The absence of adequate national reserves and other short-term resources imposes intolerable strains on the economic administration of countries. Even such eventualities as relatively minor errors in forecasting, strikes in ports, the unexpected 'bunching' of imports and modest shortfalls in production which in normal circumstances ought to be accommodated by changes in reserves, can now assume enormous proportions and play havoc with the smooth functioning of the economy. They drive countries to seek credits from suppliers and through other channels on terms which are often unsatisfactory, and to impose embargoes on nonessentials and even raw materials and intermediate goods needed for the utilization of existing productive capacity. All these result in a cumulative extension of administrative controls which by virtue of their scope and intensity lead to increasingly greater rigidities over the economy as a whole. These difficulties tend to be aggravated by the fact that inadequacy of reserves, and the consequent problems posed for countries in meeting external payments commitments, lead to a weakening of confidence and to a deterioration even in the terms of credit that are normally made available by the international banking system.
Many developing countries suffer from severe fluctuations in exports while others are vulnerable to sudden increases in demand for food imports consequent on diminished harvest yields. At the same time, given the considerable structural weaknesses and rigidities which characterize the economies of the developing countries and also their limited access to the international credit markets, their ability to adjust to fluctuations in their external payments without undue sacrifice of their growth objectives depends in part on the size of their reserves. However, the accumulation of reserves also has associated costs, which can be quite significant in the case of many developing countries with pressing needs for an increase in productive investment and consumption. Many of these countries have adopted restrictions on imports and payments and comprehensive systems of foreign exchange budgeting for the purpose of adjusting external payments to external receipts.
In the 1980s, faced with stagnation or declines in export earnings and with sharply reduced access to external finance, many developing countries had no option but to draw on their foreign exchange reserves, although these same circumstances called for the maintenance of more prudent reserve levels. Reserves nevertheless fell in many developing countries after 1981. The reserve holdings of capital importing African developing countries in the period 1982-84, were sufficient to finance little more than one month of imports. Constraints or declines in foreign exchange earnings and extremely low reserve levels often led developing countries to delay making payments. Arrears accumulated rapidly, increasing six-fold in 1982-84.