Maintain Fiscal Support, but Devise Credible Exit Strategies, Says the IMF's Fiscal Monitor

Posted by Michel Lazare.

On November 3, 2009, the IMF published the second issue of its Cross-Country Fiscal Monitor.

This Fiscal Monitor stresses that while, fiscal policy will continue to provide substantial support to aggregate demand in most countries this year, and is projected to remain supportive of economic activity in advanced countries in 2010, government debt in advanced G-20 economies is projected to reach 118 percent of GDP in 2014.

To get debt below 60 percent by 2030 will require raising the average structural primary balance by 8 percentage points of GDP over 2010-20 and then keeping it there for a further decade.

This is not a trivial amount of fiscal consolidation to say the least. The FIscal Monitor, however, considers that this could be achieved by a combination of non-renewal of stimulus measures; a freeze in real per capita spending excluding pensions and health; reforms to keep the growth of pension and health spending in line with that of GDP; and tax increases averaging about 3 percentage points of GDP for advanced G-20 countries.

Most PFM experts would probably agree that such a sizable fiscal consolidation over such a long period also requires a sound PFM system and pretty solid fiscal institutions.

Fiscal Implications of the Global Economic and Financial Crisis -- First Elements for an Exit Strategy

Posted by Michel Lazare

In virtually all countries, the global financial crisis has resulted in a significant deterioration of the fiscal position owing in part to a decline in fiscal revenues. How necessary they are to cushion the effect of the crisis and jumpstart recovery, fiscal stimulus packages have also contributed to a further deterioration in fiscal position and an accumulation of public debt. All this points to a possible fiscal solvency issue over time. Fiscal positions needs therefore to be monitored and the further accumulation of public liabilities needs to be carefully considered as the crisis unfolds, through the formulation and implementation of an exit strategy.

Against this background and "amid signs that global economic crisis is stabilizing, the Group of Eight (G-8) advanced economies has asked the International Monetary Fund (IMF) to do the necessary analytical work to help governments prepare “exit strategies” to unwind the huge stimulus packages that have been deployed to combat the crisis."

The IMF published a few days ago, a Staff Position Note on the "Fiscal Implications of the Global Economic and Financial Crisis" (Download Spn0913[1] ) which already contains some first elements of reflection on exit strategies. For instance the introduction and overview of the note (see full text below) indicates that four components are particularly important in formulating the exit strategies:

Therefore, there is an urgent need for governments to clarify their exit strategy to ensure that solvency is not at risk. In formulating such a strategy, four components are particularly important: (1) fiscal stimulus packages, where these are appropriate, should not have permanent effects on deficits; (2) medium-term frameworks, buttressed by clearly identified policies and supportive institutional arrangements, should provide a commitment to fiscal correction, once economic conditions improve; (3) structural reforms should be implemented to enhance growth; and (4) countries facing demographic pressures should firmly commit to clear strategies for health and pension reforms. While these prescriptions are not new, the weaker state of public finances has dramatically raised the cost of inaction.

Minister of Finance of Uganda, Dr. Ezra Suruma Honoured as Best Finance Minister in Africa in 2008

Posted by Davina Jacobs

In the February 11 edition of the Uganda newpaper Sunday Monitor online, Tom Magumba reports that Uganda's Finance Minister Dr Ezra Suruma has been honoured as the best finance minister in Africa for the year 2008 by The Banker magazine.

The Banker, established in 1926, is a monthly UK based global intelligence financial magazine that investigates, exposes and passes expert comment on critical developments in the global banking sector

The Banker's ninth Year of the Awards were sponsored by Qatar Financial Centre. The award results from detailed questionnaires sent to banks. This year 740 banks from about 150 countries were involved.

An article in the January edition of the Banker magazine described Dr Suruma as a minister who has overseen a year of strong growth in the face of a series of economic head winds. According to the Magazine, Uganda scored highly having kept inflation under 7 per cent from 6.8 per cent in 2007. Banks remained well capitalized with an average ratio of liquid assets to deposits of 51 per cent - which saw foreign banks flock into the market - and deposits increased by 26 per cent.

At the award ceremony, Dr Suruma described this award as a surprise recognition but also a vote of confidence in the future of the economy and a reward to his staff and the government for its hard work.

He is reported as saying "I am humbled by this award coming to a former peasant in the hills of Kabale now honored as Africa’s best finance minister."

Are Governments Obliged to Bail Out their Central Banks?

Posted by Ian Lienert

With a worldwide financial crisis in full swing, central banks are being called upon to provide support to an ailing financial sector. In some cases, central bank credit is being provided directly to financial institutions. What are the risks that the central bank itself will not be able to support the financial cost of these operations? Will the government have to step in and bail out its central bank? Is there any chance that the central bank will become bankrupt?

An IMF Working Paper published in February 2008 examines government legal obligations to recapitalize central banks when their balance sheets became seriously impaired. The paper indicates that even in cases where the government is nominally responsible for maintaining the financial strength of the central bank, it may do so only in a cosmetic fashion. In a number of countries, governments have not provided central banks with financial support on a timely basis, leaving them excessively reliant on seignorage to finance their operations and/or forcing them to abandon monetary policy objectives.

Creating Fiscal Space for Infrastructure: The Case of Tanzania

By Richard Hughes

After a decade or more in which it took a back seat to provision of basic services such as education, health and social protection in economic development theory and practice, infrastructure in back on the economic policy agenda in both developed and developing countries. In the United States and other advanced economies, kickstarting infrastructure investment is being seen in the context of the current crisis as a way to both deliver a timely, temporary and targeting fiscal stimulus while, at the same time, raising their long-run growth prospects. In Africa the work of the UK’s Africa Commission and the World Bank’s Africa Infrastructure Country Diagnostic have brought into stark relief the extent to which a lack of access to basic infrastructure services such as clear water, electricity and roads is constraining current welfare and future growth potential of the region.

But how do countries meet the sizable fiscal costs of infrastructure investment? A recently IMF Working Paper (Download wp08256.pdf ) looked at question of how to create sustainable fiscal space for infrastructure investment in Tanzania, a country with one of the least developed infrastructure networks in the region. However, its findings and conclusions are relevant for other low-income countries in Africa and elsewhere that face large gaps between their infrastructure needs and their access to long-term investment financing.

Norway’s Government Pension Fund–Global

Posted by Thomas Ekeli

A recent post by Mauricio Villafuerte and Jon Shields described newly established guidelines for sovereign wealth funds (SWFs). One of the best known SWFs is the Norwegian Government Pension Fund–Global, formerly known as the Government Petroleum Fund. The Petroleum Fund was established in 1990 as a fiscal policy tool to support a long-term management of the petroleum revenues. Renaming the Fund the Government Pension Fund–Global in 2006 was part of a broader pension reform, highlighting also the Fund’s role in facilitating government savings necessary to meet the rapid rise in public pension expenditures in the coming years. However, the Fund is not earmarked for pension expenditures.

Strengthening Political Economy Analysis to Address the Resource Curse

Posted by Teresa Dabán

photo by Ellie Sandercock (CC)

The chances of resource-rich countries to avoid the resource curse hinge on the existence of sound institutions. While several initiatives have emerged to promote the transparency and sound management of natural resource revenues (NRR)— including IMF’s Resource Revenue Transparency Guide and the EITI, there is still a need to develop an overall framework for the assessment of NRR-related political economy and governance challenges. Against this background, the Bank has launched a project to develop a framework to assess and promote good governance in each of the stages of the “value chain” of NRR, from their extraction to their use, and incorporate political economy issues in the dialogue with resource-rich client countries. To refine such a framework, and concretize the timeframe for its implementation, the Bank held a workshop on October 16, 2008. The workshop revealed that the adoption of the usually proposed mechanisms to mitigate NRR-related governance challenges raises complex issues.

World Bank—Sovereign Debt Management Forum (October 27-29, 2008)

Posted by Brian Olden

The World Bank hosted the Fourth Sovereign Debt Management Forum between October 27–29, 2008 in its Washington, D.C. headquarters. Despite the ongoing turmoil in world financial markets, the event was well attended, with representatives from over 55 advanced OECD, emerging, and low-income countries (LICs), as well as representatives from international institutions, including the IMF and the EU.

The forum was very timely, given the current market turmoil, and naturally much of the discussion centered around the impact of the crises on economies, in general, and on debt management operations, in particular.  Much of the focus was on what the role of debt managers will be in helping to mitigate the effects of the crises on economies in the short and medium-term.

The Santiago Principles: Generally Accepted Principles and Practices for SWFs

Posted by Mauricio Villafuerte and Jon Shields

Do you still wake up in the middle of the night, worried that your country is about to be gobbled up by a rampaging, politically-inspired Sovereign Wealth Fund (SWF) from the other end of the world? Or do you dream that the current financial crisis is going to be solved by massive, daredevil rescues by charitable white knights from Sovereign Wealth Funds? In either case, maybe it’s time to rest peaceably again. Because 23 countries with SWFs agreed, in October 2008, on a set of “generally accepted principles and practices” (GAPP) that would commit them to operate purely on commercial principles. And, as part of this commitment, SWFs abiding by the GAPP would make their objectives, governance structures, and investment practices visible to all.

Are Government Debts Really Irresponsible?

Posted by Andy Wynne

Disclaimer: Andy Wynne, an independent consultant,  is the editor of the International Journal of Governmental Financial Management; the point of view he expresses in the following post is not necessarily shared by either PFM Blog or the IMF.

In recent years it has been assumed that fiscal discipline should be one of the main objectives of public financial management. Thus, for example, the World Bank cites aggregate fiscal discipline as the first of the three much quoted objectives for public expenditure management.1/ The European Union has set targets of 3% for annual fiscal deficit and 60% for government debt. Several countries are adopting fiscal responsibility acts which limit the fiscal deficits which their governments are allowed to apply when setting their annual budgets.

The financial crises in Mexico (1994-95), Southeast Asia (1997) and Russia (1998) brought extensive economic dislocation, fiscal hardships and liquidity problems for the governments of these countries. The debt crisis for the governments of many developing countries over the last two decades had a similar effect and made them dependent on policy advice from the World Bank and IMF. Having suffered these problems it is a question of once bitten, twice shy. Many governments now accept the need to constrain their public expenditure to avoid future debt problems. However, in doing so they may not undertake much needed investment in public infrastructure which could be essential to achieve optimal economic growth in the future.

Does Public Sector Efficiency Matter to Growth? Some New Evidence

Posted by Francois Michel

In a recent paper published in Public Choice, Konstantinos Angelopoulos, Apostolis Philippopoulos and Efthymios Tsionas provide a welcome addition to the empirical growth literature by enlarging the traditional focus on fiscal size to introduce measures of public sector efficiency. Two such measures of public sector efficiency are used.

The first one follows the “output-to-input” (or, as it might be more appropriately denominated, outcome-to-input) approach used by Afonso, Schuknecht, and Tanzi in two famous papers ("Public sector efficiency: an international comparison," Public Choice Volume 123, Number 3-4, June 2005; and "Public Sector Efficiency: evidence from new EU members states and emerging markets," ECB Working Papers number 581, January 2006) governements’ socio-economic outcomes are related to resources used, proxied by public sector spending, for major functions—limited by data availability, in the article’s case, to four basic roles of administration, education, infrastructures, and economic stabilization. The sample consists of 64 developed and non developed countries during four five-year periods between 1980 and 2000.

The second measure of government efficiency to which the model is applied is obtained by applying a stochastic production frontier approach as discussed in Lovell and Kumbhakar’s book (2000). The sample consists here of yearly data between 1995 and 2000 for 52 countries.