Chapter 4


where they are positive in real terms, is a major precondition for stabilisation and an
important element of monetary and credit policies under adjustment.

By reducing the volume of money supply and credit expansion, tighter fiscal/monetary
policies automatically exert an upward pressure on the level of interest rates. In order to
allow interest rates to rise to market equilibrium levels, complementary measures to
liberalise credit markets and interest may be introduced. Interest rates can also be increased
through specific government action, e.g. by raising the interest rates at which commercial
banks can obtain credits from the central bank.

5.2 Effects of tighter monetary policies

The most direct and significant impact of tighter monetary policies is an increase in real
interest rates. This is expected to serve various purposes:
* to reduce the demand for domestic credits which will limit domestic credit expansion and
 the growth in money supply,
* to discourage credit demand specifically for investments with low productivity and thus
 re-allocate financial resources towards more productive investments;
 to encourage private savings which will foster domestic capital formation and reduce
 (excess) demand for consumer goods;
 to discourage capital exports and to attract capital imports which will broaden the basis
 of capital supply without credit expansion and, furthermore, improve the balance of
 payment situation.

 If successful, the restrictive monetary policies will lead to reduced inflation and decreasing
 current account and balance of payment deficits. In practice, there are various distorting
 factors and possible side effects which may prevent the policies from having the desired
 results (e.g. due to private savings and private investments responding differently from
 expectations, or due to the role and response of informal credit markets; see Box 4.3).

 Monetary and credit policies must also be seen in the context of (the results of) other
 adjustment measures, e.g. the price changes and demand contraction resulting from exchange
 rate and fiscal policies. There are, furthermore, substantial differences between (rather
 negative) short-term and (probable positive) long-term effects: while increased interest rates
 and demand contraction will promptly lead to reduced investments, and in turn reduced
 employment and income, improved general growth prospects may stimulate private
 investments in the long-run. We cannot go into great detail here. Our major concern is the
 implications of restrictive monetary and credit policies for the food economy and food
 security. In order to answer this, we follow the approach applied before and trace the main
 lines of impact from the macro-level through the meso-economy down to the factors
 determining food supply, food demand and household food entitlement.


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