Structural adjustment under the extended fund facility: The case of Bangladesh

Abstract

The paper argues that the use of quarterly credit ceilings as the chief performance criterion in a supply-oriented program like the Extended Fund Facility (EFF) is not only inappropriate for monitoring overall compliance, but can also undermine structural adjustment that is otherwise on track. Low-income countries, highly dependent on aid financing of the budget, are shown to be particularly vulnerable in this respect. This is evident from Bangladesh's experience with the extended arrangement. Ceilings on domestic credit were breached primarily because of a large, unanticipated shortfall in programmed foreign aid. Though structural policies were implemented as envisaged, the breach triggered suspension and subsequent cancellation of EFF disbursements to Bangladesh. The paper recommends changes in the IMF's approach to monitoring medium-term, supply-oriented programs, and urges extension of the new Contingency Financing Facility to cover short-falls in aid relative to baseline projections of a Fund program.