestalled.

Devolution of public expenditure did not match largeincrease in transfers to local government.

1The underlying CPSD treats privatization receipts “below the line,” rather than “above the line” as in the standard CPSD.


envisaged. Until the Asian crisis, however, the cur-rent account deficit was easily financed by buoyantcapital flows.

20. In retrospect, it can be questioned whether the1994 EFF was needed—in a balance of paymentssense—and we take up this issue in the section “WhyDid the IMF Remain Involved for So Long?” In anyevent, since financing problems eased subsequently,the authorities began to treat the EFF as precautionaryafter the initial purchase—indicating their intention torefrain from further purchases. As the fourth and sup-posedly final review approached in early 1997, staffbriefing papers noted that the authorities were look-ing forward to a graceful exit from a long line of IMFarrangements, but delays in the progress on the tax re-form because of opposition in Congress meant thatthe review could not be completed as scheduled.Rather than let the program lapse, the authorities re-quested an extension as they wanted to “graduate” ona successful note, following passage of the Compre-hensive Tax Reform Package (CTRP) by Congress.The original extension of the arrangement was nottherefore driven primarily by a perception of balanceof payments need, but rather the desire to end the pro-gram successfully. However, before this could hap-pen, the program was overtaken by the Asian crisis.

Asian crisis and its aftermath

21. As the Asian crisis hit, the EFF was augmentedand further extended first until December 1997 andthen to March 1998 and the authorities again decidedto draw on the program. The peso was floated in July1997.10 Initially, the authorities showed no interest ina follow-on arrangement, in part because graduationfrom IMF-supported programs had become a politi-cal issue in the Philippines. However, as the regionalcrisis unfolded, both the authorities and IMF man-agement became concerned about the risks of such anexit amid the turbulent financial market conditions.The IMF management was anxious to have a “fol-low-on” program to help ring-fence the Asian crisisand also to serve as a policy blueprint for the new ad-ministration which would take over following theMay 1998 presidential election. Fund management

therefore pressed for a precautionary Stand-ByArrangement prior to the elections.11

22. The new two-year SBA entered into with theoutgoing Ramos administration centered on fiscaland monetary tightening, banking sector reform, im-proved tax administration, and other structural re-forms in order to provide a framework for orderlyadjustment to the reduced level of capital inflows.The program included a new emphasis on tax admin-istration, as well as an effort to complete the originalCTRP agenda, by reintroducing legislation to reducetax exemptions and incentives. A revised version ofthe program12 was endorsed in October 1998 by theincoming Estrada administration. The program wasoriginally intended to be precautionary but, at thetime the revised program was approved, the authori-ties decided to make purchases in response to re-duced access to international capital markets follow-ing the Russian default and collapse of Long TermCapital Management.

23. At first, the momentum of the policy envisagedin the program was maintained, but over time policyslippages grew and concerns over governance prob-lems mounted. Policy slippages, related in part to theprivatization of the Philippine National Bank, led to adelay of almost a year in completing the Fifth Reviewuntil mid-2000.13 This review was the occasion of acritical discussion in the Executive Board, which fo-cused on persistent policy slippages, governance con-cerns, and the rationale for continued IMF programinvolvement. Some Executive Directors were highlycritical of the IMF’s prolonged and, in their view, in-effective relationship with the Philippines and raisedthe issue of the future relationship after the conclu-sion of the arrangement. A few suggested that theprogram should become precautionary after thedrawing that was the subject of the review.

24. The authorities noted that their earlier exitstrategy had been frustrated by the Asian crisis andthat they intended to develop a new one. They ar-gued, however, that the reserve position remainedsomewhat vulnerable, implying a need for further

150

10Exchange rate policy was the subject of some disagreementbetween the staff and the authorities in the mid-1990s. The Philip-pine peso was pegged de facto to the dollar in late 1995, as the au-thorities tried to prevent a real appreciation, encouraging short-term capital inflows. The risks of this policy, particularly if capitalflows were reversed, were highlighted in the Article IV consulta-tion in December 1996. Following the float of the peso in July1997, the authorities initially engaged in substantial one-way in-tervention to support the peso and took other measures designed toprevent depreciation, including limiting access to the foreign ex-change market by some foreign banks, while rapidly reducing in-terest rates contrary to commitments in the letter of intent.

11The existing EFF could only have been further extended untilJune 1998.

12The program was revised to take into account weaker eco-nomic activity and a deteriorating external environment, in partic-ular through a somewhat looser fiscal stance. It also reflected theannounced policy agenda of the new government, with greater at-tention to corporate governance issues, power sector reform, andmedium-term public sector reform in addition to existing plannedreforms for the banking sector and tax administration.

13The program aimed at the full privatization of the PNB bymid-2000. However, the situation was complicated by the non-transparent acquisition of a controlling stake by a local group,headed by a close associate of then President Estrada, whichowned several companies that were nonperforming debtors ofPNB, and by the revelation of increasing concerns about thegroup’s financial position.


IMF support. Staff took the view that, since theIMF’s presence in the Philippines had encouraged theimplementation of sounder macroeconomic policiesand had had an important catalytic effect, a close pol-icy dialogue should be maintained with the authori-ties, while encouraging an exit from use of IMF re-sources. In the event, the 1998 SBA was extended toend-2000, but it expired without the last review beingcompleted, as a result of further fiscal slippages, re-flecting weak revenue collection and mounting gov-ernance concerns. Thereafter, the authorities re-quested post-program monitoring in line with theexpectation of the Board for a country whose creditoutstanding exceeds a threshold amount.14

25. In defense of the long involvement of theIMF, and particularly its continued involvement inthe mid-1990s, it could be argued that, although notall aspects of the 1994 EFF were implemented asplanned, it helped the economy to weather the Asiancrisis fairly well. The Philippines did not suffer assevere a downturn as its neighbors; growth deceler-ated but remained positive. This was partly the bene-ficial consequence of the cumulative impact of struc-tural changes that had been introduced over the yearsunder successive programs, and which acceleratedas a result of strong political leadership during theRamos administration. The generally sound macro-economic management under the framework of the1994 EFF15 probably also helped, although, as al-ready noted, there continued to be differences ofview about exchange rate policy. A number of thevulnerabilities that were central to the severity of thedislocation in other economies most affected by theAsian crisis were also present in the Philippines,nonetheless.16 However, imbalances did not build up

over as long a period as they had in other Asiancountries, in part because earlier problems meantthat capital inflows were smaller and did not last foras long prior to the crisis as in the other countries.

Despite some progress, poverty remains high

26. The incidence of poverty has declined from45 percent in 1985 to 32 percent in 1997, but re-mains high in absolute terms. Moreover, income dis-tribution has not changed much in the last threedecades and remains among the most unequal inSouth East Asia: in 2000, the richest 20 percent ac-counted for over one-half of total expenditure andthe poorest 20 percent for about 5 percent.17 Signifi-cant progress was made in improving health and ed-ucation indicators over the period of IMF programengagement, but these improvements did not matchthose in other Asian economies, in part neglectingfiscal policy shortcomings.

Why Did the IMF Remain Involved for So Long?

27. In this section, we explore the main reasonswhy the IMF became as closely and continuously in-volved as it did in the Philippines over the past 30years or so and whether the involvement was consis-tent with Board guidelines on the subject.

Starting imbalances and structural problems were large

28. Part of the explanation for prolonged involve-ment lies in the fact that despite the IMF’s long en-gagement in the Marcos era, imbalances were largewhen the standstill on external debt service was de-clared in 1983. The current account deficit reachedabout 9 percent of GNP in 1982–83. External debtpeaked at 100 percent of GNP in 1985, which was

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14In September 2000 the Executive Board had agreed that, whena member’s credit outstanding exceeds a threshold of 100 percentof quota, there should be a presumption that the member will en-gage in post-program monitoring (PPM) by the IMF of economicdevelopments and policies after the expiration of its arrangement.To this end, the member engages in discussions with the staff on itspolicies, including a quantified macroeconomic framework. Thestaff then reports formally to the Board, normally twice a year, onthe member’s policies, the consistency of the proposed policieswith the objective of medium-term viability, and the implicationsfor the member’s capacity to repay the IMF.

15The question addressed in the section “Continuous ProgramsHave Limited the Independent Role of Surveillance” is whethersurveillance could also have provided the necessary framework.

16Over the years of IMF-supported programs, various effortswere made at reform of the financial sector, including the rehabil-itation and restructuring of the Philippine National Bank and theDevelopment Bank of the Philippines in the late 1980s. After theopening of foreign direct investment in 1991, most capital ac-count restrictions were removed in a wide-ranging reform in1992. Measures to strengthen the supervisory and regulatoryregime for commercial banks and to increase competition in thebanking sector were taken at about the same time. In particular,the move was accompanied by a change in the prudential formula

determining the maximum net open foreign exchange position foreach bank. Restrictions on entry and operation of foreign bankswere eased in the early 1990s to increase competition, and othermeasures were taken to tighten prudential regulation, including atightening of minimum capital requirements and the impositionof a liquid asset requirement on foreign currency deposit unitloans. Nevertheless, private credit grew very rapidly ahead of theAsian crisis, and bank supervision and regulation continued to ex-hibit serious shortcomings compared with best international prac-tice. Since 1998, the authorities have adopted further financialsector reforms, with the help of the IMF and a Banking SectorReform Loan from the World Bank (Rodlauer and others (2000),Chapter VI: Banking System Reform).

17According to the World Bank’s World Development Indica-tors, 2001.


higher than in most of the other problem debtors ofthe time. Debt service, before rescheduling, wasequivalent to about 50 percent of exports of goodsand services and private transfers.

29. The Marcos administration also left its suc-cessors a daunting legacy of structural problems, in-cluding severely indebted state corporations andgovernment financial institutions, including the cen-tral bank.18 A small elite controlled a large part ofthe economy and proved resistant to many reformsthat threatened this control.19 As a result, the eco-nomic system remained quite closed, with patronageplaying a dominant role with a limited scope forcompetition. Many industries benefited from a highdegree of protection and there were barriers to theentry of foreign corporations. The Philippines wasmuch more closed than other ASEAN economieseven though the economy was smaller in size.

30. Moreover, staff reports were quite candid inindicating that it would take a long time to return toexternal viability. For example, the staff appraisal inthe Request for SBA in 1984 notes that “effectiveadjustment will undoubtedly require time, stretchingwell beyond the program period.” Medium-term pro-jections in subsequent program documents contin-ued to imply that the restoration of external viabilitywould take a long while, typically extending wellbeyond the projection period. Indeed, with hindsightthe IMF was at times too pessimistic about the tim-ing of the return to external viability, reflecting thedifficulty of predicting when full access to private fi-nancial markets would be restored.20

“Seal of approval” influences on IMF program involvement

31. “Seal of approval” considerations, linking theprovision of financing or restructuring of debt from

other creditors to an IMF-supported program, wereparticularly important during the period 1982–92 asthe Philippines sought to work out its external debtproblems. IMF programs were formally required inorder for Paris Club creditors to reschedule debt.Commercial banks also made it clear to the Philippineauthorities that an active IMF-supported program wasthe sine qua non for the concerted commercial banklending and restructuring that took place between1986 and 1992. Apart from the various commercialbank restructurings in 1986, 1987, and 1990, the re-lease of intermediate tranches of new money by com-mercial banks were also dependent on IMF-supportedprograms. This remained so until the final Brady re-structuring in 1992, which was financed in part from“set-asides” under IMF arrangements together withsupport from JEXIM, the Japanese export creditagency, and from the World Bank—both of whichwere also tied to the programs.21 The timing ofdonors’ Consultative Groups was also closely relatedto the inception of IMF-supported programs.

32. Did the debt workout phase in the Philip-pines—and IMF involvement related to this factor—take longer than in most other countries that encoun-tered debt problems in the 1980s? The answerappears to be no, in large part because the broader in-ternational strategy vis-à-vis the middle-incomehighly indebted countries took about a decade toevolve to the Brady plan. Therefore, most of thesecountries also had a series of programs lasting adecade or so, linked to debt restructuring (Box 10.3).

33. Even after the Philippines had regained marketaccess in 1993 and IMF-supported programs were nolonger required specifically for concerted debtarrangements, they were still seen to satisfy the de-mand for a positive signal on the macroeconomicframework to donors and private financial markets. Inthis situation, donors did not formally require an IMFarrangement to be in place in order to provide support,but they appear to have been more comfortable withsuch an approach. For example, former officials statedthat one of the primary rationales for the 1994 EFFwas that the authorities felt that, in the light of thePhilippines checkered track record, an IMF-supportedprogram would be helpful to reassure lenders as thecountry started to reaccess international capital mar-kets. Both IMF staff and Philippine officials appear tohave been concerned that a discontinuation of the pro-longed relationship would be interpreted negatively

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18The Central Bank incurred large liabilities, due to the impact ofsharp exchange rate depreciation on the cost of the exchange rateguarantees and forward cover arrangements, provided in the early1980s. The authorities took a policy decision not to monetize theseliabilities—which was of critical importance in helping the Philip-pines avoid high inflation in the aftermath of the crisis—but inter-est payments on central bank bills issued to cover the losses gaverise to continuous quasi-fiscal deficits and a highly negative networth. It also affected the Central Bank’s ability to conduct mone-tary policy. The Central Bank was eventually recapitalized and re-structured, under a new statute, in 1993. This was a prior action forthe EFF, which was agreed the following year.

19See, for example, Bresnan (1986) and Gutierrez and others(1992).

20Projections for the 1991 SBA foresaw financing gaps through-out the decade, noting that this pointed to the continued involve-ment of the IMF and further Paris Club and commercial bank fi-nancing packages through the mid-1990s. The 1989 EFF requestincorporated financing gaps of $1.7 billion a year in 1993–95, andsuggested that an end to exceptional financing and a return to nor-mal market access might not occur until after 1995.

21More recently, full activation of bilateral swap arrangementswith other Asian economies have been tied to the existence of anIMF-supported program. In 1994 the program was also associ-ated with a Paris Club rescheduling but, in this case, the Philip-pines (uniquely in the history of the Paris Club) eventually de-cided to cancel the agreed rescheduling, apparently because ofthe implications for cover from export credit agencies and thequestionable need for a rescheduling.


by participants in the international capital markets.The EFF was therefore viewed as desirable in part be-cause so many players in the system had become ac-customed to the existence of a program.

34. Internal briefing papers and interviews with anumber of staff suggest that the strong “gatekeeper”role implied by the close linkage of programs toother forms of financing has had a potentially ad-verse effect on the quality of programs, in two ways:(i) the severe consequences, in terms of loss of otherfinancing, of the IMF’s potential disengagementprobably caused it to be less selective in choosing tobe involved only at times when a lending arrange-ment was likely to be most effective in advancing re-form; and (ii) since the seal of approval from IMF-supported programs has typically been linkedprimarily to agreement on a program, rather than toits successful implementation, it increased pressureson the authorities to agree to policy timetables thatlooked strong on paper, even if they were unlikely tobe delivered within the agreed time frame.

35. These tensions were frankly discussed in in-ternal briefing papers prepared when the 1994 EFFwas under negotiation, at which time staff expresseda concern to resist being pressured into early agree-ment on a less than adequate program. The authori-ties were apparently keen to agree on a new programrelatively quickly in order to pursue a Paris Clubrescheduling and an early meeting of official donors,both of which were linked to such a program. Thiswariness on the part of the staff appears to reflect anumber of earlier episodes where seal of approval

considerations influenced IMF agreement on pro-grams, and where, in the staff’s judgment, these pro-grams suffered from weaknesses as a result.22 How-ever, these internal concerns were not reflected inthe Board papers for the 1994 EFF.

Fluctuations in political commitment and ownership

36. One of the reasons why adjustment took a longtime is that there was strong political resistance byvested interests to implementing some key structuralchanges essential for success.23 The Philippines’ po-litical system required a strong political commitmentof both the executive and legislative branches to en-sure the passage of enabling legislation to support theeconomic policy agenda. However, the programssupported by the IMF were based primarily on agree-ments between staff and the executive branch, andimportant elements of the reform agenda often stalledin Congress or ran into judicial challenges.

37. Strong leadership, with ownership of reform,did at times help achieve the necessary political com-

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Box 10.3. Many Highly Indebted Countries Took as Long as the Philippines to Resolve Their Debt Problems and Consequently Also Had Repeated IMF Arrangements

The Philippines is not unusual in the length of time ittook to complete the debt workout after the debt crisisof the early 1980s. Most of the heavily indebted mid-dle-income countries that were affected also took abouta decade to work out their debt problems with the helpof Paris Club reschedulings and commercial bank re-structurings, culminating in the Brady restructurings ofthe early 1990s. Of the 17 highly indebted middle-income countries,1 Philippines was the eleventh tocomplete its series of reschedulings with commercialbanks and the Paris Club, in July 19942 (Table 10.3).

Six of these countries completed their restructurings ina concentrated period between 1992 and 1994, withfive earlier and six later.

In most of these cases, countries had a succession ofIMF-supported programs lasting a decade or morelinked to the need for a seal of approval for restructur-ing. Up until the 1991 SBA tied to the 1992 Brady dealand the 1991 Paris Club rescheduling, the Philippineswas fairly typical in the length of programs associatedwith restructuring. However, to the extent that theabortive Paris Club rescheduling was one of the ratio-nales for the 1994 EFF, which lasted until 1998, IMFinvolvement linked in some way to restructuring lasteda little longer than in most other countries.1The “Baker 15” countries, plus Costa Rica and Jamaica.

Colombia is not shown because it did not reschedule in the relevant period, although it did benefit from concertedlending arrangements with commercial banks in 1985, 1989,and 1991.

2If this Paris Club rescheduling, which was never imple-mented, is discounted the Philippines would rank as the sixth of

the 17 to complete rescheduling. Nevertheless, the Paris Clubrescheduling was one of the rationales for the 1994 EFF al-though a number of Executive Directors questioned its need.

22For example, in 1992, the tight links between Paris Clubrescheduling and IMF-supported programs caused the program tobe extended through a change of administration, risking compro-mising program ownership.

23The 1993 and 2000 country strategy papers—and the 2000Occasional Paper (Rodlauer and others, 2000)—were quite can-did in identifying these factors as key obstacles to faster adjust-ment and growth.


mitment and overcome vested interests—such as in1986–87 and during much of the Ramos administra-tion. During these periods, much was achieved underthe IMF-supported programs, even if the need to mo-bilize a political consensus and push reforms throughCongress meant that the ambitious timetables set outin program documents could not be attained. How-ever, when political leadership was weaker, reformsstalled despite the commitment of the direct economicministries and the Central Bank. Prolonged politicaluncertainties—including several coup attempts duringthe Aquino administration—added to these problems.

38. What could the IMF have done differentlyduring these periods of weaker ownership? In manycases, there is no clear answer. In principle, a differ-ent approach might have involved a combination ofthree elements: greater efforts to build consensus,greater selectivity, and changes in conditionality.

39. On the first element, IMF missions did engagein extensive dialogue on economic policy with mem-bers of key congressional committees and both offi-cials and staff interviewed thought this dialogue hadbeen helpful. Some missions also reached out to“civil society” more generally, and resident repre-sentatives generally engaged in a policy dialoguewith a broad range of groups, within and outsidegovernment, to explain the IMF point of view. How-ever, such contacts could not create, or serve as a

substitute for, broader domestic political commit-ment and ownership.

40. Greater selectivity in entering into, or extend-ing, lending arrangements would have been highlydesirable during those periods when it became evi-dent that there was no commitment at the highestpolitical level to reforms necessary for sustainableadjustment. This was the case for much of the Mar-cos era and should have been evident earlier in theEstrada administration. At other times, however,when the issue was more one of the Executive’sability to implement measures they agreed to, theIMF was faced with a more difficult situation. On anumber of occasions when policies went off-track,the IMF did halt programs—by not completing re-views—while seeking corrective actions (Box10.4). However, partly because of the “seal of ap-proval” issues discussed above, pressures oftengrew to resume the program and a compromise wasgenerally reached that involved some erosion of theoriginal policy measures.

41. Finally, could a different approach to condi-tionality have helped overcome the periods of weakownership and thereby reduced the length of IMFprogram involvement? As will be discussed further inthe section “Implications for Program Design andImplementation,” a greater prioritization of structuralreforms—with greater flexibility on the timetable but

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Table 10.3. Heavily Indebted Middle-Income Countries: IMF-Supported Programs Tied to Debt Restructuring Following the 1980s’ Debt Crisis

First program linked End of last IMF Lastto 1980s’ debt program linked to 1980s’ commercial bank

Country restructuring debt restructuring restructuring Last Paris club

Argentina Jan. 1983 Mar. 1996 Apr. 19931 July 1992Bolivia Feb. 1980 Ongoing July 19921 July 2001Brazil Mar. 1983 Aug. 1993 Apr. 19941 Feb. 1992Chile Jan. 1983 Nov. 1990 Dec. 1990 Apr. 1987Costa Rica Mar. 1980 Feb. 1994 May 19902 June 1993Ecuador3 July 1983 Dec. 1995 Feb. 19951 June 1994Jamaica June 1978 Mar. 1996 June 1990 Jan. 1993Mexico Jan. 1983 May 1993 Mar. 19901 May 1989Nigeria Jan. 1987 Apr. 1992 Jan. 19921 Dec. 2000Peru June 1982 Mar. 1999 Nov. 19961 July 1996Philippines Dec. 1984 Mar. 1998 Dec. 19921 July 1994Uruguay Apr. 1983 Mar. 1992 Feb. 19911 . . .Venezuela June 1989 Mar. 1993 Dec. 19901 . . .Côte d’Ivoire Feb. 1981 Ongoing May 19971 Apr. 2002Morocco Oct. 1980 Mar. 1993 June 1990 Feb. 1992Former Yugoslavia May 1979 Sep. 1991 Sep. 19884 July 19884

Sources: Paris Club; Global Development Finance database; and IMF Annual Reports.1Brady deal.2If this Paris Club rescheduling, which was never implemented, is discounted the Philippines would rank as the sixth of the 17 to complete rescheduling. Neverthe-

less, the Paris Club rescheduling was one of the rationales for the 1994 EFF although a number of Executive Directors questioned its need.3Ecuador rescheduled debt with official and private creditors again in 2002.4These are the dates of the reschedulings of the debt of the former Yugoslavia, whose debt problems had not been resolved at the time the federation was

dissolved.


not on the substance of those judged to be critical to macroeconomic sustainability—would probablyhave helped; however, as the later discussion of theefforts to improve the tax structure and strengthen taxadministration will show, there are limits to what any specific modalities of conditionality can be ex-pected to achieve, in the absence of strong domesticownership.

Program design and implementation

42. Several key weaknesses were consistentlyidentified by the IMF as at the core of the longer-term adjustment problem—notably weak tax col-lection and low public saving, which in turn con-tributed to low levels of gross national saving incomparison with the Philippines’ neighbors. Thiswas long seen as a factor that limited the ability ofthe economy to invest and grow without runninginto periodic external financing constraints. Nearlyall IMF-supported programs over the last 30 yearsidentified increasing saving rates as a central aim,and sought to address this problem by improvingpublic saving through a greater tax effort, whichwas also low in comparison to other economies inthe region. However, programs were not consis-tently successful in achieving these goals, eitherbecause of overoptimism of the original projectionsor policy slippages.

43. As shown in Figure 10.2, programs generallytargeted a large sustained improvement in tax rev-enues as a share of GNP as a means of boosting pub-lic and gross national saving.

44. Tax reform and efforts to improve administra-tion did yield some benefits in raising the tax ratio inthe late 1980s and early 1990s, although progresswas intermittent. The tax ratio rose from 11 percentof GNP in 1986 to 15 percent in 1993 and peaked atover 16 percent in 1997. However, except for the1989 EFF and to some extent the 1991 SBA, actualperformance still fell far short of the sharp increasesin tax revenues targeted under successive programs.Perhaps more important than this overoptimism wasthat part of the improvements that were achievedwere the result of ad hoc measures. The increase intax revenue in proportion to GNP also owes some-thing to the recovery in activity in the late 1980s. Inany event, the revenue gains were not sustained. Per-formance was particularly poor after 1998, when thetax ratio deteriorated significantly. These issues arediscussed in more depth in the section “Improvingthe tax structure and strengthening tax administra-tion: an example.”

45. The gross national saving rate was also pro-jected to rise markedly in each program but the ac-tual outturn usually fell short (Figure 10.3). Grossnational saving as a percentage of GNP declined

continuously in the first half of the 1980s, im-proved briefly between 1986, and then deterioratedagain. The measured saving rate shows a sharp in-crease in 1999 and 2000, but there is reason to be-lieve that this may simply reflect statistical weak-

155

6

8

10

12

14

16

18

20

1983 SBA 1986 SBA

1991 SBA

1998 SBA

1989 EFF

1994 EFF

1976 EFF

1984 SBA

Tax revenue actual dataData as projected under the arrangement

1972 75 78 81 84 87 90 93 96 99 2002

Figure 10.2. Philippines: National Government Tax Revenue(In percent of GNP)


10

15

20

25

30

1989 EFF 1994 EFF

1983 SBA

1984 SBA

1986 SBA

1991 SBA

1998 SBA

Gross national savings actual dataData as projected under the arrangement

Figure 10.3. Philippines: Gross National Savings(In percent of GNP)

1979 82 85 88 91 94 97 2000



nesses.24 The failure of successive programs to in-crease the saving rate in turn left the economy

vulnerable to stop-go cycles and to exogenousshocks.25

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Box 10.4. Examples of Major Interruptions to IMF-Supported Programs in the Philippines

As discussed in the main text, conditionality in thePhilippines—especially structural conditionality—re-lied heavily on program reviews. On a number of occa-sions, program reviews were delayed for extended peri-ods—sometimes leading to permanent interruptions—aspolicies diverged from program commitments. By inter-rupting programs, the IMF was sometimes able to securedesired policy changes. However, if such interruptionstook place within a context where it was tacitly under-stood by both sides that outside factors—including “sealof approval” considerations—would be likely to ensurethe eventual restoration of a program relationship, thismay have affected the efficacy of efforts to imposegreater selectivity. This box examines several suchepisodes to examine the major reasons for program in-terruptions and to assess the extent to which the policyslippages were corrected by the time programs were re-sumed, or new arrangements agreed. The broad conclu-sion is that the program interruptions were partly effec-tive in correcting policy slippages, but that substantial“recontracting” also occurred, resulting in a weakeningof original commitments.

Interruption of the 1989 EFF

The IMF took contrasting approaches to successivereviews under the 1989 EFF.

• The first review of the 1989 EFF was completed onschedule in December 1989, despite significantslippage in monetary and fiscal policies that largelyreflected the delayed implementation of politicallysensitive oil price increases and a large public sec-tor wage increase. The authorities eventually raisedoil prices at the beginning of December, andpromised to take remedial fiscal actions, includingseveral discretionary tax increases, to permit the re-view to be completed. As noted below, thesepromised increases did not materialize. One moti-vation for completing the review on time was tofree up IMF “set-asides” and linked financing fromdonors to help finance the “buy-back” of commer-cial bank debt that took place in January 1990.

• The program went more seriously off-track during1990 in light of policy slippages and a series oflarge exogenous shocks. Net international reservestargets and fiscal targets were missed, the latterlargely because Congress failed to pass the tax

measures promised earlier as a condition for com-pleting the first review.1 Staff decided that the orig-inal aims of the EFF were unattainable and that thesecond review of the program could not be com-pleted. This decision appears to have reflected thejudgment that in the political environment follow-ing the earthquake and the previous year’s coup at-tempt, it was unlikely that the government wouldbe able to take the comprehensive and strong pol-icy measures that would justify the resumption ofIMF support.

• However, the IMF was keen to head off the risk ofan intensifying crisis and also to free up needed fi-nancing from donors and creditors. Six monthsafter the review was originally scheduled, agree-ment on a new Stand-by Arrangement was reachedin January 1991. In order to meet the schedule for adonors’ group and avoid the damage to confidencethat a further delay would cause, the IMF compro-mised on its initial requirements for a new pro-gram, accepting the President’s assurance that shewould use veto powers and administrative means tokeep expenditure in line with the program, as asubstitute for full enactment by Congress of thebudget. Reflecting political sensitivities, revenuemeasures were confined to a temporary importlevy, rather than the measures promised under theprevious program. Other prior actions were agreed,including the elimination of administrative foreignexchange arrangements that artificially supportedthe peso and the announcement of a power tariff in-crease. In the event, the politically sensitive powertariff increase was not implemented until a yearlater, and was subsequently partly rolled back. Theband around the reference exchange rate for com-mercial transactions was eliminated as scheduled.More far-reaching reforms of the exchange systemwere introduced only in early 1992.

1In the aftermath of the June earthquake, the authoritieswere pressing for the early provision of emergency assistancefrom the IMF while Congress threatened a debt moratorium.Congress also voted a substantial reduction in oil taxes in theface of the run-up in world prices, and a tariff reform waswithdrawn in the face of congressional pressure.

24Private saving, which is calculated as a residual, apparentlyrose from 19.9 percent of GNP in 1998 to 29.2 percent in 2000,while the current account surplus rose to 11.8 percent of GNPfrom 2.2 percent over the same period. However, a staff analysisof partner country trade data suggests that the current accountsurplus may be overstated by as much as 9–10 percentage points

of GNP, mainly due to the underrecording of imports. Given themethod of calculation, this would imply that the saving ratio iscorrespondingly overstated.

25More recently, additional vulnerability concerns have fo-cused on public sector debt dynamics and continuing weaknessesin the financial sector. Exports remain heavily concentrated in theelectronics sector.


Adverse shocks

46. Bad luck—in the form of a long string of ad-verse shocks—also played a role in extending the pe-riod of prolonged use. A dramatic series of adversesupply shocks in the early 1990s (including an ex-tended drought and related power shortages, a severeearthquake, and a damaging volcano eruption) and de-teriorating terms of trade adversely affected the bal-ance of payments, while political uncertainties—re-

flected in several coup attempts—affected investorconfidence. Later in the 1990s, the timing of the Asianand Russian crises, and the associated contagion, dis-rupted what would otherwise probably have been asuccessful “exit” from use of IMF resources in 1997.26

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Delayed first review under the 1994 EFF

• Policy performance in the first six months of the1994 EFF deviated substantially from program ex-pectations. In particular, the introduction of an au-tomatic oil price adjustment mechanism, whichwas an original condition for completing the re-view, was postponed until late 1995, after it wasdetermined that this would require legislation.Monetary policy also went off-track. There werealso delays in establishing a simplified tariffregime, revising the National Power Corporation’spricing formula, and liberalizing entry into the oilsector. To complete the review, the IMF thereforepressed for the implementation of these trade andenergy reforms and for demonstrated adherence tothe monetary program in early 1995. It also soughtnew understandings on compensatory measuresthat would be taken if there were unforeseen devel-opments, such as weaker-than-expected capitalflows, following the Mexican crisis.

• The review was eventually completed in Septem-ber 1995, after a ten-month delay. The IMF settledfor the administration’s submitting of bills cover-ing the measures required for completion of the re-view to Congress, rather than their actual imple-mentation. The administration submitted a bill toremove quantitative agricultural import restric-tions, which was passed in March 1996, and acomprehensive oil sector reform bill, as well as atax reform bill.2 The decision to complete the re-view appears to have reflected the strong macro-economic performance, recognition that the au-thorities had limited influence over theCongressional timetable, and the judgment thatthe authorities’ efforts to advance structural reformdeserved encouragement.

• An Oil Deregulation Bill was passed in 1996, butwas subsequently judged to be unconstitutional.Replacement legislation was eventually passed inFebruary 1998, some two and a half years later.The Comprehensive Tax Reform legislation was

passed in December 1997, but suffered some im-portant shortcomings (discussed in the section“Improving the tax structure and strengthening taxadministration: an example”).

Fifth review of the 1998 Stand-By Arrangement

• Completion of the fifth review of the 1998 SBA,originally scheduled for September 1999, was de-layed by ten months. As a condition for completingthe review, the IMF sought renewed momentum inkey structural reforms, with specific prior actionsrequired in banking reform, tax administration, andpower sector restructuring. Missions in Septemberand December 1999 were unable to complete thereview because of slippage in the fiscal programand because key structural reforms were delayed—particularly power sector reform legislation and theadoption of a plan for the privatization of thePhilippine National Bank (PNB) by mid-2000.Growing governance concerns, including those re-lated to the PNB privatization, also added to diffi-culty in completing the review.

• The program was extended beyond its original ter-mination date of March 2000 to permit completionof the review in July 2000. This followed agree-ment on a fiscal program for 2000, incorporating aslightly higher targeted fiscal deficit3 as well as ap-proval of the power sector reform by the LowerHouse of Congress in April (a prior action), and bythe Senate in June. In the event, approval of unifiedlegislation was delayed for much longer—until late2001. The review went ahead despite the failure ofthe auction of the government’s stake in PNB inJune. Progress was slower than the IMF originallysought in some other areas of structural reform, in-cluding tax administration, but a General BankingAct was passed prior to the completion of the re-view. The arrangement was extended a second timeuntil end-2000, but was ultimately permitted tolapse amid increasing governance concerns, with-out completion of the final review.

2There was also a major revision to monetary policy, as theauthorities adopted a limited form of inflation targeting.

3To 2.9 percent of GDP compared to an original target of2.2 percent. In the event, the actual fiscal deficit for 2000 was4.6 percent of GDP.

26This does not imply that policies in the Philippines—includ-ing exchange rate policy, remaining financial sector regulatoryweaknesses, and relatively shallow domestic capital markets—had no role in magnifying the effects of the crisis.


The rationale for program involvement wassometimes too broad

47. The rationale for IMF program involvement inthe Philippines appears to have been very broad. Thetraditional criterion of balance of payments needwas clearly evident from the onset of the debt crisisin 1983 until the restoration of market access in1993 and, once again, during the height of contagionfrom the Asian and Russian crises in 1997–98. Dur-ing the 1983–93 period, IMF gross financing typi-cally provided a relatively small proportion of pro-jected financing gaps, but IMF involvement wasnecessary to catalyze other flows, mainly throughreschedulings. Much of the IMF financing in factrepresented a rollover of payments falling due.27

48. However, the balance of payments need wasless evident from 1993, when market access was re-gained, until the Asian crisis. It is also doubtful forhow long there was balance of payments need after1998. Admittedly, an element of judgment was in-volved in such cases, since the justification for ac-cess to IMF resources can refer to a potential, as wellas an actual, balance of payments need. In both peri-ods, the Philippines probably could have raised fromprivate markets the amounts that were borrowedfrom the IMF, but it could be argued that, at bothtimes, this market access was not fully assured.However, two points are worth noting in this respect:first, both arrangements were extended at timeswhen there appeared to be even less balance of pay-ments need;28 second, there was very little discus-sion in internal documents of whether such a needexisted. In the Board discussion in March 1993 relat-ing to the augmentation of the then Stand-ByArrangement, some Executive Directors questionedthe balance of payments need for the augmentation,and a few noted that they would want to carefullyconsider the balance of payments need for any suc-cessor arrangement. At the Executive Board discus-sion on the 1994 EFF, a year later, one Directornoted that in spite of these reservations about a fu-ture program expressed earlier, there was no discus-sion of these issues in the Staff Report.

49. The broader rationale for continued programinvolvement at these times seems to have includedthree factors. First, a desire to send a positive signalto donors and creditors (discussed above). Second,the belief that it would foster “good” policies andbolster internal groups in favor of reform. A number

of staff interviewed argued that the IMF’s continuedpresence in a program context, even when there wasno pressing balance of payments need for IMF fi-nancing or a catalytic role, was still an importantpressure in favor of the “right” policies in key peri-ods. In their view, policy implementation and eco-nomic management would have been weaker with-out a program. A number of staff and formerofficials also noted that the existence of a programhad helped to increase the leverage of internalgroups that favored a strong macroeconomic policyframework and continued reforms.

50. Finally, one of the major motivations for the1998 SBA according to internal briefing papers andinterviews with staff and former Philippine offi-cials, was to sustain earlier gains and avoid “back-sliding” during a change of administration. In theevent, while the program helped macroeconomicpolicies remain prudent during the transition perioditself, this was not sustained and the approach ulti-mately proved unsuccessful. Although the incom-ing President signaled his agreement to the pro-gram, ownership eventually proved weak andimplementation suffered, especially after the firstyear. (The discussion of efforts to strengthen thetax system, in the section “Implications for Pro-gram Design and Implementation,” gives a specificexample of how a detailed set of measures negoti-ated with an outgoing team was not implementedbecause they were not effectively “owned” by theincoming team.)

Sponsorship by key shareholders

51. International political factors probably alsohave their place in explaining the IMF’s long pro-gram engagement in the Philippines, particularly inthe 1960s and 1970s. In the view of a number of offi-cials and staff, up until about 1983, the close rela-tionship of the United States—and some other share-holders—with the Marcos regime in the context ofthe cold war and regional tensions appears to havebeen reflected in the favorable attitude of IMF man-agement and the Executive Board to the authorities’requests for support. Subsequently, tensions in thepolitical relationship between key shareholders andthe then Philippines leadership may also have con-tributed to delays in agreeing on a program in 1983and an increase in the threshold of what would beviewed as an acceptable program. The interests ofkey shareholders in regional stability and their sup-port for the efforts of President Aquino to restore andmaintain more democratic institutions were proba-bly also a factor influencing decisions to continueprogram involvement at times when weak ownershipof some core economic reforms might otherwisehave argued for greater selectivity.

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27Between 1982 and 1993, there were small net repayments tothe IMF, which was in line with the guidelines that called for agradual reduction in exposure to prolonged users.

28As noted earlier, the first one-month extension of the 1994EFF took place in June 1997 before the floating of the Thai baht,and was related to the desire for a “graceful exit” after completionof the (postponed) tax reforms.


Borrower incentive because of low cost

52. Some external observers have argued thatcontinued use of IMF resources by countries thathave access to private financial markets is driven bythe borrowing countries’ incentives to reduce theirborrowing costs, by substituting lower-cost IMF fi-nancing.29 It is not possible to test this propositiondirectly, but the impact on the Philippines’ overallborrowing costs, if it had ceased to use IMF re-sources in 1994 and from 1999 onward, would havebeen small. During the 1994 EFF the Philippinesonly made the initial SDR 36 million drawing be-fore the Asian crisis, treating the program as pre-cautionary for the most part. The relative cost ofborrowing from the IMF and the markets mighthave been a more relevant consideration in1999–2000. During this period, the Philippinesborrowed SDR 491 million from the IMF. At thetime, issue spreads on the Philippines’ sovereigninternational bonds ranged from about 350 to 425basis points over U.S. treasuries of comparable ma-turity—implying an interest saving of about SDR20 million a year.

53. Officials and staff interviewed were all of theview that a more important factor driving the author-ities’ interest in continued programs, both during andafter the restoration of market access, was the beliefthat there was a catalytic role of an IMF-supportedprogram—that is, the signal it sent to other creditorsand donors.

Did the IMF’s approach in the Philippinesmatch its guidelines on prolonged use?

54. Whatever the reasons explaining prolongeduse, and there are many, it is relevant to ask whethersuch use in the Philippines was in accord with the un-derlying policy governing prolonged use as articu-lated in Board discussions. This policy consists of thefollowing elements (see Chapter 3 of Part I for a moredetailed discussion): (i) front-loading the adjustmenteffort, including greater emphasis on prior actions,and closely monitoring program implementation; (ii)seeking a net reduction in prolonged users’ outstand-ing liabilities to the IMF, including through arrange-ments with limited access but that would still serve acatalytic role, and back-loading disbursements; (iii)an analysis of the factors underlying a country’s pro-longed use and a candid ex post assessment of perfor-mance under previous programs at the time of newprogram requests; and (iv) an “exit” strategy includ-ing ex ante assessments of the time needed to com-plete the adjustment process and of the time frame to

disengage from IMF lending along with strengthenedsurveillance at the post-program stage.

55. In the Philippines’ case, some elements of thisstrategy were implemented and some were not.

(i) It is hard to argue that the adjustment effortwas “front-loaded” in practice and, as will beshown in the next section, prior actions wereused sparingly. For example, fiscal adjustmentand the program of tax reform in the 1994 EFFwere substantially back-loaded, although ex-pansion of the coverage of the VAT was madea prior action,30 with most of the planned fiscaladjustment to occur in 1995 and 1996, after theTask Force on Tax and Tariff Reform had for-mulated more detailed plans for tax reform.However, as the discussion below of the vari-ous efforts to strengthen the tax effort willshow, the precise structure of conditionality,including prior actions, does not seem to havebeen a critical factor.

(ii) Access under arrangements did in general seeka net reduction in the Philippines’ liabilities tothe IMF, while preserving a catalytic role, butdisbursements were not always back-loaded.31

(iii) There was not a systematic ex post assessmentof each program, although the staff did “stepback” on several occasions to conduct such as-sessments (e.g., in 1991, 1993, and 2000)—more so than in the other country cases exam-ined in the evaluation. However, internalassessments were much more candid thanthose in final Board papers.

(iv) While parts of an “exit” strategy were set out,and early Board papers were reasonably forth-coming about the time frame involved, the ra-tionale for the IMF’s continued program in-volvement once market access was restoredwas not fully presented in Board papers, nordoes it seem to have been subject to much in-ternal debate. In any event, the strategy wasovertaken by the Asian crisis. A comparisonwith Morocco, which exited from 10 years ofIMF-supported programs in 1993 after ex-tended adjustment and debt restructuring, is in-

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29See, for example, Meltzer and others (2000) and Vásquez(1999).

30It was not ultimately implemented until 1996 as a result of ajudicial challenge.

31For example, disbursements under the 1994 EFF were evenlyloaded. The guidelines appear to have been more closely followedin some respects in the case of the 1998 SBA. The arrangementwas back-loaded with 5 percent of quota available on approval,while the first four installments each for 14 percent of quota andthe remainder each for 25 percent of quota. This back-loadingwas not maintained when the program was rephased in its laterstages.


teresting. The key macroeconomic indicatorsfor the two countries, discussed in more detailin Part I, were quite similar by the early 1990s.While it would not be desirable to pre-establishsimplistic quantitative “exit” criteria for a pro-longed user, it is not obvious why such differ-ent approaches were taken in the two cases.

56. The latter two points raise a more generalquestion about whether the internal review processplayed its role sufficiently. While any summary of areview process spanning several decades is bound toinvolve some generalization—especially sinceguidelines on the review process changed overtime—an assessment of internal briefing papers,country strategy papers, and review departmentcomments on those papers suggests the followingpoints. First, the diagnosis of the main problems andthe content of the proposed policy framework wastypically the subject of a detailed internal assess-ment and often considerable debate. Second, severalof the ex post assessments mentioned above diddraw potential lessons for program design (e.g., the1991 assessment pointed to the need for greater pri-oritization and a more realistic time frame on struc-tural reforms), but these lessons were not alwaysfully absorbed or debated in the subsequent reviewprocess (see the next section for more discussion ofthe time frame of program design). Third, many ofthe often quite sharp differences of view about theoverall strategy that emerged during the reviewprocess were not reflected in subsequent Board pa-pers, which tended to focus on an explanation andjustification of the agreed consensus approach andthe program as negotiated.

57. The period leading up to the 1994 EFF pro-vides a good example of the process. From the early1990s, the IMF did have an exit strategy for thePhilippines, including an ex ante assessment of thetime it would take to complete the adjustmentprocess. From the time the 1989 EFF went off-track,the consistent game plan was that an SBA, primarilyfocused on stabilization, would be followed by anEFF, which would include the major structuralchanges that would permit the Philippines to “gradu-ate.” There was considerable internal debate, aheadof agreement on the EFF, as to how strong—particu-larly in terms of fiscal adjustment—any successorprogram would have to be to be to warrant IMF sup-port. However, there was not a full discussion oftime frame and ownership/implementation issues,even in the draft 1993 country strategy paper thataimed to draw lessons from earlier experience. Thearea department was of the view that one lesson wasthat an unrealistic time table and overcrowdedagenda had contributed to implementation difficul-ties, whereas review departments generally took the

view that strong up-front actions were needed inlight of the Philippines’ perceived poor record ofprogram implementation. Nor was there an explicitdiscussion of whether any follow-up program wasneeded at all.32 Although PDR implicitly questionedthe balance of payments need, by drawing attentionto the tenuous nature of the small financing gaps as-sumed, it apparently did not argue against anarrangement per se. In retrospect, the country strat-egy paper—which was never completed—was amissed opportunity for a broader debate on thelessons from past programs and the IMF’s role.33

58. As noted above, the critical nature of the Ex-ecutive Board discussion at the time of the fifth re-view of the EFF did trigger a more comprehensiveassessment of the IMF’s role and approach in thePhilippines, in the form of the internal (2000) coun-try strategy paper.

Implications for Program Design andImplementation

59. This section discusses issues relating to pro-gram design and program implementation, whicharise from our review of the Philippines’ experienceand which suggest lessons to help avoid some of theproblems associated with prolonged use.

Program design

60. A recognition of the longer time frame re-quired for adjustment could have led to a greaterprioritization of structural reforms.

61. As noted earlier, the IMF recognized at anearly stage that the Philippines would require a rela-tively long time to restore external sustainability, butprogram design remained focused on a relativelyshort time horizon. The short-term focus was partlya reflection of the institutional constraints requiringprograms to offer evidence of concrete progresswithin the time frame of the program itself. In theview of some IMF staff interviewed by the evalua-tion team, this excessively short-term focus causedprograms to address structural issues across too

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32This may in part reflect the commitment of management to afollow-up program communicated to the Philippines authoritiesas early as June 1992.

33Similarly, a number of internal comments prepared by re-viewing departments at the time of the various reviews of the EFFdid question some of the underlying rationale for the program. Inparticular, the weak correspondence between the Philippines’economic performance and its compliance with program condi-tionality was noted, since strong capital inflows had continueddespite repeated delays in completing reviews and the breachingof a number of performance criteria and structural benchmarks,suggesting that any “signaling” rationale was weak.


broad a front and to target timetables for variousstructural reforms that were often unrealistically am-bitious. Tax reform and tax administration, exam-ined in detail below, is one example where, in theview of many staff and officials, program designwould have benefited if a longer-term perspectivehad been adopted from an early stage.

62. Program design may also have paid insuffi-cient attention to political implementation capacity.The case of the 1989 EFF which went off-track isone example (Box 10.1). Several IMF staff notedthat the programs on which they worked wouldlikely have been more effective if the program hadbeen focused on a smaller number of core struc-tural reforms. For example, in the latter stages ofthe 1994 EFF, the IMF was simultaneously pushingfor reforms to the oil-pricing system and to tax pol-icy, each of which required congressional approval,as prior actions for the completion of program re-views. In the view of some staff, this may havebeen overambitious, exceeding the capacity of thepolitical system to digest several major reforms atthe same time.

Difficulties in strengthening key institutions were critical

63. The issue of tax administration has featured invirtually all IMF-supported programs for the Philip-pines, dating back to the 1970s.34 As discussedbelow, several different approaches were tried insuccessive programs, including efforts to promoteownership of these reforms through local workinggroups to develop detailed measures. With hindsight,while programs incorporated a wide range of mea-sures to improve tax administration and policy,based on extensive technical assistance, they failedto achieve the strengthening of institutions, particu-larly the Bureau of Internal Revenue, which was crit-ical to achieving program aims.

64. The effectiveness of the Bureau of Customswas greatly strengthened, at least temporarily, underthe Ramos administration, as a result of reforms—and strong leadership of the agency—initiated in1993.

65. Could the IMF have done more to strengthentax institutions? It did make repeated efforts totackle the issue—as the discussion below will illus-trate. It would likely have been more effective if theIMF had focused on a limited number of measuresthat were critical to achieving success, along with

greater on-the-ground follow-up to technical assis-tance missions to monitor and facilitate program im-plementation, and a greater willingness to halt pro-grams when implementation of these core measureswas inadequate. However, the experience may indi-cate the limitations of what conditionality from anoutside agency can reasonably be expected toachieve, unless there is strong commitment from thecountry in question.

Dealing with uncertainty in programs

66. Some staff interviewed also believed that pro-gram design would have benefited from more explicitattention to contingency planning. The Philippineeconomy has remained vulnerable to exogenousshocks. Moreover, the revenue impact of certain taxadministration measures was highly uncertain andthe program would have benefited if contingency ac-tions to be introduced in the event of revenue short-falls had been specified at the outset.

67. In practice, program reviews were generallyused to adjust programs in the light of unexpecteddevelopments, which was probably the correct ap-proach, but the adjustments often did not occur in asufficiently timely fashion. It would likely have beenmore effective if programs had paid more attentionto identifying up-front the major risks—includingimplementation risks—along with a more systematicstress-testing of how the program framework wouldbe affected by such risks and a discussion of howpolicies would respond.

68. However, better contingency planning doesnot require a detailed ex ante quantification in theletter of intent of responses to specific shocks. Forexample, the Philippine authorities did request ac-cess to contingent financing under the Compen-satory and Contingency Financing Facility (CCFF)in association with the 1989 EFF. The view of bothstaff and officials was that the CCFF experimenthad not been helpful. The effort consumed consid-erable time and administrative resources since theformulas determining eligibility were very complexand hard to check, and the mechanism proved ex-cessively rigid and overconstrained as it simultane-ously tried to satisfy a number of inconsistent con-siderations. As a result, the focus was more on rigidformulas rather than on the broader logic of policyadjustments.

Program implementation

Implementation of IMF-supported programs has been mixed

69. The effectiveness with which programs havebeen implemented has varied markedly, with phases

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34Tax administration was not featured prominently during the1994 EFF, which focused more on tax policy issues, but, accord-ing to staff, even then efforts continued on the ground to improvetax administration.


of strong implementation—for example 1987–88,and to some extent 1991–92—alternating with peri-ods when implementation has been much weaker.There have also been phases, such as during the1994 EFF, when economic performance was strongand significant progress was achieved on somestructural reforms, even though overall program im-plementation was inconsistent.

70. Over the period 1970–2000, 8 of the 16arrangements were fully disbursed, while 77 percentof commitments were disbursed on average, a rela-tively high proportion by comparison with othercountries (see Table 10.1).35 Four of the seven pro-grams since 1983 were not completed. Even thoseprograms that were completed suffered implementa-tion problems as program reviews were subject tofrequent long delays, sometimes of as much as tenmonths.36 This reflected in part the heavy reliance onreviews to provide structural conditionality. For thesame reason, the Philippines has not been a heavyuser of waivers.37

71. The implementation of the fiscal componentof programs has been patchy. For example, deficitswere narrowed substantially in the first half of the1990s—by more than the program targets—buthave subsequently widened again (Figure 10.4).Moreover, as noted earlier, revenues were generallyoverestimated except during the early 1990s. As aresult, fiscal deficit targets were often achieved atthe expense of shortfalls in planned public spend-ing, particularly on infrastructure investment.Given the typically limited scope of discretionaryexpenditure, such ad hoc adjustments distorted ex-penditure priorities and at times prevented plannedincreases in capital expenditure. For example,under the 1986–88 SBA, public investment re-mained at 3.5 percent of GNP throughout the pro-gram rather than rising to 5 percent of GNP as tar-geted. Public investment also remained well belowprogram projections under each of the threearrangements in the 1990s.

Impact of prolonged use on domestic policy formulation

72. The close and continuous relationship betweenthe Philippine authorities and the IMF also needs tobe evaluated in terms of its impact on institutional de-velopment. Current and former officials and staffnoted that IMF involvement had a strong influence inshaping the macroeconomic framework as well as thetechnical and data systems used by the Philippineauthorities, which were essentially a mirror image ofthe IMF’s financial programming framework. In theview of most officials interviewed, IMF training andtechnical assistance played a constructive role, mostnotably in enhancing the skills needed for the formu-lation of a comprehensive and consistent macroeco-nomic framework.

73. While it is impossible to judge how policy for-mulation processes would have developed in the ab-sence of almost continuous programs, formulatingpolicies around negotiations with the IMF for morethan 30 years must have had an impact. Both the1993 and 2000 country strategy papers noted thatthere was a strong risk that the Philippines had be-come overdependent on the IMF and that this was animportant reason why the prolonged program en-gagement should eventually be discontinued. The2000 CSP stated explicitly that “Institutional devel-opment has likely been hampered in some respectsby the dependence of the authorities on the IMF toarticulate a consistent policy package, monitor its implementation, and provide discipline in the short-term. This may not have left room for the develop-

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35Over the same period, the average disbursement ratio for allarrangements using general resources was 64 percent.

36For example, of the 22 program reviews scheduled under theseven arrangements since 1983: just 6 were completed on sched-ule, with a further 3 completed with a delay of three months orless. Nine were delayed for longer, including 2 reviews delayedfor ten months each. Four of the scheduled reviews were nevercompleted, as arrangements were cancelled.

37Over the 1987–99 period, the Philippines ranks fifty-fourthout of 105 countries that had programs in terms of waivers perprogram year with just eight waivers. None of these waivers re-lated to structural performance criteria and all but one of thesewaivers related to quantitative performance criteria. In addition,the Executive Board granted three waivers of applicability overthis program period, related to delays in completing reviews.

–10

–8

–6

–4

–2

0

2

1989 EFF

1984 SBA

1986 SBA

1991 SBA

1998 SBA

1994 EFF

Fiscal balance actual dataProgram projections

1983 85 87 89 91 93 95 97 99 2001

Figure 10.4. Philippines: Implementation of Fiscal Programs—Consolidated Public Sector Balance(In percent of GNP)



ment of the authorities’ own institutions or proce-dures to ensure internal accountability and disciplinein policy-making and implementation.” Nevertheless,the Philippines does have considerable strengths in some of its major policymaking institutions—including economic ministries, the Central Bank, andkey congressional committees. The fact that, underthe post-program monitoring (PPM) arrangement ineffect since 2000, the government has continued toset goals and establish targets on key macroeconomicand financial aggregates, to ensure a forward-lookingaspect to monitoring, without being required to do sounder the PPM, suggests that domestic economicmanagers have been able to adapt quickly and pru-dently to the absence of an IMF arrangement.

Prolonged use has probably eroded theeffectiveness of conditionality

74. The nature of conditionality in programs forthe Philippines has evolved markedly over time, as ithas for programs in general. Conditionality in pro-grams during the 1970s centered on quantitative per-formance criteria related to the financial program-ming framework and to quantitative limits oncontracting medium-term external debt. The breadthof conditionality increased markedly from 1983 on-ward as programs increasingly addressed structuralissues. Conditionality on these issues was exercisedmainly through prior actions and program reviews(often in combination). There was limited use ofstructural benchmarks and virtually no use of struc-tural performance criteria.38 In deciding whether tocomplete a review, the IMF typically exercised ahigh degree of flexibility in relation to original pro-gram targets, at times introducing new conditions tocomplete reviews in light of evolving circumstances.Reviews were often substantially delayed, but gener-ally the program remained in existence and reviewswere eventually completed.

75. This flexible approach was developed at leastpartly in response to the Philippines’ congressional-style political system, whereby the Executive haslimited control over the legislative agenda andtherefore often cannot credibly commit to a specifictimetable for measures that require legislation.39

Moreover, the IMF frequently had to decidewhether to compromise over shortcomings in mea-sures passed by Congress that deviated from thosethat were originally envisaged (see Box 10.4 for examples).

76. While the reliance on reviews seems to havebeen broadly appropriate under the circumstances,there was inevitably a trade-off between the flexibil-ity gained from exercising a high degree of discre-tion, and the consequences in terms of a lack of clar-ity for the authorities, markets, and the wider publicover the “bottom line” on conditionality. Each reviewbecame an occasion for “recontracting” the underly-ing commitments, which weakened their focus andcredibility. In retrospect, greater specificity on asmall number of critical outcomes for completion ofreviews may have been desirable. In the words of oneExecutive Director, “including the most importantpolicy commitments as formal conditions . . . reducesthe risk that, ex post, measures used to justify com-pleting reviews are the ones the authorities completedrather than the ones they needed to complete.” Oneexample is the Comprehensive Tax Reform Package(CTRP), the structural centerpiece of the 1994–98EFF, which is discussed in the next section.

77. Both IMF staff and former officials acknowl-edged that such factors contributed to a tendency forthe authorities to “overpromise” with regard to thetiming of structural measures, even when they knewthat these commitments were politically unrealistic,knowing that failure to meet their commitmentwould be unlikely to prompt program cancellation.40

Improving the tax structure and strengtheningtax administration: an example

78. As pointed out earlier, virtually all IMF-supported programs have aimed at raising the taxratio as a key to raising domestic saving. The rela-tively low tax ratios have in general not been the re-sult of low statutory tax rates, but rather of a narrowtax base and poor compliance in relation to that base.Over the past 30 years, several attempts have beenmade to increase the tax effort through broadeningthe tax base and improving tax administration. Sincethese efforts have taken place against a backgroundof moves to open up the economy, an increasing em-phasis has been placed on taxes on domestic eco-nomic activity as trade taxes have been reduced.

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40The following quote illustrates the problem: “Contrary tocommon belief, the IMF is not really that inflexible. . . . ThePhilippines has had 25 programs covering 35 years. The first les-son I learned is you do not have to do everything the IMF wantsyou to do. Secondly, even if you agree with the conditions andyou do not comply, you can always ask for a waiver” (SeniorPhilippine official, 1998).

38Programs varied greatly in the degree of detail with whichconditions on structural measures have been specified. For exam-ple, some programs incorporated highly detailed agendas for ac-tion against which progress on structural reforms could be moni-tored, while others were simply specified in terms of reviewinggeneral progress in a particular area of structural reform.

39In the mid-1990s, the Philippine government formed the Leg-islative-Executive Development Advisory Council (LEDAC) as avehicle to push through Congress certain bills identified as priori-ties by the Executive.


79. Successive tax reforms have achieved someimportant gains, including a simplification and im-provement of the tax structure by reducing distor-tions and increasing its progressivity, and have alsoreduced the dependency of revenue on trade taxes.The tax revenue/GNP ratio was also improvedmarkedly between 1989 and 1997. However, contin-ued weak tax administration and large exemptionsand incentives mean that revenues remain low by in-ternational standards and inelastic with respect toeconomic activity (Table 10.4). Moreover, as notedearlier, revenue projections in many programsproved too optimistic and the considerable gainsachieved in the first half of the 1990s were erodedafter 1998. As will be discussed below, some ofthese later slippages were related to weaknesses intax administration and governance and some toshortfalls in the tax reform program.

80. The Philippines has received extensive tech-nical assistance (TA) in this area, with nine TA mis-sions on tax between 1984 and 2001. Moreover, ef-forts were made to develop reform strategies suitedto the Philippine environment. A number of times,41

working groups were established within the govern-ment to develop detailed proposals for tax reformwith the help of IMF technical assistance, in thehope of developing proposals adapted to local cir-cumstances and with ownership by the authorities.However, as pointed out earlier, the results havebeen disappointing.

81. Could the IMF have done more to improve theperformance on the tax front? The Philippine experi-ence on this issue suggests that it is not possible tocorrect for weaknesses in the domestic politicalcommitment through variations in the form of condi-tionality. However, in retrospect one can identifyseveral issues.

82. One set of problems arose from the authori-ties’ strong reluctance to accept any form of directconditionality specifying tax collection as a concretequantitative performance criterion. Staff proposed toestablish a formal performance criterion on tax rev-enues of the National Government under the 1989EFF, but this was strongly resisted.42

83. As a result, when tax revenue did not materi-alize as expected, either because the required taxstructure or tax administration measures were notimplemented or because other macroeconomic as-sumptions turned out to be inaccurate, there was atendency to squeeze expenditure in an effort to meetfiscal targets. Under some programs, stop-gap mea-sures to raise revenue with undesirable efficiencyand equity implications—such as the special importlevy in 1991—were imposed pending action onmore desirable structural reforms.

84. The implementation of conditionality throughprogram reviews was also not fully satisfactory. Forexample, some of the original targets for structural taxreforms under the CTRP during the 1994 EFF wereachieved, but many were not and the IMF progres-sively agreed to a number of modifications as the au-thorities encountered difficulty in getting the programthrough Congress. For example, there was littleprogress in reducing fiscal incentives for investment,which was an important element of the EFF. The ex-cise bill signed in November 1996 was expected to ac-count for most of the revenue gains of the CTRP, butin its ultimate form it was seriously flawed because inshifting from an ad valorem to a specific basis, inorder to make collection more effective, the provisionfor full indexation was eliminated. This was one of thereasons for the subsequent sharp fall in collection rela-tive to GNP in later years as Congress proved reluctantto increase excise tax rates in line with inflation. Simi-larly, a minimum business tax based on gross assetsfor all companies above a certain asset size (whichcould be credited against corporate income tax due)was originally a central component of the CTRP. Theversion that was ultimately passed did include an al-ternate minimum corporate income tax, but it wasbased on sales rather than assets. Implementation ofthis tax has reportedly been very weak, partly becauseof this change in its structure.

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Table 10.4.Tax Efficiency in Selected AsianEconomies

Statutory VAT effort1 EfficiencyVAT rate (1994) ratio1

Indonesia 10 4.8 0.48Thailand 7 3.18 0.45Korea 10 4.27 0.43Philippines 10 3.33 0.33

Sources: IMF Fiscal Affairs Department and IEO calculations.1The efficiency ratio is equal to the VAT effort (i.e., VAT revenue as a per-

centage of GDP) divided by the statutory rate of VAT.

41This approach was followed in 1986/87, 1994/95, and 1999.

42In the 1991 program, an unusual type of “implicit” structuralbenchmark was used. In order to meet pressing short-term fiscalneeds a temporary (9 percent) import levy was introduced andthis was to be phased out as Congress passed other tax measuressubmitted by the government. Completion of the reviews wasmade dependent on progress in phasing out the import levy andhence, implicitly, on progress in Congress in passing the alterna-tive tax measures. However, the levy was in fact eliminated aheadof schedule in 1991, despite considerable slippage in the authori-ties’ revenue efforts as some of the tax administration measureswere delayed.


85. Weak ownership presented special challengesfor the design of conditionality during a transition inadministration. The 1998 SBA included a renewedemphasis on tax administration, as a “structural pillar”of the program.43 The Memorandum of EconomicPolicies, based on the advice of an IMF technical as-sistance team, contained a matrix of extremely de-tailed commitments to reorganize the Bureau of Inter-nal Revenue (BIR) and improve its operations,focusing on increasing control over large taxpayers,strengthening audit arrangements, and completion ofa computerization project. However, according to in-terviews with IMF staff, the package was agreed pri-marily with officials of the outgoing Ramos adminis-tration. With the change in administration, and theappointment of a new Commissioner for the BIR, theincoming officials did not necessarily accept what hadbeen agreed earlier and were not necessarily commit-ted to implementing the measures.

86. The detailed “matrix approach” was also notvery effective because it was relatively easy to findsuperficial ways to meet the commitments and be-cause judgments on effective progress could not relyon a checklist of items achieved. For example, thestaff report for the Third Review of the SBA judgedthat “good progress” had been made with tax admin-istration in 1998, whereas a subsequent missionnoted that “The implementation of reform measureshad slowed down in the second half of 1998, afterthe new administration took office” and that, whileprogress had been made in some areas, “it had be-come increasingly clear that the new administrationhas not bought into key reform elements such as thecontrol of large taxpayers and the need to strengthenBIR’s audit and enforcement programs.”44

87. Another approach that was tried subsequentlyto develop a more “owned” program involved athree-day workshop with IMF staff, key officials inthe Philippines, and representatives from other agen-cies, including the World Bank and USAID, on waysof improving tax administration in the Philippines.While this is a potentially promising approach, theaction plan developed in the workshop was not ef-

fectively implemented because commitment fromtop political leadership was lacking.

88. A more difficult question to address is whetherIMF-supported programs could have done more toaddress the pervasive corruption that is widely seento lie at the root of problems with tax administrationin the Philippines. A World Bank study published in200045 identified the BIR as one of the agencies thatshould be targeted as a priority for anticorruption ef-forts. IMF-supported programs were not able tocome to grips with the impact of corruption on taxadministration although programs have from time totime touched on issues of corruption, includingthrough pressing for tax structures that limit corrup-tion by reducing tax collectors’ scope for discretion.More direct targeting of conditionality on governanceconcerns in the field of tax administration—perhapsaccompanied by more specific conditionality on thecollection of tax revenue, based on more realistic andconservative projections of the impact of policychanges and administrative measures—might haveyielded better results. However, it should be recog-nized that the IMF’s decision to be more directly in-volved in governance issues is relatively recent.There are also difficult questions about how muchany outside agency such as the IMF can realisticallybe expected to achieve in such areas.

Continuous Programs Have Limitedthe Independent Role of Surveillance

89. An important issue is whether surveillancefunctions are crowded out during periods of pro-longed program involvement. In order to examinethis issue systematically, the quality of surveillancein the Philippines was assessed in relation to nine“key elements” of surveillance, derived from theIMF’s most recent surveillance guidelines.46 Sincethe guidelines evolved over time, such a comparisondoes involve, to some extent, judging previous sur-

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43The tax administration weaknesses were due to major prob-lems with compliance and widespread corruption; weak controlover granting refunds and tax credit certificates, which weremajor loopholes in VAT collection; a failure to implement fullythe large taxpayer scheme launched in the early 1990s; and lackof an effective tax information system.

44Both missions included FAD tax experts and overlapped withFAD technical assistance missions on tax administration, al-though a lack of continuity contributed to the differences in judg-ments. One of the major area of differences between the authori-ties and the staff (which was complicated by the change inadministration) proved to be on the scope and functions of thelarge taxpayer unit. In the event, many of the institutional changestook much longer to implement than originally envisaged.

45World Bank (2000).46These elements and their derivation are discussed in Chapter

6 of Part I. The quality of surveillance was assessed by systemati-cally rating the performance of each surveillance report for ninefunctions viewed by the IEO as “key elements” of surveillance ina program context. These nine functions draw on the “minimumrequirements” of Article IV reports as listed in internal guidancenotes. They are (i) provision of realistic medium-term and alter-native scenarios; (ii) provision of meaningful sensitivity analyses;(iii) discussion of risks to the assumptions and projections; (iv)discussion of the risks and impact of policy slippages and of vul-nerabilities; (v) balanced reporting of the authorities’ views, in-cluding any significant differences with staff; (vi) cogent presen-tation of proposed policy course; (vii) discussion of policyalternatives and trade-offs; (viii) critical and frank review of pre-vious UFR performance; and (ix) presentation of collaboration/interaction with the World Bank.


veillance exercises by current standards. However,the functions highlighted have been part of surveil-lance requirements, or related guidelines, since atleast the early 1990s. One area that has receivedmuch stronger emphasis since the 1995 Mexican and1997/98 Asian crisis is the analysis of potential risksand vulnerabilities. In what follows, we note thoseareas where more recent surveillance reports haveaddressed these issues in greater depth.

90. Since 1986, nearly all the staff reports onPhilippines’ Article IV consultations have been com-bined with papers relating to the use of Fund re-sources. Given the predominance of combined papers,and the almost continuous nature of IMF-supportedprograms, it is difficult to generalize from the Philip-pines’ experience about the relative adequacy of sur-veillance in program periods and outside them, andthe relative merits of joint and stand-alone consulta-tions. In general, the content and assessment of pro-grams seem to have dominated joint reports. Surveil-lance reports that were combined with requests fornew programs have tended to be relatively stronger inreviewing performance under previous programs,compared with those prepared along with program reviews.

91. All the Article IV staff reports included sub-stantive medium-term scenarios for the economy.However, the related sensitivity analysis and discus-sion of risks to the projections were often limited topresenting the impact that relatively small changesin export growth, global interest rates, or the oilprice would have on the projections, rather than onpresenting alternative scenarios that focused atten-tion on the major vulnerabilities. Even in one case(1996) where the text of the paper did a good job ofidentifying these vulnerabilities, the formal sensitiv-ity analysis only examined the impact of a margin-ally slower growth in remittances. More recent re-ports have improved in this respect. For example, thestand-alone staff report for the 2000 Article IV con-sultation examined the impact of policy slippage ex-plicitly in an alternative medium-term scenario.

92. In general, however, there was little candiddiscussion of implementation capacity of the author-ities in any of the surveillance reports, although fromtime to time, uncertainties over a program’sprospects for success have been noted. Staff paperstypically emphasized in general terms the impor-tance of implementation of the agreed program forthe medium-term health of the economy. By con-trast, a number of internal documents did contain asubstantive discussion of implementation issues.

93. For the most part, presentation of collabora-tion with the World Bank was confined to the stan-dard proforma appendix setting out World Bank ac-tivities. However, the most recent papers have givengreater consideration to the role of the World Bank

and coordination with its activities—especially inthe financial sector.

94. With a few notable exceptions, most of thestaff reports on Article IV consultations do not givemuch sense of the long history of IMF involvementwith the Philippines, and any lessons that this expe-rience may have had for the assessment of the cur-rent situation. Many of the staff interviewed by theevaluation team believe that explicitly standing backand reviewing the history of the relationship, as wasdone for example in preparing internal country strat-egy papers (CSPs) in 1993 and in 2000, had beenvery useful. However, even these exercises had theirlimitations. As noted earlier, the preparation of adraft country strategy paper in 1993, which wasnever completed, prompted a lively internal debateabout the lessons from previous programs for the de-sign of the new program. However, little of the can-did flavor of this internal stocktaking showed up inthe subsequent 1994 Article IV consultation report.Even the 2000 Article IV report, which had consid-erable strengths (see below), does not reflect muchof the candid flavor of the 2000 CSP.

95. Discussion of policy alternatives and trade-offs was typically limited, although such issues havemore recently been covered in greater detail particu-larly when there were clear divergences between thestaff’s view and that of the authorities.

96. There is some sign that recent Article IV re-ports, even when combined with UFR issues, havebecome somewhat more effective at “standingback” from immediate program issues to assess thetotality of the relationship and the vulnerabilities in-herent in the existing situation. Some reports havealso become a little franker in airing areas of dis-agreement between the staff and authorities. To givea few examples:

• The 1991 Article IV Report/ Request for Stand-By included a critical review, unusually candidfor the time, of performance under the preced-ing EFF. It drew upon an even franker internalassessment. However, not all of the lessons—in-cluding the dangers of overloading the structuralreform agenda—were fully taken into accountin subsequent program design.

• The Staff Report for the 1996 Article IV consul-tation identified a number of key vulnerabilitiesfacing the economy and was used to put a num-ber of issues, which were not central to the orig-inal program, onto the policy agenda. In particu-lar, the report noted, inter alia, the risks of the defacto exchange rate peg that the authorities hadmaintained since late 1995 in encouraging largeshort-term capital inflows; the dangers of therapid rise in private credit in 1995–96 and itsconcentration in real estate and consumer lend-

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ing; and the risks in the way in which the largecredit expansion was being financed, through abuildup in banks’ net foreign currency liabilitiesand foreign currency deposits, offset imper-fectly by domestic foreign currency lending.The report highlighted the potential market risksof this financing structure. Circumstances at thetime, particularly the program’s then precau-tionary nature, likely made it easier for surveil-lance to provide added perspective.

Conclusions

97. Before discussing potential lessons for theIMF from its prolonged involvement in the Philip-pines, the first question to ask is: Was this involve-ment a failure? In the sense that having lendingarrangements in place for 25 years in a 30-year pe-riod is clearly not what the IMF is trying toachieve, the answer must be, at one level, yes. Butthis is not to deny that a number of IMF-supportedprograms achieved important successes: between1984 and the second half of the 1990s a substantialtransformation of the Philippine economy tookplace, and the programs assisted that transforma-tion. So a more nuanced response to the questionwould contain the following elements: (i) the IMF-supported programs with the Marcos administra-tion prior to the debt crisis clearly failed to achievetheir objectives and a much more selective IMF in-volvement, conditional upon better policies, wouldhave been desirable; (ii) the long IMF involvementfrom the 1983 debt crisis until the restoration ofmarket access in the early 1990s could probablyhave been shortened with a program approach thatinsisted upon stronger implementation of a smallerset of core measures. However, considerableprogress was eventually achieved—some of itmasked by a tendency of programs to overpromise.Global systemic factors—especially the evolvingapproach to debt workouts—also extended theIMF’s program involvement in this period; in thisrespect, the Philippines’ experience was not un-usual; and (iii) even after allowing for the unluckytiming of the Asian crisis, which prolonged thePhilippines’ use of IMF resources even further, theIMF maintained its program involvement for toolong in the 1990s. In particular, the IMF shouldprobably have disengaged earlier during theEstrada period, by not completing reviews, once itbecame clear that there was insufficient supportfrom political leadership for core elements of theprogram, including stopping corruption.

98. With this background, the main messagesarising from the Philippines’ experience with pro-longed use are as follows:

(i) The rationale for continued lending arrange-ments needs to be spelled out clearly in each caseand pressures to expand this rationale resisted.

99. In the Philippines, the rationale for continuedarrangements—well after market access had beenrestored, and any actual or potential balance of pay-ments need was questionable—was too broad. Theunderlying motivation to support reforms and re-formers or to provide a framework to guide an in-coming administration was understandable. But ifapplied IMF-wide, such an approach would lead tomany more prolonged users. While it is probably notpossible or desirable to specify ex ante precise quan-titative exit criteria, a more rigorous discussion andjustification of the reasons for continued lendingarrangements is needed than occurred in this case.

(ii) The choice of the appropriate boundaries be-tween programs and surveillance will be one of thecritical determinants of the extent of prolonged use.

100. The decisions to continue with programs inthe Philippines in 1994 and again in 1998–2000 ineffect reflected judgments that surveillance alonewould not be adequate to the tasks of encouragingmacroeconomic discipline, promoting structural re-form, and providing some “seal of approval” for in-vestors and lenders. In preparing “exit strategies” forprolonged users, the IMF should consider makinggreater use of alternative mechanisms, which do notinvolve IMF financing, to ease the transition fromprogram arrangements. Greater transparency in re-cent years has increased the potential for surveil-lance to signal the IMF’s views on the adequacy ofthe macroeconomic framework to the private sectoras well as to official creditors and donors.

(iii) IMF-supported programs since the 1983 debtcrisis did encourage macroeconomic discipline andstructural reform, but problems associated with thetime frame of programs and implementation failuresduring periods of weak ownership prolonged thelength of the adjustment.

101. Institutional constraints on implementation,particularly the Philippines’ congressional-style po-litical system, posed special challenges for programdesign and required structural conditionality to beexercised flexibly. Moreover, programs tended to“overpromise” on both the number and timing ofstructural reforms—reflecting systemic pressures toshow substantial progress within the relatively shorttime period of the program. Combined with the tacitunderstanding that the program relationship in thePhilippines was likely to continue for a prolongedperiod, and that continual recontracting of condi-tions was possible, this overpromising led to a weak-

167


ening of the credibility of conditionality. Duringthose periods when it had become evident that therewas no political commitment at the highest level tothe reforms and that governance problems werethemselves a major threat to macroeconomic stabil-ity, the IMF should have been more selective inagreeing to, or extending, programs. However, dur-ing other periods when the issue was more one of theauthorities’ political ability to push through a wide-ranging reform program, the IMF was faced withmore difficult and finely balanced judgments. In ret-rospect, programs would likely have been more ef-fective if they had focused on a narrower set of criti-cal reforms; for some elements of reform, notablythose involving deeper institutional changes such astax administration, it would have been preferable if alonger time frame had been adopted from the start,combined with an increased emphasis on strengthen-ing implementation capacity and more direct atten-tion to addressing governance concerns. Neverthe-less, it should be recognized that the IMF’s role inthe latter area has been clarified only relatively re-cently and there are clearly limits to what outsideagencies can be expected to achieve.

(iv) The IMF’s role as a gatekeeper for manyother sources of financing, through the “seal of ap-proval” element in programs, can be a two-edgedsword.

102. It can potentially increase the IMF’s leverageon policies, but in practice, it also appears to have in-fluenced the IMF’s reluctance to disengage, since todo so would have had severe consequences in terms

of financing from other creditors and donors. As aresult, the IMF was unable to be as selective aswould have been desirable in focusing its efforts onperiods of crisis management or when political cir-cumstances were ripe to advance reform.

(v) The Executive Board’s guidelines for dealingwith prolonged use were only partly followed.

103. Although there was no general commonagreed definition of prolonged use, the Philippineshas been unambiguously identified as a prolongeduser since the early 1980s. In spite of this, the pol-icy governing prolonged use as articulated in Boarddiscussions was not fully implemented. In particu-lar, there was too little systematic candid assess-ment of program experience in papers for the Exec-utive Board. Opportunities to reconsider the overallstrategy and learn from experience were too lim-ited. The staff did step back a few times to reviewstrategy, informed, inter alia, by fairly candid expost assessments of programs. This stepping backwent further than in the other countries subject tocase studies, but the most candid elements of theassessments and of the internal review process gen-erally were often not communicated to the Board.Consequently, they were not used by the institutionas a whole to critically reconsider the IMF’s overallstrategy in the Philippines. A more regular and sys-tematic approach to appraising the overall strategy,on the basis of frank assessments of previous pro-grams, and in a manner that involved the countryauthorities and the Executive Board would havebeen desirable.

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APPENDIX I

Philippines: List of People Interviewed in Connection with the Evaluation of Prolonged Use of IMF Resources

Government Officials

Mr. Jose Isidro N. Camacho, Secretary of FinanceMr. Rafael B. Buenaventura, Governor, BSPMr. Amando M. Tetangco, Jr., Deputy Governor,

BSPMr. Nestor A. Espenilla, Jr., Managing Director,

BSPMr. Gil S. Beltran, Assistant Secretary, Department

of FinanceMs. Emilia Boncodin, Secretary, Department of

Budget and ManagementMs. Laura Pascua, Under Secretary, Department of

Budget and ManagementMrs. Maribel D. Ortiz, Director, Economic Re-

search Department, Social Security System


Mr. Fidel V. Ramos, former President of the Philippines

Mr. Cesar E.A. Virata, former Prime Minister andSecretary of Finance

Mr. Gabriel Singson (former Governor, BSP),Chairman/President, JG Summit Capital Markets Corporation

Dr. Jesus P. Estanislao (former Secretary of Finance), President & CEO, The Institute ofCorporate Directors

Mr. Victor Macalincag, former Under Secretary ofFinance

Dr. Felipe Medalla, former Director-General ofNEDA


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Mr. Roberto De Ocampo (former Secretary of Finance), President, Asian Institute of Management

Mr. Jose L. Cuisia, Jr. (former Governor, CentralBank of the Philippines), President & CEO,PHIL-AM

Mr. Romeo L. Bernardo (former Under Secretary ofFinance), Managing Director, Lazard BernardoTiu & Associates, Inc.

Ms. Wilmida Guevara (former Under Secretary ofFinance), Ford Foundation

Academics

Mr. Mario B. Lamberte, President, Philippine Institute for Development Studies

Mr. Ponciano Intal, Professor, de la Salle UniversityMr. Ruperto Alonzo, Professor, University of the

Philippines School of Economics

Banking Sector

Dr. Placido L. Mapa, Jr., President, MetropolitanBank & Trust Company

Dr. Vaughn F. Montes, Senior Vice President,CitiBank, N.A.

Mr. Don Hanna, Salomon Smith BarneyMr. Tim Condon, Chief Economist, Asia, ING

Business Community

Mr. Raul Concepcion, Chairman, Federation ofPhilippines Industries

Nongovernmental Organizations

Mr. Carlito T. Anonuevo, Action for Economic Reforms

Ms. Jessica Reyes Cantos, Action for Economic Reforms

Ms. Maria Teresa D. Pascual, Freedom From DebtCoalition

Mr. Jose Luis Gascon, National Institute For PolicyStudies

Mr. Ed Tongson, World Wildlife FoundationMr. Carlos H. Aquino Jr., Philippines Peasant

Institute

Representatives of Donors

Mr. Khaja H. Moinuddin, Director General, South-east Asia Department, AsDB

Mr. Ricarda Rieger, Deputy Resident Representa-tive, UNDP

Ms. Jennifer Navarro, UNDP

The mission also met with a large number of cur-rent and former IMF and World Bank staff involvedwith these institutions’ work on the Philippines.

Introduction

1. Growing external imbalances and diminishedprospects for continuing private external financingled Senegal to seek its first IMF arrangement in1979. Since then, the country has had an almost con-tinuous succession of IMF arrangements, exceptduring 1992–93 (Table 11.1). A short-lived arrange-ment under the Extended Fund Facility (EFF) wasfollowed by four Stand-By Arrangements (SBAs)during 1981–85. Since 1986, the bulk of IMF lend-ing to Senegal has been through concessional facili-ties—a Structural Adjustment Facility (SAF)arrangement and three Enhanced Structural Adjust-ment Facility (ESAF) arrangements—with resort toregular facilities/resources limited to supplementingaccess levels (1986, 1987) or in a transition to a mul-tiyear concessional facility arrangement (1994). Fol-lowing the transformation of the ESAF into thePoverty Reduction and Growth Facility (PRGF),Senegal’s third ESAF arrangement was converted toa PRGF arrangement in 2000; it expired in April2002.1

2. Senegal has had outstanding IMF credits andloans continuously since 1975.2 They increasedfrom SDR 110 million (174 percent of quota) atend-1980, to SDR 221 million (260 percent ofquota) at end-1990, and then fell to SDR 205 mil-lion (127 percent of quota) at end-2001, partly re-flecting Senegal’s net repayments to the IMF in re-cent years (Figures 11.1 and 11.2).

3. What factors contributed to this prolonged use ofIMF resources, and what have been the effects? Inparticular, to what extent were the objectives of theprograms supported by these arrangements achieved?To the extent that key objectives have not beenachieved (or achievements have not been sustained),do the failures represent weaknesses in policy imple-

mentation or in the design of programs? What can belearned about improving the effectiveness of IMF-supported programs and avoiding permanent relianceon IMF financing? These are the main questions ad-dressed in this evaluation.

4. The evaluation is based largely on an exten-sive review of (published and unpublished) IMFdocuments and interviews conducted in Dakar(during an IEO mission in March 2002) and inWashington with (i) current and former senior offi-cials of the Senegalese government and of theBanque Centrale des Etats de l’Afrique de l’Ouest(BCEAO); (ii) a broad range of other Senegalesestakeholders, including leaders of political partiesand representatives of trade unions, NGOs, andjournalists; (iii) representatives of the donor com-munity based in Senegal; (iv) the IMF ExecutiveDirector for Senegal; (v) current and former IMFstaff; and (vi) World Bank staff.

5. Senegal’s membership of the CFA franc zonelimits the authorities’ scope for independent ex-change rate and monetary policy actions.3 Arrange-ments for pooling international reserves, limits oncentral bank financing of government operations,and support of the French Treasury have succeededin maintaining the convertibility of the CFA franc.Monetary policy is set at the regional level by thecentral bank, BCEAO. Since 1993/94, the principalinstruments of monetary policy have moved awayfrom administratively set interest rates and country-specific credit ceilings to indirect instruments; thischange further narrowed the scope for country-spe-cific monetary policy. Thus, fiscal policy and struc-tural reforms are the principal means available to theauthorities for effecting macroeconomic adjustment.Not surprisingly, these two policy areas featureprominently in this evaluation.

Senegal

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CHAPTER

11

1The authorities are expected to request a new PRGF arrange-ment as part of the process toward reaching completion pointunder the enhanced HIPC Initiative.

2Including loans from special facilities—Oil Facility and theCompensatory Financing Facility—which did not require a for-mal arrangement to be in place.

3Senegal is a member of the eight-country West African Eco-nomic and Monetary Union (WAEMU), which together with thesix-member Central African Economic and Monetary Union andthe Comoros form the CFA franc zone. Each of the three parts ofthe zone has its own central bank. The other members ofWAEMU are Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger,Togo, and Guinea-Bissau (which joined in 1997).


Overview of Policies and Performance

Background: the 1970s and early 1980s

6. Senegal’s external current account deficit al-most doubled in the 1970s from an average of about4!/2 percent of GDP in the first half of the decade toover 8!/2 percent in the second half, and the risingdeficit was financed by public sector foreign borrow-ing. Total external debt rose from about $130 millionin 1971 to almost $1 billion in 1979 (going from 19percent to 35 percent of GDP). Real GDP growth av-eraged 2 percent a year but with wide fluctuationsthat partly reflected the impact of exogenous shocks,especially weather conditions and fluctuations in theinternational terms of trade. Favorable developmentsin the world prices of two of Senegal’s main exports(groundnut oil and phosphates) helped temper theeffect of rising international oil prices on the termsof trade; on average, the terms of trade improved byabout 15 percent in the second half of the 1970s,compared with the first half. Inflation followed anupward trend in the first half of the decade, peakingat over 30 percent in 1975, and then subsided to anaverage of less than 7 percent during 1976–80.

7. Senegal faced a severe financial crisis in thelate 1970s and early 1980s, when deteriorating termsof trade and the government’s pricing policies pro-

duced a large external current account deficit (aver-aging 13 percent per annum during 1979–83) and anexpansion in the public sector deficit.4 The staff esti-mated that at the end of the 1980/81 fiscal year,internal arrears accumulated by the central govern-ment and public enterprises exceeded total govern-ment revenue during the year.

Objectives and policies of the IMF-supported programs

8. The principal medium-term objective of Sene-gal’s IMF-supported programs during 1979–85 wasto reduce internal and external financial imbalancesto sustainable levels. With respect to external imbal-ances, the objective was to reduce the current ac-count deficit to a level that could be financed with-out recourse to debt rescheduling or accumulation ofarrears. The objective was to be achieved mainlythrough policies that restrained aggregate demand.The structural weaknesses that underlay Senegal’smacroeconomic imbalances—for example, a largeinefficient public sector, extensive subsidies through

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Table 11.1. Senegal: IMF Arrangements

Amount Average annual AmountDate of Amount agreed access level drawn

Date of Original expiration or agreed (In percent (In percent (In percent ofArrangement1 arrangement expiration date cancellation (SDR million) of quota)2 of quota) agreed amount)

SBA I Mar. 1979 Mar. 1980 Mar. 1980 10.5 25.0 25.0 100.0EFF3 Aug. 1980 Aug. 1983 Sept. 1981 184.8 440.0 146.7 22.2SBA II Sept. 1981 Sept. 1982 Sept. 1982 63.0 100.0 100.0 100.0SBA III Nov. 1982 Nov. 1983 Sept. 1983 47.3 75.0 75.0 12.5SBA IV Sept. 1983 Sept. 1984 Sept. 1984 63.0 100.0 100.0 100.0SBA V Jan. 1985 Jul. 1986 Jul. 1986 76.6 90.0 60.0 100.0SBA VI Nov. 1986 Nov. 1987 Sept. 1987 34.0 40.0 40.0 100.0SAF4 Nov. 1986 Nov. 1989 Nov. 1988 54.0 63.5 21.2 78.7SBA VII5 Oct. 1987 Oct. 1988 Oct. 1988 21.3 25.0 25.0 79.8ESAF I6 Nov. 1988 Nov. 1991 Jun. 1992 144.7 170.0 56.7 100.0SBA VIII Mar. 1994 Mar. 1995 Aug. 1994 47.6 40.0 40.0 65.0ESAF II7 Aug. 1994 Aug. 1997 Jan. 1998 130.8 110.0 36.7 100.0ESAF/PRGF III8 Apr. 1998 Apr. 2001 Apr. 2002 107.0 90.0 30.0 90.2

Source: IMF Treasurer’s Department.1Roman numerals are used to indicate the sequence of arrangements, by type.2The size of Senegal’s quota at the IMF increased from SDR 42 million to SDR 63 million in December 1980, to SDR 85.1 million in December 1983, to

SDR 118.9 million in December 1992, and to SDR 161.8 million in February 1999.3Approved as a three-year arrangement. The first review, envisaged for completion by December 1980, was not completed.4The approved amount was increased from SDR 40 million in July 1987. The second annual arrangement was approved on October 26, 1987.5Combined with second annual SAF arrangement6The second and third annual arrangements were approved in December 1989 and June 1991, respectively.7The second and third annual arrangements were approved in December 1995 and January 1997, respectively.8The second and third annual arrangements were approved in July 1999 and February 2001, respectively.

4The pricing policies that led to problems were (i) not passingon to consumers increases in import costs of several consumergoods and (ii) setting the producer price of groundnuts aboveworld market prices.


controls on producer and consumer prices—wererecognized at an early stage, and the early programsincluded measures to deal with them.5 In particular,they included measures to contain financial losses

associated with government intervention in sectorssuch as agriculture and energy, policies to limitgrowth in public service employment, and attemptsto strengthen tax administration. The operations ofagencies performing quasi-fiscal functions (e.g., theCaisse de Péréquation et de Stabilisation des Prix(CPSP)) received particular attention.6

9. Structural reforms and social policy issues re-ceived greater prominence under the arrangementssupported by the concessional facilities, beginningwith the 1986 SAF. The advent of the Policy Frame-work Paper (PFP)—associated with SAFs andESAFs—provided a vehicle for incorporating theauthorities’ sectoral and social programs into IMF-supported programs. The PFP for the first ESAFarrangement (1988) indicated a “two-prongedmedium-term strategy entailing (i) a reduction in theobstacles to private sector initiative and growth; and(ii) the achievement of greater efficiency in publicresource management, including a strengthening ingovernment finances.” Policies to be implementedincluded: a public investment program to support di-rectly productive sectors, abolition of virtually allprice controls, reduction in labor market rigidities,strengthening of the government budget throughshifting to a more stable revenue base (including re-form of taxation and pricing policies for petroleumproducts), and reinforcing efforts to improve the de-livery of basic services (e.g., education and healthcare) to the population.

10. With the transformation of the ESAF into thePRGF, programs continued to emphasize structuralreforms to remove impediments to growth, but alsomade poverty reduction a more central goal. Further-more, they have paid greater attention to the alloca-tion of resources to priority social sectors and torural infrastructure. In May 2002, Senegal submittedto the IMF and the World Bank, a PRSP that wasproduced from an extensive consultation process in-volving a wide range of domestic stakeholders andinternational development partners.7

11. The World Bank supported Senegal’s adjust-ment efforts in the 1980s and 1990s with, amongother operations, four Structural Adjustment Loans(SALs) and several sectoral adjustment credits (in-cluding in the financial, agriculture, and energy sec-tors). The first SAL, which was approved in 1980,was closely aligned with the 1980 EFF.8 The second

172

0

50

100

150

200

250

300

0

50

100

150

200

250

300

350

1975 78 81 84 87 90 93 96 99

In percent of quota(right scale)

In millions of SDRs(left scale)

Figure 11.1. Senegal: Outstanding Obligations to the IMF

Source: IMF Treasurer's Department.

–80

–60

–40

–20

0

20

40

60

80

1975 78 81 84 87 90 93 96 99

Purchases anddisbursements

Repurchases andrepayments

Net flow

Figure 11.2. Senegal: Net Borrowing from the IMF(In millions of SDRs)

Sources: IMF Treasurer's Department and IEO calculations.

5The 1980 EFF was an attempt at a comprehensive approach totackling Senegal’s financial imbalances using the IMF’s only avail-able “structural” facility at the time; the authorities had expressed astrong preference for an EFF over an SBA. In the event, the EFFwas short-lived and was replaced by a succession of SBAs.

6The CPSP was responsible for administering producer pricesfor agricultural products, notably groundnuts and cotton. Its fi-nancial position went from substantial surpluses in the 1970s tolarge deficits in the early 1980s.

7Preparation of the PRSP is one of the conditions for reachingcompletion point under the enhanced HIPC Initiative.

8A program performance audit report of the SAL prepared bythe World Bank’s Operations Evaluation Department (OED) re-ported that “full cooperation between the staffs of the Bank and


and third SALs, approved in 1986 and 1987, respec-tively, run in parallel with SBA and SAF arrange-ments. The fourth SAL, approved in 1990, aimed tobuild on achievements under the 1986 and 1987SALs and to tackle some of the remaining chal-lenges. To that end, it sought to help the authorities“restore Senegal’s competitive position and achievegrowth with macroeconomic equilibrium.” It was tofocus on, among other things, measures to improveproduction incentives (e.g., reducing tax burdens,costs of production, and labor market rigidities) andto rationalize the public sector (e.g., through civilservice reform, reducing government subsidies topublic enterprises, and privatization). A FinancialSector Adjustment Credit (approved in 1989) was in-strumental in restructuring the banking system inSenegal and strengthening the BCEAO’s bankingsupervision capabilities. Adjustment credits to theagriculture and energy sectors (in 1995 and 1998, re-spectively) endeavored to tackle long-standing struc-tural problems in those sectors and included somethat had featured prominently in IMF arrangements.

Program implementation

12. Senegal’s record shows a stop-go pattern ofprogram implementation as measured by compli-ance with performance criteria and benchmarks(hereafter referred to as “performance targets”) andtimeliness of the completion of program reviews.Implementation was generally weak in the early pro-grams during 1979–82. Two of the programs in thisperiod (the 1980 EFF and the 1982 SBA) went off-track soon after they were approved, because of pol-icy slippages (especially in price liberalization andtax measures) and the failure of IMF staff and theauthorities to agree on policy adaptations required toattain program objectives in the face of unantici-pated shocks. In the case of the EFF, part of theproblem appears to have been weaknesses in the dataused for establishing performance targets, which un-derstated the magnitude of prevailing and prospec-tive financial imbalances. By contrast, all thearrangements approved between 1983 and 1987 (twostand-alone SBAs and two combined SBA/SAFs)were characterized by high compliance with perfor-mance targets and timely completion of program re-views. This period was also marked by significantderegulation of the economy, including a reductionin the scope of price controls, partial liberalization of

the agriculture sector, and the phasing out of mostquantitative restrictions on imports.

13. Program implementation weakened again be-tween 1988 and 1992. Under the first two annualarrangements of the 1988 ESAF, performance tar-gets linked to midterm reviews were observed, butwere followed by a loosening of fiscal policy aftercompletion of the reviews. These policy slippageswere judged by IMF staff to be sufficiently seriousto warrant a reestablishment of a track record ofgood performance under a six-month staff-moni-tored program (July–December 1990) before the re-quest for a third annual arrangement was submittedto the Executive Board. Under the latter arrange-ment, implementation was once again satisfactoryprior to the completion of the midterm review (inNovember 1991), but this was not sustained.

14. Discussions on a successor ESAF arrangementstarted in 1992, before the expiration of the 1988ESAF, but no agreement was reached over a period ofnearly two years.9 In this intervening period, somemeasures that had been delayed under the ESAF wereimplemented, including extension of the coverage ofVAT to the transport sector, and the starting of opera-tions of a company hired to improve the system ofvaluation of imports in order to curb underinvoicing.Measures envisaged under a banking system reformprogram were also fully implemented. On the otherhand, the authorities took several steps that worsenedthe public finances: an increase in the producer priceof groundnuts (contrary to understandings under theESAF) widened the deficit of the groundnut sector,and a reduction in selected customs tariffs and VATrates lowered revenues. Furthermore, an agreed mech-anism for automatic adjustment of domestic petro-leum prices to reflect developments in world priceswas not implemented.

15. Legislative and presidential elections in thefirst half of 1993 constrained policy actions neededto address the reemergence of severe financial prob-lems. In August, the authorities announced a pack-age of corrective “internal” (i.e., nonexchange rate)measures that included a 15 percent cut in most pub-lic sector nominal wages, increases in import duties,and increases in the retail prices of petroleum prod-ucts. The reduction in wages was not implemented,following strong protests by trade unions.

16. Discussions between the staff and the authori-ties during 1992–93 covered the issue of devaluationas a policy option for the CFA franc zone. Similardiscussions were held with the authorities in other

173

the Fund was achieved” during the preparation of the SAF andthe EFF and that some of the performance targets in the EFF andthe SAL were identical or very similar. The authors did not thinkthis overlap in conditionality was appropriate, arguing that failureto meet “short-term IMF performance criteria” should not auto-matically lead to disruption of a SAL.

9The staff report on the 1992 Article IV consultation noted that“it had not been possible to reach understandings with the author-ities on the required set of strong measures that would permit aresumption of credible adjustment, and thus establish a firm basisfor a new Fund-supported program.”


CFA franc countries, against a background of realexchange rate appreciation and persistent adverseterms of trade developments in most of the membercountries. A historic 50 percent devaluation of theCFA franc in January 1994 paved the way for newarrangements in support of a renewed adjustment ef-fort—initially, an SBA to provide quick financial as-sistance, followed by a new multiyear ESAFarrangement five months later. Implementation ofpolicies was generally good during 1994–99, al-

though the pace of structural reforms was slow andthere were policy slippages in the period leading upto legislative elections in 1998 and presidential elec-tions in 2000.

17. The incumbent president, Mr. Diouf, was de-feated by the veteran opposition leader, Mr. Wade, inpresidential elections in early 2000 to end 40 years’rule by the Socialist Party. President Wade’s Sene-galese Democratic Party won a majority of seats inlegislative elections for a new national assemblyheld in April 2001. Significant slippages in thetimetable for structural reforms occurred during thepolitical transition that extended into the period cov-ered by the third annual PRGF arrangement (ap-proved in February 2001). On the strength of somecorrective measures taken by the new government,the IMF Executive Board completed the second ofthree envisaged reviews in April 2002, shortly beforethe expiration of the PRGF arrangement.

What was achieved over the extended period of programs?10

18. Over the period of Senegal’s prolonged use ofIMF resources there has been a significant reductionin macroeconomic imbalances and less volatility inreal GDP growth (Figures 11.3 and 11.4). Inflation

174

10The data on which the tables and graphs in this section arebased are mostly from the IMF’s World Economic Outlook (WEO)database supplemented by data from the following databases: theAfrican Department’s WETA database, International Financial Sta-tistics (IFS), and the Information Notice System (INS).

–20

–15

–10

–5

0

5

1971 74 77 80 83 86 89 92 95 98 2001

Central government balance

External current account balance

Figure 11.3. Senegal: External and Fiscal Balances(In percent of GDP)

Sources: IMF, WEO database; and IEO calculations.

–10

–5

0

5

10

15

20

1971 74 77 80 83 86 89 92 95 98 2001

Figure 11.4. Senegal: Real GDP Growth(In percent per annum)


1971 74 77 80 83 86 89 92 95 98 2001

Figure 11.5. Senegal: Inflation(In percent per annum)

–5

0

5

10

15

20

25

30

35

Source: IMF, WEO database.


has followed a downward trend, except for a spike inthe rate following the large devaluation in the ex-change rate in 1994 (Figure 11.5). The impact ofterms of trade shocks on the overall economy has also declined, although there continue to be largefluctuations in the world prices of two commodities—crude oil and groundnut oil—which have been associ-ated with periodic adjustment problems and linked inpart to government policies (Figures 11.6–11.10).11

19. Table 11.2 presents selected indicators ofmacroeconomic performance during the three yearsbefore Senegal’s first IMF arrangement and five sub-periods during 1979–2001. The subperiods arebroadly based on “adjustment effort” as judged byconsistency of program implementation (discussedabove):12

(i) 1979–83: characterized by weak implementa-tion.

(ii) 1984–88: characterized by strong implemen-tation.

(iii) 1989–93: spanning the period of the 1988ESAF arrangement (uneven implementation) and a period when there was no IMF

arrangement.

(iv) 1994–99: during which there was strong im-plementation of macroeconomic policies,and modest progress on structural reforms.

(v) 2000–01: marked by some policy reversalsbut continuing relatively good macroeco-nomic performance.

175

–10

–8

–6

–4

–2

0

2

4

6

8

1970 73 76 79 82 85 88 91 94 97 2000

Terms of trade shock

Linear trend

Figure 11.6. Senegal: Impact of Terms of Trade Shocks(In percent of GDP)


0

20

40

60

80

100

120

140

1970 73 76 79 82 85 88 91 94 97 2000

Export priceImport price

Terms of trade

Figure 11.7. Senegal: Terms of Trade Indices(1995 = 100)


0

20

40

60

80

100

120

1970 73 76 79 82 85 88 91 94 97 2000

Export priceWorld price ofgroundnut oil

Figure 11.8. Senegal: Export Price Index and World Price of Groundnut Oil


11The “impact of terms of trade shocks” measures the effect (inpercent of GDP) of annual changes in export and import prices,holding trade volume constant. See McCarthy, Neary, andZanalda (1994).

12A summary of the factors considered in coming to a judg-ment on each of Senegal’s IMF arrangements, including annualarrangements within multiyear arrangements, is presented in Appendix 1.


20. The most significant adjustment took placeduring 1984–88, when the average annual currentaccount deficit improved to about 9 percent of GDPfrom 13 percent of GDP during 1979–83 and aver-age inflation was halved. An improvement in the fis-cal balance—driven by a 6 percentage point reduc-tion in the expenditure/GDP ratio—was the principalcontributor to that outturn. The adjustment achievedduring the period was aided by relatively favorable

developments in the terms of trade. During 1989–93,there were slight improvements in average fiscal andcurrent account deficit compared to 1984–88.13

21. Another significant adjustment in the externaland fiscal balances occurred during 1994–99, fol-lowing the devaluation of the CFA franc. This time,in contrast to 1984–88, the adjustment was accom-panied by significant and sustained growth andprogress on structural reforms. The period 2000–01was marked by continued growth in spite of somebacksliding on structural reforms and a reversal ofthe downward trend in fiscal and external imbal-ances. The authorities’ success in sustaining most ofthe real depreciation achieved in 1994, contributedto the better growth performance. At the end of2001, the real effective exchange rate was at aboutthe same level it was at the end of 1994, implying areal depreciation of about 30 percent compared to itspredevaluation level (Figure 11.11).14

22. There was a banking crisis in the late 1980s,brought about by severe liquidity problems that re-flected government payments arrears and a sizable(and growing) share of nonperforming loans inbanks’ portfolios. A regional (WAEMU-wide) bank-ing system restructuring project, financed by theWorld Bank and other donors, succeeded in cleaningup the sector and strengthening banking supervision.A Financial Sector Stability Assessment undertaken

176

0

50

100

150

200

250

1970 73 76 79 82 85 88 91 94 97 2000

Import price

World price of crude oil

Figure 11.9. Senegal: Import Price Index and World Price of Crude Oil


1979 81 83 85 87 89 91 93 95 97 99 2001

Nominal effective exchange rate

Real effective exchange rate

Figure 11.11. Senegal: Real and Nominal Effective Exchange Rates

0

20

40

60

80

100

120

140


Figure 11.10. Senegal: Nominal CFA Franc/ U.S. Dollar Exchange Rate(Annual averages)

Sources: IMF, WEO and WETA databases.

200

300

400

500

600

700

800

200098969492908886848280787674721970

13This comparison of averages obscures trend improvementsthat were partially reversed, especially in 1993.

14NEER and REER are indices of the nominal effective ex-change rate and the real effective exchange rate, respectively.


by a joint IMF–World Bank team in 2001 concludedthat the banking system in Senegal had recoveredfrom the crisis and was in good health. However, ithighlighted as a significant risk factor in the systemthe high exposure of banks to parastatals in the agri-culture and energy sectors—reflecting the continua-tion, after two decades of programs, of problemswith restructuring the groundnut sector and ineffi-ciencies in the energy sector—with significantmacroeconomic impact.

Why Was There Prolonged Use ofIMF Resources?

23. Five main reasons were found for Senegal’sprolonged use of IMF resources.

24. First, the initial imbalances were large anddeeply rooted in structural weaknesses of the econ-

omy that were likely to require a long time to ad-dress in a sustainable manner. The weaknesses in-cluded the vulnerability of the economy to weatherand terms of trade shocks, and the heavy burden onpublic finances exerted by a large inefficient publicsector, by extensive price controls over both con-sumer and producer prices, and by a heavy externaldebt-service burden.

25. The second reason was a broadening of objec-tives associated with programs supported under theIMF’s concessional facilities. The introduction ofthe SAF and its evolution to the ESAF, and the lat-ter’s transformation to the PRGF, were accompaniedby an elevation of growth, social policy issues, andpoverty reduction, as explicit goals in programs.This evolution has been accompanied by a lengthen-ing of the time frame within which users of these re-sources are expected to achieve goals specifiedunder programs.

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Table 11.2. Senegal: Selected Economic Indicators(In percent of GDP, unless otherwise indicated)

Period averages_________________________________________________________________1976–78 1979–83 1984–88 1989–93 1994–99 2000–01

Real GDP growth (percent per annum) 0.8 4.0 2.1 0.4 4.8 5.7Inflation (percent per annum) 5.3 10.6 5.0 –0.3 7.8 1.9Terms of trade (percent change per annum

in U.S. dollar price indices) 7.2 –5.9 2.8 –1.8 0.9 –2.5

External current account balance, including transfers –6.6 –13.2 –8.9 –8.3 –4.9 –6.3(balance of payments) of which: official transfers1 . . . 4.9 4.9 1.3 3.0 1.4

Gross national saving2 5.8 –2.4 3.0 5.3 12.8 11.9Gross investment 12.3 10.7 11.8 13.5 17.7 18.1

Central government balance –1.4 –6.9 –2.3 –1.5 –0.6 –2.1Total government revenue and grants 19.1 21.1 19.4 19.4 19.7 19.8

Of which: grants . . . 0.8 1.2 1.5 3.2 1.8Total government expenditure and net lending 20.5 28.0 21.8 20.9 20.3 21.9

Final consumption expenditure 98.6 103.7 97.4 93.4 88.9 90.7Public consumption expenditure 19.2 19.3 16.2 14.8 11.5 13.6Private consumption expenditure 79.4 84.5 81.2 78.7 77.4 77.1

Gross capital formation 12.3 10.7 11.8 13.5 17.7 18.1Gross public capital formation 4.7 4.7 4.0 4.5 6.3 6.9Gross private capital formation 7.6 6.1 7.8 9.1 11.5 11.3

Imports of goods and services 48.7 48.3 38.9 31.7 38.1 38.7Exports of goods and services 37.2 33.8 29.6 24.7 31.4 30.0

Memorandum itemsDecomposition of external adjustment

(change, in percent of GDP)Current account –6.6 4.3 0.6 3.3 –1.3

Fiscal balance –5.5 4.6 0.8 0.9 –1.5Private sector saving-investment balance3 –1.1 –0.3 –0.2 2.4 0.2

Sources: Calculated from IMF, WEO and WETA databases.1The decline between 1994–99 and 2000–01 partly reflects a reclassification of project grants from the current account to the capital account.2Calculated as the difference between the external current account balance (balance of payment) and gross investment.3Calculated as the change in the current account balance minus the change in the fiscal balance.


26. A third factor is the use of IMF arrangementsas a seal of approval for the provision of external fi-nance by several multilateral and bilateral creditorsand donors.15 One example of this is the Paris Clubof official creditors, which requires the existence ofan IMF arrangement for its debt rescheduling agree-ments. Senegal has had 13 such agreements. The ear-lier approach to debt rescheduling—with its focus onrestructuring of debt service falling due within thelimited period covered by the IMF arrangement—provided only temporary respite, and required a suc-cession of programs to continue to receive debt relief.Senegalese officials confirmed in interviews that thiscatalytic role of IMF arrangements was an importantconsideration in the country’s continuing requests foruse of IMF resources. There is some evidence frominternal documents that, on occasion, the “seal of ap-proval” role was a factor in efforts by the staff to keepprograms afloat when slippages occurred, and to tryto work on corrective measures rather than interruptthe program. Senegal’s good standing among donors,based in part on its historical role as the administra-tive center of French West Africa and its tradition ofregular democratic elections, may also have earned itthe benefit of the doubt from time to time.16

27. Weaknesses in program design also con-tributed to prolonged use. In particular, the pre-devaluation programs were too optimistic about howeffective the adjustment strategy being pursuedwould be in promoting growth and sustainable finan-cial viability. For example, the successful stabiliza-tion during 1984–88 was accompanied by lowgrowth and, in retrospect, programs during this pe-riod may have been too sanguine about the scope forachieving growth and external viability objectiveswithout an exchange rate adjustment. Furthermore,the programs could have paid more attention to theconsequences for growth of some of the measuresemployed to contain public sector deficits. For ex-ample, Rouis (1994) argues that a persistent focus onaddressing short-term financial imbalances with adhoc revenue measures and a lack of attention toneeded structural reforms (e.g., to address tax ad-ministration and international competitiveness prob-lems) produced a fiscal adjustment that hurtgrowth.17 Although there is a limit to how much an

IMF arrangement by itself can address structural re-forms, the persistence of problems in areas such asthe energy and groundnut sectors, civil service re-form, labor market regulations, and public enterprisereform, raise questions of the effectiveness of IMF–World Bank collaboration in program design (in-cluding measures to enhance implementationprospects).

28. Finally, the stop-go pattern of program imple-mentation weakened the effectiveness of programsand thus contributed to the continuing “need” forIMF arrangements. The wide variations in the degreeof implementation under different arrangements re-flected several factors. Successfully implementedprograms tended to be characterized by strong up-front adjustment measures and adaptations of poli-cies during program reviews when there were signif-icant actual or prospective deviations from targets(usually fiscal targets).18 In the cases where imple-mentation was weak, contributory factors usually in-cluded social and political concerns of the authori-ties which translated into (i) nonimplementation ofagreed measures (e.g., the contingency mechanismof freezing lower priority expenditure in the event ofa shortfall in government revenues during the secondannual arrangement under the 1988 ESAF was notimplemented because of concerns about social un-rest); (ii) delays in implementing measures (e.g.,weakening in macroeconomic management and slip-pages in the timetable for structural reforms in late1999 and early 2000, ahead of Presidential elec-tions); or (iii) policy reversals, which were also oftenlinked to the electoral cycle (e.g., suspension of thepetroleum pricing mechanism in February 2000).

Effectiveness of the IMF-SupportedPrograms

Program design: the macroeconomicframework

29. Against the backdrop of very low (and some-times negative) saving rates in the late 1970s andearly 1980s, increasing the domestic saving rate hasbeen a key objective in Senegal’s IMF-supportedprograms. This was not only to contribute towardnarrowing the external current account deficit, butalso to help boost investment and, ultimately,growth. The efficiency of investment was to be en-hanced through various structural reforms.

178

15See Chapter 6 of Part I.16During the period under review (1979–2001), presidential and

legislative elections were held in 1983, 1988, and 1993. In linewith changes in electoral laws, presidential elections were alsoheld in 2000, and legislative elections in 1998 and in 2001. Gov-ernments of national unity (which included members of opposi-tion parties as cabinet ministers) were formed in 1991 and 1994 inefforts to diffuse rising social and political tensions in the country.

17Rouis (1994) and Tahari and others (1996) provide compre-hensive analyses of economic performance in Senegal during thisperiod.

18Examples include the 1983 and 1985 SBAs and the 1994ESAF (see Appendix 1). The up-front measures in the earlier pro-grams included increases in the administered prices of consumergoods and petroleum products.


Realism of key assumptions and projections in the macroeconomic framework

30. Between 1986 and 1992 (spanning two com-bined SBA/SAF arrangements and three annualarrangements under the 1988 ESAF), programs pro-jected sharp drops in the external current accountand the government budget deficit over the mediumterm. There were improvements in both balances,but outturns tended to fall short of projections. Inparticular, exports consistently fell short of projec-tions, and budgetary revenues tended to be lowerthan envisaged. Projections of domestic saving andinvestment were consistently higher than the out-turns, and the projected real GDP growth also tendedto be higher than actual growth (Appendix 2).

31. Under the immediate post-devaluation ESAF(1994–97), the divergence between medium-termprojections and outturns narrowed considerably forseveral variables, most notably real GDP growth,current account balance, government balance, do-mestic saving, and exports. Significant deviationsbetween projections and outturns reappear under the1998 ESAF/PRGF for the current account balance(i.e., outturns worse than projected) even though ex-port performance was better than projected. In con-trast to the earlier period, government revenues havetended to be higher than projected.

Progress toward external viability

32. The first six rescheduling agreements con-cluded between Senegal and the Paris Club (between1981 and 1987) provided nonconcessional flow re-lief in successive program periods. Between 1989and 2000, Senegal concluded another seven agree-ments with the Paris Club on increasingly more con-cessional terms, reflecting the evolution of ParisClub policies with respect to low-income coun-tries.19 Throughout the 1980s, programs repeatedlyindicated that Senegal would be able to stop relianceon “exceptional financing” (rescheduling and accu-mulation of arrears) within a few years. For most ofthe 1990s, programs suggested that once accountwas taken of traditional debt relief mechanisms,Senegal’s external debt would be sustainable. Forexample, as recently as 1998, a debt sustainabilityanalysis (DSA) conducted by IMF and World Bankstaffs and the authorities indicated that Senegal’sdebt burden was sustainable when gauged againstthe thresholds under the initial HIPC Initiative.However, an updated DSA done in early 2000 indi-

cated that the country’s debt burden was not sustain-able when judged against the lower sustainabilitythresholds of the “enhanced” HIPC Initiative.20

Senegal reached the decision point under the en-hanced HIPC Initiative in June 2000, and was, at thattime, expected to reach completion point in 2002.

33. Several staff members interviewed acknowl-edged that the medium-term balance of paymentsprojections and debt sustainability analyses preparedfor Senegal had been influenced by an incentive to“overpromise” on the pace of restoration of sustain-ability that stemmed from internal guidelines requir-ing that there be significant progress toward externalviability by the end of three-year arrangements. Asecond factor that contributed to this overoptimismwas the heavy weight given to export-based indica-tors in HIPC thresholds; this focus on “external”burden indicators, rather than “fiscal” burden indica-tors, tended to downplay the extent of Senegal’s debtproblems (Figures 11.12 and 11.13). Indeed, it wasconsistently pointed out in staff reports that the debt-service burden was much heavier when viewed in re-lation to government revenues rather than to exportearnings.21 A number of Senegalese officials inter-viewed indicated that program limits on nonconces-sional borrowing have been a useful device for in-stilling discipline in external debt management. Theshare of total debt owed to private (commercial)creditors fell from a peak of nearly 50 percent in1978 to 8 percent ten years later (1988) and to lessthan 1 percent in 1999.22

Dealing with uncertainty34. For the major shocks that Senegal is suscepti-

ble to—droughts and terms of trade—programs have

179

19Three were on Toronto terms (one-third reduction in the netpresent value of eligible debt), one was on London terms (50 per-cent reduction), two were on Naples terms (two-thirds reduction),and the last was on Cologne terms (up to 90 percent reduction).

20Under the original HIPC Initiative, the sustainable thresholdwas the range of 200–250 percent for the ratio of NPV-of-debt toexports. Countries with very open economies (export/GDP ratiosof 40 percent or higher) and that had government revenue/GDPratios of at least 20 percent were eligible for assistance if the ratioof their NPV-of-debt to government revenue exceeded 280 per-cent. Under the enhanced HIPC Initiative, the threshold for theNPV-of-debt to export ratio was lowered to 150 percent (nolonger a range), and the requirements for eligibility for assistancethrough the fiscal window were changed to an export/GDP ratioof 30 percent, government revenue/GDP ratio of 15 percent, andNPV-of-debt/revenue ratio exceeding 250 percent. For further de-tails, see, for example, Andrews and others (1999).

21Foreign exchange restrictions are sometimes cited as a reasonfor favoring export-based debt burden indicators over GDP- andgovernment revenue–based indicators (see, for example, “StaffResponse to the External Evaluation of the ESAF” (IMF, 1998).For Senegal, the convertibility of the CFA franc removes this con-cern, and allows other factors to come to the fore (e.g., domi-nance of public debt in total debt, a “reasonable” revenue/GDPratio, and considerations of debt service crowding out “produc-tive” government spending).

22The ratios were calculated from the World Bank’s Global De-velopment Finance database.


tended to deal with their effects in the context of pro-gram reviews, rather than through prespecified con-tingencies. The 1994 SBA and 1994 ESAF arrange-ment went a limited way toward prespecifyingcontingency measures for some terms of tradeshocks (discussed below). In principle, program re-views provide greater flexibility than prespecifiedcontingencies, but if there is not a broad understand-ing of how policies will respond to the major risks,they increase the chances of disagreements over, andhence delay in, the appropriate policy response thatmay push programs off-track.

35. Virtually all the arrangements have had somemechanism for automatic adjustment of selectedquantitative financial performance criteria in theevent of deviations from underlying program as-sumptions. Typically, ceilings on net domestic assetsof the banking system and on the banking system’snet claims on the government were automatically ad-justed for deviations in (i) the amount of crop creditextended by the banks; and (ii) external financing ofthe budget (excluding grants). There tended to be fullaccommodation for crop credit deviations. For exter-nal financing, there tended to be a requirement to ei-ther use “excess” amounts to reduce domestic debt(especially expenditure arrears) or to save suchamounts and discuss their use during subsequent mis-sions. Shortfalls tended to be partially adjusted for,up to prespecified amounts; shortfalls beyond theseamounts were to be offset by additional measures.

36. Since 1994, programs have contained quar-terly benchmarks for government revenue and the

government wage bill, deviations from which wereto be corrected by additional tax measures or re-duction in nonpriority expenditures, in order toachieve the fiscal objectives of the programs. Thisfeature was deemed by IMF staff to be an importantdevice to ensure that the fiscal policy stance wasappropriately supportive of the devaluation. The1994 SBA and the 1994 ESAF (but not the 1998ESAF) contained prespecified contingencies in theevent that world prices for groundnut products andcotton turned out to be lower than projected underthe programs; they required that the fiscal implica-tions of such shortfalls be offset fully by additionalrevenue-raising or expenditure-reducing measures.This was too rigid an approach, since it impliedthat there would be no situation in which a higherfiscal deficit would be allowed to accommodate atemporary adverse terms of trade shock. Moreover,the lack of a clear indication of the types of revenueand expenditure actions increased the risks of adhoc adjustments that would be unsustainable andinconsistent with the medium-term growth-orientedstrategy.

Structural reforms

37. Senegal has made major strides in some struc-tural reforms (notably in the areas of price liberaliza-tion, trade liberalization, and simplification of the taxsystem). But reforms aimed at restructuring thegroundnut sector and at liberalizing petroleum prod-uct prices have proved to be intractable, resurfacing

180

1981/82 83/84 85/86 87/88 89/90 91/92 94 96 98

Government revenue ratio

Exports ratio

Figure 11.13. Senegal: Debt-Service Ratios After Rescheduling(In percent)

0

5

10

15

20

25

30

35

40

45

Sources: IMF, GFS database; and IEO calculations.

0

10

20

30

40

50

60

1981/82 83/84 85/86 87/88 89/90 91/92 94 96 98

Government revenue ratio

Exports ratio

Figure 11.12. Senegal: Debt-Service Ratios Before Rescheduling(In percent)



periodically with significant adverse effects on thegovernment budget and on production incentives inthe economy. Moreover, tax reforms have not yieldedsignificant increases in revenue (measured in relationto GDP), reflecting, in part, the short-term revenue-reducing effects of some of the reforms (e.g., tariffreduction).

Restructuring of the groundnut sector

38. A lack of clarity on the aims of restructuring(expansion of production, diversification of agricul-tural output, or stabilization of farmers’ incomes)and sociopolitical sensitivities explain the lack ofprogress on restructuring the groundnut sector. Therecurring issues about the groundnut sector in pro-grams have revolved around government interven-tions that contribute to financial losses of the sec-tor—namely subsidization of inputs, and the settingof producer prices above world market prices. How-ever, there have been periods when the sector hasbeen in surplus (reflecting favorable developmentsin world prices that were not passed on to produc-ers). During 1984/85 and 1985/86, producer priceswere increased in order to improve production in-centives. A subsequent sharp drop in the world priceof groundnut oil led to the reemergence of a finan-cial deficit for the sector in 1986/87, just as outputwas responding positively to the increased incen-tives (and good weather). The government was re-luctant to reduce producer prices so soon after theywere raised, and in any case, expected that financialassistance from STABEX would compensate for therevenue loss (which it did for 1986/87).

39. Under the 1988 ESAF, the government re-duced producer prices and undertook to adopt a flexi-ble system for the determination of producer pricesthat would take account of developments in the worldmarket. Under the 1994 ESAF, attention shifted to-ward privatization of SONACOS (the groundnutmilling and marketing parastatal). After a delay ofabout a year from the initial target date, bids were is-sued in December 1995, but the authorities did notconsider the bids received to be satisfactory. A sec-ond call for bids in 1997 also proved unsuccessful.23

40. After adhering to a producer pricing policybased on world prices for about four years, the gov-ernment returned to a more interventionist policy in2000. In response, the third annual arrangementunder the PRGF stipulated as performance criteria a

return to the pricing mechanism based on worldmarket prices (by end-September 2001), and thewithdrawal of SONAGRAINES (a wholly ownedsubsidiary of SONACOS) from the collection andtransportation of groundnuts (by December 2001).Both measures were implemented but the dissolutionof SONAGRAINES did not lead to the liberalizationenvisaged in the program, as the authorities contin-ued to set indicative margins rather than allow themarket to determine transport and collection costs.

41. Although the sector’s share in the economyhas dwindled since the 1960s, it remains a source ofincome for the majority of the population in the ruralareas, and the authorities regard it as a key sector inthe fight against poverty. The failure to deal perma-nently with the problems in the sector contributed toperiodic fiscal pressures, as in 2001 when the gov-ernment took over obligations of SONACOS to thetune of about 2 percent of GDP. Over the years, pro-grams have applied various types of conditionalitywith little lasting effect, reflecting wavering politicalcommitment of the authorities to the reforms. Themove away from the earlier ad hoc discretionary ad-justments worked for a while but did not prove a per-manent solution because the underlying institutionalapproach remained unchanged.

Petroleum pricing policy

42. As was the case with groundnuts, the earlyIMF-supported programs were concerned with estab-lishing a pricing mechanism for petroleum productsthat would reflect world market prices and obviate theneed for a subsidy from the budget; the 1983 and1984 SBAs each had a benchmark to that effect. How-ever, in 1986 (under the SBA/SAF), the policychanged to “mobilization of prospective surpluses ofthe oil sector in support of the budget,” by maintain-ing retail prices while import costs were falling.While this change was prompted by revenue difficul-ties, it damaged the credibility of the system of auto-matically linking retail prices to developments in theinternational market. Eventually, this system was rein-stated in 1998, but it was suspended once again in2000, this time in order to avoid passing on risingcosts to consumers in a period leading up to presiden-tial elections—at a cumulative cost to the 2000 and2001 budget of about 1 percent of GDP.24 While thefocus of programs on the issue was appropriate (givenits macroeconomic implications), use of ad hoc dis-cretionary deviations for revenue purposes, ratherthan a consistent approach to establishing the pricingmechanism, probably undermined the strategy.

181

23A World Bank evaluation of performance under the 1995agriculture sector credit noted that SONACOS was not privatizedbecause the conditions imposed by the government (e.g., require-ment to provide seeds and fertilizers to farmers on credit and tomaintain the integration of the industry) were not attractive to po-tential investors. 24The pass-through mechanism was reinstated in June 2001.


Tax reform

43. Since the mid-1980s (following the recom-mendations of an IMF technical assistance missionin 1985), the authorities have endeavored to modern-ize the tax system, as well as broaden the base andincrease yields. Measures undertaken through 1991included introduction of a new tax code (with mostspecific duties converted to ad valorem rates), sim-plification of the structure of the tax system (by re-ducing the number of rates for import taxes andVAT), and increased coverage of VAT (to include theservice sectors). However, the reforms did not yieldmuch improvement in revenues for reasons that in-cluded pervasive exemptions and weak tax and cus-toms administration.

44. There have been further significant reformssince the 1994 devaluation, mostly in the context ofa harmonized tariff regime and domestic taxeswithin the West African Economic and MonetaryUnion (WAEMU). The 1994 and 1998 ESAF/PRGFarrangements contained several measures aimed atstrengthening tax administration and expanding thetax base (e.g., computerization and expansion ofcoverage of VAT).

45. Conditionality (in terms of performance cri-teria and benchmarks) on tax reform measures wasvirtually absent in programs until 1997. Since thenthere have been several, including on the elimina-tion of hundreds of tariff lines, the establishment ofa large taxpayer unit, the implementation of a sin-gle taxpayer identification number in all revenuecollecting agencies, and a single rate VAT.25

46. In the event, the revenue effort did eventuallyshow some improvements—rising from an averageof about 16.5 percent of GDP in 1994–99 to 18.1percent in 2000–01 in spite of a lowering of tariffs inthe context of a common external tariff in WAEMU(Figure 11.14).26 However, greater emphasis in theearly programs on improving tax administration andreducing exemptions could have yielded significantadditional benefits and would have reduced the re-liance on various ad hoc revenue and expendituremeasures at times of fiscal pressure.

Social policies

47. While several programs contained socialsafety net measures to cushion the impact on thepoorest groups of some price increases, problemswith targeting of the measures limited their effec-tiveness. Two examples are:

(i) Under the 1988 ESAF, a reduction in the pro-ducer price of groundnuts was a key measurefor eliminating the deficit of the sector. In orderto provide some relief to farmers, administeredprices of selected key consumer goods (rice,sugar, groundnut oil) were subsidized.

(ii) Both the post-devaluation SBA (1994) and thesubsequent ESAF arrangement that replaced itcontained budgetary provisions for subsidizingthe price of a number of products deemed“sensitive” for low-income households (e.g.,bread, rice, medicines).

48. Neither of the two programs was well tar-geted. An internal World Bank evaluation of theBank’s Economic Recovery Credit (approved inMarch 1994 to provide emergency support to thepost-devaluation reform program) concluded that thesubsidies designed to limit the impact of price in-creases of basic consumer goods had been poorlytargeted and had not delivered the expected benefitsto the most vulnerable groups.

Collaboration with the World Bank

49. Program documents presented to the IMF’sExecutive Board convey the impression of close col-

182

25Most of the measures were specified as performance criteria,except the establishment of the large taxpayer unit, which was abenchmark. Most were observed on time or with slight delays.One measure that was delayed and that became a prior action forcompletion of a review was the introduction of the single VATrate, which was implemented in September 2001 (instead ofMay).

26Figure 11.14 breaks down government revenue into: (i) in-come and property taxes; (ii) taxes on domestic goods and ser-vices; (iii) taxes on nonpetroleum imports; (iv) petroleum rev-enues; and (v) other revenues. For the period 1981/82–1982/83,petroleum revenues are distributed between import taxes and“other” revenues.

0

5

10

15

20

25

858483821981

Figure 11.14. Senegal: Composition of Government Revenue(In percent of GDP)

OtherPetroleumImports

Goods and servicesIncome and property


laboration between the staffs of the IMF and theWorld Bank, especially on sectoral issues (e.g., thebanking system, agriculture, energy, and industry).Discussions with staff members of the two institu-tions confirm that there have always been regularcontacts and exchange of information, including inareas not highlighted in staff reports (e.g., thepreparatory work that informed the staffs’ advice tothe authorities of the CFA franc zone in the periodleading up to the 1994 devaluation). A recent staffreport clearly described the division of responsibili-ties between the two institutions.27

50. Nevertheless, there have been some problemsin matching the time frame and priorities of the twoinstitutions, which affected the timeliness of WorldBank inputs on some sectoral issues in IMF-sup-ported programs. Some of the differences in thetimetable may be related to the World Bank’s at-tempts to encourage internal consensus on structural

reforms before going ahead with lending programs(Box 11.1).

51. Several Senegalese officials interviewed em-phasized the need for better collaboration between theIMF and the World Bank, especially with respect tothe structural reform and social policy content of pro-grams. The PRSP and the recent formalization of the“lead agency” approach are the major instruments forimproving such collaboration, although in the case ofSenegal it is too early to judge their impact.

Ownership, Conditionality,and the PRSP Approach

52. The evaluation sought views on what impact,if any, prolonged engagement in IMF arrangementshas had on (i) “ownership” of programs and on theeconomic policymaking process; (ii) capacity build-ing in institutions responsible for formulating andimplementing macroeconomic policies; and (iii) theeffectiveness of IMF conditionality.

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27Box 4 in EBS/02/50, March 21, 2002.

Box 11.1. Selected Lessons from World Bank Evaluations

The World Bank employs a range of evaluation reports to take stock of achievementsand failures, and to draw lessons from experiences under its lending operations. At thecompletion or termination of such operations, a “project completion report” or “imple-mentation completion report” is prepared. The Operations Evaluation Department(OED) may comment on these reports, and/or undertake a “performance audit” of itsown. This box draws on a range of such evaluation reports on the four SALs and theAgricultural Sector Adjustment Credit (AGSAC) extended to Senegal, since a number ofthe lessons highlighted are also relevant for the IMF’s operations.

• Under the first three SALs, incomplete and tenuous links between proposed mea-sures and objectives gave rise to overestimation of likely performance and underesti-mation of constraints (e.g., in agriculture and industry).

• Notwithstanding significant achievements, including transformation of the economyaway from excessive state intervention, about one-third of measures envisaged underSAL II and SAL III were not implemented as scheduled. These measures were con-centrated in areas—labor regulations, parastatal reform—where there was strong po-litical opposition from vested interests. The lesson drawn was that politically sensi-tive reforms are unlikely to be implemented unless a prior internal debate has takenplace and consensus reached on key issues. It is important to encourage internalagreement on key issues, and based on that formulate upfront measures to be imple-mented under programs.

• A basic design flaw in SAL IV was expecting a positive supply response to improve-ments in regulations and incentives at a time when demand compression was beingrelied on to achieve external equilibrium. By the time of SAL IV (1990) work under-taken in the World Bank suggested that devaluation would be essential for restoringcompetitiveness and boosting growth.

• Lack of consensus among donors and the government on the strategy for restructur-ing the groundnut sector has contributed to the slow pace of reform. In retrospect,too much emphasis may have been placed on privatization of SONACOS, at the ex-pense of other reforms to improve the efficiency of the sector.


Ownership and capacity issues

53. Interviews with many Senegalese officialsand with IMF staff indicate a striking difference inperceptions about the degree to which policies hadbeen “imposed” on the authorities without suffi-cient consultation. However, there was broadagreement that the successful programs had beenthose to which there was strong domestic politicalcommitment, regardless of the precise nature ofIMF conditionality. The main lesson drawn by theWorld Bank from a review of its structural adjust-ment loans to Senegal was that politically sensitivereforms are unlikely to be implemented unlessthere has been prior internal debate and consensusbuilding on key issues (see Box 11.1).

54. A number of Senegalese officials who haveparticipated in negotiations with the IMF over timethought that the level of “country ownership” ofprograms has generally been low. In their view, the“seal of approval” role of IMF arrangements in un-locking other sources of financing gave the IMF theupper hand in negotiations with the authorities, andthat sometimes the authorities went along withthese proposals—even though they had doubtsabout their ability to deliver on implementation—inorder to secure urgently needed resources. Severalindicated that, more often than not, they were inagreement with the IMF’s diagnoses of the coun-try’s financial problems, but sometimes differed onthe pace of implementation of measures. In theirview, the IMF tended to underestimate implementa-tion constraints and overestimate the speed withwhich some structural reforms (e.g., privatizations)could be brought to conclusion. However, a few of-ficials put the onus of responsibility for the contentof programs and for implementing them on the au-thorities (including themselves), noting that whileit was convenient to blame the IMF for implemen-tation failures, the primary responsibility for diffi-culties in addressing some well-recognized prob-lems belonged at home.

55. The IMF staff appears to share the characteri-zation of weak ownership of programs, at least withrespect to structural reforms: the staff report for the2001 Article IV consultation noted that the new gov-ernment that took office in April 2000 “inherited alegacy of weak implementation and ownership of thestructural reforms program, particularly the long-standing structural problems of the groundnut andenergy sector.”

56. A number of staff interviewed thought that of-ficials tended to underestimate the scale of quasi-fis-cal activities and the risks such activities pose tomacroeconomic stability. However, they noted thatthere had been periods when senior Senegalese offi-cials clearly were convinced of the merits of ad-

dressing these issues in IMF-supported programsand had been able to persuade the highest politicalauthorities to implement difficult reforms. They ac-cepted that there was a need to bring greater trans-parency to discussions with officials and other stake-holders about financial constraints in the broadlydefined public sector, highlighting the risks of disor-derly adjustment in the absence of measures totackle the financial problems. It appears that the ac-tive involvement of senior political leaders in pro-gram negotiations can help increase political com-mitment to programs.

57. With regard to the effects of “prolonged use”on the policymaking process, there was broad recog-nition by those interviewed in Senegal that the IMFhad contributed importantly to an “internalization”of the need for prudent fiscal management. How-ever, many pointed to problems in the way programshad been negotiated, notably that they (i) tended toundermine the policymaking processes of the gov-ernment, especially parliament’s role in economicdecision making; and (ii) provided an excuse forgovernment to stifle domestic policy debate.

58. On capacity building, many officials inter-viewed thought there had been significant knowl-edge transfer from IMF staff at the technical level.At the same time, they felt that a lack of flexibilityin the formulation of IMF-supported programs haddiscouraged local initiative, and that the system hadbecome too dependent on the IMF for diagnosingand proposing remedies to the country’s macroeco-nomic problems. Several also expressed regret that an excessive focus on short-term solutions tofinancial problems had led government officials toabandon medium-term “planning” and long-termstrategic thinking about Senegal’s developmentchallenges. The response of staff to these criticismswas that programs are usually constructed in amedium-term framework with growth as one of thekey planks, and that the PRSP process had been de-signed to help improve the integration of programswith the longer-term strategy into PRGF arrange-ments (see below).

Conditionality

59. The evolution of the IMF’s concessional facil-ities has been marked by significant changes in con-ditionality: from the low-access, low-conditionalitySAF; to the relatively high-access, high-conditional-ity ESAF; to the PRGF, which has been accompa-nied by efforts to streamline structural conditionalitybut at the same time has introduced some new condi-tionality (e.g., preparation of PRSPs through a par-ticipatory process). The average number of structuralconditions (prior actions, performance criteria, andbenchmarks) per program year increased steadily in

184


successive multiyear ESAF/PRGF arrangements,from 4 in the 1988 ESAF to 10 in the 1998 ESAF/PRGF (Figure 11.15).28

60. With regard to the impact of “prolonged use”on the effectiveness of conditionality, views rangedfrom “conditionality had lost its bite over time” to“effectiveness of conditionality had been strength-ened, as officials have learned from experience theimportance of compliance.” On balance, the evalua-tion found no clear evidence of weakening; therewas some evidence of “elevating” targets frombenchmarks to performance criteria and prior ac-tions in response to implementation slippages. How-ever, as noted earlier, in the discussion of several“intractable” structural problems, a “hardening” ofconditionality does not appear to have been success-ful in fostering permanent changes if political com-mitment was weak. For example, prior actions wereeffective in the early programs in bringing aboutonce-off discretionary changes (several increases inadministered prices were effected before programswere presented to the Board), but they did not per-manently change the price-setting systems. Prior ac-tions have also been extensively used recently inconjunction with completion of reviews for mea-sures whose implementation had been delayed.29

But they cannot ensure that there will be no policyreversals, as demonstrated by the abandonment ofthe mechanism for setting petroleum product pricesin the lead-up to elections in 2000 when world priceswere on the rise.

The PRSP approach

61. In many respects, changes under way at theIMF—most notably, the transformation of the ESAFto the PRGF (and related to that, the PRSP ap-proach), the increased emphasis on country “owner-ship” of programs, and attempts to streamline struc-tural conditionality—already have begun to respondto many of the criticisms of the IMF that the IEOmission heard in Senegal (and reported above).

62. Most of those interviewed in Senegal for thisevaluation welcomed the PRSP process as an appro-priate way of promoting country ownership andhence increasing the likelihood of consistent imple-

mentation of IMF-supported programs. A commonview was that it goes some way to address criticismsof the process of formulating previous programs.However, most argued that the jury was still out onwhether the PRSP (which has only recently beencompleted) will significantly influence the policycontent of the next PRGF arrangement. A number ofpeople interviewed stressed the key role IMF resi-dent representatives can play in the implementationof the PRSP approach by widening the range ofstakeholders with whom the IMF interacts on a regu-lar basis.

IMF Internal Governance Issues

Were IMF policies to contain “prolonged use”applied to Senegal?

63. The IMF has developed policies aimed at con-taining the phenomenon of prolonged use, the mainelements of which are (i) reduction in access levels(in relation to size of IMF quota); (ii) front-loadingof adjustment effort and close monitoring of pro-gram implementation; (iii) comprehensive ex postassessment of programs; and (iv) the formulation of“exit” strategies.30

64. Average annual access levels in Senegal’sIMF arrangements have followed a declining trend,

185

28The increase in the 1998 ESAF/PRGF partly reflects the ef-fect of carrying over missed performance targets from one annualarrangement to a successor annual arrangement.

29The reintroduction of the pass-through mechanism for petro-leum product prices and the submission to parliament of a draftbill introducing VAT at a single rate were performance criteria forMay 2001 that were missed. They became prior actions for thecompletion of the first review under the third annual PRGF whichwas completed in September 2001.

0

5

10

15

20

1988 1994 1998

Performance criteriaPrior actions/conditions for completion of reviewBenchmarks

Figure 11.15. Senegal: Structural Conditionality Under ESAF/PRGF Arrangements(In number of conditions per program year)

Sources: IMF Policy Development and Review Department and IEO calculations.

30These policies are discussed at greater length in Chapter 3 ofPart I.


although the country has enjoyed above-average ac-cess levels in its three ESAF/PRGF arrangements(Figure 11.16).31 Over the course of the 1998 ESAF/PRGF, there was a move toward closer monitoring(more reviews in annual arrangements), and conver-sion of measures that had not been implemented atthe time of review missions into “prior actions” forthe completion of reviews.

65. With regard to ex post assessments, a countrystrategy paper prepared in early 1998, before the nego-tiations for a new three-year ESAF, took stock of per-formance under previous arrangements and set out anagenda of remaining challenges to be tackled underthe new arrangement. However, it had little discussionof lessons from the nonimplementation of earlier re-forms. Nor did it have a forward-looking medium-term macroeconomic framework and a discussion ofalternative scenarios and policy options. Another expost assessment, this time limited to Senegal’s pre-de-valuation IMF-supported programs, was contained inthe background paper to the 1995 Article IV consulta-tion. It contained a comprehensive analysis of the rela-

tive roles of shocks and policies in Senegal’s eco-nomic performance from the late 1970s through theearly 1990s. However, it is not clear what impact theanalysis had on the design of subsequent programs.

66. One set of “stepping-back” exercises that def-initely influenced the design of a subsequent pro-gram was work done during 1992–93, some of it inclose collaboration with the World Bank that pro-vided advice given to CFA franc countries prior tothe 1994 devaluation. The key issues tackled relatedto the limits of a purely “internal” adjustment strat-egy for dealing with loss of competitiveness and lowgrowth. The analysis presented in internal docu-ments was significantly more comprehensive thanthat contained in subsequent staff papers to theBoard. However, we were told that the Board wasbriefed at greater length in an informal session.32

67. We found no evidence that the issue of an “exitstrategy” from the use of ESAF/PRGF resources hadbeen discussed in any systematic manner within thestaff (e.g., in the internal review process) or with theauthorities.33 On the occasion of Board considerationof the request for the 1998 ESAF arrangements, oneExecutive Director expressed the hope that the thirdset of ESAF arrangements would represent an “exit”arrangement for Senegal. The absence of systematicdiscussion of the issue of exit from the use of conces-sional facilities may have reflected an implicit accep-tance that the deep-seated structural problems ofSenegal would require its continued use of IMF re-sources for some time—but it also probably reflectedthe fact that overall, IMF-wide criteria and strategiesfor exit are not well defined in such cases.

Surveillance and program activities

68. To assess whether program activities have“crowded out” surveillance, the evaluation examinedhow staff reports on Senegal measured up against achecklist of “best practices” inferred from variousinternal IMF guidelines on reporting on Article IVconsultations.34 Virtually all such consultations with

186

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EFF

SBA II

SBA III

SBA IV

SBA V

SAF/S

BAES

AF I

SBA VIII

ESAF I

I

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Figure 11.16. Senegal: Average Annual Access Levels Under IMF Arrangements(In percent of quota)


31Access under the 1988, 1994, and 1998 ESAFs was 90 per-cent, 81 percent, and 66 percent, respectively. This compares withIMF-wide averages for first, second, and third three-yearESAF/PRGF arrangements of 85 percent, 72 percent, and 65 per-cent. Current access norms under the PRGF are 90 percent ofquota over three years for first-time users and 65 percent of quotaover three years for second-time users.

32The staff report for the 1992 Article IV consultation containedsome discussion of the issue, in rather general terms, leading tosome discussion at the Board meeting of the appropriateness ofusing a purely “internal” adjustment strategy to address externalcompetitiveness issues in Senegal and other CFA franc countries.

33The issue of IMF long-term involvement in Senegal aroseduring the process of clearing briefing papers in 1987. The rem-edy for the “problem” of the country’s prolonged use of “regular”IMF resources was to shift to arrangements under a concessionalfacility (at the time, the SAF).

34The factors considered were (i) presentation of alternativemedium-term scenarios; (ii) quality of sensitivity analyses; (iii)discussion of risks of deviations from assumptions and projec-tions; (iv) discussion of risks and impact of policy slippages; (v)reporting on the views of the authorities; (vi) cogent presentationof proposed/recommended policy course; (vii) discussion of pol-


Senegal have tended to be combined with either re-quests for arrangements or program reviews during1980–2001; there were only two stand-alone ArticleIV consultation discussions at the Board (out of atotal of 16) during this period.

69. For a persistently active program country likeSenegal, the line between program and surveillanceactivities becomes blurred; indeed, an effective pro-gram design process should cover all the issues onthe surveillance “best-practice” checklist. But regard-less of how and in what context, there should be op-portunities to step back periodically from the detailsof designing and monitoring compliance with pro-gram targets, so as to review the overall adjustmentstrategy underpinning programs. A natural point todo this for “prolonged users” is between arrange-ments and in the context of surveillance. In this con-text, the main points from the review are as follows:

• Staff reports generally did a reasonable job onthe presentation of medium-term scenarios, butsensitivity analyses tended to consider relativelysmall shocks—in other words, they did not“stress test” the consequences of markedly dif-ferent, but still possible, outcomes. Nonetheless,the reports from the mid-1980s through the early1990s demonstrated how even small adversechanges in the external environment could sig-nificantly delay the attainment of external viabil-ity. The sensitivity analyses in recent reportshave tended not to include any stress testing ofmajor vulnerabilities and downside risks. Conse-quently, they have been somewhat perfunctory.

• In general, there was relatively little discussionof risks of deviations from assumptions andprojections, and how programs might beadapted. A handful of reports contained candiddiscussions of the risks of policy slippages andpolicy reversals.35

• Reports usually provide an indication of the au-thorities’ views; in most cases, however, therewere no reports of significant differences and sono sense of any compromises that might havebeen reached between the staff and the authori-ties. Two exceptions to this were the 1992 ArticleIV staff report (which covered a period whenthere was no IMF arrangement in place), and the2001 Article IV consultation report (which indi-cated differences on the timing of an increase inelectricity tariffs).

• Presentation of the reform strategy and reviewsof performance under previous or ongoing pro-grams were broadly satisfactory. However, dis-cussion of alternative options and trade-offs wasalmost completely absent from reports, exceptin the 1992 report, which presented an accountof the authorities’ internal adjustment efforts.

• Little detail was provided in reports about thesubstance of the collaboration with the WorldBank; often there were statements affirmingclose collaboration and—as is general prac-tice—an appendix listing World Bank opera-tions in Senegal, but with no sense of how thestrategies of the two institutions were integratedand what the mutual priorities were. In a fewcases, where there had been a recent WorldBank operation with objectives that were similarto those in IMF arrangements—for exampleStructural Adjustment Loans—a summary ofthe content of the authorities’ Letter of Develop-ment Policy to the World Bank was provided.36

70. In terms of topics covered, it is striking howlittle explicit discussion of exchange rate misalign-ment there was in the reports before the 1994 deval-uation, with most of the focus on traditional mea-sures of the real effective exchange rate.37 This wasexplained by the staff as the result of a deliberate de-cision by management to keep discussion of a possi-ble devaluation of the CFA franc confidential. Asdiscussed above, the issue was analyzed extensivelyin internal documents during 1992–93.

187

icy alternatives and trade-offs; (viii) critical and frank review ofperformance under (previous and ongoing) IMF-supported pro-gram(s); and (ix) account of collaboration with the World Bank.

35Examples include the report on the midterm review under thethird annual arrangement under the 1988 ESAF and the 2001 Ar-ticle IV consultation report.

36For example, in the reports for 1983, 1988, 1989, and 2001.37The staff report for the 1989 Article IV consultation indicated

that the authorities held the view that “the benefits of full convert-ibility and stability of the CFA franc afforded by membership ofWAMU outweighed the potential advantages of a more flexibleexchange rate policy.” The 1991 Article IV staff report elaboratedon the benefits (promotion of confidence in the currency/countryand contribution to domestic price stability—essential factors forattracting foreign investment and mobilizing domestic saving),and on how the authorities intended to support the system (appro-priate financial and structural policies, notably a restrained in-comes policy, a restructuring of energy pricing, and reforms de-signed to increase productivity). In neither report were the staff’sown views spelled out. However, the latter report noted that therehad been a 5.7 percent depreciation in the real effective exchangerate between 1985 and 1990, at a time when the terms of tradehad improved, thus betraying no “overvaluation” concerns. Eventhe 1992 Article IV report, which went beyond the standard pre-sentation of real effective exchange rate indices to consider otherindicators (e.g., relatively high cost of labor), stopped short of ad-vocating an exchange rate adjustment, though it did provoke adiscussion of devaluation of the CFA franc at the Board discus-sion. The inadequacies of the real effective exchange rate index asan indicator of international competitiveness are well known.Using a method that incorporates terms of trade shocks, Devara-jan (1997) estimates that on average the real exchange rate wasovervalued by about 30 percent for 12 countries in the CFA franczone prior to the January 1994 devaluation. He estimates the realexchange rate in Senegal was overvalued by 22 percent.


Conclusions and Recommendations71. Five main reasons were found for Senegal’s

prolonged use of IMF resources.

• First, the initial imbalances were large anddeeply rooted in structural weaknesses of theeconomy, including vulnerability to terms oftrade and weather-related shocks, which werelikely to require a long time to address in a sus-tainable manner.

• Second, Senegal’s prolonged use of IMF re-sources can also be attributed to the broadeningof objectives associated with programs sup-ported under the IMF’s concessional facilities.

• A third factor is the use of IMF arrangements asa seal of approval for the provision of externalfinance by several multilateral and bilateralcreditors and donors.

• Fourth, overoptimism about the effectiveness ofthe pre-devaluation adjustment strategy on pro-moting growth may have contributed to pro-longed use.

• Weaknesses in program design that were com-pounded by a stop-go pattern of program imple-mentation, especially with regard to structuralreforms, undermined program effectiveness.

Ex post assessments and exit strategy

• We recommend that guidelines on ex post as-sessments be applied more consistently andforcefully for countries that have had a succes-sion of multiyear arrangements.

• A more explicit strategy for eventual exit fromuse of IMF resources is needed. Attainment ofthe completion point under the enhanced HIPCInitiative would be one possible opportunity fordiscussion of such a strategy for Senegal, draw-ing on the assessments of previous programs.

Program design

• Successful programs have been those to whichthere was strong political commitment, regard-less of the precise nature of conditionality.

• Key lessons for improving the effectiveness ofSenegal’s IMF-supported programs include (i)fostering greater ownership of reform programs;(ii) reflecting capacity constraints more realisti-cally in implementation schedules; and (iii) ar-ticulating measures for improving implementa-tion—including through a greater flow oftechnical assistance on implementation aspects.

• Programs need to be set in a realistic time framethat avoids overpromising on the pace of adjust-ment toward external viability; if the adjustment

is realistically expected to extend well beyondthe period of a three-year arrangement, then theconsequences for IMF involvement should bediscussed explicitly as part of a medium-termstrategic framework.

• To help programs adapt better to uncertainty,the principal risks to the program, and howpolicies would adapt to those risks, should beset out explicitly.

• There is room for improving Bank-Fund collabo-ration to address fundamental institutional/ struc-tural issues at the heart of prolonged use. ThePRSP provides an instrument to that end, but willneed to be matched by operational changes to en-sure that the work priorities and time frames ofthe two institutions mesh effectively.

• In countries like Senegal where quasi-fiscal ac-tivities are significant, the macroeconomicframework needs to focus on a broad coverageof the public sector accounts (instead of focus-ing mainly on central government balances), inorder to provide a more comprehensive andmore transparent basis for considering publicsector financial problems, and for discussingrisks of disorderly adjustment in the absence ofcorrective measures.

Surveillance

• Surveillance discussions and reports should beused as an occasion to “step back” and recon-sider the overall strategy. While such reconsid-erations should be a normal part of any effectiveprogram process, a natural time to reconsiderthe overall strategy is between arrangements andin the context of surveillance. Such a strategicreview should include an assessment of perfor-mance under previous programs, including afrank appraisal of previous assumptions aboutimplementation; a stress-testing of major vul-nerabilities and downside risks; and a discussionof alternative policy options and trade-offs. Theresults of such reassessments should be reportedcandidly to the Executive Board.

Outreach

• Persistence of criticisms of the IMF, in spite ofits embrace of the PRSP approach, suggests thatmany people do not believe that the IMF haschanged the way it does business. The IMF hasincreased its outreach activities in Senegal in re-cent years, including through the role of the res-ident representative. These efforts need to besustained and broadened, including more publicdiscussion of the rationale for policy advice, es-pecially on sensitive issues.

188


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serv

ed.

sche

dule

.st

ipul

ated

tha

t ad

ditio

nal m

easu

res

Dec

line

in w

orld

pri

ce

com

plet

ing

that

rev

iew

led

to

to r

educ

e pr

ojec

ted

fisca

l def

icit

of g

roun

dnut

oil.

mod

ifica

tion

of a

rran

gem

ent

tobe

agr

eed

duri

ng m

idte

rm r

evie

w

add

a se

cond

rev

iew

and

rep

hase

mis

sion

and

impl

emen

ted

in

disb

urse

men

t.Ja

nuar

y 19

82.

Dec

isio

n to

mod

ify r

athe

r th

anca

ncel

arr

ange

men

t pa

rtly

influ

ence

d by

link

to

Pari

s C

lub

agre

emen

t.

SBA

III (

1982

/83)

Mos

t no

t ob

serv

ed.

Mid

term

rev

iew

was

not

Ta

x m

easu

res

envi

sage

d fo

r Sh

arp

dow

ntur

n

Pres

iden

tial a

nd le

gisl

ativ

e co

mpl

eted

.N

ovem

ber

1982

not

impl

emen

ted;

in w

orld

pri

ce o

f el

ectio

ns h

eld

in F

ebru

ary

1983

.el

ectio

n pr

essu

res.

grou

ndnu

t oi

l.

SBA

IV (

1983

/84)

Obs

erve

d.M

idte

rm r

evie

w w

as c

ompl

eted

Se

vere

dro

ught

.M

easu

res

impl

emen

ted

befo

re

on t

ime.

Boar

d ap

prov

al in

clud

ed

Hig

her-

than

-exp

ecte

d si

gnifi

cant

incr

ease

s in

pri

ces

of

expo

rt p

rice

for

seve

ral c

onsu

mer

goo

ds.

grou

ndnu

t pr

oduc

ts

(par

tly o

ffset

larg

e fa

ll Ex

pend

iture

cut

s m

ore

than

in

out

put

and

expo

rt

com

pens

ate

for

reve

nue

shor

tfal

l.vo

lum

es).

Incr

ease

in s

ome

petr

oleu

mpr

oduc

t pr

ices

to

avoi

d de

ficit

inN

atio

nal E

nerg

y Fu

nd

SBA

V

Alm

ost

all o

bser

ved.

Envi

sage

d re

view

s (t

hree

) Im

prov

ed w

eath

erSi

gnifi

cant

pol

icy

adap

tatio

n in

(1

984/

85–1

985/

86)

wer

e co

mpl

eted

on

time.

cond

ition

s.re

spon

se t

o sh

ortf

alls

in e

xpor

tea

rnin

gs a

nd g

over

nmen

t re

venu

e(e

.g.,

exte

nsio

n of

ser

vice

tax

to

tele

com

ser

vice

s,tig

hten

ing

ofcr

edit

ceili

ng).


190

Sen

egal

:Im

plem

enta

tio

n o

f IM

F A

rran

gem

ents

(con

clud

ed)

Fina

ncia

l and

str

uctu

ral

Arr

ange

men

ts1

PCs

and

benc

hmar

ks2

Prog

ram

rev

iew

sSl

ippa

ges

and

prox

imat

e ca

uses

Shoc

ksC

omm

ents

SBA

VI a

nd S

AF_

1 A

ll PC

s un

der

SBA

obs

erve

d;M

idte

rm r

evie

w u

nder

SB

A

Del

ay in

form

ulat

ion

of a

ctio

n pl

an

Shar

p de

clin

e in

exp

ort

Win

dfal

l pro

fits

from

pet

role

um

(198

6/87

)ne

arly

all

benc

hmar

ks u

nder

co

mpl

eted

on

time.

for

dete

rmin

atio

n of

pro

duce

r pr

ice

of g

roun

dnut

s;se

ctor

and

from

ric

e im

port

s SA

F ob

serv

ed.

pric

es o

f cer

eals

(be

nchm

ark

decl

ine

in im

port

pri

cem

obili

zed

for

the

gove

rnm

ent

unde

r SA

F).

of p

etro

leum

pro

duct

s.bu

dget

.

SBA

VII

and

SAF_

2 A

ll PC

s un

der

SBA

obs

erve

d.M

idte

rm r

evie

w u

nder

SB

A

Slig

ht d

elay

in r

emov

al o

f rem

aini

ng

Goo

d w

eath

er

Pres

iden

tial a

nd p

arlia

men

tary

(198

7/88

)Be

nchm

arks

und

er S

AF

com

plet

ed o

n tim

e.qu

antit

ativ

e re

stri

ctio

ns o

n im

port

s co

nditi

ons.

elec

tions

hel

d in

Feb

ruar

y 19

88.

obse

rved

,with

slig

ht d

elay

(b

ench

mar

k un

der

SAF)

.in

one

.Sh

arp

dete

rior

atio

n in

th

e te

rms

of t

rade

.

ESA

F I_

1 (1

988/

89)

Obs

erve

d.M

idte

rm r

evie

w c

ompl

eted

Sl

ippa

ges

in im

plem

enta

tion

of t

ax

Locu

st in

fest

atio

n of

So

cial

unr

est

in s

econ

d ha

lf of

on

tim

e.re

form

mea

sure

s in

the

sec

ond

half

crop

s.pr

ogra

m p

erio

d.of

the

yea

r (a

fter

mid

term

rev

iew

).

Une

ven

dist

ribu

tion

of

rain

fall.

ESA

F I_

2 (1

989/

90)

Obs

erve

d.M

idte

rm r

evie

w c

ompl

eted

on

Slip

page

s af

ter

mid

term

rev

iew

:M

easu

res

to in

crea

se t

ax r

even

uetim

e.—

del

ay in

impl

emen

ting

tax

refo

rm

impl

emen

ted

prio

r to

app

rova

l of

mea

sure

s (e

xpan

ding

VAT

bas

e).

arra

ngem

ent.

— c

ontin

genc

y m

echa

nism

for

free

zing

low

er p

rior

ity e

xpen

ditu

res,

Tig

hter

mon

itori

ng:

in t

he e

vent

of a

rev

enue

sho

rtfa

ll,in

trod

uctio

n of

mon

thly

rev

enue

no

t im

plem

ente

d.ta

rget

s,an

d a

PC o

n m

inim

umre

venu

e co

llect

ion.

ESA

F I_

3 (1

991)

Obs

erve

d.Sl

ight

del

ay (

one

mon

th)

in

Wea

keni

ng o

f per

form

ance

aft

er

Shar

per

drop

in e

xpor

t.R

eque

st fo

r th

ird

annu

al

com

plet

ion

of m

idte

rm r

evie

w.

mid

term

rev

iew

.ar

rang

emen

t w

as d

elay

ed u

ntil

succ

essf

ul im

plem

enta

tion

of s

ix-

Del

ays

in im

plem

enta

tion

of

Poor

wea

ther

mon

th s

taff-

mon

itore

d pr

ogra

mst

ruct

ural

mea

sure

s.co

nditi

ons.

SBA

VIII

(19

94)

All

PCs

for

Mar

ch 1

994

wer

e O

nly

the

purc

hase

ass

ocia

ted

met

,exc

ept

accu

mul

atio

n of

w

ith a

ppro

val o

f the

arr

ange

men

t ne

w a

rrea

rs.

was

mad

e be

fore

the

SB

A w

asre

plac

ed b

y an

ESA

F.ES

AF

II_1

(199

4/95

)O

bser

ved.

Mid

term

rev

iew

com

plet

ed

slig

htly

beh

ind

sche

dule

(t

wo

mon

ths)

.

ESA

F II_

2 (1

995/

96)

Mos

t ob

serv

ed.

Mid

term

rev

iew

com

plet

ed

Del

ays

in r

efor

m o

f ene

rgy

sect

or.

slig

htly

beh

ind

sche

dule

(t

wo

mon

ths)

.Sl

ow p

ace

of p

riva

tizat

ion

prog

ram

.

ESA

F II_

3 (1

997)

Mos

t ob

serv

ed.

Mid

term

rev

iew

com

plet

ed

Del

ays

in p

ublic

ent

erpr

ise

and

Unf

avor

able

wea

ther

sl

ight

ly b

ehin

d sc

hedu

leen

ergy

sec

tor

refo

rms;

cond

ition

s.(t

wo

mon

ths)

.re

sist

ance

from

inte

rest

gro

ups.


191

ESA

F III

_1 (

1998

)M

ost

obse

rved

.M

idte

rm r

evie

w c

ompl

eted

D

roug

ht.

slig

htly

beh

ind

sche

dule

(o

ne m

onth

).D

eclin

ing

oil p

rice

s.

ESA

F III

_2 (

1999

/M

ost

of t

arge

ts p

rior

to

Com

plet

ion

of fi

rst

revi

ew

Slip

page

s in

the

impl

emen

tatio

n Pr

esid

entia

l ele

ctio

ns h

eld

in

2000

)D

ecem

ber

1999

tes

t de

laye

d by

six

mon

ths.

of fi

scal

pro

gram

and

str

uctu

ral

Febr

uary

and

Mar

ch 2

000;

date

wer

e m

et.T

here

afte

r,re

form

s in

the

run

-up

won

by

oppo

sitio

n ca

ndid

ate

m

ost

stru

ctur

al a

nd

Envi

sage

d se

cond

rev

iew

was

to

pre

side

ntia

l ele

ctio

ns.

(Mr.

Wad

e).

som

e fin

anci

al b

ench

mar

ksno

t co

mpl

eted

.N

ew d

ates

for

mee

ting

wer

e no

t ob

serv

ed.

stru

ctur

al b

ench

mar

ks a

gree

dw

ith n

ew g

over

nmen

t.

ESA

F/PR

GF

III_3

Se

vera

l PC

s re

late

d to

D

elay

s of

tw

o m

onth

s an

d fo

ur

Eigh

t m

onth

s el

apse

d be

twee

n (2

001)

seco

nd a

nd t

hird

rev

iew

s

mon

ths

for

first

and

sec

ond

com

plet

ion

of r

evie

w u

nder

wer

e no

t ob

serv

ed.

revi

ews,

resp

ectiv

ely.

seco

nd a

nnua

l arr

ange

men

t an

d ap

prov

al o

f yea

r (fi

rst,

seco

nd,o

rEn

visa

ged

thir

d re

view

was

th

ird)

arr

ange

men

t.no

t co

mpl

eted

.Le

gisl

ativ

e el

ectio

ns h

eld

in

Apr

il 20

01.

Impl

emen

tatio

n of

som

eco

rrec

tive

mea

sure

s al

low

edco

mpl

etio

n of

sec

ond

revi

ew,b

utno

t th

e th

ird

revi

ew,j

ust

befo

reth

e ex

pira

tion

of t

hear

rang

emen

t.

Sour

ce:I

MF

staf

f rep

orts

.1 R

oman

num

eral

s ar

e us

ed t

o in

dica

te t

he s

eque

nce

of a

rran

gem

ents

,by

type

.For

mul

tiyea

r ar

rang

emen

ts,n

umbe

r su

ffix

refe

rs t

o ar

rang

emen

t ye

ar (

first

,sec

ond,

or t

hird

).2 P

Cs

= P

erfo

rman

ce c

rite

ria.


192

AP

PE

ND

IX2

Sen

egal

:Pro

ject

ions

and

Out

turn

s o

f Sel

ecte

d V

aria

bles

(In

per

cent

of G

DP,

unle

ss o

ther

wise

indi

cate

d)

Cur

rent

acc

ount

Expo

rt g

row

thde

ficit

(exc

ludi

ng(in

per

cent

Gov

ernm

ent

Gov

ernm

ent

Gro

ss d

omes

tic

Gro

ss d

omes

tic

offic

ial t

rans

fers

)pe

r an

num

)ba

lanc

ere

venu

eR

eal G

DP

grow

thsa

ving

inve

stm

ent

____

____

____

____

___

____

____

____

___

____

____

____

____

___

____

____

____

___

____

____

____

____

___

____

____

____

___

____

____

____

____

_Pr

o-O

ut-

Diff

er-

Pro-

Out

-D

iffer

-Pr

o-O

ut-

Diff

er-

Pro-

Out

-D

iffer

-Pr

o-O

ut-

Diff

er-

Pro-

Out

-D

iffer

-Pr

o-O

ut-

Diff

er-

ject

ion

turn

ence

1je

ctio

ntu

rnen

ce1

ject

ion

turn

ence

1je

ctio

ntu

rnen

ce1

ject

ion

turn

ence

1je

ctio

ntu

rnen

ce1

ject

ion

turn

ence

1

Med

ium

-ter

m p

roje

ctio

ns2

SAF/

SBA

1986

/87

9.2

10.8

–1.6

13.2

–0.4

13.6

–0.9

–1.5

0.6

18.4

18.8

–0.4

4.4

4.2

0.2

6.3

6.9

–0.6

14.0

13.7

0.3

1987

/88

7.8

11.4

–3.6

11.1

–5.2

16.3

0.5

–1.2

1.7

18.0

17.5

0.5

3.3

4.4

–1.1

8.0

7.2

0.8

14.0

12.5

1.5

1988

/89

6.6

10.0

–3.4

10.4

13.4

–3.0

1.3

–2.1

3.4

17.7

16.8

0.9

3.5

–0.5

4.0

9.5

7.5

2.0

14.0

12.6

1.4

1989

/90

5.5

8.4

–2.9

17.5

16.9

0.6

10.5

8.5

2.0

ESA

F I

1988

/89

9.1

10.0

–0.9

11.8

13.4

–1.6

0.2

–2.1

2.3

17.7

16.8

0.9

4.2

–0.5

4.7

10.6

7.5

3.1

14.5

12.6

1.9

1989

/90

7.8

8.4

–0.6

12.2

13.1

–0.9

0.6

–3.2

3.8

18.1

16.9

1.2

3.5

3.6

–0.1

11.8

8.5

3.3

14.6

13.4

1.2

1990

/91

6.5

8.9

–2.4

13.3

2.9

10.4

1.9

2.0

–0.1

18.8

18.9

–0.1

3.6

1.3

2.3

13.2

8.8

4.4

14.9

13.7

1.2

1991

/92

5.4

8.4

–3.0

12.6

–3.4

16.0

2.

70.

22.

519

.018

.60.

43.

82.

31.

514

.18.

55.

614

.913

.51.

4

ESA

F II

1994

9.8

9.3

0.5

6.5

9.5

–3.0

–0.7

–1.8

1.1

14.4

14.0

0.4

2.4

2.0

0.4

9.3

9.6

–0.3

15.1

16.2

–1.1

1995

7.8

9.2

–1.4

13.5

15.1

–1.6

–1.4

–0.2

–1.2

15.0

15.1

–0.1

4.7

4.8

–0.1

11.2

11.3

–0.1

15.5

16.9

–1.4

1996

7.3

8.0

–0.7

7.3

6.4

0.9

–0.6

–0.2

–0.4

15.3

16.0

–0.7

4.8

5.2

–0.4

12.6

12.8

–0.2

16.7

16.3

0.4

1997

6.8

7.8

–1.0

7.9

–0.3

8.2

0.8

0.5

0.3

15.7

16.9

–1.2

4.5

5.0

–0.5

14

.011

.62.

4 17

.817

.30.

5

ESA

F/PR

GF

III19

987.

35.

32.

07.

18.

2–1

.1–1

.0–0

.3–0

.715

.616

.8–1

.25.

35.

7–0

.413

.810

.43.

419

.217

.51.

719

996.

87.

9–1

.16.

110

.7–4

.6–0

.1–1

.41.

316

.017

.3–1

.36.

55.

01.

514

.711

.82.

919

.919

.40.

520

006.

79.

0–2

.36.

13.

62.

50.

10.

10.

016

.118

.1–2

.06.

05.

60.

415

.48.

47.

0 20

.718

.42.

3

Ann

ual p

roje

ctio

ns3

1986

/87

9.2

10.8

–1.6

13.2

–0.4

13.6

–0.9

–1.5

0.6

18.4

18.8

–0.4

4.4

4.2

0.2

6.3

6.9

–0.6

14.0

13.7

0.3

1987

/88

9.2

11.4

–2.2

19.5

–5.2

24.7

–0.4

–1.2

0.8

18.0

17.5

0.5

4.2

4.4

–0.2

9.5

7.2

2.3

14.0

12.5

1.5

1988

/89

9.1

10.0

–0.9

11.8

13.4

–1.6

0.2

–2.1

2.3

17.7

16.8

0.9

4.2

–0.5

4.7

10.6

7.5

3.1

14.5

12.6

1.9

1989

/90

8.2

8.4

–0.2

–0.4

13.1

–13.

5–1

.3–3

.21.

917

.616

.90.

74.

63.

61.

010

.28.

51.

715

.213

.41.

819

90/9

17.

28.

9–1

.713

.72.

910

.81.

52.

0–0

.518

.818

.9–0

.11.

31.

30.

09.

28.

80.

412

.913

.7–0

.819

91/9

27.

38.

4–1

.1–0

.9–3

.42.

51.

60.

21.

418

.018

.6–0

.6

5.1

2.3

2.8

10.1

8.5

1.6

12.3

13.5

–1.2

1994

9.8

9.3

0.5

6.5

9.5

–3.0

–0.8

–1.8

1.0

14.4

14.0

0.4

2.4

2.0

0.4

9.3

9.6

–0.3

15.1

16.2

–1.1

1995

7.7

9.2

–1.5

10.6

15.1

–4.5

–0.9

–0.2

–0.7

15.3

15.1

0.2

4.5

4.8

–0.3

11.3

11.3

0.0

15.6

16.9

–1.3

1996

7.3

8.0

–0.7

7.4

6.4

1.0

–0.8

–0.2

–0.6

15.5

16.0

–0.5

4.5

5.2

–0.7

12.8

12.8

0.0

16.9

16.3

0.6

1997

6.7

7.8

–1.1

6.9

–0.3

7.2

0.5

0.5

0.0

15.5

16.9

–1.4

4.5

5.0

–0.5

11.7

11.6

0.1

16.5

17.3

–0.8

1998

7.3

5.3

2.0

7.1

8.2

–1.1

–1.1

–0.3

–0.8

15.6

16.8

–1.2

5.3

5.7

–0.4

13.8

10.4

3.4

19.2

17.5

1.7

1999

7.0

7.9

–0.9

7.5

10.7

–3.2

–1.9

–1.4

–0.5

16.8

17.3

–0.5

6.4

5.0

1.4

13.9

11.8

2.1

19.7

19.4

0.3

2000

6.6

9.0

–2.4

15.0

3.6

11.4

–1.6

0.1

–1.7

17.3

18.1

–0.8

5.5

5.6

–0.1

14.2

8.4

5.8

19.6

18.4

1.2

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Current Senior Officials

Mr. A. Boucar, Deputy Governor, BCEAOMr. Ababacar Diop, Cabinet DirectorMr. Serigue Babacar Diop, Directeur de Cabinet,

Ministère des MinesMr. Pape Diouf, Minister of AgricultureMr. A. Fall, President, Power Sector Regulatory

CommissionMr. Alioune Gassama, Director of Analyses,

Forecasting and StatisticsMr. Ambroise Koné, Director of Research, BCEAOMr. Seyni N’Diaye, National Director, BCEAOMr. Souleymane Saib, Director of Administrative

and Financial AffairsMr. Macky Sall, Minister of EnergyMr. Abdoulaye Sene, Technical AdvisorMr. Chiekh Soumare, Minister of Budget


Mr. Serigne Lamine Diop, Minister of FinanceMr. Mamadou Lamine Loum, Prime Minister,

Minister of FinanceMr. Famara Ibrahim Sagna, Minister of FinanceMr. Djibril Sakho, National Director, BCEAOMr. Magatte Pathé Sené, National Director, BCEAOMr. Mamoudou Touré, Minister of Finance

Representatives of Political Parties

Mr. Amath Dansokho, Parti pour l’Indépendance etle Travail (PIT)

Mr. Sakhma Diouf Faye, PITMr. Sémun Pathé Gnèye, PITMr. Makhtar Mbay, PITMr. Ibrahima Sène, PITMr. Dibo Ka, Union pour le Renouveau

DémocratiqueMr. Amath Wade, PITMr. Landing Savane, Jef/PADS

Academics

Mr. Abdoulaye Diagne, Director of Research, Eco-nomics Faculty, Cheik Anta Diop University

Business Community

Mr. Amath Benoit Gaye, Secretary General,National Union of Chambers of Commerce,Industry & Agriculture

Mr. Nor Talla Kane, Executive Secretary, ConseilNational des Employeurs du Senegal

Mr. Mamadou Lamine Niang, President, NationalUnion of Chambers of Commerce, Industry &Agriculture

JournalistsMr. Abdou Diarra, Le MatinMr. Malik Diaw, Le SoleilMs. Aissatou Fall, Walf-FMMr. Mounirou Fall, Sud QuotidienMr. Amadou Gueye, Le Journal de l’EconomieMr. Josias Toba Tanama, Le Journal de l’Economie

Nongovernmental OrganizationsMr. Mame Gueye, President, Civil Forum, National

Chapter of Transparency InternationalMr. Jacques Habib Sy, Founder, Aid Transparency

Trade Union RepresentativesMr. Pape Diallo, UNSASMr. Madia Diop, President, CNTSMr. Abdoulaye Gueye, President, Union Nationale

des Syndicats Autonomes du Sénégal (UNSAS)Mr. Mody Guiro, Secretary General, Confédération

Nationale des Travailleurs du Sénégal (CNTS)Mr. Jhohume Kout, Secretary General, AGHTSMr. Waly Ndiaye, Confédération des Syndicat

AutonomesMr. Mademba Sock, Secretary General, UNSAS

Representatives of Donors

Mr. Jean de Gliniasty, Ambassador of FranceMr. Matar Fall, Senior Sanitary Engineer, World

Bank Acting Country Director, and water sectorlead specialist

Mr. Alain Frossard, Conseiller économique et com-mercial régional, French Embassy

Mr. Xavier Rose, Counselor, French EmbassyMr. Jean-Luc Supera, Country Director, Agence

Française de DéveloppementMr. Daniel Voizot, Chef de la Mission de

Coopération, French EmbassyMr. Richard Young, Economic Adviser, European

Union Delegation

The mission also met with a large number of currentand former IMF and World Bank staff involved withthese institutions’ work on Senegal.

193

APPENDIX 3

Senegal: List of People Interviewed in Connection with the Evaluation of the Prolonged Use of IMF Resources

Morocco

1. Morocco is one of the few recent prolongedusers of IMF resources to have “graduated.” It had aseries of nine arrangements between 1980 and1993,1 but has not had an IMF-supported programsince then and completed repaying its borrowingfrom the IMF in 1997.

2. After a temporary sharp increase in phosphateprices in the early 1970s that led to a boom in expen-ditures, the Moroccan economy ran into major prob-lems in the late 1970s, as the global recession andfalling phosphate prices led to sharp declines in ex-ports and budgetary revenues. At first, the govern-ment maintained spending and this resulted in verylarge current account and budget deficits, financedmainly through external borrowing on commercialterms. Consequently, the imbalances Morocco facedas it entered a series of IMF-supported programswere very large. In 1981, the external current ac-count deficit (excluding grants) exceeded 12 percentof GDP, while the central government budget deficitreached 14 percent of GDP. Between 1982 and 1984,the stock of external debt averaged over 100 percentof GDP, while the external debt-service ratio, beforerescheduling, averaged 50 percent of exports ofgoods and services. In addition, Morocco facedmajor structural weaknesses, with heavy governmentregulation, including on consumer prices and creditallocation, a strong inward economic orientation,and considerable vulnerability to exogenous shocksdue to its dependence on the agricultural sector andon phosphate exports.

3. Programs in the early 1980s had only a moder-ate impact in reducing these imbalances. Fiscal ad-justment was achieved mainly through expenditurereduction, but domestic payments arrears rose. At

first, progress on structural reforms was slower thanplanned, in part due to concerns over the social ac-ceptability of a more rapid pace of reform. For ex-ample, there were serious riots over increases in theprices of some heavily subsidized consumer goods.

4. In the second half of the 1980s, as the structuralreforms started to reach maturity, the contribution ofthe private sector to investment and growth increasedas it benefited from deregulation and improved ac-cess to credit. Moreover, financial adjustment poli-cies and structural reforms became mutually rein-forcing, as for example tax reform contributed to agreater tax effort, and as export growth accelerated.Over the course of its IMF programs, Morocco even-tually achieved significant structural changes, includ-ing the liberalization of most foreign transactions andconsumer prices; reform of public enterprises; taxand public expenditure reform; and the removal ofadministrative impediments to private investment.Moreover programs were successful in raising sav-ing: the ratio of gross national saving to GDP rosefrom an average of 16 percent during 1980–82 to al-most 23 percent during 1990–92 (Figure 12.1). Taxreforms contributed to this change, with the tax effortrising from 19!/4 percent of GDP to 22!/4 percent ofGDP over the same period.2 Progress, while eventu-ally substantial, was not smooth. There were a num-ber of setbacks in the face of exogenous shocks andperiodic slippages in policy implementation.

5. This experience suggests a number of ques-tions. Were there elements of the design and imple-mentation of programs that helped Morocco achievegreater external sustainability and dispense withIMF support more quickly than many other pro-longed users? Why did core policies continue tomove in the right direction? And compared with theother case studies, were there any differences interms of “exit strategies” once Morocco had reacheda certain threshold in terms of external viability? Thefollowing aspects help to cast light on these issues:

Evidence from Two CountriesThat “Graduated” fromProlonged Use

194

CHAPTER

12

1Two EFFs in the early 1980s, both of which quickly went off-track and were cancelled, followed by seven SBAs between 1982and 1993 (see Figure 3.1 in Part I, Chapter 3). Morocco also hadsix nearly continuous annual SBAs between 1965 and 1972.

2Morocco’s adjustment experience is described in more detailin Nsouli and others (1995).


No obvious differences in the time frame ofprograms from other prolonged users

6. As in Pakistan and Senegal (but less so in thePhilippines), programs were initially overoptimisticabout the time frame needed for external viability tobe restored.3 For example, the 1983 staff reportstated that despite large disequilibria, Morocco“must aim at reaching a sustainable position in a rel-atively short period. . . . the medium-term scenario inwhich the program is set aims at reaching this sus-tainability by 1988. . . . which, in the view of thestaff, is an appropriate time horizon.”4 Later, pro-grams appear to have become more realistic aboutthe timetable for restoring external viability: by the1986 program viability was not expected until about1993. Medium-term projections in subsequent pro-grams broadly maintained this time horizon.

7. Programs from 1982 onward were supportedby 12–18 month SBAs, but there was some recogni-tion on both sides that this was part of a moremedium-term effort. Nevertheless, the Moroccan au-thorities have expressed the view that programs stillhad an overly short-term time horizon, particularly

as far as structural reforms were concerned and that,at least formally, staff could not candidly positionprograms within the longer-term framework. Thus,initial programs were too ambitious about thetimetable for structural reform.

8. For example, the 1983 program called for avalue-added tax (VAT) to be implemented by July1984, and for draft bills for reform of the general in-come tax and the corporate income tax to be submit-ted along with the 1984 budget. In the event, theVAT was not implemented until 1986, after extendedconsideration in Parliament, and a global personalincome tax was only implemented in 1989. Despitethis initial “overpromising” on the timetable of taxreform—which appears to have reflected institu-tional pressures to demonstrate concrete progresswithin the time frame of the program—one factorthat helped maintain progress was that an initial “LoiCadre” adopted by Parliament had defined the over-all framework for tax reform, so that the ultimate ob-jectives remained clear despite slippages in thetimetable of individual components. Indeed, officialsand staff interviewed were of the view that, withhindsight, the additional time taken for preparationand debate, including in Parliament, on the VAT andthe income and profits taxes contributed to theireventual successful implementation by helping to se-cure greater popular support.

Program design and the nature ofconditionality showed no major differences inapproach from that in other prolonged users

9. Until 1985, IMF-supported programs focusedon fiscal adjustment, primarily through large reduc-tions in capital spending and public sector wage re-straint, tight monetary policy through credit con-trols, and a flexible exchange rate. Structuralreforms were also envisaged, but in practice werelargely limited to preparatory work. From 1986 on,programs gave greater emphasis to structural reform,including of the fiscal system and trade regime. Pro-grams continued to target moderate strengthening ofthe fiscal position, while the nominal exchange ratewas fixed in relation to a basket of the currencies ofMorocco’s principal trading partners.

10. Programs generally took a fairly gradual ap-proach to adjustment. On average, the six IMF-sup-ported programs between 1983 and 1992 targeted areduction in the fiscal deficit by an average of 1.3 per-centage points of GDP between the year in which theprogram started and the next,5 while the current ac-count deficit was projected to narrow on average by

195

0

5

10

15

20

25

20009896949290888684821980

1983 SBA

1988 SBA

1986 SBA

1990 SBA

Actual dataData as projected under the arrangement

Figure 12.1. Morocco: National Saving(In percent of GDP)


3The first programs in 1980 and 1981 turned out to be particu-larly unrealistic, assuming as they did that commercial bankswould continue to lend on a significant scale.

4However, even then the medium-term projections showedlarge overall balance of payments deficits (equivalent to 6 percentof GDP) persisting through 1987. The staff report claimed that“beyond 1987, the situation could be regarded as more sustain-able in the light of the resumption of normal capital inflows. . . .”

5That is, between the projection or estimate for year T, and theprojection for year T + 1.


1.4 percentage points of GDP over the same period(Table 12.1 and Figures 12.2 and 12.3). In both cases,the targeted adjustment was somewhat greater in theearlier programs than in later ones, in part reflectingthe scale of the initial imbalances. Although there wasconsiderable slippage in individual programs, therewas a substantial reduction in the fiscal deficit overthe period of IMF-supported programs, from 14 per-cent of GDP in 1981 to a little over 2 percent in1992.6

11. Conditionality in most programs concentratedon the standard macroeconomic quantitative perfor-mance criteria. Programs typically also included in-dicative benchmarks for government revenue, whichwould trigger consultations on corrective actions ifthey were missed. Conditionality on structural mea-sures was exercised primarily through the reviewprocess, with little use of specific benchmarks. Thereseems to have been relatively limited use of prior ac-tions even though the guidelines on prolonged usecalled for greater emphasis on such actions. 7

12. Given the basic commitment of the authori-ties, the IMF’s flexibility in exercising conditional-ity—with the focus on reviews to judge whether suf-ficient progress was being made in key structuralareas—was probably appropriate. However, there isno evidence that the IMF was more “flexible” than

in many other cases; for example, programs with thePhilippines also relied primarily on reviews forstructural conditionality.8

Ownership and implementation: despiteslippages in timing, political commitment tothe broad direction of the reforms and goodimplementation capacity appear to have beenthe critical factors

13. Implementation of the programs was some-what mixed, but despite periodic slippages, particu-larly in relation to fiscal targets, policies on core is-sues continued to move in the right direction,although not always at the pace envisaged in pro-grams.9 Implementation of the monetary aspects ofprograms was generally strong. This consistent di-rection appears to have owed much to a high degreeof commitment by the economic team to the under-lying aims and content of successive programs, withthe backing of the highest levels of government, andto a high degree of political stability. Interviews withstaff also suggest that the strength of Morocco’s civilservice was a major factor in successful implementa-tion of key reforms. Increasing transparency inputting information and policies out for public dis-cussion also appears to have helped develop abroader consensus, although this consensus was by

196

6Year-to-year comparisons are complicated because of arrearsand other data issues. Much of the fiscal adjustment apparentlyoccurred in 1986, after the 1985 program went off-track and be-fore a new program was approved in December of that year.

7However, they were used on occasion. For example, parlia-mentary approval of a revised budget, upward adjustment of retailprices of subsidized commodities, and partial reversal of recentlyintroduced import restrictions were required as “prior actions” forapproval of the 1983 SBA arrangement. The 1992 SBA also in-cluded a number of prior actions relating to fiscal issues and thereform of interest rate policy, open market operations, and con-sideration of a new banking law.

Table 12.1. Morocco: Implementation of Fiscal Programs1

T T + 1____________________ ____________________Year Program T – 1 Projected Actual Projected Actual

1981 EFF 10.1 7.42 14.5 . . . 12.41982 SBA 12.4 8.22 12.5 . . . 12.11983 SBA 12.1 8.7 12.1 7.2 11.21985 SBA 11.2 6.0 9.6 4–4.5 5.41986 SBA 9.6 6.6 5.4 4.3 5.91988 SBA 4.6 4.5 4.6 3.5 6.01990 SBA 5.7 2.8 3.5 2.0 3.11992 SBA 3.1 0.8 2.2 0.0 4.0

Source: IMF staff reports.1Central government deficit, payments order basis, excluding grants; unless otherwise stated.2Budget deficit, excluding grants, and excluding changes in “Fonds réservés.”

8The Executive Board did grant waivers of fiscal performancecriteria in the 1983, 1986, and 1988 programs, in addition towaivers for primarily technical breaches of performance criteriarelating to external arrears.

9Both the 1980 and 1981 EFF programs went off-track quicklyand were cancelled, with less than 20 percent of the planned dis-bursements made. The remaining SBAs were more successfullyimplemented; on average 78 percent of planned disbursementswere made. However, neither of the last two programs in 1990and 1992 was completed as performance criteria were missed andprogram reviews were not completed.


no means complete since some measures—espe-cially price increases on consumer goods—contin-ued to meet considerable social resistance.

14. In this context, the pace of adjustment and re-form was set to some degree by the authorities’ per-ceptions of the domestic political acceptability ofreform. In practice, the IMF accommodated this ap-proach by tolerating minor policy slippages and tak-ing a flexible attitude to progress on structural re-form in completing program reviews. But thisapproach does not seem to have differed fundamen-tally from that in the case study countries wherethere was also considerable de facto flexibility. Thereal difference appears to have been made by strongdomestic ownership, rather than by the structure ofconditionality.

The economy was highly vulnerable toexogenous shocks, but the approach ofprograms to this uncertainty was not differentfrom that in other prolonged users10

15. However, although exogenous developmentsled to some relaxation of adjustment efforts in1981–82 and caused temporary problems in otherprograms, more generally, shocks do not seem tohave distracted the authorities from their broad com-mitment to advancing reform. For example, therewas no major erosion of earlier gains even in theface of the Middle East crisis in 1990–91 andepisodes of severe drought. Nevertheless, in theirquestionnaire responses, the Moroccan authoritiessaid that programs were insufficiently flexible withregard to exogenous shocks. In their view, advanceagreement on how supply shortfalls would be dealtwith in programs would have made the processsmoother and programs less subject to interruption.

With regard to the exit strategy, theauthorities and the IMF appear to haveadopted a narrower rationale for continuedprogram involvement than in some otherprolonged users

16. The staff appraisal for the 1992 SBA requestnoted that Morocco was poised to achieve viablebudgetary and external sector positions, and thatwith the help of the program in 1992 and a furtherconcerted effort in 1993, Morocco would graduatefrom the use of IMF resources, restore normal rela-

tions with its creditors, be able to service its futuredebt obligations, and achieve current account con-vertibility in 1993. This “graduation” certainly didnot mean that all structural adjustment problemshad been solved. Indeed, the economy continued to

197

–2000

–1500

–1000

–500

0

500

1000

1980 82 84 86 88 90 92 94 96 98 2000

1983 SBA

1985 SBA

1986 SBA

1988 SBA

1990 SBA

1992 SBA

Actual dataData as projected under the program

Figure 12.2. Morocco: Current Account Balance1

(In millions of U.S. dollars)

Source: IMF staff reports.1The starting point of projections is occasionally off the “actuals” line because

of subsequent revisions to the data on which the projections were based.

–20

–15

–10

–5

0

1983 SBA

1985 SBA

1986 SBA1988 SBA1990 SBA

1992 SBA

Actual dataData as projected underthe program

1980 82 84 86 88 90 92 94 96 98

Figure 12.3. Morocco: Central Government Balance1

(Payments order basis; in percent of GDP)

Source: IMF staff reports.1The starting point of projections is occasionally off the “actuals” line because

of subsequent revisions to the data on which the projections were based.

10However, unlike, for example, in Senegal, there was onlyvery limited use of automatic adjustments to quantitative perfor-mance criteria. The 1990 and 1992 programs did include ad-justers in relation to net external financing and to privatizationproceeds.


face major challenges, including in the areas ofpublic enterprise reform, the regulatory environ-ment for private investment, and reform of the fi-nancial system. Moreover, the economy remainedinsufficiently diversified, with its heavy reliance onrain-fed agriculture leaving it still very sensitive toweather variations.

17. However, it is not clear that common stan-dards were applied with respect to different coun-tries when judging when an exit from IMF-sup-ported programs was justified. For example, acomparison of Morocco’s situation in 1993 with thatof the Philippines, where the IMF judged that a fur-ther EFF arrangement was justified, does not suggestany obvious reasons for the differences in approach(see Box 5.3 in Chapter 5 of Part I).

Lessons from Jamaica: Implications for Ownership and the “Seal ofApproval”

18. Jamaica is a former prolonged user of IMF re-sources that made a decision not to seek further fi-nancial support from the IMF. The current evalua-tion has not attempted to investigate all aspects ofIMF-supported programs with Jamaica, but focuseson two issues: (i) how did the authorities’ decisionnot to enter into new lending arrangements with theIMF affect the nature of the policy dialogue and“ownership”; and (ii) what lessons does Jamaica’srecent experience suggest for the IMF’s role in sig-naling a “seal of approval” on the macroeconomicframework to donors, including other IFIs? The eval-uation is based on reviews of internal and publishedIMF documents, interviews with IMF staff and a se-nior Jamaican representative as well as written re-sponses by the authorities.

19. Since the 1960s, Jamaica has had nine SBAsand four extended arrangements with the IMF. Thelast EFF expired in March 1996, after which the Ja-maican government announced its “independencefrom the IMF,” indicating that it would not borrowagain. The authorities explained in interviews withthe IEO that this decision was taken in large part be-cause of their assessment that previous IMF-sup-ported programs had not achieved success and thatthey had consequently prepared a “homegrown”macroeconomic program.

20. At the time the EFF expired, Jamaica stillfaced large adjustment challenges. Public debt washigh (over 100 percent of GDP, with over two-thirdsexternal); inflation was over 20 percent; the real ef-fective exchange rate was appreciating under thecombined impact of sizable wage increases in thepublic and private sectors and an anti-inflationary

monetary policy that had pushed up real interestrates;11 growth remained weak (recorded GDP roseby only 3 percent during the decade of the 1990s);12

and the first stage of a major financial sector crisiswas under way. The IMF policy advice at the timewas that (i) a major adjustment of the exchange ratewas necessary in order to restore competitivenessand thereby contribute to higher sustainable growth,along with (ii) some fiscal adjustment (i.e., smalloverall surpluses). Later, IMF staff also recom-mended a workout strategy for the financial sectorthat involved the separation of banks from insurancecompanies and the intervention and closure of all in-solvent institutions. The authorities strongly rejectedthe advice on the exchange rate, arguing that, with awage formation process that was heavily influencedby the exchange rate, a sizable devaluation wouldonly accelerate the wage-price spiral so that the bestway to assure competitiveness was through a tightmonetary policy. The IMF staff initially doubtedthat, in the likely protracted low-growth environ-ment that such a stabilization strategy would in-volve, the authorities would be able to maintain thesizable fiscal effort necessary to avoid unsustainablepublic debt dynamics. On the financial sector, thegovernment feared that outright intervention andclosure of banks would lead to a crisis of confidenceand capital flight. They opted instead for a strategybased on guaranteeing all deposits and other liabili-ties; keeping all institutions open; and dealing withproblem institutions more gradually, albeit at a highfiscal cost. An off-budget institution, FINSAC, wascreated and gradually acquired shares in a number ofinstitutions in return for official liquidity supportuntil it effectively controlled all domestically ownedcommercial banks; a process of merger, reorganiza-tion, and gradual privatization then followed.

21. In the event, the government did manage togenerate and maintain large primary fiscal surpluses(Figure 12.4), involving some difficult budgetary de-cisions, including a squeeze on capital spending. Asthe authorities’ “homegrown” policy strategy wasseen to be implemented quite forcefully, and theIMF backed away in subsequent Article IV surveil-lance reports from its previous insistence on an ini-tial large depreciation while still encouraging greaterexchange rate flexibility, the nature of the policy dia-logue gradually improved. In July 2000, it wasagreed that there would be staff monitoring of thegovernment’s economic program. The authoritieshave indicated that they sought the SMP specifically

198

11The real effective exchange rate appreciated by over 20 per-cent in the two years prior to March 1996 and appreciated by afurther 30 percent in the next two years, before leveling off.

12However, GDP growth was probably under-recorded becausethe sizable informal sector appears to have grown much faster.


in order to obtain policy-based loans from the multi-lateral development banks by sending a signal ontheir macroeconomic framework.13

22. The authorities’ program achieved some im-portant results, although Jamaica’s problems are farfrom resolved.14 High primary fiscal surpluses pre-vented the public sector debt dynamics from deterio-rating further; real interest rates declined moder-ately, although they are still extremely high; and thecushion of external reserves improved. However, thepublic sector debt (at around 130 percent of GDP)remains a major source of vulnerability and realGDP growth has only recently begun to recovermoderately, after a number of years of stagnation.Nevertheless, given the extremely difficult startingconditions and the consequences of the financial sec-tor crisis, any adjustment was bound to be protractedand difficult, with or without IMF support.

23. This experience suggests some interestinglessons:

On ownership

• The staff’s own assessment was that one of themain reasons earlier programs had failed toachieve their objectives was a lack of owner-ship. In their view, as reflected in an internal re-view prepared in 1998, the authorities’ agree-ment to programs had been mainly motivated bythe need to obtain foreign financing and debt re-lief—a view shared by the authorities. Underthese conditions, program implementation,when it was successful, was geared to meetingspecific quantitative performance criteria ratherthan to the implementation of the underlyingpolicy approach. Indeed, a principal conclusion

of the internal assessment was that unless theauthorities made a future economic program amatter of national political priority, it was un-likely that any such program would achieve thestated objectives.

• In this case, the move away from a financialarrangement with the IMF—at the authorities’initiative—was associated with much strongerdomestic ownership, which proved critical. Thepolicy strategy they pursued, while not in accordwith the IMF’s recommendations on some keypoints, does not appear to have been a less appro-priate strategy in Jamaica’s circumstances, espe-cially since it was implemented with commit-ment. Although any counterfactual cannot be

199

13A staff-monitored program (SMP) is an informal agreementbetween the authorities and the IMF staff to monitor the imple-mentation of the authorities’ economic program; such monitoringdoes not imply endorsement of the program by the IMF ExecutiveBoard, management, or staff, but management and staff shouldconsider that the program is capable of achieving its targets if it isconsistently implemented. See “Guidelines for the Use of StaffMonitored Programs.” While SMPs can serve several purposes,the objective of Jamaica’s SMP was to serve as a signal to officiallenders—specifically, the World Bank, as the text notes, and theInter-American Development Bank (IDB) and the Caribbean De-velopment Bank (CDB)—about the authorities’ commitment tosound macroeconomic policies. While the minimum requirementof the World Bank to proceed with policy-based adjustment (asopposed to project) lending is that IMF management provide a“comfort” letter indicating that, in its view, macroeconomic poli-cies are being conducted in a satisfactory manner, in the case ofJamaica the World Bank had initially indicated that it preferred anIMF-supported program to be in place. It eventually agreed to ac-cept the SMP as the necessary seal of approval.

14See the staff report for the 2001 Article IV Consultation andReview of Staff-Monitored Program, available on the IMF’s web-site, for further details.

–10

–5

0

0

50

100

150

200

250

5

10

15

1990

Central government primary and overall balances

Public debt (end of period)2

92 94 96 98 2000

1990 92 94 96 98 2000

Central governmentprimary balance

Central governmentbalance

Adjusted centralgovernment

balance1

Figure 12.4. Jamaica: Trends in Fiscal Balance and Public Debt(In percent of GDP)

Source: IMF staff reports.1Includes FINSAC interest payments on a full year base. Fiscal year starts

in April.2Excluding Bank of Jamaica’s external debt and net of public enterprises’

holding of FINSAC and government securities.


assessed with rigor, it seems likely that, if Ja-maica had been obliged at that time (e.g., in orderto unlock other sources of financing) to adopt aprogram along the lines proposed by the IMFstaff, the eventual outcome would have beenworse than the current situation, especially be-cause a lack of ownership would have led to weakimplementation. It is more difficult to judgewhich set of policies might have been preferable,abstracting from political commitment.15

• With the benefit of hindsight, the IMF shouldnot have been so dogmatic in insisting upon itspreferred strategy, which also involved substan-tial risks. However, the IMF was prepared tomodify its position, once it was clear that the au-thorities had a strong commitment to an alterna-tive strategy and were prepared to back it upwith action, especially on fiscal policy. Indeed,records of the surveillance Board discussions inMay 2001 suggest that a number of ExecutiveDirectors expressed sympathy for the authori-ties’ position on the exchange rate/monetarypolicy framework.

• The authorities’ strong commitment to trans-parency was a major advantage. They agreed tothe publishing of a (rather critical) Public Infor-mation Notice (PIN) following the 1997 ArticleIV consultation—an action that had a favorableeffect on private financial markets (reflected inquite narrow spreads)—and have consistentlyagreed to the publishing of Article IV consulta-tion missions’ concluding statements, includinginformation on performance relative to SMP tar-gets, as well as staff reports for the consultationsand SMPs. Their normal practice has been toissue, around the time of publication, their own“commentary” on the staff reports, emphasizingboth points of agreement and disagreement,which has helped foster a more open debate.

On the seal of approval

• Internal IMF documents and staff interviewssuggest that the need for an IMF arrangement inorder to have access to Paris Club reschedulingwas a major motivation behind the authorities’

proceeding with many earlier programs.16 But,as noted above, many of the programs appear tohave been weakly owned. By the time the gov-ernment decided to forgo any further lendingarrangements with the IMF, any further resched-uling of (pre-cutoff date) official debt wouldhave had little impact, and Jamaica was able toaccess private financial markets without anIMF-supported program. Therefore, the initiallack of a “seal of approval” from the IMFmainly affected program lending by the multi-lateral development banks.

• The ambiguous nature of the staff-monitoredprogram (SMP) as a seal of approval on themacroeconomic framework caused some initialproblems. On the one hand, the authorities wereconcerned that the IMF might become an im-pediment to their access to much needed re-sources from other sources, notably the WorldBank and the IDB, while the latter institutionswere concerned that the IMF staff might not beas rigorous in their policy advice and assess-ments if no IMF financial resources were in-volved. The World Bank also had burden-shar-ing concerns. Eventually, both institutions didundertake lending for financial sector restructur-ing, using the SMP as the basis for the signal onthe macroeconomic framework.

• Despite these initial concerns about the role ofthe SMP, it does appear to have played a usefulrole in the case of Jamaica—allowing some roomfor maneuver to combine a strong domestic pol-icy formulation process with a healthier policydialogue with the IMF. IMF staff expressed theview that the authorities became more receptiveto a discussion on alternative policy mixes—within their own overall framework—once theSMP route became an option, and the authoritieshave also indicated that they found the approachuseful. The point is not that the SMP as an instru-ment necessarily had any major advantages overa lending arrangement. Although the IMF didhave initial reservations about the authorities’ ap-proach, these reservations diminished, and theIMF might have been willing to agree to a lend-ing arrangement in support of the authorities’program rather than a SMP. But in this case aSMP did provide an alternative approach to sig-naling on the “seal of approval” that was moreacceptable to the authorities, and hence morelikely to foster ownership.

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15Kirkpatrick and Tennant (2002) attempt to assess what theoutcome would have been if an alternative financial sector strat-egy, closer to one like that recommended by the IMF, had beenadopted. However, their counterfactual assumes that the IMFstrategy would have led to a major currency crisis and output col-lapse and hence an obviously inferior outcome. There is no wayto test this assertion. It is also possible that the counterfactualwould have been a stronger flow of funds into foreign-owned do-mestic banks.

16Jamaica reached seven rescheduling agreements with theParis Club between 1984 and 1993.

Documents

Part II Country Case Studies - IEO Home II...Country Case Studies 1. Pakistan is one of the most prolonged users of IMF resources and has been under IMF-supported programs almost continuously