Fiscal Adjustment in IMF-Supported Adjustment Programmes: The Tanzanian Experience

Abstract

Fiscal adjustment is an essential element of macro-economic stability and economic growth. Given that economic growth is the most powerful weapon in the fight for higher living standards, poor growth performance in African countries, has been a challenge to economists, policy makers and international development institutions. Sub-Saharan Africa's performance in the 1980s and 1990s was disappointing with much of the region unable to break away from paths of negative or low per capita income growth, high inflation and fiscal deficits, and balance of payments difficulties. In the face of excessive fiscal deficits, balance of payment crises, rapid monetary expansion, high inflation and lack of credit to the private sector, the imperative was to embark on adjustment programmes supported by the World Bank and IMF with fiscal reforms aimed at achieving sustainable external balance and macroeconomic stability through restraining aggregate demand, promoting supply and improving economic efficiency. Some countries were able to make progress as fiscal reforms gained ground, liberalization efforts marked progress, and numerous countries took steps to eliminate credit controls, and to adopt indirect instruments of monetary policy. Fiscal adjustments have however become the subject of criticism in recent years, especially in low income countries, because they involves trade-offs between stability and growth, or stability and social expenditures, which are often not adequately articulated or quantified and involve distributional issues that are politically sensitive. The key issues raised are: (1) To what extent have the W.B./IMF-supported programmes helped in achieving a more sustainable fiscal adjustment? (2) How did the negotiations of adjustment take account of constraints on implementation, explore alternatives and assess the social impacts of the key measures? (3) To what extent have the adjustment programmes contributed to building institutional capacity and fostering ownership? (4) How were trade-offs considered i.e. how important were efforts to sharply reallocate the budget toward protecting the most vulnerable groups? (5) How effective has Bank-Fund collaboration been in addressing public expenditure policy and management and social safety net issues? (6) Do Fund-supported programmes show improvements overtime to take account of lessons learnt? (Af. J. of Finance and Management: 2003 11(2): 84-103)