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International Monetary Fund. Research Dept.
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Keywords:
WEO; debt service; terms of trade; debt; current account; MENA country; transition country; debt-reduction policy; net debtor countries; a number of country; factor income; net creditor country; Fiscal consolidation; Exports; Government debt management; Middle East; Eastern Europe; Western Hemisphere; Africa; Asia and Pacific
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Abstract

Increasing capital market integration has expanded the markets in which governments can sell their debt. In principle, this provides greater scope for governments to smooth taxation and spending, and for countries to smooth consumption over time in the face of temporary shocks. But capital market integration also implies that the fiscal policies of one country will affect other countries. In a world with perfect capital market integration, a country that issues an amount of debt that is globally significant will thereby raise world real interest rates and crowd out private investment in all countries. An important policy implication is that countries with high levels of debt may not only jeopardize their own domestic macroeconomic stability and reduce their own living standards, but they may also impose significant spillovers on other countries.

Annex I The Spillover Effects of Government Debt

Increasing capital market integration has expanded the markets in which governments can sell their debt. In principle, this provides greater scope for governments to smooth taxation and spending, and for countries to smooth consumption over time in the face of temporary shocks. But capital market integration also implies that the fiscal policies of one country will affect other countries. In a world with perfect capital market integration, a country that issues an amount of debt that is globally significant will thereby raise world real interest rates and crowd out private investment in all countries. An important policy implication is that countries with high levels of debt may not only jeopardize their own domestic macroeconomic stability and reduce their own living standards, but they may also impose significant spillovers on other countries.

For the industrial countries as a whole, government net financial liabilities increased by about 25 percentage points of GDP from the early 1980s to 1994.1 Recent empirical evidence suggests that this massive buildup of government debt, which has been notably widespread across countries, has resulted in significantly higher global real interest rates and a lower world capital stock. For example, recent reduced-form evidence that links world government debt to real interest rates in individual industrial countries with integrated capital markets suggests that the growth in world government debt since the early 1980s has raised the average level of real interest rates by between 150 and 450 basis points.2

The recent empirical evidence that finds a strong link from world government debt to real interest rates is consistent with other empirical evidence that suggests that government deficits reduce national and world saving because consumers do not increase their saving by the full amount of the future increase in the tax burden that will be necessary to finance the higher level of debt. As a consequence, there will be a tendency to overconsume available resources, and this will result in higher real interest rates and a lower world capital stock. This tendency to overconsume available resources in the short run not only reduces the capital stock and labor productivity, but also lowers the sustainable level of consumption in the long run.

Recent estimates of the crowding-out effects of government debt from structural models also suggest that consumers would be significantly better off in the long run if aggregate government debt were reduced in the industrial countries. For example, in the May 1995 World Economic Outlook, which provided estimates of the long-run crowding-out effects of government debt from a structural model of the industrial economies, it was estimated that a 20 percentage point increase in the net debt-to-GDP ratio would result in an increase in world real interest rates of about 100 basis points.3 These estimates are smaller than those obtained from recent reduced-form equations that provide direct links from world government debt to real interest rates, but they still suggest important crowding-out effects from government debt. For example, they imply that a permanent increase in the world real interest rate of 100 basis points would eventually reduce the world capital stock by 10½ percent. This lower capital stock would reduce labor productivity and real wages and lower the sustainable level of world output and consumption by 3¾ and 2¼ percent, respectively. While these aggregate estimates suggest that there could be very significant benefits for the world economy if governments were successful at reducing their debt, they tend to mask the spillover effects of one country’s debt on other countries.

MULTIMOD, the Fund’s multicountry model, is well designed to study such spillovers, because it captures the essential intertemporal aspects of government debt and has well-defined short- and long-run properties.4 As in any modern macro model that has well-defined properties, the extent of crowding out depends critically on (1) the degree to which consumers are assumed to count government bonds as net worth; (2) the relationship assumed between aggregate consumption and disposable income; and (3) the assumed sensitivity of aggregate consumption to changes in interest rates. If consumers are connected to all future generations by operative intergenerational transfers, increases in government debt will not crowd out private investment because consumers will change their saving rate today to prepare for tax liabilities in the future. In the economics literature, this is referred to as the Ricardian equivalence hypothesis. But empirical evidence on the response of private saving to changes in government deficits casts serious doubt on the Ricardian equivalence hypothesis.5 This empirical evidence suggests that consumers save for only some fraction of the higher future tax burden that is associated with higher levels of government debt. In effect, this implies that they treat only some portion of their holdings of government bonds as net worth because they realize that they will have to pay higher taxes in the future to service the government’s interest payments on this debt.

There seem to be two reasons why full Ricardian equivalence does not apply in practice, and both are embodied in MULTIMOD’s properties. First, because a significant fraction of consumers cannot borrow against their future labor income, their expenditure is effectively constrained by their current disposable income. Second, consumers who are constrained by wealth rather than disposable income are assumed not to care about all of the tax burden that will be passed on to future generations. Thus, wealth-constrained consumers are assumed to adjust their saving rates in response to a higher expected future tax burden, but they also realize that future generations will help share the tax burden associated with higher levels of government debt. Both imperfect capital markets and the disconnectedness of today’s generation from future generations imply that higher levels of government debt will be associated with a tendency to overconsume available resources. And this tendency to overconsume will result in higher real interest rates and eventually in less capital and lower sustainable levels of real income and consumption.

The increase in interest rates needed to eliminate the tendency to overconsume available resources will depend critically on the interest sensitivity of consumption, If consumption were highly sensitive to changes in real interest rates, then it would take only a small rise in interest rates to induce consumers to adjust their saving rates in response to an increase in government debt. However, the empirical literature suggests that the interest sensitivity of consumption and saving is low.6 Thus, this evidence also implies significant long-run crowding-out effects of government debt.

Three MULTIMOD-based fiscal scenarios were constructed to illustrate the domestic and external effects of changing government debt. In the first scenario, government debt in the United States is reduced by 5 percent of baseline nominal GDP, through reductions in government expenditures.7 The second scenario is similar except that the 5 percent debt reduction is now assumed for all industrial countries except the United Slates. A third simulation considers the case in which debt reduction in the United States is achieved by raising taxes instead of reducing government expenditures.

Scenario 1. Debt Reduction in the United States Through Lower Expenditures

In this scenario (see Table 25), the reduction in government debt is achieved by reducing government expenditures by 1 percent of GDP forever and then allowing taxes to fall once the desired reduction in government debt has been achieved. Lower government expenditures in this simulation result in smaller government deficits of about 1 percent of nominal GDP for the first five years of the simulation and then gradually declining percentages of GDP after the desired debt reduction has been achieved.8

Table 25.

Effects of Debt Reduction in the United States Through Lower Government Expenditures

(Percentage deviation from baseline unless otherwise noted)

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In percentage points.

The short-run effects of lower government expenditures are contractionary; real GDP in the United States declines by 1.1 percent in the first year and this induces a 0.4 percent reduction in real GDP in the other industrial countries. The short-run effects on aggregate demand and output will, however, depend critically on the response of the monetary authorities. In this simulation, a monetary policy rule is employed whereby the money stock is held constant. In the short run, this results in a decline in short-term interest rates, but this is not sufficient to completely offset the contractionary effects of the fiscal contraction on real GDP. Consequently, there is a temporary decline in inflation in the first three years of the simulation and thus a lower price level in the long run. If the monetary authorities were to provide some monetary accommodation by reducing interest rates more in the short run and allowing the money stock to expand, this would result in even smaller contractionary effects in the short run. However, even without monetary accommodation the contractionary effects are short-lived as lower real interest rates stimulate investment demand.

In the first year, real long-term interest rates decline by 70 basis points in the United States and by 30 basis points in the other industrial countries.9 In the long run, the lower level of world government debt reduces world real interest rates by 20 basis points. This will lower the financial cost of capital in all countries and provide an incentive for firms to invest. There will, however, be an additional effect on the capital stock in the United States. Because capital taxes are distortionary in MULTIMOD, the permanent reduction in government expenditures combined with lower financing requirements on the debt will imply a permanent reduction in the tax burden.10 In the United States, the combined effects of lower interest rates and less distortionary taxation of capital raise the capital stock in the long run by 2.2 percent, which in turn raises the long-run sustainable level of real income by 0.6 percent and the sustainable level of real consumption by 2.1 percent. In this simulation, the effects on consumption and investment are greater than those on output because the U.S. government is assumed to absorb a smaller share of output and because the reduction in U.S. government debt improves the net foreign liability position of the United States. In the long run, this raises permanent income in the United States because it results in lower net interest payments to the rest of the world and higher net imports of goods and services.

As argued above, the international integration of capital markets implies that the long-term benefits of debt reduction in the United States will not be limited to the U.S. economy. Because a reduction in U.S. government debt will reduce the cost of capital in other countries, consumers in other industrial countries and the developing countries will also experience a rise in their real incomes, in fact, real GDP in the long run increases almost as much in the rest of the world as it does in the United States. In aggregate, there are permanent increases in real GDP of 0.4 percent in the other industrial countries and 0.3 percent in the developing countries as both debtor and creditor countries benefit from the increase in world saving.

Scenario 2. Debt Reduction in the Other Industrial Countries

The second scenario considers the effects of debt reduction in all countries except the United Slates (Table 26), Because these countries, in aggregate, are larger than the United States, the same reduction in debt-to-GDP ratios in all of these countries would be expected to produce larger changes in world saving and real interest rates. Indeed, in this case, real interest rates decline by 40 basis points in the long run, and this results in even larger permanent gains in real income. In fact, in this scenario consumers in the United States are even better off because there are smaller contractionary effects in the short run and significantly greater gains in permanent income in the long run. Very similar long-run gains in real income are realized in the developing countries. However, the reduction in real long-term interest rates in the short run implies that there are smaller short-run contractionary effects for net debtor countries than for net creditors.

Table 26.

Effects of Debt Reduction in All Industrial Countries Except the United States

(Percentage deviation from baseline unless otherwise noted)

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In percentage points.

Scenario 3. Debt Reduction in the United States Through Higher Taxes

The third simulation illustrates the effects of debt reduction in the United States through tax increases rather than reductions in expenditures (Table 27). Again, once the desired effect on government debt has been achieved, taxes are allowed to decline to stabilize the debt-to-GDP ratio. However, because government expenditures are unchanged in the scenario, taxes decline less in the long run than they did in the first scenario.

Table 27.

Effects of Debt Reduction in the United States Through Higher Taxes

(Percentage deviation from baseline unless otherwise noted)

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In percentage points.

In the third scenario, private sector demand and economic activity are stimulated significantly less than in the first scenario for two reasons. First, although the lower level of government debt implies lower taxes in the long run, because lower debt results in a smaller interest burden from government securities, the reduction in taxes is smaller because of higher government expenditures. Second, since taxes on capital are distortionary in MULTIMOD, higher taxes imply a smaller capital stock. As a consequence, a reduction in government debt achieved through higher taxes in the short run will be less beneficial in the long run than if the same debt reduction is achieved through a permanent reduction in government expenditures.

* * *

This annex has focused mainly on the spillover effects of a significant but small reduction in government debt. For countries that have very high levels of government debt, debt reduction may lead to changes in market participants’ views about the riskiness of government securities and may consequently result in even larger benefits through lower risk premiums in interest rates. Moreover, in the scenarios it is assumed that the private sector views the permanence of the debt reduction as perfectly credible. Some recent evidence suggests that fiscal consolidation achieved through higher taxes may be less credible than the same debt reduction achieved through lower government expenditures (see Chapter III). This suggests that the short-term contractionary effects of higher taxes in the short run may be larger than those estimated in the third scenario. Finally, the three scenarios assume that monetary policy is such as to allow inflation to fall in the short run. But, if the debt-reduction policy is viewed as being credible, there may be a case, depending on the initial rate of inflation and inflationary pressures, for the monetary authorities to ease monetary conditions further in the short run to offset more of the short-run contractionary effects on both output and inflation.

Annex II Macroeconomic and Structural Adjustment in the Middle East and North Africa

The economies of the Middle East and North Africa (MENA) region offer striking contrasts with considerable variations in per capita incomes and underlying economic structures.1 Most countries in the region are classified as middle-income economies with per capita incomes ranging from $1,000 to $7,000. However, Israel, Kuwait, Qatar, and the United Arab Emirates are classified as high-income economies with an average per capita income of about $15,000, while Egypt and the Republic of Yemen—with per capita incomes below $1,000—are classified as low-income countries. Israel, Jordan, Lebanon, Morocco, and Tunisia have a more diversified economic structure than most countries of the region, which are characterized by a narrow production and export base, particularly the major fuel exporters—Algeria, the Islamic Republic of Iran, and the countries belonging to the Gulf Cooperation Council for Arab States (GCC).2

Because of their high dependence on mineral resources, most countries of the MENA region remain particularly vulnerable to adverse developments in their external environment (Table 28). For example, the terms of trade of all the major fuel producers have deteriorated by more than 50 percent since the reverse oil shock of 1986, which has complicated macroeconomic management and hampered economic performance. Furthermore, the reverse oil shock had important consequences for most of the other countries of the region, particularly Egypt, Jordan, Lebanon, the Republic of Yemen, and the Syrian Arab Republic, because a large share of their foreign exchange earnings derives from the GCC countries in the form of workers’ remittances. Also, the regional crisis of the early 1990s triggered by Iraq’s invasion of Kuwait resulted in a marked deterioration in the fiscal positions of several GCC countries while having a major impact on the flows of aid and workers’ remittances to other countries of the MENA region.

Table 28.

Middle East and North Africa: Revenue from Mineral Resources

(In percent of total revenue)

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Averages for 1993/94, unless otherwise indicated.

Exports of goods and services plus workers’ remittances

Average for 1992.

Including Suez Canal receipts.

Average for 1992/94.

Average for 1992/93.

Overall economic performance over the last decade and a half has been disappointing, in particular among fuel exporting countries where real per capita GDP fell by 20 percent on average from 1981 to 1995 (Chart 30). The fall in per capita GDP coincided with weak oil market conditions, the widening of fiscal and current account imbalances, and the accumulation of external debt (Charts 31 and 32), However, a number of countries have achieved important progress, particularly the more diversified exporters, in strengthening growth performance since the mid-1980s. In addition, most MENA countries have reassessed their economic policy strategy and initiated reforms aimed at reducing internal and external imbalances while addressing structural weaknesses. The main challenge faced by most MENA countries in the period ahead is the intensification and sustained implementation of these reforms with a view to reaping the benefits of globalization and favorable regional developments.3

Chart 30.
Chart 30.

Middle East and North Africa: Economic Performance

(In percent change unless otherwise noted)

1Egypt, Israel, Jordan, Morocco, Syria, and Tunisia.2Algeria, Bahrain, Islamic Republic of Iran, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
Chart 31.
Chart 31.

Middle East and North Africa: Fiscal Balances

(In percent of GDP)

1Algeria, Bahrain, Islamic Republic of Iran, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.2Egypt, Israel, Jordan, Morocco, Syria, and Tunisia.
Chart 32.
Chart 32.

Middle East and North Africa: External Balances

(In percent of GDP)

1Algeria, Bahrain, Islamic Republic of Iran, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.2Egypt, Israel, Jordan, Morocco, Syria, and Tunisia.

The Adjustment Experience

Most of the economies of the MENA region have suffered adverse exogenous shocks since 1986 onward, including a terms of trade deterioration, several episodes of war and civil strife, and, in the North African countries and the Republic of Yemen, recurrent droughts. The nature, intensity, and timing of these shocks, and the associated policy responses, have differed significantly among countries. The fuel exporters have faced a major adjustment challenge as a result of the erosion of real oil prices since the early 1980s. The associated terms of trade deterioration and resulting macroeconomic instability were much more severe than those experienced over the same period by the other MENA countries with a more diversified economic and export base (Chart 33).

Chart 33.
Chart 33.

Middle East and North Africa: External Conditions

(1985 = 100)

Fuel Exporting Economies

MENA’s fuel exporting countries are heavily dependent on hydrocarbon export proceeds as a source of both foreign exchange and budgetary revenue, making these countries particularly vulnerable to fluctuations in world oil prices. Because of the relatively limited scope of the nonhydrocarbon sector and the narrow domestic tax base in most of these countries, budgetary revenue fell sharply from about 39 percent of GDP in 1981–85, to about 29 percent of GDP during 1986–90. Partly offsetting this revenue contraction, government spending declined by only about 2 to 3 percentage points of GDP over the same periods, mainly as a result of cuts in capital expenditure.4 The average fiscal deficit widened markedly from 1½ percent of GDP in 1981–85 to 8 percent of GDP in 1986–90. In the early 1990s, the regional crisis resulted in a marked increase in public expenditure in some GCC countries. Because of a subsequent decline in budgetary revenue associated with falling oil prices, and notwithstanding a curtailment in public spending, budget deficits have remained excessive and averaged 9 percent of GDP for the group of fuel exporters in 1991–95. The economic implications of these fiscal imbalances have differed significantly between the GCC countries on the one hand, and Algeria and the Islamic Republic of Iran on the other, mainly because of the differing degrees of outward orientation and levels of foreign exchange reserves of these countries.

The GCC countries have traditionally pegged their currencies to the U.S. dollar and maintained their trade and payment systems free of current and capital account restrictions. As a result, inflation in these countries was not affected by aggregate demand pressures stemming from the expansionary fiscal stance in the second half of the 1980s. These pressures, however, contributed to a substantial deterioration of the countries’ external current account position, which shrunk from a surplus of 7 percent of GDP on average in 1981–85 to near balance in 1986–90.

In the first half of the 1990s, most of the GCC countries stepped up their efforts at expenditure restraint. For instance, government spending in Saudi Arabia was reduced from 54 percent of GDP in 1986–90 to 44 percent of GDP in 1991–95, and this spending restraint was supplemented by steps in 1995 to increase non-oil revenues significantly. The expenditure cuts were broad-based, including in services and supplies, operations and maintenance, and subsidies.5 Efforts in GCC countries, however, proved insufficient to bring down fiscal deficits to the low levels that had prevailed in the mid-1980s. The persistence of large fiscal imbalances contributed to a shift of the external current account balance from a surplus to a deficit of about 10 percent of GDP on average in 1991–95 which led to a drawdown of official foreign assets and of the foreign asset positions of the domestic private sector. There was also a rapid buildup of domestic public debt as a ratio to GDP, which, in the case of Saudi Arabia, had risen from about 50 percent to more than 80 percent over the last three years. A strengthening of efforts to reduce primary deficits and improve growth performance through structural reforms will be needed to reverse this trend.

In contrast to the GCC countries, the nonhydrocarbon sector has played a much more important role in the economies of Algeria and the Islamic Republic of Iran. This has reflected in part the import-substitution strategy originally pursued by these two countries whose populations and domestic markets are much larger than those of the GCC countries. The import-substitution policy also favored less open trade and payment systems than other MENA fuel exporters, which allowed Algeria and the Islamic Republic of Iran to avoid a significant deterioration in their current account positions despite the widening of their fiscal imbalances in the second half of the 1980s. On the other hand, demand pressures stemming from fiscal imbalances gave rise to substantial inflationary pressures that, despite pervasive price controls, translated into an increase in the rate of inflation from an average of 14 percent in 1981–85 to an average of 19 percent in 1986–90. The persistence of internal and external imbalances and the associated buildup of external debt prompted these two countries in the early 1990s to initiate some steps toward tighter demand-management policies and to implement key structural reforms, including unifying exchange rates and liberalizing external current transactions. These efforts were undertaken in the context of an IMF-supported adjustment program in Algeria in 1991. They were undermined, however, by wage policies and, mainly as result of insufficient commitment to reform, could not be sustained for long.

The reimposition of an array of trade and exchange restrictions and a significant relaxation of fiscal and monetary policies in Algeria in 1992–93, as well as in the Islamic Republic of Iran in 1993–94 in the context of a difficult external environment, had a detrimental effect on economic performance. Per capita income levels continued to decline, while inflation increased further to 25 percent on average in 1991–95. The deterioration compelled Algeria to formulate, in 1994, a more comprehensive program of macroeconomic stabilization and structural reform. This program, which has been supported by the Fund, has been predicated upon tight demand-management policies and wage restraint, as well as realigning relative prices, removing trade and payments restrictions, and establishing market mechanisms with a view to giving the private sector a greater role in the economy. As a result, the decline in economic activity has been arrested and the fiscal deficit has shrunk from about 9 percent of GDP in 1993 to about 1 percent in 1995. The Islamic Republic of Iran has also been able to reduce substantially its budget deficit in the last two years, which has contributed to a decline in inflation, but has maintained trade and payments restrictions in the face of continued tight external constraints.

Diversified Exporters

The more diversified exporters form a rather heterogeneous group of countries that differ significantly with regard to the comprehensiveness and consistency of their adjustment efforts. Israel, Jordan, Morocco, and Tunisia launched early on comprehensive programs of macroeconomic stabilization and structural reforms in the 1980s. These policies have been sustained over time, contributing to a reduction of both internal and external imbalances, as well as to a substantial overall improvement in economic performance. Egypt and the Syrian Arab Republic have also undertaken reforms, although later (early 1990s) and more gradually. Lebanon and the Republic of Yemen have only recently been in a position to start tackling their macroeconomic imbalances and structural weaknesses, following the ending of protracted periods of civil strife and political instability that severely impaired economic policy formulation and disrupted economic activity.

During the 1970s, Israel, Jordan, Morocco, and Tunisia pursued an inward-oriented development strategy characterized by pervasive government controls and lax financial policies. The strategy proved unsustainable in the early 1980s and both internal and external imbalances widened. Failure to restrain public expenditure in the face of declining revenues resulted in a significant widening of their fiscal deficits, which averaged over 14 percent of GDP during 1980–85. Growing fiscal imbalances contributed to both rising inflation and a worsening in their external positions: external debt burdens reached more than 90 percent of GDP on average during the first half of the 1980s.

In the second half of the 1980s, Morocco, Tunisia, and Israel, and later Jordan, reassessed their policy strategy and tried to redress their fiscal positions and reduce government absorption, first by restraining both current and capital expenditure, and in a second stage, by reforming their tax systems. The tax reforms entailed a widening of the tax base, improving the elasticity of tax systems, and introducing less distortionary taxes, including the value-added tax (Israel, Morocco, and Tunisia) or a general sales tax (Jordan). The tightening of fiscal policy led to a steep decline in budget deficits from an average of 14 percent of GDP in 1981–85 to about 5 percent of GDP in 1986–90 and 3 percent of GDP in 1991–95. At the same time, the introduction of market-oriented treasury debt instruments allowed for an increased reliance on noninflationary sources of deficit financing. The improvement in fiscal positions has been supported by nonaccommodating monetary policies and has allowed a shift in credit to support private sector activity.

These policies contributed to a substantial decline in inflation, especially in Israel where the rate of inflation fell from an average of over 200 percent a year during 1981–85 to under 25 percent during 1986–90 and 13 percent in 1991–95. In Jordan, Morocco, and Tunisia, average inflation fell from 9 percent in 1981–85 to about 6 percent in 1986–95. In addition to their anti-inflationary fiscal and monetary policies, broadly flexible exchange rate policies enabled these countries to respond to a deterioration of their average terms of trade of about 12 percent from 1986 to 1995 and avoid any significant misalignment of real exchange rates.

On the supply side, all four countries have taken wide-ranging actions to liberalize the incentive structure and reform the regulatory framework. Important steps have been taken to liberalize foreign trade, which was critical for promoting exports and enhancing domestic competition, in particular by virtually abolishing quantitative restrictions and reducing effective protection. They have also made considerable progress in decontrolling domestic prices. Ambitious privatization programs have been launched (Jordan, Morocco, Tunisia) to widen the scope for private sector activity and help reduce the burden of public enterprises on governments’ finances. Financial sector reforms have facilitated the financing of private sector investment. Interest rates have been largely deregulated and compulsory credit allocation schemes eliminated, while banking legislation has been modernized and prudential standards brought closer to international norms.

The substantial reduction of internal imbalances and the liberalization of the incentive structure have enabled these countries to attain external current account convertibility while at the same time allowing for the accumulation of foreign exchange reserves. In addition, some progress with the phasing out of restrictions on longer-term capital account transactions has helped to attract private foreign investment.

As a result of the reforms, the share of saving and investment in GDP increased. There was also a substantial increase in the efficiency of investment. Consequently, economic activity accelerated significantly, with real GDP growth increasing from 3½ percent a year in the first half of the 1980s to almost 5 percent in 1991–95. This translated into a more limited, albeit substantial, increase in the growth of per capita income from 1.1 percent a year in 1981–85 to 1.7 percent in 1991–95, reflecting in part the impact of the large number of Palestinian workers who returned from the GCC countries to Jordan following the Persian Gulf crisis of 1990–91 and of emigrants from the former Soviet Union who moved to Israel.

Egypt and the Syrian Arab Republic undertook steps to liberalize their economies in the early 1990s, following several decades of extensive public ownership in most areas of economic activity and inward-oriented trade policies. Nevertheless, the public sector still plays a pervasive role in both countries, not only in the hydrocarbon sector but also in industry where public enterprises account for more than two thirds of output.

In the second half of the 1980s, Egypt faced large macroeconomic imbalances, including an average budget deficit of 18 percent of GDP, an average inflation rate of about 20 percent, and an external debt of more than 90 percent of GDP, Following several attempts at tackling these imbalances and liberalizing the economy, Egypt embarked, in 1991, on a program of macroeconomic stabilization and structural reform supported by the IMF. Under this program substantial progress in fiscal adjustment was achieved, coupled with a strengthening of the budget through the introduction of a general sales tax and a global income lax reform, and significant efforts at expenditure restraint. Reflecting these measures, as well as higher oil revenues and Suez Canal receipts, the fiscal deficit declined steadily from 17 percent of GDP in 1990/91 to less than 2 percent of GDP in 1994/95, contributing to a decline in the rate of inflation to about 9 percent in 1994/95. The intensified adjustment efforts from 1991 onward, combined with debt relief and a surge in capital inflows, have also resulted in substantial accumulation of external reserves. Egypt has also undertaken a number of structural reforms toward liberalizing the trade system, eliminating input and consumer goods subsidies, and privatizing public sector companies. The continued pursuit of appropriate macroeconomic and structural reform policies will be needed to provide the basis for growth in real per capita GDP.

Since the early 1990s, the Syrian Arab Republic’s ongoing transition from a tightly regulated economy dominated by the public sector to a market based economy driven by the private sector has centered on promoting private investment, foreign trade, a more realistic pricing of foreign exchange, and increased price flexibility. The realignment of relative prices has induced a strong supply response and a marked improvement in growth performance, with output growing on average at 7 percent a year during 1991–95. The Syrian Arab Republic’s liberalization efforts, however, have not been backed by sufficient fiscal adjustment. High public expenditure resulted in budgetary pressures that were intensified by the drying up of external financing following the 1990–91 regional crisis and the weakening of oil prices. Thus, the fiscal balance shifted from a surplus of about 2 percent of GDP in 1992 to a deficit of about 4 percent in 1995. The associated aggregate demand pressures have contributed to a deterioration of the external current account position from a surplus of 8 percent of GDP in 1991–92 to a deficit of 3½ percent of GDP in 1993–95.

In recent years, economic difficulties in the Republic of Yemen have been exacerbated by a sharp decline in external assistance and workers’ remittances following the breakup of the former Soviet Union and the Persian Gulf war and also by a terms of trade deterioration. Civil strife, in the wake of the country’s unification, limited the government’s capacity to respond to these external factors and burdened the economy with rehabilitation costs. The resolution of the political conflict in late 1994 was quickly followed, in 1995, by determined actions to adjust the course of demand-management policies and initiate structural reforms. These initial measures were reinforced by the formulation, for 1996, of a comprehensive adjustment program incorporating forceful stabilization policies and a broad set of far-reaching structural reforms. This program aims at achieving higher growth in the non-hydrocarbon sector while quickly reducing inflation and progressing toward the restoration of external sector viability. The core policy actions recently initiated emphasize a further realignment and liberalization of relative prices, including the exchange rate and interest rates, a substantial tightening of the fiscal stance, a major liberalization of the trade and payments system, and an aggressive privatization program.

Lebanon’s civil war, which spanned 15 years (1975–90), exacted a heavy toll in human and economic terms. Per capita income is estimated to have fallen by more than 50 percent during that period. The end of the hostilities in 1990 and the restoration of political stability allowed for concerted economic policies to ensure a sustainable recovery of the economy. In addition to a pickup in real GDP growth, stabilization efforts centered on a nominal exchange rate anchor that resulted in a sharp decline in inflation and an accumulation of foreign exchange reserves to comfortable levels. Notwithstanding the need to finance a large reconstruction program, further reduction in the budget deficit will be necessary to reach the authorities’ stabilization objectives.

Challenges for the Period Ahead

The MENA region has considerable natural, human, and financial resources; it is strategically located, has long-standing economic and financial links with industrial countries, and has considerable trading skills. To realize more fully this potential, there has been a broad reassessment by all MENA countries of their economic strategy toward attaining high and sustainable growth. Consequently, the focus has turned to achieving both a more stable macroeconomic environment and more efficient resource allocation.

So far, the progress toward these objectives has varied substantially among countries with regard to the timeliness, depth, and consistency of adjustment policies. The challenges for the period ahead are bound to vary considerably among countries in accordance with these differences and the results of past adjustment efforts. In addition, they will also depend, to an important degree, on future developments in the external environment, including, in particular (1) the prospects for Arab-Israeli peace;6 (2) the opportunities for a closer integration with the European Union under the Mediterranean Basin Initiative;7 (3) the economic outlook in industrial countries; and (4) the evolution of world hydrocarbon prices, which could be subject to strong downward pressures as a result of developments in the countries of the former Soviet Union and Iraq’s possible return to the oil market.

Current projections indicate the continuation of a relatively moderate expansion of economic activity in industrial countries and point to a rather subdued outlook for oil prices over the next two years. Nevertheless, the short-term outlook for the MENA region is expected to improve. Real GDP growth should average about 3½ percent in 1996–97, allowing for gains in per capita incomes of 1 percent a year. Concurrently, average inflation is expected to slow down to 6½ percent while the external current account should narrow to 1½ percent of GDP by 1997. To realize these projections and strengthen their potential for achieving sustainable economic growth, all MENA countries will need to act forcefully to address macroeconomic imbalances and structural weaknesses that have limited saving and investment.

First, large fiscal imbalances remain in many countries, especially among the GCC members where they have contributed to both large external account deficits and mounting public debt in recent years. Fuel exporting countries need to broaden their domestic tax base by adopting broad-based domestic taxes to reduce the dependence of budgetary revenues on hydrocarbon earnings. Similarly, among the more diversified exporters, Lebanon, the Syrian Arab Republic, and the Republic of Yemen would benefit from adopting broader-based domestic taxes, while Jordan, Morocco, and Tunisia would need to strengthen alternative revenue sources with a view to compensating for the losses in trade taxes expected to result from the implementation of the agreements with the European Union. On the expenditure side, certain MENA countries should aim at targeting better the remaining generalized subsidies to the most vulnerable population groups and at strengthening public education to reduce poverty and facilitate these countries’ integration in the world economy. This should be accompanied by civil service reform to reduce the government wage bill and improve the efficiency of government operations. The prospects for broadening the peace process between the Arab countries and Israel should also increase the scope for significant reductions in defense spending over time.

Second, MENA countries will need to intensify privatization programs to revitalize their manufacturing sectors and limit government operations to the efficient provision of public goods. While tangible progress has already been achieved in some countries, such as Morocco, the need for promoting the role of the private sector is particularly pressing for Algeria, Egypt, the Islamic Republic of Iran, and the Syrian Arab Republic where industrial sectors remain largely dominated by public enterprises.

Third, stepped-up efforts are also needed to scale back regulations and remove distortions in both goods and factor markets to improve the efficiency of resource allocation. The external trade and payments systems of several MENA countries are still saddled with restrictions, including excessive tariffs and pervasive quantitative restrictions. While the economies of the GCC are relatively open, trade reform is needed in several other countries, such as Egypt, the Islamic Republic of Iran, and the Syrian Arab Republic. For Israel, Jordan, Morocco, and Tunisia, which have already committed to join a free-trade area with the European Union, dismantling trade barriers with third countries will help to minimize the risk of trade diversion. Regarding factor markets, measures must be adopted to facilitate labor mobility within certain countries and within the region to maximize the creation of employment opportunities for a rapidly growing labor force in most MENA countries. Moreover, further steps should be taken to strengthen financial intermediation in most non-GCC countries, through the removal of controls on rates of return and credit allocation—particularly in the Islamic Republic of Iran and the Syrian Arab Republic—the promotion of greater competition among financial institutions and the strengthening of prudential regulations.

Fourth, there is a need for greater diversification of the nonhydrocarbon export base to reduce the excessive vulnerability of most MENA countries to adverse terms of trade movements. The need is particularly acute for countries such as Algeria, Egypt, the Islamic Republic of Iran, and the Syrian Arab Republic, which have the capacity to develop strong export driven growth strategies.8 The latter two countries would also benefit from further liberalization of their foreign exchange markets. Beyond these structural measures, sustaining reform programs will require a stable macroeconomic environment with consistent fiscal, monetary, and exchange rate policies.

Statistical Appendix

Assumptions

The statistical tables in this appendix have been compiled on the basis of information available through April 3, 1996. The estimates and projections for 1996 and 1997, as well as the 1998–2001 medium-term scenarios, are based on the following assumptions.

  • For the industrial countries, real effective exchange rates are assumed to remain constant at their average four-week level, February 16–March 14, 1996, except for the bilateral exchange rates among the ERM currencies, which are assumed to remain constant in nominal terms. For 1996 and 1997, these assumptions imply average U.S. dollar/SDR conversion rates of 1.466 and 1.465, respectively.

  • Established policies of national authorities will be maintained. The more specific policy assumptions underlying the projections for industrial countries are described in Box 1.

  • The price of oil will average $17.39 a barrel in 1996 and $16.12 a barrel in 1997. In the medium term, the oil price is assumed to remain unchanged in real terms.

  • Interest rates, as represented by the London interbank offered rate (LIBOR) on six-month U.S. dollar deposits, will average 5.4 percent in 1996 and 5.6 percent in 1997; the three-month certificate of deposit rate in Japan will average 0.6 percent in 1996 and 1.7 percent in 1997; and the three-month interbank deposit rate in Germany will average 3.3 percent in 1996 and 4.3 percent in 1997.

Data and Conventions

Data and projections for more than 180 countries form the statistical basis for the World Economic Outlook (the World Economic Outlook data base). The data are maintained jointly by the IMF’s Research Department and area departments, with the latter regularly updating country projections based on consistent global assumptions.

Although national statistical agencies are the ultimate providers of historical data and definitions, international organizations are also involved in statistical issues, with the objective of harmonizing differences among national statistical systems, of setting international standards with respect to definitions, and of providing conceptual frameworks for measurement and presentation of economic statistics. The World Economic Outlook data base reflects information from both national source agencies and international organizations.

The completion of the comprehensive revision of the United Nations’ standardized System of National Accounts (SNA) and the IMF’s fifth edition of the Balance of Payments Manual (BPM) is an important improvement in the standards of economic statistics and analysis.1 The IMF was actively involved in both projects, particularly the Manual, which is central to the IMF’s interest in countries’ external positions. Key changes introduced with the revised Manual were summarized in Box 13 of the May 1994 World Economic Outlook. The process of adapting country balance of payments data to the definitions of the revised Balance of Payments Manual began with the May 1995 World Economic Outlook; however, full concordance is ultimately dependent on national statistical compilers providing revised country data, and hence the World Economic Outlook estimates are still only partly adapted to the Manual.

Composite data for country groups in the World Economic Outlook are either sums or weighted averages of data for individual countries. Arithmetic weighted averages are used for all data except inflation and money growth for nonindustrial country groups, for which geometric averages are used. The following conventions are used.

  • Country group composites for interest rates, exchange rates, and the growth of monetary aggregates are weighted by GDP converted to U.S. dollars at market exchange rates (averaged over the preceding three years) as a share of world or group GDP.

  • Composites for other data relating to the domestic economy, whether growth rates or ratios, are weighted by GDP valued at purchasing power parities (PPPs) as a share of total world or group GDP.2

  • Composite unemployment rates and employment growth are weighted by labor force as a share of group labor force.

  • Composites for data relating to the external economy are sums of individual country data after conversion to U.S. dollars al the average exchange rates in the years indicated for balance of payments, and at end-of-period exchange rates for debt denominated in currencies other than U.S. dollars. Composites of foreign trade volumes and prices, however, are arithmetic averages of percentage changes for individual countries weighted by the U.S. dollar value of exports or imports as a share of total world or group exports or imports (in the preceding year).

For central and eastern European countries in existence before 1991, external transactions in nonconvertible currencies (through 1990) are converted to U.S. dollars at the implicit U.S. dollar/ruble conversion rates obtained from each country’s national currency exchange rate for the U.S. dollar and for the ruble.

Unless otherwise indicated, multiyear averages of growth rates are expressed as compound annual rates of change.

Classification of Countries

Summary of the Country Classification

The country classification in the World Economic Outlook divides the world into three major groups: industrial countries, developing countries, and countries in transition.3 Rather than being based on strict criteria, economic or otherwise, this classification has evolved over time with the objective of facilitating the analysis by providing a reasonably meaningful organization of data. Each of the three main country groups is further divided into a number of subgroups. Tables A and B provide an overview of these standard groups in the World Economic Outlook, showing the number of countries in each group and the average 1995 shares of groups in aggregate PPP-valued GDP, total exports of goods and services, and total debt outstanding.

Table A.

Industrial Countries: Classification by Standard World Economic Outlook Groups, and Their Shares in Aggregate GDP and Exports of Goods and Services, 19951

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The GDP shares are based on the purchasing power parity (PPP) valuation of country GDPs.

Table B.

Developing Countries and Countries in Transition: Classification by Standard World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports of Goods and Services, and Total Debt Outstanding, 19951

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The GDP shares are based on the purchasing power parity (PPP) valuation of country GDPs.

The general features and the compositions of groups in the World Economic Outlook classification are as follows.4

The group of industrial countries (23 countries) comprises

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The seven largest countries in this group in terms of GDP—the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada—are collectively referred to as the major industrial countries.

The current members of the European Union (15 countries) are also distinguished as a subgroup. They are

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Composite data shown in the tables under the heading “European Union” cover the current 15 members of the European Union for all years, even though the membership has changed over time.

In 1991 and subsequent years, data for Germany refer to west Germany and the eastern Lander (i.e., the former German Democratic Republic). Before 1991, economic data are not available on a unified basis or in a consistent manner. Hence, in tables featuring data expressed as annual percent change, these apply to west Germany in 1991 as well. In general, data on national accounts and domestic economic and financial activity through 1990 cover west Germany only, whereas data for the central government and balance of payments apply to west Germany through June 1990 and to unified Germany thereafter.

The group of developing countries (132 countries) includes all countries that are not classified as industrial countries or as countries in transition, together with a few dependent territories for which adequate statistics are available.

The regional breakdowns of developing countries in the World Economic Outlook conform to the IMF’s international Financial Statistics (IFS) classification, with one important exception. Because all of the developing countries in Europe except Cyprus, Malta, and Turkey are included in the group of countries in transition, the World Economic Outlook classification places these three countries in a combined Middle East and Europe region. It should also be noted that in both classifications, Egypt and the Libyan Arab Jamahiriya are included in this region, not in Africa. Two additional regional groupings are included in the World Economic Outlook because of their analytical significance. These are sub-Saharan Africa5 and four newly industrializing Asian economies.6

The developing countries are also grouped according to analytical criteria: predominant export, financial, and other groups. The first analytical criterion, by predominant export, distinguishes among five groups: fuel (Standard International Trade Classification—SITC 3); manufactures (SITC 5 to 9, less 68); nonfuel primary products (SITC 0, 1, 2, 4, and 68); services, factor income, and private transfers (factor and non-factor service receipts plus workers’ remittances); and diversified export base. A further distinction is made among the exporters of nonfuel primary products on the basis of whether countries’ exports of primary commodities consist primarily of agricultural commodities (SITC 0, 1, 2 except 27, 28, and 4) or minerals (SITC 27, 28, and 68). The export criteria, which in the October 1995 World Economic Outlook were updated to correspond more closely to the World Bank classification, are based on countries’ export composition in 1988–92.

The financial criterion first distinguishes between net creditor and net debtor countries. Countries in the latter, much larger group are then differentiated on the basis of two additional financial criteria: by predominant type of creditor and by experience with debt servicing. The financial criteria reflect net creditor and debtor positions as of 1987, sources of borrowing as of the end of 1989, and experience with debt servicing during 1986–90.

The country groups shown under other groups constitute the small low-income economies and the least developed countries.

The group of countries in transition (28 countries) comprises central and eastern European countries, Russia, non-European states of the former Soviet Union, and Mongolia. A common characteristic of these countries is the transitional state of their economies from a centrally administered system to one based on market principles. The group of countries in transition comprises

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The countries in transition are classified in three subgroups: central and eastern Europe, Russia, and Transcaucasus and central Asia, The Transcaucasian and central Asian countries include Kazakstan for purposes of the World Economic Outlook. The countries in central and eastern Europe (18 countries) are

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The countries in the Transcaucasian and central Asian group (9 countries) are

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Detailed Description of the Developing Country Classification by Analytical Group

Countries Classified by Predominant Export

Fuel exporters (15 countries) are countries whose ratio of fuel exports to total export earnings in 1988-92 exceeded 50 percent. The group comprises

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Nonfuel exporters (117 countries) are countries with total exports of goods and services including a substantial share of (a) manufactures, (b) primary products, or (c) services, factor income, and private transfers. However, those countries whose export structure is so diversified that they do not fall clearly into any one of these three groups are assigned to a fourth group, (d) diversified export base.

(a) Economies whose exports of manufactures accounted for 50 percent or more of their total export earnings in 1988–92 are included in the group of exporters of manufactures (7 countries). This group includes

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(b) The group of exporters of primary products (43 countries) consists of those countries whose exports of agricultural and mineral primary products (SITC 0, 1, 2, 4, and 68) accounted for at least half of their total export earnings in 1988–92. These countries are

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Among exporters of primary products, a further distinction is made between exporters of agricultural products and minerals. The group of mineral exporters (14 countries) comprises

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All other exporters of primary products are classified as agricultural exporters (29 countries).

(c) The exporters of services and recipients of factor income and private transfers (37 countries) are defined as those countries whose average income from services, factor income, and workers’ remittances accounted for half or more of total export earnings in 1988–92. This group comprises

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(d) Countries with a diversified export base (30 countries) are those whose export earnings in 1988–92 were not dominated by any one of the categories mentioned under (a) through (c) above. This group comprises

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Countries Classified by Financial Criteria

Net creditor countries (7 countries) are defined as developing countries that were net external creditors in 1987 or that experienced substantial cumulated current account surpluses (excluding official transfers) between 1967 (the beginning of most balance of payments series in the World Economic Outlook data base) and 1987. The net creditor group consists of the following economies:

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Net debtor countries (125 countries) are disaggregated according to two criteria: (a) predominant type of creditor and (b) experience with debt servicing.

(a) Within the classification predominant type of creditor (sources of borrowing), three subgroups are identified: market borrowers, official borrowers, and diversified borrowers. Market borrowers (23 countries) are defined as net debtor countries with more than two thirds of their total liabilities outstanding at the end of 1989 owed to commercial creditors. This group comprises

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Official borrowers (69 countries) are defined as net debtor countries with more than two thirds of their total liabilities outstanding at the end of 1989 owed to official creditors. This group comprises

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Diversified borrowers (33 countries) consist of those net debtor developing countries that are classified neither as market nor as official borrowers.

(b) Within the classification experience with debt servicing, a further distinction is made. Countries with recent debt-servicing difficulties (71 countries) are defined as those countries that incurred external payments arrears or entered into official or commercial bank debt-rescheduling agreements during 1986–90. Information on these developments is taken from relevant issues of the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions.

All other net debtor countries are classified as countries without debt-servicing difficulties (54 countries).

Other Groups

The countries classified by the World Bank as small low-income economies (50 countries) are those whose GNP per capita (as estimated by the World Bank) did not exceed the equivalent of $695 in 1993. This group comprises

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The countries currently classified by the United Nations as the least developed countries (46 countries) are8

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List of Tables

Output

Inflation

Financial Policies

Foreign Trade

Current Account Transactions

Balance of Payments and External Financing

External Debt and Debt Service

Flow of Funds

Medium-Term Baseline Scenario

Output

Table A1.

Summary of World Output1

(Annual percent change)

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Real GDP.

Table A2.

Industrial Countries: Real GDP and Total Domestic Demand

(Annual percent change)

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From fourth quarter of preceding year.

Data through 1991 apply to west Germany only.

Average of expenditure, income, and output estimates of GDP at market prices.

Based on revised national accounts for 1988 onward.

Table A3.

Industrial Countries: Components of Real GDP

(Annual percent change)

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Data through 1991 apply to west Germany only.

Changes expressed as percent of GDP in the preceding period.

Table A4.

Industrial Countries: Unemployment, Employment, and Real Per Capita GDP

(In percent)

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Compound annual rate of change for employment and per capita GDP; arithmetic average for unemployment rate.

The projections for unemployment have been adjusted to reflect the new survey techniques adopted by the U.S. Bureau of Labor Statistics in January 1994.

Data through 1991 apply to west Germany only.

New series starting in 1993, reflecting revisions in the labor force surveys and the definition of unemployment to bring data in line with those of other industrial countries.

Table A5.

Developing Countries: Real GDP

(Annual percent change)

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Table A6.

Developing Countries—by Country: Real GDP1

(Annual percent change)

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For many countries, figures for recent years are IMF staff estimates. Data for some countries are for fiscal years.

Table A7.

Countries in Transition: Real GDP1

(Annual percent change)

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Data for some countries refer to real net material product (NMP) or are estimates based on NMP. For many countries, figures for recent years are IMF staff estimates. The figures should be interpreted only as indicative of broad orders of magnitude because reliable, comparable data are not generally available. In particular, the growth of output of new private enterprises or of the informal economy is not fully reflected in the recent figures.

Inflation

Table A8.

Summary of Inflation

(In percent)

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Table A9.

Industrial Countries: GDP Deflators and Consumer Prices

(Annual percent change)

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From fourth quarter of preceding year.

Data through 1991 apply to west Germany only.

Based on the revised consumer price index for united Germany introduced in September 1995.

Retail price index excluding mortgage interest.

Table A10.

Industrial Countries: Hourly Earnings, Productivity, and Unit Labor Costs in Manufacturing

(Annual percent change)

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Data through 1991 apply to west Germany only.

Table A11.

Developing Countries: Consumer Prices

(Annual percent change)

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Table A12.

Developing Countries—by Country: Consumer Prices1

(Annual percent change)

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For many countries, figures for recent years are IMF staff estimates. Data for some countries are for fiscal years.

From December 1994 to December 1995, consumer prices increased by about 15 percent. The figure differs from the year-on-year changes reported in the table.

Table A13.

Countries in Transition; Consumer Prices1

(Annual percent change)

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For many countries, inflation for the earlier years is measured based on a retail price index. Consumer price indices with a broader and more up-to-date coverage are typically used for more recent years.

Financial Policies

Table A14.

Summary Financial Indicators

(In percent)

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In percent of GDP.

For the United States, three-month treasury bills; for Japan, three-month certificates of deposit; for Germany, three-month interbank deposits; for LIBOR, London interbank offered rate on six-month U.S. dollar deposits.

For many transition countries, the fiscal balance reflects a broader definition of government. Because of these country differences in definition and coverage, the estimates should be interpreted only as indicative of broad orders of magnitude.

Table A15.

Industrial Countries: General and Central Government Fiscal Balances and Balances Excluding Social Security Transactions1

(In percent of GDP)

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On a national income accounts basis except as indicated in footnotes. The projections are based on “unchanged fiscal policies” which may differ from countries’ stated fiscal objectives. For a summary of medium-term fiscal objectives, see the May 1995 World Economic Outlook, Table 5, p. 28.

Data through 1990 apply to west Germany only.

Adjusted for valuation changes of the foreign exchange stabilization fund.

Includes interest accruing on zero coupon bonds.

Excludes asset sales.

Data are on a budget basis.

Data are on a national income basis and exclude social security transactions.

Data through June 1990 apply to west Germany only.

Data are on an administrative basis and exclude social security transactions.

Data refer to the state sector and cover the transactions of the state budget as well as those of several autonomous entities operating at the same level; data do not include the gross transactions of social security institutions, only their deficits. Includes interest accruing on zero coupon bonds.

Table A16.

Industrial Countries: General Government Structural Balances and Fiscal Impulses1

(In percent of GDP)

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On a national income accounts basis.

The structural budget position is defined as the actual budget deficit (or surplus) less the effects of cyclical deviations of output from potential output. Because of the margin of uncertainty that attaches to estimates of cyclical gaps and to tax and expenditure elasticities with respect to national income, indicators of structural budget positions should be interpreted as broad orders of magnitude. Moreover, it is important to note that changes in structural budget balances are not necessarily attributable to policy changes but may reflect the built-in momentum of existing expenditure programs. In the period beyond that for which specific consolidation programs exist, it is assumed that the structural deficit remains unchanged.

Data through 1990 apply to west Germany only. The estimate of the fiscal impulse for 1995 is affected by the assumption by the federal government of the debt of the Treuhandanstalt and various other agencies, which were formerly held outside the general government sector. At the public sector level, there would be an estimated withdrawal of fiscal impulse amounting to just over 1 percent of GDP.

Includes interest accruing on zero coupon bonds.

Excludes privatization proceeds.

Excludes Luxembourg.

For a definition of the fiscal impulse measure, see The New Palgrave Dictionary of Money and Finance, edited by Peter Newman. Murray Milgate, and John Eatwell (London: Macmillan, 1992; New York: Stockton, 1992). Impulse estimates equal to or less than ±0.3 percent of GDP are indicated by “—.”

For relevant years, the fiscal impulse is calculated on the basis of data adjusted for net international financial transfers related to the 1990–91 regional conflict in the Middle East.

Table A17.

Industrial Countries: Monetary Aggregates

(Annual percent change)1

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Based on end-of-period data.

M1 except for the United Kingdom, where M0 is used here as a measure of narrow money: it comprises notes in circulation plus bankers’ operational deposits. M1 is generally currency in circulation plus private demand deposits. In addition, the United States includes traveler’s checks of nonbank issues and other checkable deposits and excludes private sector float and demand deposits of banks. Japan includes government demand deposits and excludes float. Germany includes demand deposits at fixed interest rates, Canada excludes private sector float.

Data through 1989 apply to west Germany only. The growth rates for the monetary aggregates in 1990 are affected by the extension of the currency area.

M2, defined as M1 plus quasi-money, except for Japan, Germany, and the United Kingdom, for which the data are based on M2 plus certificates of deposit (CDs), M3, and M4, respectively. Quasi-money is essentially private term deposits and other notice deposits. The United States also includes money market mutual fund balances, money market deposit accounts, overnight repurchase agreements, and overnight Eurodollars issued to U.S. residents by foreign branches of U.S. banks. For Japan, M2 plus CDs is currency in circulation plus total private and public sector deposits and installments of Sogo Banks plus CDs. For Germany, M3 is M1 plus private time deposits with maturities of less than four years plus savings deposits at statutory notice. For the United Kingdom, M4 is composed of non-interest-bearing M1, private sector interest-bearing sterling sight bank deposits, private sector sterling time bank deposits, private sector holdings of sterling bank CDs, private sector holdings of building society shares and deposits, and sterling CDs less building society holdings of bank deposits and bank CDs, and notes and coins.

Table A18.

Industrial Countries: Interest Rates

(In percent a year)

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For the United States, federal funds rate; for Japan, overnight call rate; for Germany, repurchase rate; for France, day-to-day money rate; for Italy, three-month treasury bill rate; for the United Kingdom, base lending rate; and for Canada, overnight money market financing rate.

For the United States, three-month certificates of deposit (CDs) in secondary markets; for Japan, three-month CDs; for Germany, France, and the United Kingdom, three-month interbank deposits; for Italy, three-month treasury bills; and for Canada, three-month prime corporate paper.

For the United States, yield on ten-year treasury bonds; for Japan, over-the-counter sales yield on ten-year government bonds with longest residual maturity; for Germany, yield on government bonds with maturities of nine to ten years; for France, long-term (seven- to ten-year) government bond yield (Emprunts d’Etat à long terme TME); for Italy, secondary market yield on fixed-coupon (BTP) government bonds with two to four years’ residual maturity; for the United Kingdom, yield on medium-dated (ten-year) government stock; and for Canada, average yield on government bonds with residual maturities of over ten years.

March 1996 data refer to yield on ten-year government bonds.

Table A19.

Industrial Countries: Exchange Rates

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March data refer to the average for February 16–March 14, 1996, the reference period for the exchange rate assumptions. See “Assumptions” in the introduction to this Statistical Appendix.

Expressed in U.S. dollars per pound.

Defined as the ratio, in common currency, of the normalized unit labor costs in the manufacturing sector to the weighted average of those of its industrial country trading partners, using 1989–91 trade weights.

Table A20.

Developing Countries: Central Government Fiscal Balances

(In percent of GDP)

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Table A21.

Developing Countries: Broad Money Aggregates

(Annual percent change)

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Foreign Trade

Table A22.

Summary of World Trade Volumes and Prices

(Annual percent change)

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Average of annual percent change for world exports and imports. The estimates of world trade comprise, in addition to trade of industrial and developing countries (which is summarized in the table), trade of countries in transition.

As represented, respectively, by the export unit value index for the manufactures of the industrial countries the average of U.K. Brent, Dubai, and West Texas Intermediate crude oil spot prices; and the average of world market prices for nonfuel primary commodities weighted by their 1987–89 shares in world commodity exports.

Table A23.

Industrial Countries: Export Volumes, Import Volumes, and Terms of Trade

(Annual percent change)

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Data through 1991 apply to west Germany only.

Table A24.

Developing Countries—by Region: Total Trade in Goods

(Annual percent change)

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Table A25.

Developing Countries—by Predominant Export: Total Trade in Goods

(Annual percent change)

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Table A26.

Nonfuel Commodity Prices1

(Annual percent change; U.S. dollar terms)

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Averages of world market prices weighted by 1987–89 exports as a share of world or group commodity estimates.

Average of U.K. Brent, Dubai, and West Texas Intermediate crude oil spot prices.

For the manufactures exported by the industrial countries.

Current Account Transactions

Table A27.

Summary of Payments Balances on Current Account

(In billions of U.S. dollars)

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Reflects errors, omissions, and asymmetries in balance of payments statistics on current account, as well as the exclusion of data for international organizations and a limited number of countries. See “Classification of Countries” in the introduction to this Statistical Appendix.

Table A28.

Industrial Countries: Balance of Payments on Current Account

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Data through June 1990 apply to west Germany only.

Table A29.

Industrial Countries: Current Account Transactions

(in billions of U.S. dollars)

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Data through June 1990 apply to west Germany only.

Table A30.

Developing Countries: Payments Balances on Current Account

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Table A31.

Developing Countries—by Region: Current Account Transactions

(In billions of U.S. dollars)

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Table A32.

Developing Countries—by Analytical Criteria: Current Account Transactions

(In billions of U.S. dollars)

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