Back Matter

Back Matter

Author(s):
International Monetary Fund. Independent Evaluation Office
Published Date:
November 2003
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    Appendix 1
    Table A1.1.Determinants of the Envisaged and Actual Fiscal Adjustment (T−1 to T+1) in IMF-Supported Programs
    EnvisagedActual
    ΔGBALΔGPBALΔGBALΔGPBAL
    GBALT−1−0.4609***−0.5877***
    (−8.52)(−6.73)
    GPBALT−1−0.4799***−0.6094***
    (−6.93)(−6.03)
    CABT−10.1186***0.0874*0.0600*0.0886**
    (2.10)(1.78)(1.88)(2.42)
    EXPT−10.0712***0.1054***0.04630.1226***
    (2.65)(4.49)(1.48)(3.53)
    ΔCABT+10.1801***0.2106***0.0625*0.1366**
    (4.12)(4.63)(1.81)(2.43)
    GrowthT+10.0564−0.03270.2099***0.1906**
    (0.45)(−0.21)(2.84)(2.37)
    Transition−2.079***−2.151***0.8949−1.0238
    (−3.26)(−3.87)(1.16)(−1.51)
    Transition*GBALT−1−0.2425*−0.14050.10010.1949
    (−1.85)(−1.23)(0.81)(1.25)
    Constant−1.5420−0.5875−3.4334−2.6590***
    (−1.60)(−0.54)(−5.57)(−3.44)
    N143142166138
    F21.9219.5914.2111.96
    Prob > F0.00000.00000.00000.0000
    R-squared0.60650.57990.43100.4785
    Root MSE2.1892.2452.9952.964
    Note: Equation estimated through ordinary least squares with White-corrected (heteroskedasticity-consistent) standard errors. *, **, and *** denote significance at the 90 percennt, 95 percent, and 99 percent confidence levels, respectively.
    Table A1.2.Determinants of the Differences Between Envisaged and Actual Fiscal Adjustment
    ∆GBALA – ∆GBALE
    GrowthT+1AGrowthT+1E0.3017*
    (4.01)
    GBALT1AGBALT1E−0.4798*
    (−4.20)
    Transition1.3868*
    (2.07)
    Constant−0.9863*
    (−3.24)
    N135
    F12.67
    Prob > F0.0000
    R-squared0.2248
    Root MSE3.10
    Notes: Equation estimated through ordinary least squares with White-corrected (heteroskedasticity-consistent) standard errors. * = significant at the 99 percent confidence level.Definition of variables∆GBALA – ∆GBALE : Difference between actual and envisaged changes in the fiscal balance from T–1 to T+1.GrowthAT+ 1 – GrowthET+ 1: Differences between actual and envisaged real GDP growth at year T+1.GBALAT– 1 – GBALET– 1: Difference in the fiscal balance between the WEO (actual) and MONA (envisaged) databases.Transition: Dummy for transition countries.
    Appendix 2: Code Book for Assessing the Need for Fiscal Adjustment

    Do program documents clearly explain the source of the existing or potential balance of payments problem motivating the program?1

    • “Unsatisfactory”: The program document provides no explicit reference to any existing or impending external imbalance either from a flow or stock type that the program aims to correct or prevent.

    • “Marginally satisfactory”: The program document makes some quick reference to an existing or possible external imbalance, but does not provide any detailed discussion of the problem. The reader is therefore unclear about whether there is a balance of payments problem, what the nature of the problem is, and how the program is expected to correct it.

    • “Satisfactory”: The program document identifies, discusses, and critically analyzes the sources of the balance of payments problem the IMF-supported program is trying to correct. The document clearly explains the nature of the balance of payments problem calling for IMF involvement and the strategy that the program will follow to tackle it.

    • “Highly satisfactory”: In addition to the characteristics under “satisfactory,” the program document would clearly identify whether the external financing gap calling for IMF involvement resulted from a current or capital account deficit and whether it stemmed from the public or private sector.

    In light of the above, do documents explain the country-specific mechanism by which the fiscal adjustment will help improve the balance of payments problem (or more generally the problem that called for the Fund’s involvement)?

    • “Unsatisfactory”: The program document makes no reference to the country-specific mechanism through which the envisaged fiscal adjustment will assist in solving or preventing the problems associated with the external imbalance.

    • “Marginally satisfactory”: The program documents refer to a possible link between fiscal adjustment and the external problems and imbalances mentioned above but provide virtually no discussion of how the mechanism that links the two will operate.

    • “Satisfactory”: The program document clearly describes and explains the mechanism through which the envisaged fiscal adjustment is going to contribute to solve or prevent the existing or possible balance of payments problem.

    • “Highly satisfactory”: Same as in previous category, but the program either provides a comprehensive analysis of these questions or includes a medium-term assessment of the relationship between these two variables.

    Do documents explain the factors determining the pace and magnitude of the fiscal deficit adjustment, in particular its magnitude relative to the envisaged current account adjustment (e.g., fiscal adjustment as a fraction of the total adjustment)?

    • “Unsatisfactory”: Program documents do not compare the direction and size of the change in the fiscal and current account balances over the life of the program.

    • “Marginally satisfactory”: Program documents make some connection between how the magnitude of the envisaged fiscal adjustment is related to the magnitude of the envisaged current account adjustment, but provide practically no explanation or analysis of the envisaged joint evolution of these variables. Alternatively, a program document that makes no verbal connection between these two indicators but provides a table with information on the evolution of saving and investment balances of both the public and private sector has also been classified here.

    • “Satisfactory”: The program document provides a clear sense of the pace of “burden sharing” between adjustment in the private and public sector.

    • “Highly satisfactory”: Same as “satisfactory,” but the document also provides an analysis of the factors affecting the likely evolution of the current account, fiscal deficit, and private savings-investment balance, including a medium-term table with disaggregated data on savings and investment of the public and private sector.

    If there are other factors influencing the envisaged fiscal deficit adjustment (other than balance of payments considerations), do documents explain clearly how they influence that adjustment?

    • “Unsatisfactory”: The program documents do not point out which macroeconomic imbalances or problems, if any, the envisaged fiscal adjustment is expected to correct, or why a reduction of the fiscal deficit under the program is the appropriate economic policy to follow.

    • “Marginally satisfactory”: The program documents give some general reasons why the fiscal adjustment might be necessary (high inflation, debt sustainability, and financing problem) but the language is vague and does not analyze the problem with sufficient detail.

    • “Satisfactory”: The program documents provide a clear explanation of the objectives of the fiscal adjustment in terms of some well-defined macroeconomic objective (free resources for the private sector, reduce inflation, and bring the public debt to a sustainable path) and the reader is given a good and unequivocal sense of why the fiscal adjustment is necessary.

    • “Highly satisfactory”: The document not only provides a good analysis of why the fiscal adjustment is necessary but also a clear explanation of why the precise magnitude of the envisaged adjustment being proposed (and not some other magnitude) is necessary.

    Do documents explain the rationale for the composition of the fiscal deficit adjustment? In other words, is there a good explanation of why the adjustment has to be done through revenues or expenditures or a combination of the two?

    • “Unsatisfactory”: The program documents provide a list of expenditure and revenue measures associated with the fiscal deficit reduction, but do not explain why the burden of adjustment has to fall on revenues and expenditures; or how the specific share of adjustment revenue and expenditures has been designed.

    • “Marginally satisfactory”: The program documents refer to how the adjustment will be effected (including a sense of the envisaged revenue and expenditure changes), but do not provide a clear rationale of why this specific composition between revenue and expenditures is optimal or necessary.

    • “Satisfactory”: The program documents provide a clear sense of why the specific composition of the adjustment (between revenue and expenditures) is the appropriate one. It includes indicators of what percentage of GDP specific revenue and expenditure measures are going to yield.

    • “Highly satisfactory”: In addition to providing a good explanation of the envisaged composition of the adjustment, the documents provide some analysis of the structure of revenue and expenditure (aimed at identifying major weaknesses in the structure of public finance) and a relatively detailed analysis of how intra-revenue or intra-expenditure changes are going to contribute to the adjustment.

    In the less likely case that the IMF-supported program did not respond to a balance of payments difficulty, the same criteria would apply but with regard to the specific reasons that motivated the program.

    Appendix 3
    Table A3.1.Levels of Grants in a Sample of Sub-Saharan African Countries
    Foreign Currency Magnitudes
    ProjectionsOutturns
    CountryYearTUnitsT−1TT+1T+2TT+1T+2
    Benin1996US$ m84.6153.5138.099.486.8108.473.2
    Burkina Faso1996US$ m102.6131.2129.0124.6159.1150.2175.8
    Central African Republic1998US$ m48.158.564.753.690.086.746.2
    Congo, Republic of1996US$ m21.420.65.15.08.42.46.1
    Côte d’Ivoire1998US$ m75.779.167.668.085.665.047.2
    Ethiopia1996/97SDR m248.4244.3246.6244.6163.5136.9171.1
    Gambia, The1998SDR m3.83.94.14.44.43.53.6
    Ghana1995US$ m40.8148.3133.5144.2233.3177.793.1
    Guinea1997US$ m122.0127.5123.9150.5116.7103.380.1
    Kenya1995/96US$ m103.9130.3165.1136.4101.8100.287.3
    Madagascar1996SDR m60.888.995.998.4115.9136.595.9
    Mali1996SDR m121.789.088.385.8129.9104.993.0
    Mauritania1995SDR m26.730.522.016.514.116.66.2
    Mozambique1996US$ m399.0249.0249.0248.0283.0313.0313.0
    Niger1996US$ m63.182.396.6101.281.184.3110.7
    Rwanda1998US$ m128.6164.7130.3134.1105.7115.3163.5
    Senegal1998US$ m71.850.546.542.5136.6100.089.9
    Tanzania1995/96US$ m128.6174.9179.7182.1254.0245.1350.9
    Togo1994US$ m3.510.338.254.913.717.67.6
    Uganda1997/98US$ m280.0301.8299.2302.9345.8298.8341.1
    In Percent of GDP
    ProjectionsOutturns
    CountryYearTUnitsT−1TT+1T+2TT+1T+2
    Benin1996US$ m4.16.95.83.93.95.03.1
    Burkina Faso1996US$ m4.45.24.84.36.36.36.8
    Central African Republic1998US$ m4.75.45.74.58.88.34.8
    Congo, Republic of1996US$ m1.11.00.20.20.30.10.3
    Côte d’Ivoire1998US$ m0.70.70.60.50.70.50.4
    Ethiopia1996/97SDR m6.36.15.95.43.62.83.6
    Gambia, The1998SDR m1.31.21.21.21.41.11.1
    Ghana1995US$ m0.81.91.31.23.62.61.4
    Guinea1997US$ m3.13.22.93.33.12.92.3
    Kenya1995/96US$ m1.41.61.91.41.21.00.8
    Madagascar1996SDR m2.93.13.33.44.25.33.5
    Mali1996SDR m7.54.94.64.37.15.74.7
    Mauritania1995SDR m3.74.12.81.92.02.20.8
    Mozambique1996US$ m11.58.58.27.18.89.38.3
    Niger1996US$ m3.34.14.54.54.14.65.3
    Rwanda1998US$ m6.98.05.75.35.35.99.0
    Senegal1998US$ m1.61.00.90.73.02.12.1
    Tanzania1995/96US$ m2.53.13.02.93.63.03.9
    Togo1994US$ m0.31.23.85.01.51.40.8
    Uganda1997/98US$ m4.64.43.93.65.85.56.4
    Source: Program documents.
    Table A3.2.Changes in Levels of Grants
    Percentage Change
    Foreign currency valuesIn Percent of GDP
    CountryYearTT/(T−1)(T+2)/ TT−(T−1)(T+2)-T
    Benin199681.5−35.22.8−3.0
    Burkina Faso199627.9−5.00.8−0.8
    Central African Republic199821.6−8.30.7−0.9
    Congo, Republic of1996−3.8−75.6−0.1−0.8
    Côte d’Ivoire19984.4−14.00.0−0.2
    Ethiopia1996/97−1.70.1−0.3−0.7
    Gambia, The19981.614.50.00.0
    Ghana1995263.7−2.81.2−0.7
    Guinea19974.518.00.20.1
    Kenya1995/9625.44.60.2−0.2
    Madagascar199646.310.60.30.2
    Mali1996−26.8−3.6−2.6−0.7
    Mauritania199514.3−45.80.4−2.1
    Mozambique1996−37.6
    Niger199630.422.90.70.4
    Rwanda199828.0−18.61.1−2.7
    Senegal1998−29.7−15.8−0.5−0.3
    Tanzania1995/9636.04.10.6−0.3
    Togo1994192.3431.50.93.8
    Uganda1997/987.80.4−0.2−0.8
    Counts
    Increase157124
    No change0221
    Decrease410514
    Source: Program documents.
    Table A3.3.Aid Flows Under IMF-Supported Programs, 1995–2001
    Panel A. Medium-Term Projections of Aid Flows in ESAF/PRGF-Supported Programs, 1995-2001
    (Change between initial and third program year)
    Direction and Magnitude of ChangeCountShare of Total

    (In percent)
    Mean Change

    (In percent of GDP)
    Decrease7476−1.1
    By more than 2 percent of GDP1010−3.7
    Between 1 and 2 percent of GDP1718−1.4
    By less than 1 percent of GDP4748−0.5
    Increase23240.6
    Total97100
    Sources: Program documents, and IEO staff estimates.
    Panel B. Deviation of Outturns from Projected Aid Flows for the First Year of the Program (T)
    Direction and Magnitude of ChangeCountShare of Total

    (In percent)
    Mean Projection

    Shortfall

    (In percent of GDP)
    Projections exceed actuals
    By more than 1 percent of GDP382.6
    By less than 1 percent of GDP17420.6
    Projections below actuals
    By less than 1 percent of GDP1230−0.4
    By more than 1 percent of GDP820−1.4
    Total40100
    Sources: Program documents, and IEO staff estimates.
    Panel C. Deviations of Outturns from Projected Aid Flows for the Outer Years in a Sample of 20 Sub-Saharan African Countries
    (Aid flows measured in U.S. dollars)
    Number of Cases
    TT+1T+2
    Projected exceeded outturns by more than 20 percent669
    Projected exceeded outturns by less than 20 percent262
    Projected below outturns by less than 20 percent764
    Projected below outturns by more than 20 percent525
    Total202020
    Sources: Program documents, and IEO staff estimates.
    Appendix 4: Explanatory Variables and Methodological Issues in the Analysis of Social Spending in IMF-Supported Programs

    In order to appropriately assess the impact of the IMF on social spending using a multivariate regression framework, we need to take into account at least three methodological problems: (1) missing variable bias, (2) serial correlation and nonstationarity, and (3) the endogeneity of IMF-supported programs (for a more extensive discussion of these methodological issues, including an analysis of alternative estimating techniques such as the Generalized Evaluation Estimator, see Martin and Segura-Ubiergo (forthcoming).

    To avoid a missing variable bias, the following control variables were defined using data from the World Bank’s World Development Indicators and the IMF’s World Economic Outlook (see Table A4.4 of this appendix for the summary statistics, including means for the “with IMF” and “without IMF” groups). Two other control variables (health_priv and ca_y) had insignificant coefficients and were excluded from the final regressions.

    gdpusdpc=GDP per capita in U.S. dollars
    health_priv=private expenditures in health as share of GDP (percent)
    pop95young=share of the population aged 0-4(percent)
    pop95old=share of the population 65 years or older (percent)
    growth=annual rate of real growth (percent)
    grw_neg=annual rate of growth, when it is negative (= 0 otherwise)
    grw_sd=variability (standard deviation) on the rate of growth
    ca_y=current account deficit, share of GDP (percent)
    devaluation=annual change on the real exchange rate (percent)
    democracy=index of democracy from Gurr’s Polity III data.1

    The above control variables explain some of the differences in spending between countries, but there may be residual country differences in spending not captured by them. To account for that, the empirical model was also estimated with country dummies (fixed effects), that is, which allowed for a different level of average spending for each country.

    To address the problem of serial correlation and nonstationarity we used a dynamic model that clearly separates short- and medium-term effects. Although there are different models that can serve this purpose, we decided to use an Autoregressive Moving Average process (ARIMA), which seemed to fit the data rather well. A first-order process on the dependent and independent variables was enough to obtain residuals without further detectable serial correlation or unit roots. The following equation was used:

    where Sit denotes social spending in country “i” and period “t”, Xit is the vector of exogenous variables defined above, and IMFit measures the presence of an IMF-supported program as proxied by the instruments defined below. L is the lag operator (i.e., LZZt1 , for any variable Z), D is the first-difference operator (DZtZtZt1 ) and uit are the residuals.

    An alternative and equivalent way of writing (1) is:

    where (1γ)·α2=α1and(1γ)·β2=β1. In this specification, changes in the dependent variables, D Sit, can be seen as the result of two effects: contemporaneous change in the explanatory variables (with an impact determined by the coefficients α1andβ1) ; and gradual adjustment to an “equilibrium” level of spending, determined by the coefficients α2andβ2 . Transitory changes in the independent variables do not change the long-run “equilibrium” level, so that the effect decays geometrically at the rate (1γ) after the second period.

    To address the endogeneity issue, the following instruments were used to “predict” the presence of an IMF-supported program:

    • current account deficit as fraction of GDP in the previous year (as proxy of external crisis);

    • growth in the previous year (proxy of unsustainable expansion);

    • income per capita (IMF-supported programs less likely in high-income countries);

    • presence of an IMF-supported program in the previous year;

    • government balance as share of GDP in the previous year; and

    • democracy index (as in the control variables).

    To explore the robustness of the result we compared the results with those obtained with alternative estimation methods and with different subsamples of countries (see Table A4.2 and Table A4.3).

    Table A4.1.ARIMA Model with Control Variables and Endogenous IMF-Supported Programs
    HealthEducation
    GDPTotal ExpGDPTotal Exp
    (In percent)US$ pcDP pc(In percent)US$ pcDP pc
    L. Depend. Var.0.577***0.548***0.748***0.688***0.604***0.559***0.662***0.743***
    L.IMF(predicted)0.179***0.492*0.390*4.5930.251**0.681*0.1684.157
    D.IMF(predicted)0.206***0.636**0.395**9.736***0.228***0.748**0.3336.027**
    L.gdpusdpc−0.030*−0.0270.014−0.1640.0210.0700.5171.406
    D.gdpusdpc−0.080***−0.0931.101***−2.761**−0.0340.1252.144***0.178
    L.devaluation0.002**0.012***0.010***0.109***−0.0010.0010.011***0.007
    D.devaluation0.0010.008***0.005***0.046*−0.0010.0000.005**−0.025
    L.year0.011***0.068***−0.0021.219***0.012*0.104***−0.0120.686***
    L.democracy0.0610.3420.221*2.9170.1420.620*0.1144.969
    D.democracy0.0090.3080.0721.7840.0350.4280.0562.852
    L.pop95young−0.031**−0.015−0.1900.0590.0230.211***−0.1901.593***
    L.pop95old−0.129*−0.120−1.980***−1.528−0.116−0.119−3.745***3.560
    L.growth0.013*0.0280.073**1.521***−0.010−0.0470.0500.779***
    D.growth0.0050.0190.0330.895***−0.021***−0.0350.0250.320
    L.grw_neg−0.049***−0.060−0.078*−1.736***−0.0240.022−0.045−0.399
    D.grw_neg−0.035**−0.0250.000−1.027**0.0040.0360.0600.236
    L.grw_sd0.047***0.0000.386***−0.0290.050**−0.1180.955***−0.831*
    Number of obs.9921,0019929929891,001989989
    R-squared0.9310.8940.9850.5440.9180.8810.9870.626
    Root MSE0.4081.3751.20920.5690.5971.9521.76115.591
    Note: See the text for variable definitions. An initial L indicates a lagged value and D the first difference. IMF(predicted) is the estimated value of the IMF variable with the following instruments: lagged values of IMF, growth, CA/GDP, government balance/GDP, democracy index, and GDP per capita in U.S. dollars. The actual estimated equation is IMF(predicted)=0.148+0.696IMF(-1)-0.003growth(-1)+0.001ca-y(-1)+0.001cgbal(-1)-0.043democracy-0.011.gdpusdpc(41.94***)(-2.58***)(-0.69)(0.60)(-3.26***)(-4.85***)

    N=1.916

    R2=0.522

    Table A4.2.Summary of Robustness Analysis
    Subsamples According to Total Time Under IMF-Supported Programs During 1985-2000
    S0: Complete Sample

    (N = 146 countries)
    S1: one to five

    years (N = 53)
    S2: one to ten

    years (N = 88)
    S3: five or more

    years (N = 64)
    Time series analysis
    R1.

    Regressions by countries
    For most countries no significant difference between years with and without IMF-supported programs. In countries with significant differences it was found that years with programs show lower spending in U.S. dollars, but higher spending measured in domestic prices.Small number of countries with significant results.Similar to the overall sample (S0), but with a smaller number of countries with non- significant difference with and without IMF- supported programs.Significant difference between years with and without IMF- supported programs in half of the countries; among them, when there is an IMF-supported program, half have higher education spending and two-thirds have higher health spending.
    Pooled cross-section and time series data
    R2.

    No correction for serial correlation or endogeneity of IMF- supported programs
    No significant difference with and without an IMF-supported program, except for health/expend (+) and education per capita in U.S. dollars (−). High level of serial correlation in the residuals.No significant difference. High level of serial correlation in the residuals.No significant difference except for education per capita in U.S. dollars (−). High level of serial correlation in the residualsNo significant difference with and without an IMF-supported program, except for health/ expend (+) and education per capita in U.S. dollars (−). High level of serial correlation in the residuals.
    R3.

    No correction for endogeneity of IMF- supported programs
    Health: significant positive impact in all definitions. Education: significant positive impact for GDP and domestic prices measures.Health: no significant effects. Education: positive effect as share of GDP; others no significant effects.Health: significant positive impact in all definitions. Education: no significant effects.Health: significant positive impact in all definitions. Education: significant positive impact in all definitions.
    R4.

    Base case.

    ARIMA model and instrumental var. (Table A4.1)
    All 16 coefficients for contemporaneous and lagged effects positive and all but 4 significant.No significant coefficient.All 16 coefficients for contemporaneous and lagged effects positive and all but 6 significant.All 16 coefficients for contemporaneous and lagged effects positive and all but 2 significant; smaller in magnitude than in the base case.
    R5.

    Probit model for IMF- supported programs
    All 16 coefficients for contemporaneous and lagged effects positive and all but 3 significant; smaller in magnitude than in the base case.No significant coefficient.All 16 coefficients for contemporaneous and lagged effects positive and all but 6 significant; smaller in magnitude than in the base case.All 16 coefficients for contemporaneous and lagged effects positive and all but 2 significant; smaller in magnitude than in the base case.
    Table A4.3.Summary of Regression Results
    HealthEducation
    GDPTotal ExpGDPTotal Exp
    (In percent)US$ pcDP pc(In percent)US$ pcDP pc
    R0. Without control variables
    IMF−0.156*0.170−5.721***0.795−0.440***0.267−11.983***−2.968*
    Const2.277.209.1499.744.3114.1816.27100.99
    R1. Regressions by country
    Number of countries where the IMF variable is:
    Signif. Positive81331071118
    Nonsignificant7876837583768671
    Signif. Negative746758614
    R1a. Regressions by country-with GROWTH as control variable
    Number of countries where the IMF variable is:
    Signif. Positive712210b1019
    Nonsignificant8077807682788472
    Signif. Negative5310644711
    R2. With control variables and country dummies (fixed effects)
    IMF0.0740.355*0.0641.793−0.0740.090−0.771***−2.898
    Est. serial corr10.497***0.329***0.505***0.439***0.574***0.523***0.617***0.651***
    R3. With correction for serial correlation (ARIMA, fixed effects)
    Lagged IMF0.148***0.512***0.240*7.056***0.112*0.3650.0873.969**
    Delta IMF0.0420.2240.0172.855−0.017−0.072−0.0951.352
    R4. [Base case] with instrumental variables for IMF-supported programs (ARIMA, fixed effects)
    Lagged IMF(pred)0.179***0.492*0.390*4.5930.251**0.681*0.1684.157
    Delta IMF(pred)0.206***0.636**0.395**9.736***0.228***0.748**0.3336.027**
    R4b. With limited dependent model for endogenous IMF-supported programs (Tobit model;ARIMA, fixed effects)
    Lagged IMF(pred)0.058***0.159*0.131*1.4880.083***0.223*0.0611.398
    Delta IMF(pred)0.065***0.198**0.126**3.071***0.073***0.237**0.116*1.993**
    R4c. With PROBIT model for endogenous IMF-supported programs (ARIMA, fixed effects)
    Lagged IMF(pred)0.042***0.115*0.096*1.0790.061***0.161**0.0461.020
    Delta IMF(pred)0.047***0.142**0.091**2.216***0.053***0.171**0.087*1.450**
    R5. With concessionary/nonconcessionary IMF-supported programs (instrumental variables, ARIMA, fixed effects)2
    Lagged CONC(pred)0.506***1.083*1.804***14.476**0.382**0.8370.7045.194
    Delta CONC(pred)0.274**0.6380.798**9.328**0.2510.936*0.5204.096
    Lagged NONCONC(pred)0.0600.2700.0991.5450.0420.327−0.0062.317
    Delta NONCONC(pred)0.195**0.739**0.07311.477*0.0360.091−0.0324.746
    F-test of CONC = NONCONC3.44**1.224.52**2.051.130.590.920.25
    Sample 1. At least 1 year of IMF-supported program but not more than 6 years (53 countries)
    R0. Without control variables
    IMF0.095−0.533−1.626*−9.342***−0.075−1.636***−4.535***−10.641***
    _cons2.207.295.52102.764.3015.3110.32103.20
    R1. Regressions by country. Number of countries where the IMF variable is:
    Signif. Positive33122203
    Nonsignificant3436363338373730
    Signif. Negative31241237
    R2. With control variables and country dummies (fixed effects)
    IMF0.0920.1520.242−1.9320.083−0.083−0.406−1.623
    Est. serial corr. coeff.0.695***0.663***0.786***0.751***0.788***0.851***0.868***0.837***
    R3. With correction for serial correlation (ARIMA, fixed effects)
    Lagged IMF0.103−0.0660.1511.8620.184*−0.2850.0473.520
    Delta IMF−0.052−0.270−0.134−2.5330.026−0.539−0.2321.432
    R4. [Base case] With instrumental variables for IMF-supported programs (ARIMA, fixed effects)
    Lagged IMF(pred)0.1210.1930.119−3.3550.1430.063−0.270−1.388
    Delta IMF(pred)0.1900.0970.3994.3750.124−0.0310.1852.390
    R4c. With PROBIT model for endogenous IMF-supported programs (ARIMA, fixed effects)
    Lagged IMF(pred)0.0300.0470.033−0.6310.0340.015−0.052−0.269
    Delta IMF(pred)0.0380.0080.0900.7950.026−0.0100.0490.623
    Sample 2. At least 1 year of IMF-supported program but not more than 10 years (88 countries)
    R0. Without control variables
    IMF0.1350.260−1.155**−1.491−0.140−0.609−3.503***−6.430***
    const2.127.225.13100.604.1114.728.99102.62
    R1. Regressions by country. Number of countries where the IMF variable is:
    Signif. Positive710284906
    Nonsignificant6262666067616856
    Signif. Negative525545612
    R2. With control variables and country dummies (fixed effects)
    IMF0.0490.2290.048−0.102−0.0770.085−0.554***−3.032
    Est. serial corr. coeff.0.598***0.681***0.833***0.776***0.711***0.911***0.897***0.837***
    R3. With correction for serial correlation (ARIMA, fixed effects)
    Lagged IMF0.138***0.439**0.247**5.508**0.0880.2950.0332.887
    Delta IMF0.0010.093−0.0490.427−0.020−0.021−0.1330.868
    R4. [Base case] with instrumental variables for IMF-supported programs (ARIMA, fixed effects)
    Lagged IMF(pred)0.263***0.627**0.537**6.7370.264**0.6560.0493.685
    Delta IMF(pred)0.269***0.764**0.452*11.058***0.199*0.6530.1935.053*
    R4c. With PROBIT model for endogenous IMF-supported programs (ARIMA, fixed effects)
    Lagged IMF(pred)0.062***0.147**0.125**1.6120.064**0.1620.0160.917
    Delta IMF(pred)0.061***0.172**0.102*2.520**0.047*0.1560.0481.236*
    Sample 3. Five or more years of IMF-supported program (64 countries)
    R0. Without control variables
    IMF0.1840.888**−0.0226.196**0.0310.742*−0.692−0.662
    _cons1.966.673.9696.463.8713.846.05100.38
    R1. Regressions by country. Number of countries where the IMF variable is:
    Signif. Positive712284915
    Nonsignificant4743534651455548
    Signif. Negative43344536
    R2. With control variables and country dummies (fixed effects)
    IMF0.1050.467*0.0313.373−0.0300.324−0.544***−0.953
    Est. serial corr. coeff.0.395***0.717***0.926***0.817***0.734***0.939***0.928***0.905***
    R3. With correction for serial correlation (ARIMA, fixed effects)
    Lagged IMF0.168***0.702***0.276**8.919***0.163**0.662**0.252**5.862***
    Delta IMF0.085*0.435**0.0985.058**0.0190.1150.0571.742
    R4. [Base case] with instrumental variables for IMF-supported programs (ARIMA, fixed effects)
    Lagged IMF(pred)0.225**0.730*0.542**7.5210.392***1.339***0.493***9.584**
    Delta IMF(pred)0.235***0.826**0.32112.823***0.382***1.123***0.386*10.523***
    R4c. With PROBIT model for endogenous IMF-supported programs (ARIMA, fixed effects)
    Lagged IMF(pred)0.056**0.180*0.136**1.8320.097***0.333***0.123***2.353**
    Delta IMF(pred)0.058***0.205**0.0783.214***0.096***0.281***0.097**2.650***
    Note: IMF variable measured as proportion of the years under an IMF-supported program. The number of asterisks indicates the significance level for the test that the coefficient is different from zero: *** for 99 percent, ** for 95 percent, and * for 90 percent.

    Estimate of serial correlation of the regression.

    CONC = Stand-By or EFF programs; NONCONC = SAF, ESAF, or PRGF programs.

    Table A4.4.Control Variables for Social Spending
    Group Mean
    VariableDescriptionNumber

    of Obs.
    MeanStd. Dev.With IMF-

    supported

    program
    Without IMF-

    supported

    program 1
    ca_yCurrent account deficit, share of GDP (percent)2,233−4.61011.937−4.620−4.583
    democracyIndex of democracy2,3360.5190.5000.5620.409***
    devalAnnual change in the real exchange rate (percent)2,2354.27435.0624.5193.665
    gdpusdpcGDP per capita in U.S. dollars2,2652.2143.0752.7220.934***
    growthAnnual rate of real growth (percent)2,2642.7206.7912.5743.086
    grw_negAnnual rate of growth, when it is negative (= 0 otherwise)2,264−1.2754.207−1.444−0.848***
    grw_sdVariability (standard deviation) in the rate of growth2,2725.2503.6935.4304.794***
    health_privPrivate expenditures in health as share of GDP (percent)9942.2411.4122.2062.302
    pop95oldShare of the population 65 years or older (percent)2,1445.1413.2175.1955.014
    pop95youngShare of the population aged 0-14 (percent)2,16036.8608.71636.18138.482***
    populationTotal population (millions)2,26530.439124.40034.93019.125**
    reg_AFRRegional dummy for countries in each of IMF2,3360.3010.4590.2440.450***
    reg_APDDepartments: Africa, Asia and Pacific, Europe I,2,3360.1710.3770.2010.095***
    reg_EU1Europe II (countries of the former Soviet Union2,3360.0960.2950.1080.065***
    reg_EU2in Europe and Central Asia), and Western Hemisphere2,3360.1030.3040.1030.103
    reg_WHD(America). AFR is used as reference in the regressions2,3360.2050.4040.2010.217
    yearYears, from 1985 to 20002,3361,992.504.611,992.111,993.52***

    Statistically significant differences in means are indicated by *** (99 percent confidence level) or **(95 percent).

    Table A4.5.List of Countries and Subsamples
    CountryYears Under

    IMF-Supported

    Program
    S1S2S3CountryYears Under

    IMF-Supported

    Program
    S1S2S3
    Albania5.71S1S2S3Indonesia3.16S1S2
    Algeria4.81S1S2Iran, Islamic Rep. of0.00
    Angola0.00Jamaica9.73S1S3
    Argentina11.76S3Jordan9.42S1S3
    Armenia4.48S1S2Kazakhstan6.05S1S3
    Azerbaijan4.13S1S2Kenya6.99S1S3
    Bahamas, The0.00Kiribati0.00
    Bahrain0.00Korea4.90S1S2
    Bangladesh6.59S1S3Kuwait0.00
    Barbados1.31S1S2Kyrgyz Republic7.12S1S3
    Belarus1.00S1S2Lao P.D.R.6.63S1S3
    Belize1.24S1S2Latvia7.13S1S3
    Benin9.61S1S3Lebanon0.00
    Bhutan0.00Lesotho8.72S1S3
    Bolivia12.10S3Liberia1.43S1S2
    Bosnia and Herzegovina1.00Libya0.00
    Botswana0.00Lithuania5.74S1S2S3
    Brazil6.35S1S3Macedonia, FYR3.41S1S2
    Bulgaria7.34S1S3Madagascar9.63S1S3
    Burkina Faso9.77S1S3Malawi10.13S3
    Burundi5.26S1S2S3Malaysia0.00
    Cambodia3.56S1S2Maldives0.00
    Cameroon7.86S1S3Mali13.38S3
    Cape Verde1.16S1S2Malta0.00
    Central African Rep.2.45S1S2Marshall Islands0.00
    Chad8.23S1S3Mauritania12.16S3
    Chile3.02S1S2Mauritius1.50S1S2
    China0.00Mexico8.30S1S3
    Colombia1.03S1S2Moldova5.29S1S2S3
    Comoros2.45S1S2Mongolia6.29S1S3
    Congo, Dem. Rep. of4.42S1S2Morocco5.95S1S2S3
    Congo, Republic of5.41S1S2S3Mozambique10.52S3
    Costa Rica6.59S1S3Myanmar0.00
    Côte d’Ivoire10.94S3Namibia0.00
    Croatia4.50S1S2Nepal6.24S1S3
    Cyprus0.00Netherlands Antilles0.00
    Czech Republic1.00Nicaragua4.99S1S2
    Djibouti2.37S1S2Niger10.96S3
    Dominica3.05S1S2Nigeria3.90S1S2
    Dominican Republic3.63S1S2Oman0.00
    Ecuador8.20S1S3Panama7.93S1S3
    Egypt8.06S1S3Papua New Guinea4.60S1S2
    El Salvador6.73S1S3Paraguay0.00
    Equatorial Guinea5.72S1S2S3Peru8.27S1S3
    Eritrea0.00Philippines11.92S3
    Estonia6.82S1S3Poland5.83S1S2S3
    Ethiopia5.62S1S2S3Qatar0.00
    Fiji0.00Romania5.15S1S2S3
    Gabon9.20S1S3Russia5.37S1S2S3
    Gambia, The8.55S1S3Rwanda5.13S1S2S3
    Georgia4.08S1S2Samoa0.52
    Ghana11.78S3São Tomé and Príncipe3.18S1S2
    Grenada1.64S1S2Saudi Arabia0.00
    Guatemala2.59S1S2Senegal13.93S3
    Guinea13.38S3Seychelles0.00
    Guinea-Bissau0.00Sierra Leone6.87S1S3
    Guyana10.12S3Slovak Republic1.67S1S2
    Honduras6.29S1S3Solomon Islands0.00
    Hungary7.75S1S3South Africa0.00
    India1.66S1S2Sri Lanka6.27S1S3
    St. Kitts and Nevis0.00Turkey2.45S1S2
    St. Lucia0.00Turkmenistan0.00
    St. Vincent andUganda11.66S3
    the Grenadines0.00Ukraine5.08S1S2S3
    Suriname0.00United Arab Emirates0.00
    Swaziland0.00Uruguay8.47S1S3
    Syrian Arab Rep.0.00Uzbekistan1.24S1S2
    Tajikistan3.18S1S2Vanuatu0.00
    Tanzania10.09S3Venezuela4.00S1S2
    Thailand4.63S1S2Vietnam3.30S1S2
    Togo12.07S3Yemen, Rep. of4.60S1S2
    Tonga0.00Zambia7.48S1S3
    Trinidad and Tobago2.07S1S2Zimbabwe6.12S1S3
    Tunisia4.49S1S2
    Note: S1 = one to five years; S2 = one to ten years; and S3 = five or more years.

    This index is defined from Gurr’s AUTOC and DEMOC scores: democracy = 1 when DEMOC – AUTOC > 4, following Brown and Hunter (1999). See also Kaufman and Segura-Ubiergo (2001), and Segura-Ubiergo (2002).

    Appendix 5: Coverage of Social Issues in IMF-Supported Programs
    1

    Is Social Spending

    Referenced?
    1a

    Changes in Social

    Spending Noted?
    1b

    Changes in Social

    Spending Analyzed?
    2

    Social Spending

    Clearly Defined?
    3

    Specific Problems

    Identified?
    3a

    How to Protect

    Critical Programs?
    4

    Conditionality
    5

    Series on Social

    Spending
    6

    Follow-Up
    AlgeriaSocial safety net to cushion price increases; housing.Move from Indemnité Complémentaire pour les Sans-Revenu (ICSR) unemployment scheme to targeted employment program; overhead savings from merging three cash transfer programs.Impact of move from ICSR.1992 social safety net costs 2.2 percent of GDP and abused due to bad means testing and lack of integration to other social support; need to control costs of public housing, increase rents, and target concessional mortgages; high cost of severance requires unemployment insurance schemeBudgetary appropriations of 1.2 percentof GDP for public works program versus 0.6 percent of GDP for ICSR.Public works scheme by September 1994 (benchmark); unemployment compensation scheme by September 1994 (benchmark); completed according to reviewICSR to be abolished in October 1994; three allowances integrated; unemployment insurance scheme introduced; no discussion on housing.
    BulgariaRecovery of social assistance spending; need to address critical social needs.Revamp social programs; reallocate spending to low income and unemployed; box discusses social assistance, pensions, health.Estimated impact of reforms is additional 1 percent of GDP annually over three years.Box on reforms in social sector: poor targeting;World Bank assistance to improve targeting and increase assistance to the unemployed.Health reform (benchmark).Table 2; 1994–98 and projected to 2001.Health reform.
    Costa RicaMeasures to improve efficiency of social spending and strengthen social safety net.Measures to improve efficiency of social spending and strengthen social safety net implemented, including administrative reform, decentralization, and increased resources.
    EcuadorSocial spending to decline from 4.7 percent to 4.5 percent of GDP under program.Detailed discussion in Box 6.Bono Solidario cash transfer to decline by 0.4 percent of GDP to 0.9 percent of GDP; Box 6: traditional social programs (education, health, and welfare) cut by 1.4 percent of GDP from 1996 to 1999.Implicitly in Box 6.Rising poverty: from 33 percent in 1995 to 43 percent in 1999; cutbacks in social spending due to rising deficits; targeting Bono Solidario problematic: 25 percent of recipients not eligible; regressivity of price subsidies: bottom 20 percent get10 percent electricity.In Box 6: 1996 to 2000.
    EgyptAuthorities shielding social sectors (especially health and education); Social Fund set up in 1991 to cushion adjustment on poor via public works and assistance to enterprises and displaced workers.Increased employment in health and education while cutting other areas; improved targeting of social safety net; increased donor support for Social Fund.Poverty regionally concentrated and linked to agriculture: 20-25 percent of households.Not clearly defined. Series for Social Fund and Subsidies 1992/93 to 1996/97.Seventh review, September 1998: under program public spending on health increased from 2.4 percent to 3.2 percent of public spending; education spending increased to 13 percent; assistance through cash transfers; and Social Fund financed projects; Social Fund addressed (1) human resources development; (2) public works; (3) enterprise development; (4) community development; and (5) institutional development. Vision 2017 plan adopted to promote development.
    JordanContinue efforts since 1998 to protect more vulnerable groups and promote employment generation through Social Productivity Program; social spending to be protected.Elimination of poorly targeted food cash transfer; protect social spending.Food cash transfer: 1.3 percent of GDP; education from 10.6 percent to 10.9 percent of total spending; health, 5.5 percent to 5.9 percent.Implicitly: health, education.Food cash transfer not well targeted due to virtually unrestricted eligibility; extensive discussion in Box 3.Increased share of budgetary outlays to education and health.
    PakistanMeasures required to safeguard social and poverty-related spending.Projected sizable increase in social spending aimed at poverty reduction.Public Sector Development Program (PSDP), Social Action Program, and Food Support Program increased by 28 percent (0.4 percent of GDP to 2.8 percent of GDP).Implicit;Table 5 indicates social and poverty-related spending as percent of GDP; 1993/94 to 1998/99 and projected to 2000/01.Cushion impact on poor of price increases and exchange rate depreciation; public debt constrains social and poverty-related spending; dilemma between fiscal adjustment and increased social and poverty-related spending.Expansion of PSDP, Social Action Program, and Food Support Program; broadening of social safety net over medium term; quarterly quantitative targets for social and poverty-related spending to protect from cuts.Indicative quarterly targets on social and poverty-related spending.Table 5 indicates social and poverty-related spending as percent of GDP; 1993/94 to 1998/99 and projected to 2000/01; updated first review Table 5; second review Table 3.First review: maintain target to increase social and poverty- related spending by 0.4 percent of GDP; concern over shortfalls in first half, although offset by improved accountability and governance; second review: social and pro-poor outlays below target but services not affected due to efficiency gains; increased spending related to education reform; third review: shortfalls confirmed and impact discussed in general terms.
    PeruWill continue policies aimed at poverty reduction by redirecting primary health care and other basic services to poorest areas.Geographical targeting of health and other basic services; increased social spending to be financed by improvements in tax administration.Only in second-year program in Box 2.Only in second-year program: Box 2 and Table 7, 1992 to 1997.Health and pension reform have long-term positive benefit and short-term cost; aim to promote private provision in education and health while strengthening safety nets; Box 2 of second-year program discusses social spending 1992-97, targeting under social safety net, and reforms supported by World Bank and IDB; third-year program proposes increased health and education spending financed by revenue mobilization; pilot health programs linking outlays to outcomes; more follow-up in December 1998 review.
    PhilippinesAuthorities urged to protect poverty programs from 25 percent across-the-board nonwage cuts and to restore social programs if revenue allows.Minimize impact of emergency budget cuts on social programs; ensure availability of rice stocks; contain inflationary impact of peso depreciation.First and second reviews: small amount of social spending restored from sequestration (1.6 billion pesos for 1998) including maintenance for schools and operations for basic health; targets relaxed to accommodate less revenue and higher social spending;World Bank assistance to improve targeting and efficiency of poverty reduction programs; third review: relax targets to allow higher social spending; emphasis on agriculture, education, and health; fourth review: government spending in social areas (education, health, and nutrition) fell in 1998; budget cuts and slow disbursement affected some critical social programs.
    RomaniaTargeted social spending required to diminish risk of social unrest undermining reform agenda.Targeting social transfers of 10.5 percent of GDP in 1999 to vulnerable: unemployment benefits constant in real terms; severance payments of 0.7 percent of GDP; introduction of retraining; expand wage subsidy for new entrants; child allowances of 1.1 percent of GDP.Implicitly Table 3: 1995-98 and projected to 2000.Social stability requires protection of the most vulnerable through well-targeted measures; devolution of health insurance administration to 43 national insurance houses; pensions to be decompressed to reduce incentives for evasion.Socially sensitive programs constant in real terms: unemployment benefits; severance payments and pensions.Table 3 lists social expenditure.First review: better targeting social benefits with World Bank assistance includes child protection agency, earmarking local spending for handicapped and children; real allocations raised 25-30 percent; overall social spending constant at 9 percent of GDP with real cuts in pensions.
    SenegalAim to provide adequate allocations for social services.Adequate provisions for education and health.Raise primary enrollment rates with emphasis on girls and raise efficiency; reinvigorate primary health care through community participation; availability of drugs and expanded coverage.Policy performance indicator: finalize 10-year development plan and 5- year investment program for health; operational programs to develop human resources (primary enrollment); rationalization of higher education and initiation of plans to increase literacy, especially among women; Second National Action Plan for Women; update Declaration of Population Policy; completion of poverty assessment; adoption of program to fight poverty.Implicit: second annual arrangement: education and health series Table 5 July 1999; 1996-98 and projected to 2001; Table 5 November review; Table 3 June 2000 review;Table 3 third annual arrangement; Table 3 August 2001 review;Table 3 March 2002 review.November 1998 review: progress on 1998-2007 health plan, 5-year investment program, 10-year education plan, intension fication of measures aimed at most disadvantaged, mobilize revenue and external financing to support human resource development and social sectors. Second annual arrangement: education and health increased from 33 percent to 36 percent of current spending in 1998; aim at 38 percent and share in capital up 3 percent to 15 percent; June 2000 review: pension reform; action plan to improve use of health and education appropriations; social spending in line with targets; plan to increase health spending to reach World Health Organization target of 9 percent by 2002. Third annual arrangement: health and education increased to 4.7 percent of GDP in 2000 but 0.1 percent of GDP less than programmed due to shortfalls in education spending; priority investment for rural water and electricity, health, rural roads; August 2001 review: HIPC re-resources to health, education, rural infrastructure, butane price freeze, pensions = 20 percent more social spending from domestic resources. March 2002 review: increase education spending and monitor education and health completion point targets.
    TanzaniaOrient public spending to physical and social infrastructure, particularly health, education, and water.Social safety net to support public sector retrenchment.Second annual arrangement: education and health 1995/96-1997/98; July 1999 review: health and education 1996/97- 1998/99 and projected to 2000/01.Second annual arrangement: social indicators compare ably; devolution to enhance community development and cost recovery and shift resources to basic needs, e.g., primary education; expansion in social spending for 1997/98. July 1998 review: social spending protected from budget cuts. Third annual arrangement: increased social spending with nonwage spending up 10 percent and road repair from minimal to 0.8 percent of GDP; extension of devolution based on pilot projects;moving on educational reform including rationalization with World Bank assistance of teacher hiring and deployment. July 1999 review: social spending higher than projected;World Bank public expenditure review strengthened medium-term priority setting; increased allocation for social sectors by 29 percent for 1999/2000.
    UkraineAim to improve efficiency of social spending.Box 2 on structural rigidities of budget: 40 percent earmarked for social payments, road construction, and research and development; program continuing process of reducing earmarking to free resources for wages and social benefits; need to rationalize employment through reform of health and education; many social services provided by extrabudgetary funds.Finalize action plans for re- structuring ministries of health and education (benchmark) completed according to third review.Table 4 lists education and health spending 1996-98 and projected to 1999;Table 4 of first review lists education, health, social security and welfare, and housing and community services for 1996-98 and projected to 1999. Second review:Table 4 updated from first review. Fourth review: updates Table 4 from 1997 to 1999 and projected to 2001. Fifth and sixth reviews: updates 1998-2002.First review: cuts except in social spending protected by law; Box 2 discusses social safety net and poverty: better targeting required. Third review: timetable for reform of ministries of labor and social policy. Fourth review: consolidating all social programs by end-2001.
    Uruguay
    VenezuelaImprovement in social safety net by increasing monthly stipends to vulnerable families with school-age children.Social expenditure will increase by 1 percent of GDP including social security outlaysDeteriorating economic conditions resulted in increase of poverty to 50 percent of population over 1990-95. Protection of vulnerable key objective: aim to assist vulnerable families with school-age children; subsidy to protect low-income users of public transport; increase old-age pensions; need to improve targeting and efficiency of social safety net to increase political support for program.Increase social transfers by 1 percent of GDP and consolidate benefits within “family subsidy.”Legislation to reform severance payment system (benchmark); strengthen social safety net (benchmark).Social transfers in Table 4 for 1991-97. First review:Table 5 lists social transfers for 1995-96.First review: social safety net measures, in particular, enhancement of family subsidy, mitigated impact of adjustment on vulnerable, and increased support for program. However, social safety net needs more consolidation and better targeting and reforms being discussed with IDB. Real spending on social safety net increased by 300 percent in first half of 1996 relative to 1995. Outlays projected to increase from 0.3 percent of GDP in 1995 to 1.2 percent of GDP in 1996.
    Source: Program documents.
    Appendix 6: Progress with Reforms in 15 Selected IMF-Supported Programs
    Progress with Reform by Area and Degree of Progress and as a Percent of Programs in Which the Area of Reform Is Covered
    Little or No

    Progress
    Partial

    Progress
    Significant

    Progress
    Number

    of Cases
    Little or No

    Progress
    Partial

    Progress
    Significant

    Progress
    Revenue
    Tax policySenegalAlgeriaBulgaria131102
    EcuadorTanzania8%77%15%
    Egypt
    Jordan
    Pakistan
    Peru
    Philippines
    Romania
    Ukraine
    Uruguay
    Tax administrationEgyptPeruBulgaria10343
    PakistanPhilippinesJordan30%40%30%
    RomaniaUkraineTanzania
    Uruguay
    Organizational reformsSenegalPakistanBulgaria8332
    UkrainePeruJordan38%38%25%
    VenezuelaPhilippines
    Expenditure
    Wage bill/civil serviceBulgariaAlgeriaPakistan13652
    EcuadorCosta RicaTanzania46%39%15%
    EgyptPhilippines
    PeruUkraine
    RomaniaUruguay
    Venezuela
    Social sectorPakistanPeruAlgeria7223
    VenezuelaUkraineEcuador29%29%42%
    Bulgaria
    Other spendingUruguayAlgeria3012
    Costa Rica0%33%67%
    Quasi-fiscal
    Public enterprises including privatizationCosta RicaAlgeriaBulgaria14284
    SenegalEgyptJordan14%57%29%
    PakistanTanzania
    PeruUkraine
    Philippines
    Romania
    Uruguay
    Venezuela
    Social securitySenegalBulgariaPeru6321
    UkraineUruguay50%33%17%
    Venezuela
    Pricing policyAlgeriaEcuador7034
    EgyptPakistan0%43%57%
    VenezuelaPhilippines
    Senegal
    Source: Program documents.
    Appendix 7: Illustrative Selection of Technical Assistance Inputs to Fiscal Reforms in the Lead-Up to the IMF-Supported Programs in 15 Countries

    Algeria 1994 Stand-By Arrangement. A 1989 FAD mission recommended measures to modernize tax administration, including a new taxpayer identification system and master file, reorganizing the department, and developing computer systems. Follow-up in 1990 to 1993 reviewed implementation and provided advice including administrative preparations for the VAT (introduced in 1992), development of a single tax identifier, and computerization of the tax department. A 1990 mission advised on revenue sharing. Missions in 1991 and 1993 assisted in the design of social safety nets.

    Bulgaria 1998 Extended Fund Facility. Missions in 1996 and 1997 focused on establishing a Large Taxpayer Unit. Other recommendations included: introduction of a unique tax identification number across tax, customs, and social security; adoption of a functionally based organizational structure; improvements to the VAT audit program and collection enforcement; and development of a tax administration modernization program and computerization strategy. A resident expert was installed to help implement the tax administration reform strategy. In 1997, a mission reviewed draft legislation on the profits tax, personal income tax, and VAT. Assistance was also provided on expenditure control, fiscal management under a currency board, and public expenditure management.

    Costa Rica 1995 Stand-By Arrangement. A 1992 mission reviewed proposed tax reforms and a 1995 mission provided TA on the introduction of an Integrated Financial Management System.

    Ecuador 2000 Stand-By Arrangement. TA missions reviewed policy and administration in respect of the main taxes (1996–2000) and a long-term advisor assisted with tax administration reforms. Issues raised included the lack of administrative controls and suggestions included improvements in the audit process, tax collection system, management of tax arrears, and computerization of tax returns, in addition to reform of the tax code. The latest TA placed priority on the modernization of the revenue administration and offered proposals to redesign the tax system. Public expenditure management (PEM) TA aimed to strengthen the financial management of the public sector (1993), improve the monitoring and control system of major public enterprises (1995), introduce an Integrated Financial Management System (1996), and develop the social safety net (1999).

    Egypt 1996 Stand-By Arrangement. TA missions reviewed the personal income and profits taxes, arguing for further simplification of the rate structure and more aggressive action to roll back exemptions and stressing problems arising from asymmetries in the treatment of interest income (1993 and 1996); and examined investment incentives, pressing for the elimination of tax holidays (1994).

    Jordan 1999 Extended Fund Facility. TA missions advised on design and implementation of the goods and services tax (GST) (1993 to 1995). Jordan also received extensive technical assistance, including procedures for budget preparation and execution, financial reporting, sales taxation, reform of the tax system, and pension reform. In 1998 FAD TA included three missions to advise on means to improve budget monitoring and execution.

    Pakistan 2000 Stand-By Arrangement. TA missions covered a variety of areas, including a study of the PEM system (1997); the operation of the GST and measures to improve tax administration and increase tax compliance (1997, 1998, and 1999); a review of the income tax system and development of a strategy to improve its efficiency, potential for long-term development, and ease of administration (1999); an overhaul of the income tax law (2000); the revision of fiscal data; and measures to strengthen the fiscal reporting and accounting systems (2000). In 2000, a TA mission assisted with the preparation of the fiscal module of the Report on the Observance of Standards and Codes that was followed up with a review of progress in the strengthening of the fiscal reporting and accounting systems and assistance to the authorities in the preparation of revised fiscal data for 1993/94 to 1998/99.

    Peru 1996 Extended Fund Facility. TA included long-term technical assistance in tax administration since 1991 and missions to advise on the reform of the pension system (1993); VAT and excise tax administration (1994); tax administration (1994 and 1995); expenditure management and expenditure policy design in the context of a poverty reduction program (1994). In particular, the Integrated System of Financial Administration—to provide monthly planning and monitoring of expenditure and Treasury resources—benefited from FAD TA missions in 1994 and 1996 backed up by long-term technical assistance.

    Philippines 1998 Stand-By Arrangement. TA missions reviewed proposals to improve the structure of the individual and corporate income taxes and to rationalize tax incentives (1995); counseled on the tax treatment of the financial sector recommending movement away from transactions-type taxes (1997); and advised on tax administration (1998). A joint FAD–World Bank mission explored the interrelations between macroeconomic policy and environmental and resource policies (1996).

    Romania 1999 Stand-By Arrangement. Peripatetic TA aimed at strengthening VAT administration (1994 and 1995) and missions provided broad policy and administration advice on income taxation (personal and corporate) and indirect taxes, advising on simplicity and the establishment of broad bases (1997) as well as comprehensive assessments of revenue administration and recommendations on reorganizing the tax administration, improving registration, payments, audits and arrears management processes and, in customs, advising on strengthening antismuggling efforts, and valuation procedures (1998).

    Senegal 1998 Enhanced Structural Adjustment Facility. TA included advice on social safety net issues (1994); recommendations to strengthen tax and customs administration, including upgrading the customs computer system (GAINDE); developing a strategy for staffing and training in customs; improving collaboration between the preshipment inspection supplier and customs; implementing a tax identification number; strengthening monitoring of large taxpayers; and improving audit and collection enforcement (1996). This last measure included an assessment of the revenue impact of the new external tariff structure with suggested measures to correct the revenue shortfall stemming from the introduction of a common external tariff under the West African Economic and Monetary Union—for example, establish a Large Taxpayer Unit, simplify procedures for small businesses, develop a computer system for tax operations, reinforce customs valuation controls, implement a customs warehousing procedure for petroleum products, and improve information exchange between the tax and customs departments (1998).

    Tanzania 1996 Enhanced Structural Adjustment Facility. TA missions reviewed PEM (1992); assisted in the design of a VAT (1992 and 1994); recommended measures to strengthen tax and customs administration, including improvements in arrears collection, compliance, and audit procedures and information technology systems (1994); and advised on tax reforms for the 1995/96 budget (1995). To prepare for VAT, FAD provided resident advisors for 12 months between March 1994 and July 1995. TA missions also undertook a broad review of the tax system, including investment incentives (1995), and addressed a range of tax aspects of the relationship between the mainland and Zanzibar (1996). In addition, a seminar on PEM was organized in 1995.

    Ukraine 1998 Extended Fund Facility. Three long-term advisors and one short-term advisor were assigned and missions undertook a broad assessment of the personal and corporate income tax and indirect taxes, and contributed to the drafting of a tax code. The assistance entailed two distinct phases: an initial phase from 1993 to 1997 that aimed at implementing a comprehensive reform program of the tax department and a subsequent phase beginning in 1997 that focused on a more targeted range of issues, including creating large taxpayer offices, strengthening audit and arrears collection, and improving the processing of VAT refunds. Other TA focused on setting up social safety nets, improving fiscal management, increasing transparency and accountability, reducing opportunities for corruption, promoting cash operations, scaling back government activities out-side the budget and quasi-fiscal operations, and strengthening expenditure controls. The key public expenditure management element was treasury development and more specifically the introduction of a single treasury account.

    Uruguay 2000 Stand-By Arrangement. TA in the areas of tax and customs administration was provided in 1996. To improve transparency of public finance, in 2000 and 2001, PEM TA missions facilitated the identification of losses incurred by the public enterprises and public banks due to governmental activities that were not visible in the fiscal accounts.

    Venezuela 1996 Stand-By Arrangement. TA included a review of the VAT law and advice on its implementation (1993); guidance on the implementation of the VAT, including a tax administration expert on a six-month assignment (1993/94); recommendations on tax administration (1994 and 1996); advice on tax policy (1996); and suggestions on strengthening of non-oil revenue, including indirect and income taxes (1996). A long-term expert in tax administration was also assigned. The range of recommendations went from redesigning forms for tax returns to modernizing tax administration and redrafting codes and laws covering all taxes, internal revenues, and customs. TA also assisted with performance auditing and internal control (1996).

    Appendix 8
    Table A8.1.Effectiveness of Surveillance
    PoorMixedGoodIndex
    Learning from the past
    Does the program request mention, analyze, or evaluate past fiscal performance?Costa Rica, Peru,

    Romania, Uruguay,

    Venezuela
    Egypt, Jordan,

    Pakistan, Ukraine
    Algeria, Bulgaria,

    Ecuador, Philippines,

    Senegal, Tanzania
    Percentage of cases33274053
    Does the program request evaluate fiscal performance under preceding arrangement?Costa Rica, Ecuador,

    Jordan, Pakistan, Peru,

    Romania, Tanzania,

    Uruguay, Venezuela
    Egypt, UkraineAlgeria, Bulgaria,

    Philippines, Senegal
    Percentage of cases60132733
    Does self-standing surveillance between arrangements evaluate fiscal performance and draw lessons?1Algeria, VenezuelaCosta Rica, Ecuador,

    Tanzania
    Romania
    Monitoring of reforms during surveillance
    Has surveillance forcefully promoted structural reforms in the fiscal area where implementation was lacking?Algeria, Costa Rica,

    Ecuador, Jordan,

    Peru, Senegal, Venezuela
    Pakistan, Philippines,

    Romania, Uruguay
    Bulgaria, Egypt,

    Tanzania, Ukraine
    Percentage of cases46272740
    Links between surveillance and program
    Were all major issues flagged during surveillance incorporated in the program?Egypt, Pakistan, PeruAlgeria, Bulgaria,

    Costa Rica, Ecuador,

    Jordan, Philippines,

    Romania, Senegal,

    Tanzania, Ukraine,

    Uruguay, Venezuela
    Percentage of cases208080
    Were all problem areas taken up in the program identified during surveillance?Algeria, Bulgaria,

    Costa Rica, Ecuador,

    Egypt, Jordan, Peru,

    Romania, Senegal,

    Tanzania, Ukraine,

    Uruguay, Venezuela
    Pakistan, Philippines
    Percentage of cases871313

    Bulgaria, Egypt, and Ukraine are excluded because the Article IV could not evaluate the program which was ongoing.

    Effectiveness of Surveillance—Most Recent Program Request
    None or BriefPartial or GeneralSpecific or Comprehensive0020
    Learning from the past
    Does the program request evaluate fiscal performance under preceding arrangement?Bulgaria (SBA 2002),

    Jordan (SBA 2002),

    Peru (SBA 2002),

    Uruguay (SBA 2002)
    Pakistan (PRGF 2001),

    Romania (SBA 2001)
    Algeria (EFF 1995),

    Tanzania (PRGF 2000)0020
    Does the program request mention, analyze, or evaluate past fiscal performance?Jordan (SBA 2002)Bulgaria (SBA 2002),

    Pakistan (PRGF 2001),

    Peru (SBA 2002),

    Uruguay (SBA 2002)
    Algeria (EFF 1995),

    Romania (SBA 2001),

    Tanzania (PRGF 2000)

    Bulgaria, Egypt, and Ukraine are excluded because the Article IV could not evaluate the program which was ongoing.

    Table A8.2.Article IV Reports Reviewed in the Preprogram Period
    ArrangementTT–1T–2T–3TotalFreestanding
    Algeria 1994 SBA1994 Article IV and request for SBA (EBS/94/99).1992 Article IV consultation (SM/93/9).1991 Article IV consultation and request for a SBA and External Contingency Mechanism (EBS/91/79).31
    Bulgaria 1998 EFF1997 Article IV consultation and first review under the SBA (EBS/97/124).1995 Article IV consultation (SM/95/300).21
    Costa Rica 1995 SBA1994 Article IV consultation (SM/94/273).1993 Article IV consultation and request for SBA (EBS/93/45).1992 Article IV consultation and review under the SBA (EBS/92/35).31
    Ecuador 2000 SBA1997 Article IV consultation (SM/97/212).11
    Egypt 1996 SBA1996 Article IV and request for SBA (EBS/96/149).1995 Article IV consultation (SM/95/221).1993 Article IV consultation and request for Extended Arrangement (EBS/93/139).31
    Jordan 1999 EFF1999 Article IV consultation, request for Extended Arrangement, and use of Fund resources, request for purchase under the Compensatory and Contingency Financing Facility (EBS/99/51).1998 Article IV consultation and fourth review under Extended Arrangement (EBS/98/65).1996 Article IV consultation and second review under the Extended Arrangement (EBS/97/7).30
    Pakistan 2000 SBA2000 Article IV consultation and request for SBA (EBS/00/230).1998 Article IV consultation, second review under the Extended Arrangement and request for waiver of performance criteria, request for the second annual arrangement under the ESAF, use of Fund resources—request for purchase under the Compensatory and Contingency Financing Facility, and exchange system (EBS/98/231).1997 Article IV consultation and request for arrangement under the Enhanced Structural Adjustment Facility and the EFF (EBS/97/185).30
    Peru 1996 EFF1995 Article IV consultation and midterm and financing assurances reviews of the third year of the Extended Arrangement (EBS/95/177).1994 Article IV consultation, second year program under the Extended Arrangement, and reviews of financing assurances (EBS/94/137).20
    Philippines 1998 SBA1997 Article IV consultation, final review under the Extended Arrangement and request for SBA (EBS/98/50).1996 Article IV consultation and review under the Extended Arrangement (EBS/96/187).1995 Article IV consultation and review under the Extended Arrangement (EBS/95/153).1994 Article IV consultation and request for an Extended Arrangement (EBS/94/117).40
    Romania 1999 SBA1998 Article IV consultation (SM/98/220).1997 Article IV consultation and request for SBA (EBS/97/69).21
    Senegal 1998 ESAF1997 Article IV consultation and midterm review under the third annual arrangement under the ESAF (EBS/97/130).1996 Article IV consultation and midterm review under the second annual arrangement under the ESAF (EBS/96/92).1995 Article IV consultation and midterm review under the first annual arrangement under the ESAF (EBS/95/80).30
    Tanzania 1996 ESAF1996 Article IV consultation and request for SBA (EBS/96/165).1995 Article IV consultation (SM/95/291).11994 Article IV consultation (EBS/94/82).232
    Ukraine 1998 EFF1997 Article IV consultation and request for SBA (EBS/97/144).1995 Article IV consultation (SM/95/320).21
    Uruguay 2000 SBA1999 Article IV consultation, first review under the SBA, and request for modification of performance criteria (EBS/99/117).1998 Article IV consultation and second review under the SBA (EBS/98/128).1997 consultation and request for SBA (EBS/97/88).30
    Venezuela 1996 SBA1996 Article IV consultation and request for SBA (EBS/96/108).1994 Article IV consultation (SM/95/28).1993 Article IV consultation (SM/94/30).32
    4011
    indicates freestanding Article IV.

    Tanzania’s 10/28/94 request for two-year arrangement under ESAF (EBS/94/210) was withdrawn.

    Tanzania’s 1994 Article IV dates to April 1994, before the 1991 program’s ending date of July 1994. The 1995 Article IV is therefore taken as the first after that program.

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    Statement by Managing Director IMF Staff Response IEO Comments on Staff Response Summing Up of IMF Executive Board Discussion by Acting Chair
    Statement by the Managing Director on the Evaluation by the Independent Evaluation Office of Fiscal Adjustment in IMF-Supported Programs

    Executive Board Meeting August 29, 2003

    The Independent Evaluation Office (IEO) is to be commended for its well-researched and insightful account of fiscal adjustment in IMF-supported programs. Circulation of this report within the Fund has already been helpful in disseminating the lessons for Fund practice and enhancing the learning culture for the institution.

    On the whole, I welcome the recommendations in the report. I have asked staff to prepare a statement indicating how we envisage taking up the report’s recommendations in the period ahead, subject to the conclusions of the Board discussion.

    I look forward to Board discussion of these papers, which will provide the opportunity to draw out their implications for the Fund’s policies and procedures.

    Staff Response to the Evaluation by the Independent Evaluation Office of Fiscal Adjustment in IMF-Supported Programs

    Executive Board Meeting August 29, 2003

    1. The staff welcomes this report (SM/03/291), which provides valuable insights on the challenges of fiscal reforms in Fund policy advice and program design. Among many useful contributions, the paper brings careful scrutiny to concerns that the Fund’s policy advice in this area follows a “one-size-fits-all” approach that tends to result in a contraction in economic activity, and it concludes that these are not valid. The staff supports most of the recommendations put forward. This statement elaborates on some of the analytical underpinnings of the report, and discusses how its recommendations can be put in practice, building on the work already under way in the Fund.

    2. While the report presents extensive statistical findings on the size and composition of fiscal adjustment, its treatment of the appropriateness of the fiscal stance and its effectiveness in achieving program goals is somewhat limited. The fact that a significant share of programs envisaged an increase in the fiscal deficit may counter criticsí arguments that the Fund always recommends tighter fiscal policy, but provides little indication of the extent to which programs were successful in achieving their goals. Moreover, beyond the “headline” overall deficit, other measures such as changes in the primary balance or in the cyclically adjusted deficit may be of importance in analyzing adjustment effort and the economic impact of fiscal policy. In a similar vein, the analysis should not be confined to central or general government: in many countries, operations of the wider public sector, including quasi-fiscal activities, entail sizable deficits and contingent liabilities that can be as important as core fiscal operations.

    3. The role of financing constraints in determining the size of the fiscal adjustment receives less attention in the report than we feel would be warranted. For countries that have limited access to private capital, such constraints are often binding. Conversely, for countries with access to capital markets, debt sustainability considerations play a key role in influencing the scale and terms of financing from private creditors, and the appropriate path of the fiscal balance. These factors, which are central to determining the stance of fiscal policy, would have benefited from fuller treatment in the report. Given the often present financing constraints and debt sustainability considerations, the staff would question whether the fiscal stance could realistically have been more accommodating in many cases, and there is some basis for concern in the opposite direction.

    4. The report rightly urges staff to endeavor to project realistic growth rates to correct the positive bias observed in Fund-supported programs. The sources of this bias are varied but familiar. In some instances, it may be due to the assumption that the program will be fully implemented as designed. Often the overoptimism reflects the fact that program assumptions must be agreed with the authorities, who are trying to maximize support for the program and hence project a quick return of investor confidence and a rapid pickup in growth. While a more comprehensive analysis of the demand components of growth is desirable, it is unlikely to correct the bias by itself. Moreover, the implications for fiscal policy are not always clear-cut: weaker-than-projected activity might argue for a looser fiscal stance, but in cases where financing constraints are paramount, it could dictate stronger measures to achieve the needed amount of adjustment. Similarly, in those cases in which the external objective is just met, while growth turns out weaker than projected, a significantly looser fiscal policy may not have been appropriate.

    5. The report suggests there is scope for greater attention to reforms to improve tax performance and spending composition in Fund-supported programs. Measures aimed at strengthening tax administration are already part of most programs where such issues are prominent. The fundamental task of tax administration is to strengthen revenue collection, and technical assistance and measures aimed at improving organizational effectiveness address tax evasion, either directly or indirectly.1 On the expenditure side, public expenditure management (PEM) has been growing in importance: in many programs, PEM measures have played a key role, aimed at strengthening expenditure control and improving the timeliness and accuracy of fiscal information. Such reforms, backed by technical assistance, include reforms in accounting, budget classification, financial planning, and cash management. PEM, an area of joint responsibility between the Fund and the World Bank, has important implications for the implementation of fiscal adjustment envisaged in Fund-supported programs. The development of social safety nets is an area in which the World Bank has lead responsibility, while Fund-supported programs integrate the envisaged cost of safety nets into fiscal targets.

    6. The report provides a valuable perspective on the time frame mismatch between the duration of programs and the time required to adopt structural reforms. Clearly, this mismatch is of varying importance for different types of reform. The collection of tax arrears—in many cases mainly a question of political will—and the elimination of tax exemptions can often generate revenues quickly. On the other hand, experience suggests that other reforms, such as more general improvements in tax administration, or civil service reform, can take many years to obtain results. The staff agrees that this reality should not discourage the inclusion of key structural reforms in Fund-supported programs even when they require a multiyear effort, provided they are critical to the macroeconomic challenges facing the country. Finally, the limited success in the implementation of these types of measures is unlikely to be largely the result of the excessive focus on short-term quantitative targets of programs as the report maintains, but rather of political resistance, especially when reforms attack entrenched vested interests.

    7. Recommendation 1: Program documentation should provide a more in-depth and coherent justification for the magnitude and pace of the fiscal adjustment and how it is linked with assumptions about the recovery of private sector activity and growth. The staff supports this recommendation. At the same time, it cautions that attempting too much precision in this area could lead to spurious justifications, given the inherent difficulties in forecasting the response of economic actors to policy changes and recognizing the difficulties in calibrating the appropriate degree of fiscal resilience against shocks or adverse economic outcomes against the challenges in building political support for those policy choices. Finally, after a crisis large uncertainties may remain regarding the pace of recovery in private sector demand and particularly investment. The latter depends on investor confidence and financial market conditions, which in turn are a function of the perceived degree of commitment of the authorities to adhere to the program.

    8. Recommendation 2: The internal review mechanism should place relatively more emphasis on the early stages of the process. The staff supports this recommendation, and this is an important feature of recent changes to the review process. Early meetings between the area department and functional departments provide critical input to initial decisions on program design, and the issues and trade-offs raised in this context should inform the presentation in program documents. The report correctly notes that Fund-supported programs evolve greatly during the course of their implementation, and for this reason comments raised during the review process on the occasion of the program reviews are often extensive.

    9. Recommendation 3: Programs should give greater emphasis to the formulation and implementation of key institutional reforms in the fiscal area, even if (as is likely) they cannot be fully implemented during the program period. The staff supports this recommendation and welcomes the clarification that the attention to key structural reforms could not substitute for short-term quantitative targets. Staff will have to continue to use careful judgment in identifying fiscal reforms that need to be sustained over time and how to design quantitative performance criteria to safeguard the Fund’s resources. While the staff agrees that structural reforms are, in many cases, more important to fiscal sustainability than short-term expenditure and revenue measures, conditionality needs to focus on actions or quantitative targets that can be monitored during the period of the arrangement. The same considerations apply to strengthening market confidence: market participants need to see signs of progress in the short run to be convinced that a country’s fiscal problems are being addressed. The need for action to be monitorable in the short run is particularly acute during a crisis.

    10. Recommendation 4: The surveillance process should be used more explicitly to provide a longer-term road map for fiscal reforms and to assess progress achieved. The staff supports this recommendation with some qualifications. Given that fiscal reforms are already covered in broad terms in Article IV consultations, the report appears to be arguing for a deeper and more comprehensive analysis across countries. This sits somewhat uncomfortably with the Board’s instructions regarding the focus of surveillance as reflected in the 2002 Biennial Surveillance Review. Consistent with these instructions, staff would propose to continue with an approach under which, during Article IV consultations, staff examine those aspects of fiscal policy and its institutional underpinnings that are material to the assessment of macroeconomic policies—following up as needed (and as requested by the authorities) with fiscal Reports on the Observance of Standards and Codes (ROSCs) and technical assistance. Such follow-up, combined with advice from the World Bank and other agencies as appropriate, would assist the authorities in formulating or enhancing a detailed road map for fiscal reform and help guide implementation in specific areas. Any further expansion of the Fund’s role in this area would also, of course, have resource implications that would need to be addressed.

    11. Recommendation 5: The IMF should clearly delineate the operational framework in which social issues will be addressed within program design in non-PRGF countries. This should include a clear indication of the IMF’s responsibilities and activities in this area. The staff recognizes the importance of social issues, particularly to the extent that they frequently have implications both for fiscal policy and for program ownership. For instance, it is essential to understand the key social programs and their implications for the sensitivity of public expenditure to macroeconomic developments. Moreover, the experience of some crisis cases, in which it proved difficult to introduce effective and well-targeted social safety nets in the midst of a downturn, supports the suggestion that staff should be open to discussing with the authorities how their existing social protection systems, or those to be designed, would operate under conditions of financial stringency. Given that, under the existing framework, the World Bank takes the lead in designing social safety nets and in identifying high-priority spending, it is essential for Fund staff to collaborate effectively with the Bank on these issues, including by supporting efforts to design social safety nets that are effective in a crisis. These are issues that we will continue to explore and, to the extent possible, take into account in program design in each case.

    The present report chooses not to deal with technical assistance, arguing that a forthcoming IEO report will address this topic. This is an important priority for the Fund, and it commands a substantial amount of resources and attention.

    IEO Comments on Staff Response to the Evaluation of Fiscal Adjustment in IMF-Supported Programs

    Executive Board Meeting August 29, 2003

    Paragraph numbers refer to the Staff Response on pages 110–12; bracketed chapter and page numbers refer to the main report on pages 3–106.

    Paragraph 2: The staff has commented that the evaluation’s “treatment of the appropriateness of the fiscal stance and its effectiveness in achieving program goals is somewhat limited.” Program goals cover a wide variety of objectives and are influenced by the whole set of macro and other policies in the program—not only fiscal. To disentangle the impact of the fiscal stance alone on these overall program objectives would have meant estimating the effects of a counterfactual program, which is beyond the scope of this evaluation.

    The evaluation discusses extensively the extent to which programs were able to achieve typical goals such as fiscal deficit, current account deficit, GDP growth, and investment targets. In addition, the case studies provide an evaluation of implementation of fiscal reforms.

    Paragraph 3: The staff response states that the role of financing constraints in determining the size of the fiscal adjustment receives less attention than warranted. The evaluation does examine the impact of projected financing on the fiscal adjustment, including an econometric estimate of the magnitude of the link [Chapter 2, page 20]. In addition, the evaluation explicitly recognizes that the fiscal stance cannot be determined solely on countercylical grounds, but must also take account of its impact on market confidence and debt sustainability, particularly in emerging markets [“Summary of Findings and Recommendations,” pages 6–7; and Chapter 5, pages 47–48].

    Paragraph 4: We agree with the staff that there are many causes for overoptimism in projecting growth. We also agree that the fiscal response to weaker growth is not clear-cut and depends on financing constraints. However, one of the key findings of the evaluation is the reluctance to project growth slowdowns, let alone negative growth, in programs [“Summary of Findings and Recommendations,” page 6]. This result, together with the finding that program documents often do not discuss the rationale behind the fiscal stance, implies that the pros and cons of a countercyclical fiscal stance in such cases are rarely addressed explicitly [“Summary of Findings and Recommendations,” page 7].

    Paragraph 5: The staff response stresses the extensive technical assistance activities to improve tax administration and public expenditure management systems. The evaluation acknowledges these efforts, including preprogram activities. However the point made by the evaluation, based on the programs examined, is a different one: notwithstanding efforts at technical assistance, there is little observable policy action and limited impact during program implementation, particularly in reduction of tax evasion and reallocations of spending (Chapter 7 of the report).

    Paragraph 10: The staff response states that Recommendation 4 of the evaluation (“Surveillance should be used more explicitly to provide a longer-term road map of fiscal reforms and to assess progress achieved”) sits somewhat uncomfortably with the Board instructions regarding the focus of surveillance as reflected in the 2002 Biennial Surveillance Review. We do not feel there is any inconsistency. The new guidelines on surveillance that have emerged from the 2002 review (SM/02/292) explicitly stress macro relevance, sustainability, and sound economic growth as the principles for selectivity. In the opinion of the IEO this means that surveillance should focus not only on the magnitude of the short-term fiscal adjustment, but also its sustainability and its quality in terms of efficiency and equity. This is precisely what is recommended by the evaluation [“Summary of Findings and Recommendations,” page 12].

    Paragraph 11: The staff response indicates that it “supports the suggestion that staff should be open to discussing with the authorities how their existing social protection systems, or those to be designed, would operate under conditions of financial stringency.” This falls short of the evaluation’s recommendation. In fact, this evaluation recommends that “the IMF could invite the authorities regularly during Article IV consultations to suggest what are the existing critical social programs and social services they would like to see protected in the event of adverse shocks.”

    The Acting Chair’s Summing Up Evaluation Report on Fiscal Adjustment in IMF-Supported Programs by the Independent Evaluation Office

    Executive Board Meeting 03/83 August 29, 2003

    Executive Directors welcomed the report of the Independent Evaluation Office (IEO), which draws valuable lessons for fiscal policy, a central element of Fund-supported programs. They agreed that the report has a number of constructive recommendations whose implementation would enhance the Fund’s advice and programs in the fiscal area. Most Directors were encouraged that some of the common criticisms of fiscal adjustment in Fund-supported programs—notably that Fund-supported programs adopt a “one-size-fits-all” approach, are inflexible, and cause a decline in social spending—were not supported by the empirical evidence presented in the report. A few others felt that the evidence in the report does not fully answer criticisms of the Fund’s approach. Directors also noted that the report found significant weaknesses in the results of fiscal adjustment in programs, noting that fiscal targets were not met in a large number of cases. However, they cautioned against drawing conclusions based on generalizations across a large number of countries, and stressed that the appropriateness of the size, pace, and results of fiscal adjustment can only be assessed against the specific circumstances of each individual country.

    Directors reviewed the report’s extensive evidence that addresses the concern that Fund-supported programs always involve fiscal austerity often associated with a contractionary bias. They agreed with the report’s finding that Fund-supported programs vary across countries and are also in many instances revised when necessary to incorporate changing realities. They welcomed the conclusion that there is no evidence that Fund programs are uniformly contractionary, but noted that a contractionary bias could exist in certain circumstances. Some Directors considered that a closer investigation of the appropriateness of the fiscal stance in relation to programsí goals for individual countries could have shed more light on the report’s conclusions.

    Directors took note of the report’s finding that, while growth does not typically decline in program years compared to trend, programs’ projections of economic growth rates and private investment tend to be overoptimistic. They agreed with the report’s conclusion that this forecasting bias has at times led to a contractionary bias in fiscal design. Many Directors, however, cautioned that less optimistic growth projections would not necessarily call for a less contractionary fiscal stance, especially in cases in which financing constraints and debt sustainability concerns are paramount and may be exacerbated by lower growth. In such cases, further strong fiscal adjustment may be needed to maintain market confidence and achieve desired levels of investment. Some Directors believed, however, that where debt sustainability is the primary objective, additional capital spending on productive assets would not necessarily jeopardize the program’s objectives. Directors believed that the downside risks to growth projections should be weighed more systematically in program documents, and that the scope for countercyclical fiscal policy should be assessed if these risks were to materialize. Directors also noted the finding that most of the progress in fiscal adjustment took place in the first year of the programs with little progress thereafter, and emphasized the need for a better understanding of this phenomenon.

    On the qualitative aspects of fiscal adjustment, Directors noted the report’s finding that Fund-supported programs are not associated with lower public education and health spending than would have occurred in a nonprogram situation. However, they agreed with the report’s assessment that this evidence did not allow them to conclude that the most vulnerable social groups are protected from the economic shocks they may suffer during program years. Directors underscored the need to shield the poor from economic downturns and called for Fund-supported programs to incorporate, to the extent possible, the cost of social safety nets, which should be Summing Up by the Acting Chair developed in advance by the authorities in collaboration with the World Bank.

    Directors also agreed with the report’s finding that there is scope for greater attention to reforms to improve tax performance and spending composition in Fund-supported programs. They considered that greater efforts are needed to increase tax compliance, curtail exemptions, and improve collection efficiency, but cautioned against overestimating the yield of revenue administration measures, at least in the short run. In this context, Directors noted the important role of technical assistance in achieving improvements in this area. On expenditure, Directors agreed that programs should put more emphasis on lasting improvements in expenditure patterns, such as by focusing on medium-term civil service reform.

    Directors commended the report for crystallizing the issue of the mismatch between the period covered by a single Fund-supported program and the time required to complete structural and institutional reforms. They noted the report’s findings that, in several instances, surveillance has drawn too few lessons from past failures and has not forcefully flagged the need to accelerate key structural reforms in the fiscal area. Directors agreed that programs should focus on key fiscal reforms that can improve the sustainability, efficiency, and equity of the adjustment, even when their adoption requires a longer period than that covered by the Fund-supported program. Most reforms would need to be broken down into discrete steps, and these intermediate targets could be included in program conditionality, while respecting the key principles of the conditionality guidelines. The reforms would also need to be appropriately prioritized and sequenced. Directors stressed the need for fiscal targets to respect existing capacity constraints, or at least to indicate clearly those cases where fiscal adjustment, while required by macroeconomic circumstances, might be beyond the country’s implementation capacity. Directors also noted that successful fiscal reform would require that the authorities have strong ownership of the process.

    Directors commented on the specific recommendations in the IEO report.

    Recommendation 1: Program documentation should provide a more in-depth and coherent justification for the magnitude and pace of the fiscal adjustment and how it is linked with assumptions about the recovery of private sector activity and growth.

    Directors supported this recommendation, and deemed that this initiative would instill greater discipline in program design, enhance transparency, and provide the public and the private sector with a more convincing rationale for the program, thereby helping to overcome political obstacles to implementation. Nevertheless, they recognized that uncertainties regarding key macroeconomic variables, particularly in countries in crisis, and concern about the implementation of policy measures and reforms complicate this task. A few Directors cautioned against spurious precision in such justifications, and others noted that the magnitude and pace of programmed fiscal adjustment may also reflect political constraints. Several Directors stressed the importance of better integrating debt sustainability analyses into program work. Directors looked forward to further staff analysis of the issue of growth projections in the context of the program design discussions.

    Recommendation 2: The internal review mechanism should place relatively more emphasis on the early stages of the process.

    Directors supported this recommendation. They welcomed Management’s recent initiative aimed at enhancing the effectiveness of the review process, which, inter alia, encourages early consultation between departments.

    Recommendation 3: Programs should give greater emphasis to the formulation and implementation of key institutional reforms in the fiscal area, even if (as is likely) they cannot be fully implemented during the program period.

    Directors agreed that key institutional reforms can be more critical for fiscal sustainability than short-term expenditure and revenue measures. However, they recognized that short-term measures are hard to avoid in many cases, especially if the immediate objective is economic stabilization. Medium-term institutional reform may be of particular relevance in countries that have achieved macro-economic stability and where “second generation” reforms are necessary to foster growth and reduce longer-term vulnerabilities. Some Directors agreed with the report’s suggestion that reforms should be broken down into those that require executive action, legislation, and capacity building.

    Directors, however, pointed out that in crisis situations, the pressing need to resolve the crisis may pose serious constraints on a medium-term approach. They reiterated the conclusion of the discussion on the Evaluation of the Role of the Fund in Recent Capital Account Crises that a crisis should not be used as an opportunity to force long-awaited reforms, however desirable they may be, in areas that are not critical to the resolution of the crisis or to address vulnerability to future crises. Careful judgment will continue to be needed to focus conditionality on those reforms judged critical while at the same time ensuring that adequate progress is made in addressing vulnerabilities and achieving the program’s goals during the period of the arrangement, thus safeguarding the Fund’s resources.

    Recommendation 4: The surveillance process should be used more explicitly to provide a longer-term road map for fiscal reforms and to assess progress achieved.

    Most Directors agreed that Article IV consultations should play a stronger role in identifying longer-term reform priorities and the causes of past failures in addressing fiscal problems, and that these analyses should inform subsequent program design. In this respect, the various initiatives to distinguish Article IV surveillance from program work are aimed at providing fresh perspectives. Some Directors considered the current framework of surveillance to be adequate for achieving the objectives of the IEO’s recommendation. Directors also called for staff reports to set out in more detail the progress in implementing the recommendations of ROSC and technical assistance missions, as well as key reform priorities. Nevertheless, they under-scored that the ultimate responsibility to develop a fiscal reform agenda resides with the individual country authorities, while the Fund should stand ready to provide advice.

    Directors also stressed that, consistent with the Fund’s mandate, surveillance needs to focus on key issues of macroeconomic relevance, which will be different in each country, and should draw on the expertise of other institutions as appropriate. They encouraged the use of cross-country experiences and comparisons, including inputs from regional and multilateral surveillance, to assist in program design. Most Directors viewed Article IV consultations as the appropriate vehicle for staff to identify countries in need of an in-depth fiscal review, stressing that this identification process should be applied uniformly to all member countries of the Fund. In most cases, these needs could be accommodated through technical assistance and ROSCs.

    Recommendation 5: The IMF should clearly delineate the operational framework in which social issues will be addressed within program design in non-PRGF countries. This should include a clear indication of the IMF’s responsibilities and activities in this area.

    Directors agreed that an important aim of program design should be to protect critical social expenditures. However, they stressed, as recognized in the report, that the Fund should not become involved in the detailed selection and design of social policy; this task is outside both the Fund’s mandate and its expertise. A number of Directors supported the IEO’s call for updating of the 1997 guidelines that direct IMF work in the social area, in order to improve their clarity and effectiveness as an operational tool in protecting the most vulnerable from economic shocks and budgetary retrenchment. Other Directors, however, viewed the existing guidelines as adequate, and a few considered that the annual and medium-term budgets of non-PRGF countries already adequately identify critical social sector programs. These Directors recalled that the new framework for Bank-Fund collaboration on public expenditure issues should enhance countriesí public expenditure reform strategies, including measures to protect critical social spending. Many Directors agreed with the recommendation that staff should inquire, during Article IV consultations, whether the authorities have identified social programs that they would like to protect in the event of a crisis, as they believed this would help dispel the criticism that Fund programs unduly curtail social spending. A few others considered this recommendation impractical, as it would create significant costs and pressures for the authorities with little benefit.

    Directors looked forward to two evaluations that the IEO is conducting: those on the Fund’s technical assistance and on the PRSP/PRGF initiatives. Directors stressed that, as the Fund provides extensive technical assistance on fiscal issues, the findings of the first report will be an important complement to the conclusions of the present one. Likewise, Directors anticipated that the forthcoming IEO’s evaluation of PRSP/PRGFs will supplement the report under consideration in the lessons it holds for low-income countries and how they can be implemented.

    Directors looked forward to receiving a report from IMF Management on how the report’s recommendations might be addressed and followed up on in the period ahead.

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