Global Crisis -- Using Fiscal Policy to Stimulate Growth (an IMF Podcast)

Posted by Michel Lazare

In a recent podcast, our colleagues Paolo Mauro, Charles F. Kramer, and Steven A. Barnett of the IMF's Fiscal Affairs, Western Hemisphere, and Asia and the Pacific departments respectively, talk about using public money to compensate for declining private demand and how the U.S. and China are doing it. (click here for a link to the podcast.)

This podcast is a rich source of information on how to use fiscal policy in a time of crisis, and more specifically in the current global financial crisis. Paolo Mauro who heads one of the Fiscal Operations Divisions of the Fiscal Affairs Department makes the point that there is now a consensus that fiscal stimulus are in the present circumstances necessary to counteract the fall in private sector demand and the overall contraction in demand. He underscores the need for international dialog and coordination on fiscal policy.

He also stresses, however, that fiscal stimulus should not be used by all countries because different countries are facing different initial fiscal positions and sustainability constraints.

Attention should also be paid to the nature of the spending to include in the package in order to maximize effect on demand: increasing public infrastructure spending looks attractive, while other types of spending (e.g., transfers) should be targeted. Countries, as a matter of fact, have used a wide varieties of modalities.

Listen to the podcast for many other points and a presentation of the U.S. and China fiscal stimulus packages.

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.

IMF Conference on “Fiscal Risks: Sources, Disclosure, and Management” (Paris, October 28–29, 2008)

Posted by Ricardo Velloso

The IMF’s Fiscal Affairs Department and the Offices in Europe organized a conference on “Fiscal Risks: Sources, Disclosure, and Management,” at the IMF’s Paris Office on October 28 and 29, 2008. The conference was attended by high-level officials from ministries of finance representing twenty European countries as well as representatives from international institutions, rating agencies, think tanks, and academia. The opening address was delivered by Mr. Saleh M. Nsouli, Director of the Offices in Europe, followed by former FAD Director, Mrs. Teresa Ter-Minassian's keynote speech.

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.

Addressing Infrastructure Challenges and Managing Fiscal Risks from PPPs

Posted by Gerd Schwartz, Ana Corbacho, and Katja Funke (all IMF staff)

Governments face important challenges to upgrade public infrastructure and improve the delivery of public services. As in other regions of the world, countries in the European Union (EU) and several non-EU economies in Europe have been facing strong demands to strengthen the quality of public infrastructure to accelerate economic development and income convergence. At the same time, tight budget constraints have raised incentives to rely on private sector resources to supply infrastructure. In this context, public-private partnerships (PPPs) are being used more and more as an alternative to traditional public procurement. While this has created new business opportunities for the private sector, it has also given rise to new fiscal, macroeconomic, and reputational risks for governments.

How then should governments address these infrastructure challenges and manage associated risks? Edited by Gerd Schwartz, Ana Corbacho, and Katja Funke Public investment and Public-Private Partnerships: Addressing Infrastructure Challenges and Managing Fiscal Risks brings together the perspectives of academics, practitioners, and members of several international organizations. It is based on the proceedings from a high-level international seminar for government officials, which was organized jointly by the Fiscal Affairs Department of the IMF, the Hungarian Ministry of Finance, and the International Center for Economic Growth, European Center (ICEG-EC), and with some financial support from the European Investment Bank.

A Review of Capital Budgeting Practices

Posted by Davina Jacobs

In general, government capital budgets have multiple roles: as instruments of fiscal policy, to improve the net worth of government, and—particularly in the area of economic infrastructure—as vehicles for economic development. This is usually achieved through greater reliance on debt or external aid than on such conventional sources of financing as taxation. Governments have introduced capital budgets to serve all these objectives, singly or collectively, depending on the context. In some cases, more attention has been paid to capital budgets as a way to reduce deficits caused by an excess of recurrent expenditures versus revenues.

Notwithstanding the seeming virtues of capital budgets, opinions continue to be divided, as they have been during the past seven decades, about their utility in governments. In the present context, in which some more advanced countries have budgetary surpluses and use them to reduce levels of public debt, there is little incentive to revive the debate about the need for capital budgets. In the developing world, however, where many governments operate on the edge of financial instability, the debate about capital budgets and their equivalents continues.

Previous blog postings by Bill Dorotinsky on March, 3, 2008 focused on the capital budgeting process itself, while another post on February 20, 2008 discussed capital budgeting in the context of the over-all PFM system, and addressed defining capital and measuring some aspects of efficiency and effectiveness. This post summarizes the recent IMF Working Paper by Davina Jacobs on “A Review of Capital Budgeting Practices”

Download a_review_of_capital_budgeting_practices1.pdf

The text of the working paper is also available by clicking on this link.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 3)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the third part of this YouTube video; parts 1 and 2 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges ( Video 2)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the second part of this YouTube video; parts 1 and 3 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 1)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the first part of this YouTube video; parts 2 and 3 appear in other posts published today.

Public Financial Management Reform -- Trends and Challenges

Posted by Bill Dorotinsky

On June 18, 2008, I spoke on Public Financial Management Reform: Trends at the the International Consortium on Government Financial Management (ICGFM) monthly speaker series in Washington, D.C.

I took the opportunity to share my personal views on current trends and challenges in public financial management (PFM) reform, drawing on my experience across the globe and multiple institutions. (As I noted, these are not the views of the IMF, or any other institutions with which I have been associated.)

The presentation covered three broad areas:

1. Common PFM reform recommendations, seen across all donors, consultants, etc.
2. Information on what reforms countries have been implementing in recent years
3. Challenges ahead for improving PFM

The PowerPoint can be downloaded here Download public_financial_reform_trends_icgfm_June_2008.ppt

The ICGFM Blog also posted a summary and video of the presentation on their Blog (CLICK HERE).

The Role of Fiscal Transparency in Sustaining Stability and Growth in Latin America

Posted by Taryn Parry

How can Latin America reduce its vulnerability to financial crises and global slowdowns?

The answer I developed in a recent IMF working paper is for these governments to focus on their full adherence to the IMF Code of Fiscal Transparency. Although there has been a strong rebound in growth in Latin America since the recession early in this decade, the pace of expansion has lagged behind other emerging market countries, and concerns have been raised about their ability to avoid future crises. Fiscal priorities for the region include avoiding procyclical fiscal policies, continuing to reduce public debt, improving the quality of the tax system, and promoting a better business environment. Fiscal transparency can play a critical role in meeting these challenges and remedying weaknesses in fiscal management practices that have been associated with past financial crises.

Fiscal Discipline and Subnational Borrowing: the Case Study of Brazil

Posted by Mario Pessoa

Decentralization of borrowing authority to local government and fiscal sustainability are two issues in permanent tension in public financial management. On the one hand, it is positive to give local authorities room for raising financial resources in order to finance investment and provision of goods and services to local communities. On the other hand, the lack of institutional capacity, history of defaults, and lack of controls pose to the central government an argument to restrict autonomy. In other words, there is a fear that decentralization can weaken fiscal discipline. Therefore, is it possible to built a safe net in order to prevent problems? Can both objectives be met?

A recent article by C.R. Martell entitled "Fiscal Institutions of Brazilian Municipal Borrowing" (Public Administration and Development 28, 30-41; 2008) examines the effectiveness of Brazilian fiscal institutions (constitution, fiscal responsibility law, and borrowing arrangements) in light of 2001 policy recommendations for strengthening efficiency and fiscal discipline in subnational borrowing by means of fiscal policies that encourage efficiency, discipline, and controls.

The Pile of Books on the “Resource Curse” Just Keep Growing !!!

So, why we should read “Escaping the Resource Curse”?

Posted by Teresa Dabán

Devising policies and institutions for the prevention of the “resource curse”—a term used to describe the surprisingly negative outcomes of resource-rich countries—has been the object of an extensive literature. One of the most recent contributions is Escaping the Resource Curse, a book edited by Macartan Humphreys, Jeffrey D. Sachs, and Joseph E. Stiglitz under the auspices of the Initiative for Policy Dialogue at the University of Columbia. The book reviews the main challenges posed by the management of resource revenues and proposes some interesting ways to address them.

To strengthen resource revenue management, for instance, the book proposes creating innovative budgetary  bodies and management arrangements that would operate in “parallel” to the existing ones. This post definitely recommends reading Escaping the Resource Curse, but argues that the benefits of creating such additional bodies and arrangements need to be carefully weighed against the risk of undermining and alienating existing budgetary institutions and discouraging reform efforts, especially in low-income countries, weakening governance and fragmenting already weak public finance systems.

Governor Arnold Schwarzenegger and California's Budget

Posted by Michel Lazare

To further illustrate our February 1, 2008 post on the difficult fiscal outlook in a number of US states and the harsh measures that states are considering to adjust their fiscal position, here is a YouTube video on the bugetary measures proposed by the Governor of California, Arnold Schwarzenegger.

This video is not dated, but was posted on YouTube on January 26, 2008.

Fiscal Double Whammy: Combination of Balanced-Budget Rule and Economic Slowdown Forcing U.S. States to Make Tough Fiscal Decisions

Posted by Michel Lazare

A majority of US states are facing a difficult fiscal situation according to the survey made by the Center on Budget and Policy Priorities (CBPP).

In a January 28, 2008 revision of a survey of states fiscal outlook (prepared by Elizabeth C. McNichol and Iris J. Lav ), CBPP indicates that "19 states face a total budget shortfall of at least $32 billion in fiscal year 2009; 9 others expect budget problems." These dire projections were made by the states themselves and were aggregated by CBPP.

Because they have passed a fiscal rule, which forces the state legislators to adopt a balanced budget, "the vast majority of states cannot simply run a deficit or borrow to cover their operating expenditures."  They have to resort to fiscal retrenchment--not a very pleasant perspective at times when the US economy is noticeably slowing down--, which could in turn negatively affect economic growth prospects (procyclical effects).

Germany: Ministry of Finance's Task Force Recommends Introduction of Performance Budgeting and Accrual Accounting

Posted by Michel Lazare

A few days ago, our FAD colleague and PFM Blog author Marc Robinson published a short article in IMFSurvey Magazine titled "Major Reforms for German Budget System." Here is a summary of the key points; the full text of the article is accessible by clicking here.

The German Ministry of Finance's Budget and Accounting Reform Task Force, who was assisted by staff of FAD, recently recommended "the introduction of product budgets--often known elsewhere as programs. The intention is to focus greater attention in the budget formulation stage on choices about how much money is allocated to" various outputs.

"Under the task force's proposals, the product budgets would not in the first instance be used for parliamentary budget appropriations. The idea is that they would initially be used [...] in formulating the budget. The logical next step would, however, be to shift the annual budget law also onto programmatic basis."

7th IMF Debt Management Forum

Posted by Brian Olden

The 7th IMF Debt Managers Forum, hosted by the IMF’s Monetary and Capital Markets Department, was held in the IMF’s HQ building in Washington D.C. between November 5th and 6th. This two day event was attended by leading public debt managers from advanced and emerging market economies, participants from the financial markets, including leading investment banks and hedge funds and other international financial institutions. 

Many interesting topics were discussed including the effects of the recent credit crunch on sovereign debt management and issuance strategies, trends in the composition of public debt portfolios, use of derivatives to assist in the implementation of debt management strategies, asset and liability management strategies and the issue of sub-national and public enterprise debt management.

The involvement of private sector financial market participants was useful as they were able to provide some commentary on the credit crises and their take on how this would affect , issuance spreads for sovereign issuers over the short to medium-term. Most of the participants were relatively optimistic about the prospects for emerging markets but perhaps less so about the more advanced economies. The most interesting message from the Forum was the view that, for once, this was a crisis that had originated in the advanced economies and that the affect on emerging markets was proving much less severe than has been the case in other international financial crises of recent years.  Lack of exposure of domestic financial institutions to the sub-prime mortgage market and the improvement in the fiscal management of emerging markets has insulated these economies from the worst effects and this has been reflected in the relatively mild reaction of investors to EM sovereign debt as evidenced by the relatively mild widening of spreads in binds issued by these countries. 

The attached note highlights the main areas of discussion in more detail. [Download highlight_7th_imf_debt_forum_2007.DOC]

From Line-item to Program Budgeting - Opening the 'black-box' of spending

Posted by Bill Dorotinsky

A perennial question of annual public budgeting for Ministries of Finance and legislatures, and the general public, is "What are we getting for the money?" It is the proverbial "black box" of annual spending, where funds are allocated by traditional line-item budgets to agencies, but there is no sense of what the money actually achieves. While under line-item budgeting, budget offices know what inputs are being purchased, there is no clear indication of what activities, purposes, or objectives -- or ultimately outputs or outcomes -- are being purchased, or how government policies translate into spending. A common first step for many countries towards opening the black box of spending is to adopt a program classification of spending, and introduce program budgeting. A program classification is often thought of as a first step in introducing a performance orientation into the budget process.

While sounding like a very dry, technical exercise, the reality of successful introduction of program budgeting is more complex, involving elements of change management across government. Various governments across the globe have been introducing program budgets over many decades, including within the past decade in Russia, Brazil, and more recently, the Republic of Korea (RoK). A recent book by the Korean Institute of Public Finance and the World Bank, From Line-item to Program Budgeting (John Kim, Editor; Seoul, 2007), summarizes some key lessons from the global experience, and offers practical advice to countries embarking on this journey.

Public Investment: Good Project Management is an Issue of ...Capital Importance

"Unexpected changes to payment schedules related to capital projects can create significant difficulties for finance officers responsible for cash management" remarks Steven R. Kreklow (*) in his short article ("Capital Project Cash Flow Management") of the August 2007 issue of the Government Finance Review, the membership magazine of the US-based Government Finance Officers Association.

This adverse impact on cash management and more generally budget execution can be mitigated by good budget and project management techniques described in Steven R. Krelow's article.