chapter  12
12 Pages

Structural Adjustment And Development

Faced with such problems, many debtor countries had to deal with the International Monetary Fund (IMF) and the World Bank (WB) to seek new loans and to extend the loan repayment period for principal and interest. Some LDCs had to renegotiate loans with private international banks and financial agencies to cover a domestic budget or external balance of payments deficit. In response, the IMF/WB strongly advocated their 'conditionality' clauses, i.e. structural adjustment and stabilization policies (SAS) before they first agreed to advance further loans to countries suffering from serious macroeconomic instability. The SAS policies required countries to adopt appropriate monetary, fiscal and trade policies to reduce internal (fiscal) and external (balance of payments) deficit and bring down the rate of inflation from a high level. The overall objective was to promote economic growth by pursuing prudent microeconomic reform policies to improve economic efficiency and productive capacity. Policies are also designed to promote enough flexibility in the economic systems of LDCs to absorb the adverse impact of any negative shocks (Agenor 2001). At the same time, some macroeconomic stabilization policies like reduction of public sector deficit and money supply are supposed to bring down the rate of inflation and increase the competitiveness of the economy. In the next section, we discuss the different types of SAS policies generally recommended by the IMF and the WB.